Black Stone Minerals (BSM) for High Yield - Aug 7

[dan_s]

BSM is a candidate for our High Yield Income Portfolio.

Stifel: Black Stone Minerals, L.P. (BSM, $14.62, Buy; Target $16.00) by Timothy D. Howard

Long Term Value, but Challenged Near Term Macro; Maintain Buy

BSM posted 2Q19 results ahead of our expectations, although supported by a one-time benefit. The macro environment is causing headwinds, particularly the outlook for natural gas. While activity is declining on Black Stone’s Shelby Trough minerals, management anticipates volumes to remain strong through 2020 and is working to re-lease acreage.
Production guidance was upwardly revised following 2Q19, although this quarter included one-time suspense payments which should normalize into 3Q19. We expect relatively flat production after 3Q19, but believe BSM can maintain a $0.37/quarter distribution with coverage near 1.2x and leverage of 1.1x.
Management suggested buyback activity could pick up given BSM’s valuation. BSM’s 10% yield remains attractive, although an overhang could remain given natural gas macro headwinds.
While we are maintaining our Buy rating, we are adjusting our target price to $16.00.