Author Topic: BSM - Black Stone Minerals, L.P.  (Read 5507 times)

KJP

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BSM - Black Stone Minerals, L.P.
« on: December 12, 2018, 11:41:55 AM »
The few Texans I know all give the same advice:  “Never sell minerals.”  That is the tl;dr investment case for Black Stone Minerals, L.P. (“BSM”).  The longer version follows.

BSM is a lightly levered MLP with 25% insider ownership and no IDRs.  The company owns mineral interests in over 20 million acres across the United States.  Mineral interests are created by severing ownership of underground minerals from ownership of the surface acreage.  The owner of the mineral interest has the right to to come onto the land and extract the minerals without the permission of the surface owner.

Like most mineral owners, BSM generally does not do its own exploration or production.  Instead, it leases its acreage to E&Ps like Chesapeake, BP and XTO, which typically pay BSM a cash “lease bonus” upon signing of the lease and a per unit (barrel or MBTU) royalty (usually 20-25%) for any hydrocarbons actually extracted from the leased acreage.  Once a lease expires, BSM can release the property and earn additional lease bonuses and royalties.

Mineral ownership is a great business model.  All capex (and the risks associated with it) are borne by the E&P, not the mineral owner.  Similarly, the mineral owner pays nothing to develop new or improved drilling technologies, but directly benefits from any advancements made by others because they increase the amount of oil or gas that can be economically extracted from the mineral owner’s acreage.  This creates significant optionality that is impossible to accurately model but nonetheless quite valuable.

Today, only about 30% of BSM’s acreage is currently leased.  In typical MLP-speak, the company refers to the unleased acreage as “cost-free embedded drop-downs” that will lead to future growth, along with growth from additional drilling/recovery on existing leases.

Because BSM is effectively a royalty streamer, I would expect it to trade at a very high multiple to current cash flows, but that is not the case.  The company currently trades at ~8 or 9x distributable cash flow (“DCF”) [necessarily based on a management estimate of the amounts necessary to cover depletion] and yields 9%.  The difference between the DCF yield and the distribution yield represents additional amounts beyond the depletion reserve that management retains to buy additional mineral interests.  The company also often issues units to mineral sellers, and I understand that structuring transactions that way can create significant tax benefits to the seller.

Obviously DCF and yield aren’t the only figures that matter when they’re being extracted from what appears to be a depleting asset.  That would be particularly true of current numbers are inflated by a large number of recently drilled, quickly depleting wells.  On the depletion issue, I note that production from acreage owned by the company at the time of its 2015 IPO has continued to increase, so the company’s production numbers are not obviously inflated by  fast-depleting wells on newly acquired acreage. 

In addition, if you believe hydrocarbon production will continue to increase in the United States over the next several years, then you can look at an overview of BSM’s acreage and ask yourself the likelihood that BSM is going to be a beneficiary of that volume increase.  Similarly, BSM is exposed to the price of oil and gas via the percentage royalties it receives.  To the extent the price of oil and gas increase in the future, BSM would benefit.  So, in a nutshell, BSM is a company that (i) is lightly levered, very capex-light and paying a ~9% yield out of current cash flow, and (ii) will benefit from any increases in hydrocarbon prices or advancements in drilling technology without having to pay any of the costs of developing that technology.

Two final points:  (i) management recently put a unit repurchase program in place to take advantage of the current unit price; and (ii) a few comparable companies have recently converted to C corps, but I don't get the sense that BSM management wants to go that route.
« Last Edit: December 12, 2018, 11:51:50 AM by KJP »


Cigarbutt

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Re: BSM - Black Stone Minerals, L.P.
« Reply #1 on: December 01, 2019, 03:45:38 PM »
The few Texans I know all give the same advice:  “Never sell minerals.”  That is the tl;dr investment case for Black Stone Minerals, L.P. (“BSM”). 
...
Followed the recent reference in a related thread and this is an interesting area. Thanks.
There may be a wave of further consolidation which may bring teams combining technical expertise, relevant understanding of field economics, ability to evaluate the likelihood and timing of further development of actual production and ?discipline. The niche players form only about 2% of the fragmented market, which is huge, in total. After spending some time on this, it appears that there was institutional momentum after 2014 that was kind of procyclical but (this reminds me of the Altius thread with the royalty model smoothing both the upside and the downside and the necessary optimization of the return profile through competent capital allocation) now the price paid for mineral rights may be more neutral, reflecting lower expectations, at least to some degree. Viper Energy Partners is a relevant comparable (more Permian exposure and different composition of revenues) and I like the ticker: VNOM.
The next step is to try to define a valuation range and maybe include one or two in this specific field (including BSM) into some kind of a basket of oil and gas related securities. I like this sector for the mid-term but timing remains the big challenge.
I also have to look into the potential ramifications from potential C-corp conversion.

ratiman

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Re: BSM - Black Stone Minerals, L.P.
« Reply #2 on: February 01, 2020, 02:15:00 PM »
I don't see any news here but it's dropping like there is bad news out there. Does look a bit like the chart of CHK.
« Last Edit: February 01, 2020, 02:16:33 PM by ratiman »

KJP

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Re: BSM - Black Stone Minerals, L.P.
« Reply #3 on: April 21, 2020, 12:21:27 PM »
I like this sector for the mid-term but timing remains the big challenge.

