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Black Stone Minerals LP (NYSE:BSM)
Q2 2019 Earnings Call
Aug 6, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Q2 2019 Black Stone Minerals LP 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 Instruction]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Brent Collins, Vice President of Investor Relations.

Brent Collins -- Vice President, Investor Relations

Thank you, Ashley. Good morning everyone and thank you for joining us either by phone or online for Black Stone Minerals Second Quarter 2019 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-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 release from yesterday, which can be found on our website at blackstoneminerals.com. Company officials on the call this morning are Tom Carter, Chairman and CEO; Jeff Wood, 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.

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Thanks, Brent. Good morning and thank you for joining us today. Yesterday, we announced our results for the second quarter of 2019 which reflect strong operational and financial performance across all our asset base. Our total reported production crossed over to $50,000 BOE per day for the first time in our history, driven by a 19% increase in mineral and royalty production over the first quarter's volumes.

On the strength of this record quarter you're increasing 2019 full-year production guidance by approximately 5% to a range of 47,500 BOE per day to 50,500 BOE per day from 45,000 to 48,000 respectively. At the end of the second quarter, we had a total of 101 drilling rigs operating on our acreage, of which a third were in the Midland Basin, and the third in the Delaware Basin, and the remaining third operating across the rest of our asset base. That total number is down somewhat from the end of the first quarter which shouldn't be that surprising to those who have been following the rig count in recent months. While the number of rigs running on us was down a bit. We did have a solid quarter with respect to well additions and permits added. During the quarter we added 5.25 net wells on our acreage. The largest contributor was the Midland, Delaware with two net wells, Haynesville, Bakken, Eagle Ford contributed toward another 1.3 and the remaining 2 net wells being added outside of our top four place.

In 2018, we added 21 net wells across our acreage and we're on a pace to meet that level of activity, again this year. In terms of permitting activity, we saw 471 horizontal permits added on our acreage. During the quarter, with 248 of those coming in Midland and Delaware Basins, and 138 horizontal permits in total across Bakken, Eagle Ford, Haynesville.

Black Stone generated $98 million of distributable cash flow in the second quarter or $0.48 per unit, we're maintaining our distribution at $0.37 per unit, which equates to a 1.3 times distribution coverage and roughly $22 million of retained cash. This excess coverage funded $21 million in acquisitions purchased during the quarter as well as about $2 million in share repurchases that were done in that period.

Our practice of maintaining some distribution coverage allows us to do things that help improve the business, while avoiding incremental debt or expensive equity issuances and we think it makes a lot of sense in the current environment.

Before I turn the call over to Jeff, I want to say a couple of things about our -- about the Shelby Trough. I'm confident that many of you listening on this call are well aware of the challenges that exist in the natural gas markets today. With natural gas prices dipping below $2.20 NM [Phonetic] the economics of even the best natural gas plays across the country are strained, Shelby Trough included.

As we noted, in our press release yesterday, our two operators in the area XTO and BP have recently communicated that they are slowing activity in the play. In the case of XTO we understand that they will pause drilling for approximately 12 months and focus on completing existing drilled, uncompleted wells as they await some incremental gathering and trading capacity in the area. Gross production from Brent Miller, the project XTO operates is currently at 250 MMcf per day and we think it will increase to about 400 MMcf per day as they complete those drilled uncompleted wells over the next year.

As for BP, they have made a decision to focus on a relatively small portion of acreage covered by our development agreement with them, and our expectation is that their gross production volumes at the year-end will be around 330 MMcf per day. One of the key aspects of our agreement with BP is that they only hold acreage through continuous drilling.

As a result, BP will release approximately interest in 100,000 gross acres that we will now be able to market to other operators. BP has been a great partner and has done a lot to help significantly derisk this asset base. We are confident in the Shelby Trough long-term potential giving -- given its proximity to LNG export infrastructure and the anticipated growth in global gas demand. We will now be focusing on attracting new operators to the area, to exploit the Multi-TCF of potential that we have there. Driving activity on our acreage is core to what we do, and the team here is focused on continuing to do just that in the Shelby Trough.

