Black Stone Minerals, L.P. (BSM) Q1 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2020 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 Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jeff Wood, President and Chief Financial Officer. Please go ahead, sir.

Thank you, Angela. And good morning to everyone. Thank you for joining us either by phone or online for the Black Stone Minerals' first quarter 2020 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 evening. 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 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 in the Risk Factors section of our 10-Q which we anticipate 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 www.blackstoneminerals.com. Joining me today on the call from the company are Tom Carter, our Chairman and CEO; Steve Putman, our Senior Vice President and General Counsel; and Garrett Gremillion, our Director of Engineering. So, I'm going to kick things off, today, we're living through, as we all know, a very challenging time in the midst of this global pandemic, which has had a big impact on all of our lives. Given the unique circumstances facing our industry and Black Stone, we're going to take a little different approach to the call today. We had a very solid quarter from an operational and financial perspective, despite the worsening commodity price environment. We have included all the usual details about our performance for the quarter in the earnings release we posted yesterday, but I suspect, most of you are more interested in our plans to deal with the incredible disruption that we are going through as an oil and gas industry. So I'm just going to touch on a few points around our financial condition and then I'm going to turn it over to Tom to discuss our response to everything going on. First, as you may have seen in the earnings release from last night, we have withdrawn our production and distribution guidance for 2020. To the extent that we can get greater clarity around our producers' plans for the year, we are happy to revisit those guidance measures, but for now, there is just simply too much uncertainty in the market and our crystal ball is frankly a little cloudier than usual. Because of this market uncertainty and our concern that it may persist for some time, we have put in place substantial hedges for 2021 for both oil and gas to further our already robust 2020 hedge positions. We added 480,000 barrels per quarter of crude oil hedges at an average price of $36.18 per barrel and we put in around 7.3 Bcf per quarter of natural gas hedges at an average price of $2.60 per Mcf. And just to put a little context around those volumes, they represent about 40% of our reported first quarter of 2020 production for both oil and gas. Full details of this hedge position can be found in the 10-Q that we plan to file later today. So just quickly turning to the balance sheet, our borrowing base was set at $460 million last Friday as part of our regular semi-annual redetermination process. Obviously, the weak commodity price environment had a negative impact on that borrowing base, but we were able to get through the process with no increase in our bank pricing in a very difficult banking environment. I think that reflects the moves we have made to really shore up the balance sheet recently and present Black Stone as a very strong credit. So speaking of our debt balance, we continue to make very important strides in lowering our total debt load and maintaining our leverage ratio at a very healthy 1 times trailing EBITDA. Total debt at the end of the first quarter was $388 million and as of today, that debt balance is down to $350 million. We will continue to aggressively target further debt reduction throughout the year. So I'm going to leave it there in my prepared remarks and turn it over to Tom before we open it up for your questions.

