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Black Stone Minerals LP (NYSE:BSM)
Q3 2020 Earnings Call
Nov 3, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Third Quarter 2020 Black Stone Minerals, L.P. Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Evan Kiefer, Director of Investor Relations. Sir, please begin.

Evan Kiefer -- Director of Finance and Investor Relations

Thank you, Norma. Good morning to everyone and thank you for joining us either by phone or online for the Black Stone Minerals third quarter 2020 earnings conference call. Today's call is being recorded and will be available on our website 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 from 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. A reconciliation of these 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.

Joining me on the call from the Company are Tom Carter, Chairman and CEO; Jeff Wood, President and Chief Financial Officer; Steve Putman, Senior Vice President and General Counsel; and Garrett Gremillion, Director of Engineering and Geology.

I'll now turn the call over to Tom.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Thanks, Evan. Good morning to everybody on Election Day. I'm going to kick off the call by focusing on some positive results in the third quarter coming off of our debt reduction efforts. As most of you know, in July, we closed two asset sales we announced during the second quarter. Those brought in total cash proceeds of $150 million, which we used to reduce outstanding balances under our revolver. We also continued to pay down debt with retained cash flow, given the strong distribution coverage we've maintained through this year.

In total, we've lowered our borrowings by $176 million during the third quarter. We ended the quarter with under $150 million of total debt, which represents the leverage ratio of just around 0.5 times our trailing 12 months adjusted EBITDA. Even with our reduced borrowing base, which we expect will be common place across the industry, we ended the quarter with over $250 million of liquidity.

We've also remained focused on moving our gas weighted properties into development or redevelopment. Aethon will kick off its drilling program on our Shelby Trough Haynesville acreage in Angelina County this month. As one of the most experienced operators in the Haynesville, we're very excited to begin what we hope will be a long-term partnership with Aethon in this area. Moving east into San Augustine County, we continue to have a constructive dialogue with XTO Energy. We're currently working through their DUC inventory in the area and we remain engaged with them more broadly to restart development in that portion of the Shelby Trough either with XTO or by bringing in additional operators on this part of the acreage or both.

We also continued to advance efforts to facilitate new Austin Chalk development, including additional wells on our acreage to test the efficacy of modern completion techniques in this play. We have tens of thousands -- actually hundreds of thousands of acres in the Chalk, so a step up in well performance could move the needle for us in the long run. We've accomplished these things against a very difficult backdrop. The macro environment remains challenging. Oil prices continue to struggle, as COVID concerns limit demand and additional supplies come online from areas like Libya. This has kept activity levels down across our acreage. As of September 30, there were 29 rigs active on our acreage. This is consistent with what we saw last quarter, but is down sharply from activity levels that we saw a year ago.

In addition, the balance sheet of many operators are strained and we -- as we go through the fall borrowing base redetermination season, bank and equity markets remain closed for most E&P companies. This plus a renewed focus on cash returns instead of simply production growth has limited new drilling capital across Lower 48, which obviously impacts our production levels.

We're living in uncertain times. It's unclear how long and to what extent demand for oil and gas will be constrained due to COVID. We don't know for sure what will happen tonight and what long-term impacts of potential change in administration could have on the regulatory environment in the oil and gas industry overall. Given all the uncertainties, we are glad to have taken the actions that we have thus far this year. With lower cost structure, much lower debt balances and extensive inventory of gas-focused development opportunities, we believe Black Stone is positioned to remain healthy and continue to pay a strong distribution through this downturn. I would also add that we continue to be very focused long-term on regrowing our production base and we're working on that every minute of every day. Overall, I'm very pleased with the progress we have made in a number of important areas.

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

Jeff Wood -- President and Chief Financial Officer

Okay. Thank you, Tom, and good morning, everyone. As you saw in the release last night, we generated 31,100 Boe per day of mineral and royalty production for the third quarter. That's down 9% from last quarter. And our total production volumes for the quarter were 37.9 MBoe per day. The production declines were in line with our revised guidance for the year and they were driven by all the macro factors that Tom just discussed.