With that, I'll turn it over to Jeff.

Jeff Wood -- President and Chief Financial Officer

All right, thank you, Tom, and good morning everyone. So, we reported total production for the second quarter of 52.2 MBoe per day, that's a 12% increase over last quarter. Royalty production specifically was up almost 20% from Q1, while our working interest production continue to decline as planned. The production growth came primarily from the Permian, where we continue to see very strong results across our core Delaware and Midland acreage. Oil prices rebounded in to the second quarter, but we did see wider oil differentials. Natural gas prices on the other hand -- now over 16% in the second quarter. We don't report NGL separately, but those prices fell substantially as well. We include NGL sales as part of our natural gas revenues, and as a result, our realized natural gas prices were down over 20% quarter-over-quarter.

Our hedging program provide us some protection against the drop in gas prices. We had realized hedge gains about $2.9 million for the quarter, as well as the large unrealized gain caused by the forward curve for gas moving down over the quarter. We posted approximately $128 million of oil and gas revenues and $6.7 million of lease bonus in the second quarter. Lease bonus was up from Q1, but still at a run rate below our original full year guidance and I'll come back to guidance in just a moment.

Overall adjusted EBITDA for the second quarter was $108 million and as Tom mentioned, distributable cash flow for the quarter was $98 million. We generated very healthy distribution coverage for the quarter and retain sufficient cash to fund our acquisition and repurchase activity, without additional borrowings, because of that our overall leverage levels and liquidity position remain in great shape. At the end of the quarter, we had $436 million of debt outstanding and our debt to trailing 12 month, EBITDAX or our leverage ratio was approximately 1.1 times. We had over $240 million of liquidity available to us at quarter end, based on our current $675 million borrowing base. We paid down over $40 million, since quarter-end, so as of now, our revolver balance is under $400 million and the liquidity number has increased over $290 million today.

As part of the earnings release yesterday afternoon, we announced updated guidance for 2019, we've raised total production guidance by 5% to a midpoint of 49,000 BOE per day for the full year. As I mentioned earlier, lease bonus continues to trend a bit below our original expectations, as we said before, that's a part of our business, that can be a little lumpy and can be difficult to predict, but based on the trend this year-to-date, we're going to move the full-year estimate down to $20 million to $30 million.

Our current expectations around costs are generally in line with our original guidance, with the exception of both DD&A and cash G&A and both of those, we now expect to be slightly lower than our original estimates. So overall, we remain in a very strong financial position, despite the choppy capital markets and expect to see continued solid operational performance, through the year.

And so with that, Ashley, I will turn it back to you to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Philip Stuart with Scotia Howard Weil.

Philip Stuart -- Scotia Howard Weil -- Analyst

Good morning, guys, congrats on a good quarter.

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Good morning, Phil.

Philip Stuart -- Scotia Howard Weil -- Analyst

I really appreciate the additional commentary on the Shelby Trough activity from XTO and BPX. Particularly on XTO, I guess, you all talked about -- I guess gross production, from their main development there, increasing from 250 million cubic feet a day to 400 million. Just kind of curious, well, A, want to make sure that those numbers are correct and then B, kind of if you had a timeline of that ramp, is it pretty ratable over the next three or four quarters, or if you guys expect a significant ramp in any one quarter?

Brock Morris -- Senior Vice President of Engineering and Geology

Yeah. Hi, Phil, it's Brock Morris. So, yeah, the increase we expect is real, they've currently got some production constrained because of, as we mentioned lack of -- or some constraints in the midstream-gathering and treating capacity, that's going to be kind of resolved up to about $400 million a day in the coming few months. At the same time, they're going to be completing a number of docks [Phonetic] and there are a couple of wells currently drilling, that will get completed also over the next six to nine months, and as those wells come online, you'll see kind of a general growth to that $400 million a day growth rate, probably over the next three quarters.