Thanks, Jeff. Good morning to everyone. We want to start by saying that we hope you're all healthy and doing well. At Black Stone, we've taken steps to protect the health and welfare of our employees, as well as the health of our company. The combination of simultaneous supply and demand shocks have created a challenging -- as challenging an environment as I've seen over my career. Our visibility into producer activity is more limited today than it normally is. We do know that the U.S. rig counts are down by more than 50%. Global CapEx in the energy sector is down over 30% and many producer balance sheets are strained. This will have an impact on the volumes produced on our minerals and royalty acreage. At the root of this is the dramatic crash in the oil prices that we are all well aware of. Supply is contracting quickly, but it's difficult to overcome more than 25 million barrels of oil a day of COVID-19 related demand disruption. It's tough to know how long this will continue. So we have taken the approach that we will be prepared for the worst while hoping for a speedy recovery. So, let's talk about how we are responding to this downturn. We moved early in the cycle to reduce our costs. As we've discussed on the call in February, we made the difficult decision to reduce our workforce by approximately 20%. We also reduced Board and executive compensation. To put some context to that, our total target executive compensation for 2020 is down 64% compared to 2019. We're seeing the benefit of these cost reduction efforts in our reported G&A and expect it to be at or below the low end of our original guidance range of $39 million to $43 million of total G&A for 2020, excluding the restructuring charges we recorded in G&A in the first quarter. As we announced in April, our Board of Directors decided to lower the distribution on our common units to a very low $0.08 per unit for the quarter. This allows us to retain substantial amounts of free cash flow from the business while production volumes remain strong and our extensive hedge portfolio provides protection from the low price environment. With a coverage ratio of 4 times for the first quarter of 2020, we've already made good progress on our debt reduction efforts and expect to exit 2020 with our balance sheet in a very strong position as we go into the next year. We're taking advantage of the relatively optimistic view on natural gas prices to aggressively pursue new development opportunities across our acreage. Our reserve base is approximately 70% weighted to gas and we have numerous high interest positions in the leading gas basins like Haynesville and Austin Chalk, for example. We are very excited to have signed a deal with Aethon to restart development on our acreage in the Shelby Trough in 2020 in Angelina County, Texas. This is an area previously operated by BP Energy. Our agreement with Aethon was just finalized actually today and is similar to our deal with BP in that Aethon receives reduced royalty rates on our acreage in exchange for minimum drilling commitments. Assuming the initial wells in the program go well, it should lead to significant drilling activity on our high interest acreage there as we move into '21 and beyond. Aethon is a private company, but has been a major player throughout the Haynesville for some time. Their capital resources and extensive experience drilling in the Haynesville make them an ideal partner for us at this -- in this important area. We hope this is the first step in a program that could last well over a decade. We are also diligently pursuing ways to stimulate additional activity in the San Augustine side of the Shelby Trough via the existing operator and by bringing in an additional operator or operators. Our objective with the improved forward gas price curve is to reboot this large resource over the coming years and we feel we're off to a great start with the Aethon agreement. All of these strategic decisions are designed to make Black Stone ready to deal with whatever the market might throw at us in the coming quarters. We will continue to prioritize the balance sheet and seek to drive activity on our acreage as we have always done. This will ensure our ability to weather the current storm and position us with ample liquidity to take advantage of opportunities once the energy sector recovers. Finally, I want to thank our employees for staying focused and for working really hard while adapting to a rapidly changing environment. In March, we transitioned to a fully remote workplace and since that time, our employees have continued to make the trains run well and on-time and execute on the many strategic initiatives we are pursuing. With that, operator, we'll open it up for questions.

[Operator Instructions] And your first question comes from Steve Decker with KeyBanc.

Hey, guys. Just wanted to get a sense of what you guys need to see to start paying out more of your cash flow. Is there a certain debt metric or any commodity price you guys are looking for?

I'll take a stab at that, Steve. We don't have a defined debt metric that we're trying to get to right now in an absolute sense today. I think this is a function of -- there is obviously a very clear circular relationship between reserves, production volumes, commodity prices, borrowing base, the termination as dependent upon those and our outstanding debt as a percentage of our borrowing base. So as we look forward and see what our production is going to look like, as we can get a more stable position on that, as we see where commodity prices are going, we will continue to refine our debt metrics and our direction. So, until we see clarity in those areas, we will continue to pay our debt down pretty aggressively, yet, once we do see what those metrics will look like and should they indicate that we've got plenty of coverage, we will, as soon as that happens, we will commence to increase our distribution payout. If that answers that question.

Yeah, that's very helpful. And then I just had one question on the Aethon deal. These are the initial four wells in the first year. Do you have a net number on that? And then the four is the minimum, is there a maximum range associated with that as well?

Steve, this is Jeff. We are generally around a 50% mineral owner in the entire area. So I think just from a very round number perspective, you can use that as a basis on any given well that's drilled. We're probably -- frankly we're normally a little higher than that, but it's just probably a good round number in terms of how they would net down. And then while fourth amendment for the first of the well commitments step up pretty significantly from there. I think as we mentioned in the press release, by the third year, It moves up to a 15 well per year commitment. There is certainly no maximum. So if Aethon wants to drill more than they are welcome to do that.

