Good day, ladies and gentlemen, and welcome to the Q4 2017 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 instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Brent Collins, Vice President of Investor Relations. Sir, you may begin.

Thank you, Brian. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals' fourth quarter and full year 2017 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 on 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 Factor section of our 10-K, which will be filed tomorrow. 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. The 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.

Good morning, thanks for joining us today. We had a very strong fourth quarter to cap off what was an exceptional year for Black Stone Minerals. Operationally, we set a new quarterly production record of 38.1 MBoe per day, by growing total production by 3% over the last quarter. Last year we laid out a plan to gradually reduce our working interest volumes while still growing our total production. And we're very pleased that how that has played out so far. When we break down our production levels for the quarter minerals and royalty production grew by 15% over last quarter, while our working interest volumes declined 13% for the same period. As we've seen for most of this year the Haynesville/Bossier and the horizontal Midland/Delaware plays in the Permian are driving the majority of our production growth with the Bakken/Three Forks and the rest of our portfolio posting solid results for the period as well. Working interest volumes declined as expected following the farmouts we put in place during 2017 covering our working interest in the Haynesville/Bossier and selective monetization of our working interest in the Bakken/Three Forks. Record production led to record adjusted EBITDA and distributable cash flow in the fourth quarter as well. In addition to the strong financial performance, we also completed a number of important transactions during the fourth quarter. First, we announced and closed a $335 million acquisition of a diverse set of minerals and royalty assets from affiliates of Noble Energy. It was a largest acquisition dollar wise in our history and significantly bolstered our Permian basin footprint while adding to our Williston Basin in Mid-Continent portfolios. This was an ideal acquisition for us, large scale with complementary acreage around some of our core positions, together with a diverse footprint where we hope…

Okay. Thanks Tom, and good morning everybody. So we posted another very solid quarter across all of our key financial metrics, and that was on the back of the record production level that Tom just discussed. Total oil and gas revenues for the fourth quarter were almost $100 million and we generated 5 million of least bonus and other income. We also realized about 2.9 million in cash gains from our hedge settlements during the quarter. LOE fourth quarter of '17 was 4.4 million and production taxes average 12% of oil and gas revenues, both of those were right in line with our expectations. Total G&A for the fourth quarter rose to 25.6 million and that is well above our normal run rate, that increase was primarily due to non-cash accruals related to some performance-based unit grants we made around our IPO in 2015. We have previously written-off those accruals, both with improved commodity prices and our expectation of higher production levels, we put those accruals back on the books in the past fourth quarter. To that total again non-cash charge of G&A for the quarter related to this was about $7 million. And that represents the full expense of those awards that would have been recognized ratably from early '15, the time of the IPO through the end of 2017. So really we're playing catch up here more than 2.5 years of these charges all in the fourth quarter. Looking at cash G&A for the fourth quarter, we were at $11.1 million and that's very consistent with recent run rates and reflects some continue transaction related expenses associated with our acquisition efforts this year. Overall adjusted EBITDA for the fourth quarter was 79.5 million that's a 2% increase from last quarter and a 36% increase from the fourth quarter…

[Operator Instructions] And our first question comes from the line of Nick Raza from Citi. Your line is now open.

Thank you. Just a quick question on your five year forecast. Could you sort of point out what's driving the production increase year-over-year? And that's the first part. Second part of question is how much, if any of that growth is from your expectations of eventually leasing out the PepperJack prospect?

Yeah. So this is Jeff, Nick, so good morning and I'll start and others may chime in. Maybe I'll take it in reverse. We don't have any production volume specifically from PepperJack. As Tom mentioned, while we're certainly encouraged by the logging of that first well the idea there is to bring in external capital to develop it, and that's little early for us to start baking those types of volumes in the forecast, which is not how we typically do long range forecast. So hopefully that is just bonus volumes to the outlook here and obviously we'll keep you all informed as that goes forward, but kind of early days for that and nothing baked in. In terms of overall production outlook, there is a number of kind of major drivers, the two that we've been talking about the most over the past quarters will remain the two that are probably most important to that growth over the forecast, the first is the Haynesville/Bossier, primarily in East Texas. As Tom mentioned, we've got two major operators there that are very committed to the area and we structured development deals that really encourage, continued drilling activity there. So we're excited about what we're seeing there and expect that to be a big volume driver. And then the other one kind of no surprises as we beefed-up our Permian position significantly over the past year plus, and we're just seeing fantastic activity levels there. So we would expect that to be a big driver as well.

Just to add to that, I think the biggest changes were Shelby Trough, Haynesville where we just have a more constructive view on type curves and activity levels than previously. And then as well as Brock mentioned -- excuse me Jeff mentioned in the Permian Basin, the activity there is just outpacing what we originally got.

Great. And then -- go ahead.

No, please go ahead, Nick.

I was just going to ask if you could sort of -- somewhat similar question to the production forecast that includes acquisitions. I mean reducing the -- you just kind of do more bolt-on acquisitions within the Shelby Trough or the Haynesville or more Permian or just curious how your views changed in terms of just branching out into other sort of basins?

