Black Stone Minerals(BSM) - 2021 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited Q2 2021 financial statements reflect a shift to net income from higher commodity prices, increased liabilities from derivatives, and decreased operating cash flow Consolidated Balance Sheets Total assets remained stable at $1.24 billion as of June 30, 2021, while total liabilities significantly increased to $218.2 million due to higher commodity derivative liabilities | (In millions) | June 30, 2021 ($M) | December 31, 2020 ($M) | | :--- | :--- | :--- | | Total Assets | $1,242.2 | $1,244.0 | | Total Current Assets | $71.5 | $66.5 | | Net Property and Equipment | $1,163.1 | $1,172.1 | | Total Liabilities | $218.2 | $185.0 | | Total Current Liabilities | $95.1 | $39.9 | | Credit Facility | $96.0 | $121.0 | | Commodity derivative liabilities (Current + Long-term) | $85.5 | $21.2 | | Total Equity | $725.7 | $760.6 | Consolidated Statements of Operations Q2 2021 saw net income of $15.4 million driven by a 104% increase in contract revenue from higher commodity prices, despite derivative losses, while H1 net income decreased due to derivative impacts | (In millions, except per unit) | Three Months Ended June 30, 2021 ($M) | Three Months Ended June 30, 2020 ($M) | Six Months Ended June 30, 2021 ($M) | Six Months Ended June 30, 2020 ($M) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $58.4 | $38.5 | $120.0 | $221.6 | | Revenue from contracts | $117.9 | $57.7 | $207.4 | $150.7 | | Gain (loss) on derivatives | $(59.5) | $(19.2) | $(87.4) | $70.8 | | Income (Loss) from Operations | $17.0 | $(5.3) | $34.2 | $75.2 | | Net Income (Loss) | $15.4 | $(8.4) | $31.6 | $67.7 | | Net Income (Loss) per common unit (basic) | $0.05 | $(0.07) | $0.10 | $0.28 | Consolidated Statements of Cash Flows H1 2021 net cash from operations decreased to $125.6 million due to derivative settlements, with $12.8 million used in investing and $113.6 million in financing activities | (In millions) | Six Months Ended June 30, 2021 ($M) | Six Months Ended June 30, 2020 ($M) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $125.6 | $158.0 | | Net Cash Provided by (Used in) Investing Activities | $(12.8) | $0.4 | | Net Cash Used in Financing Activities | $(113.6) | $(164.9) | | Net Change in Cash and Cash Equivalents | $(0.8) | $(6.5) | Notes to Unaudited Consolidated Financial Statements The notes detail key accounting policies and events, including a $20.8 million Midland Basin acquisition, derivative positions, reaffirmed $400 million credit facility, and a $0.25 per common unit quarterly distribution - In Q2 2021, the Partnership acquired mineral and royalty acreage in the northern Midland Basin for $20.8 million, consisting of $10.0 million in cash and $10.8 million in common units[35] - The Partnership uses fixed-price swap contracts to mitigate commodity price risk, with a net fair value liability of $85.5 million as of June 30, 2021[52][53][60] - The credit facility's borrowing base was reaffirmed at $400.0 million in April 2021, with $96.0 million outstanding and $304.0 million unused capacity as of June 30, 2021[78][84] - On July 26, 2021, the Board approved a Q2 2021 distribution of $0.25 per common unit, comprising a $0.20 base and $0.05 special distribution[105] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes improved Q2 2021 performance to higher commodity prices offsetting lower production and derivative losses, highlighting strategic acquisitions and strong liquidity despite ongoing COVID-19 uncertainty Overview and Recent Developments The Partnership focuses on maximizing its mineral and royalty asset base, with recent activities including a $20.8 million Midland Basin acquisition, new development agreements, and a sustainability initiative - Closed a $20.8 million acquisition of mineral and royalty acreage in the northern Midland Basin, funded with $10.0 million cash and $10.8 million in common units[116] - Entered new development agreements with Aethon in the Shelby Trough and with operators to test the Austin Chalk formation in East Texas[119][121] - Announced a sustainability initiative to use proceeds from solar development waivers to purchase carbon credits, offsetting mineral production emissions[124] Business Environment The business environment improved significantly in 2021 with commodity prices recovering to 2018 levels by July, and the U.S. rig count increasing, though COVID-19 uncertainty persists | Benchmark Prices | Q2 2021 ($) | Q2 2020 ($) | | :--- | :--- | :--- | | WTI