Which will be very much -- probably results in commodity price growth.

Got it. Okay, great. Yeah, that's very helpful.

Your next question comes from Brian Downey with Citigroup.

On the Haynesville in Shelby Trough, nice job on the agreement announced this morning. And you touched on, on the prepared remarks, but I'm wondering if you could characterize more broadly, with other operators, what interest levels you're seeing in dry gas plays like the Haynesville versus prior quarters and from your conversations, how you think operators are potentially thinking about dry gas activity, given oil volume curtailments we're hearing across the industry and the potential for associated declines -- associated gas declines more broadly?

Yes, this is Tom. I'll take a stab at that and then Jeff could chime in as well. I would -- the first thing I would say is I think it's a little bit early to really understand what the industry reaction to the -- seeing the 6 to 1 BTU equivalency between gas prices and West Texas Intermediate prices being hit on a BTU basis for the first time that I can remember in quite some time and the inferred benefit that, that may bring to dry gas plays like the Haynesville, but we are optimistic that those areas will get more activity, relatively speaking, than they've gotten in the past. Jeff, do you want to?

Yes, Brian, so just to add to Tom's comments, I think that, one, we are seeing a little more interest in drier gas plays. I mean for so long, right, just all of the capital was rushing to the Permian and now with the collapse in oil prices and again, as Tom mentioned earlier, kind of a relatively optimistic view on gas, we're starting to see some real rebounding interest in gas and we have looked at it internally and looked at some third-party sources as well. And for example, you take our Shelby Trough dry gas wells in the economics at $3 gas and we think they are actually much superior to core Mid-Del at a $30 to $40 oil price. And so I think that will bring some capital back to these spaces. And then the other thing that's sort of beneficial for Black Stone is we own so much of East Texas that we can -- as a high net mineral owner in a lot of these areas, we can structure deals like the deal with Aethon that can incentivize producer activity. And so, hopefully, we're going to see the marriage of both, more producer interest and our ability to kind of match that up with creative deals and maybe it really works out to something. And again, as Tom said in his remarks, we think Aethon's a first step but we would certainly like to take it further.

And then maybe a quick one on a go-forward strategy around 2021 hedging. I guess, how should we think about potentially layering more on over time? Is that something that there is a particular price point you'd like to see to add more or that'll be more methodical from this point, given the amount you've had thus far? Just how you think that's there.

Yes. So, what we wanted to do first was just take a big chunk of the risk off the table. And so we were pretty pleased to put gas hedges on at $2.50's and then the $2.60's and then got some in the $2.70's as well, which is very consistent with our price levels for the 2020 hedge book. Obviously, the average price on those hedges for oil is coming down, but again that was more about risk removal. I think you'll see us continue to be methodical in our hedging as we always have. We just -- with -- especially in this time where we're really focused on getting the debt balance down is that we are just valuing greater certainty of cash flows when the production picture is selling clear.

Yeah, we'd be really happy to be meaningfully wrong on a significant hedge program in 2021.

Great. I appreciate it. Appreciate the color.

Your next question comes from Pearce Hammond with Simmons.

Good morning and thanks for taking my questions. My first question is kind of a hard one but I know you're not providing guidance for 2020 and completely understand why, but just curious if you did have a sense from some producers about kind of the level of volumes that could be impacted in Q2, Q3 from production shut-ins, curtailments. I mean, are there any rough guardrails you can provide around that?

