Black Stone Minerals(BSM) - 2023 Q4 - Annual Report

GLOSSARY OF TERMS This section defines key technical, operational, and financial terms used in the oil and gas industry - This section provides definitions for common terms used in the oil and natural gas industry, covering technical, operational, and financial terminology relevant to the company's business[15] SUMMARY OF RISK FACTORS This section highlights key risks including commodity price volatility, operational dependencies, and financial challenges - Key risks include insufficient cash for distributions, volatility of oil and natural gas prices, dependence on unaffiliated operators, production-related challenges, capital access limitations, environmental and regulatory risks (including climate change), reliance on key individuals, title defects, and specific risks related to the partnership agreement and tax treatment[62] PART I BUSINESS AND PROPERTIES The company owns and manages a vast portfolio of U.S. oil and natural gas mineral and royalty interests General Business Overview Black Stone Minerals, L.P. is a premier owner and manager of U.S. oil and natural gas mineral interests - Black Stone Minerals, L.P. is one of the largest owners and managers of oil and natural gas mineral interests in the U.S., maximizing value through active management and creative lease structuring to encourage drilling[66] Our Assets The company's asset base includes extensive mineral interests and significant proved reserves across the U.S Asset Base (as of Dec 31, 2023): | Asset Type | Gross Acres | Ownership Interest | Producing Wells | | :--- | :--- | :--- | :--- | | Mineral Interests | 16.8 million | 43.5% | ~68,000 | | Nonparticipating Royalty Interests (NPRIs) | 1.8 million | N/A | N/A | | Overriding Royalty Interests (ORRIs) | 1.6 million | N/A | N/A | Proved Reserves (as of Dec 31, 2023): | Category | Total (MBoe) | Oil (%) | Natural Gas (%) | Proved Developed (%) | Proved Undeveloped (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Estimated Proved | 64,474 | 30% | 70% | 89% | 11% | Mineral and Royalty Interests Mineral interests grant perpetual ownership of oil and gas with rights to explore, develop, or lease - Mineral interests are perpetual real-property interests granting ownership of oil and natural gas, with the right to explore, develop, and produce, or lease these rights to third parties, typically retaining a 20% to 25% cost-free royalty interest[73] - Approximately 25% of mineral and royalty interests were leased as of December 31, 2023, calculated on a cumulative gross acreage basis[74] Non-Operated Working Interests The company holds non-operated working interests, primarily in the Haynesville/Bossier play - The company owns non-operated working interests, primarily in the Haynesville/Bossier play, and often includes participation rights in leases, which are frequently farmed out or sold to third parties while retaining non-cost-bearing interests[76] - Working interest production represented 6% of total production volumes for the year ended December 31, 2023[77] - As of December 31, 2023, the company owned non-operated working interests in 3,352 gross (377 net) wells[77] Acreage Overlap The company often holds multiple interest types on the same land tract, creating significant acreage overlap - The company may own more than one type of interest (mineral, royalty, working interest) in the same tract of land, leading to significant overlap between working interest acreage and mineral/royalty interest acreage[79] Farmout Agreements Farmout agreements are utilized to reduce capital expenditures while retaining royalty income or economic interests - Farmout arrangements are used to reduce working interest capital expenditures by conveying participation rights to external capital providers, while retaining value through additional royalty income or retained economic interests[80] Our Properties The company's properties are geographically diversified across major U.S. land regions and resource plays Total Acreage by BSM Land Region (as of Dec 31, 2023): | BSM Land Region | Mineral Interests (Gross Acres) | NPRIs (Gross Acres) | ORRIs (Gross Acres) | Working Interests (Gross Acres) | | :--- | :--- | :--- | :--- | :--- | | Gulf Coast | 7,927,137 | 553,369 | 191,011 | 325,500 | | Southwestern U.S. | 2,764,885 | 988,675 | 193,734 | 18,122 | | Rocky Mountains | 2,121,611 | 243,295 | 798,728 | 90,328 | | Eastern U.S. | 1,649,953 | 1,727 | 74,247 | 13,468 | | Mid-Continent | 1,307,718 | 38,332 | 269,750 | 53,391 | | Western U.S. | 1,025,864 | 331 | 28,029 | — | | Total | 16,797,168 | 1,825,729 | 1,555,499 | 500,809 | Average Daily Production (Boe/d) by BSM Land Region (2023): | BSM Land Region | Mineral and Royalty Interests | Working Interests | | :--- | :--- | :--- | | Gulf Coast | 23,600 | 1,614 | | Southwestern U.S. | 6,417 | 67 | | Rocky Mountains | 4,609 | 519 | | Eastern U.S. | 748 | 6 | | Mid-Continent | 1,824 | 170 | | Western U.S. | 238 | — | | Total | 37,436 | 2,376 | - Material resource plays, including Bakken/Three Forks, Haynesville/Bossier, Permian-Midland, Permian-Delaware, and Eagle Ford, accounted for 75% of aggregate production in 2023[86] Estimated Proved Reserves Proved reserves are estimated with reasonable certainty of economic recoverability under existing conditions - Proved reserves are estimated using deterministic methods, based on geological and engineering data, with reasonable certainty of economic recoverability under existing conditions[94] Estimated Proved Reserves (as of Dec 31): | Category | 2023 (MBoe) | 2022 (MBoe) | 2021 (MBoe) | | :--- | :--- | :--- | :--- | | Proved Developed | 57,101 | 58,606 | 56,481 | | Proved Undeveloped | 7,373 | 5,509 | 3,343 | | Total Proved Reserves | 64,474 | 64,115 | 59,824 | | Percent Proved Developed | 88.6% | 91.4% | 94.4% | Changes in Proved Undeveloped Reserves (2023, in MBoe): | Item | Amount | | :--- | :--- | | As of December 31, 2022 | 5,509 | | Extensions and discoveries | 7,373 | | Revisions of previous estimates | (488) | | Transfers to estimated proved developed | (5,021) | | As of December 31, 2023 | 7,373 | - New PUD reserves totaling 7,373 MBoe were added in 2023 from Haynesville/Bossier development activities, and 5,021 MBoe of PUDs were converted to PDP reserves[100][101] Oil and Natural Gas Production Prices and Production Costs This section details historical production volumes, realized prices, and associated costs per barrel of oil