Black Stone Minerals LP (BSM) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Black Stone Minerals second quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Brent Collins, Vice President, Investor Relations. Please go ahead, sir.

Thank you Ashley. Good morning to everyone, and thank you for joining us for Black Stone Mineral's second quarter 2016 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 afternoon. Before we start, I'd 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 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 afternoon, and the Risk Factors section of our 10-K that was filed earlier this year, and our Form 10-Q which will be filed later today. We may refer to certain non-GAAP Financial measures that we believe are useful in evaluating our performance. Reconciliation 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.

Company officials on the call this morning are Tom Carter, Chairman, President and CEO, Marc Carroll, Senior Vice President and CEO, Holbrook Dorn, Senior Vice President, 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, and thank you for joining us today. Black Stone had a solid second quarter and our diverse high quality asset base continues to attract significant drilling activity and new leasing dollars. Production for the quarter was up sequentially driven by the continued growth in mineral and royalty production. Based on the strength of our first half of the year performance, as we stated earlier, we are increasing our production guidance to a range of 31 MBoe to 32 MBoe per day, which is roughly a 9% increase from our original guidance for the year.

We also had a strong quarter for lease bonus, with leases executed in numerous plays across our assets. The Permian, Austin Chalk, and Haynesville Shale make up most of the leases we closed this quarter. While I don't think it's surprising to anyone that the industry is interested in the Permian, it is interesting to note the increase in the Haynesville, which may be a little bit unexpected. However, if you look at the level of investments that's been made by private and public companies in the play recently, and if you look at the recent results producers are announcing, there is clearly some renewed interest in this resource and justifiably so. We closed on the previously-announced Freeport-McMoRan and Wattenberg transactions in June, which further enhance our asset portfolio.

I would note that some of the lease bonus that we booked in the quarter related to the recently-acquired properties from Freeport. We clearly got out of the gate quickly with that acreage, and are already adding meaningful value to these assets that were non-core in Freeport's portfolio. I would also note that yesterday afternoon we completed an acquisition of interest in the Midland Basin for approximately $8 million. Our common distribution for the second quarter was increased by approximately $0.10 to $0.287 per unit.

We're now in our second year as a public company, and my hope is that the investment community sees and appreciates our public track record. We exceeded our production forecast that we laid out at the IPO by 10%. We've done approximately $200 million in acquisitions, which is in the ballpark of what we said we would do, and we defended our common distribution through our subordination structure, which some were skeptical as to how that would work. I would add that we did all of this in a pretty challenging environment for the industry. In the first half of the year we are averaging 74 new well adds per month. This is in line with historic averages, and I think speaks to the quality of our acreage in the core of some of the best plays in the industry, as well as our ability to attract investment to our acreage in periods of low commodity prices, and decreased industry activity.

Looking ahead, we're well-positioned with a great set of assets that would be almost impossible to replicate, and we maintain a strong financial position. Furthermore, in a world where yield and returns are increasingly hard to come by, I think the combination of our current yield, the growing distribution profile we offer, and the reasonable probability that our valuation metrics move closer to a peer average, make our common units an extremely attractive investment. It is an exciting time to be an investor in Black Stone. With that, I'll turn the call over to Marc for his review of the quarter.

Thanks Tom. Good morning everyone. We had a great quarter all around. As Tom mentioned, production came in at 31.6 MBoe per day. That's a sequential increase of 4% from last quarter, and 7% increase from a year ago. Our working interest volumes were essentially flat after posting a large increase in Q1, but our mineral and royalty production performed well this quarter, and grew by 6% sequentially, and that was driven largely by the Haynesville, the Eagle Ford, and the Wilcox. As Tom mentioned, we're increasing our production guidance for the year by approximately 9%. Directionally we're forecasting flat production in the third quarter, and then a step-up in Q4, when we expect a number of completions coming online on our Haynesville and Bossier acreage in East Texas. As these wells come on, our natural gas weighting is expected to increase a little in the back half of the year to about 70%. Excluding derivative settlements, realized prices in the second quarter were $36.50 per barrel of oil, and $1.87 per Mcf for nat gas. Our realization percentages were down some this quarter, in the quarters following significant volatility in commodity prices you'll see some variation in our realizations due to the changes in NGL pricing and basis differentials. For the rest of the year we think the average of the Q1 and Q2 realization is a good number to use for forecasting. We recognize a $30.7 million loss on commodity derivative instruments in the quarter. Of this amount, $13.3 million was realized cash settlements that we received, and $44.1 million was non-cash hedge losses resulting from an increase in commodity prices. The unrealized hedge loss is what caused our net loss for the quarter, but we'll take that since it means that prices are moving in the right direction. You also note that our hedge position is laid out by quarter in the 10-Q that's coming out later today.

