Black Stone Minerals(BSM) - 2024 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Black Stone Minerals, L.P., including the balance sheets, statements of operations, statements of equity, statements of cash flows, and detailed notes Consolidated Balance Sheets The consolidated balance sheets show a decrease in total assets from $1,266,884 thousand at December 31, 2023, to $1,231,675 thousand at March 31, 2024, primarily driven by reduced cash and commodity derivative assets Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----- | :------------- | :---------------- | | Total Current Assets | $146,165 | $193,127 | | Total Assets | $1,231,675 | $1,266,884 | | Total Current Liabilities | $27,380 | $25,836 | | Total Liabilities | $55,873 | $49,539 | | Mezzanine Equity (Preferred Units) | $300,478 | $299,137 | | Total Equity | $875,324 | $918,208 | - Cash and cash equivalents decreased from $70,282 thousand at December 31, 2023, to $40,456 thousand at March 31, 2024[120] - Commodity derivative assets decreased by $7,532 thousand, while commodity derivative liabilities increased by $17,400 thousand (current and long-term combined)[120] Consolidated Statements of Operations For the three months ended March 31, 2024, total revenue significantly decreased by 39.6% year-over-year, primarily due to a loss on commodity derivative instruments compared to a gain in the prior year, and lower natural gas and NGL sales Consolidated Statements of Operations Highlights (in thousands, except per unit amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :----- | :--------- | | Total Revenue | $105,493 | $174,578 | $(69,085) | (39.6)% | | Income (Loss) from Operations | $63,974 | $135,199 | $(71,225) | (52.7)% | | Net Income (Loss) | $63,927 | $134,443 | $(70,516) | (52.4)% | | Net Income (Loss) Attributable to Common Units | $56,560 | $129,193 | $(72,633) | (56.2)% | | Basic EPU | $0.27 | $0.62 | $(0.35) | (56.5)% | | Diluted EPU | $0.27 | $0.60 | $(0.33) | (55.0)% | - Revenue from contracts with customers decreased by 4.5% to $116,783 thousand, driven by lower natural gas and NGL sales, partially offset by increased oil and condensate sales[181][253] - The company recognized a loss of $11,290 thousand on commodity derivative instruments in Q1 2024, a significant shift from a gain of $52,271 thousand in Q1 2023[181][253] Consolidated Statements of Equity The consolidated statements of equity show a decrease in total partners' equity from $918,208 thousand at December 31, 2023, to $875,324 thousand at March 31, 2024, primarily due to distributions and repurchases, partially offset by net income Consolidated Statements of Equity Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----- | :------------- | :---------------- | | Common Units Outstanding | 210,656 | 209,991 | | Partners' Equity | $875,324 | $918,208 | | Distributions to Common Unitholders | $(99,899) | N/A (period activity) | | Distributions on Series B Preferred Units | $(7,367) | N/A (period activity) | | Repurchases of Common Units | $(4,381) | N/A (period activity) | | Net Income (Loss) | $63,927 | N/A (period activity) | - Repurchases of common units amounted to $4,381 thousand for the three months ended March 31, 2024[123] Consolidated Statements of Cash Flows Cash flows from operating activities decreased by 23.8% year-over-year, primarily due to reduced natural gas and NGL sales from lower realized commodity prices, while investing activities saw a significant increase in cash used Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :----- | :--------- | | Net Cash Provided by Operating Activities | $104,460 | $137,155 | $(32,695) | (23.8)% | | Net Cash Used in Investing Activities | $(23,964) | $(1,954) | $(22,010) | (1126.4)% | | Net Cash Used in Financing Activities | $(110,322) | $(120,358) | $10,036 | (8.3)% | | Net Change in Cash and Cash Equivalents | $(29,826) | $14,843 | $(44,669) | (300.9)% | | Cash and Cash Equivalents – End of Period | $40,456 | $19,150 | $21,306 | 111.2% | - Acquisitions of oil and natural gas properties accounted for $22,966 thousand in cash used in investing activities in Q1 2024, compared to none in Q1 2023[125] - Distributions to common unitholders were $99,899 thousand in Q1 2024, slightly up from $99,600 thousand in Q1 2023[125] Notes to Unaudited Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, clarifying the Partnership's operations as an owner of oil and natural gas mineral interests and detailing significant financial instruments and equity structures - The Partnership operates primarily as an owner of oil and natural gas mineral interests across 41 states, with assets being substantially non-cost-bearing[104][187] - The financial statements are prepared in accordance with GAAP and SEC rules, and all intercompany balances and transactions have been eliminated[104][128] NOTE 1 - BUSINESS AND BASIS OF PRESENTATION Black Stone Minerals, L.P. (BSM) is a publicly traded Delaware limited partnership primarily owning non-cost-bearing oil and natural gas mineral and royalty interests in 41 U.S. states, operating as a single reportable segment - BSM's primary business involves owning oil and natural gas mineral and royalty interests across 41 states, which are largely non-cost-bearing[104][187] - The Partnership operates in a single operating and reportable