Black Stone Minerals(BSM) - 2019 Q1 - Quarterly Report

FORM 10-Q Cover Page This section identifies Black Stone Minerals, L.P. as a large accelerated filer and details its outstanding securities - Black Stone Minerals, L.P. filed its Quarterly Report on Form 10-Q for the period ended March 31, 2019. The registrant is a large accelerated filer and is not a shell company[1][2][4] Class of Securities | Class of Securities | Trading Symbol | Exchange Registered On | | :------------------ | :------------- | :--------------------- | | Common Units Representing Limited Partner Interests | BSM | New York Stock Exchange | - As of April 30, 2019, there were 109,382,957 common units, 96,328,836 subordinated units, and 14,711,219 Series B cumulative convertible preferred units outstanding[4] TABLE OF CONTENTS This section provides an organized listing of all chapters and items included in the report PART I – FINANCIAL INFORMATION This part presents the unaudited financial statements, management's discussion and analysis, and market risk disclosures Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with explanatory notes Consolidated Balance Sheets This section provides a comparative overview of the company's financial position as of March 31, 2019, and December 31, 2018 Consolidated Balance Sheets (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :-------------------- | :------------- | :---------------- | | Total Current Assets | $113,129 | $157,533 | | Net Property and Equipment | $1,586,386 | $1,575,881 | | Total Assets | $1,711,887 | $1,750,124 | | Total Current Liabilities | $48,509 | $64,766 | | Total Liabilities | $577,998 | $547,500 | | Total Equity | $835,528 | $904,263 | | Total Liabilities, Mezzanine Equity, and Equity | $1,711,887 | $1,750,124 | - Total assets decreased by approximately $38.2 million from December 31, 2018, to March 31, 2019, primarily driven by a decrease in current assets, particularly commodity derivative assets and accounts receivable[15] - Total equity decreased by approximately $68.7 million, while total liabilities increased by $30.5 million during the three-month period[15] Consolidated Statements of Operations This section presents the company's financial performance for the three months ended March 31, 2019, compared to the same period in 2018 Consolidated Statements of Operations (in thousands, except per unit) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Total Revenue | $83,806 | $114,494 | | Income (Loss) From Operations | $14,594 | $47,960 | | Net Income (Loss) | $9,017 | $41,957 | | Net Income (Loss) Attributable to General Partner and Common and Subordinated Units | $3,767 | $36,655 | | Per Common Unit (basic) | $0.02 | $0.23 | | Per Subordinated Unit (basic) | $0.02 | $0.13 | - Total revenue decreased by 26.8% year-over-year, primarily due to a significant loss on commodity derivative instruments ($41.183 million in 2019 vs. $16.333 million in 2018) and lower oil and condensate sales[17] - Net income decreased substantially from $41.957 million in Q1 2018 to $9.017 million in Q1 2019, leading to a significant drop in basic earnings per common and subordinated unit[17] Consolidated Statements of Equity This section details changes in partners' equity for the three months ended March 31, 2019, and 2018 Consolidated Statements of Equity (in thousands) | Equity Component | Balance at Dec 31, 2018 | Balance at Mar 31, 2019 | | :------------------------------ | :---------------------- | :---------------------- | | Partners' equity — common units | $714,823 | $679,868 | | Partners' equity — subordinated units | $189,440 | $155,660 | | Total Equity | $904,263 | $835,528 | - Total equity decreased by $68.735 million from December 31, 2018, to March 31, 2019, primarily due to distributions to unitholders ($75.917 million) and repurchases of common units ($10.110 million), partially offset by equity-based compensation ($13.669 million) and net income ($9.017 million)[21] Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019, and 2018 Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by Operating Activities | $90,174 | $76,474 | | Net Cash Used in Investing Activities | $(24,379) | $(60,166) | | Net Cash Used in Financing Activities | $(66,962) | $(15,653) | | Net Change in Cash and Cash Equivalents | $(1,167) | $655 | | Cash and Cash Equivalents – end of the period | $4,247 | $6,297 | - Net cash provided by operating activities increased by $13.7 million, driven by changes in operating assets and liabilities and net cash received on commodity derivative settlements[25][195] - Net cash used in investing activities decreased significantly