In addition, we were negatively impacted by some existing Shelby Trough wells that were temporarily shut in, while XTO works through completing its DUC inventory. We estimate the impact of those shut-ins to be over 2,000 Boe per day for the third quarter, all of which is in dry gas volumes. Realized prices for oil and gas were up in the third quarter from the lows that we saw last quarter. Despite that, we did take a bit of a hit in the third quarter on our oil revenues because of wider differentials to average WTI prices on checks that we processed during the quarter, and that's primarily on our Permian volumes.

Once again this quarter, our robust hedge portfolio provided a lot of cushion to the low price environment. And we recognized $21.3 million in cash hedge settlements to our favor. Expenses were generally in line with our expectations, with G&A continuing to trend down. Cash G&A was down to $7.6 million in the quarter and total G&A was under $10 million. We reported $65.5 million of adjusted EBITDA and $58.8 million of distributable cash flow for the third quarter. While both of these metrics were down relative to last quarter, we still reported healthy distribution coverage of 1.9 times based on our announced distribution of $0.15 per unit.

As Tom mentioned, our balance sheet is in great shape. We ended the quarter with $147 million of debt outstanding after closing the two asset sales in July and continuing to use our excess coverage for debt repayments. Just for context, we started the year with almost $400 million of debt. So, that's a reduction of over 60% through the end of third quarter. That gives us a tremendous amount of flexibility and security as we navigate through this downturn.

Yesterday, we finalized our fall borrowing base redetermination. Borrowing base was lowered from $430 million to $400 million, and as part of that process, we agreed to increase the interest rate spread on facility by 25 basis points to LIBOR plus 200 basis points to 300 basis points depending on our utilization. That change just reflects a much tighter bank market today, given some of the difficult situations that banks are facing across the upstream energy lending universe.

This revised pricing grid is actually the same as what we -- where we were originally under the facility before the bank group agreed to lower it by 25 basis points in mid 2018 in a much stronger market. And there were no other changes to the terms of the credit facility as part of our borrowing base redetermination. Overall, the bank group remains very constructive and, of course, they're very appreciative of all the moves we've made this year to strengthen our credit profile.

Once again, I just want to thank our employees for staying focused, while we continue to work remotely. As Tom mentioned, everyone is working very hard to push projects forward in this challenging environment, with the hope and expectation that the efforts we make during this downturn are going to create long-term value for our unitholders once this market recovers. And we do believe that it will recover, there is already some optimism in natural gas with '21 forward prices over $3 an MMbtu and the recent underinvestment in oil projects both domestically and abroad, combined with the lessening influence of OPEC, is setting the stage for an oil rally once demand recovers. The trick, of course, is to make sure you're still around when it happens and we feel very comfortable that we've done that here at Black Stone.

With that, Norma, we're going to go ahead and open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Pearce Hammond of Simmons Energy. Your line is open.

Pearce Hammond -- Simmons Energy -- Analyst

Yeah. Good morning and thanks for taking my questions. You mentioned in the earnings release the -- with the improvement in natural gas prices that you're looking to sell assets or divest some assets in the Haynesville and Austin Chalk. And I was just curious, how much are you talking about there, is this sizable? The reason I'm asking is the balance sheet is in good shape, so just trying to understand what is driving the need for divestitures?

Jeff Wood -- President and Chief Financial Officer

Hey, Pearce, this is Jeff. Yeah. I think the press release didn't convey this the right way, I apologize that. The press release is just meant to convey that with the uptick in natural gas prices, we're seeing more traction in getting our existing assets into play in the Chalk and in the Haynesville. So it's just -- that was just meant to say, hey, we are continuing to have really good and productive discussions with existing and potential new operators in those plays. I completely agree with you, and the balance sheet is in great shape, we don't really feel that this is a spot where we would need to divest additional assets. So, it's -- that was meant to be more of a growth comment than a divestiture comment.