segment, with the CEO acting as the chief operating decision maker[106][130] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note states no significant changes in accounting policies during Q1 2024 and mentions a new FASB ASU 2023-07 on segment disclosures, which the Partnership does not plan to early adopt - No material changes to significant accounting policies or their application occurred during Q1 2024[131] - The Partnership does not plan to early adopt ASU 2023-07 (Improvements to Reportable Segments Disclosures) and expects no material impact on its financial statements[109] NOTE 3 - OIL AND NATURAL GAS PROPERTIES In Q1 2024, the Partnership acquired $23.0 million in unproved oil and natural gas properties, primarily in the Gulf Coast, and Aethon Energy exercised "time-out" provisions in December 2023 due to low natural gas prices - In Q1 2024, the Partnership acquired $23.0 million in unproved oil and natural gas properties, mainly in the Gulf Coast, funded by operating cash flows[133] - Aethon Energy exercised "time-out" provisions in December 2023 under Joint Exploration Agreements (JEAs) in East Texas, temporarily suspending drilling obligations for up to nine consecutive months due to low natural gas prices[1][164] - The Partnership did not recognize any impairment of oil and natural gas properties for the three months ended March 31, 2024, or 2023[165] NOTE 4 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS The Partnership uses fixed-price swap contracts to mitigate commodity price risk, with changes in fair value recognized in net income, and had open derivative contracts for oil and natural gas for 2024 and 2025 as of March 31, 2024 - The Partnership uses fixed-price swap contracts to mitigate commodity price risk, with changes in fair value recognized in net income[166][168] Open Oil Swap Contracts as of March 31, 2024 | Period | Volume (Bbl) | Weighted Average Price (Per Bbl) | Range Low (Per Bbl) | Range High (Per Bbl) | | :----- | :----------- | :------------------------------- | :------------------ | :------------------- | | 2024 First Quarter | 190,000 | $71.45 | $67.00 | $81.00 | | 2024 Second Quarter | 570,000 | $71.45 | $67.00 | $81.00 | | 2024 Third Quarter | 570,000 | $71.45 | $67.00 | $81.00 | | 2024 Fourth Quarter | 570,000 | $71.45 | $67.00 | $81.00 | | 2025 First Quarter | 555,000 | $71.22 | $70.02 | $73.15 | | 2025 Second Quarter | 555,000 | $71.22 | $70.02 | $73.15 | | 2025 Third Quarter | 555,000 | $71.22 | $70.02 | $73.15 | | 2025 Fourth Quarter | 555,000 | $71.22 | $70.02 | $73.15 | Open Natural Gas Swap Contracts as of March 31, 2024 | Period | Volume (MMBtu) | Weighted Average Price (Per MMBtu) | Range Low (Per MMBtu) | Range High (Per MMBtu) | | :----- | :------------- | :--------------------------------- | :-------------------- | :--------------------- | | 2024 Second Quarter | 10,465,000 | $3.55 | $3.00 | $3.76 | | 2024 Third Quarter | 10,580,000 | $3.55 | $3.00 | $3.76 | | 2024 Fourth Quarter | 10,580,000 | $3.55 | $3.00 | $3.76 | | 2025 First Quarter | 7,200,000 | $3.39 | $3.34 | $3.65 | | 2025 Second Quarter | 7,280,000 | $3.39 | $3.34 | $3.65 | | 2025 Third Quarter | 11,040,000 | $3.45 | $3.34 | $3.65 | | 2025 Fourth Quarter | 11,040,000 | $3.45 | $3.34 | $3.65 | NOTE 5 - FAIR VALUE MEASUREMENTS The Partnership uses a three-level valuation hierarchy for fair value measurements, with commodity derivative instruments primarily categorized as Level 2 due to observable market inputs, and no significant changes in valuation techniques occurred in Q1 2024 - Fair value measurements are categorized into a three-level hierarchy based on input observability, with Level 2 inputs being observable for substantially the full term of the financial instrument[173] Fair Value Measurements (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------- | :------------- | :---------------- | | Commodity Derivative Instruments (Assets) | $30,888 | $38,645 | | Commodity Derivative Instruments (Liabilities) | $18,640 | $1,310 | - The fair value of commodity derivative instruments is estimated using the market approach with observable inputs, categorized as Level 2[152][173] NOTE 6 - CREDIT FACILITY The Partnership maintains a senior secured revolving Credit Facility with a maximum credit amount of $1.0 billion, terminating on October 31, 2027, with the borrowing base reaffirmed at $580.0 million in April 2024 and no outstanding principal balance as of March 31, 2024 - The Credit Facility has a maximum credit amount of $1.0 billion and terminates on October 31, 2027[197] - The borrowing base was reaffirmed at $580.0 million in April 2024, and the Partnership maintained cash commitments at $375.0 million[197][263] - As of March 31, 2024, there was no outstanding principal balance, and the Partnership was in compliance with all debt covenants[81][82] NOTE 7 - COMMITMENTS AND CONTINGENCIES The Partnership is subject to environmental regulations and routine litigation, but management believes existing legal actions and claims will not materially adversely affect its financial condition or operations - The Partnership is subject to various environmental regulations regarding air, land, and water quality[45] - Management believes current legal actions and claims will not materially adversely affect financial condition, cash