by $35.787 million, primarily due to reduced acquisitions and higher proceeds from farmout agreements[25][196] - Net cash used in financing activities increased by $51.309 million, mainly due to higher distributions to unitholders and preferred unitholders, and decreased net borrowings under the credit facility[25][197] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements NOTE 1 — BUSINESS AND BASIS OF PRESENTATION This note describes Black Stone Minerals, L.P.'s core business as an owner of oil and natural gas mineral interests and the basis for financial statement presentation - Black Stone Minerals, L.P. (BSM) is a publicly traded Delaware limited partnership primarily owning non-cost-bearing oil and natural gas mineral, royalty, and overriding royalty interests across 41 U.S. states, including major onshore basins. It also holds non-operated working interests[28] - The financial statements are prepared in accordance with GAAP and SEC rules for Form 10-Q, and the Partnership operates in a single operating and reportable segment[29][33] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting policies applied in preparing the financial statements, including recent adoptions and future pronouncements - No changes in significant accounting policies occurred during Q1 2019, except for the adoption of ASC 842, Leases[36] Accounts Receivable (in thousands) | Accounts Receivable | March 31, 2019 | December 31, 2018 | | :--------------------------------- | :------------- | :---------------- | | Revenues from contracts with customers | $97,816 | $107,804 | | Other | $5,511 | $5,344 | | Total Accounts Receivable | $103,327 | $113,148 | - The Partnership does not plan to early adopt ASU 2018-13, Fair Value Measurement, which will remove, modify, and add certain required disclosures on fair value measurements, effective for fiscal years beginning after December 15, 2019[39] NOTE 3 — IMPACT OF ASC 842 ADOPTION This note details the impact of adopting ASU 2016-02, Leases (Topic 842), on the consolidated financial statements - On January 1, 2019, the Partnership adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective method. This resulted in the recognition of operating lease right-of-use (ROU) assets and operating lease liabilities on the consolidated balance sheet, which were less than 1% of total assets and not material[40][41] - The adoption had no related impact on the consolidated statement of operations or debt covenant compliance[41] - The Partnership elected not to recognize leases with terms of less than twelve months on the consolidated balance sheets[46] NOTE 4 — OIL AND NATURAL GAS PROPERTIES ACQUISITIONS This note provides information on the Partnership's acquisitions of mineral and royalty interests and farmout agreements - In Q1 2019, the Partnership closed multiple acquisitions of mineral and royalty interests for $20.9 million, primarily in the Permian Basin and East Texas. $0.9 million was funded through common unit issuance, and the rest by borrowings under the Credit Facility and operating activities[48][49][50][52] - From inception through March 31, 2019, the Partnership received $86.4 million from the Canaan Farmout and $86.8 million from the Pivotal Farmout, with portions included in Other long-term liabilities[59][60] - As of March 31, 2019, $8.9 million from Canaan and $63.1 million from Pivotal farmout reimbursements were included in Other long-term liabilities[59][60] NOTE 5 — COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS This note describes the Partnership's use of derivative instruments to manage commodity price risk and their fair value measurements - The Partnership uses fixed-price swap contracts and costless collar contracts to mitigate commodity price risk, not for speculative purposes. Changes in fair value are included in the consolidated statement of operations[62][63] Derivative Instrument Fair Value (in thousands) | Derivative Instrument Fair Value | March 31, 2019 | December 31, 2018 | | :---------------------------------------------- | :------------- | :---------------- | | Total Derivative Assets (Net Value) | $7,102 | $48,038 | | Total Derivative Liabilities (Net Value) | $1,990 | $0 | Net Change in Fair Value of Commodity Derivative Instruments (in thousands) | Net Change in Fair Value of Commodity Derivative Instruments | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning fair value | $48,038 | $(5,028) | | Net change in fair value | $(42,926) | $(11,958) | | Ending fair value | $5,112 | $(16,986) | - As of March 31, 2019, the Partnership had nine derivative counterparties, all rated Baa1 or better by Moody's and