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spk05: Good morning and welcome to the Blackstone Minerals second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I would like to hand over to Mr. Evan Kiefer, Vice President, Finance and Investor Relations.
spk06: Thank you. And good morning to everyone. Thank you for joining us either by phone or online for the Blackstone Minerals second quarter 2022 earnings conference call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night. Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations, and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday and the risk factors section in our 2021 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. A reconciliation of those measures to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday. which can also be found on our website at blackstoneminerals.com. Joining me on the call from the company are Tom Carter, Chairman and CEO, Jeff Wood, President and Chief Financial Officer, Steve Putman, Senior Vice President and General Counsel, Carrie Clark, Senior Vice President, Land and Commercial, Garrett Grimion, Vice President of Engineering and Geology, and Thad Montgomery, Vice President of Lands. I'll now turn the call over to Tom.
spk03: Thanks, Evan. Good morning to you all. And thanks for joining our second quarter 2022 financial and operating results call. We generated over $112 million of adjusted EBITDA in the second quarter, which is an increase of 14% over the prior quarter. That resulted in distributable cash flow for the quarter of $107 million. That's the highest level of cash flow in a quarter for Blackstone as a public company. And on the back of that record financial performance, we were able to continue to increase the distribution to the unit holders. Last week, we announced a 42% per unit distribution with respect to the second quarter, which is 5% over the last quarter's distribution and 68% higher than what we paid out for the second quarter last year. We had a lot of tailwinds from commodity prices in the second quarter, with crude averaging over 100%. and natural gas averaging around 7. Overall, I realized prices were up 32% for the quarter. That was helpful for a quarter with relatively low production volumes, especially compared to what we see coming in 2023 and beyond. With that, let's talk about our core plays, production trends, and inventory. We feel pretty good about our production outlook. As many know, our total production volumes, royalty, and working interest peaked in 2019 at just over 50,000 BOE per day. Today, we're at around 34,000 BOE per day. That decline is a result of a number of factors. First, in 2017, we farmed out all of our working interest in the Haynesville, Bossier, Shelby trough play in East Texas. At the end of 18, Our working interest volumes there averaged 12 to 15,000 BOE per day from a 50 million plus annual capital spend we were investing in Shelby Trough prior to the farm out. That capital was strategically spent to foster development of a significant mineral position we hold in that play. We made strategic decisions to focus only on the royalty volumes once that play was proven up and running on its own. As a result, we have incurred no drilling capital in that area since 2017, and working interest volumes have naturally declined over the past five years from about 10,000 BOE a day to our current level of around 3,000 BOE per day. Once again, that's working interest volumes in the Shelby trawl. Lower working interest volumes in the Shelby trawl are the biggest contributor to the decline in our peak production levels. And just when the Shelby Trough development was hitting full stride in 2019, both royalty and otherwise, natural gas prices fell and our major operators in the area shifted to other priorities. BP exited the area entirely and XTO said they were done for several years. Many of you are familiar with our efforts to remarket that acreage in 20 and 21, which resulted in two development agreements we have in place today with Athon Energy covering our available Shelby Trough acreage. This year we will conclude the second program year covering our Angelina County acreage and the first program year covering our San Augustine County acreage with APHON. It continues to be a very important and successful relationship for both of us. The agreement calls for increasing well counts annually for exclusive access to our acreage and preferred royalty rates. The program year requirement is 15 cumulative wells drilled across the area for the current year. That rate increases to 25 wells a year for the program year starting in September of this year. And finally, in the following year, it goes to 27 per program year. These are deep, high-pressured wells. Athon is using fit-for-purpose rigs to reduce cycle times and lower costs. Even choked back, these wells typically come in at over 20 million cubic feet per day and can stay at those rates for over a year. So we see a lot of growth from athon activity in the Shelby Trough. And lo and behold, XTO is back out there in San Augustine as well on our acreage for three wells this year and possibly more going forward. So while our royalty volumes are down by approximately 5,000 