Philip Stuart -- Scotia Howard Weil -- Analyst

Okay, that's very helpful. And then I guess pivoting to the Permian Basin. Just curious, obviously a good bit of rig activity there and a lot of permitting. Just kind of curious what your kind of near-term outlook is on the ability of your mineral position to grow production over the six to nine months there, and if that's enough to kind of grow corporate oil volumes, while kind of maybe finding some declines in Eagle Ford [Technical Issues] and or Bakken?

Jeff Wood -- President and Chief Financial Officer

Yeah, Phil this is Jeff. I appreciate the question. Yeah, look, we think we continue to be very well positioned in the Midland and Delaware Basins. So we expect to see continued growth there. As you mentioned, right, I mean, both the Eagle Ford and the Bakken are relatively mature positions for us. I say that and yet they have been at least in the Bakken, outperforming our expectations here for the past few quarters. So we'll see what happens going forward.

Short answer is, we expect to continue to see growth, I'll tell you the -- some of the carnage here in the market over the Permian over the last few days, I think maybe, it's been a little bit overblown right and I'll further say that things like Concho's announcement and some of the testing they did in the Delaware, with some of the testing there is well above anything that we would have assumed in our acquisition assumptions, when we are looking at Permian acreage. So we certainly don't think that that condemns the Delaware or the Permian overall, in terms of production volumes going forward. So, anyway, obviously we will come out with updated guidance for 2020 at the beginning of that year, and that will include our thoughts on oil production going forward, but we certainly expect to see continued development.

Philip Stuart -- Scotia Howard Weil -- Analyst

Okay, great. And then I guess one more quick modeling question, for me, on oil realizations, are you all expecting oil realizations to potentially pick up a little bit relative to WTI, as some of the long-haul pipes come online in the next couple of quarters out of the Permian, down to the Gulf Coast. Just kind of curious, really if you all are able to piggyback off of the operators, I guess, gross takeaway on the oil side in the Permian?

Jeff Wood -- President and Chief Financial Officer

Yeah. So again, this is Jeff. I mean, that's always a little tough to tell for us, because we don't have perfect visibility as to which of our operators have dedicated pipeline transportation agreements, that may be avoided some of the specific differentials. What I can say is that you -- you can see it in our financial results, that -- with this quarter, specifically that our oil differentials have widened over the past several quarters, that's primarily due to the Permian. So, just given that, I would expect that we would stand to benefit when pipeline constraints free up and those Permian differentials shrink the TI, that should benefit us just given the fact that we've seen some widening over the past few quarters.

Philip Stuart -- Scotia Howard Weil -- Analyst

Okay, guys. Makes sense. I appreciate your time.

Jeff Wood -- President and Chief Financial Officer

Thanks, Phil.

Operator

Your next question comes from Pearce Hammond with Simmons Energy.

Pearce Hammond -- Simmons Energy -- Analyst

Hi, good morning and congrats on a solid Q2. My first question pertains to the acquisition you announced -- you acquired roughly $21 million of properties in Q2 and I was just curious, number one, what's the market rate right now on acquiring properties, is it cooled off a little, is it still pretty, tight, so what does that look like. And then secondarily, what can you tell us about the acreage or the acquisitions that you added in the Permian basin specifically?

Holbrook F. Dorn -- Senior Vice President, Business Development

Pearce, this Holbrook. The market has been somewhat volatile, I think, you start to see fuel prices come back a little bit earlier this summer when people got real nervous about where oil was going. And then as oil seems to a thousand footing in and the mid to high '50s, as the market has tightened up a little bit again. And then, you're still seeing a lot of capital moving in both the Midland and Delaware basins and I think Delaware continues to price at a higher royalty acre metrics here in the Midland Basin.