equivalent Production and Price History (Year Ended Dec 31): | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Oil and condensate (MBbls) | 3,757 | 3,591 | 3,646 | | Natural gas (MMcf) | 64,647 | 59,778 | 61,445 | | Total (MBoe) | 14,532 | 13,554 | 13,887 | | Average daily production (MBoe/d) | 39.8 | 37.1 | 38.0 | | Realized Oil Price (per Bbl, w/o derivatives) | $76.74 | $93.65 | $64.67 | | Realized Natural Gas Price (per Mcf, w/o derivatives) | $3.10 | $7.28 | $4.16 | | Production costs and ad valorem taxes (per Boe) | $3.92 | $4.89 | $3.59 | - For 2023, 26% of production and 59% of oil and natural gas revenues were from oil and condensate, while natural gas and NGLs accounted for 74% of production and 41% of revenues[105] Productive Wells The company holds interests in over 67,000 gross productive mineral and royalty wells as of year-end 2023 Productive Wells (as of Dec 31, 2023): | Well Type | Mineral and Royalty Interests (Gross) | Working Interests (Gross) | Working Interests (Net) | | :--- | :--- | :--- | :--- | | Oil | 38,775 | 2,052 | 129 | | Natural Gas | 28,781 | 1,300 | 248 | | Total | 67,556 | 3,352 | 377 | Acreage This section provides a detailed breakdown of the company's developed and undeveloped acreage by interest type Mineral and Royalty Interests Acreage (as of Dec 31, 2023): | BSM Land Region | Developed Acreage | Undeveloped Acreage | Total Acreage | | :--- | :--- | :--- | :--- | | Gulf Coast | 449,539 | 8,221,978 | 8,671,517 | | Southwestern U.S. | 629,847 | 3,317,447 | 3,947,294 | | Rocky Mountains | 888,909 | 2,274,725 | 3,163,634 | | Eastern U.S. | 84,242 | 1,641,685 | 1,725,927 | | Mid-Continent | 524,762 | 1,091,038 | 1,615,800 | | Western U.S. | 28,340 | 1,025,884 | 1,054,224 | | Total | 2,605,639 | 17,572,757 | 20,178,396 | Working Interests Acreage (as of Dec 31, 2023): | BSM Land Region | Developed Acreage (Gross) | Undeveloped Acreage (Gross) | Total Acreage (Gross) | | :--- | :--- | :--- | :--- | | Gulf Coast | 310,166 | 15,334 | 325,500 | | Southwestern U.S. | 18,122 | — | 18,122 | | Rocky Mountains | 89,492 | 836 | 90,328 | | Eastern U.S. | 13,468 | — | 13,468 | | Mid-Continent | 53,391 | — | 53,391 | | Western U.S. | — | — | — | | Total | 484,639 | 16,170 | 500,809 | Undeveloped Acreage Expirations (Net Acres): | Year | Without Extension Option | With Extension Option | | :--- | :--- | :--- | | 2024 | 1,392 | 1,754 | | 2025 | 64 | 1,596 | | 2026 | 3 | — | | Total Net Undeveloped Acreage | 4,809 | N/A | Drilling Results for Our Working Interests This section summarizes the outcomes of development and exploratory drilling activities for working interests Working Interest Drilling Results (Year Ended Dec 31): | Well Type | 2023 (Gross) | 2022 (Gross) | 2021 (Gross) | | :--- | :--- | :--- | :--- | | Productive Development | 1.0 | 1.0 | 2.0 | | Dry Development | — | — | — | | Productive Exploratory | — | — | — | | Dry Exploratory | — | — | 1.0 | Environmental Matters Operations are subject to stringent environmental laws that can impose significant costs and liabilities - Oil and natural gas operations are subject to stringent environmental laws and regulations (e.g., RCRA, CERCLA, CWA, SDWA, OPA, CAA) that can impose significant financial burdens, delays, and potential liabilities on operators[116][117][118][119][125] - The threat of climate change and related governmental initiatives (e.g., EPA methane rules, Inflation Reduction Act, LNG export pauses) pose regulatory, political, litigation, and financial risks, potentially reducing demand for fossil fuels and increasing operating costs[126][128][129][131] - Hydraulic fracturing, a key production technique, faces increasing public controversy and regulatory scrutiny at federal, state, and local levels, which could lead to increased costs, operating restrictions, or fewer drilling locations[134][135][137][138] Title to Properties The company believes its asset titles are satisfactory, performing reviews and obtaining opinions as needed - The company performs title reviews for high-value tracts and obtains title opinions when necessary, with operators conducting thorough examinations before drilling to cure any material title defects[141][142] - Title to assets is considered satisfactory in all material respects, despite customary encumbrances common in the oil and natural gas industry[143] Marketing and Major Customers Customer concentration risk is low, with no single customer accounting for over 10% of revenue in 2023 - In 2023, no single customer accounted for more than 10% of total oil and gas revenues, mitigating the risk of losing a significant customer[146] Significant Customers (10% or more of total oil and natural gas revenues): | Customer | 2022 | 2021 | | :--- | :--- | :--- | | XTO Energy Inc. | 12% | 19% | Competition The oil and gas industry is highly competitive in exploration, acquisition, and personnel recruitment - The oil and natural gas business is highly competitive in exploration, acquisition of reserves, and personnel, with some competitors possessing substantially larger financial resources[147] - Oil and natural gas products compete with other energy sources (coal, nuclear, solar, wind) primarily based on price, with demand affected by availability, price changes, conservation, and regulations[147] Seasonal Nature of Business Natural gas demand and prices are typically higher in winter, while weather can impact operations - Demand for natural gas is typically higher in winter, leading to higher prices in Q1 and Q4, while seasonal weather can also delay drilling and production activities[148] Human Capital The company employs a skilled workforce and offers competitive compensation to attract and retain talent - As of December 31, 2023, Black Stone Management had 108 full-time employees and 18 contractors, with Accounting (33) and Land Administration (23) being the largest departments[151] - The company offers competitive compensation and benefits, including a cash-bonus program, restricted-unit and performance-unit awards for leadership, 401(k) matching, comprehensive medical insurance, and a hybrid work environment[153][154][155] Facilities The company's principal office is a leased space located in Houston, Texas - The principal office is a leased 55,862 square foot space in Houston, Texas[156] Risk Factors This section outlines significant risks affecting the company's finances, operations, and distributions Cash Distributions Cash distributions are not