Black Stone Minerals LP (BSM) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Black Stone Minerals LP's fourth-quarter and full-year 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Brent Collins, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Michelle. Good morning to all joining us by phone and online for Black Stone Minerals LP's fourth-quarter and full-year 2015 earnings conference call. Today's call is being recorded and will be available on our website, along with the earnings release, which was issued yesterday evening.

Before we start, I would like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our cautionary information about forward-looking statements -- implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday evening and the risk factors section of our prospectus that was filed earlier this year and our Form 10-K, which will be filed later today.

We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at blackstoneminerals.com.

The Company officials on the call this morning are Tom Carter, Chairman, President and CEO; Marc Carroll, Senior Vice President and CFO; Holbrook Dorn, Senior Vice President of Business Development and Land; Brock Morris, Senior Vice President of Engineering and Geology; and Steve Putman, Senior Vice President and General Counsel. I will now turn the call over to Tom.

Good morning, everyone. Against the backdrop of a challenging environment, Black Stone had a solid year. As you all know, we went public in May of last year, which allowed us to enter the public space substantially debt-free. In our first reporting year as a publicly traded MLP, we grew production year-over-year and added more reserves through the drill bit than we produced despite industry activity slowing throughout the year. Even in this environment, we continue to see both development and exploratory activity on our minerals.

We proactively made some tough choices, as did many in the industry, to ensure we would be on solid footing as we came into 2016. We reduced G&A through voluntary severance programs and other cost-cutting measures resulting in a meaningful reduction in our cash G&A and leaving our cost structure better aligned with current levels of industry activity. Additionally, we reduced the distribution to subordinated units attributable to the fourth quarter of 2015 to preserve liquidity. These were not easy decisions, but they have helped put us in a good position entering 2016.

Although we are seeing more assets in the mineral acquisition market, we are also seeing increased competition in the space. The balance sheet is in good shape and we have significant liquidity available to us for acquisitions when valuations are right.

We announced yesterday that the Board of Directors has approved a common unit repurchase program in the amount of $50 million. We think that our common units are unique and aren't being valued appropriately in the market. They have a growing MQD for the next three years and are protected by the subordination of approximately half of the equity of the partnership.

Given how our common yields compare to the yields in the acquisition market, we think currently repurchasing our equity is a great way of buying a diverse mineral spread at attractive costs. With that, I will hand the call over to Marc.

Thanks, Tom. Good morning, everyone. I have a few items to discuss for the quarter and then I will talk a little bit about 2015 as a whole. Production for the quarter came in at 27,100 BOE per day. That's a 4% increase over the forecast that we had put in our S-1 for the fourth quarter. Excluding hedges, realized prices in the fourth quarter were $41.20 per barrel for oil and $2.43 per Mcf for natural gas. During the quarter, we recognized a $33 million gain on hedges and $16.7 million of that is cash and another $16.1 million is unrealized.

Lease bonus came in at $7 million for the quarter. You've heard us say before the timing and amount of the lease bonus is variable from quarter to quarter and can make comparing prior periods a little misleading. On the cost side, LOE is actually an improving story. Our LOE is wholly attributable to our working interests and while, on a total company basis, LOE per BOE increased slightly quarter-over-quarter, you really need to focus on the LOE per working interest BOE and that declined sequentially in the fourth quarter and that's a trend we continue to see into 2016.

Production costs and ad valorem taxes as a percentage of oil and gas revenue were a bit higher in the fourth quarter than in the third quarter because we have some catch-up severance tax reimbursements in the third quarter that were one-time in nature. Also a portion of this line item is fixed, which means, as prices come down, the percentage goes up.

G&A was impacted in the fourth quarter by approximately $4 million associated with personnel reductions. This is a voluntary program that Tom just mentioned previously. Our guidance for 2016 reflects the efforts we've made to align our entire G&A cost structure to the current environment.

DD&A decreased as a result of the impairments that we took in the third quarter. Consistent with others in the industry, we also had an impairment in the fourth quarter and it was $93 million and that's really due to the lower prices we saw at the end of the year.

Our net loss for the quarter was $49.7 million. Our adjusted EBITDA came in at $54 million and our cash available for distributions and reinvestment was $50.2 million. Our coverage ratio for the quarter was approximately 1.2 times on all units.

Those are the highlights for the quarter and I want to quickly talk about 2015 as a whole. We think it's important for investors to know that despite the rapidly deteriorating environment we faced during the year, we still managed to outperform in important areas compared to the forecast that we laid out in our S-1 during the IPO.

One of the strengths of Black Stone is the scale and diversity of our mineral position. We are exposed to numerous plays in every producing basin in the US and our acreage lies in the best parts of many of the best plays. Despite declining levels of activity last year, we continued to see activity on our minerals. Production for the year came in at 28,700 BOE per day. That's a 4% increase year-over-year and we also outperformed our S-1 forecast for the periods that we showed.

