Good morning, ladies and gentlemen, and welcome to the Black Stone Minerals First Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host Mr. Evan Kiefer, Vice President of Finance and Investor Relations.

Thank you, Ashley, and good morning to everyone. Thank you for joining us either by phone or online for the Black Stone Minerals first quarter 2021 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 our forward-looking statements in our press release from yesterday and the Risk Factors section of our 2020 10-K. 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, which can be found on our website at blackstoneminerals.com. Joining me on the call today from the Company are Tom Carter, Chairman and CEO; Jeff Wood, President and Chief Financial Officer; Steve Putman, Senior Vice President, General Counsel; Garrett Gremillion, Vice President of Engineering and Geology; and Thad Montgomery, Head of land. Now I'll turn the call over to Tom.

Thank you, Evan, and good morning to you all. Thanks for joining us. We've got a lot of matters to report to you all this morning, so I'll start. We reported a 36.8 MBoe per day for the first quarter of '21 yesterday. Of that amount, the big 5 are Shelby Trough Haynesville/Bossier, Midland Delaware, Louisiana Haynesville/Bossier, Bakken and then what we generally refer to is other which is basically -- which basically consists of diverse non-resource plays. Of that 36.8 MBoe per day, 5.7 MBoe per day was working interest, primarily in the Shelby Trough. Before the year 2020, and the pandemic, and other economic activities that took such toll on the world economy, we exited 2019 in the high 45 MBoe plus per day with about 7 of that being in working interest. Both BP and XTO had been super active in the Shelby Trough, the Permian was on par, the Bakken was very busy and the general rig count was robust. We all know that Shel came to an abrupt halt, both BP and XTO have severely cut back or have ceased drilling on our acreage in the Shelby Trough. We monetize the minority interest in our Permian acreage to clean up our balance sheet in such uncertain times. The Bakken has slowed and rig counts plummeted. But with that -- all that said, remember that we were in the high 26 MBoe per day range in 2015 when we went public. We made great strides growing volumes up to the big event in 2020, and we are hard at work to spool back up our production in the coming years. To that end, we have been heavily focused on our high interest legacy lands. As you saw in our earnings release last night, we have made…

Well thank you, Tom, and good morning, everyone. Well, in the midst of all this recent activity, we did actually release first quarter earnings last night. So, at the risk of being a bit anti-climactic, I'll just point out a few notable items for the quarter. We reported total production of 36.8 MBoe per day, mineral and royalty volumes were relatively flat while working interest volumes declined by 17%, of course that's by design as we stopped funding that business in 2017. We estimate the first quarter volumes primarily on the natural gas side were negatively impacted by about 1.6 MBoe per day by the winter storms that swept through Texas in February. Our realized prices before hedges for oil and gas improved meaningfully in the first quarter and gas differentials improve due both to the period of high gas prices during our February storm and due to the increase in NGL prices. As most of you are aware, we have always been active hedgers of our commodity risk. Those hedges benefited us greatly last year when prices cratered, but also tempered the impact of the dramatic rise in prices for us during the first quarter. Our LOE and production costs were slightly below our guidance levels, so that's good news. Total G&A cost did tick up a bit in the quarter due to higher legal and professional fees and due to higher non-cash G&A, due to the increase in our unit price during the first quarter, which drives up the mark-to-market on our outstanding long-term performance units. Overall, we generated $60 million of adjusted EBITDA and $53.8 million of distributable cash flow for the first quarter. That results in distribution coverage of about 1.5x on our announced distribution of 17 or $0.70 per unit annualized for the quarter. That…

[Operator Instructions]. And your first question comes from Leo Mariani with KeyBanc.

Hey guys, I was hoping to get maybe a little bit more color. I know it's maybe a tough question to answer on what the potential success case could look like. You've got this new deal here on the Chalk with this consortium that's going to drill through wells and you certainly pointed out, but could be individual deals struck for these 3 companies, if there is success. Could you maybe just try to frame up roughly kind of what the land area is that might be up; between these three companies. And I guess if these wells are successful, I mean, could we see something like each company have a rig there next year and maybe what's kind of your rough interest in that area? So, for example if I just made up a number, if 10 wells were drilled, how many net wells would that be at the Black Stone?

This is Tom, I'll take a shot at that with Fab here, who has been really working on this, but we -- among the 3 deals -- actually one -- well, one of the deals has 3 different operators, one of the deals has 1 operator and other one is 1, so we would expect 8 to 12 wells on the deals that we have done in the next 12 months, assuming there is some level of success. That number would go up in development in the subsequent years, so it could be well north of that. And in addition to that, there are several other areas where we have large acreage positions that we are working on other deals that we have not completed yet. So we're not done adding to that cycle yet. In terms of the consortium, there are over 100 plus existing units and and/or operated by those 3 operators, and the test well program is being conducted in a somewhat diverse position across those 3 operators, in such a manner that it will help delineate the play. Then once that happens, each operator will go on a continuous development cycle, if they want to keep up with the play with some 3 to 5 wells a year. So the number of acres and the amount of interest that we have in those plays, if the play is successful could ramp up into very meaningful volumes. It's going to take a couple of years, it just does. And -- but as I said earlier, it's an area that does produce, it's not a rank wildcat. In many respects with all of the attention over the last 5 plus years on resource plays, I kind of look at the Chalk play as the original resource play, and it's had at least 3 cycles of development. I'm turning 70 years old and I was -- this year, and I was driving past Chalk wells and the Giddings field when I was in college at the University of Texas. So it's just -- it's sort of like the gift that keeps on giving.

