Black Stone Minerals(BSM) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited consolidated financial statements for the period ended June 30, 2020, show total assets decreased to $1.44 billion, a net loss of $8.4 million, and $158.0 million in net cash from operations - Total assets decreased to $1.44 billion as of June 30, 2020, from $1.55 billion at December 31, 2019, primarily due to a reduction in the value of oil and natural gas properties[12] - The company reported a net loss of $8.4 million for the second quarter of 2020, a significant downturn from the $95.1 million net income in the same period of 2019[15] - Net cash from operating activities for the first six months of 2020 was $158.0 million, down from $201.0 million in the comparable 2019 period, mainly due to lower commodity prices[25] Consolidated Balance Sheets As of June 30, 2020, total assets decreased to $1.44 billion from $1.55 billion at year-end 2019, while total liabilities decreased to $364.8 million from $448.4 million Consolidated Balance Sheet Highlights (in thousands of US dollars) | Metric | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,600 | $8,119 | | Assets held for sale | $126,491 | $— | | Net Property and Equipment | $1,211,171 | $1,434,228 | | Total Assets | $1,438,838 | $1,545,208 | | Credit Facility | $323,000 | $394,000 | | Total Liabilities | $364,796 | $448,404 | | Total Equity | $775,681 | $798,443 | Consolidated Statements of Operations For Q2 2020, total revenue was $38.5 million and net loss was $8.4 million, a significant decline from Q2 2019's $163.6 million revenue and $95.1 million net income Statement of Operations Highlights (Three Months Ended June 30, in thousands of US dollars) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $38,529 | $163,618 | | Income (Loss) from Operations | $(5,314) | $100,666 | | Net Income (Loss) | $(8,371) | $95,087 | | Net Income (Loss) Attributable to Common Units | $(13,621) | $89,837 | | Per common unit (basic) | $(0.07) | $0.45 | - For the six months ended June 30, 2020, the company recognized a $51.0 million impairment of oil and natural gas properties, a charge not present in the same period of 2019[15] Consolidated Statements of Equity Total equity decreased from $798.4 million at year-end 2019 to $775.7 million as of June 30, 2020, influenced by $78.3 million in distributions and the net loss - Total equity stood at $775.7 million as of June 30, 2020, down from $803.7 million at March 31, 2020[18] - On May 24, 2019, all outstanding subordinated units were converted into common units, simplifying the equity structure[21][108] Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash from operations was $158.0 million, investing activities provided $0.4 million, and financing activities used $164.9 million Cash Flow Summary (Six Months Ended June 30, in thousands of US dollars) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $157,969 | $200,976 | | Net Cash Provided by (Used in) Investing Activities | $367 | $(46,013) | | Net Cash Used in Financing Activities | $(164,855) | $(156,471) | | Net Change in Cash | $(6,519) | $(1,508) | Notes to Unaudited Consolidated Financial Statements Key disclosures include the $150.1 million sale of Permian Basin assets, a $51.0 million impairment charge, and a reduction of the credit facility's borrowing base to $460.0 million - In June 2020, the Partnership entered into agreements to sell certain Permian Basin mineral and royalty properties for total proceeds of $150.1 million, which closed in July 2020[39] - A $51.0 million impairment of oil and natural gas properties was recognized for the six months ended June 30, 2020, due to the collapse in oil prices during the first quarter[53][54] - The credit facility borrowing base was reduced from $650.0 million to $460.0 million effective May 1, 2020, and further reduced to $430.0 million effective July 21, 2020, following asset sales[83] - A distribution of $0.15 per common unit for Q2 2020 was approved and scheduled for payment in August 2020[113] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A discusses Q2 2020 revenue decrease due to lower commodity prices and COVID-19, detailing $150.1 million in asset sales, new development agreements, and a $51.0 million impairment charge Recent Developments Key events include the $150.1 million sale of Permian Basin assets, a $51.0 million impairment due to COVID-19, and new development agreements in the Shelby Trough - Closed two asset sales in the Permian Basin for total proceeds of $150.1 million, which were used to reduce outstanding borrowings; the divested properties produced approximately 1,800 Boe per day[124][125] - The COVID-19 pandemic and sharp decline in oil prices led to a $51.0 million impairment charge and a reduction in the credit facility's borrowing base[128] - Entered into a new development agreement with Aethon Energy for undeveloped Shelby Trough acreage and an incentive agreement with XTO Energy for 13 drilled but uncompleted (DUC) wells in the same area[129][130] Business Environment The business environment was highly volatile due to COVID-19, with WTI oil prices dropping to $20.51/Barrel and the U.S. rotary rig count falling to 265 Benchmark Price and Rig Count Trends | Metric | June 30, 2020 | March 31, 2020 | June 30, 2019 | | :--- | :--- | :--- | :--- | | WTI spot oil price (US dollars per Barrel) | $39.27 | $20.51 | $58.20 | | Henry