Pearce Hammond -- Simmons Energy -- Analyst

Okay, great. And then as far as your specific acquisitions were they more weighted to the Delaware versus the Midland or evenly split.

Jeff Wood -- President and Chief Financial Officer

We frankly, really like both basins and we're agnostic, and we just look for what we think are the best returns or risk reward opportunities, just to happened a probably 80% of our Permian dollars have been spent in the Delaware this year, but that wasn't by designed.

Pearce Hammond -- Simmons Energy -- Analyst

Great. And then my follow-up is just picking up on Phil's question from earlier on the Shelby Trough. Thanks for the helpful commentary on the gross production from both XTO and BPX. If you look at your Q2 volumes -- gas volume, roughly 226 million cubic feet a day which you reported. What percent, or -- of that is from next year on BPX within the Shelby Trough. I'm just trying to get that kind of gross number down to some sort of NII or net number?

Jeff Wood -- President and Chief Financial Officer

Yeah, Pearce, this is Jeff. I mean, our two operators in the Shelby Trough are -- I mean, those are the two operators, so virtually 100% of our Shelby Trough volumes are XTO on BPX.

Pearce Hammond -- Simmons Energy -- Analyst

Okay, all right, perfect. And that's it for me. Thank you.

Jeff Wood -- President and Chief Financial Officer

Thank you, Pearce.

Operator

[Operator Instructions] And your next question comes from Tim Howard with Stifel.

Tim Howard -- Stifel -- Analyst

Hi, thanks for taking my question. So, just given what you know in the Shelby Trough, and I understand you -- were trying to release it, but how are you thinking about the production growth outlook into 2020. Can you provide any preliminary comments.

Jeff Wood -- President and Chief Financial Officer

Sure. Tim, I'm going to start and then Tom may want to weigh in a little bit. So obviously, we haven't put guidance out for 2020. What I'll tell you about the Shelby Trough wells is, they come on very strong and then they tend to stay pretty strong for 12 months to 18 plus months. So really even with a pretty meaningful cessation [Phonetic] of activity in the -- if that were to happen, you really wouldn't see a lot of rollover in volumes until '21 and beyond. And then maybe just a couple more points to that, one is we don't expect to full cessation of activity, nothing else. We know XTO is going to continue to complete their docks and that BP will continue to do some drilling activity in what we call the Lacey [Phonetic] bill area.

And then second, look, we think this is our -- really unique area, such a large contiguous acreage position over a delineated resource play that is majority controlled by a single landowner of us, and so -- in a way we're pretty excited about getting this back out there. Now in this gas price environment, there is going to be -- as we mentioned, there is going to be challenges, but this is a long-term resource base that we own in perpetuity, and that, whether it's tomorrow or a couple of years down the road is going to be a meaningful contributor to the Blackstone and Tom, I don't know if you have additional comments there.

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Well, I think Jeff, that sums it up, but I'd just continue -- I would underscore a couple of things you said and that is it. We have a very large position there, we probably won't be making traditional oil and gas leases there. We will be putting it in the hands of operators at appropriate times that will commit capital to develop it and there is over 25 years of well identified locations out there and if you look at the general industry macro outlook for gas over the next 20 plus years, it's got a relatively positive outlook, the infrastructure being built along the Gulf Coast for LNG has seen its zenith in activity in 2019, and this will continue to build out over the next two or three years.

So how fast we -- or slow this gigs back into full-blown drilling cycle is yet to be determined. We are going to be testing the market on near-term and long-term capital, but it's something we own in perpetuity. We have the right to very royalty rates to the extent that it will affect economics over time i.e., lower royalty and lower gas prices and higher in -- high ones and we -- we are very confident that this resource will get develop prudently over time. Does that mean we may have some slow cycles in the next year or two or three, it very well could, but it may not. So it's a little early to say.

