Black Stone Minerals, L.P. (BSM) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Unitholders of Black Stone Minerals. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Thomas L. Carter, Jr., Chairman of the Board. Sir, the floor is yours.

Thank you. Good afternoon, ladies and gentlemen. It is now 12:00, and in accordance with the notice of the annual meeting, I call the Black Stone Minerals, L.P. 2020 Annual Meeting of Limited Partners to order. I'm Tom Carter, Chief Executive Officer and Chairman of the Board, and a candidate for election as Director. I will preside at today's meeting, and Steve Putman will act as secretary of the meeting. On behalf of the Board, I welcome you to the 2020 meeting. I would like to take a moment to introduce the members of our current Board of Directors and executive officers. The nonmanagement directors in attendance today are William Bardel, Carin Barth, Mark DeWalch, Ricky Haeflinger, Jerry Kyle, Mike Linn, John Longmaid, Will Mathis, Will Randall, Sandy Stuart and Allison Thacker. The executive officers in attendance today are Steve Putman, Dawn Smajstrla and Jeff Wood. In addition, I would like to recognize John Russell and Jill Ahrens, who are also in attendance as representatives of Ernst & Young LLP, our current independent registered public accounting firm. Mr. Russell and Ms. Ahrens will be available to answer questions during the Q&A period following the adjournment of formal business. I've appointed Steve Putman to act as the inspector of elections for the meeting. The inspector of elections has taken the oath of office, which are directed to be filed with the partnership's records. Mr. Secretary?

It is important that we have an orderly meeting. You can access the agenda via the web portal, which we will strictly follow in carrying out the business of this meeting. As you will see on the agenda, time has been allotted later in the meeting for discussion as well as any questions or comments you may have concerning the matters to be voted upon this afternoon. Please keep in mind that as this year's meeting is a virtual-only format, you will be able to submit questions that we will answer at the appropriate time later in the meeting as long as the questions are relevant to the meeting. So that all of the items are on the agenda may be presented before that time, the election of directors, the auditor ratification and the say-on-pay vote will be presented first in succession without comment. After these matters have been presented, the polls will be opened and questions relating to these matters may be asked for up to 15 minutes. After which time, the polls will be closed. If you intend to vote at the meeting, please send a message through the web portal now so that we can ensure that the polls remain open long enough for you to complete voting. After presentation of the matter to be voted on, you may vote via the web portal. Of course, if you have already voted, you need not vote again at this meeting. If you have not voted or if you would like to change your vote, you may do so by following the directions in the web portal. Again, please be assured that later in the meeting after the action items on today's agenda have been presented, appropriate questions and comments will be answered. If any unitholder has any matter of individual concern, please raise it after the meeting.

Thank you, Mr. Secretary. There are a few formalities to cover before we get into the business of the meeting. Will the secretary please report on the record date, listing of unitholders, notice, quorum and matters to be considered at today's annual meeting?

April 20, 2020 was set by resolution of the Board of Directors as the record date for today's annual meeting. All unitholders of record or their proxy holders at the close of business on April 20 are entitled to vote at the annual meeting. If you would like to view the listing of unitholders as of the record date, please ask a question saying so, and we will provide the list. Notice of this meeting was duly given in accordance with the partnership agreement. We received an affidavit from the partnership's transfer agent, American Stock Transfer & Trust Company, certifying that the notice of Internet availability of proxy materials was sent to all unitholders on or about April 29, 2020. The affidavit will be filed with the partnership's records. As set forth in the agenda and in the notice of the annual meeting, the matters to be considered at today's annual meeting are: first, the election of directors to the Board of Directors of the General Partner, each to serve until the 2021 Annual Meeting of Limited Partners, and thereafter, until such directors' successor shall have been duly elected and qualified or until such directors' earlier death, resignation or removal, which we refer to as the director-elect. Second, the ratification of the appointment of Ernst & Young LLP as the partnership's independent registered public accounting firm for the fiscal year ending December 31, 2020, which we refer to as the auditor ratification. And last, the approval on a nonbinding advisory basis of the compensation of the General Partners' named executive officers for the fiscal year ended December 31, 2019, which we refer to as the say-on-pay vote. Each of the matters to be considered today is described in the proxy statement, which accompany the notice of the annual meeting.

