Black Stone Minerals, L.P. — Q3 2020 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and nine months ended September 30, 2020. Black Stone owns mineral and royalty interests across 41 states, as well as non-operated working interests. The Partnership reported one operating segment.
Financial performance
Amounts below are in millions of dollars, except per-unit amounts and where noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue, including derivative gains/losses | $43.7 | $137.4 | $265.3 | $384.8 |
| Revenue from customer contracts | $64.8 | $113.1 | $215.6 | $372.5 |
| Net income | $23.7 | $70.2 | $91.5 | $174.4 |
| Net income per common unit | $0.09 | $0.32 | $0.37 | $0.87 |
| Adjusted EBITDA (non-GAAP) | $65.5 | $96.2 | $209.0 | $299.4 |
| Distributable cash flow (non-GAAP) | $58.8 | $85.8 | $189.5 | $265.2 |
- Production and realized prices: Q3 equivalent production fell 22.6% to 3.49 million Boe; realized price without derivatives declined 25.2% to $18.18/Boe. For the nine-month period, equivalent production fell 13.6% to 11.63 million Boe and realized price declined 32.5% to $17.87/Boe.
- Cash flow: Nine-month operating cash flow was $221.4 million, down from $306.3 million. Investing activities provided $150.6 million, mainly reflecting asset-sale proceeds; financing activities used $377.1 million, including net credit-facility repayments and distributions. Cash ended the period at $3.1 million.
- Debt and liquidity: Credit-facility borrowings were $147 million at September 30, down from $394 million at December 31, 2019; unused availability was $283 million. The borrowing base was $430 million after the July asset sales, then reduced to $400 million effective November 3. The Partnership reported compliance with financial covenants at September 30.
- Distributions: Common-unit distributions declared and paid were $0.15 per unit in Q3 and $0.53 per unit for the first nine months, versus $0.37 and $1.11, respectively, in 2019. The Board approved a Q3 distribution of $0.15 per common unit, payable November 20, 2020. Preferred units carry a 7% annual distribution.
Material changes and unusual items
- Two Permian Basin divestitures generated $150.2 million of net proceeds; the properties had an estimated 1,800 Boe/day of production. The Partnership used the proceeds to reduce debt and recorded a $24.0 million gain on sale.
- The nine-month results included a $51.0 million property impairment, recorded in Q1 after the sharp commodity-price decline. No impairment was recorded in Q3.
- Q3 commodity derivatives produced a $21.1 million loss, compared with a $24.3 million gain in Q3 2019. The nine-month derivative result was a $49.8 million gain, including $66.8 million of realized gains and $17.0 million of unrealized losses.
- Q3 operating expenses declined year over year, including lower lease operating costs, production taxes, DD&A and G&A. Nine-month G&A also reflected workforce reductions and a $4.8 million restructuring charge.
Outlook, risks and contingencies
- Management described continued COVID-19-related demand and commodity-price uncertainty. Lower prices and reduced operator drilling and completion activity, along with temporary shut-ins, weighed on production; drilling activity remained below pre-pandemic levels.
- Management warned prolonged low prices could prompt further property impairments and borrowing-base reductions. A November 3 amendment cut the borrowing base to $400 million and raised interest-rate margins by 25 basis points. The next scheduled redetermination was expected in spring 2021.
- The 2020 development-capital budget for non-operated working interests was approximately $2.0 million, net of farmout reimbursements; $0.8 million had been invested through September. Aethon’s development agreement calls for at least four wells in its initial program year and at least 15 annually beginning in its third program year. XTO’s incentive agreement covers 13 drilled-but-uncompleted wells, subject to completion and sales by March 31, 2021.
- At September 30, the Partnership had hedged all available oil and condensate hedge volumes and 81% of available natural-gas volumes for 2020; corresponding 2021 figures were 69% and 73%. Derivatives mitigate, but do not eliminate, exposure to price changes; their fair-value changes affect reported revenue.
- The Partnership stated that pending ordinary-course claims were not expected to have a material adverse effect and recorded no liability for co-owner repurchase options that had not been exercised. It also notified co-owners it expected to terminate the relevant co-ownership agreement effective December 31, 2020.
Investor verification points
- Confirm the latest borrowing-base availability, covenant headroom and effect of higher credit margins on interest expense.
- Assess whether operating cash generation and hedge settlements can support distributions amid lower prices, production and lease-bonus income.
- Review the production and reserve impacts of the Permian divestitures, operator activity and any further impairment risk.
- Check the assumptions behind derivative valuations and the timing and results of Aethon’s and XTO’s drilling commitments.