Black Stone Minerals LP (BSM) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Black Stone Minerals third quarter of 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Brent Collins, Vice President of Investor Relations. Please proceed, sir.

Thank you, Takia. Good morning to everyone and thank you for joining us by phone or online for Black Stone Minerals' third-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 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 CFO; Holbrook Dorn, Senior Vice President of Business Development; Brock Morris, Senior Vice President of Engineering and Geology; Steve Putman, Senior Vice President and General Counsel. Jeff Wood, our incoming Senior Vice President and CFO, is also on the call this morning. And with that, I'll turn the call over to Tom.

Thanks, Brent, and good morning to everyone. Black Stone had a good third quarter. We had a strong quarter on the production front, with quarterly production of 35,000 BOE per day. Minerals and royalty volumes grew by 3% on a sequential basis, and we had a very robust quarter for our working interest volumes, with production growth driven by activity in the Haynesville and the Bakken.

You'll recall that we raised our guidance for production last quarter from 31,000 to 32,000 BOE per day for the full year. At this point, we are confident that we will come in near or at the high end of our range, with the potential to come in even a little bit better than our revised expectations.

Our quarter was also good from a lease bonus standpoint. The $9.6 million we reported for the quarter was comprised primarily of leases in the Midland Basin and the Marcellus/Utica play, as well as some leases in the Mid-Continent that are prospective for the Woodford and the Marmaton.

We continue to look at a lot of acquisitions. In the third quarter we did a small deal in the Permian for $8.3 million that added approximately 640 acres in the Midland Basin. That is prospective for the Lower Spraberry and Wolfcamp A and B intervals.

Our business is performing well, and there continues to be both permitting and drilling activity across our minerals and royalty assets. We're also seeing very good results and are working interest program in the Haynesville shale. We have a high quality portfolio of assets and a strong balance sheet that will allow us to opportunistically to add to our base. Black Stone is well positioned to continue growing production and cash flow that will support a growing distribution for unitholders over time.

As we have previously announced, Marc Carroll will be retiring from Black Stone Minerals at the end of this week, and this will be his last earnings call with us. I want to express my sincere thanks to Marc for his many years of service and wish him the best in his future endeavors. Marc has already been working with Jeff, our incoming CFO, and we expect a seamless transition of the role.

With that, Marc, take it away.

Thanks, Tom; good morning, everyone. Black Stone's core business is performing very well, as Tom mentioned. We reported average daily production in the third quarter of 35,000 BOE per day, which is a new record for the Partnership. We had growth in both mineral and royalty and in the working interest volumes, and total production was up 11% from last quarter and 20% from a year ago.

The third quarter included a couple thousand BOE per day that related to outperformance on existing wells relative to our prior expectations, as well as certain nonrecurring items, such as the collection of suspended revenue. Taking these items into account, our normalized run rate was probably closer to 33,000 BOE per day for the quarter, which is still a record.

We're clearly performing well against the production guidance that we put out last quarter. And as Tom said a few minutes ago, we are confident that we'll come in at the high end of the range.

Realized prices for the quarter, excluding derivatives, were $42.15 per barrel for oil and $2.95 per Mcf for gas. Our realization percentages improved from the dip that we saw last quarter and are back in line with normal levels for the Partnership.

We had a hedging gain of $7.8 million for the third quarter, which consisted of $5.3 million in cash primarily related to the settled oil hedges and $2.5 million non-cash, reflecting the change in value of the hedge book between quarters. As of today, we've hedged about 95% of our PDP volumes through the end of 2017 at an average oil price of about $55 per barrel and an average gas price of almost $3.15 per MMBtu.

Lease bonus was very solid at $9.6 million for the quarter. The bulk of this activity was for leases that we wrote in the Midland Basin, the Marcellus/Utica, and Mid-Con. We're looking at a lot of deals now. And Holbrook can talk on that later, if it's desired.

Turning to expenses, we are also performing well against the cost guidance that we laid out. Our LOE per working interest barrel is looking like it will come in at the low end of our range. Our production costs, ad valorem taxes, G&A, and DD&A are all in line with our expectations. And we expect end up within our guided ranges for the year.

Net income for the quarter came in at $37.5 million. Adjusted EBITDA was $74.2 million, and cash available for distribution came in at $66.6 million.

Yesterday we announced our distribution to common unitholders for the third quarter of $0.2875 cents per unit or $1.15 per unit on an annualized basis. This represents a 9.5% increase relative to our common distribution for the third quarter of last year. Our distribution coverage for the quarter was 1.5 times on all units and 2.4 times on only our common units.

Turning to the balance sheet, we continue to be in great shape financially. We ended the quarter with $299 million in debt on our revolver. And as of November 3, the balance was down to $287 million.

