Black Stone Minerals(BSM) - 2019 Q4 - Annual Report

Part I This section provides an overview of the company's business, properties, estimated reserves, regulatory environment, key risk factors, and legal disclosures Business and Properties The company is a leading owner of U.S. oil and natural gas mineral interests, actively managing and acquiring assets to maximize value - The company's principal business is maximizing the value of its existing mineral and royalty assets through active management and expanding its asset base via acquisitions[79] Asset and Reserve Overview (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Mineral Interests (Gross Acres) | ~16.8 million | | NPRIs (Gross Acres) | 1.8 million | | ORRIs (Gross Acres) | 1.7 million | | Producing Wells | ~69,000 | | Total Estimated Proved Reserves | 68,543 MBoe | | Proved Developed Reserves % | 88.9% | | Reserve Composition | 25% Oil, 75% Natural Gas | - The company has entered into two significant farmout agreements with Canaan Resource Partners and Pivotal Petroleum Partners to reduce working interest capital expenditures in the Haynesville/Bossier shale, retaining value through royalty income and economic interests[96][97][98] - For 2019, working interest production represented 25% of total production volumes. The 2020 capital expenditure budget for non-operated working interests is approximately $5 million, mainly for workovers[93][94] Our Properties and Production The company's assets are diversified across six major U.S. geographical regions, with significant contributions from Gulf Coast and Southwestern U.S. in acreage and production Average Daily Production by Interest Type (Boe/d) | Interest Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Mineral and Royalty Interests | 36,447 | 32,078 | 24,061 | | Working Interests | 12,092 | 14,223 | 12,950 | | Total | 48,539 | 46,301 | 37,011 | - The most material resource plays, including Bakken/Three Forks, Haynesville/Bossier, Permian-Midland, Permian-Delaware, and Eagle Ford, accounted for 75% of the company's aggregate production for the year ended December 31, 2019[111] Average Daily Production from Material Plays (Boe/d) - 2019 | Resource Play | Mineral & Royalty Interests | Working Interests | | :--- | :--- | :--- | | Haynesville/Bossier | 15,091 | 9,364 | | Bakken/Three Forks | 4,150 | 541 | | Permian-Delaware | 2,932 | 52 | | Permian-Midland | 2,621 | — | | Eagle Ford | 1,631 | 12 | Estimated Proved Reserves As of December 31, 2019, total proved reserves were 68,543 MBoe, with proved undeveloped reserves increasing to 7,598 MBoe, primarily in the Haynesville/Bossier play Estimated Proved Reserves by Year (MBoe) | Reserve Category | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | :--- | | Proved Developed | 60,945 | 63,939 | 56,727 | | Proved Undeveloped | 7,598 | 5,965 | 11,218 | | Total Proved | 68,543 | 69,904 | 67,945 | - Reserve estimates as of December 31, 2019 were based on an average WTI spot oil price of $55.85 per barrel and an average Henry Hub price of $2.58 per MMBTU[131] Changes in Proved Undeveloped Reserves (PUDs) in 2019 (MBoe) | Category | Volume (MBoe) | | :--- | :--- | | PUDs at Dec 31, 2018 | 5,965 | | Extensions and discoveries | 3,366 | | Revisions of previous estimates | (548) | | Transfers to proved developed | (1,185) | | PUDs at Dec 31, 2019 | 7,598 | Environmental Matters and Regulation The company's operations are subject to extensive federal, state, and local environmental laws, with increasing scrutiny on climate change and hydraulic fracturing posing significant risks - Operations are subject to stringent environmental laws (RCRA, CERCLA, CWA, CAA) which can impose substantial penalties and liabilities for non-compliance, potentially impacting production on company properties[152][153][154] - The company faces risks related to climate change, including potential new regulations on GHG emissions, litigation from local governments, and financial risks as investors and lenders shift away from fossil fuels[163][166][167] - Hydraulic fracturing, a key production technique used by operators, is facing increased public controversy and regulation at state and local levels, particularly concerning water use, induced seismicity, and fluid disclosure. New restrictions could increase costs and delay or prohibit drilling[170][172][173] Risk Factors The company faces significant risks from volatile commodity prices, dependence on unaffiliated operators, acquisition challenges, reserve estimate uncertainties, and regulatory changes - The company's financial condition is highly sensitive to volatile oil and natural gas prices, which are influenced by