flows, or results of operations[47][48] - No significant provision for potential environmental remediation costs has been recorded[84] NOTE 8 - INCENTIVE COMPENSATION Total incentive compensation expense increased to $3,643 thousand for Q1 2024, including cash and equity-based compensation, with Aspirational Awards tied to a production target of 42 Mboe per day by Q4 2025, for which no expense was recognized as achievement was not yet probable Total Incentive Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------- | :-------------------------------- | :-------------------------------- | | Cash—short and long-term incentive plans | $1,260 | $1,079 | | Equity-based compensation—restricted common units | $996 | $954 | | Equity-based compensation—restricted performance units | $738 | $633 | | Board of Directors incentive plan | $649 | $531 | | Total Incentive Compensation Expense | $3,643 | $3,197 | - Aspirational Awards, including performance cash and equity awards, are dependent on achieving an aspirational production target of at least 42 Mboe per day by Q4 2025[63] - As of March 31, 2024, the performance condition for Aspirational Awards was not yet probable, and no related expense was recognized[63] NOTE 9 - PREFERRED UNITS The Partnership has 14,711,219 Series B cumulative convertible preferred units outstanding, issued in 2017 for $300.0 million, with a distribution rate adjusted to 9.8% on November 28, 2023, and classified as mezzanine equity due to redemption provisions - 14,711,219 Series B cumulative convertible preferred units are outstanding, with a carrying value of $300.5 million as of March 31, 2024[49][55] - The distribution rate for Series B preferred units was adjusted to 9.8% on November 28, 2023, and readjusts every two years[22][52][87] - The Partnership has the option to redeem all or a portion of Series B preferred units at $20.39 per unit during a 90-day period starting on each readjustment date[22][54] NOTE 10 - EARNINGS PER UNIT The Partnership calculates earnings per unit (EPU) using the two-class method, with basic and diluted EPU both at $0.27 for Q1 2024, a significant decrease from the prior year due to reduced net income attributable to common unitholders Earnings Per Common Unit (in thousands, except per unit amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | | Net Income (Loss) Attributable to Common Unitholders | $56,560 | $129,193 | | Basic EPU | $0.27 | $0.62 | | Diluted EPU | $0.27 | $0.60 | | Weighted Average Common Units Outstanding (Basic) | 210,654 | 209,941 | | Weighted Average Common Units Outstanding (Diluted) | 210,654 | 224,910 | - The decrease in EPU is primarily due to a significant reduction in net income attributable to common unitholders, from $129,193 thousand in Q1 2023 to $56,560 thousand in Q1 2024[70] - Series B cumulative convertible preferred units are assessed on an as-converted basis for diluted EPU, but their inclusion was anti-dilutive in Q1 2023[68][70] NOTE 11 - COMMON UNITS Common unitholders are entitled to distributions after preferred unitholders, with a $0.4750 per common unit distribution declared for Q1 2024, and a new $150.0 million unit repurchase program authorized, though no repurchases were made under it in Q1 2024 - Common unitholders receive distributions after Series B preferred unitholders, with a quarterly distribution of $0.4750 per common unit declared and paid for Q1 2024 and Q1 2023[73][74] - A new $150.0 million unit repurchase program was authorized on October 30, 2023, but no repurchases were made under it in Q1 2024[75] - 286,761 common units were repurchased in Q1 2024 at a weighted average price of $15.28 per unit to satisfy tax withholding obligations for incentive awards[86] NOTE 12 - SUBSEQUENT EVENTS Subsequent to March 31, 2024, the Board approved a distribution of $0.375 per common unit for Q1 2024, payable on May 17, 2024, and the Partnership acquired mineral and royalty interests for $12.3 million in cash - On April 17, 2024, a distribution of $0.375 per common unit for Q1 2024 was approved, payable on May 17, 2024[76] - Subsequent to March 31, 2024, the Partnership acquired mineral and royalty interests for $12.3 million in cash, funded by operating activities[77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion of the Partnership's financial condition, results of operations, and liquidity for the three months ended March 31, 2024, compared to the same period in 2023 - The discussion analyzes financial performance for Q1 2024 versus Q1 2023, covering revenue, operating expenses, and cash flow drivers[65][79] - Key factors affecting the business include volatile oil and natural gas prices, drilling activity by operators, and the impact of derivative instruments[66][190][240] Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements, which are not historical in nature and are subject to significant risks and uncertainties, advising readers not to place undue reliance on them - The report contains forward-looking statements identified by words like "believe," "expect," "anticipate," and "plan," which are subject to significant risks and uncertainties[66] - Important factors that could cause actual results to differ include volatility of oil and natural gas prices, production levels, general economic conditions, and regulatory