Our debt to trailing EBITDAX ratio is a healthy 1.2 times versus a maximum of 3.5 times that allowed for in our credit facility. After the end of the quarter, our borrowing base was increased to $50 million -- by $50 million to $500 million, which we think speaks volumes about the quality of the assets that we have here at Black Stone.

With that, I'll turn the call over for questions.

(Operator Instructions) Jason Smith, Bank of America.

Congrats on the results. And Marc, best of luck; and Jeff, welcome.

So my first question is just -- to hit the high end of guidance for the year would imply, I think, a pretty decent-sized decline from 3Q. So I just wanted to check as to why we should expect production to decline at a time when it seems like, as you guys mentioned, most of your companies are ramping activity, not slowing activity?

Jason, this is Brock. You know, the -- I think you're right. I think we do feel like we're going to come in, as Tom mentioned, at or even maybe above the high end of our range. And Marc referred to what we think our underlying run rate is when you correct Q3 for some one-time things.

We don't expect a big decline, but any decline is really the result of a slight postponement in some of the Haynesville completions in our Brent Miller area just due to some operational conveniences. Some of those completions are going to come in a couple of months later than we'd originally projected.

Got it, got it. Thanks. And Marc, I think you set Holbrook up for the layup here. So, to Holbrook: just curious for some color around the deals you're looking at?

We're seeing a lot of opportunities out there. I'll tell you, the space remains very competitive. There's a lot of volume in terms of transactions in the Permian, as you would probably expect, as well as in the Mid-Con -- specifically the STACK and, to a lesser extent, the SCOOP.

We are also seeing some off-the-beaten-path opportunities that you probably wouldn't see in a more robust environment. And we'll continue to pursue those -- more akin to the likes of a diversified mineral package, which is really right down the middle of our fairway in terms of what we like to buy. That said, there's no shortage of deal flow. We are just trying to find the best opportunities.

Thanks. And last one for me: so the working interest program seems to be increasing as a percent of overall production. I know it's a bit early, but obviously with companies starting to ramp activity as we look towards 2017, how should we think about that part of the business, both as a percentage of production and on a year-over-year basis, thinking about kind of CapEx?

This is Tom. Let me answer that. We will be coming out with some guidance around our working interest program, both in near term and intermediate term within the next quarter or so. But I think the takeaway is that we do not intend to increase on a permanent basis our working interest program as a percentage of volumes over time.

And in fact, we are -- the Board is pretty dedicated to reducing that component of our business. And we are looking at what are the best ways to monetize some of those assets for the benefit of the unitholders and, at the same time, be able to have long-term, stable, and growing distributions to all classes of unitholders.

We remain dedicated to being a mineral company and not turning into a working interest company. And we will have some definitive outlook on that in the near future.

Thanks, Tom, and I appreciate the answer to everyone.

(Operator Instructions) Nick Raza, Citi.

Just a couple of add-on questions. In terms of the acquisition that you made, is there a associated production number with that acreage -- mineral and royalty asset package, excuse me, in the Permian?

There is. It's not going to be overly impactful to the entire Company, because it was a fairly small acquisition. But we think we bought that on a very attractive kind of next-12-months yield. There was one section with 5 to 7 wells that were in the process of being completed. So there should be some decent volumes associated with that.

And are these Delaware or Midland?

This was in Midland County.

Midland. Just to sort of ask a few questions about what Tom just stated in terms of monetizing your working interest, if we were to see something to be done, would this be all the Haynesville acreage that you have a significant chunk of working interest in, or would it be other areas?

Well, the Haynesville right now is a very robust piece of our working interest activity. But also, remember that it's also a very large royalty piece, too, because every well that we have a working interest in, we also have a meaningful royalty in. So monetization of that would affect the working interest volumes and not the royalty volumes, if that's -- so, yes, Haynesville would be part of it.

Right now, that's the biggest piece of it. But the big takeaway is that we are all about reducing from a certain point our working interest volumes into a more modest percentage of our total volumes over time.

Okay, thanks for the color, I appreciate that. And I guess the last question I wanted to ask was about the Marcellus and Utica. In terms of just activity, I mean, there's a lot of talk around the Street about what the infrastructure will look like in a couple of years -- pipeline delays, et cetera. On your particular acreage, what do you see in terms of activity? Has it sort of decreased, increased, stayed the same?

The Marcellus/Utica for us is a smaller part of our overall Company. It has steadily increased over time. I would say the more recent lease transactions that we are referencing in this Q were related to step-up in northern Pennsylvania in Potter County, near -- really on the Potter/Tioga county line, where Shell and JKLM are actively developing the Utica.

Okay.

So we would expect those volumes to come in. We're not expecting near-term development, so to speak. We could be surprised. But our Marcellus has been outperforming our projections in general, but that's not a large driver of our overall volumes today.

Thanks, guys. That's all I had.

(Operator Instructions)

Okay, if there are no more questions, we thank you very much for joining us today. And we'll talk to you in about 90 days.

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