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BSM - Black Stone Minerals, L.P.


KJP
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The few Texans I know all give the same advice:  “Never sell minerals.”  That is the tl;dr investment case for Black Stone Minerals, L.P. (“BSM”).  The longer version follows.

 

BSM is a lightly levered MLP with 25% insider ownership and no IDRs.  The company owns mineral interests in over 20 million acres across the United States.  Mineral interests are created by severing ownership of underground minerals from ownership of the surface acreage.  The owner of the mineral interest has the right to to come onto the land and extract the minerals without the permission of the surface owner.

 

Like most mineral owners, BSM generally does not do its own exploration or production.  Instead, it leases its acreage to E&Ps like Chesapeake, BP and XTO, which typically pay BSM a cash “lease bonus” upon signing of the lease and a per unit (barrel or MBTU) royalty (usually 20-25%) for any hydrocarbons actually extracted from the leased acreage.  Once a lease expires, BSM can release the property and earn additional lease bonuses and royalties.

 

Mineral ownership is a great business model.  All capex (and the risks associated with it) are borne by the E&P, not the mineral owner.  Similarly, the mineral owner pays nothing to develop new or improved drilling technologies, but directly benefits from any advancements made by others because they increase the amount of oil or gas that can be economically extracted from the mineral owner’s acreage.  This creates significant optionality that is impossible to accurately model but nonetheless quite valuable.

 

Today, only about 30% of BSM’s acreage is currently leased.  In typical MLP-speak, the company refers to the unleased acreage as “cost-free embedded drop-downs” that will lead to future growth, along with growth from additional drilling/recovery on existing leases.

 

Because BSM is effectively a royalty streamer, I would expect it to trade at a very high multiple to current cash flows, but that is not the case.  The company currently trades at ~8 or 9x distributable cash flow (“DCF”) [necessarily based on a management estimate of the amounts necessary to cover depletion] and yields 9%.  The difference between the DCF yield and the distribution yield represents additional amounts beyond the depletion reserve that management retains to buy additional mineral interests.  The company also often issues units to mineral sellers, and I understand that structuring transactions that way can create significant tax benefits to the seller.

 

Obviously DCF and yield aren’t the only figures that matter when they’re being extracted from what appears to be a depleting asset.  That would be particularly true of current numbers are inflated by a large number of recently drilled, quickly depleting wells.  On the depletion issue, I note that production from acreage owned by the company at the time of its 2015 IPO has continued to increase, so the company’s production numbers are not obviously inflated by  fast-depleting wells on newly acquired acreage. 

 

In addition, if you believe hydrocarbon production will continue to increase in the United States over the next several years, then you can look at an overview of BSM’s acreage and ask yourself the likelihood that BSM is going to be a beneficiary of that volume increase.  Similarly, BSM is exposed to the price of oil and gas via the percentage royalties it receives.  To the extent the price of oil and gas increase in the future, BSM would benefit.  So, in a nutshell, BSM is a company that (i) is lightly levered, very capex-light and paying a ~9% yield out of current cash flow, and (ii) will benefit from any increases in hydrocarbon prices or advancements in drilling technology without having to pay any of the costs of developing that technology.

 

Two final points:  (i) management recently put a unit repurchase program in place to take advantage of the current unit price; and (ii) a few comparable companies have recently converted to C corps, but I don't get the sense that BSM management wants to go that route.

 

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  • 11 months later...

The few Texans I know all give the same advice:  “Never sell minerals.”  That is the tl;dr investment case for Black Stone Minerals, L.P. (“BSM”). 

...

Followed the recent reference in a related thread and this is an interesting area. Thanks.

There may be a wave of further consolidation which may bring teams combining technical expertise, relevant understanding of field economics, ability to evaluate the likelihood and timing of further development of actual production and ?discipline. The niche players form only about 2% of the fragmented market, which is huge, in total. After spending some time on this, it appears that there was institutional momentum after 2014 that was kind of procyclical but (this reminds me of the Altius thread with the royalty model smoothing both the upside and the downside and the necessary optimization of the return profile through competent capital allocation) now the price paid for mineral rights may be more neutral, reflecting lower expectations, at least to some degree. Viper Energy Partners is a relevant comparable (more Permian exposure and different composition of revenues) and I like the ticker: VNOM.