Our oil mix increased to 34% for the year from 30% in 2014, but we expect that to decline throughout 2016 as we participate in some gas drilling specifically in the Haynesville in East Texas. Realized prices in 2015 for oil fell 46% to $45.87 per barrel; and for natural gas, the price fell 43% to $2.80 per Mcf relative to 2014. This pricing doesn't include the $90.3 million of hedge gains that we recognized during the year. Of this amount, $63 million was realized cash and another $27 million is unrealized. Right now, the majority of our PDP is hedged throughout the middle of 2017 and the details of our hedge position will be included in the 10-K that we are filing later today.

Lease bonus came in at $23 million for the year. We've mentioned numerous times before that that is a very hard number to predict and to forecast going forward, but, in the fourth quarter, we also received $25 million in cash related to various transactions on our leasehold acreage. While we don't book this as lease bonus, these transactions provided us cash while still allowing us to maintain an interest in the acreage and the amount is reflected under investing activities on the cash flow statement you will see later today.

On the cost side, LOE remained essentially flat compared to last year at about $7 per working interest BOE. Production costs and ad valorem taxes dropped significantly in absolute terms compared to 2014 and that's mainly due to reduced revenue. Expenses associated with our IPO and severance costs were the major drivers of the increase in G&A in 2015 versus 2014. The vast majority of this increase was one time in nature and I would point out we are guiding to lower absolute G&A in 2016.

As discussed earlier in the year and in previous quarters, we had non-cash impairment charges in the year totaling $250 million. Our net loss for the year was $101 million and that's driven primarily by the impairment. Adjusted EBITDA came in at $251 million and cash available for distributions and reinvestment was $234 million. Our coverage ratio for 2015 since we went public was about 1.23 on all units.

The balance sheet remains in great shape, as Tom said. At the end of the quarter, we had $66 million outstanding on the revolver and as of today, we have $99 million outstanding. We announced guidance in our release from yesterday. We expect Q1 production to be about flat to Q4 with production growing throughout the remainder of the year. Approximately 63% of our oil is hedged this year at roughly $55 and about 60% of our gas is hedged at a little more than $3 per Mcf. At this time, I'd like to open up the call to questions.

Thank you. (Operator Instructions). [Nick Raza], Citigroup Research.

Good morning. Thanks for the report this morning. I just had one quick question on your guidance of lease bonus. You mentioned that it's kind of hard to forecast and you mentioned that your number had come in lower than you forecasted originally. Could you give us some color though on how you are coming up with that $30 million number for 2016?

It's an aggressive target, just as $40 million was for 2015. Not to talk about missed opportunities, but we actually, as of three weeks before the end of the year, thought we were going to be able to hit our $40 million target. We had a few trades die as the environment continued to turn south. The $30 million is based off some stuff we can see today and it's based off of what we think we can do. It's not going to be easy. Hopefully, the overall environment continues to improve through the rest of the year and that ought to give us a shot.

Okay, okay. And then just on your comments about the Haynesville, any thoughts on the impact from Chesapeake there?

With respect to our forecast, we are not forecasting a lot of development activity in Louisiana that's material to us and that's where Chesapeake would have the biggest impact to us from a producing -- on a producing basis, we wouldn't see any impact at all relative to anything that might happen with Chesapeake.

All right. That's it for me, guys. Thank you very much.

Jason Smith, Bank of America Merrill Lynch.

Good morning, everyone. Guys, you've talked in the last few quarters a lot about the Wilcox and you talked about marketing those properties. Can you just give an update as to how that is progressing? Are you seeing interest at this point in the Wilcox and what are you doing to potentially incentivize production on that play?

We've done a lot of work in the Wilcox, the lower Wilcox. [Gilley Fault Trend], [All Fall] and we have a number of very interesting prospects that we have taken out for market. We have a number of different companies that we are discussing terms with currently.

And are there any other new plays that you guys are focused on or that we should be focused on and thinking about?

Not that we are ready to talk about.

Got it. And the only other one from me is just the guidance for 2016 implies a fairly big drop in oil, oil percentage. I know you've mentioned previously you had some gas wells coming online in the first quarter and you highlighted that, that Shelby Trough program. Is that just what's driving it, or is there anything else driving the decline in oil relative to gas?

I think it's a combination of a couple of things. Mainly it's related to some significant wells in the Shelby Trough coming on in 2016, but the Eagle Ford, as we expected, our properties had a big development program in 2015 and some of that production is rolling off. Those properties continue to be developed, but the stuff in the core of the play came on strong in the second quarter of 2015 and some of that is just rolling off.

Yes, just to add to that, that was in one specific Eagle Ford property. We still have a number of other Eagle Ford properties that have a lot of remaining development, but we are not putting a lot of activity on them just given the current state of the environment.

Got it. Actually if I could try maybe one more for Marc. Just as we come in towards the spring, just any thoughts around the borrowing base and discussion with the banks around the potential borrowing base redeterminations.