Pearce, this is Jeff. And obviously, if Tom or Garrett want to chime in, they can. I mean, all I would say, and Tom sort of touched on it in his opening remarks, is that we are -- we have a broad, broad acreage position around the lower 48 and so you look at what's happening in rig counts, and maybe to a little bit lesser extent permits, but we're starting to see it in terms of new well adds trending down as well. So, look, we are sort of battening down the hatches here to prepare for what could be a rough spell in the oil patch for a while and I think that's going to be -- you're going to see that manifested by continued reductions in rig count and continued deferrals of completion activity and, to a more limited extent, some shut-ins. We haven't seen much wide scale shut-ins yet, but we've seen a few and it's, as we said, just really tough to know where that's all going to go. So your guess there is probably as good as ours.

Okay. Completely understand. Thanks, Jeff. And then my follow up, when you look at the credit facility or 77% drawn as of May 1, I assume that you would expect that percentage to decline as the year progresses since you're retaining more cash to fortify the balance sheet. Do you have a target that you want to get to and given the environment right now with where the Fed is kind of supporting the bond market, could you consider a bond offering to pay down the credit facility and improve the liquidity?

Well, to answer the first question there, Pearce, is we do expect to continue to pay down debt pretty aggressively. I mean just this quarter, right, I mean, just coverage in this quarter was in the neighborhood of $50 million and that probably compresses a bit as we get through the year, just as -- because we will feel the full impact of the price declines, specifically for oil, a little more fully next quarter and then whatever happens with shut-ins and other volume declines. But we have positioned the distribution to aggressively pay down debt while we've got such a strong hedge portfolio and while production levels are relatively good. So we would expect to continue to pay down pretty aggressively. I don't know that there is a specific target. What we want to do is just make sure that we've got sufficient cushion against the borrowing base. And so we feel like we've got a good plan to do that. Completely hear you on the high yield, those two words were sort of the words that would not be spoken around this company for a long time. I think that's probably the case, if nothing else, you're going to be looking at a pretty good increase in interest rate risk. So, I think as long as we feel comfortable, like we do today, that we can appropriately manage our liquidity around the credit facility, we'd probably stay there. But every day is a new day in this market.

Your next question comes from Derek Whitfield with Stifel.

Understanding the challenges associated with forward guidance, could you offer color on where activity including rigs permits and net wells added stands for Q1?

Sure. So, we had a pretty good production increase in the Midland and Delaware. But we are seeing rig counts fall there. We saw rig counts go from around 64 in the Mid-Del at the end of the year down to 47 at the end of the first quarter. Also, probably, the biggest decline in active rigs, no surprise, probably anybody who's across the Bakken, where at the end of the quarter, we just had a single rig running on our Bakken acreage. And then in terms of new well adds, I mean we had a -- for the first quarter, we had a nice quarter in terms of new well adds. We had 415 wells added across the portfolio in the first quarter that compares to just under 500 in 4Q of '19. It is actually above what we saw in Q1, Q2 and Q3 of '19. So, again -- so pretty solid quarter overall. I think the issue is just where it all goes from here that we're trying to protect against.

Understood. And as my follow-up, I know you guys have taken a very cautious near term view to improve the balance sheet and manage the risk associated with the current commodity environment. With that said, as we look forward, what will be your guiding principles for increasing the percentage of distributable cash flow as the commodity price environment improves?

I would say the answer to that is making sure that our debt balances as a percentage of our borrowing base are further reduced than they are today meaningfully even while our borrowing base may be reduced. And once we have clarity on that and have those metrics established, we will start distributing more.

[Operator Instructions] And at this time, I would like to turn it back over to the speakers for any further comments.

Well, this is Tom. Thank you all for joining us today. These are clearly times that none of us have really experienced before in so many ways, and I'm just very grateful to our team and feel good about the way that we are all working together to put ourselves in a pretty safe position, as safe as we can be going through these uncharted waters, and we look forward to getting into a better place and returning to a more robust distribution scenario, but we're going to make sure that the company is on a sound footing. Thank you all for joining us today.

Ladies and gentleman, this conclude today’s conference. Thank you for participation and have a wonderful day. You may all disconnect.