The next step is to try to define a valuation range and maybe include one or two in this specific field (including BSM) into some kind of a basket of oil and gas related securities. I like this sector for the mid-term but timing remains the big challenge.

I also have to look into the potential ramifications from potential C-corp conversion.

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  • 2 months later...

I like this sector for the mid-term but timing remains the big challenge.

 

You weren't kidding.  My timing was, to put it gently, poor.  But BSM remains quite interesting to me.  Their hedge book will see them through 2020, though a further dividend cut wouldn't shock me.  Unlike many of the other O&G royalty companies that I'm aware of, they also have large gas-directed acreage, particularly in the Haynesville, and the 2021 gas forward curve has been perking up recently.  All that being said, projecting 2021 volumes is beyond my capability.  Instead, I continue to like this for its inherent optionality.

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I like this sector for the mid-term but timing remains the big challenge.

 

You weren't kidding.  My timing was, to put it gently, poor.  But BSM remains quite interesting to me.  Their hedge book will see them through 2020, though a further dividend cut wouldn't shock me.  Unlike many of the other O&G royalty companies that I'm aware of, they also have large gas-directed acreage, particularly in the Haynesville, and the 2021 gas forward curve has been perking up recently.  All that being said, projecting 2021 volumes is beyond my capability.  Instead, I continue to like this for its inherent optionality.

 

The market has created a lot of inherent optionality recently for some of us, even where we might have not even wanted much of it

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I like this sector for the mid-term but timing remains the big challenge.

 

You weren't kidding.  My timing was, to put it gently, poor.  But BSM remains quite interesting to me.  Their hedge book will see them through 2020, though a further dividend cut wouldn't shock me.  Unlike many of the other O&G royalty companies that I'm aware of, they also have large gas-directed acreage, particularly in the Haynesville, and the 2021 gas forward curve has been perking up recently.  All that being said, projecting 2021 volumes is beyond my capability.  Instead, I continue to like this for its inherent optionality.

 

Well, that didn't take long.  Black Stone announced a distribution cut this morning:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-declares-distribution-common-units-and-2

 

Given the lack of any significant price reaction, this wasn't a surprise to many.

 

Note the commentary on the 2020 hedge book and weighting towards natural gas. 

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...

Well, that didn't take long.  Black Stone announced a distribution cut this morning:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-declares-distribution-common-units-and-2

 

Given the lack of any significant price reaction, this wasn't a surprise to many.

 

Note the commentary on the 2020 hedge book and weighting towards natural gas.

What happens after a distribution or dividend cut can be interesting and can result in buying opportunities.

It depends on the balance between those who see related change in intrinsic value and those who don't.

So, in this specific case, trading appears to reflect some kind of rotation.

For disclosure, as a CDN, i don't plan to invest in this LP structure but find the sector interesting (now with a long term mindset although i suspect that this will be a recurring theme for a while) and may eventually contribute for CDN equivalents.

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this is my parents largest energy position. first purchase at $9.60, last purchase at $4.40, average cost in the $7's. I like it because I think it is non-binary [one might say it's basin-fluid ; ) ] in that you have some Permian, some Haynesville, some Marcellus, Bakken, it is rapidly de-levering with hedged cash flow, and it has no capital spend requirements. I view it as a permanent holding where intrinsic value is extremely squishy and there is a wide range of outcomes. Plan is to just hold on and not re-invest the distributions.

 

think it will return its cost within 5-10 years, gravy thereafter, big optionality on becoming a scaled advantaged consolidator of royalties via accretive tax efficient issuance to wealthy families.

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Apparently North American oil and gas drilling isn't dead:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-announces-agreement-aethon-energy

 

Note that this is gas-directed drilling and that Black Stone did give Aethon "reduced royalty rates and exclusive access to Black Stone’s mineral and leasehold acreage in the contract area."  So it appears that the natural gas forward curve is doing its work.  This is also one of the benefits of owning the most diversified (in terms of basins) royalty company. 

 

For context, Black Stone is a big owner in the Haynesville and invested a lot of capital with XTO and BP to develop it (that's where the working interests on the balance sheet are from).  Those companies scaled down their Haynesville plans due to the collapse of gas prices, and it was unclear when they are another E&P would step back into this acreage. 