factors beyond its control, such as global supply/demand, political conditions, and economic activity[192][193] - A significant portion of 2019 revenue was concentrated with two operators in the Shelby Trough area of the Haynesville play. A slowdown or cessation of drilling activity by these operators poses a material risk to revenue and cash flow[216][217] - The credit facility contains restrictive covenants, including a borrowing base determined by lenders that is subject to redetermination. A decrease in the borrowing base due to lower commodity prices or reserve values could force debt repayment and restrict distributions[263][265] - Tax risks for unitholders are significant, including the potential for the partnership to be treated as a corporation for tax purposes, changes in tax law, and the requirement for unitholders to pay taxes on their share of taxable income even if no cash distributions are received[317][321][331] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the SEC - None[353] Legal Proceedings The company states that while it may be involved in various legal claims in the normal course of business, it does not believe their resolution will have a material adverse impact on its financial condition or results of operations - The company is not involved in any legal proceedings that are expected to have a material adverse impact on its financial condition or operations[354] Mine Safety Disclosures This section is not applicable to the company - Not applicable[355] Part II This section details the market for common equity, selected financial data, management's discussion and analysis, market risk disclosures, and the consolidated financial statements Market for Common Equity, Unitholder Matters, and Issuer Purchases The company's common units trade on the NYSE, with cash distributions prioritized for Series B preferred unitholders and a common unit repurchase program in place - The Board determines the quarterly cash distribution after reviewing cash generated from operations, with distributions to Series B preferred unitholders having priority. The policy is discretionary and subject to restrictions from the credit facility[367][368][372] - The subordination period ended in Q1 2019, leading to the conversion of 96,328,836 subordinated units into common units on May 24, 2019[380] - A common unit repurchase program of up to $75.0 million was authorized in November 2018. As of December 31, 2019, a total of $4.2 million in common units had been repurchased since the program's inception[366][394] Selected Financial Data For 2019, total revenue was $487.8 million and net income was $214.4 million, both decreases from 2018, while long-term debt decreased and cash distributions per common unit increased Selected Financial Data (in thousands, except per unit amounts) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenue | $487,821 | $609,568 | $429,659 | | Net income (loss) | $214,368 | $295,560 | $157,153 | | Long-term debt | $394,000 | $410,000 | $388,000 | | Total assets | $1,545,208 | $1,750,124 | $1,576,451 | | Cash distributions declared per common unit | $1.48 | $1.33 | $1.20 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2019, total revenue decreased by 20% due to lower commodity prices despite increased production, with net income falling and liquidity maintained through operations and a credit facility - Recent developments include significant steps to reduce general and administrative expenses through workforce reductions and lower executive compensation, resulting in an expected one-time charge of approximately $5 million in Q1 2020[389] - Drilling activity has slowed in the key Shelby Trough area, with XTO Energy postponing activity and BPX Energy releasing over 100,000 gross acres. The company expects to place this acreage with new operators in 2020[391] 2019 vs. 2018 Operational and Financial Comparison | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Total Production (MBoe) | 17,716 | 16,899 | 4.8% | | Avg. Realized Oil Price ($/Bbl) | $55.20 | $62.53 | (11.7)% | | Avg. Realized Gas Price ($/Mcf) | $2.57 | $3.47 | (25.9)% | | Total Revenue | $487.8M | $609.6M | (20.0)% | | Net Income | $214.4M | $295.6M | (27.5)% | | Adjusted EBITDA | $399.5M | $419.4M | (4.8)% | - The company's primary sources of liquidity are cash from operations and its $1.0 billion credit facility, which had a borrowing base of $650.0 million and $394.0 million outstanding as of Dec 31, 2019[442][456][459] Quantitative and Qualitative Disclosures About Market Risk The company manages commodity price volatility through derivative instruments and is exposed to interest rate risk on its variable-rate