Another bright spot for the quarter is lease bonus and other income, which came in at $15.1 million for the quarter. That's almost twice the amount from second quarter of 2015. Our land group negotiated leases in a number of plays, but the bulk of those dollars and the acreage were in the Permian, the Austin Chalk and the Haynesville Shale. On the cost side, total LOE was down compared to the previous quarter. We've seen a general decline in costs which is benefiting the broader industry, but in Q2 we also had a few one-time credits helped bring down LOE for the quarter.

We're forecasting that LOE per working interest barrel for the rest of the year will be between first and second quarter numbers, with the fourth quarter a little lower as flush production associated with our Brent Miller wells comes online in the Haynesville. Production costs and ad valorem taxes as a percentage of oil and gas revenue were slightly better than what we saw last quarter, and we have moved our guidance range down some to reflect that.

As for G&A, much of our incentive comp is based on performance, unless it's heavily influenced by commodity prices. As commodity price outlook improved from Q1 to Q2, the accruals for the expected annual payout increased accordingly. Additionally, during the quarter some legacy comp programs that were previously scheduled to settle in cash were amended, and they'll now be settled in equity. As a result, you'll see a one-time adjustment in our DCF calculation this quarter, to reflect the fact that these payments will now be settled in units instead of cash.

The increase in DD&A rates for Q2 is a function of a true-up during the second quarter for production that we received during the first half of the year, and that included first time payments for some new wells. We also had a true-up of reserves from our recently completed midyear reserve report. Going forward, we expect that a blended rate for the first half, so the average of Q1 and Q2, DD&A per barrel or BOE, is the best estimate to use going forward. Our net loss for the quarter was $20.8 million. Again, that was driven by that unrealized hedge loss. Our adjusted EBITDA came in at $74 million, and cash available for distributions and reinvestment was $68 million. Our coverage ratio for the quarter was approximately 1.5 times on all units, and 2.5 times for common units only. If you exclude the adjustment to our incentive comp plan I mentioned a few moments ago, coverage for all of the units was about 1.3 times, and common units only was 2.1 times. As for our financial position, the balance sheet is in great shape. At the end of the quarter we had about $10 million in cash, and $285 million outstanding on our revolver, and that was after the closing of the Freeport-McMoRan and Wattenberg deals. And as of today, we have about $200 million in dry powder. So all-in-all, we think it was a great quarter, and with that, I'll turn over the call for questions.

Thank you. (Operator Instructions). Our first question comes from Jason Smith of Bank of America. Your line is open.

Good morning everyone, and congratulations on a solid quarter. Guys, just given the comments on increased interest on leasing and the improvement of the commodity since you issued your initial guidance for the year, I just want to get a feel on your thoughts for lease bonus in the second half of the year, given that at this point you guys didn't change your guidance?

Jason, this is Holbrook. I will just say that we're continuing to be very active on the land front, and we are happy with how things are turning out.

Okay. Sounds good. On the M&A market, obviously you guys just closed on the two acquisitions. It seems like there's a lot more interest in royalty assets out there. Just can you give just some color around what you're seeing today? Is there still a lot available? What's going on with bid ask spreads, are there things you guys are looking at pretty aggressively now?

Jason, Holbrook again. We're seeing a lot of opportunities on the acquisition front. As you noted, there's increasing interest in the space, so that means increasing competition, but we're finding attractive transactions out there, and the positive part about the increased interest is, companies that own these assets are now appreciating that they're probably non-core, and are more open to considering divesting them.

Got it. Thanks. Just one last quick one. On a subordinated distribution, can you just give some color about how to think about the trajectory there? I mean, is there a certain coverage ratio that you guys would want to see to increase the distribution, or are you going to kind of keep it at the lower level for quite a bit of time here?

Jason, this is Tom Carter. We are in the process of formulating, and will make it known to everyone, a distribution policy, but with the inception of Q2, Q3, Q4 of 2018 and Q1 of 2019, which is our conversion cycle, which takes on some different issues, other than that, we do not foresee increasing the subordinated distribution without also increasing the common distribution. In other words, if there's a sustainable uptick in distributable cash flow, it will be shared across all units, if that helps.