Okay, that's very helpful color. And I guess maybe just a high level, is most all of this activity focused on the oily window in the Chalk at this point in terms of all these deals you guys have?

I would -- the core -- the deals that we mentioned today are in the rich gas window. And we do have some significant acreage in the oily window that we are also working on and we have a lot of acreage immediately down dip to the rich gas window that we know is perspective for gassier Chalk wells that we will be working on as well. And I think that has some similarities to Dorado, in terms of deliverabilities. I would add that it is deeper than Dorado but fortunately for us, we have just a whole lot of acreage sitting in this play and it could be extremely meaningful for us, it's going to be a very interesting year.

All right. I guess, certainly noticed that you guys made an acquisition here. It seems like it's been a while since Black Stone had bought something. I think you guys obviously point out it's not a huge deal, but can you maybe talk about your appetite for incremental M&A in this environment?

Hey, Leo, this is Jeff. Yeah, thanks for that question. It has been a while, I mean, that our view was, during most of 2020, there were a lot of things going on, none of it good, well, just generally, but certainly not for the acquisition environment, right. So we had a stock price where we didn't really feel like the equity was a usable acquisition currency and I think sellers still had maybe higher expectations in the environment warranted. And so with prices recovering, with equity -- with commodity prices recovering with equity prices recovering and frankly where sellers sitting on those assets for another 12 to 18 months, we think that environment is just getting much more constructive. So while this was not a huge deal for us by any means, it's the kind of deal we really like doing. This was a negotiated process not an auction process. It involve relationships that we've had for years and it was for a seller, who was willing or perhaps excited to take back equity in Black Stone. And I think that's just going to have to be the model going forward. We've done a tremendous amount of work to get the balance sheet where we want it, so we're not going to put that at risk again, and this was something that was we thought a reasonable price, Midland Basin and one that was not at all harmful to the balance sheet. So we're excited about this and excited about the opportunities to come. Definitely think it's a more constructive acquisition environment.

Okay thanks.

Your next question comes from Brian Downey with Citigroup.

Good morning, thanks for taking my questions. Solid set of new development agreements, aside from the 100 Boe per day that Jeff mentioned on the northern Midland acquisition. Do you foresee any of those agreements potentially contributing in the second half 2021 production volumes or is that more of a TBD impact to next year? I know you mentioned the 8 to 12 wells over the next year, but curious on potential timing there.

Yes, Brian, this is Jeff. I think it's -- I mean, maybe just some trickling in from those initial wells in the back half of this year when you talk about the deals between Austin Chalk plus Shelby Trough, but no, it's much more of a ramp. So as Tom said, look, we're very excited about the area. This is not some brand new exploratory play. We know that the resources there. We don't have a ton of data points on our acreage specifically, but we've got a lot of others in the Chalk as you look across the trend that these high intensity completions will work. But we are absolutely at the very, very early stages of the test and then build up phase in this. So it's much more kind of setting the stage for future growth in production volumes versus anything that we should expect to see that's material in the second half of this year.

Great. And then in the release you stated increased producer activity across your acreage, I'm curious how you're seeing that translate in the base production levels, how current activity levels as we're sitting in early May might have compared to your expectations when you set your initial guidance for 2021?

Yes, so a couple of things going on there, Brian, I may add. I think the comment just is reflective of general rig activity. The biggest step up in rig activity over past couple of quarters has obviously been in the Permian, but we've seen some stability or increases in other areas as well. I will tell you that what we're kind of feeling the impact early in the year in terms of new well adds from the lack of permitting and drilling activity that we saw in mid-2020. So that always kind of lags and that's impacting us in the first quarter. And so as this activity picks up, we think it will be beneficial to volumes as we go through. I mean, we're not at a point that we're ready to make any adjustments to that original guidance, we typically do that mid-year, so I think we'll probably stick to that timing.

Your next question comes from Derrick Whitfield with Stifel.

Congrats on your agreements. With regard to the Haynesville updates, do the Aethon agreement announced today fully unlock the potential of your Shelby acreage -- Shelby Trough acreage within your control?

Yes, the short answer to that Derrick is, yes, right. So we had two operators [Technical Difficulty] Angelina XTO operating in San Augustine. As Tom mentioned XTO still has a meaningful position there on acreage that they hold in that original, what we call the Brent Miller area, which really kind of kicked off the entire program as we look back to kind of '15. So we certainly hope that XTO will restart development in that area at some point but that's up to them. But yes, other than that, kind of Aethon has stepped in to the other acreage that was formerly operated by BP and some of that was operated by XTO. So it's a very large position, which is why we're excited that we've got somebody really well capitalized and really, really good technically around the Haynesville to help unlock all that.

