Q4 2023 Black Stone Minerals LP Earnings Call

Participants

Mark Meaux; Director of Finance; Black Stone Minerals LP

Thomas Carter; Chairman and Chief Executive Officer & Chairman of the Board; Black Stone Minerals LP

Evan Kiefer; Senior Vice President and Chief Financial Officer & Treasurer; Black Stone Minerals LP

Carrie Clark; Senior Vice President - Land and Commercial; Black Stone Minerals LP

Tim Rezvan; Analyst; KeyBanc Capital Markets Inc

Derrick Whitfield; Analyst; Stifel Nicolaus & Company Inc

Presentation

Operator

Please standby, we're about to begin.
Good day, everyone, and welcome to the Black Stone Minerals fourth quarter and year end earnings call. (Operator Instructions) Please note, this call is being recorded. I will be standing by if you should need any assistance. I'd now like to turn the call over to Mark Meaux, Director of Finance. Please go ahead.
Thank you.

Mark Meaux

Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals fourth quarter and full year 2023 earnings conference call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night. 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 of our 2022 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 from yesterday, which can be found on our website at www.blackstoneminerals.com.
Joining me on the call today from the company are Tom Carter, Chairman, CEO and President; Evan Kiefer, Senoir Vice President, Chief Financial Officer and Treasurer; Carrie Clark, Senior Vice President, Land and Commercial; Steve Putman, Senior Vice President and General Counsel.
I'll now turn the call over to Tom.

Thomas Carter

Good morning to everyone on the call, and thank you for joining us today to discuss our fourth quarter and full year 23 results, we posted a strong we posted strong results with adjusted EBITDA of $125.5 million for the quarter, bringing us to $474.7 million in 2023. We generated total production volumes for the fourth quarter of 41,400 BOE per day, 2% above the upper end of our full year guidance, rate.
Royalty volumes for the quarter were 38,900 BOE, where we saw oil volumes trend down in the Bakken and Eagle Ford, but were offset by an increase in net on Dell. We also saw a modest decrease in natural gas volumes, primarily in the Louisiana Haynesville conforming with natural gas trends in our industry.
Yes, we see the glass as half full. Today, 39 wells have been turned to sales in the Shelby Trough under our development agreements with a time we announced in December that Aegon elected to use a time-out provision under our development agreement that specifies that when prices fall below a certain threshold, they may elect temporary, temporarily suspend contractually obligated drilling on our acreage.
At this time, we do not expect a timeout will impact the next 12 months cycle for the drilling and completion of eight operated wells that were spud prior to the time out and in fact, eight on head count, as I indicated, they may drill additional wells during the time period and have actually begun operations on several.
We are working closely with a bond to determine the effects of the time out as we focus on the longer term expectations for production in 2025, we had 63 rigs running on our acreage at the end of the quarter, representing approximately approximately 10% of the US rig count and a reduction of $13 million compared to the third quarter.
Like most in our business we are seeing a general slowdown in drilling in the Haynesville and Gulf Coast as a response to lower natural gas price with oil gas oil prices remaining around the $70 per barrel range. We did see a small increase in Midland, Delaware and the Bakken play trends. We previously announced that we were maintaining our $47.5 per unit for the last quarter or $1.90 on an annualized basis, which as reported yesterday represents 1.19 times coverage for the quarter.
Despite the challenges with natural gas prices. We've been able to maintain a strong balance sheet throughout the year and hold distributions at its highest levels since going public due to the suppressed price environment.
We may be in a position where at current distribution rates we could fall below one times coverage, something we likely would not let stand implying a possible reduce distributions until pricing recovers. In 2022, we mentioned that we expected to grow production through '23 with a target exit rate close to 40,000 BOE per day and were able to execute and exceed those expectations.
As we enter 2024 there are headwinds proved to be due to the quality of our acreage and no debt on our balance sheet. We adjusted our commercial efforts to be proactive in a down cycle and had included targeted mineral and royalty acquisitions that complement our existing acreage position.
At 2023, we acquired nonproducing minerals and royalties totaling $15 million. Our strategy in 24 includes a continuation of targeted acquisitions that support our commercial initiatives and provide long-term accretive growth to our unitholders. Overall, it's a strong quarter and despite challenging commodity price environment, we remain encouraged by the long-term natural gas outlook as we continue to make progress on strategic initiatives in '24 and beyond with that, I'll turn it over to Evan.