That helps. Does that mean that the subordinated doesn't go higher until the second quarter of next year at the earliest?

Well, it's unknown, if we have a dramatic uptick in distributable cash flow, the Board would consider an increase in both common and subs at that point in time. We don't see that right now, so I think that you can count on the prescribed common distribution, and the subordinated distribution staying about where it is.

Very clear. I appreciate the answers. Thanks, guys.

Thank you. Our next question comes from Kevin Smith of Raymond James. Your line is open.

Hi, good morning, gentlemen. And congratulations on the quarterly results. Would you mind elaborating on where you saw the incremental leasing activity? I know you talked about the three areas, but was there one that was more specific, and then I guess the next, where I'm kind of going with that, do you expect to see near term activity on those leases?

This is Holbrook. The activity was probably more heavily biased towards the Permian and the Chalk. We're seeing ongoing activity through our Midland and Delaware Basin assets, so the bonus numbers were attractive, and we would expect development to happen in the near term as well. We have a lot of acreage out there, so it may not be on the exact tracks we lease, but other tracks we have that are already leased.

Okay. That's helpful. And then my only other question is, we're hearing a lot of operators, especially this quarter, talk about how they're getting more bullish on Haynesville's drilling economics with a few putting up pretty nice drilling rates. Are you seeing any increase in activity in your acreage, or any thoughts there?

Well, we are seeing increases in both Louisiana and Texas that our bigger interests are in the Shelby Trough in Texas, where XTO is our operator, and they increased activity by adding a rig earlier this year, and have really done a good job in that program in terms of improving drilling efficiencies and costs. So the rate of drilling is faster than we had anticipated going into the year, which is one reason why we've increased our capital guidance, and we expect some more production out of the Haynesville in the latter part of this year as a result, but overall the well results are improving, costs are improving, and the economics are quite attractive now.

Okay. That is all I have. Thanks.

Thank you. Our next question comes from Nick Raza of Citi. Your line is open.

Thank you. Good morning guys. Couple of quick add ons. Could you just give us a little more color around your maintenance CapEx? This is clearly something new that you guys have started to do, and started to reserve, or if you could just give us a little color on how you came up with the number, and what we should expect going forward?

Hi, Nick, it's Marc Carroll. The way we came up with that is kind of looking historically, what it costs us to add or reserve acquisition costs all-in with both PDP at the time of acquisition and future drilling. That is an estimate. We talked long and hard during the road show, and if you look at our historical royalty production, you'll see that over the long haul, we believed and still believe that we don't have maintenance CapEx, because our assets regenerate. And the history proves that out.

As of right now, where we stand, the working interest has gotten a little more than its it's historically been so we've evaluated and done the analysis and for the time being right now we're calculating maintenance CapEx and, again, it's kind of based on that blended reserve acquisition cost of both working and royalty interest over time, and that's where the number came out, kind of an all-in rack to replace the production we're producing each year right now. So that's where the number came in. We had maintenance CapEx last year, accordingly, but as we stated in the S-1, it was well within the coverage that we had. This year we've changed the presentation on our reconciliation to be a little more consistent and showing the actual count going forward. And we'll evaluate that every year in the same manner.

Okay.

So that could change over time.

So, I mean, just to clarify, the reserve will actually be used to pay down debt, in the meantime, I am assuming that you guys do the acquisitions, which is fine, but if there were no acquisitions from here through the next two years, that cash would just build on your balance sheet or pay down debt, is that the right way to think about it?

Yes. I mean that cash goes to, obviously if it's not spent, it will push down the revolver, we'll apply it to the revolver, and again, as we showed in the first year, when we need the cash for acquisitions or some of our working interest participation, we'll just draw down the revolver.

Okay. Then I guess my second question was relating to the uplift, I guess, re-determination, seasonal will hit us again pretty soon, but in terms of your acquisitions, how much of a reserve base, a borrowing base uplift do you expect?

This is Marc again. And I'll ask Brock and Holbrook to jump in if they want. But a lot of those acquisitions were non-producing and future drilling potential, but they had a good amount of PDP with them. So again, there's obviously, the advance rate is not 100% on that PDP, but we do expect to get some uplift and we actually had some good reserve numbers and reserve adds in the first half of the year, that combined with kind of strengthening prices, hopefully that will translate into a more favorable bank price deck, when it's time for the re-determination. So we're cautiously optimistic that we should see an increase, but at this time there are a lot of moving parts, and we won't be for certain until we get into the season, September, October.