guaranteed and depend on operational performance and Board discretion - The company may not generate sufficient cash from operations to pay distributions on common units, and Series B cumulative convertible preferred unitholders have priority[159] - The amount of cash distributed depends on revenues, debt payments, working-capital needs, and other cash requirements, and the Board can modify the distribution policy at any time[160] Price of Oil and Natural Gas Financial performance is highly sensitive to volatile and unpredictable commodity prices - Oil and natural gas prices are highly volatile due to supply/demand, market uncertainty, and geopolitical factors, significantly affecting financial condition, results of operations, and cash distributions[162][163] Commodity Price Volatility (Year Ended Dec 31): | Benchmark | 2023 High | 2023 Low | 5-Year Prior High | 5-Year Prior Low | | :--- | :--- | :--- | :--- | :--- | | WTI spot crude oil ($/Bbl) | $93.67 | $66.61 | $123.64 (2022) | $8.91 (2020) | | Henry Hub spot natural gas ($/MMBtu) | $3.78 | $1.74 | $23.86 (2021) | $1.33 (2020) | - Prolonged declines in commodity prices could materially adversely affect financial condition, lead to reserve write-downs, impact borrowing capacity, and reduce cash available for distributions[166][167] Production Production risks include natural decline rates, reliance on operators, and reserve estimation uncertainties - The company's cash generation and distribution ability depend on replacing produced oil and natural gas, as wells experience declining production rates[171] - Development of proved undeveloped reserves requires significant capital and successful drilling, with decisions made by operators, not the company, introducing uncertainty in timing and costs[172] - Unavailability or high costs of rigs, equipment, raw materials, supplies, or personnel can restrict or increase costs for operators, adversely affecting development and production[174] - The marketability of production relies on third-party transportation and refining facilities, which are beyond the company's control, and any limitations could harm the business[175] - Estimated reserves are based on assumptions that may be inaccurate, and material inaccuracies could significantly affect reserve quantities and present value[177] - The company is highly dependent on unaffiliated operators for all exploration, development, and production activities on its mineral and royalty interests, with little control over their drilling decisions or operational efficiency[182][183] - Cessation or slowdown of activity in the Shelby Trough area, where the company has concentrated acreage, could adversely affect results, especially given Aethon Energy's exercise of 'time-out' provisions in December 2023[185] Access to Capital and Financing The company relies on external financing for growth, which is subject to credit facility restrictions - The Credit Facility imposes substantial restrictions and financial covenants, including a borrowing base redetermined semi-annually, which can limit borrowing amounts and restrict business activities or distributions[187] - Distributing a substantial majority of cash generated from operations limits reinvestment and acquisition funding, making the company reliant on external financing sources[190] - Operators' development activities and the company's non-operated working interests require substantial capital, and inability to obtain financing on satisfactory terms could adversely affect property development and revenues[192] Acquisitions Acquisitions carry inherent risks, including inaccurate reserve estimates and integration challenges - Acquisitions of additional mineral and royalty interests are subject to substantial risks, including inaccurate reserve estimates, decreased liquidity, increased debt, unknown liabilities, and challenges in integrating new assets[196] Environmental, Legal and Regulatory Risks Extensive regulations, climate change concerns, and ESG pressures pose significant compliance and financial risks - Conservation measures, technological advances, and environmental concerns could reduce demand for oil and natural gas, negatively impacting operations and unit trading prices[197] - Compliance with various governmental laws and regulations, including those related to climate change and hydraulic fracturing, can be burdensome and expensive, potentially leading to significant liabilities and reduced cash distributions[198][202][204][205] - Operating hazards and uninsured risks, such as fires, explosions, and environmental damage, could result in substantial losses not fully covered by insurance, adversely affecting financial condition[206][207][208] - Increasing attention to ESG matters, including climate change, may lead to increased costs, reduced demand, litigation risks, negative investor sentiment, and restricted access to capital markets[209][210][211][212] Key Persons The business depends on a small number of key individuals whose loss could adversely affect operations - The business relies on a small number of key individuals, and the loss of their services, particularly executive team members, could adversely affect operations, as the company does not maintain 'key person' life insurance[213][214] Title Defects Undiscovered title defects in properties could result in financial losses for the company - Title defects or failures in properties where the company holds an interest, especially undeveloped acreage, could result in financial losses[215] Risks to Unitholders under Our Partnership Agreement The partnership agreement limits unitholder rights, including fiduciary duties and voting power - The Board can modify or revoke the cash distribution policy at any time, and the partnership agreement does not guarantee distributions on common units, with Series B preferred unitholders having priority[216][217] - The partnership agreement eliminates fiduciary duties of the general partner and its officers/directors under Delaware law, replacing them with a contractual good faith standard, which may subject actions to lesser legal scrutiny[218] - Voting rights of unitholders owning 15% or more of units are restricted, with certain exceptions[221] - The partnership agreement designates Delaware courts as the exclusive forum for certain claims, potentially requiring unitholders to pursue legal remedies in an inconvenient location[222] - The company can issue additional common units and