Black Stone Minerals (BSM): Distributable Cash Flow May Exceed $500 Million In 2023

Black Stone Minerals (NYSE:BSM) may benefit significantly from very strong natural gas prices starting in 2023. Around 72% of Black Stone’s production is natural gas and nearly half of its total production comes from the Haynesville Shale and Shelby Trough, which are areas that are well positioned to service the increasing LNG exports.

Black Stone does partially benefit from strong commodity prices in 2022, but is also projected to suffer significant hedging losses this year. As a result, Black Stone’s projected distributable cash flow for 2023 is close to $100 million higher than its projected distributable cash flow for 2022. This is due to reduced hedging losses more than offsetting lower strip prices next year.

Updated 2022 Outlook

The 2022 strip for NYMEX natural gas has improved to around $7.25. At that price (combined with high-$90s WTI oil) Black Stone Minerals is now projected to generate $786 million in revenues before hedges.

Black Stone has the majority of its production hedged for 2022 and these hedges have an estimated negative $219 million in value at current strip.

Type	Barrels/Mcf	Realized $ Per Barrel/Mcf	Revenue ($ Million)
Oil (Barrels)	3,781,400	$96.00	$363
Natural Gas [MCF]	58,341,600	$7.25	$423
Lease Bonus and Other Income			$15
Hedge Value			-$228
Total			$567

This results in a projection of $415 million in distributable cash flow during 2022, or $1.98 per common unit.

	$ Million
Lease Operating Expense	$11
Production Costs And Ad Valorem Taxes	$80
Cash G&A	$37
Cash Interest	$3
Preferred Distributions	$21
Total Expenses	$152

That amount of distributable cash flow would allow Black Stone the ability to pay an average quarterly distribution of $0.425 per unit related to its 2022 results while also paying its net debt down to around $21 million by the end of the year.

Black Stone also has a $75 million unit repurchase program, although it has only spent $4.2 million on repurchasing units since it started the repurchase program in November 2018.

Updated 2023 Outlook

At current 2023 strip of mid-$80s WTI oil and $5.90 NYMEX gas, Black Stone is projected to generate $652 million in revenues after hedges.

Black Stone is mostly unhedged (only 5% hedged) on oil for 2023, but has added some additional natural gas hedges so that it is now approximately 26% hedged on natural gas for 2023. Between mid-February and late-April it added hedges covering 12% of its 2023 natural gas production at an average price of $5.04

Black Stone’s significantly reduced hedging losses for 2023 means that it should generate higher distributable cash flow next year despite strip prices being lower.

Type	Barrels/Mcf	Realized $ Per Barrel/Mcf	Revenue ($ Million)
Oil (Barrels)	3,781,400	$83.00	$314
Natural Gas [MCF]	60,531,600	$5.90	$357
Lease Bonus and Other Income			$11
Hedge Value			-$30
Total			$652

Black Stone is now projected to generate $510 million in distributable cash flow for 2023 at current strip, or $2.44 per common unit. This could allow it to pay a $0.55 per unit quarterly distribution while also putting $50 million towards unit repurchases or further debt reduction.

	$ Million
Lease Operating Expense	$11
Production Costs And Ad Valorem Taxes	$72
Cash G&A	$37
Cash Interest	$1
Preferred Distributions	$21
Total Expenses	$142

Notes On Valuation

The prospect for high near-term distributable cash flow (particularly in 2023) increases Black Stone’s estimated value to around $16.30 per unit in a scenario where commodity prices average $70 WTI oil and $3.50 NYMEX gas after 2023. With long-term $75 WTI oil and $3.75 NYMEX gas instead, Black Stone’s estimated value is now around $17.60 per unit.

Conclusion

Black Stone Minerals is now projected to generate $415 million in distributable cash flow in 2022 and $510 million in distributable cash flow in 2023 at current strip. It is benefiting from strong natural gas prices (with 72% of its production being natural gas). Black Stone’s hedges have a significant negative effect on its projected 2022 results, but its 2023 results should be stronger due to fewer current hedges along with the new natural hedges being added at $5+ now.