Fantastic. And then as my follow-up regarding your Austin Chalk agreements. Could you tell me broadly what has been conveyed in the participation and development agreements to drive activity? Meaning, if I were to quote this 12 gross wells that you guys noted in your prepared comments, what would be your net exposure to those 12 gross wells?

Yes, Derrick, I mean look the incentives that we put in place for these operators sort of vary, but as we mentioned, it's royalty incentives in the early wells, especially in the test phase, and then it's a matter of charging reduced or very lessened upfront bonus payments. So the model for us is to get the molecules out of the ground. So for something like this where it's not the heart of the Permian, we need to work with producers. And the benefit of having such huge high net acreage positions, and I know I've talked about this before is that, we are relevant in those producer discussions as mineral owner, right, which is pretty unusual. We have a broad scattered low net interest, it doesn't matter what you do with a given producer, but since ours is so extensive we can't. So anyway, short answer to your question is that, we are -- we want people -- we want producers to spend their first dollar on the ground not on lease bonus and we will offer incentives in terms of royalty relief, especially for the upfront test wells.

In terms of net exposure and I'm going to say some numbers here that I hope the guys will help me with. But, if you look at our historic well count, net well counts, which is if you add up all of the net revenue points that we have and all the wells we have drilled on our acreage, over the boom and bust cycle that we've been through in the last couple of years, you've seen numbers range from 3 of the 6 and back down to 2 net wells per year drilled in all the different basins. When you get -- that's a 100% -- 100 net revenue points in a given well we used to add them up. So that's the kind of volume of net revenue points that we've been seeing. If you take a very broad brush look at the potential for the Chalk deals that we've done, there is probably upwards of 40 to 50 net wells on that acreage, so -- that's assuming success, and you can drill that out over 5 years, you can drill that out over 10 years, either way it's meaningful.

[Operator Instructions]. And your next question comes from Harry Halbach with Raymond James.

I was just wondering if I could get some additional color on the Midland deal, what counties is in and who are the operators?

Yeah, it's Northern Howard primarily, and then there is a number of operators, for instance, since a big one...

SM.

Yes.

I believed into Gordon just a little bit.

Great, thanks. And then I guess another question on M&A. What's kind of your appetite for going outside the Permian? Would that be, assuming can get them to take equity or would that just be your primary focus?

Oh no, we've always been relatively agnostic to basin, other than those things that we just maybe feel like we don't have a deepen understanding on, right. For example, we haven't done a big Appalachian deal in part just because of the concerns and understanding, the full picture around takeaway capacity, just as an example. But look, what we look for our deals that are accretive to our NAV, that have solid IRRs, and what we think will return solid ROIs to our investors. And so, yeah, short answer is no, we're absolutely not limited to the Permian. One of the benefits we think to being a very large, diverse mineral holders is that gives us the ability to look at a lot of different deals in a lot of different areas and really just try to pick and choose those that we think are going to provide the greatest returns. So look, at the end of day, you kind of got to go where the rigs are so that's been largely Permian over the past few years, but anytime we can find an opportunity where we think we've got a direct line of sight on development, we're more than happy to look at them.

Great, thanks. And then the if I can just squeeze one more in. You guys kind of mentioned LOE 20% below the quarterly run rate implied in your guidance. You guys expect to LOE to kind of pick up in the coming quarters? Do you think this is some what of a run rate?

No, I know, we're a little below guidance on LOE for the quarter. It can get a little bit lumpy at some -- sometimes they're just workover activity, et cetera. But no, we wouldn't expect any big tick-ups and we'll be back next quarter and that's one of those things that if it continues to trend this way, we'll probably just guidance down a little bit on LOE.

Great. Appreciate you all taking my questions and congrats on a great quarter.

Your next question comes from Pearce Hammond with Simmons Energy.

Hey good morning and thanks for taking my question, and congrats on all the news. Just a quick update, Jeff, on your thoughts on hedging. Notice you layered on some, looks like some good hedges for oil for next year, for 2022 and just your thoughts on natural gas.

Good morning, Pearce. Thanks for that. And yes, look, we're just going to continue to be systematic around hedging. We don't typically try to time any of these markets. So I think just in normal course as we go on through the quarter, we would look to continue to add oil and natural gas hedges. We haven't put on a gas position for '22, so that would be something in the normal course of business that we would do in the near term. So yes, no change to hedging philosophy. As I said in my remarks, right, with huge, huge help to us last year, a little bit of the other side of that coin this year, but we just generally like the additional stability.

And at this time there are no further questions. I will now hand the call back for closing remarks.

Well, we thank you all for joining the Black Stone call today. And we're excited about this quarter and we're going to keep working hard and we'll talk to you in the next quarter.

That concludes today's conference. Thank you for your participation. You may now disconnect.