BOE per day in the Shelby Trough through 2015, from 2019. Our run rate on royalty-driven growth there is about as good as it's ever been, and we anticipate that the area will spool back up quickly. We've also seen volumes trend up in the Louisiana side of the Hainesville Plague, driven by our efforts to strike accelerated development deals with operators like Comstock, in addition to the general increase in activity by producers responding to the favorable market dynamics of Gulf Coast gas and LNG exports. In the Permian, we peaked at over 6,000 BOE per day by the end of 2019, beginning 2020. Today, we're averaging around 3,500 BOE per day run rate. Remember that in the Permian, in the depths of the pandemic, we sold properties generating approximately thousand seven hundred BOE per day of production to reduce our debt from a peak of four hundred and fifty million dollars to around fifty five million dollars today. We've recently seen new deals in some of our highest interest lands in the Pecos and Reeves County area and expect increasing drilling activity and production growth there as well as and as you know the rest of the acreage tends to follow the trend which is up in the in the permian our new kid on the block is the same as the old one east texas austin chalk since this play was restarted in 2019 in the middle of the commodity downturn and just before the real fun of the pandemic uh took hold there have been 18 wells drilled in this play and we have And we are working towards contractual well commitments on our acreage, delivering a strong line of sight to 25 to 30 wells per year spud over the next 12 months. This part of the Austin chalk play was summarized via very positive report by Inveris on June 29th. And the exciting part of that is that the report didn't include the last well out there that's flowing at 2,200 barrels of oil per day and almost 12 million cubic feet of gas per day. That is a monster well by any standard, and it's part of the reason we're excited about our prospects out there. This Austin chalk place certainly has variability and covers multiple counties. Yet in this environment, we believe many sub areas have solid to outstanding economics. We and our operators in the area are getting up the learning curve quickly on where and how to drill this new generation of chalk wells. We have a lot of inventory and high interest territory. So we're excited about what this might turn into, especially with hundreds of thousands of acres in what may be the core and with that much more in areas still to be tested. And we're continuing discussions now with solid large private and public E&T companies to expand the play towards new areas and previously untested areas where we have significant acreage positions. Certainly more to come on this in coming quarters. The foregoing points to how we went from 2019 peak of over 50,000 BOE per day to the current mid-30,000s. It's a story of voluntary curtailment. a non-op, the sale of some Permian to strengthen our balance sheet, and a period of acute activity reduction during the pandemic. But we see that as in the rearview mirror with new and old operators spooling back up strongly and revival plays looking very promising. We've made a strategic decision to focus on organic growth centered around our existing acreage to maintain our balance sheet strength and to take advantage of rising prices in this environment. team has rallied around the mandate and delivered so we feel great about our volumes as we move from this last cycle forward the plays are there the operators are there the economics are there and we will grow production assuming the macro environment stays constructive and our key operators in the shelby trough and austin chalk deliver on their stated and mostly contractual plans we expect to grow production to through 2023 and exit next year at close to 40,000 VOE per day. Finally, let's focus on inventory. And let's do that in the context of the general macro view on global oil and gas consumption. Two years ago, in the early mid-20s, many said oil and gas would be over in two to three years and renewables were just going to pop up and fill the voids. Today, I think the macro view is less reactionary to 100-year crisis headlines and other realities. In short, we believe oil and gas have a good run ahead as the world looks to transition to more environmentally sound ways to meet increasing energy demand of a growing, evolving global economy. So with that said, I'll make a statement about Blackstone's inventories. We see all in with various categories of costs and risk efficiencies, Blackstone's knowable inventory at the last 12 months production rates to be well in excess of 20 years. That's a very healthy inventory number no matter how you slice it. And very importantly, you might remember that 15 years ago, our Shelby Trough Hainesville-Bossier known inventory was zero because that play hadn't even been put in play yet. We don't know what other major surprises are out there in our remaining acreage, but Blackstone has millions of undeveloped acreage that today are not included in these inventory numbers. With that, I'll now turn it over to Jeff to go through some of the details for the quarter.