Pearce Hammond -- Simmons Energy -- Analyst

Okay, perfect. Thanks for the clarification. And then my follow-up, how should we think about Q4 production and are there any guardrails you can provide around 2021 production?

Jeff Wood -- President and Chief Financial Officer

Well, Pearce, what I'd say is that I think we're still comfortable with the updated guidance that we've put out in mid-year, which I think kind of puts us in the -- implies a mid 30s kind of MBoe per day level for 4Q. And then as normal course, we will come out with '21 guidance in February when we have our next conference call, but it's just going to be a balance of things and a lot of the overall market factors are going to impact it as well. But what I'd say is, we are -- Aethon is starting up its program that will accelerate through '21.

We're hoping to get some other things in play. But we are facing some headwinds both from continuing to not fund the working interest volumes that we would expect to continue to see those gas volumes decline. And then we're still going to be coming off of a very large production wedge in the Shelby Trough that while Aethon and the XTO DUC volumes will start to replace that, we're probably going to see end of '20 and into '21 as just a bit of a resetting recovery period for that part of the portfolio.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Yeah, and this is Tom. I'll just add and support what Jeff is saying. As probably the subject that you're talking about is something that we're probably most focused on, everything and anything in the company. And when you really look at where we went in '17, '18, '19 and what the industry ran into in late '19 and '20 and the contraction in activities, we are acutely focused right now on spooling those volumes back up, and it just takes time. But I'm very pleased with the progress our teams are making on getting core properties moving into drilling queues and it will take a while for it to spool back up, but I promise you, we've got our eye on that ball.

Pearce Hammond -- Simmons Energy -- Analyst

Perfect. Thank you very much.

Jeff Wood -- President and Chief Financial Officer

Thanks, Pearce.

Operator

[Operator Instructions] Our next question comes from Harry Halbach with Raymond James. Your line is open.

Harry Halbach -- Raymond James -- Analyst

Good morning, guys. I was just kind of wondering, you kept that distribution flat like $0.15 and now that your leverage is at like a 0.5 turn, your utilization rate is around 31%. When are you guys thinking about potentially increasing that payout ratio a little bit more? And, I guess, what kind of metrics are you looking for in order to do that?

Jeff Wood -- President and Chief Financial Officer

Harry, this is Jeff. I'll start. Thanks for the question. Look, we have always -- a lot of our core investors really value stability and a decent amount of foresight into the distribution. So, we wanted to set that $0.15 a quarter, $0.60 a year level as something that we thought was very sustainable across a pretty wide range of markets. And frankly, while we have done a really nice job paying down a lot of debt, retaining some cash flow for either further debt repayment or to do other things, right, whether it's small acquisition opportunities or share repurchases, what have you, I think we'd see that as a continued benefit. At -- my outlook, and look, this is something that's going to be determined by the Board every quarter.

I think we're comfortable with increasing that payout ratio, but we probably just need to see a little more visibility on the way the world is going to go. And as Tom mentioned, right, we are -- you've got a whole bunch of stuff in play right now that we think is going to over the medium and longer term spool those volumes back up. But in the meantime in the near-term, we're going to be at a point of transition, and I think that we just again value some stability in that distribution and wanted to set it at a level that we were very comfortable with sustaining and we'll just evaluate it quarter-by-quarter after that.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

I will just add that coverage has been extraordinarily high for the obvious reason of paying debt down and we feel pretty comfortable where we are in that arena now. So -- but production volumes have come down too, so we will be looking into '21 with the Board here pretty soon and we're interested in increasing distributions if we can do so conservatively and logically.

Harry Halbach -- Raymond James -- Analyst

Great, thanks. And then my second question is, any update on where your base decline sits right now and where you expect it to be kind of next year?