Evan Kiefer

Thank you, Tom, and good morning, everyone. As Tom pointed out, we had a very good fourth quarter where we reported average daily production of [41,100] BOE per day. For the full year, we generated $474.7 million of adjusted EBITDA, up from [39,800] BOE per day, which is just above the high end of our full year guidance range. In conjunction with the earnings release, we put out our 2024 guidance yesterday. And as we look forward to the full year 2024, we forecast annual production to be up slightly from 2023 levels.
As Tom mentioned, in the Shelby Trough. Aegon has indicated their intentions to turn-in-line in 2020 for the wells that have been spud prior to the time out provisions. And we're working very closely with them to determine the long-term impact on future production volumes.
We expect a modest increase in volumes in the East Texas Austin Chalk, where we now have 30 new generation multi-stage completion wells that are currently producing as we are working with our operating partners in the area to accelerate activity, our Permian position is broadly expected to remain in line with 2023 levels as operators continue to focus on capital discipline, but is offset by expected declines in the Bakken as that play continues to mature on the heels of a robust 2022 and 2023, we expect a slowdown in the Louisiana Haynesville in response to lower natural gas prices as evidenced by recent announcement of rate cuts as well as some natural production declines on our acreage outside of these core plays.
Lease bonus and other income was $3.8 million for the fourth quarter and $12.5 million for the full year. The fourth quarter included leasing from primarily in the Haynesville, the Granite Wash and Gulf Coast, but we remain encouraged by continued activity in these plays despite the lower price environment we expect lease operating expenses, production costs for 2024 to be in line with 2023 level. G&A is expected to increase slightly in 2024 as a result of inflationary costs and our continued efforts to support our ability to evaluate market and manage our undeveloped acreage positions to potential operators.
In 2023, Henry Hub averaged $2.74 per MMBTU, while our natural gas hedges had a strike price of over $5 per MMBTU, which provided over $80 million of realized hedge gains for the year. In 2024, we see those levels move lower to $3.55 per MMBTU. Our oil hedges are currently just above $71 per barrel.
We are in our normal range of hedging approximately 60 to 70 plus percent of expected volumes for the rest of the year. That will continue to provide support to our cash flows for 2024 due to the recent pullback in pricing. With the previously announced fourth quarter distribution, we will pay out total distributions of $1.90 per unit for 2023, which represents a 9% increase over 2022.
Distributable cash flow for the quarter was $119.1 million and resulted in distribution coverage for the fourth quarter of 1.19 times and 1.13 times for the full year. That allowed us to fully pay off the debt at the end of 2022 and remain at a zero debt balance throughout the year. We currently have $103 million of cash in advance of paying the fourth quarter distribution.
So now moving on from the common units to the preferred, we as we have discussed on prior calls, we have the option to redeem our outstanding preferred units at 105% of par or $21.41 per unit through February 26th, 2024 or next week. We have not redeemed and do not expect to redeem any units before the redemption window closes, which will not reopen for two years until November of 2025 at a redemption price of 100% of par or $20.39 per unit.
The rate on the preferred units reset in November of 2023 from 7% to the 10-year treasury plus 550 basis points or 9.8%. As you recall, we also put in place a $150 million unit repurchase program in October of 2023. This gives us the flexibility to opportunistically buy our common units, which currently trade at a discount to the preferred unit redemption price.
Given the low natural gas environment today and the liquefied natural gas export capacity expected to increase going into 2025 and beyond. We remain bullish on our long-term gas exposure and unit price. And so with that, I will turn the call open for questions.

Question and Answer Session

Operator

(Operator Instructions)
Tim Rezvan, KeyBanc.

Tim Rezvan

Thank you for taking my questions folks. Just start on the comments you've mentioned you're expanding your growth strategy into buying minerals in the Gulf Coast and the $15 million is relatively small relative to some acquisitions that your public peers have made in the last couple of years. I was wondering if you could expand a bit on this on this growth strategy. How big are you willing to go? And then if you could talk, you mentioned the Gulf Coast, they're non-producing. Can you talk specifically where that is in you line of sight on production from that area?

Thomas Carter

Thanks for the question, Tim. This is Tom, I'll be glad to answer that as follows. We do we acknowledge that $15 million. It is not a needle mover for Blackstone and we do extent to to continue those efforts and substantially expand upon that number may be tenfold.
And with respect to the type of acquisitions and where those are I don't want to say too much because of competitive reasons. But suffice it to say that our goals here are to buy properties that are not already well overpriced like in the Permian so that our capital will have better running room and can be accretive to our production profile.

Tim Rezvan

Okay. So it's fair to think of it as maybe a third leg on the growth stool now in addition to the Chalk and Haynesville agreements?

Thomas Carter

Well, I would tell you that typically speaking, we are expanding areas where we're already in place. So it's probably more expansive of things that we already own than adding new plays.