 

 

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Here's a recent VIC writeup:  https://www.valueinvestorsclub.com/idea/BLACK_STONE_MINERALS_LP/2269477254/messages/159979#description

 

The math is easy enough; estimating the inputs is, of course, a bit more difficult.  The author's worst case scenario for 2021 is already partially off the table, because the company has begun hedging 2021 production at $36/barrel for oil and $2.60/MCF for gas. 

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FCF till 2021 is not great with current hedges in place and their dedication to paying down debt first. But downside is limited and they will surely survive the next 2 years. To me the most interesting part of this company is what happens after 2021.

 

Expenses are roughly ~70-80M excluding ad valorem taxes (which are ~16% based on their production).  At a conservative estimate of 2022+ revenue of $200M+ they would earn $0.5/share in FCF. That's a 7-8% yield at current price. That doesn't sound all that great but there's a lot of upside to be had from this $200M revenue point. Their worst year since 2014 was $260M in revenue and average revenue 2014-2019 is $478M.

 

I am not invested yet, but I do think it's an attractive bet as long as you're willing to wait at least a couple years for things to normalize and for them to weather the current storm.

 

 

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FCF till 2021 is not great with current hedges in place and their dedication to paying down debt first. But downside is limited and they will surely survive the next 2 years. To me the most interesting part of this company is what happens after 2021.

 

Expenses are roughly ~70-80M excluding ad valorem taxes (which are ~16% based on their production).  At a conservative estimate of 2022+ revenue of $200M+ they would earn $0.5/share in FCF. That's a 7-8% yield at current price. That doesn't sound all that great but there's a lot of upside to be had from this $200M revenue point. Their worst year since 2014 was $260M in revenue and average revenue 2014-2019 is $478M.

 

I am not invested yet, but I do think it's an attractive bet as long as you're willing to wait at least a couple years for things to normalize and for them to weather the current storm.

 

Are you including interest and preferred distribution in your expense calculation?  (Not saying that's wrong -- they both do come before LP distributions.)

 

What are the average oil and gas prices and production that you're using to get $200 million in 2022 revenue?

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I am including interest (4% on avg outstanding loan $225M) and preferred ($21M).

 

~3M Bbl and ~48M MMcf. I've used a 20% decrease in production for 2020 as well as 2021 to get to this number for 2022. If you take these numbers and a $30 oil price and $2.5 gas price you get $200M+ revenue. There's some extra income from lease bonuses as well which I didn't include here. But it's all very rough numbers just to get an idea anyways.

 

2022 oil futures currently are in the $40 region and NG seems to be ~$2.75. They also say this:

 

We are allowed to hedge up to 90% of such volumes for the first 24 months, 70% for months 25 through 36, and 50% for months 37 through 48. As of March 31, 2020, we have hedged 91% of our available oil and condensate hedge volumes and 75% of our available natural gas hedge volumes for 2020.

 

So they might lock in some 2022 rates maybe even this year given how defensive they're playing it atm. I am by no means an expert on this though, but after doing some (sometimes confusing) number crunching it looks like a reasonable bet to me. It feels like a slamdunk bet at $4-$5. 

 

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It feels like a slamdunk bet at $4-$5.

I know right? Which is why it's trading $6.60. Still yields almost 5% even after cutting div.

 

I was telling myself to get a full position around $5 and still only ended up with a quarter position.

I like this as a way to play oil recovery (also hedges to my tankers) and a way to fade the relentless money printing.

Would anybody be surprised to see $100 oil in a few years?

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  • 2 weeks later...

Black Stone Minerals, L.P. Announces Asset Sales Totaling $155 million, Further Strengthening Balance Sheet and Liquidity Position.

 

Reducing their Boe production with about 1800 Boe a day, which is about 3.7% of their total production (this seems really low, so I might be missing something here).

 

If true, this is a very interesting deal because dividend payouts will increase a lot.

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Black Stone Minerals, L.P. Announces Asset Sales Totaling $155 million, Further Strengthening Balance Sheet and Liquidity Position.

 

Reducing their Boe production with about 1800 Boe a day, which is about 3.7% of their total production (this seems really low, so I might be missing something here).

 

If true, this is a very interesting deal because dividend payouts will increase a lot.

 

Regarding evaluating the BOE disclosure, (i) Black Stone sold mineral interests in the Permian, which presumably is primarily oil rather than gas production, and (ii) it's unclear how much of that acreage has already been drilled or is currently producing, so existing production may not be a good indicator of the acreage's value. To state the obvious, this makes the company even more "gassy" than it previously was.

