Black Stone Minerals LP (BSM) Update - April 3

[dan_s]

Today, after filing my Federal Income Tax Return (an annual job that I HATE), I spent several hours looking at BSM.
Our update profile has been posted to the EPG website under the High Yield tab.

> BSM is one of four minerals companies in our High Yield Income Portfolio.
> It is a Master Limited Partnership (MLP), so distributions are partially tax deferred.
> Quarterly Cash Distributions are $0.375/unit ($1.50 per year); annualized yield over 10% based on today's closing price.
> Pristine Balance Sheet with a very conservative management team.
> Hedging program locks in more than enough free cash flow to maintain dividends.
> Favorable production mix of 77% natural gas & NGLs.
> Production guidance shows natural gas production increasing from 160,804 mcfpd in Q4 2024 to a 2025 exit rate over 200,000 mcfpd.
> Lots of their natural gas has direct access to the Gulf Coast LNG exporters, so they get premium gas prices. $3.45/mcf realized gas price in Q4 2024.

BSM is a very safe way to add more exposure to natural gas.

PS: The political "noise" is impacting the global oil market. The U.S. natural gas market is based on supply/demand fundamentals, and it is a very tight market. The DEC25 NYMEX contract for HH natural gas closed at $5.17 today.

[ChuckGeb]

Do BSM’s hedges limit their upside ie swaps or collars vs puts?

[ChuckGeb]

Do BSM’s hedges limit their upside ie swaps or collars vs puts that cover downside risk only?

[Petroleum economist]

Chuck,

Hedging
Blackstone minerals has bought only swaps and no collars for 2025 and 2026. The swaps cover both oil and gas:
• 2025 oil swaps are 2.22 million bbl @ $ 71.22/bbl = 62.7% of the 2025 oil production.
• 2026 oil swaps are for 0.72 million bbl @ $ 66.29/bbl.
• 2025 gas swaps are 43.8 bcf @ $ 3.36-3.45/Mm Btu =71.5% of 2025 gas production.
• 2026 gas swaps are 43.8 bcf @ $ 3.64/Mm Btu.
Through the swaps the returns for 2025 and 2026 are reasonably well guaranteed.

Reserves and production
BSM in 2024 had proven reserves of 57.4 M BoE. This is equivalent to only 4.2 years of 2025 production.
Blackstone has a mediocre history of reserves replacement. The RRR 2019-2024 was only 0.89 and the 2024 RRR was an even lower 0.52.
Based on the reserves and RRR I expect production and consequently shareholder returns over time to gradually decline. I expect the production of 37.7 K BoE/d in 2025 to decline to 30.0 K BoE/d in 2029.

Blackstone production.jpg (28.65 KiB) Viewed 4777 times

Blackstone fluids are 70% gas and 30% oil. With the high gas content, future higher gas prices will partially compensate the decline in production over the next few years.

[ChuckGeb]

Thanks. So they traded the natural gas upside to protect their distributions. their reporting and the recent profile are a bit confusing in that they report production as boepd while they are heavily weighted to gas. Thanks again for the analysis. It seems that security is more important than the upside at this moment in time! and I liek the gas weighting.

[dan_s]

Look carefully at the map on page one of the profile and you will see that BSM owns a lot of minerals in East Texas / West Louisiana. It is an area that holds a lot of natural gas with plenty of pipeline access to the premium markets on the Gulf Coast. A lot of their minerals in Mississippi also have potential for natural gas, if gas prices go over $5.00.

My forecast model is "macro driven". So, just for fun, I took the WTI oil price down to $50/bbl after Q1 2025 just to see what it would do to the Company's operating cash flow. Even with oil at that price for 7 quarters, thanks to their hedging program BSM should have enough free cash flow to maintain their dividends at $1.50/year.

Download the BSM forecast model to Excel and you can change commodity prices at the bottom (row 62 - 105 / columns U to AA).

Keep in mind that BSM is a minerals company. It has no control over the development drilling programs of the upstream companies that have leased the acreage, nor do they have any drilling risk.

It has very stable production. BSM's production should increase in 2025 and 2026 based on the "Activity Update" on page 10 of the profile.

Aethon Energy is a large private upstream company that is running three drilling rigs in the Haynesville. It has already completed 11 new horizontal wells on BSM minerals that are producing at between 20 to 30 MMcf per day < these are "monster" gas wells in the Haynesville Shale.
The Haynesville has direct access to the large LNG exporters on the Gulf Coast.

Harry:
> BSM's proved reserves at December 31, 2024, are based on the very misleading SEC natural gas price of $2.13/mcf (average gas price over the previous 12 months).
> BSM's actual proved and probable reserves are much higher. Because of the SEC's requirement that only reserves that are going to be developed in the next five years can be counted as proved AND the fact that minerals companies don't control the pace of drilling, their proved reserves are always understated.
> Note that 70% of BSM's proved reserves are proved developed reserves. That is because of the SEC 5-year rule. They probably only have one or two years of development drilling included in the proved category.
> There will be drilling on BSM minerals for decades to come. Minerals don't expire.
> BSM's production will only decline if there is an extended period of very low natural gas prices.

[Petroleum economist]

Dan, you have some valid points on the reserves in relation to gas prices utilized and wells outside the 5-year plan.
I always try to cover these issues as much as possible.

In 2023 and 2024 Blackstone de-booked about 45 bcf of gas reserves, which is equivalent to about 10% of the total reserves. Part of this may be due to gas price. Unlike others Blackstone does not split out changes due to prices changes. 10% more gas reserves will not make a signifiant change to the production profile.

I also consider history.
Blackstone production has been falling since a peak of 49 K BoE/d in 2019 and my future profile is just an extension of this trend.

Blackstone historic.jpg (30.97 KiB) Viewed 3119 times