credit facility, with counterparty risk managed through highly-rated institutions - The major market risk is commodity price volatility. The company uses derivative instruments to reduce this exposure and has not designated them as hedges for accounting purposes[496] - As of December 31, 2019, the company had hedged 82.6% of its available oil and condensate hedge volumes and 61.9% of its available natural gas hedge volumes for 2020[419] - The company has interest rate risk on its $394.0 million of outstanding debt. A hypothetical 1% increase in interest rates would have increased 2019 interest expense by $3.9 million[501] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for 2019, along with the independent auditor's report and unaudited supplemental oil and natural gas disclosures - This section includes the consolidated financial statements and supplementary data, which begin on page F-1 of the report[502] Consolidated Financial Statements The consolidated financial statements present the financial position of Black Stone Minerals, L.P. as of December 31, 2019 and 2018, and the results of its operations and cash flows for the three years ended December 31, 2019 Key Financial Statement Data (Year Ended Dec 31, 2019) | Metric | Amount (in thousands) | | :--- | :--- | | Balance Sheet | | | Total Assets | $1,545,208 | | Total Liabilities | $448,404 | | Total Equity | $798,443 | | Statement of Operations | | | Total Revenue | $487,821 | | Net Income | $214,368 | | Statement of Cash Flows | | | Net Cash from Operating Activities | $412,720 | | Net Cash used in Investing Activities | ($48,623) | | Net Cash used in Financing Activities | ($361,392) | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, acquisitions, derivative instruments, debt, equity, and other financial matters, including credit facility covenants and unit conversions - The company follows the successful efforts method of accounting for its oil and natural gas properties. DD&A is calculated using the units-of-production method based on proved reserves[607][610] - In 2019, the company completed multiple acquisitions of mineral and royalty interests for total consideration of $44.0 million, funded by cash and common units[650][651] - As of Dec 31, 2019, the company had open oil swap contracts for 2020 covering 2,520,000 Bbl at a weighted average price of $57.32/Bbl and natural gas swap contracts covering 40,260,000 MMBtu at a weighted average price of $2.69/MMBtu[690] - The credit facility requires maintaining a total debt to EBITDAX ratio of 3.5:1.0 or less and a current ratio of 1.0:1.0 or greater. The company was in compliance with all covenants as of Dec 31, 2019[715] Changes in and Disagreements with Accountants The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[503] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2019 - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2019[504] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2019[508] - There were no changes in internal control over financial reporting during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, internal controls[510] Other Information The company reports no other information for this item - None[511] Part III This section incorporates information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and accounting fees by reference Directors, Executive Officers, and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 Annual Meeting proxy statement - Information for this item is incorporated by reference from the 2020 Proxy Statement[514] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2020 Annual Meeting proxy statement - Information for this item is incorporated by reference from the 2020 Proxy Statement[516] Security Ownership and Related Unitholder Matters Information regarding security ownership of certain beneficial owners, management, and related unitholder matters is incorporated by reference from the company's 2020 Annual Meeting proxy statement - Information for this item is incorporated by reference from the 2020 Proxy Statement[516] Certain Relationships, Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Annual Meeting proxy statement - Information for this item is incorporated by reference from the 2020 Proxy Statement[517] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2020 Annual Meeting proxy statement - Information for this item is incorporated by reference from the 2020 Proxy Statement[518] Part IV This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report, including key agreements and certifications - This section provides a list of all exhibits filed with or incorporated by reference into the Form 10-K[523]