spot oil price ($/Bbl) | $73.52 | $39.27 | | Henry Hub spot natural gas ($/MMBtu) | $3.79 | $1.76 | | U.S. Rotary Rig Count | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Oil | 372 | 188 | | Natural gas | 98 | 75 | | Total | 470 | 265 | - Commodity prices improved in late 2020 and fully recovered to 2018 levels by July 2021, reflecting rising demand and ongoing OPEC+ crude oil production limits[133] Results of Operations Q2 2021 total revenue increased 51.7% to $58.4 million due to higher realized commodity prices, offsetting lower production, while H1 total revenue decreased 45.8% due to negative derivative impacts Q2 2021 vs Q2 2020 Performance | Metric | Q2 2021 | Q2 2020 | % Change | | :--- | :--- | :--- | :--- | | Production (MBoe/d) | 38.2 | 42.6 | (10.3)% | | Realized Oil Price ($/Bbl) | $62.72 | $29.42 | 113.2% | | Realized Gas Price ($/Mcf) | $3.60 | $1.68 | 114.3% | | Revenue from contracts ($M) | $117.9 | $57.7 | 104.4% | | Gain (loss) on derivatives ($M) | $(59.5) | $(19.2) | 210.2% | | Total Revenue ($M) | $58.4 | $38.5 | 51.7% | H1 2021 vs H1 2020 Performance | Metric | H1 2021 | H1 2020 | % Change | | :--- | :--- | :--- | :--- | | Production (MBoe/d) | 37.5 | 44.7 | (16.1)% | | Realized Oil Price ($/Bbl) | $58.09 | $38.24 | 51.9% | | Realized Gas Price ($/Mcf) | $3.25 | $1.82 | 78.6% | | Revenue from contracts ($M) | $207.4 | $150.7 | 37.6% | | Gain (loss) on derivatives ($M) | $(87.4) | $70.8 | NM | | Total Revenue ($M) | $120.0 | $221.6 | (45.8)% | - For the six months ended June 30, 2020, the company recognized a $51.0 million impairment on oil and natural gas properties due to sharp oil price decline, with no impairment in 2021[191] Liquidity and Capital Resources Primary liquidity sources are cash from operations and the credit facility, with $304.0 million available capacity and a $5.0 million capital expenditure budget for 2021, despite decreased operating cash flow - As of June 30, 2021, the company had $96.0 million outstanding on its credit facility, with an available borrowing capacity of $304.0 million[195][84] - The 2021 capital expenditure budget for non-operated working interests is approximately $5.0 million, net of farmout reimbursements[202] - The decrease in operating cash flow for H1 2021 compared to H1 2020 was primarily due to net cash paid on derivative settlements versus net cash received in the prior year period[199] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Partnership manages commodity price volatility through derivatives, while also addressing counterparty credit risk and interest rate risk on its variable-rate credit facility - The company's major market risk is the pricing of oil, natural gas, and NGLs, mitigated by commodity derivative instruments to reduce price volatility[214] - As of June 30, 2021, the company had seven derivative counterparties, all rated Baa1 or better by Moody's[216] - The company is exposed to interest rate risk on its $96.0 million of outstanding variable-rate debt; a hypothetical 1% increase would raise interest expense by $0.5 million for H1 2021[218] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The principal executive and financial officers concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[219] - No material changes occurred in internal control over financial reporting during Q2 2021[221] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine litigation, but management believes no pending legal matters will materially adversely affect its financial condition or operations - Management believes no pending litigation, disputes, or claims will have a material adverse effect on the company's financial condition or operations[224] Item 1A. Risk Factors No material changes have occurred in the company's risk factors from those previously disclosed in the 2020 Annual Report on Form 10-K - No material changes have occurred in the company's risk factors from those described in the 2020 Annual Report on Form 10-K[225] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On May 28, 2021, the company issued 1,087,498 common units valued at $10.8 million as partial consideration for a mineral interest acquisition, exempt from registration - On May 28, 2021, the company issued 1,087,498 common units valued at $10.8 million to partially fund a mineral interest acquisition[226] - The issuance was exempt from registration requirements under Section 4(a)(2) of the Securities Act, as it was made to accredited investors for investment purposes[227]