Jeff Wood -- President and Chief Financial Officer

I don't think there is any update. I mean, as we've long said that the base decline across the asset base is in the high 20%s, low 30%-ish that may be coming down just a tad with some of the roll-off that we've seen already, but it's still in that neighborhood.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

One interesting statistic that I won't comment too much on, but you can just plug it in. When we went public in 2015, which was in some respects the real beginning of the shale boom, the explosion, our production volumes were in the 24,000 Boe-25,000 Boe per day range and they peaked in '19 close to 50,000 Boe per day. And, obviously, those shale volumes have some interesting declining curves. And when you turn the capex off, volumes come down, but we're feeling like we're in a -- we're hitting a stability period and one where we can start growing volumes again.

Harry Halbach -- Raymond James -- Analyst

Great. Appreciate all the color, guys.

Jeff Wood -- President and Chief Financial Officer

Thanks, Harry.

Operator

Thank you. And our next question comes from Andrew Carreon with University of Notre Dame. Your line is open.

Andrew Carreon -- University of Notre Dame -- Analyst

Hi, Tom and Jeff. Thanks for making some time for my questions. I'm curious, if you look at the share price today and some of the other players in -- that are publicly listed minerals businesses, even with kind of how crazy this environment has been, I think you can pay in a lot of scenarios, this being a really, really attractive kind of pricing environment or just that the assets are extremely cheap. I'm curious on the acquisition front, on the private side, are you seeing opportunities where you could actually acquire either larger mineral packages from private equity or smaller packages that would be accretive to where you could just buy back your own shares?

Jeff Wood -- President and Chief Financial Officer

Hey. Good morning, Andrew, and thanks for being on the call. This is Jeff. I'll start. Yeah. I'll tell you, I think that there's still just a disconnect out there. We are probably seeing a few more assets come to market both in kind of the small to larger packet sizes, but I'd say with all the work that we've done to get the balance sheet in really good shape, and as you mentioned with the share price of the public guys including us having taken a real hit over the past year or so, we just have to look at everything, is it long-term accretive to our NAV per unit, right? And I just -- today, if you think about it, whether it's the private equity guys or even some of the smaller aggregators, a lot of these positions were put together in different overall commodity price and production environment.

And what we've seen at least to-date is that there is still a pretty wide gulf between what those sellers would expect, anchored, of course, by what they paid for them and the kind of price that we would need to pay to make it long-term value accretive. So, we're not -- we're really not interested in rushing out and relevering up in a meaningful way in the course of this environment and frankly we're not very interested in using our equity as an acquisition currency right now. So, I'll just tell you, and I'm sure Tom will second this is that really so much of our efforts have been to try to do what we can to put some of these massive acreage positions that we have in-house today that are not in development and get those things in development, to the extent that we can create cash flow streams from existing unleased acreage, that's like doing a series of acquisitions that we don't actually have to pay for.

So, that's really where the focus of the company has been. Look, I think that if things continue like this that whether it's using some excess coverage or whatever that there might be some opportunities, but, yeah, I think there's just going to need to be some more diligent on the seller side before that happens.

Andrew Carreon -- University of Notre Dame -- Analyst

No, that's really helpful. And then maybe just one more question on the Austin Chalk acreage or even maybe an update on kind of the PepperJack play, I know it's been some time since that's been brought up, but I kind of recall that that was a possible kind of more conventional type wet gas play. Just curious -- I know you guys are working really hard to be active on putting those into play for operators, but with this kind of pricing environment and you've mentioned kind of the bank markets being closed to E&Ps, how those conversations are going for a place like maybe in Tyler, Texas that only have a few wells that are actually modern completions? Are these something that you're expecting to be able to get kind of something that maybe is a little less or a little more speculative out there in development?

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Well, this is Tom. Let me take a stab at the Austin Chalk. We are pretty excited about what we're seeing in what was the old -- what I would call the core part of the old Brooklyn field, which has some very good production since the '90s through the last decade. And literally, we have hundreds of old units that are a 1,000 acres to 2,000 acres of size with mature wells on them that were not drilled and completed with modern technology, and there have been a few very bright spots by a few operators going into those old units and drilling wells that show virgin reservoir pressures and extremely good production rates and good EURs.

