Black Stone Minerals LP (BSM) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Black Stone Minerals L.P. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Brent Collins, Vice President of Investor Relations. Sir, you may begin.

Thank you, Jimmy. Good morning to everyone, and thank you for joining us, either by phone or online, for Black Stone Minerals First Quarter 2018 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 discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday and the Risk Factor section of our 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 measure 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; Jeff Wood, Senior Vice President and CFO; Holbrook Dorn, Senior Vice President of Business Development; Brock Morris, Senior Vice President of Engineering and Geology; and Steve Putman, Senior Vice President and General Counsel.

I'll now turn the call over to Tom.

Thanks, Brent. Good morning, and thanks for joining us today. Black Stone continues to build on the strong momentum that we had at the end of 2017, as we move into and through 2018.

Our production during the quarter was at an all-time high of just over 42,000 barrels of oil equivalent per day, that's 11% higher than Q4 2017. This was driven partly by higher levels of activity broadly across our asset base. We averaged 122 gross well adds per month for the quarter, which is a 62% increase to the 2017 average of 75 gross well adds per month.

Our net revenue point adds were up commensurately and were 60% higher in the quarter compared with the -- our 2017 average. We had a particularly strong production contribution from the Bakken/Three Forks this quarter. That play saw increasing levels of activity over the last year. And now, production from the play is back to within a few percent of its peak in late 2014.

I'd also note that the asset we acquired from Noble at the end of 2017 is performing above expectations. The result is that we are ahead of where we thought we would be at this point in the year with respect to production.

Record production, combined with favorable commodity price backdrops, led to new records for both adjusted EBITDA and distributable cash flow of $95 million and $83.4 million, respectively.

On the acquisition front, we continue to be successful adding complementary acreage to our portfolio. We invested around $32 million during the quarter, about 70% of which is related to a single acquisition in the Midland Basin. The balance was spent bolting on to our East Texas Shelby Trough acquisition position. We're pleased with our ability to continue to find attractive acquisition opportunities in this competitive environment.

We've talked a lot about reducing exposure working interest capital over the last year or so. We expect the first quarter of 2018 to be the last quarter where we have any meaningful working interest capital related to the development of our Shelby Trough acreage in East Texas, where we own non-op working interest ranging from 12.5% to 50% in over 80,000 net mineral acres and where we expect 35 to 45 wells to be drilled annually.

As you know, we now have farm-out agreements in place that have our partner stepping into our working interest position. Going forward, we expect to have mineral working interest capital -- to have minimal working interest capital related to development opportunities.

Periodically, though, we may spend a small amount of capital to advance the understanding of prospects on our minerals with the goal of moving these assets into development. A great example of this is what we are doing at our PepperJack project. You'll recall from our 4Q '17 announcement, we drilled and logged the PepperJack A#1 well earlier this year with encouraging results. We are drilling a delineation well in the second quarter. We expect that we'll ultimately recoup a large part of the CapEx spend testing this area, and that these 2 wells will allow us to secure a healthy continuous drilling commitment resulting in meaningful royalty production from our mineral position there.

As I look forward, I'm confident that we'll continue to see this level of performance from our assets. We're in some of the best parts of the Permian, which everyone knows, is being rapidly developed, and completion activity in the Haynesville/Bossier play is really accelerating, particularly on our assets in the Shelby Trough. We're well positioned to deliver on our commitment to increase the distribution for common and subordinated owners to an annualized $1.35 per unit next quarter, being Q2 of '19.

Before turning the call over to Jeff, I'll address the -- a question that we've been asked a number of times recently, which is, given the recent announcements by Viper, KKR and others, what are our thoughts about converting to a C corp. A couple of things that I would note. We generate a lot of revenue with relatively little capital expense. As a result, we would be subject to a fair amount of corporate taxes if we were to convert out of the MLP structure. Viper dealt with this through structuring a deal with its parent, Diamondback, who was willing to absorb the taxable income. With an alliance -- an alliance with a strategic partner would need to exist for Black Stone to create this type of tax deferral strategy, one component of their trends of Viper's transaction. One thing we are sure of at this point is that it's relatively easy to convert to a C corp, but virtually -- or relatively impossible effectively to convert back to an MLP. There's no doubt that the MLP space is sitting under pressure. However, we think we need to see the real tangible benefits of a conversion, ones that would also survive eventual future tax code overhauls.

While at times challenging, we've been successful raising capital we need to support our acquisition program as an MLP, so we don't want to rush into a decision without real clarity around the long-term benefits of such move. With that said, we will continue to evaluate this situation for any potential to increase our overall value.