spk07: All right. Well, thank you and good morning, everyone. I'm going to keep my comments brief this morning as Tom really covered the important stuff of production, both for this quarter and, of course, our expectations for future growth in those volumes. I do want to make a quick word just on price realizations and our outlook around that. Realizations for the second quarter were consistent with last quarter at almost 100% of average WTI prices for crude and 120% of average Henry Hub prices for our gas. That is before the impact of commodity hedges. And I'll note that even though, as Tom mentioned, we reported record highs for adjusted EBITDA and DCF this quarter, those amounts were constrained by our hedges. That should be no surprise. The positive news around that is those hedges roll at the end of the year. And the swap prices for our gas hedges increased by over 50% going from 22 to 2023. and our oil hedge swap prices are up almost 30% for next year. So at current strip prices and our existing hedges in place for both 22 and 23, realized prices would increase by 11% next year despite the backwardation in the current curves. So even if production levels stayed flat from 2022 to 2023, which of course is not our expectation, that would apply over $50 million of incremental distributable cash flow next year. Now, as you might expect in this environment, we do get a lot of questions around our hedging philosophy and our hedging practices. I'll just say during our entire history as a public company, we have hedged a certain percentage of our near-term forecasted production volumes. Typically, that's around 70% one year out and 50% or less two years out. We designed that hedging strategy to even out and reduce volatility in our cash distributions. And looking at the history of that hedging program since our IPO in 2015, it has generally been positive, including a big benefit in 2020 when commodity prices turned down so dramatically. In 2021 and so far this year, as prices have risen just as dramatically, the hedging program has limited some of that upside for us. So you take the bad with the good, and we continue to believe that a systematic hedging program serves its purpose over the long term. And frankly, the worst outcome would be to hedge through a down cycle, stop hedging at a time like this when prices are relatively attractive, and then watch prices just fall again when we don't have that hedge protection. The other thing that we like about hedging for 2023 is that it locks in some of that incremental DCF over this year that I just mentioned. And as a management team, we feel good about the extent to which we can use hedges to provide greater certainty to investor distributions, and particularly, when that points to locking in a distribution increase. As I said last quarter in response to a question around all of this, it's just a corporate philosophy. It's one that we've been consistent around since our IPO, recognizing that in some years we'll benefit from it, and in some years we won't. Okay, so in our earnings release yesterday, we updated our guidance with the expectation that we would come in for the full year around the low end of our original guidance range. We see the ramp up in some of our more active plays facing some headwinds, by global supply chain interruptions that are happening across the industry. And we've also had some well-timing slip in some high-interest areas as our operators optimized for multi-pad drilling. Over the long term, that's going to be good for us, but it can tamp down some near-term volumes. And as Tom said, we absolutely view these as temporary issues. Our focus is to facilitate activity on our existing acreage that leads to production growth in 2023 and beyond. And we believe we're very well positioned to do that. And finally, the balance sheet remains in great shape. The borrowing base for our revolving credit facility was reaffirmed at $400 million in April. Our total debt balance was $86 million at the end of this quarter and is down further to $54 million today. And of course, that is in advance of paying our second quarter distribution, which will occur on August 19th. So that concludes our prepared remarks. So Polly, we will open this up for questions.
spk05: Thank you all speakers. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster.
spk04: Your first question comes from the line of Brian Fitzgerald, private investor.
spk05: Your line is now open.
spk00: Hi, thank you for a very good quarter, great results. Could you add more commentary on the East Chalk and the operators in the area now that you set up a royalty program, favorable royalty program to induce their drilling?