initiatives[66][80][184][185][204] - Readers are cautioned not to place undue reliance on forward-looking statements, and the company undertakes no obligation to update or revise them[205] Overview The Partnership is one of the largest owners and managers of oil and natural gas mineral interests in the U.S., focusing on maximizing value through active management, leasing, and creative structuring to encourage drilling, while also exploring energy transition opportunities - The Partnership is a major owner and manager of oil and natural gas mineral interests in the U.S., aiming to maximize value through active management and lease structuring[206] - Its business model relies on a large, diversified asset base of long-lived, non-cost-bearing mineral and royalty interests to provide stable production and cash flow for distributions[206] - The company is exploring energy transition opportunities, such as renewable energy and carbon sequestration[206] Recent Developments Recent developments include significant Shelby Trough development by Aethon Energy under Joint Exploration Agreements (JEAs) in San Augustine and Angelina counties, which outline Aethon's drilling obligations and BSM's core mineral positions - Shelby Trough development is significantly driven by Aethon Energy under Joint Exploration Agreements (JEAs) in San Augustine and Angelina counties[207] - JEAs define Aethon's development obligations and BSM's rights related to core mineral positions[207] Shelby Trough Development Update In April 2024, Aethon began curtailing production volumes on a small number of producing wells, expecting a temporary decrease of approximately 800 Boe/d, and plans to delay initial production of an additional 10 wells until the second half of the year - Aethon began curtailing production volumes in April 2024, expecting a temporary decrease of approximately 800 Boe/d[188] - Aethon intends to delay initial production of 10 wells until H2 2024, anticipating improved natural gas prices[208] Aethon Time-Out In December 2023, Aethon exercised "time-out" provisions under its JEAs in East Texas, temporarily suspending drilling obligations for up to nine consecutive months due to low natural gas prices, marking the first time these provisions have been invoked - Aethon exercised "time-out" provisions in December 2023 under JEAs in East Texas, allowing temporary suspension of drilling obligations[1][164] - The suspension can last up to nine consecutive months and a maximum of 18 total months in any 48-month period, triggered by natural gas prices falling below specified thresholds[1][164] - This is the first time Aethon has invoked these time-out provisions[1][164] Austin Chalk Update The Partnership has agreements with multiple operators to drill wells in the Austin Chalk area of East Texas, where modern completion technology has improved production rates and increased reserves, with 30 wells currently producing - The Partnership has agreements with operators for drilling in the Austin Chalk area of East Texas[189] - Modern completion technology in the Brookeland Field has demonstrated potential for improved production rates and increased reserves[189] - 30 wells with modern completions are currently producing in the Austin Chalk field[189] Business Environment The business environment is characterized by volatile oil and natural gas prices, with oil prices increasing due to geopolitical risks and OPEC+ cuts, while natural gas prices decreased significantly due to a large storage surplus - Oil prices increased due to heightened geopolitical risks and OPEC+ voluntary production cuts[240] - Natural gas prices decreased significantly due to a large surplus of storage inventory, resulting from a mild winter and below-average consumption[240] Commodity Prices and Demand Oil prices increased in Q1 2024 due to geopolitical risks and OPEC+ production cuts, while natural gas prices significantly decreased due to a large storage surplus, with the company using derivative instruments to mitigate volatility Benchmark Commodity Prices | Benchmark Price | 2024 First Quarter | 2023 First Quarter | | :-------------- | :----------------- | :----------------- | | WTI spot oil price ($/Bbl) | $83.96 | $75.68 | | Henry Hub spot natural gas ($/MMBtu) | $1.54 | $2.10 | - Oil prices increased due to geopolitical risks and OPEC+ production cuts, while natural gas prices decreased due to a storage surplus[240] - The company uses derivative instruments to partially mitigate commodity price volatility, but revenues and operating results are significantly dependent on prevailing prices[190][240] Rig Count The U.S. rotary rig count decreased in Q1 2024 compared to Q1 2023, with declines in both oil and natural gas rigs, which the Partnership monitors to identify drilling activity on its acreage U.S. Rotary Rig Count | Category | 2024 First Quarter | 2023 First Quarter | | :------- | :----------------- | :----------------- | | Oil | 506 | 592 | | Natural gas | 112 | 160 | | Other | 3 | 3 | | Total | 621 | 755 | - Total U.S. rotary rig count decreased from 755 in Q1 2023 to 621 in Q1 2024, with declines in both oil and natural gas rigs[241] - The Partnership monitors rig counts to track drilling activity on its acreage, which is dependent on exploration and production companies[191] Natural Gas Storage Natural