With that said, I'll turn the call over to Jeff now.

All right. Thank you, Tom, and good morning, everyone. As Tom mentioned, we're off to a great start to 2018, with the first quarter operating and finance results that we reported yesterday afternoon.

Total production at 42.4 million BOE per day was up 11% from last quarter. We saw big gains in our legacy Bakken production. And so far, production coming from the properties acquired from Noble late last year is running ahead of our expectations. Now the 42.4 million BOE per day is within our production guidance range that we provided for the full year, but we originally expected a lower starting point and to ramp up through the year to achieve those levels. So we're very encouraged by what we're seeing early on. Even more encouraging, the production growth was driven more by oil volumes, which were up almost 25% over last quarter, and by royalty volumes. Those were up 15% compared to only a 3% increase in our working interest production. These numbers will move around a bit throughout the year, including for the second quarter, as we expect a number of Shelby Trough Haynesville/Bossier wells will turn to sales. And those wells are typically dry gas and ones where we own both royalty and working interest.

We also benefited from improved commodity prices. Index prices for oil and gas increased in the quarter. But we also saw improved differentials, so that our net realized price before hedges increased 17% over the fourth quarter. Now we're obviously keeping a close eye on differentials, particularly out of the Permian, but we did not see much of an impact of that in the first quarter, while we did see shrinking differentials in the Bakken.

In total, we posted over $125 million of oil and gas revenues for the quarter, and lease bonus and other income of around $5 million. I'll note that while our lease bonus is a little bit below our run rate to our annual target of $30 million to $40 million, it is one of the most difficult parts of our business to model, as it can vary a lot from quarter to quarter.

Our costs were all in line with the 2018 guidance that we provided last quarter with the exception of DD&A, which we now expect will be about $0.50 lower per BOE of production due to refreshing some of our depletion rates.

Taking all of this into account, we generated adjusted EBITDA for the quarter of $95 million, and that's 20% higher than what we generated last quarter. That translated into a record distributable cash flow for the quarter, as well, at $83.4 million.

We announced our distributions on the common and subordinated units last night. As Tom mentioned, this is the last quarter of our MQD at $0.3125 per unit, or $1.25 per unit on an annualized basis. That distribution will be paid on May 24.

We also posted very robust distribution coverage of almost 1.6x for the quarter, and that coverage allowed us to fully fund our net working interest CapEx out of retained cash flow. Next quarter, the MQD is scheduled to increase by 8% to $0.3375 per unit or $1.35 per unit annualized. And we still plan to bring subordinated distribution to that level as well.

Turning to the balance sheet. Debt balance moved up a bit from year-end as we closed on over $30 million of new acquisitions in the first quarter. However, we ended the quarter with very solid liquidity, and our leverage ratio stayed flat to last quarter at 1.3x. We benefited from another increase on our credit facility borrowing base. As part of our normal semiannual redetermination, the borrowing base was increased by $50 million to $600 million, effective May 4. We did this through the existing banking group, as always, had great support from our lenders. As of last Friday, we had paid down the revolver balance to $394 million with resulting liquidity in excess of $200 million after taking into account the new borrowing base. That's a number we're very comfortable with as we look forward to our liquidity needs for the rest of the year.

Almost all of the forecasted $20 million to $25 million of CapEx associated with participating alongside operators as a non-op working interest partner, which we call our working interest participation program, was spent in the first quarter. As a result of the farm-outs put in place last year, we will have very little working interest participation CapEx going forward.

The only other working interest CapEx we have scheduled is the one delineation well around our PepperJack development area that Tom spoke about. In total, that leaves just $5 million to $15 million of total capital requirements for the rest of the year, and that will allow us to focus that liquidity on the acquisition front.

In closing, this is a really great start to the year. And we're very well positioned as we look into the second quarter with a number of new wells coming online in our Shelby Trough development areas, good completion activity in the Eagle Ford and continued strong performance from recent acquisitions.

And with, Jimmy, we can open up the call to questions.

(Operator Instructions) Our first question comes from Brent Koaches with Raymond James.

Just curious if you could sort of start off by giving maybe a little bit more color on activity in the Bakken, maybe which areas in particularly -- were particularly strong and then what that says about full year guidance going forward. Should we expect maybe some updates later this year? What do you think about that?