Hub spot natural gas (US dollars per Million British Thermal Units) | $1.76 | $1.71 | $2.42 | | Total U.S. Rotary Rig Count | 265 | 728 | 967 | How We Evaluate Our Operations Management evaluates performance using key metrics like Adjusted EBITDA ($72.4 million) and Distributable Cash Flow ($64.4 million), employing derivatives to mitigate commodity price volatility Non-GAAP Financial Measures (Three Months Ended June 30, in thousands of US dollars) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net income (loss) | $(8,371) | $95,087 | | Adjusted EBITDA | $72,390 | $108,336 | | Distributable cash flow | $64,429 | $97,988 | - As of June 30, 2020, the company had hedged all of its available oil and condensate hedge volumes and 83% of its available natural gas hedge volumes for the remainder of 2020[157] Results of Operations For Q2 2020, total revenue fell 76.5% to $38.5 million due to lower realized oil prices and production volumes, resulting in a net loss Q2 2020 vs. Q2 2019 Performance | Metric (Three Months Ended June 30) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Production (Thousand Barrels of Oil Equivalent per day) | 42.6 | 52.2 | (18.4)% | | Realized Oil Price (US dollars per Barrel) | $29.42 | $56.30 | (47.7)% | | Total Revenue (in thousands of US dollars) | $38,529 | $163,618 | (76.5)% | - For the six months ended June 30, 2020, total revenue decreased 10.4% to $221.6 million, cushioned by a $70.8 million gain on commodity derivative instruments, compared to a $12.0 million loss in the prior-year period[184][185] - General and administrative expenses for the six months ended June 30, 2020 decreased by $12.2 million (34.3%) compared to 2019, primarily due to lower equity-based compensation and workforce reductions[184][196] Liquidity and Capital Resources Primary liquidity sources are cash from operations and the credit facility, with $323.0 million outstanding as of June 30, 2020, reduced to $153.0 million post-asset sales, and a $430.0 million borrowing base - As of July 31, 2020, after applying proceeds from asset sales, outstanding borrowings under the Credit Facility were reduced to $153.0 million[199] - The credit facility borrowing base was reduced to $430.0 million effective July 21, 2020, providing liquidity but reflecting a lower asset valuation by lenders[199][209] - The 2020 total development capital expenditure budget is expected to be approximately $3.5 million, net of farmout reimbursements, indicating minimal capital spending[207] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is commodity price volatility for oil, natural gas, and NGLs, mitigated by derivatives, with a hypothetical 10% price reduction leading to a 4.3% decrease in proved reserve volumes - The company's major market risk exposure is the pricing of oil, natural gas, and NGLs; this risk is managed through the use of commodity derivative instruments[219] - A hypothetical 10% reduction in SEC commodity pricing as of June 30, 2020, would result in an approximate 4.3% reduction of proved reserve volumes[223] - As of June 30, 2020, a 1% increase in interest rates on the $323.0 million of outstanding debt would have increased interest expense by $1.6 million for the six-month period[226] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of June 30, 2020[227] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[228] PART II – OTHER INFORMATION Legal Proceedings The company is involved in routine litigation, which management believes will not materially adversely affect its financial condition or operations - Management does not expect pending litigation, which arises in the ordinary course of business, to have a material adverse effect on its financial condition, cash flows, or results of operations[231] Risk Factors Updated risk factors primarily focus on the significant adverse effects of the COVID-19 pandemic and sharp decline in commodity prices, including reduced demand, potential impairments, and borrowing base reductions - The COVID-19 pandemic and the significant decline in commodity prices in the first half of 2020 have adversely affected the business, with the ultimate effect remaining highly uncertain[233] - The challenging price environment led to a $51.0 million impairment charge and a reduction in the credit facility's borrowing base, with the risk of further reductions if low prices persist[236] - The company's ability to hedge future production could be limited by declines in production or production forecasts resulting from the low commodity price environment[238] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no purchases of its equity securities by the issuer or its affiliates during the period - There were no unregistered sales of equity securities or issuer purchases of equity securities during the reporting period[241][242] Other Information There was no other information to report for the period - None[243] Exhibits This section lists the exhibits filed with the 10-Q report, including amendments to the partnership agreement, credit agreement, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - Lists various corporate governance documents, credit agreements, and officer certifications filed as exhibits with the report[245] Signatures - The report was duly signed on August 4, 2020, by Thomas L. Carter, Jr. (Chief Executive Officer) and Jeffrey P. Wood (President and Chief Financial Officer)[249][251][252]