Black Stone Minerals Q3 Earnings: Stronger Than Expected Production (NYSE:BSM)

Black Stone Minerals (NYSE:BSM) has given an improved outlook for its 2H 2022 production, one quarter after reducing expectations due to some well completion delays on its acreage. The stronger than expected production allowed Black Stone to bump up its Q3 2022 distribution to $0.45 per unit. There is a good chance that Black Stone’s distribution cash flow will be lower in Q4 2022 (compared to Q3 2022), but I’d expect it to maintain its distribution next quarter before potentially raising it again during 2023 with its much-improved hedging situation.

The strength in its natural gas production increases its value by around $1.00 to $1.50 per unit compared to the value I had estimated for it before. This assumes a long-term (after 2023) $70 WTI oil and $4.00 NYMEX gas scenario.

Strong Q3 2022 Results

Black Stone’s Q3 2022 results were significantly better than previously expected. Black Stone had expected its 2H 2022 production to be negatively affected by delays from global supply chain interruptions and increased cycle times on some of its high-interest acreage. This led Black Stone to expect that its full-year production volumes would be at the low end of its 34,000 to 37,000 BOEPD guidance range, which suggested roughly 35,000 BOEPD in production for the second half of 2022.

Now Black Stone expects its total production for 2022 to be at or above the midpoint of that 34,000 to 37,000 BOEPD guidance range. It reported 40,000 BOEPD in total production in Q3 2022, boosted by “numerous first payments received on new wells brought online at high initial flow rates”. Black Stone noted that it typically receives initial payments covering multiple months of production, so high initial production rates can boost its reported production volumes by a fair bit. Black Stone’s production growth is being driven by natural gas wells, which pushed up its natural gas percentage to 77% in Q3 2022, up from 71% in Q2 2022.

Black Stone also expects to receive additional initial payments in Q4 2022 that will boost its production during that quarter, above its earlier expectations. Black Stone now expects 36,000 BOEPD in Q4 2022 production, with upside if the new well activity that it saw in Q3 2022 continues in Q4 2022. At the end of Q3 2022, Black Stone had 92 rigs running on its acreage, up from 81 rigs at the end of Q2 2022.

Effect On Distribution

Due to the stronger than expected production, Black Stone was able to bump its Q3 2022 distribution up to $0.45 per unit, with 1.24x distribution coverage. I had believed that it would keep its quarter distribution at $0.42 per unit for the second half of 2022, with distribution coverage of around 1.1x based on its prior expectations for around 35,000 BOEPD in production in 2H 2022.Black Stone’s distributable cash flow is likely to be a bit lower in Q4 2022 due to a combination of weaker commodity prices and potentially lower production. I now expect it to keep its distribution around $0.45 per unit (which would be close to 1.0x distribution coverage) for Q4 2022 before potentially increasing it again next year.

Updated 2023 Outlook

If we now assume that Black Stone can average 40,000 BOEPD (77% natural gas) production in 2023, it would generate approximately $619 million in oil and gas revenues after hedges. Black Stone’s hedging situation is much improved, with its oil hedged around $80 and natural gas hedged at a bit over $5. Thus Black Stone’s 2023 hedges have approximately negative $2 million in estimated value at current strip.

Type	Barrels/Mcf	Realized $ Per Barrel/Mcf	Revenue ($ Million)
Oil (Barrels)	3,376,250	$80.00	$270
Natural Gas [MCF]	67,342,500	$5.10	$343
Lease Bonus and Other Income			$8
Hedge Value			-$2
Total			$619

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Thus Black Stone could generate $484 million ($2.31 per unit) in distributable cash flow in 2023 at current strip prices. This would support a $0.50 per unit quarterly distribution with 1.16x distribution coverage and would allow Black Stone to eliminate its debt by the end of 2023 (before potential spending on unit repurchases).

	$ Million
Lease Operating Expense	$12
Production Costs And Ad Valorem Taxes	$63
Cash G&A	$37
Cash Interest	$2
Preferred Distributions	$21
Total Expenses	$135

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Valuation

Due to increased natural gas production expectations, Black Stone’s estimated value has been bumped up to approximately $18.50 to $19.00 per unit in a long-term (after 2023) $70 WTI oil and $4.00 NYMEX gas scenario. Thus at those long-term prices, Black Stone appears roughly fairly priced, although it would also be able to offer a slightly above 10% yield (with close to $2 per unit in distributable cash flow).

A scenario with long-term $75 WTI oil and $4.50 NYMEX gas instead would bump up Black Stone’s estimated value by approximately $2 per unit, to a range of $20.50 to $21.00 per unit.

Conclusion

Black Stone Minerals bumped up its expectations for 2H 2022 production by at least 3,000 BOEPD, driven significantly by new Haynesville natural gas wells. This allowed Black Stone to increase its distribution to $0.45 per unit for Q3 2022 and it has a good path to support a $0.50 per unit distribution in 2023.

From a unit price perspective, Black Stone Minerals appears fairly priced for a long-term $70 WTI oil and $4.00 NYMEX gas scenario. It can also offer a yield slightly above 10% with those commodity prices. At long-term $75 WTI oil and $4.50 NYMEX gas, Black Stone has a couple dollars in upside.