spk07: Sure, Brian, I'll start on that and this is Jeff and others can chime in. Look, we're very excited about the chalk. This is honestly two years of a lot of hard work by the team. As we said in prior calls, we had an existing group of really three main operators in the core of that field, and so we've just done a number of things. We have worked with those existing operators to try to accelerate their activity on existing leases, and we have brought in new players to start new development activity around it. So I think as we mentioned, we've had 19 wells spud around that area over the past year plus and 11 wells producing now. We see that area is getting better and better delineated all the time. And what we're excited about is with this new completion technology, we're absolutely seeing a nice fair way of acreage where we're seeing consistent and very, very strong results. As Tom mentioned, the most recent well out here came in just an absolute barn burner at 2,000 plus barrels a day and almost 12 million cubic feet of gas a day. So, yeah, look, we're excited about this. It's been a ton of hard work and we think that as we look into 23 and beyond, it's going to be a real area of growth for us.
spk04: Thank you. Thank you, Brian.
spk05: As a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad, and your next question comes from the line of Trafford Lamar of Raymond James. Your line is open.
spk02: Hi, guys. Thanks for taking my call. My first question kind of revolves around the the distribution coverage. I know in the first quarter y'all were about at 1.1x and then this quarter was closer to 1.2. Just looking at the second half of the year and on like a modeling basis, what can we expect, you know, an average of that or closer to 1.2 or revert back to 1.1? I just want to get y'all's thoughts on that. Thanks.
spk07: Sure. Sure, Trapper. This is Jeff. I'll start on that as well. Yeah, so look, we have sort of said on some of these past calls that we expect distribution to come down, payout ratios to come up over time, just given the fact that the balance sheet is so clean and we are prioritizing returning our excess cash to investors. Second quarter was a little unusual. Obviously, there's some backwardation in price curves through Q3 and Q4. before the uptick in hedges kick in for 2023. So really, we ran a little higher coverage than we would anticipate going forward this quarter at the 1.21 times, really just to sort of balance it out through the rest of the year. But there's been no change in philosophy here. I think we will continue to prioritize returning cash to investors over things like buybacks for the moment. and So you should see that coverage ratio come down as we go forward through the year Okay, perfect great.
spk02: Thank you for that and then my second question is It revolves around hedges. I just want to get y'all's thoughts on maybe 23 and onwards, the possibility of collars. Have y'all talked about that versus swaps? I know y'all have been strictly swaps in 22 and then right now for 23. I just want to get y'all's thoughts on that.
spk07: Yeah, so we look at collars and swaps for every time we go to put on trades. We've seen those swap levels as attractive. So collars will be something that we continue to look at. I think the last time we had them was maybe in 19 that we used some collars, and we've been pretty simple with the swaps since then. So I think most likely what you'll see is the hedge program will continue to be dominated by swaps, but if we see some areas that really make sense to... maybe preserve a little more upside and still get nice downside production through a collar, we may do that. But again, we like to stay pretty simple with this. We're not trying to do anything other than provide stability in the distribution. And what we found is that swaps tend to do that most effectively.
spk02: Okay, perfect. Thank you all. Thank you.
spk05: Thank you. Your next question comes from the line of William Sams from the Marlin Sams Fund. Your line is open.
spk01: Congratulations on a great year for you. I never dreamed the dividend would go up quite that much. What percent do you hedge on your oil and gas production?
spk07: William, yeah, thank you for the question, William. It really depends. I mean, historically, what we've done is we will look to systematically layer in hedges that give us something like 70% coverage for one year forward and then we will typically hedge some level of our expected volumes two years forward from the current time that we put on a hedge. So again, sort of call it in that one year forward range up to 70% and two year forward in the 30 to 50% range and then we would just periodically layer those hedges on.
spk03: Okay, that answers my question. I'd add a comment on that on the hedging if you just If you think about that in the context of the comment around inventory of 20 plus years, you know, we are systematically covering 12 months out. So, in terms of a total resource base, we're substantially on edge.
spk04: Okay. Thank you, William. Thank you.
spk05: There are no further questions at this time. I would like to turn the call back over to CEO and Chairman, Mr. Tom Carter.
spk03: Well, thank you all for joining today. We're excited about what's going on on our assets, and we look forward to talking with you next quarter.
spk05: This now concludes the presentation. You may now disconnect.
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