Black Stone Minerals LP

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.

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.

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.