gas storage levels fluctuate seasonally, typically increasing from April to October, with the EIA forecasting inventories to reach 4.1 Tcf by October 2024, indicating a significant surplus that influences prices - Natural gas storage levels typically increase in warmer months (April-October) and decline in colder months (November-March) due to seasonal demand fluctuations[212] - The EIA forecasts natural gas inventories to reach 4.1 Tcf by October 2024, 10% higher than the five-year average, indicating a surplus[212] - Natural gas prices are significantly influenced by storage levels, which the Partnership monitors regularly[242] Natural Gas Exports The EIA projects a 2% increase in natural gas exports, both by pipeline and as LNG, in 2024, with continued growth expected into 2025 as new LNG export projects become operational and pipeline exports to Mexico increase - EIA forecasts a 2% increase in natural gas exports (pipeline and LNG) to an average of 12.2 Bcf per day in 2024[213] - LNG exports are expected to increase in 2025 due to three new LNG export projects starting operations[6] - Natural gas exports by pipeline to Mexico are also expected to grow[6] How We Evaluate Our Operations The Partnership evaluates its operations by monitoring and analyzing production volumes from its diverse asset base, comparing projected to actual volumes, and assessing performance based on commodity prices and derivative instruments - The Partnership monitors and analyzes production volumes from its asset base and compares them to projections to assess performance[245] - Performance is evaluated based on commodity prices (WTI for oil, Henry Hub for natural gas), considering quality and location differentials[214][215][246] Volumes of Oil and Natural Gas Produced The Partnership tracks and assesses its performance by monitoring and analyzing production volumes from various basins and plays, regularly comparing projected volumes to actual reported volumes and investigating unexpected variances - The Partnership monitors and analyzes production volumes from its extensive asset base to track and assess performance[245] - Projected volumes are regularly compared to actual reported volumes, and unexpected variances are investigated[245] Commodity Prices The majority of the Partnership's oil production is sold at prevailing market prices, primarily benchmarked against West Texas Intermediate (WTI), while natural gas is benchmarked against Henry Hub, with both affected by quality and location differentials - Oil production is primarily priced at prevailing market prices, benchmarked against WTI, with quality and location differentials affecting the final realized price[214][246] - Natural gas is benchmarked against Henry Hub, with realized prices differing due to quality and location differentials[215][246] Factors Affecting the Sales Price of Oil and Natural Gas The sales price of oil is affected by its chemical composition (API gravity, impurities) relative to WTI, while natural gas prices are influenced by heating value and impurity concentration, with location differentials also playing a role due to transportation costs and local supply/demand - Oil quality differentials are influenced by density (API gravity) and impurities (sulfur) relative to WTI[9] - Natural gas quality differentials depend on Btu value (higher for ethane/heavier hydrocarbons) and impurity concentration (lower price for higher impurities)[10] - Location differentials for both oil and natural gas result from transportation costs and regional supply/demand dynamics[247][248] Hedging The Partnership uses commodity derivative financial instruments, such as fixed-price swaps and costless collars, to mitigate the impact of price fluctuations on future revenue, having hedged significant percentages of available oil and natural gas volumes for 2024 and 2025 - The Partnership uses commodity derivative instruments (fixed-price swaps, costless collars) to mitigate price volatility and is not for speculative purposes[12][13][249] - As of March 31, 2024, the Partnership had hedged 72% of 2024 and 71% of 2025 available oil/condensate volumes[218] - As of March 31, 2024, the Partnership had hedged 69% of 2024 and 60% of 2025 available natural gas volumes[218] Non-GAAP Financial Measures Adjusted EBITDA and Distributable cash flow are non-GAAP financial measures used by management and external users to assess financial performance and ability to sustain distributions, with specific adjustments from net income (loss) - Adjusted EBITDA and Distributable cash flow are non-GAAP measures used to assess financial performance and ability to sustain distributions[219] - Adjusted EBITDA is net income (loss) adjusted for interest, taxes, DDA, impairment, ARO accretion, unrealized derivative gains/losses, non-cash equity compensation, and asset sales[219] - Distributable cash flow is Adjusted EBITDA further adjusted for non-cash operating activities, cash interest, preferred unit distributions, and restructuring charges[219] Adjusted EBITDA and Distributable Cash Flow (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | | Net Income (Loss) | $63,927 | $134,443 | | Unrealized (gain) loss on commodity derivative instruments | $25,087 | $(38,986) | | Adjusted EBITDA | $104,117 | $109,928 | | Distributable Cash Flow | $96,388 | $104,114 | Results of Operations Total revenue for Q1 2024 decreased by 39.6% year-over-year, primarily due to a loss on commodity derivative instruments and lower natural gas and NGL sales, while operating expenses increased slightly due to higher production costs and general and administrative expenses Key Financial Results (Three Months Ended March 31) | Metric | 2024 (in thousands) | 2023 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Total Revenue | $105,493 | $174,578 | (39.6)% | | Income (Loss) from Operations | $63,974 | $135,199 | (52.7)% | | Total Operating Expense | $41,519 | $39,379 | 5.4% | - The significant decrease in total revenue was driven by a $63.6 million swing from a gain to a loss on commodity derivative instruments[253] Revenue Oil and condensate sales increased by 16.9% in Q1 2024, while natural gas and NGL sales decreased by 26.8% due to lower prices, and a significant shift from a $52.3 million gain to an $11.3 million loss on commodity derivative instruments led to a substantial overall revenue decline Revenue Breakdown (Three Months Ended March 31, in thousands) | Revenue Source | 2024 | 2023 | Change | Change (%) | | :------------- | :--- | :--- | :----- | :--------- | | Oil and condensate sales | $71,224 | $60,909 | $10,315 | 16.9% | | Natural gas and NGL sales | $42,011 | $57,423 | $(15,412) | (26.8)% | | Lease bonus and other income | $3,548 | $3,975 | $(427) | (10.7)% | | Gain (loss) on commodity derivative instruments | $(11,290) | $52,271 | $(63,561) | (121.6)% | | Total Revenue | $105,493 | $174,578 | $(69,085) | (39.6)% | - Oil and condensate production volumes increased, driven by higher mineral and royalty production in the Permian Basin[223] - Unrealized losses on commodity contracts in Q1 2024 were primarily due to changes in forward oil price curves, while Q1 2023 gains were from natural gas curves[224] Operating Expenses Total operating expenses increased by 5.4% in Q1 2024, driven by higher production costs and general and administrative expenses, partially offset by decreased lease operating expense Operating Expenses (Three Months Ended March 31, in thousands) | Expense Category | 2024 | 2023 | Change | Change (%) | | :--------------- | :--- | :--- | :----- | :--------- | | Lease operating expense | $2,432 | $2,668 | $(236) | (8.8)% | | Production costs and ad valorem taxes | $13,038 | $12,667 | $371 | 2.9% | | Depreciation, depletion, and amortization | $11,639 | $11,147 | $492 | 4.4% | | General and administrative | $14,090 | $12,648 | $1,442 | 11.4% | - Production costs and ad valorem taxes increased primarily due to severance tax refunds received in Q1 2023 with no similar activity in Q1 2024[19] - General and administrative expenses increased due to higher professional costs, including outside legal fees and consulting for internal projects[20] Interest Expense Interest expense decreased by 22.7% in Q1 2024 compared to Q1 2023, primarily due to lower average outstanding borrowings under the Credit Facility, consisting mainly of commitment fees and amortization of debt issuance costs Interest Expense (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | Change | Change (%) | | :----- | :--- | :--- | :----- | :--------- | | Interest expense | $629 | $814 | $(185) | (22.7)% | - The decrease in interest expense was driven by lower average outstanding borrowings under the Credit Facility[227] Liquidity and Capital Resources The Partnership's primary liquidity sources are cash from operations and Credit Facility borrowings, used for unitholder distributions, debt reduction, and business investments, with operating cash flows decreasing and investing activities increasing cash usage in Q1 2024 - Primary liquidity sources are cash from operations and Credit Facility borrowings, used for distributions, debt reduction, and investments[22] - Operating cash flows decreased in Q1 2024 due to reduced natural gas and NGL sales from lower commodity prices[229] - Investing activities increased cash usage due to $23.0 million in oil and natural gas property acquisitions in Q1 2024[24][231] Overview The Partnership plans to finance future acquisitions with cash from operations, Credit Facility borrowings, and future equity/debt issuances, with long-term working interest capital needs funded by farmout agreements and internally generated cash flows - Future acquisitions will be financed by cash from operations, Credit Facility borrowings, and future equity/debt issuances[228] - Working interest capital needs are primarily funded by farmout agreements and internally generated cash flows[228] - The Board's distribution policy aims for quarterly common unit distributions from operating cash, but there is no legal or contractual obligation[259] Cash Flows Cash flows from operating activities decreased by $32.7 million in Q1 2024 due to lower natural gas and NGL sales, while net cash used in investing activities increased significantly by $22.0 million due to property acquisitions, and net cash used in financing activities decreased by $10.0 million Cash Flow Summary (Three Months Ended March 31, in thousands) | Activity | 2024 | 2023 | Change | | :------- | :--- | :--- | :----- | | Operating Activities | $104,460 | $137,155 | $(32,695) | | Investing Activities | $(23,964) | $(1,954) | $(22,010) | | Financing