other equity interests without common unitholder approval, potentially diluting existing holders, though there are limitations on issuing units senior or on parity with Series B preferred units without their approval[223][224] Distributions to Unitholders; Price of Units and Other Risks Unit price and distributions are subject to market forces, interest rates, and potential dilution - Decisions by the general partner regarding asset purchases/sales, expenditures, borrowings, and reserves can affect the cash available for distribution to unitholders[225][226] - Sales of substantial amounts of common units in public or private markets, or the perception of such sales, could adversely affect the unit price[227] - Increases in interest rates may cause the market price of common units to decline, particularly for yield-based equity investments[228] - Unitholders may be liable to repay distributions if they were made in violation of Delaware law, specifically if liabilities exceed the fair value of assets[229] Tax-Related Risks Changes in tax law or partnership status could significantly reduce cash distributions to unitholders - The company's tax treatment as a partnership is critical; if treated as a corporation or subjected to entity-level taxation, cash distributions to common unitholders would be substantially reduced[232][234][235] - Changes in tax laws or interpretations, potentially retroactive, could affect the partnership's tax treatment or eliminate deductions, negatively impacting unit value[236][238][239] - IRS challenges to tax positions could adversely affect the market for common units and reduce cash available for distribution due to contest costs or direct tax assessments[241][242] - Unitholders are required to pay taxes on their share of taxable income even without receiving cash distributions, and tax gain or loss on disposition of units may differ from expectations due to recapture items and nonrecourse liabilities[243][244][245] - Tax-exempt entities and non-U.S. unitholders face unique tax issues, including unrelated business taxable income and U.S. taxes/withholding on income and gain from common units[249][250] General Risk Factors General risks include increased compliance costs, internal control failures, and cybersecurity threats - As a publicly traded partnership, the company incurs increased legal, accounting, and compliance costs, which affect cash available for distributions[261][262] - Failure to develop or maintain effective internal controls could harm financial reporting, reputation, and unit trading price[264] - Various security risks, including sophisticated cybersecurity threats, could lead to data loss, legal claims, regulatory penalties, and operational disruptions[265] UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the SEC - No unresolved staff comments[266] CYBERSECURITY The company maintains a robust cybersecurity framework with no material incidents reported to date - Cybersecurity governance involves oversight by the Board and Audit Committee, with primary responsibility held by the Vice President, Information Technology (VP IT) and the Infrastructure Team[268][269] - Risk management processes include ongoing threat assessment, layered security, employee training (including quarterly phishing tests), adherence to industry standards (NIST, ISO), and annual external penetration testing[271] - The Information Security Committee (VP IT, Manager of Infrastructure Team, General Counsel) handles initial assessment and response to cybersecurity incidents, escalating serious incidents to senior management and the Audit Committee[270] - As of the report date, the company is not aware of any previous cybersecurity threats that have materially affected or are reasonably likely to materially affect its business strategy, results of operation, or financial condition[272] LEGAL PROCEEDINGS Current legal claims are not expected to have a material adverse impact on the company's financial condition - The company does not believe that the resolution of its legal claims will have a material adverse impact on its financial condition or results of operations[273] MINE SAFETY DISCLOSURES This item is not applicable to the company's operations - This item is not applicable[274] PART II MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED UNITHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES This section details common unit market information, performance, and the company's cash distribution policy Common Unit Performance Graph The graph compares the company's cumulative total return to the S&P 500 and S&P Oil & Gas E&P indices Cumulative Total Return (Initial Investment of $100 as of Dec 31, 2018): | Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Black Stone Minerals, L.P. | $100.00 | $90.20 | $51.09 | $84.40 | $149.18 | $153.17 | | S&P 500 Index | $100.00 | $131.49 | $155.68 | $200.37 | $164.08 | $207.21 | | S&P Oil & Gas E&P Index | $100.00 | $90.56 | $58.06 | $96.72 | $140.31 | $144.91 | Cash Distribution Policy The cash distribution policy is subject to Board discretion and certain financial covenants - Distributions are paid quarterly, first to Series B cumulative convertible preferred unitholders (7.0% p.a. through Nov 27, 2023, adjusted to 9.8% p.a. thereafter), and then to common unitholders[285] - The Board determines the distribution amount and can change or revoke the policy at any time; there is no contractual obligation to pay common unit distributions[285] - Distributions are restricted if there is a default under the Credit Facility, if Credit Facility availability is less than 10% of lender commitments, or if total debt to EBITDAX is greater than 3.0[288] Series B Cumulative Convertible Preferred Units This section outlines the terms, distribution rate, and conversion rights of Series B preferred units - The distribution rate for Series B preferred units was adjusted to 9.8% per annum effective November 28, 2023, and will readjust every two years thereafter[289] - Holders can convert preferred units into common units on a one-for-one basis, subject to certain conditions and minimum value requirements[290] - The company has the option to redeem preferred units at $21.41 per unit until February 26, 2024, and at par value ($20.39) within a 90-day period on each second anniversary following November 28, 2023[291] RESERVED This item is reserved and contains no information - This item is reserved[292] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes 2023 financial performance, discussing revenue drivers, operational developments, and liquidity Overview The company's mineral and royalty interests span 41 states and include approximately 68,000 producing wells - As of December 31, 2023, the company's mineral and royalty interests were located in 41 states, including all major onshore producing basins, with approximately 68,000 producing wells[295] Recent Developments Recent developments include a temporary drilling suspension by Aethon Energy and progress in the Austin Chalk play - Aethon Energy exercised 'time-out' provisions in December 2023 under joint exploration agreements in Angelina and San Augustine counties, temporarily suspending drilling obligations due to low natural gas prices[297][298] - In the Austin Chalk play, 29 wells with modern completions are now producing, demonstrating potential for improved production rates and increased reserves[299] Business Environment The 2023 business environment was marked by lower commodity prices and a declining U.S. rig count - Commodity prices decreased in 2023 due to reduced natural gas demand and rising global oil inventories, though tensions in the Red Sea and Middle East have added upward price pressure since December[303] Benchmark Commodity Prices (End of Quarter 2023): | Benchmark Prices | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | | :--- | :--- | :--- | :--- | :--- | | WTI spot crude oil ($/Bbl) | $71.89 | $90.77 | $70.66 | $75.68 | | Henry Hub spot natural gas ($/MMBtu) | $2.58 | $2.68 | $2.48 | $2.10 | U.S. Rotary Rig Count (End of Quarter 2023): | Rig Type | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | | :--- | :--- | :--- | :--- | :--- | | Oil | 500 | 502 | 545 | 592 | | Natural gas | 120 | 116 | 124 | 160 | | Total | 622 | 623 | 674 | 755 | - Natural gas storage levels are forecast to be 15% higher than the five-year average by end of March 2024, and 6% higher by end of October 2024[308] - Natural gas exports are expected to increase by 2% in 2024, but a pause in approvals for new LNG facilities by the Biden administration could impact future growth[310][311] How We Evaluate Our Operations Management evaluates operations using production volumes, commodity prices, and non-GAAP financial measures - Management assesses performance using production volumes, commodity prices (including derivative effects), and non-GAAP measures like Adjusted EBITDA and Distributable cash flow[313][316] - Realized prices for oil and natural gas are influenced by global and regional supply/demand dynamics, product quality, and proximity to markets, leading to quality and location differentials from benchmark prices (WTI for oil, Henry Hub for natural gas)[314][315][316] - The company uses fixed-price swap contracts to partially mitigate commodity price volatility, hedging 73% of available oil and condensate and 66% of natural gas hedge volumes for 2024[317][321] Reconciliation of Net Income (Loss) to Adjusted EBITDA and Distributable Cash Flow (in thousands): | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net income (loss) | $422,549 | $476,480 | | Adjusted EBITDA | $474,710 | $466,374 | | Distributable cash flow | $451,210 | $441,062 | Results of Operations Total revenue decreased in 2023 due to lower commodity prices, partially offset by higher production volumes Production, Revenue, and Operating Expenses (Year Ended Dec 31): | Metric | 2023 | 2022 | Variance (%) | | :--- | :--- | :--- | :--- | | Production: | | | | | Oil and condensate (MBbls) | 3,757 | 3,591 | 4.6% | | Natural gas (MMcf) | 64,647 | 59,778 | 8.1% | | Total (MBoe) | 14,532 | 13,554 | 7.2% | | Realized prices, without derivatives: | | | | | Oil and condensate ($/Bbl) | $76.74 | $93.65 | (18.1)% | | Natural gas ($/Mcf) | $3.10 | $7.28 | (57.4)% | | Revenue: | | | | | Oil and condensate sales | $288,296 | $336,287 | (14.3)% | | Natural gas and NGL sales | $200,297 | $434,945 | (53.9)% | | Gain (loss) on commodity derivative instruments | $91,117 | $(120,680) | (175.5)% | | Total revenue | $592,216 | $663,604 | (10.8)% | | Operating expenses: | | | | | Lease operating expense | $11,386 | $12,380 | (8.0)% | | Production costs and ad valorem taxes | $56,979 | $66,233 | (14.0)% | | Exploration expense | $2,148 | $193 | 1013.0% | | Depreciation, depletion, and amortization | $45,683 | $47,804 | (4.4)% | | General and administrative | $51,455 | $53,652 | (4.1)% | | Interest expense | $2,754 | $6,286 | (56.2)% | - Total revenue decreased by 10.8% in 2023 compared to 2022, primarily due to lower realized commodity prices, partially offset by increased production volumes and a gain on commodity derivative instruments[331] - Oil and condensate sales decreased due to lower prices despite higher production, mainly from the Permian Basin; Natural gas and NGL sales decreased significantly due to lower prices, offset by increased production from the Haynesville/Bossier play[332][334] - The company recognized $82.7 million in realized gains and $8.4 million in unrealized gains from commodity derivatives in 2023, a reversal from realized losses and unrealized gains in 2022[335] - Operating expenses generally decreased, with lease operating expense down due to lower non-operated working interest production, and production/ad valorem taxes down due to lower commodity prices; Exploration expense significantly increased due to seismic information acquisition[337][338][339] - General and administrative expenses decreased primarily due to a $6.6 million reduction in equity-based compensation, partially offset by increased consulting costs[341][342] - Interest expense decreased due to lower average outstanding borrowings, as the Credit Facility was fully paid down in Q1 2023[343] Liquidity and Capital Resources Liquidity is primarily sourced from operating cash flow, which increased significantly in 2023 - Primary liquidity sources are cash from operations and Credit Facility borrowings; primary uses are distributions, debt reduction, and business investments[344] Cash Flows (Year Ended Dec 31, in thousands): | Cash Flow Type | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Provided by operating activities | $521,251 | $424,983 | +$96,268 | | Used in investing activities | $(19,740) | $(1,215) | $(18,525) | | Used in financing activities | $(435,536) | $(428,337) | $(7,199) | | Net change in cash and cash equivalents | $65,975 | $(4,569) | +$70,544 | - Operating cash flows