Yeah, this is Holbrook, as always we're somewhat basin agnostic and we're just looking for the best risk reward opportunity from our point of view, and it just so happened. And 2017 we saw a lot of opportunities in the Shelby Trough, we still see a lot of opportunities in the Shelby Trough, so we love to continue to accrete that position. We still see opportunities in both the Midland and the Delaware, albeit that those areas continue to get more and more expensive. So it's hard to find opportunities in bulk, so to speak. But I mean we're -- we remain very excited about the lower 48 more broadly, whether it's the DJ, the Marcellus, you name it. You just need to pick your spots and our model is not to be one basin focus.

Okay. And sorry, I apologize, one last question. But in terms of just constraints out of the Permian, I mean there is a lot of industry talk about a lot of pipeline getting built and how producers are sort of hesitant to take up capacity. I was just wondering from your perspective, if you could just provide your views about that going forward, what you think about it?

I think there was a lot of midstream that needs to get built out in the Permian Basin.

Okay, and any sort of views on oil versus gas, I mean I know your acreage probably is moreover focused in the Permian. But any sort of thoughts initially in terms of the just net back received?

Yeah, I mean we -- I mean, we think gas differential in the Permian will continue to get worse in the near-term or probably mid-term. And there will be headwinds as they always are in plays that have production, that's really ramping up.

But to the extent, we can see those or anticipate those, they are baked into our forecast.

Okay. Fair enough. That's all I had. Thank you.

Thanks, Nick.

And our next question comes from line of Brent Cotches [ph] from Raymond James. Your line is now open.

Hey, good morning, guys. Congrats on a nice 2017, just a couple of clarification questions. The capital spending guidance 10 million to 12 million for the Wilcox step out wells. Does that include the first Wilcox well drilled? And then separately the 10 to 12 is in fact separate from the 15 to 25 for working interest participation is that right?

Yeah. Bran, this is Jeff. Both of those are correct. So we've got 15 to 25 sort of what I would call residual working interest participation capital, where we're going alongside the operator and those are just wells that were frankly spud free the farmout dates, and so the completion cost of those wells. And then the 10 to 12 for the PepperJack delineation includes a well and that's a good point that you bring up, and includes a well that frankly we've already drilled, and so it's that plus one more.

Okay. And is there any timing -- expected timing on the second well? And if you could maybe, is there any specifics you can share on what was wallocks [ph]

Yeah. We are endeavoring to spud that well on or before March 31st and the well that we drilled, there are three primary pay zones in the Gilly Field, the Segno series, the Gilchrease series and the Blackwood series, those zones kind of come and go in the Gilly Field to the North. But in a macro sense the Segno B section was about 90 feet thick and about 40 plus feet of that was very good pay. The Gilchrease section was about 170 feet thick and over 30 feet of that was really good pay. The Blackwood section was -- that we got on our log because we stopped drilling a little early was 200 feet thick and -- but for about a 40 foot shale section it was all very high quality rock. So, we think that we know the log looks very good. In addition, the bottom hole pressures at Gilly are somewhere in the 11,000 pounds range, this will probably has closer to 14,000 pounds, that's 2,000 feet thicker and the pay zones have thickened up quite nicely, and so we're very pleased with what we've seen.

Okay. Great. And then if I could just maybe a couple of modeling questions. So, Jeff, just thinking about the conversion a little bit more. Just trying to figure what price assumptions are you assuming looking forward, is that surplus your hedging impact. And then if I could is there any kind of early indication as far as the Board's opinion on raising the subordinated distribution. And then finally, thinking about replacing capital. Is that expected, do you think that will be in the $13 million neighborhood again this year?

Yes, let me take those three, Bran. So one yeah, we don't ever kind of speculate on prices here. So all of our modeling is just based on the strip with of course, our hedge impact which really just today covers pretty well covered in '18 and call it 20-ish percent covered in '19. But otherwise it's just strip prices as we look forward. I think the board's view right now and why we felt that was an appropriate time to come out with an updated view, I think, the Board's intention now would be to bring the subs distribution to parity with the common when we move to the $35 MQD with the second quarter of 2018. And then finally on replacement or maintenance CapEx, we will be going through that calculation this quarter, and so that we've typically will come out with that on sort of an April 1 to April 1 time frame, we ramp 13 million last year, we're reducing our working interest volumes obviously in a pretty significant way. So we'll have to see the impact of that on overall maintenance capital levels. So I think I'll just defer that to next quarter if you don't mind.

Okay. Fair enough. Thanks, guys.

Thanks, Bran

And our next question comes from the line of Phil Stuart from Scotia Howard Weil. Your line is now open.

Good morning, guys. And I apologize, I missed a little bit of the beginning of the call. So I apologize if some of this has been asked already. But thinking more broadly on the acquisition strategy, given that you're going to have significant growth over the Shelby Trough in terms of gas volumes. Does that lead you to be a little bit more biased towards acquiring oil focused properties in your future acquisitions. Obviously in 2017 you did a great job of adding to the Bakken and the Permian. But just kind of wondering, as we look out 2018 through kind of 2022, what your bias is in terms of commodity mix of the acquisitions?