are lenders under the Credit Facility[64] NOTE 6 — FAIR VALUE MEASUREMENTS This note explains the valuation hierarchy and methods used for fair value measurements of financial and nonfinancial assets and liabilities - The Partnership uses a three-level valuation hierarchy for fair value measurements, with commodity derivative instruments measured at Level 2 (observable inputs)[74][75][78][80] - The carrying value of cash, receivables, payables, and debt approximates fair value. Debt fair values are Level 3 measurements, estimated based on incremental borrowing rates[77] - Nonfinancial assets like oil and natural gas properties are measured at fair value on a non-recurring basis (Level 3) for acquisitions and impairment assessments, using discounted projected future cash flows[81][82] NOTE 7 — CREDIT FACILITY This note details the terms, borrowing base, outstanding balance, and compliance with covenants of the Partnership's senior secured revolving credit agreement - The Partnership maintains a senior secured revolving credit agreement (Credit Facility) with an aggregate maximum credit amount of $1.0 billion, terminating November 1, 2022[86] - The borrowing base was increased to $600.0 million effective May 4, 2018, and further to $675.0 million effective October 31, 2018[86] Credit Facility Metrics | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Aggregate Principal Balance Outstanding | $435.0 million | $410.0 million | | Unused Portion of Available Borrowings | $240.0 million | $265.0 million | | Weighted-Average Interest Rate | 4.75% | 4.76% | - The Credit Facility requires a current ratio of not less than 1.0:1.0 and a total debt to EBITDAX ratio of not more than 3.5:1.0. As of March 31, 2019, the Partnership was in compliance with all financial covenants[89] NOTE 8 — COMMITMENTS AND CONTINGENCIES This note discusses the Partnership's environmental obligations, co-owner options, and routine litigation - The Partnership's business is subject to environmental regulations, but potential remediation costs are not considered significant, and no provision has been recorded[91][92] - Co-owners of certain mineral interests acquired in the Noble acquisition have an unconditional option to require the Partnership to purchase their beneficial ownership. As of March 31, 2019, no notice was received, so no liability was recorded[93][96] - Routine litigation and claims are not expected to have a material adverse effect on the Partnership's financial condition or operations[97] NOTE 9 — INCENTIVE COMPENSATION This note details the components and changes in incentive compensation expense for the three months ended March 31, 2019, and 2018 Incentive Compensation Expense (in thousands) | Incentive Compensation Expense | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Cash—short and long-term incentive plans | $1,772 | $1,634 | | Equity-based compensation—restricted common and subordinated units | $3,019 | $3,405 | | Equity-based compensation—restricted performance units | $5,620 | $2,242 | | Board of Directors incentive plan | $585 | $579 | | Total Incentive Compensation Expense | $10,996 | $7,860 | - Total incentive compensation expense increased by $3.136 million (39.9%) year-over-year, primarily driven by a significant increase in equity-based compensation for restricted performance units[98] NOTE 10 — PREFERRED UNITS This note provides information on the Series A and Series B preferred units, including their issuance, distributions, and conversion terms - As of March 31, 2019, there were no Series A redeemable preferred units outstanding, as all were redeemed or mandatorily converted into common and subordinated units by March 31, 2018[99][101][102] - The Partnership issued 14,711,219 Series B cumulative convertible preferred units in November 2017 for $300.0 million, carrying a 7% annual distribution[103][104] - Series B distributions can be paid in-kind or cash for the first eight quarters, then cash only. They are convertible into common units on a one-for-one basis starting November 29, 2019[106][107] - Series B units had a carrying value of $298.4 million as of March 31, 2019, and are classified as mezzanine equity[108] NOTE 11 — EARNINGS PER UNIT This note explains the calculation of basic and diluted earnings per unit using the two-class method - The Partnership applies the two-class method for EPU calculation, including restricted common and subordinated units as participating securities[109] EPU Metric | EPU Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income (Loss) Attributable to General Partner and Common and Subordinated Units (in thousands) | $3,767 | $36,655 | | Per Common Unit (basic) | $0.02 | $0.23 | | Per Subordinated Unit (basic) | $0.02 | $0.13 | | Weighted average common units outstanding (basic) | 109,420 | 103,774 | | Weighted average subordinated units outstanding (basic) | 96,329 | 95,395 | - Potentially dilutive securities, including Series B cumulative convertible preferred units (14,969 thousand units in 2019), were excluded from diluted EPU calculation if anti-dilutive[111][115] NOTE 12 — COMMON AND SUBORDINATED UNITS This note outlines voting rights, distribution priorities, and details on unit repurchases and the At-The-Market (ATM) Offering Program - The partnership agreement restricts voting rights for unitholders owning 15% or more of any class of units, with certain exceptions[116] - Distributions prioritize Series B preferred units (7% per annum), then common units (minimum quarterly distribution + arrearages), then subordinated units. Excess amounts are distributed pro rata[117][118] Distributions Declared and Paid | Distributions Declared and Paid | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Per common unit | $0.3700 | $0.3125 | | Per subordinated unit | $0.3700 | $0.2088 | - The subordination period will end upon payment of the Q1 2019 distribution (payable May 23, 2019), leading to a one-for-one conversion of all subordinated units into common units[121][130] - The Board authorized a $75.0 million common unit repurchase program on November 5, 2018, but no repurchases were made under this program in Q1 2019. However, 588 thousand common units were repurchased for $10.110 million in Q1 2019, and 57,356 common units ($0.9 million) were issued for property acquisitions[21][122][225] - The At-The-Market (ATM) Offering Program allows for the sale of up to $100.0 million in common units. No common units were sold under the ATM Program in Q1 2019, but $73.0 million net proceeds have been raised to date[123][129] NOTE 13 — SUBSEQUENT EVENTS This note describes significant events that occurred after the balance sheet date, including the Q1 2019 distribution and subordination period end - On April 25, 2019, the Board approved a distribution of $0.37 per common unit and $0.37 per subordinated unit for Q1 2019, payable May 23, 2019[130] - Upon payment of this distribution, the tests for conversion of all 96,328,836 outstanding subordinated units into common units on a one-for-one basis will be met[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operational results, and future outlook, covering business overview, recent developments, and liquidity Cautionary Note Regarding Forward-Looking Statements This note advises that the report contains forward-looking statements subject to significant risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements based on current expectations and beliefs, which involve significant risks and uncertainties that could cause actual results to differ materially[133] - Key risk factors include volatility of oil and natural gas prices, production levels, ability to replace reserves, acquisition integration, economic conditions, competition, and regulatory changes[133][135] Overview This section provides a high-level description of Black Stone Minerals' business, strategic objectives, and asset base - Black Stone Minerals is a major owner and manager of oil and natural gas mineral interests in the U.S., focused on maximizing value through active management, expanding its asset base via acquisitions, and participating in drilling activity[137] - The primary business objective is to grow reserves, production, and cash from operations long-term, while paying growing quarterly distributions[137] - As of March 31, 2019, the company's mineral and royalty interests spanned 41 states, including over 60,000 producing wells, and also included non-operated working interests[138] Recent Developments This section highlights key events and operational updates that occurred during or immediately after the first quarter of 2019 - In Q1 2019, the Partnership acquired mineral and royalty interests for $20.0 million in cash and $0.9 million in common units, primarily in the Permian Basin and East Texas[139] - The PepperJack A1 well was completed in April 2019, with data being collected to assess economic viability. The Partnership assigned 75% of its working interest in the well and acreage to Development Partners, receiving $6.4 million in reimbursements and $1.0 million for an option[141] - The subordination period for common and subordinated units is expected to end upon payment of the Q1 2019 distribution on May 23, 2019, leading to a one-for-one conversion of subordinated units to