increased in 2023 primarily due to higher net cash received from commodity derivative settlements, partially offset by lower oil and natural gas sales revenue[348] - Net cash used in investing activities increased due to higher acquisition activity and oil and natural gas capital expenditures[349] - Net cash used in financing activities increased due to higher distributions to common unitholders, partially offset by lower net repayments under the Credit Facility[350] - The 2024 capital expenditure budget for non-operated working interests is approximately $2.3 million, mainly for workovers and recompletions[352] - In 2023, the company acquired mineral and royalty interests for $14.6 million cash, primarily in the Gulf Coast, funded by operating activities[353] - The Credit Facility's borrowing base was increased to $580.0 million in October 2023, with elected cash commitments maintained at $375.0 million; no outstanding borrowings as of December 31, 2023[356][359] Contractual Obligations (as of Dec 31, 2023, in thousands): | Obligation Type | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $2,463 | $655 | $1,764 | $44 | $— | | Purchase commitments | $660 | $450 | $205 | $5 | $— | | Total | $3,123 | $1,105 | $1,969 | $49 | $— | Critical Accounting Policies and Related Estimates Financial statements rely on significant estimates, particularly for oil and natural gas reserve quantities - The preparation of financial statements involves significant estimates, particularly for oil and natural gas reserve quantities, which are crucial for DD&A and impairment calculations[361] - The company follows the successful efforts method of accounting, capitalizing costs for property acquisitions, successful exploratory wells, and development, while expensing other exploratory costs[363][364] - DD&A of producing oil and natural gas properties is recorded using the units-of-production method, with rates adjusted semi-annually based on reserve reports[366] - Revenue from oil and natural gas sales is recognized when control is transferred to the customer, using a practical expedient for variable consideration due to fluctuating prices[372] QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risks are commodity price volatility, counterparty credit, and interest rate changes Commodity Price Risk The company uses derivative instruments to mitigate exposure to volatile oil and natural gas prices - The company's major market risk is the volatile pricing of oil, natural gas, and NGLs, which is partially mitigated through commodity derivative financial instruments like fixed-price swap contracts[376] - A 10% discount to the SEC commodity pricing for the twelve months ended December 31, 2023, would result in an approximate 2.0% reduction of proved reserve volumes[377] Counterparty and Customer Credit Risk Credit risk is managed through dealings with highly-rated derivative counterparties and diverse operators - Derivative contracts expose the company to credit risk from nonperformance by counterparties; all seven counterparties as of December 31, 2023, are rated Baa2 or better by Moody's and are Credit Facility lenders[378] - The principal exposure to credit risk also results from receivables generated by operators' production activities, but the company believes this risk is acceptable[379] Interest Rate Risk The company has limited exposure to interest rate risk on its variable-rate debt - The company has exposure to changes in interest rates on its indebtedness; a 1% increase in interest rate would have resulted in an increase of less than $0.1 million in interest expense for 2023[380] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item refers to the consolidated financial statements and supplementary data included in the Annual Report - The required financial statements and supplementary data are included in this Annual Report beginning on page F-1[381] CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reports no changes in or disagreements with its accountants - There were no changes in or disagreements with accountants on accounting and financial disclosure[382] CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and internal controls were effective as of year-end 2023 Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2023 - The company's disclosure controls and procedures were evaluated and deemed effective as of December 31, 2023, providing reasonable assurance for timely and accurate reporting[383] Management's Annual Report on Internal Control over Financial Reporting Management assessed internal control over financial reporting as effective based on the COSO framework - Management assessed and believes that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO criteria[386] Changes in Internal Control over Financial Reporting No material changes to internal controls over financial reporting occurred during the fourth quarter of 2023 - There were no changes in the system of internal control over financial reporting during the quarter ended December 31, 2023, that materially affected or are reasonably likely to materially affect it[388] OTHER INFORMATION No directors or executive officers adopted or terminated Rule 10b5-1 trading arrangements in Q4 2023 - None of the directors or executive officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended December 31, 2023[389] DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to the company - This item is not applicable[390] PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE This section lists the executive officers and directors and refers to the 2024 Proxy Statement for more details Executive Officers and Directors of the General Partner: | Name | Position | | :--- | :--- | | Thomas L. Carter, Jr. | Chairman, Chief Executive Officer, and President | | Evan M. Kiefer | Senior Vice President, Chief Financial Officer and Treasurer | | L. Steve Putman | Senior Vice President, General Counsel, and Secretary | | Carrie P. Clark | Senior Vice President, Land & Commercial | | Dawn K. Smajstrla | Vice President and Chief Accounting Officer | | Carin M. Barth | Director | | D. Mark DeWalch | Director | | Jerry V. Kyle, Jr. | Director | | Michael C. Linn | Director | | John H. Longmaid | Director | | William N. Mathis | Director | | William E. Randall | Director | | Alexander D. Stuart | Director | | James W. Whitehead | Director | - The company has a Code of Business Conduct and Ethics for directors, officers, and