Thank you. The secretary has advised us that there is a quorum -- that a quorum is present. Legal notice having been given, this meeting is now convened and open for the transaction of business, and the items of business being submitted to the unitholders for action at today's meeting have previously been described by the secretary. The first item of business is director election. The Board nominees for election are: Carin Barth, Thomas Carter, Mark DeWalch, Jerry Kyle, Mike Linn, John Longmaid, Will Mathis, Will Randall, Sandy Stuart and Allison Thacker. The second item of business is the auditor ratification. The final item of business is the say-on-pay vote. There are no other proposals to come before this meeting since management has not made any other proposals, and no other proposals were submitted by unitholders in the manner prescribed in the partnership agreement, which requires that certain information concerning unitholder proposals be provided to the partnership before the date of the meeting. It is now 12:07 on June 18, 2020, and I now declare the polls open for voting on the items of business. It is important that each unitholder be given an opportunity to cast his or her vote. Accordingly, the polls will remain open for up to 15 minutes if the unitholder has indicated through the portal that he or she wishes to vote. If you've already voted, you need not vote again at this meeting. If you have not voted or if you would like to change your vote, you may do so by following the directions on the web portal. You may vote at this time. [Voting]

I guess that…

There is nothing.

Okay. This concludes the matters to be considered and voted upon at today's meeting. It's now 12:08 on June 18, 2020. I now declare the polls closed subject to the 15-minute -- is that right?

They are closed.

Okay. They are closed. The inspector of elections will count the votes. Will the secretary please announce the preliminary voting results?

Based on preliminary tabulation of the votes, a plurality of the votes cast were in favor of each of the partnership's nominees for directors of the General Partner, each to serve until the 2021 Annual Meeting of Limited Partners and thereafter until such directors' successor should have been duly elected and qualified or until such directors earlier death, resignation or removal. Based on preliminary tabulation of the votes, a majority of the votes cast were in favor of ratification of the appointment of Ernst & Young LLP as the partnership's independent registered public accounting firm for the fiscal year ending December 31, 2020. Based on the preliminary tabulation of the votes, a majority of the votes cast were in favor of the approval on a nonbinding advisory basis for the compensation of the General Partner's named executive officers for the fiscal year ended December 31, 2019. The final voting results will be tallied and subsequently announced in accordance with requirements of the Securities and Exchange Commission.

Thank you. Before we adjourn the formal business of the meeting, I would like to take a moment to thank Bill Bardel and Ricky Haeflinger for their service as Directors of Black Stone Minerals for many years. These gentlemen have been excellent board members and have been very thorough in their thoughtfulness towards the governance of this company and have participated extensively in our committee structure, and we will miss them in the future. Thank you, gentlemen. Following the conclusion of the business portion of this meeting, we will continue with a presentation by the partnership management and question-and-answer session. I'm aware of no other business that should be brought before this meeting. Accordingly, I declare this meeting adjourned.

Ladies and gentlemen, gentlemen, this concludes the meeting. You may now disconnect, and have a pleasant day.

Wait. Hold on.

Yes?

We're doing a quick -- that's the adjournment of the formal meeting. So we're going to do a quick presentation.

Thank you.