common units[143] - A $75.0 million common unit repurchase program was authorized in November 2018, but no repurchases were made under this program in Q1 2019[144] Business Environment This section discusses the prevailing market conditions for oil and natural gas, including price trends, rig counts, and inventory levels - Oil and natural gas prices remain volatile. EIA forecasts WTI spot oil prices to average $58.80 per barrel in 2019 and $58.00 per barrel in 2020, and Henry Hub natural gas prices to average $2.82 per MMBtu in 2019 and $2.77 per MMBtu in 2020[146] Benchmark Prices | Benchmark Prices | 2019 First Quarter | 2018 First Quarter | | :----------------- | :----------------- | :----------------- | | WTI spot crude oil ($/Bbl) | $60.19 | $64.87 | | Henry Hub spot natural gas ($/MMBtu) | $2.73 | $2.81 | U.S. Rotary Rig Count | U.S. Rotary Rig Count | 2019 First Quarter | 2018 First Quarter | | :-------------------- | :----------------- | :----------------- | | Oil | 816 | 797 | | Natural gas | 190 | 194 | | Total | 1,006 | 993 | - Natural gas inventories declined to 1.2 trillion cubic feet on March 31, 2019 (lowest since 2014), but EIA expects inventory builds to outpace the previous five-year average in 2019, reaching 3.7 trillion cubic feet by October 31, 2019[153] How We Evaluate Our Operations This section describes the key metrics and strategies management uses to assess operational performance, including production, prices, and derivative instruments - Management assesses performance using production volumes, commodity prices (including derivative effects), Adjusted EBITDA, and distributable cash flow[156] - Realized prices for oil, natural gas, and NGLs are influenced by global/regional supply and demand, product quality (e.g., API gravity, impurities), and location differentials (transportation costs)[158][160][161][162][163] - The Partnership uses derivative instruments (fixed-price swaps, costless collars) to mitigate commodity price volatility, hedging up to 90% of available volumes for the first 24 months, 70% for months 25-36, and 50% for months 37-48[164][169] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, Adjusted EBITDA and distributable cash flow, used to evaluate performance and distribution capacity - Adjusted EBITDA and distributable cash flow are non-GAAP measures used to assess financial performance and ability to sustain distributions[170] - Adjusted EBITDA is defined as net income (loss) before interest, taxes, DDA, adjusted for impairment, accretion of ARO, unrealized derivative gains/losses, and non-cash equity-based compensation[171] - Distributable cash flow is Adjusted EBITDA adjusted for certain non-cash operating activities, estimated replacement capital expenditures, cash interest expense, and distributions to noncontrolling interests and preferred unitholders[171] Reconciliation (in thousands) | Reconciliation | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $9,017 | $41,957 | | Adjusted EBITDA | $94,932 | $95,008 | | Distributable cash flow | $81,359 | $83,416 | Results of Operations This section provides a detailed comparative analysis of the Partnership's revenues and expenses for the three months ended March 31, 2019, and 2018 Results of Operations | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Variance | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------- | | Oil and condensate production (MBbls) | 1,108 | 1,190 | (6.9)% | | Natural gas production (MMcf) | 18,615 | 15,742 | 18.3% | | Total Revenue | $83,806 | $114,494 | (26.8)% | | Realized oil and condensate price ($/Bbl) | $52.08 | $61.33 | (15.1)% | | Realized natural gas price ($/Mcf) | $3.31 | $3.38 | (2.1)% | | Lease operating expense | $5,292 | $4,248 | 24.6% | | Production costs and ad valorem taxes | $14,592 | $14,925 | (2.2)% | | General and administrative | $21,214 | $18,521 | 14.5% | - Total revenue decreased by $30.688 million, primarily due to increased losses from commodity derivative instruments ($41.183 million loss in 2019 vs. $16.333 million loss in 2018), decreased oil and condensate production, and lower realized oil prices[179][180][183] - Natural gas and NGL sales increased due to higher production volumes, mainly in the Haynesville/Bossier play and Midland/Delaware Basins, partially offset by lower commodity prices[182] - Operating expenses saw increases in lease operating expense (due to higher workover costs) and general and administrative expenses (due to higher incentive compensation), while production costs and ad valorem taxes decreased due to tax credits and lower commodity prices[185][186][189] Liquidity and Capital Resources