employees, and a Financial Code of Ethics for senior financial officers, available on its website[395] EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement - Information on executive compensation is incorporated by reference to the 2024 Proxy Statement[396] SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS Information on security ownership is incorporated by reference from the 2024 Proxy Statement - Information on security ownership of certain beneficial owners and management and related unitholder matters is incorporated by reference to the 2024 Proxy Statement[397] CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information on related transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information on certain relationships and related transactions, and director independence is incorporated by reference to the 2024 Proxy Statement[398] PRINCIPAL ACCOUNTING FEES AND SERVICES Ernst & Young LLP serves as the independent auditor, with further details in the 2024 Proxy Statement - The independent registered public accounting firm is Ernst & Young LLP, Houston TX, Auditor Firm ID: 42[399] - Information required by this item is incorporated by reference to the 2024 Proxy Statement[399] PART IV EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This item lists all exhibits and financial statement schedules filed as part of the Annual Report - The Consolidated Financial Statements are included under Part II, Item 8 of this Annual Report, starting on page F-1[402] - All financial statement schedules have been omitted as they are either not applicable, not required, or the information is presented in the consolidated financial statements or notes[403] - Exhibits include various organizational documents, credit agreements, incentive plans, and certifications[404][405][406] INDEX TO CONSOLIDATED FINANCIAL STATEMENTS This section provides the independent auditor's report and the company's core consolidated financial statements Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the 2023 financial statements and internal controls - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 31, 2023, and on the effectiveness of internal control over financial reporting as of December 31, 2023[417][418] - Critical audit matters included the complexity of auditing Depreciation, Depletion and Amortization (DD&A) of Oil and Natural Gas Properties due to subjective reserve estimates[423][424] - Another critical audit matter was the complexity and judgment involved in auditing Revenues from Contracts with Customers Accrual, given the need for management estimates as a non-operator[429] Consolidated Balance Sheets The balance sheet shows total assets of $1.27 billion as of December 31, 2023, a slight decrease from 2022 Consolidated Balance Sheet Highlights (in thousands): | Item | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $70,282 | $4,307 | | Accounts receivable | $82,253 | $135,697 | | Oil and natural gas properties, net | $1,064,495 | $1,086,988 | | Total Current Assets | $193,127 | $173,381 | | Total Assets | $1,266,884 | $1,271,082 | | Total Current Liabilities | $25,836 | $30,734 | | Credit facility (long-term) | $— | $10,000 | | Total Liabilities | $49,539 | $61,270 | | Partners' equity — common units | $918,208 | $911,451 | | Total Liabilities, Mezzanine Equity, and Equity | $1,266,884 | $1,271,082 | Consolidated Statements of Operations Net income decreased to $422.5 million in 2023 from $476.5 million in 2022 due to lower commodity prices Consolidated Statements of Operations Highlights (in thousands, except per unit amounts): | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Oil and condensate sales | $288,296 | $336,287 | $235,771 | | Natural gas and natural gas liquids sales | $200,297 | $434,945 | $255,671 | | Gain (loss) on commodity derivative instruments | $91,117 | $(120,680) | $(146,474) | | TOTAL REVENUE | $592,216 | $663,604 | $359,260 | | TOTAL OPERATING EXPENSE | $168,620 | $181,106 | $171,935 | | INCOME (LOSS) FROM OPERATIONS | $423,596 | $482,498 | $187,325 | | NET INCOME (LOSS) | $422,549 | $476,480 | $181,987 | | Distributions on Series B preferred units | $(21,776) | $(21,000) | $(21,000) | | NET INCOME (LOSS) ATTRIBUTABLE TO COMMON UNITS | $400,773 | $455,480 | $160,987 | | Per common unit (basic) | $1.91 | $2.18 | $0.77 | | Weighted average common units outstanding (basic) | 209,970 | 209,382 | 208,181 | Consolidated Statements of Equity Total partners' equity increased to $918.2 million in 2023, driven by net income offset by distributions Consolidated Statements of Equity Highlights (in thousands): | Item | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | BALANCE AT DECEMBER 31 | $918,208 | $911,451 | $765,268 | | Net income (loss) | $422,549 | $476,480 | $181,987 | | Distributions | $(398,824) | $(322,403) | $(176,924) | | Distributions on Series B preferred units | $(21,776) | $(21,000) | $(21,000) | | Repurchases of common units | $(5,496) | $(2,991) | $(1,957) | | Equity-based compensation | $12,525 | $18,146 | $12,932 | Consolidated Statements of Cash Flows Net cash from operating activities increased significantly to $521.3 million in 2023 Consolidated Statements of Cash Flows Highlights (in thousands): | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | NET CASH PROVIDED BY OPERATING ACTIVITIES | $521,251 | $424,983 | $256,880 | | NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | $(19,740) | $(1,215) | $(14,317) | | NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | $(435,536) | $(428,337) | $(235,483) | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $65,975 | $(4,569) | $7,080 | | Cash and cash equivalents — end of the year | $70,282 | $4,307 | $8,876 | - Net cash provided by operating activities increased by $96.3 million in 2023 compared to 2022, primarily due to higher net cash received on settlements of commodity derivative instruments[348][449] - Net cash used in investing activities increased by $18.5 million in 2023, mainly due to increased acquisition activity and higher oil and natural gas capital expenditures[349][449] - Net cash used in financing activities increased by $7.2 million in 2023, primarily due to higher distributions to common unitholders, partially offset by lower net repayments under the Credit Facility[350][449] Notes to Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and financial statement items NOTE 1 — BUSINESS AND BASIS OF PRESENTATION The company is a publicly