Okay. All right. We will now present a report to our shareholders, which I think you can find on our website, or hopefully have found on our website. It is entitled Annual Meeting Presentation June 2020, opens with the forward-looking statement, which I'm sure you have all read and digested. Page 3 is a recap of the slide that you have seen in the past. Just quickly recapping Black Stone's key metrics. Our enterprise value of $2.2 billion; current yield, 4.4% in distributions; 17% on distributable cash flow; first quarter 2020 production was 46,900 BOE per day; inside ownership greater than 25%, legacy owners greater than 80%. The second -- Page #4 shows a slide that you've all seen many times before, running from 1980 through today, where we have gone from ownership in around 200,000 acres to ownership in over 20.4 million acres, and there is a map that shows where those are, and we own positions in substantially all of the major producing basins in the lower 48 of the United States. We have a very diversified portfolio. As you can see in Q1, we were -- have had 38% of our production come from the Shelby Trough in Haynesville, another 10% from the Louisiana side of Haynesville, totaling almost 50% of our production. We have 16% in the Midland and Delaware, 10% almost from the Bakken, Eagle Ford is 2%, and other, which is everything else we own, which is a very important part of our business, is 25%. Our Q1 production in terms of volumes on an Mboe basis were 73% gas, 27% oil or liquids. You all know and have seen what's been going on in our industry, and we are in unprecedented times. World oil supply and demand, demand has fallen from around $95 million barrels per day to something in the -- this is $80s, but I think it's actually a little bit lower than that. And supply has come down as well, but not as fast, from around 96 million BOE per day to around 90 million BOE per day, and a substantial gap has opened between supply and demand, primarily and very importantly, caused by the global pandemic and the shutdown of the global economy and consumption of energy. That has caused the U.S. horizontal rig count to fall from 700-or-so at the end of last year to approximately 250 rigs working in the U.S. right now. That's a decline of 64%. Someone noted at our Board meeting that frac crews and fracking have even declined further than that, somewhere in the 80% range, which indicates even today, some of the many fewer wells that are being drilled, they are still being drilled and uncompleted. U.S. E&P CapEx amongst a select group of companies, which is representative, we think, of the broader industry, have declined by approximately 40% from where they stood in guidance at the beginning of the year to where we see them now. And production trends have fallen off significantly, crude oil production is down by 15% and gas production is down by 10%, and they're both still at least through the first part of the year in excess of demand. Black Stone's response to this situation, which is unprecedented certainly in my career, and maybe as far back as the discovery of the East Texas field before or -- in February, even before the impact of the coronavirus, Black Stone took significant steps to reduce its controllable costs. We reduced size of workforce by approximately 20%. We reduced executive compensation. Total target executive comp is down 64% in 2020 compared to 2019 and we reduced our Board compensation as well. Total G&A costs expected to decline from around $65 million to sub-$40 million run rate this year. We lowered the distribution to direct significant free cash flow to further pay down our debt balance. Our debt has been reduced by $60 million year-to-date. We have concluded -- well, let me restate, we have concluded signing purchase and sale agreements covering $155 million in targeted asset sales to accelerate debt reduction objectives and to create a potential for higher payout ratios, i.e., higher distributions in Q2 through the rest of the year. Total debt outstanding expected to be below $200 million post closing the July '20 -- post our closing of those events in July of 2020. Black Stone is seeing strong balance sheets through cycles. Our strategy has always been to maximize financing flexibility for new acquisition opportunities, funding sources of public market, roughly $70 million of shares issued through our ATM at the market program since 2017, private capital, $300 million convertible preferred issued in November of 2017. Equity issued directly to sellers of properties since the beginning of 2017, approximately $95 million issued through Q1 '20. Credit facility availability, Black Stone regularly maintains $100 million to $200 million of dry powder on its loan. We've got a long-term history of returning cash to our equity holders. Distribution yield supported by coverage. We have distributed $3.6 billion to our investors through the distribution over the past 20 years. That's a 2.2x return on invested capital to date, with a pretty good long runway ahead of us. We've had consistent return performance across commodity cycles on average -- return on average capital employed in the high teens. And very, very well positioned within our industry. Active management, 20 million acres, 7 point million net of opportunity leads to organic growth with no incremental capital requirements. Black Stone's team of landmen, engineers and geologists actively promoted its acreage to industry operators. Most recent example is partnering with Aethon to restart development in the Shelby Trough Haynesville/Bossier acreage in Angelina County, following the departure of British Petroleum from that area. Current leased acreage we have, 26% of our acreage is leased, generating current cash flow, infill and multi-zone development, acceleration opportunities therein as well. 74% of our acreage is unleased. This is opportunity for new lease bonus, new production from emerging plays or technological advances and cost-free embedded drop-downs of producing properties into our production mix. We mentioned restarting the Shelby Trough. Shelby Trough is important to Black Stone. It's one of our core areas. It's a prolific natural gas play in the southern extent of the Haynesville/Bossier play in East Texas. Black Stone is the single largest landowner in parts of this area. Two original operators in the area significantly slowed development activities in 2019 going into contraction in our history. In May 2020, Black Stone after quite a lot of negotiation with Aethon entered into a new partnership with Aethon to initiate new development in our Angelina County acreage. Black Stone also reached an agreement with XTO Energy in June of 2020 to begin completing 13 drilled but uncompleted wells, or otherwise known as DUCs, on our Brent Miller San Augustine County area that we expect those to be fully online by the end of the first quarter of '21 and will have a meaningful add to our production. Black Stone is currently marketing other Shelby Trough development opportunities in San Augustine County as well. As we stated, we have 20 million acres of opportunity in many basins across the United States, which you can see on Page 12 of the presentation. And when properties are appropriate for being developed, either due to natural economics or incentivizing operators to spend their capital on us through royalty reduction programs, we intend to continue to work diligently to keep our properties in play and manage our production profile for years to come. That ends the formal presentation for today. I would just conclude before the Q&A period of reiterating what we all know is obvious, and that is that we have gone through -- we're going through a global period of unprecedented health issues, economic issues and social issues, and we are being conservative in our management of our company so that we will be around for the long haul to be able to continue to be a source of cash flow to our unitholders. And we are -- we have been working very hard. Our team has been putting in as much time as they ever have over the last couple of months. And I'm very proud of what they have achieved, and I thank them very much for everything they have done on behalf of the unitholders. And we look forward to smoother seas and clearer skies. With that, we'll open it up for Q&A.

There are no questions.

We have no questions posted. So I presume, with that, on behalf of Black Stone Minerals and the Board of Directors and employees of Black Stone, I want to thank you for attending today's meeting. Hopefully, next year, we will be together in person. Thank you.

Ladies and gentlemen, this concludes the meeting. You may now disconnect, and have a pleasant day.