Brent, this Holbrook. I'll take that. I think what we saw in the Bakken was just a considerable buildup of docks over the last 2 years finally get converted to completed wells on top of just increased rig counts in the play, generally. But we've got a large position in the Bakken, a lot of that down the gut of the Nesson anticline. And frankly, that's where we've seen a lot of activity. We are seeing folks start to reach out into what I would consider to be less core parts of the Bakken with these higher prices, so we're excited about that, to see those areas start to attract capital again.

And Brent, this is Jeff. I'll just say, in terms of guidance, I think we're going to do what we typically do. This is early in the year. No doubt it was a great start, probably a little better than we had originally anticipated, as well, due to Bakken and some of the -- just performance from the acquisition. So we're very encouraged for where we are to start this year. We want to give it a little more time here. So I think the plan would be to look at things after the second quarter and to determine if there's a need to revise guidance at that point.

Okay, fair enough. Just as a follow-up, we saw in the non-GAAP reconciliations an item there for income tax expense. I'm just curious if you maybe could share some detail on what that item relates to. And then as far as the C corp conversion, definitely appreciate the -- your comments in the prepared section. I'm just curious if you could comment on what kind of things you're looking at from the Viper conversion, what you'll basically evaluate in relation to your own business. And I can appreciate that Viper is significantly different from Black Stone in terms of the Diamondbacks sponsor, et cetera. So just any kind of color you can give on that process.

Sure. So Brent, this is Jeff. I'll take a first stab at those and then let others jump in, if they'd like to. First of all, on the income tax expense, congrats on reading the document in such detail. The -- we did a simplification. Some of our corporate structure, we -- I mean, it's kind of getting into the minutia, but we had an internal series of transactions early in the year to just simplify the structure. There were a couple of income tax paying structures within that, and it just relates to that. So that -- I guess, all I'd say is that income tax expense should be a onetime item we don't expect to see anything on a go-forward basis. So that's that. On the C corp conversion, as Tom said, this is something that we're actively evaluating. I'll just give my opinion. I thought that the way that Diamondback and Viper structured that, they did a really nice job to move that cash tax exposure away from Viper, so there would not be a near-term impact to Viper's unitholders. We don't have a similar situation. So again, as Tom mentioned, as a mineral company with a lot of revenues and relatively low cost and relatively low CapEx, we do generate taxable income. So what we really have to be comfortable with in making that sort of decision, well, there's a number of things: one, we have to be really comfortable that the increased liquidity and the other benefits of being in that structure would create enough yield compression to offset the tax leakage we would have at the institute level. Again, it's just a value play at the end of the day. So we would like to see that maybe play out a little further. And then second, frankly, we just would like to get more comfortable that this -- that the changes in the tax code will be sticky. What we would not want to do is convert to a C corp; C corporate tax rates go back into the 30-plus percent range and then not really have a clear avenue to get back to the MLP structure, which is still -- provides advantages to the total tax picture. So if there's other comments, but that's sort of my thinking at this point.

Great. I would just add that -- this is Tom. I'll just add one thing. I mean, of all -- the looking and studying we have done hasn't convinced us yet. The C corp space for somebody like us is a high-correlation event to more investors, more liquidity, greater access to capital. It may be, but it's not crystal clear at this point, for sure. The second thing is one thing that I personally think is sure is that the different parties get control of Congress from time to time, and I think the tax code will be changed again in the future and probably not in a direction that is benefiting to the structure that's there right now. So I don't know. Once you step over that line, it's very expensive to go back.

(Operator Instructions) Our next question comes from Kashy Harrison with Piper Jaffray.

Tom, with the subordinate -- subordination period and with minimum quarterly distribution period almost at an end, I was wondering if you could just help us think through how you look at distribution growth following the converts. Once the subordinate units become common units, just how do you conceptually think about distribution growth over a multiyear period of time?

Well, I -- as we have said in some of our guidance in the past, we see multiyear growth in the 3% to 5% range for common units after the conversion. As in the past, we hope that, that is conservative. And we would work to have a better growth rate than that. But that's our model right now. With respect to whether we have a variable distribution or a fixed distribution, that's a question that we haven't fully answered yet. I think all MLPs, at the end of the day, are variable. They may not be variable quarter to quarter because they're just distributing what they've earned, and some do that. Historically, the way we have -- even before the public platform with the subordinated units, we like to look at a annual forecast and a multiyear forecast and set a growing distribution that sees adequate to good coverage every quarter. And as long as we've got the coverage in a good way, maybe vary the coverage a little bit more than varying the distribution quarter to quarter, i.e. we would hope to tell the investing public what we see coming up and try to stick to it as best we can, if that answers your question.