traded partnership primarily owning U.S. oil and natural gas mineral interests - Black Stone Minerals, L.P. is a publicly traded Delaware limited partnership primarily owning oil and natural gas mineral interests, nonparticipating royalty interests, and overriding royalty interests across 41 U.S. states[452] - The consolidated financial statements are prepared in accordance with GAAP and SEC rules, with all intercompany balances and transactions eliminated[453][454] - The company operates in a single operating and reportable segment, with the CEO as the chief operating decision maker[457] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the significant accounting policies and estimates used in preparing financial statements - Financial statements rely on significant estimates, including oil and natural gas reserve quantities, which are subjective and can differ from actual recoveries[458][459][461][462] - The company follows the successful efforts method for oil and natural gas operations, capitalizing acquisition, successful exploratory, and development costs, and expensing other exploratory costs[473][474] - DD&A of producing oil and natural gas properties is recorded using the units-of-production method, based on proved developed reserves for capitalized development costs and all proved reserves for leasehold acquisition costs[476] - Revenue from oil and natural gas sales is recognized when control is transferred to the customer, using a practical expedient for variable consideration[491] - Lease bonus and other income are recognized when the lease agreement is executed and payment is received, as the performance obligation is satisfied at that point[492] - The company is organized as a pass-through entity for income tax purposes, with unitholders responsible for federal and state income taxes on their share of taxable income[497] NOTE 3 — ASSET RETIREMENT OBLIGATIONS This note details the liability for future costs to dismantle and reclaim working interest properties - The ARO liability reflects the present value of estimated costs for dismantlement, removal, and site reclamation of working interest oil and natural gas properties[503] Changes to ARO Liability (in thousands): | Item | 2023 | 2022 | | :--- | :--- | :--- | | Beginning asset retirement obligations | $16,019 | $13,284 | | Liabilities incurred | $174 | $124 | | Liabilities settled | $(98) | $(294) | | Accretion expense | $1,042 | $861 | | Revisions in estimated costs | $3,130 | $2,044 | | Ending asset retirement obligations | $20,267 | $16,019 | | Current asset retirement obligations | $1,237 | $989 | | Non-current asset retirement obligations | $19,030 | $15,030 | NOTE 4 — OIL AND NATURAL GAS PROPERTIES This note covers acquisitions, divestitures, farmout agreements, and impairment of oil and gas properties - The company had no material divestiture activity in 2023 and 2022, but divested TLW Investments, L.L.C. in 2021 for $0.2 million, recognizing a $2.9 million gain[506][507] - In 2023, the company acquired mineral and royalty interests for $14.6 million cash, primarily in the Gulf Coast region[509] - Farmout agreements, such as those with Canaan, Azul, JWM, and Pivotal, are used to reduce working interest capital expenditures by conveying participation rights while retaining ORRIs[512][517][521] - Aethon Energy exercised 'time-out' provisions in December 2023, temporarily suspending drilling obligations in Angelina and San Augustine counties due to low natural gas prices[524] - No impairment of proved or unproved oil and natural gas properties was recognized for the years ended December 31, 2023, 2022, and 2021[525] NOTE 5 — COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS The company uses fixed-price swap contracts to mitigate commodity price risk - The company uses oil and natural gas commodity derivative financial instruments, primarily fixed-price swap contracts, to mitigate price risk, but does not designate them as hedges for accounting purposes[526][527] - Derivative gains and losses are recognized in revenue, and unsettled contracts are reflected as derivative assets or liabilities[527] - The company had seven counterparties for derivative contracts as of December 31, 2023, all rated Baa2 or better by Moody's and also lenders under the Credit Facility[528] Net Change in Fair Value of Commodity Derivative Instruments (in thousands): | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Beginning fair value | $28,941 | $(53,545) | $(20,017) | | Gain (loss) on oil derivative instruments | $3,888 | $(46,890) | $(75,180) | | Gain (loss) on natural gas derivative instruments | $87,229 | $(73,790) | $(71,294) | | Net cash paid (received) on settlements of oil derivative instruments | $(2,653) | $77,790 | $66,418 | | Net cash paid (received) on settlements of natural gas derivative instruments | $(80,070) | $125,376 | $46,528 | | Net change in fair value | $8,394 | $82,486 | $(33,528) | | Ending fair value | $37,335 | $28,941 | $(53,545) | NOTE 6 — FAIR VALUE MEASUREMENTS This note explains the methodology for measuring assets and liabilities at fair value - Fair value measurements are categorized into a three-level hierarchy based on input observability (Level 1: quoted prices, Level 2: observable inputs, Level 3: unobservable inputs)[538][539] - Commodity derivative financial instruments are measured at fair value on a recurring basis using a market approach with observable inputs (Level 2)[542][543] - Nonfinancial assets like oil and natural gas properties are measured at fair value on a non-recurring basis for impairment assessment, using discounted projected future cash flows (Level 3)[545][548] NOTE 7 — SIGNIFICANT CUSTOMERS No single customer accounted for more than 10% of total oil and gas revenue in 2023 - No single customer accounted for more than 10% of total oil and natural gas revenue for the year ended December 31, 2023[550] - XTO Energy represented approximately 12% and 19% of total oil and natural gas revenue for 2022 and 2021, respectively[550] NOTE 8 — CREDIT FACILITY The company maintains a senior secured revolving credit facility with a $1.0 billion maximum credit amount - The senior secured revolving Credit Facility has an aggregate maximum credit amount of $1.0 billion, with a borrowing base redetermined semi-annually[552] - In October 2023, the borrowing base increased to $580.0 million, and the company elected to maintain cash commitments at $375.0 million[554] - As of De