You weren't kidding.  My timing was, to put it gently, poor.  But BSM remains quite interesting to me.  Their hedge book will see them through 2020, though a further dividend cut wouldn't shock me.  Unlike many of the other O&G royalty companies that I'm aware of, they also have large gas-directed acreage, particularly in the Haynesville, and the 2021 gas forward curve has been perking up recently.  All that being said, projecting 2021 volumes is beyond my capability.  Instead, I continue to like this for its inherent optionality.

mjohn707

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Re: BSM - Black Stone Minerals, L.P.
« Reply #4 on: April 21, 2020, 12:33:48 PM »
I like this sector for the mid-term but timing remains the big challenge.

You weren't kidding.  My timing was, to put it gently, poor.  But BSM remains quite interesting to me.  Their hedge book will see them through 2020, though a further dividend cut wouldn't shock me.  Unlike many of the other O&G royalty companies that I'm aware of, they also have large gas-directed acreage, particularly in the Haynesville, and the 2021 gas forward curve has been perking up recently.  All that being said, projecting 2021 volumes is beyond my capability.  Instead, I continue to like this for its inherent optionality.

The market has created a lot of inherent optionality recently for some of us, even where we might have not even wanted much of it
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KJP

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Re: BSM - Black Stone Minerals, L.P.
« Reply #5 on: April 23, 2020, 07:06:49 AM »
I like this sector for the mid-term but timing remains the big challenge.

You weren't kidding.  My timing was, to put it gently, poor.  But BSM remains quite interesting to me.  Their hedge book will see them through 2020, though a further dividend cut wouldn't shock me.  Unlike many of the other O&G royalty companies that I'm aware of, they also have large gas-directed acreage, particularly in the Haynesville, and the 2021 gas forward curve has been perking up recently.  All that being said, projecting 2021 volumes is beyond my capability.  Instead, I continue to like this for its inherent optionality.

Well, that didn't take long.  Black Stone announced a distribution cut this morning:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-declares-distribution-common-units-and-2

Given the lack of any significant price reaction, this wasn't a surprise to many.

Note the commentary on the 2020 hedge book and weighting towards natural gas. 
« Last Edit: April 23, 2020, 07:08:54 AM by KJP »

Cigarbutt

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Re: BSM - Black Stone Minerals, L.P.
« Reply #6 on: April 23, 2020, 08:14:13 AM »
...
Well, that didn't take long.  Black Stone announced a distribution cut this morning:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-declares-distribution-common-units-and-2

Given the lack of any significant price reaction, this wasn't a surprise to many.

Note the commentary on the 2020 hedge book and weighting towards natural gas.
What happens after a distribution or dividend cut can be interesting and can result in buying opportunities.
It depends on the balance between those who see related change in intrinsic value and those who don't.
So, in this specific case, trading appears to reflect some kind of rotation.
For disclosure, as a CDN, i don't plan to invest in this LP structure but find the sector interesting (now with a long term mindset although i suspect that this will be a recurring theme for a while) and may eventually contribute for CDN equivalents.

bskptkl

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Re: BSM - Black Stone Minerals, L.P.
« Reply #7 on: April 23, 2020, 09:04:37 AM »
This seems like a reasonable way to fade oil price crash. Thanks for starting thread. I added to small position I started last week. Seems to me it's better to make large div cut now and get it over with.

thepupil

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Re: BSM - Black Stone Minerals, L.P.
« Reply #8 on: April 23, 2020, 09:29:51 AM »
this is my parents largest energy position. first purchase at $9.60, last purchase at $4.40, average cost in the $7's. I like it because I think it is non-binary [one might say it's basin-fluid ; ) ] in that you have some Permian, some Haynesville, some Marcellus, Bakken, it is rapidly de-levering with hedged cash flow, and it has no capital spend requirements. I view it as a permanent holding where intrinsic value is extremely squishy and there is a wide range of outcomes. Plan is to just hold on and not re-invest the distributions.

think it will return its cost within 5-10 years, gravy thereafter, big optionality on becoming a scaled advantaged consolidator of royalties via accretive tax efficient issuance to wealthy families.
« Last Edit: April 23, 2020, 09:32:23 AM by thepupil »

KJP

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Re: BSM - Black Stone Minerals, L.P.
« Reply #9 on: May 05, 2020, 07:10:13 AM »
Apparently North American oil and gas drilling isn't dead:  https://investor.blackstoneminerals.com/news-releases/news-release-details/black-stone-minerals-lp-announces-agreement-aethon-energy

Note that this is gas-directed drilling and that Black Stone did give Aethon "reduced royalty rates and exclusive access to Black Stone’s mineral and leasehold acreage in the contract area."  So it appears that the natural gas forward curve is doing its work.  This is also one of the benefits of owning the most diversified (in terms of basins) royalty company. 

For context, Black Stone is a big owner in the Haynesville and invested a lot of capital with XTO and BP to develop it (that's where the working interests on the balance sheet are from).  Those companies scaled down their Haynesville plans due to the collapse of gas prices, and it was unclear when they are another E&P would step back into this acreage.