Tim Howard -- Stifel -- Analyst

That's very helpful, I appreciate that. And then maybe just update us on, -- I'm not sure when BP released the acres, but have you had conversations with producers or operators to date. I mean, understanding that the natural gas macro is challenging, but just any initial thoughts you can provide on that releasing process.

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Well, a couple of comments, we are -- with respect to BP there indications of and then actual termination of activity on four of five blocks happened rather abruptly in the second quarter of this year, and yes, we have had conversations with others. Yes, anybody that is in the gas business is going to have a -- an attraction to this area, economics are obviously important to everybody. And as I said, at 20 plus wells a year, there is over 20 years of inventory on this acreage that's come back to us. So whether we ramp up to two or three wells a year over the next couple of years or 20 wells.

I think that's going to be driven by the operator and our own expectations, but this thing has been thoroughly delineated both in the intermediate depths, as well as the deeper debt, the quality of the reservoir is outstanding. As always drilling costs are challenging and our industry does a pretty good job of getting a handle on those over time, and so -- well, it's -- we're really early innings in working to reboot this area and we'll have to just keep working at a while before we can give you much clarity on the next 24 months.

Tim Howard -- Stifel -- Analyst

Appreciate that comment there. And then just pivoting to M&A activity, given, it seems like there's more stress happened at the Upstream, the industry have company level, are those conversations of royalty deals or overrides being sold down increasing or decreasing. Just kind of -- maybe from six months ago.

Holbrook F. Dorn -- Senior Vice President, Business Development

This is Holbrook. We have not really seen an uptick and those structures, to be honest with you, there are couple of public players that range announced recently that they sold an additional override across in their Washington; County acreage are -- and then all of our Southwest Appalachian and there have been a few other companies I have looked at it, but there hasn't been a mad rush to market on that front.

Tim Howard -- Stifel -- Analyst

Got it. And then could you help us update on the hedging strategy into 2020 given the low gas environment, I think, yes, I just picked up for 2020, but just kind of how you're thinking about that as we get into year-end and into next year?

Jeff Wood -- President and Chief Financial Officer

Yeah, Tim, this is Jeff. Look, it's been difficult, right. I mean, we typically just hedge on -- upon a pretty regular basis. We certainly done that with oil we're about 50% hedged of our available volumes for 2020 for gas that we're happy to at least be in that position. Cal 20 [Phonetic] has been pretty ugly, so we try not to speculate on prices, but again when there is this low, it makes a little tougher to lock them in. So we're probably a little behind where we would normally be for 20 gas at this point. And that's just been price driven, so we'll continue to look to be opportunistic -- opportunistic around gas hedges, from where we are today.

Tim Howard -- Stifel -- Analyst

Got it. And then just last one, an update on the buyback program, how you're thinking about that kind of going forward, if this -- given where it be a... is there any update, would be appreciate.

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Yeah. I appreciate the question. So we've got a $75 million authorized repurchase program, we've only repurchased about $4 million worth of shares to date over the past couple of three quarters under that program. And part of that is just because windows tend to get tight, I would assume, we'll speak with the Board and look to restart that program, maybe even put in a 10b5-1 program that would allow us to continue to buy under certain parameters when we are outside of trading windows, but you know, I think at these levels -- we think it's a pretty good investment and you may see us act upon that this quarter.

Tim Howard -- Stifel -- Analyst

Thanks for all the details.

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Thanks, Tim.

Operator

[Operator Instructions]

Brent Collins -- Vice President, Investor Relations

Okay. If we don't have anymore questions, we thank you all very much for joining us today and we look forward to speaking with you next quarter.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Brent Collins -- Vice President, Investor Relations

Thomas L. Carter -- Chairman of the Board and Chief Executive Officer

Jeff Wood -- President and Chief Financial Officer

Brock Morris -- Senior Vice President of Engineering and Geology

Holbrook F. Dorn -- Senior Vice President, Business Development

Philip Stuart -- Scotia Howard Weil -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

Tim Howard -- Stifel -- Analyst

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