Tim Rezvan

Okay. I appreciate the details and then and I appreciated his comments about. And on that the redeeming the preferred shares would make sense at where prices are today. How are you thinking about that, that repurchase program you intentionally put that into release? And I'm just trying to understand the difference between that cash on hands, the repurchasing shares, in weakness versus maybe you seem to indicate you don't want to maintain that [$0.475] per unit. If it's over 100% of your cash flow, you're trying to think how you're thinking about uses of cash, given you have no debt between the repurchases and distributions in 2024.

Evan Kiefer

And this is evident as we think about our overall cash and kind of our debt balance is well, we don't really like the idea of going below one times coverage for a period of time and effectively having to borrow to support the distribution. That said, we also see value in our units over a long term and see that there could be accretion to repurchasing those units at where we're at today is lower gas prices, especially compared to the $21 on the preferred. And so overall we feel more comfortable using some of the revolver as it exists to be able to repurchase our common units as opposed to supporting a distribution level that would require coverage to be less than one times.

Tim Rezvan

Okay. So I guess we'll just stay tuned and see to start that program with repurchases.

Evan Kiefer

Yes, that's correct. It's something that, yes, with the current environment we think it makes sense and something where we have the opportunity to utilized kind of throughout the year and expect more of that to come.

Tim Rezvan

I appreciate the detail, and I'll hop back in queue. Thank you.

Evan Kiefer

Thank you.

Operator

Derrick Whitfield, Stifel.

Derrick Whitfield

Good morning all and congrats on a strong year end.

Thomas Carter

Good morning, derrick.

Derrick Whitfield

My this question I wanted to focus on your 2024 guidance with the lower gas prices we're observing at present. How are you thinking about the conversion of the AT&S, your production and your guidance, meaning are you expecting uniform cadence across the quarters or more second half weighted activity?

Thomas Carter

Great question. So overall, you know, based off our conversations with a thorn in the existing docs. We do expect those to come online and they provided there are, as you would expect, with multi-well pad completions, it becomes a little bit lumpy as multiple wells are going to and expected to come online at the same time. What that's going to do is you'll likely see some earlier on in the year, call it the first, the second quarter and then a little bit more towards the end of the year and based off the current expectations that they provided to us.

Derrick Whitfield

So lumpy, but relatively uniform across the year. Is that a fair characterization?

Thomas Carter

Yes.

Derrick Whitfield

Okay. And then shifting over to the competitive landscape, we've seen considerable M&A across the upstream sector over the last two years. But only limited amounts of activity in the minerals subsector. And with that said, what are your thoughts on the impact E&P consolidation could have on your business, namely Chesapeake, Southwestern and you're expecting to see greater consolidation within the minerals sector?

Thomas Carter

Yes. So this is that I mean, I'll kind of hit on the operator consolidation first. And I think overall consolidation within the industry on the operating side to be in official high-paying union, specifically thinking about comps that are thinking about the Southwestern deal, there's benefits that can be gained through operating efficiencies cost and everything that I think will trickle down, especially benefit on the mineral owner side as additional development could percent.
Now on the other side of that, there's capital discipline and I know Diamondback Endeavour has indicated possibly rig types and maybe a little bit more to what I would have significantly flatter production. So I think overall, we're still kind of waiting to see how everything ultimately transaction and how that kind of post transaction world works. But I think at a reasonable level, it's probably neutral on the moderate to low growth story particularly in the Permian and overall kind of efficiencies to be gained on the gas side, particularly in the Haynesville it, heat.

Derrick Whitfield

And just on more of the minerals consolidation side of the equation. What are your thoughts on that?

Carrie Clark

And yes, this is Carrie Clark and thanks for the question. I think, Dan, in the mineral base, just on a relative basis versus a much smaller pool, but there has been significant consolidation over the last couple of years, just off the top of my head, the city evergance transaction from last year and to touch back a bit on the operator consolidation and its impact to us. We're always monitoring it as these deals come about what the specific impact is to us and trying to quantify that. And I think for the to Chesapeake and when consolidation that we don't expect a material impact to us and based on that transaction.
But of course, yes, as I said, again, we're always looking at those operator consolidations and understand that capitals can shift from priority projects for one company in a form eight. It's a different company that could that could shift around and that's what we are monitoring on that front.
I don't that -- as far as outlook on mineral consolidation, there's nothing out there that we don't see at this point that we're anticipating. But so that I think that's all we really have to share on. That is just for kind of seeing the same thing. It sounds like be been in the market.

Derrick Whitfield

Terrific. Thanks for the added color.

Carrie Clark

Sure

Operator

At this time, I would like to turn the call back over to Tom Carter for any closing comments or additional remarks.

Thomas Carter

We'll thank you all for joining the call today, and we look forward to speaking with you again in 90 days.

Operator

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation. You may disconnect at this time.