Activities | $(110,322) | $(120,358) | $10,036 | - The decrease in operating cash flows was mainly due to reduced natural gas and NGL sales from lower realized commodity prices[229] - The increase in cash used in investing activities was primarily due to $22.97 million in acquisitions of oil and natural gas properties in Q1 2024[24][125] Development Capital Expenditures The 2024 capital expenditure budget for non-operated working interests is approximately $2.3 million, net of farmout reimbursements, with $0.3 million invested in Q1 2024 primarily for workovers and recompletions, and an additional $0.7 million spent on acquiring leases - The 2024 capital expenditure budget for non-operated working interests is approximately $2.3 million, net of farmout reimbursements[262] - $0.3 million of the capital budget was invested in Q1 2024, primarily for workovers and recompletions on existing wells[262] - $0.7 million was spent on acquiring leases around drilling programs through March 31, 2024[262] Acquisitions In Q1 2024, the Partnership acquired $23.0 million in unproved oil and natural gas properties, primarily in the Gulf Coast, funded by operating activities, as part of its ongoing commercial strategy for targeted mineral and royalty acquisitions - In Q1 2024, the Partnership acquired $23.0 million in unproved oil and natural gas properties, primarily in the Gulf Coast[231] - These acquisitions were funded with cash from operating activities[231] - The commercial strategy includes ongoing targeted mineral and royalty acquisitions to complement existing positions[231] Credit Facility The Partnership's senior secured revolving Credit Facility has a maximum credit amount of $1.0 billion and matures on October 31, 2027, with the borrowing base reaffirmed at $580.0 million in April 2024 and cash commitments maintained at $375.0 million - The Credit Facility has a maximum credit amount of $1.0 billion and terminates on October 31, 2027[263] - The borrowing base was reaffirmed at $580.0 million in April 2024, with cash commitments maintained at $375.0 million[263] - The next semi-annual redetermination of the borrowing base is scheduled for October 2024[263] Contractual Obligations As of March 31, 2024, there have been no material changes to the Partnership's contractual obligations previously disclosed in its 2023 Annual Report on Form 10-K - No material changes to contractual obligations were reported as of March 31, 2024, compared to the 2023 Annual Report on Form 10-K[27][276] Critical Accounting Policies and Related Estimates As of March 31, 2024, there have been no significant changes to the Partnership's critical accounting policies and related estimates previously disclosed in its 2023 Annual Report on Form 10-K - No significant changes to critical accounting policies and related estimates were reported as of March 31, 2024[44][264] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the Partnership's exposure to market risks, primarily commodity price risk for oil, natural gas, and NGLs, and interest rate risk on its indebtedness, while also addressing counterparty and customer credit risk - The Partnership's major market risk exposure is the pricing of oil, natural gas, and NGLs, which are historically volatile[28][277] - Derivative financial instruments are used to reduce exposure to commodity price volatility[28][277] - The Partnership also has exposure to changes in interest rates on its indebtedness and counterparty credit risk[29][30][279] Commodity Price Risk The Partnership's primary market risk is the volatile pricing of oil, natural gas, and NGLs, which it mitigates using commodity derivative financial instruments, and a hypothetical 10% discount to SEC commodity pricing would reduce proved reserve volumes by approximately 2.2% - The Partnership's major market risk is the volatile pricing of oil, natural gas, and NGLs, driven by global and U.S. market dynamics[28][277] - Commodity derivative financial instruments (fixed-price swaps) are used to reduce exposure to price volatility, settling monthly based on NYMEX benchmarks[28][217][234] - A hypothetical 10% discount to SEC commodity pricing would reduce proved reserve volumes by approximately 2.2%[278] Counterparty and Customer Credit Risk The Partnership faces credit risk from receivables generated by its operators' production activities, but believes its credit risk associated with operators and customers is acceptable, and evaluates the credit standing of its seven derivative contract counterparties, all rated Baa2 or better by Moody's - Principal credit risk arises from receivables generated by operators' production activities[29][235] - The Partnership believes its credit risk with operators and customers is acceptable[235] - All seven derivative contract counterparties are rated Baa2 or better by Moody's[143][265] Interest Rate Risk The Partnership has exposure to changes in interest rates on its indebtedness, with weighted average outstanding borrowings of $0.3 million at a 7.92% weighted average interest rate for Q1 2024, and a 1% increase would have a de minimis impact on interest expense - The Partnership is exposed to interest rate risk on its indebtedness[30][279] - For Q1 2024, weighted average outstanding borrowings were $0.3 million at a 7.92% weighted average interest