This section discusses the Partnership's sources and uses of liquidity, including cash from operations, credit facilities, and distribution policies - Primary liquidity sources are cash from operations, Credit Facility borrowings, and equity/debt issuances. Primary uses are unitholder distributions and business investments (acquisitions, non-operated working interests)[192] - The Board's distribution policy prioritizes preferred units, then common units (minimum quarterly distribution + arrearages), then subordinated units. This policy can change, and distributions are not guaranteed[193] - Future acquisitions will be financed by cash from operations, Credit Facility, and future equity/debt. Working interest capital needs will be met by farmout agreements and internally-generated cash flows[194] Cash Flow Activity (in thousands) | Cash Flow Activity | 2019 | 2018 | Change | | :-------------------------------- | :--- | :--- | :----- | | Cash flows provided by operating activities | $90,174 | $76,474 | $13,700 | | Cash flows used in investing activities | $(24,379) | $(60,166) | $35,787 | | Cash flows used in financing activities | $(66,962) | $(15,653) | $(51,309) | Development Capital Expenditures This section outlines the planned and actual capital expenditures for non-operated working interests and their primary uses - The 2019 development capital expenditure budget for non-operated working interests is approximately $10.0 million, net of farmout reimbursements. $2.4 million was invested in Q1 2019[200] - Most of this capital will be used for workovers on existing wells and acquiring new leasehold acreage for subsequent farmout in the Haynesville/Bossier play[200] Acquisitions This section details the cash and common units spent on mineral and royalty interest acquisitions during the first quarter of 2019 - In Q1 2019, the Partnership spent approximately $20.0 million in cash and issued common units valued at $0.9 million for mineral and royalty interest acquisitions, including proved oil and natural gas properties[201] Credit Facility This section provides an update on the Credit Facility's maximum amount, borrowing base, outstanding balance, interest rate, and covenant compliance - The Credit Facility has a $1.0 billion maximum credit amount and a borrowing base of $675.0 million as of October 31, 2018, terminating November 1, 2022[202] - As of March 31, 2019, outstanding borrowings were $435.0 million at a weighted-average interest rate of 4.75%[202] - The borrowing base is redetermined semi-annually (April and October) and can be redetermined between scheduled times under specific conditions[203] - The Credit Facility includes financial covenants (total debt to EBITDAX ≤ 3.5:1.0, current ratio ≥ 1.0:1.0) and other limitations. The Partnership was in compliance as of March 31, 2019[206][208] Contractual Obligations This section confirms that there have been no material changes to the Partnership's contractual obligations since the 2018 Annual Report on Form 10-K - As of March 31, 2019, there have been no material changes to contractual obligations previously disclosed in the 2018 Annual Report on Form 10-K[209] Off-Balance Sheet Arrangements This section states that the Partnership did not have any material off-balance sheet arrangements as of March 31, 2019 - As of March 31, 2019, the Partnership did not have any material off-balance sheet arrangements[210] Critical Accounting Policies and Related Estimates This section confirms no significant changes to critical accounting policies and estimates compared to the 2018 Annual Report on Form 10-K - No significant changes to critical accounting policies and related estimates were made as of March 31, 2019, compared to those disclosed in the 2018 Annual Report on Form 10-K[211] New and Revised Financial Accounting Standards This section refers to the notes to the unaudited consolidated financial statements for details on new accounting pronouncements - The effects of new accounting pronouncements are discussed in the notes to the unaudited consolidated financial statements[212] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Partnership's exposure to various market risks, including commodity price risk, counterparty and customer credit risk, and interest rate risk, and outlines the strategies employed to mitigate these exposures Commodity Price Risk This section discusses the Partnership's exposure to volatile oil, natural gas, and NGL prices and its use of derivative instruments for hedging - The Partnership is exposed to commodity price risk from oil, natural gas, and NGLs, which are historically volatile. It uses