That's very helpful. And maybe just as a follow-up, in terms of a -- let's call it a minimum coverage ratio that you would be comfortable with assuming prices are in a respectable place, call it, a 50 to 60 environment, even 60 to 70, what do you think that covered ratio would look like just as a minimum?

Well, as -- on a over multiple quarters, I mean, I think it can -- it should be one at least every quarter. But you may have quarters where it's slightly below that, if you're in a cycle where over a cycle, you have good coverage. And when I say good coverage, I'm talking about 1.1 or better. I hope better, 1.2, 1.3. And some quarters, you may have better than that, especially if you think about the volatility in bonus income, which is a little bit of a unique thing for us relative to other MLPs. That can cause your coverage to bounce around a lot.

And our next question comes from Tim Howard with Stifel.

Could you speak a little bit to realize prices to NYMEX? We estimate the crude differential as narrow over the past 4 quarters down to about $1.50 this quarter, while all natural gas is at a premium for about 5 quarters. Just interested in the drivers of each. And if you could provide any expectation going forward, would appreciate it.

Tim, I'll start. This is Jeff. Yes, so a couple of things that we've seen. One, is as I mentioned, some shrinking crude differentials in the Bakken. I think, frankly, that's just a matter of DAPL and other takeaway getting a little better there. We are, again, as I mentioned, watching the levels of differentials in the Permian. We haven't really seen much of an impact on oil yet from Permian differentials, but it's something that we're paying a lot of attention to. I think, on a go-forward basis, that will be a driver of -- do differentials widening the Permian, do our producers have firm transportation that gets them there. So it's really a step or 2 removed, obviously, from our direct participation there, but that will be a driver. And we would think that the Bakken differential should stay at this current lower rate versus historical. On the gas side, I think a lot of what you're seeing in the gas realizations tick up a bit is just the additional value of the NGL products, which are, at least, to have yourself is more tied to crude, so that has run up. Just as a reminder, we don't report liquids volume separately. We show that as a price adjustment to our gas volumes, so that has a pretty big impact as liquid prices move around.

And our next question comes from Philip Stuart with Howard Weil.

And circling back to production, I guess, I was a bit surprised to see the outperformance in 1Q just given some of the commentary from the E&P companies, so far, during 1Q earnings, kind of noting weather issues in both the Permian and the Bakken affecting production. So I guess, the question,is kind of twofold. Are you able to quantify the impact that maybe weather had on production? And I guess, was it meaningful? And then as we look at completions, in general, it also seems like a lot of completions for E&P companies were more weighted towards 2Q and 3Q. I'm just wondering if you all are kind of seeing that on your acreage.

This is Holbrook. I can take the completion question. In the Bakken, we feel like we saw a rush of completions in the fourth quarter given the nature of our mineral position there being very large from a gross footprint perspective, smaller in net perspective, so very large, significant mineral position overall. We don't have a strong of insight in that particular position on each given well. And a lot of the wells are held under confidential status with the NDIC. But we work with our operators to get as close to real-time information as we can. I'll tell you, in the Eagle Ford, we do -- we did see a delay in completions. And we're seeing that pick up considerably in the second quarter and, actually, frankly, the end of the first quarter. So it really just varies by play. The Permian has been fairly consistent. We didn't really see a lot of weather delays that we could feel. And that's probably because our interest is not really concentrated in 1 or 2 hands, just for diversification aspect or the benefits of that. And then in the Haynesville, we are now seeing a round of completions that are about to run through. So we feel really good about Q1. And we think that's a great kind of foundation to build off of for the rest of the year.

Okay. Good deal. And then, I guess, another question, more on the acquisition front. Where are you all seeing kind of the most intriguing opportunities maybe outside of the Permian and the Shelby Trough?

This is Holbrook again. I would say that -- I think that, that's [ours for] putting the work, in my opinion, right now, is probably the Shelby Trough. The Permian is extremely competitive. And that market's gotten very, very efficient. And a lot of other folks are -- there's been a lot of capital that's shown up for other liquid oil-rich plays, whether it's the DJ or the Bakken. And we've seen prices tick up across the lower 48 in the mineral market over the last 6 months. We're trying to continue to focus where we have an edge or think we have an edge, at least.

(Operator Instructions) And I'm showing no further questions in the queue at this time.

Okay. Well, in that case, this is Tom, I just thank you all for joining the call today. And we're gonna do our best to keep the momentum going throughout '18 and '19. Thank you so much for joining us.

Ladies and gentlemen, this does conclude your program, and you may all disconnect. Speakers, please stay on the line. Everyone else, have a great day.