Fair enough. Fair enough. And I guess this will be my last question, I apologize, but in terms of the transactions that you've seen out there, I know Viper announced an acquisition of some Permian mineral interests over in Midland, I think it was about $110 million, do you guys have sort of a thought about that? Were you guys participating in that as well, or trying to look at it?

Yes, there wasn't a lot of disclosure on their acquisition. I think parts of that, parts of what you could see through their announcement, we may be familiar with a couple of those assets.

Okay. That's all I had. Thank you very much, guys.

Thank you. (Operator Instructions). Our next question comes from Jeff Robertson of Barclays. Your line is open.

Thank you. I'm just curious, Tom or Holbrook or Brock maybe, with the better than expected production in the first half of the year when commodity prices were low, how much visibility do you have as you start to think about 2017, either things you're hearing from operators, or permits being pulled on the royalty interest that give some indication of what an early look at activity next year is?

I'll take it. In a macro level, we are constantly in the forward-looking modeling business, and from where we sit right now in August of 2016, we are bullish on volumes for next year, and we are positive about our trajectory in 2017 relative to today, I don't know how much more detail, Brock, you might want to add to that or--.

Sure, yes, Jeff, this is Brock. There are a few plays that we worked pretty hard on because of our position, where we've got the ability to incent operators. East Texas is an area where we've got large contiguous blocks of acreage, and we are able to write leases in a way that give us some visibility with respect to drilling activity, near term activity, and other arrangements, such as in the Haynesville with XTO, where we've got some incentives in place to incent drilling there. So that often gives us some visibility into where some of our growth is going to come from. We track our production and activity by play for over 40 plays, and just watching the activity very closely in each of those plays, gives us some insight and visibility into what to expect, in the forward quarters. We look at the economics in those plays and we try to understand it from the perspective of the operator. So we feel like we've got some pretty good visibility, even though we're in a somewhat passive position as a royalty owner, and certainly with commodity prices moving in a positive direction, it helps us feel even better about those forecasts.

Brock, can you tell how much of the performance is just better performance on existing wells than maybe what you all had factored into your models versus incremental activity?

It's a little of both in the Wilcox, for example, we've had less drilling activity than we would have anticipated a year ago, but the wells are actually performing quite a bit better than we had forecasted for a variety of reasons. So we see a little bit of both. But as Tom mentioned in his remarks, even during the worst part of the cycle, which we hope is behind us now, we're continuing to see new wells added on at a rate just right in line with where we've been historically, even during the peaks of the industry. So it's a combination of just, good continued solid activity, and some outperformance by some wells in individual cases. The Haynesville results in the Shelby Trough have been very, very good. The wells are being produced at restricted rates, so time will tell. In some cases, how much better in terms of overall recovery those wells will be. We are hopeful that we'll start to see some improved early rates, as well as XTO continues to tweak the completion designs there. So we're hopeful that it's going to continue to be a combination of both outperformance and increased activity.

Okay. Thank you very much.

Thank you. Our next question comes from Brian Vess of Robotti, your line is open.

Hey, good morning gentlemen. I see you repurchased 1.2 million units and you have about 30 million remaining. I just wanted to see what you could tell us about your plans to continue the repurchase program, and how you think about capital allocation as you weigh those repurchases versus spending on acquisitions?

Brian, this is Tom. And I would answer that this way. When we first envisioned the share repurchase program, it was shortly after the middle of February, earlier in the quarter, which was a pretty different place than where we are today. And we put in place a tiered repurchase program that our Board approved, and it was somewhat the amount of capital to be spent was somewhat dependent upon where the units were trading. And the total capital to be spent decreased the higher the shares went.

In other words, if we felt like our shares were at a significant bargain in the public trading, we had capital , a lot of capital we were going to allocate to it. I think our top tier price was something a little, where our repurchase was the least amount of capital, was a little bit higher than where it is today, but the shares are trading a good 3 to 4 points higher than it was some time ago when that program was put in place. So if we see acquisitions, if we see the acquisition of our own units at a significant premium to the underwriting metrics in the acquisition market, it's really hard to buy diversified mineral packages, and we are one, so if our stock is low, we like buying it. If it's not, we're going to put money into new acquisitions.

All right. Thank you.

Thank you. I am not showing any further questions in queue at this time. I would like to turn the call back over to management for any further remarks.

We don't have any, I don't think. Thanks everybody for joining us today, and we look forward to talking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a wonderful day.