rate[30] - A 1% interest rate increase would have a de minimis impact on interest expense for Q1 2024[30] 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 Q1 2024 - Management concluded that disclosure controls and procedures were effective as of March 31, 2024, providing reasonable assurance[280] Evaluation of Disclosure Controls and Procedures As of March 31, 2024, management concluded that the Partnership's disclosure controls and procedures were effective in providing reasonable assurance that required information is accumulated, communicated, recorded, processed, summarized, and reported timely - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[280] - These controls are designed to ensure timely accumulation, communication, recording, processing, summarization, and reporting of required information[280] Changes in Internal Control over Financial Reporting There were no changes in the Partnership's internal control over financial reporting during the quarter ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting - No material changes in internal control over financial reporting occurred during Q1 2024[31][267] PART II – OTHER INFORMATION Item 1. Legal Proceedings The Partnership is involved in routine litigation, disputes, or claims arising from its business activities, and management believes none of these will have a material adverse effect on its financial condition, cash flows, or results of operations - The Partnership is involved in routine litigation and claims in the ordinary course of business[48] - Management believes pending litigation will not have a material adverse effect on financial condition, cash flows, or results of operations[48] Item 1A. Risk Factors This section directs readers to consider the risk factors outlined in the 2023 Annual Report on Form 10-K, stating no material changes except as updated in this report, and noting that additional unknown or currently immaterial risks could adversely affect the business - Readers should consider risk factors from the 2023 Annual Report on Form 10-K[268] - No material changes to risk factors were reported, except as updated in this quarterly report[268] - Additional unknown or immaterial risks could adversely affect the business[268] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities and details the common unit repurchase program, which authorized up to $150.0 million in repurchases, though no repurchases were made under this program in Q1 2024 - No unregistered sales of equity securities occurred[33] Recent Sales of Unregistered Securities The Partnership reported no unregistered sales of equity securities during the period - No unregistered sales of equity securities were reported[33] Purchases of Equity Securities by the Issuer and Affiliated Purchasers The Board authorized a $150.0 million common unit repurchase program on October 30, 2023, but no repurchases were made under this specific program in Q1 2024; instead, 286,761 common units were purchased to satisfy tax withholding obligations for incentive awards Common Units Purchased (Three Months Ended March 31, 2024) | Period | Total Number of Common Units Purchased | Average Price Paid Per Unit | Maximum Dollar Value Remaining | | :----- | :------------------------------------- | :-------------------------- | :----------------------------- | | January 1 - January 31, 2024 | 92,614 | $16.04 | $150,000,000 | | February 1 - February 29, 2024 | 193,914 | $14.91 | $150,000,000 | | March 1 - March 31, 2024 | 233 | $15.05 | $150,000,000 | | Total for Q1 2024 | 286,761 | $15.28 (weighted average) | $150,000,000 | - The $150.0 million unit repurchase program, authorized on October 30, 2023, allows discretionary repurchases but none were made under this specific program in Q1 2024[34][75] - Common units were purchased to satisfy tax withholding obligations for vested long-term incentive equity awards[86][269] Item 5. Other Information This section states that during the three months ended March 31, 2024, none of the Partnership's directors or executive officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" - No directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q1 2024[53] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, registration rights agreements, long-term incentive award forms, certifications from the CEO and CFO, and Inline XBRL documents - Exhibits include organizational documents (Certificate of Limited Partnership, Amended Partnership Agreement), Registration Rights Agreement, and forms for Long-Term Incentive (LTI) Award Grant Notices[36] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[36] - Inline XBRL documents (Instance, Schema, Calculation, Label, Presentation, Definition Linkbase Documents) are also filed[36] SIGNATURES SIGNATURES The report is duly signed on behalf of Black Stone Minerals, L.P. by its general partner, Black Stone Minerals GP, L.L.C., with signatures from Thomas L. Carter, Jr. (President, CEO, and Chairman) and Evan M. Kiefer (Senior Vice President, CFO, and Treasurer), dated May 7, 2024 - The report is signed by Thomas L. Carter, Jr., President, CEO, and Chairman (Principal Executive Officer)[38] - The report is also signed by Evan M. Kiefer, Senior Vice President, CFO, and Treasurer (Principal Financial Officer)[38] - The signing date is May 7, 2024[57][273]