This is Tom. I would answer that question somewhat similarly to the way Bernard Looney, who is the Global Exploration Manager for BP answered the same type of question that they got on their earnings call about 10 days ago. And that is that the cost of entry into the Payne closure area for acquisitions are much to use a phrase saner than they are in the Permian. And -- but the rates of return are still very, very, very good. And so I would say that we are very much a gas story and it would be to turn us away from being a gas story into being a significant liquid story, we would have to make some massive acquisitions. So -- I would say that we will not be consciously pivoting towards oil acquisitions. However, if we can make good oil acquisitions, we will make them, but we certainly like the long-term nature of the gas play in East Texas especially in juxtapose to what's going on with gas markets domestically and internationally along the Gulf Coast.

Phil, this is, Jeff. I would you say just to add to Tom's comments. As Holbrook said we're relatively agnostic. But really IRR driven when it comes to IRR ROI driven when it comes to acquisitions. And the second thing to point out, I know this is -- I know you're aware of this. But just given the differential and pricing between oil and gas, while we're heavy on gas on the production side. From a revenue standpoint, we're pretty well blended, we're about 50-50 on a revenue standpoint between oil and gas. So long answer to your very short question, but I think again the -- from an acquisition standpoint, we're going to just go after the best deals out there.

I'll just add that, we've got a pretty large mineral position and we've got exposure to not only the Permian from an oil perspective, not only the Bakken, not only the Eagle Ford. But we've got a great mid-time position. And then we have great positions and emerging plays, or plays that are experiencing a renaissance like the Austin Chalk for instance. So we've got exposure to a lot of oily rich acreage, our liquid rich acreage already in Black Stone today. So there is all sorts of avenues and growth from the liquid side outside of acquisitions.

And the Wilcox has liquids.

The Wilcox has liquids.

Okay. I really appreciate all the comments there. And I guess, as we look to lease bonus for 2018, again, you might have already mentioned this. But what areas specifically do you think are probably the best candidates to kind of drive the lease bonus is revenue in 2018? Is that primarily going to be Shelby Trough and the Austin Chalk or is there a good bit of Permian mixed in there?

The Permian has been a great lease bonus driver over the last few years here. I'm sure we already -- yes we've got some more trades in the Permian in this year and works. The Shelby Trough that's going to have a lesser impact frankly because of the development deals we've struck with our two primary operators. We've kind of passed on bonus and exchange for increased development commitments, only thing that was a good decision in terms of accreting PV to our unitholders. We've got a lot of interest in our Chalk acreage, we have a tremendous shock position. So we are hopeful that, that will be a significant bonus driver. This year plays like the Canyon line have already contributed a fair amount of bonus this year. And then we're seeing a lot of activity in the Mid-Con Stack/Scoop areas, as well as up in -- kind of consistent yield or bonus over the last few years. And then to date, there is really only been one player in the lower Wilcox and East Texas, and that's been unit Petroleum. They discovered the Gilly Field, which we have a significant mineral position in, and that was a Great Lower Wilcox discovery after Gilly Field was discovered, we spent approximately a year, generating a number of additional Lower Wilcox prospects. We sold one of those two units, which they call --

Cherry Creek.

Cherry Creek, thank you, and that was a discovery. And then the second prospect that has been tested from more inventory was PepperJack, and that was the largest in terms of potential of all of our prospects, and so far so good. That said, we are hopeful that with continued success for instances with PepperJack that the lower Wilcox could also be a bonus driver for '18. So we have a view as where bonus is going to come from this year. And we do every year and every year we're also surprised it comes from plays that we wanting to thinking about.

All right. Great. I appreciate the color. That's it from me.

Thanks, Phil.

[Operator Instructions] And our next question comes from the line of Tim Howard from Stifel. Sir, your line is now open.

Thanks for taking my question. Just want to understand how you guys balance distribution growth and coverage, following the subordinated conversion? Do you anticipate moving coverage cost into a one-times coverage given the limited needs from working interest?

Well, I think that's a fair point, Tim. We do think that we are -- working interest CapEx falling to really low levels mid '18 and beyond, that it obviates a little bit of the need for coverage again, one of the things that we are always very focused on was to make sure that we were funding working interest CapEx through our retained cash flow and not off of the balance sheet. So that relieves some of the pressure there. So look, I think just in very general terms, we think that coverage going forward of 1.1-ish is appropriate, that's a little bit lower than what we've done historically, in part driven by the lower amount of working interest CapEx. And then in terms of growth, I think we're still -- where we've always been, which is we think low to mid-single digit growth is a pretty good run rate to shoot for maybe with some upside to that with big acquisitions et cetera.

Okay. Thank you.

And this is Hol, just to add that real quick, I mean that's our long-term forecast. And we forecast what we have a high degree of conviction in. And we can't touch everything out there. And so hopefully there is upside to that.

And I am showing no further questions. And I would now like to turn the call back to you Tom Carter, President and CEO for any further remarks.

Well, we just thank all of you for joining us today. And we thank you for your interest in Black Stone and we're very excited about what's going on. Thanks.

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