 

More broadly, it's very hard to tell what this deal says about management's skill and capital allocation.  Just a few months ago the company was buying Permian acreage, now they're selling it.

 

Were they buying high and now selling low? 

 

Do they think the company's stock price doesn't reflect the private market value of their assets so they're going to try to do some arbitrage between public and private values, a la Paramount Group and NYC commercial real estate?  The press release didn't mention buybacks, so this seems unlikely. 

 

Is Tom Carter getting a lot of pressure to increase near-term distributions because friends/family effectively live off them?

 

As someone mentioned in the Howard Hughes thread, your view of this transaction may depend on whether your cost basis is $5 or $15/share.

 

 

 

 

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Larger of the two previously announced sales has closed, and the other is set to close tomorrow:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-announces-update-previously-announced

 

They're using the cash to pay down their credit line and increasing the dividend to 15 cents/quarter.  They suggest distributable cash flow for Q2 will be double that, but DCF is currently being propped up by the hedge book. 

 

 

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Long writeup on Black Stone Minerals by Emeth Value Capital (whom I know nothing about) available here:  https://d6c0348e-5a3f-4bb3-a1bf-3864188b9c6e.filesusr.com/ugd/b2ee4c_c1778ec658b04174856e4169cb505c0c.pdf

 

I don't think there's anything particularly new in the writeup, particularly if you've already read the VIC writeups.  The author includes two models at the end to show possible outcomes.  I think even the author would say these are simply illustrations of possible outcomes, not projections of what likely will happen, which I doubt is even predictable by anyone given the complexity of the variable involves (US oil and gas production over the next several decades and their prices).

 

One point to note is that the author says that "the price of oil and natural gas are inversely correlated" because associated gas is a byproduct that will be produced regardless of the market price of gas if the price of oil is high enough.  Thus, in the author's view, having a diversified portfolio of mineral interests that includes both oil and gas creates something of a natural hedge.  But in both of his models, the price of oil and gas over time are positively correlated (and increasing). 

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  • 8 months later...

Some encouraging news on new development agreements, particularly in the Austin Chalk:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-reports-first-quarter-results-and

On the other hand, now that hydrocarbon prices are up, they bought some acreage after selling Permian acreage at the bottom last year.  One would hope that the insider ownership here would lead to good capital allocation, but it's not clear that's happening.

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yea, I think they could help themselves out a lot by saying "we think our stock is cheap and will repurchase the $10mm issued in the permian acquisition". It would cost a lousy $10mm but demonstrate that they value their currency.

I'm not really interested in crying over spilled milk regarding the 2020 permian sale. there are alternative histories where that would prove prudent. But we've de-levered, borrowing base has been affirmed, vaccine rollout, it's not time to be issuing even a token amount of stock at 10% DCF yield. 

as you said, the most promising thing is that there appears to be a fair bit of activity where they're most concentrated. 

 

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On 8/9/2020 at 9:44 AM, KJP said:

Long writeup on Black Stone Minerals by Emeth Value Capital (whom I know nothing about) available here:  https://d6c0348e-5a3f-4bb3-a1bf-3864188b9c6e.filesusr.com/ugd/b2ee4c_c1778ec658b04174856e4169cb505c0c.pdf

 

I don't think there's anything particularly new in the writeup, particularly if you've already read the VIC writeups.  The author includes two models at the end to show possible outcomes.  I think even the author would say these are simply illustrations of possible outcomes, not projections of what likely will happen, which I doubt is even predictable by anyone given the complexity of the variable involves (US oil and gas production over the next several decades and their prices).

 

One point to note is that the author says that "the price of oil and natural gas are inversely correlated" because associated gas is a byproduct that will be produced regardless of the market price of gas if the price of oil is high enough.  Thus, in the author's view, having a diversified portfolio of mineral interests that includes both oil and gas creates something of a natural hedge.  But in both of his models, the price of oil and gas over time are positively correlated (and increasing). 

 

Here's a recent Andrew Walker podcast with Andrew Carreon of Emeth Value about Black Stone:  https://podcasts.apple.com/us/podcast/andrew-carreon-from-emeth-value-on-blackstone-minerals/id1526149547?i=1000524948149

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