The problem with the area is that the way the capital markets are and the way the industry is right now. If people don't have to do something, they would rather wait. Okay? And that's just the way the industry is right now. We are working with all of our operators to help them find ways to not wait and move forward in development because of the scope of our position out there. And if that play is like the plays in the Giddings Field to the west, where there is some redevelopment going on, it could be a very substantial long-term growth area for us. Without getting too specific, I'm very optimistic that in the first half of '21, we will see some additional activity out there.

With respect to PepperJack, I think that's a ways off. I mean, I thought a lot about PepperJack in that play. The problem with the part of the play where we were active is we don't have enough conventional 3D seismic down there to really tell us what's going on. And I don't see that getting traction imminently, but it's -- we've got a long list of core areas with large gross and net acreage positions that we're going to just keep banging on and try to bring capital in to our acreage.

Andrew Carreon -- University of Notre Dame -- Analyst

Really appreciate the color, Tom and Jeff. Thank you for the time.

Jeff Wood -- President and Chief Financial Officer

Thanks, Andrew.

Operator

Thank you. And our next question comes from Derrick Whitfield with Stifel. Your line is open.

Derrick Whitfield -- Stifel -- Analyst

Hi. Good morning, all.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Good morning.

Derrick Whitfield -- Stifel -- Analyst

Perhaps for Tom, maybe staying where you just ended effectively and really drilling down on the first question in Q&A regarding your comments on taking advantage of the relative strength in natural gas prices to market -- or aggressively market your extensive acreage positions. With regard to the Haynesville specifically, are there areas outside of Shelby Trough where you have an NRI to drive activities?

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Our next area of rank in terms of net revenue points would be Louisiana, and we are a bit leaner there, but we -- in some areas, we have some concentration. And as a matter of fact, we have just recently made some trades in Louisiana to incent some of our key operators to drill four, five wells pretty soon that weren't in the queue to be drilled. And so, yes, we're working that part of the play as well and it is -- it's a meaningful opportunity for us.

Derrick Whitfield -- Stifel -- Analyst

That's great. And then as my follow-up with regard to the 2,000 barrels of equivalent volumes that were shut in when XTO did offset completions. Does that carry over into Q4 or does it really clean up in Q4?

Jeff Wood -- President and Chief Financial Officer

Derrick, this is Jeff. No, that will carry over into Q4. They're going to -- there'll be at least 13 wells and they'll be completing those kind of through the -- way through sort of the -- into the end of the first quarter of next year. But, we'll continue to see some of those offset locations shut in as they're fracking as well. So, I would think that we'll see some impact in the fourth quarter and some impact in the first quarter of '21.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

But when they come on --

Jeff Wood -- President and Chief Financial Officer

Yeah. I mean, it's obviously for a good reason. Yeah.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Those wells are going to be strong -- strong wells and there'll be 13 of them, so while being shut in and fun, it will pick back up.

Derrick Whitfield -- Stifel -- Analyst

All right, guys. Thanks. That's very helpful. Great update.

Jeff Wood -- President and Chief Financial Officer

Thanks, Derrick.

Operator

Thank you. And I'm currently showing no other callers in the queue at this time. I would like to turn the call back over to Mr. Tom Carter for any further remarks.

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Well, we thank you all for joining us today. You know it's been a long year, we're not done with it yet. We got a long day in front of us here today and we're looking forward to moving into 2021 and we will keep working to add volumes, to add revenues, to add distributions and financial strength for Black Stone and we look forward to the next 10 years.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Evan Kiefer -- Director of Finance and Investor Relations

Thomas L. Carter, Jr. -- Chief Executive Officer and Chairman

Jeff Wood -- President and Chief Financial Officer

Pearce Hammond -- Simmons Energy -- Analyst

Harry Halbach -- Raymond James -- Analyst

Andrew Carreon -- University of Notre Dame -- Analyst

Derrick Whitfield -- Stifel -- Analyst

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