Yes, we've been looking at that a lot, running our own analysis. I think everybody knows the environment we are in and we would expect to be affected like everybody in the industry on that. To the degree we are not certain yet. We are actually working on our bank reserve report and starting to talk to the banks right now, but when we analyze our liquidity going forward, we take into account that there is a decent chance that we're going to have a drop. Maybe we will be hopeful, but we factor that in when we look at the liquidity available to us.

Got it. Okay. That's all from me. Thanks, guys.

(Operator Instructions). Dave Kistler, Simmons & Company.

Good morning, guys. Real quickly, looking at the percent of production associated with working interest participation, that's kind of been creeping up and looks like it's creeping up going into 2016 as well. Do you guys look at that as more of a temporal aberration just given what's happening with activity levels in the industry and what that means to your royalty program? And if it's not temporal, is there a target level of working interest participation that you are looking for going forward?

I will answer that. I think a temporal aberration is a perfect description of that statistical anomaly and specifically as we have said all along that the primary driving force for that is the anomalously large working interest position that we have in the Haynesville and the Shelby Trough with XTO. This is an interest that we got virtually for free when Encana exited the position. We think it's got substantial long-term resource value, 25 plus years of drilling. The economics on it in today's environment are okay and we do not expect -- generally, our drilling, our non-op working interest is less as a percentage of our CapEx budget and our volumes.

But, in this environment and in juxtaposition to that situation being something that XTO is aggressively developing, we do see an anomaly occurring there. We do not see ourselves in five years being a 50% working interest company by any means. However, in the environment that we are in with the economics that are afforded to us and the visibility and transparency of that program with an excellent operator and the value of it in the marketplace, we think it is a justifiable place for us to park our capital at attractive returns.

Okay. Appreciate that clarification. Thank you. And then maybe following up a little bit on the unit repo or common unit repo, is that something you guys are considering funding with debt and how do you guys think about the possibility of increasing leverage versus retiring common units?

Well, that's a very complicated and often discussed question around here and the question about using debt to acquire common units is a complicated one. The conventional wisdom would question the use of debt to repurchase shares because one would want to maintain as much liquidity for acquisitions in a marketplace like the one that we are in. However, that assumes that the equity markets and the private asset markets are in their normal state of pricing, which they are not. Specifically, we see assets trading in the private marketplace at yields substantially below where we are trading. And so therefore using debt to make acquisitions is not accretive to purchasing our own shares.

The second thing I would say about that is we don't think that that is a position that is appropriate. If you look at the Alerian Index, of which we are a part, it trades at about a 9% yield currently. That is about where we trade. However, the Alerian Index typically has companies in there with 3 to 4 times EBITDA, debt to EBITDA. It has companies that have coverage ratios hovering around 1 whereas we have substantially no debt and if you look at our structure where, if we do not -- we cannot pay anything to our subordinated units unless we make the required MQD for the common, the coverage on our common units is in excess of 2 times this year and well in the high 1.5 to 2 next year with and without hedges.

So I would tell you that I don't think -- I think that the value of our common shares is trading at a more attractive place than acquisitions are right now. So therefore, in this environment, we want to avail ourselves of access to that commodity.

I appreciate the clarifications, guys. Thank you so much.

Jeff Robertson, Barclays.

Thanks. Tom, just as a follow-up to your answer about common units and acquisitions, is the competition you referenced earlier in the royalty market or mineral market, is that coming from new sources or are those just people you've seen as competitors before being more aggressive about what they are willing to pay for assets?

I would not say that it's new competitors. A couple of specific examples are acquisitions that were made by folks that have been in the business for three to five years, if not longer that are aggregators of capital from both family offices, as well as private equity. And also one of the places -- one of the competitors, as we've said all along, is really not the other buyers, it's what the sellers are willing to sell at.

You've got a lot of assets going into the marketplace from public companies in the working interest space and they are willing to sell those assets at substantially lower multiples than they are willing to entertain sales of minerals. It's really quite confounding why monetizing non-core minerals for public companies is not more compelling to them than it is, but it's not.

(multiple speakers)

That may change as the market moves forward.

This question might be -- well, for anybody -- but maybe for Holbrook. Can you provide any color on what or anything you all are able to do in the current environment to try to stimulate activity on your minerals or what maybe some of your lessees might be asking for?

There's a number of different levers we've been pulling and you can name them all. We've allowed people to add additional acreage to existing leases. We've lowered royalties for increased activity, whether that's a recomplete or something else. We are developing prospects across our acreage. We are working with people for really low-cost entry points just to get things moving in hopes of a discovery. Just out there marketing it and trying to get what you can of your operator's capital budget.

Okay. Thank you.

I'm showing no further questions at this time. I would like to turn the call back over to Mr. Tom Carter, President and CEO, for any closing remarks.

Well, we just thank you all for joining us today. We continue to deal with a challenging market environment and it's one that we are in. It's one that we've been in before and we will -- we think we are in great shape and we will continue to work through it and thank you for your interest.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.