commodity derivative instruments to reduce this exposure, settling monthly in cash based on NYMEX benchmarks[214] - A 10% reduction in SEC commodity pricing for Q1 2019 would result in an approximate 2% reduction of proved reserve volumes[215] Counterparty and Customer Credit Risk This section addresses the credit risk associated with derivative counterparties and operators, and the evaluation of their credit standing - The Partnership faces credit risk from derivative counterparties and operators. It evaluates counterparties' credit standing (all nine rated Baa1 or better by Moody's as of March 31, 2019)[216][217] - The credit risk associated with operators and customers is deemed acceptable[217] Interest Rate Risk This section details the Partnership's exposure to interest rate fluctuations on its variable-rate borrowings and potential hedging strategies - As of March 31, 2019, the Partnership had $435.0 million in outstanding variable-rate borrowings under its Credit Facility at a 4.75% weighted-average interest rate[218] - A 1% increase in the interest rate would increase interest expense by $1.1 million for the three months ended March 31, 2019[218] - The Partnership does not currently have interest rate hedges in place but may use derivative instruments in the future[218] Item 4. Controls and Procedures This section confirms the effectiveness of the Partnership's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion on the effectiveness of the Partnership's disclosure controls and procedures - Management, including the principal executive and financial officers, concluded that the Partnership's disclosure controls and procedures were effective as of March 31, 2019[219] Changes in Internal Control over Financial Reporting This section reports that no material changes occurred in internal control over financial reporting during the first quarter of 2019 - There were no changes in internal control over financial reporting during Q1 2019 that materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting[221] PART II – OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, and other required information Item 1. Legal Proceedings This section states that the Partnership is involved in routine litigation but does not expect any material adverse effects on its financial condition or operations - The Partnership is involved in routine litigation and claims, but management believes existing claims will be resolved without material adverse effect on financial condition or operations[223] Item 1A. Risk Factors This section refers readers to the comprehensive risk factors detailed in the company's 2018 Annual Report on Form 10-K, noting no material changes during the current reporting period - Readers should consider the risk factors in the 2018 Annual Report on Form 10-K. There has been no material change in risk factors from those previously described[224] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the issuance of common units for property acquisitions and the repurchase of common units to satisfy tax withholding obligations - During Q1 2019, 57,356 common units valued at $0.9 million were issued for mineral and royalty interest acquisitions, relying on a Section 4(a)(2) exemption from registration[225] Common Units Purchased | Period | Total Number of Common Units Purchased | Average Price Paid Per Unit | | :-------------------------- | :----------------------------------- | :-------------------------- | | January 1 - January 31, 2019 | 187,821 | $15.98 | | February 1 - February 28, 2019 | 341,387 | $17.76 | | March 1 - March 31, 2019 | 59,215 | $17.68 | - These unit repurchases were for units withheld to satisfy tax withholding obligations upon the vesting of restricted common units held by executive officers and employees[227] Item 5. Other Information This section indicates that there is no other information to report for the period - No other information is reported in this section[228] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including partnership agreements, registration rights agreements, and certifications - The exhibits include various certificates of partnership, amendments to the partnership agreement, a registration rights agreement, and certifications from the CEO and CFO under Sarbanes-Oxley Act[230] Signatures This section contains the authorized signatures of the registrant's Chief Executive Officer and President and Chief Financial Officer, affirming the filing of the report - The report is signed by Thomas L. Carter, Jr., Chief Executive Officer and Chairman, and Jeffrey P. Wood, President and Chief Financial Officer, on May 7, 2019[234][235]