Phra yor Jitonnom
Phra yor Jitonnom
Black Stone Minerals, L.P. (NYSE:BSM) provided 2024 guidance including expectations of approximately 41,000 BOEPD (24% oil) in average production. This was higher than what I had previously expected for Black Stone in terms of 2024 production, although the oil cut is lower than what I had modeled in December 2023.
Based on guidance, Black Stone is projected to generate $391 million in distributable cash flow (or $1.86 per common unit) during 2024 at current strip prices. This results in 0.98x distribution coverage for its current $0.475 per unit quarterly distribution.
Black Stone had zero credit facility debt and $70 million in cash on hand at the end of 2023, so I'd expect it to maintain its $0.475 per unit quarterly distribution for now, and use its cash on hand to cover the minor (projected at $8 million for 2024) shortfall in its distribution coverage.
I've trimmed Black Stone's estimated value slightly (by $0.25 per unit from my December 2023 estimate) to a new range of $18.75 to $19.25 per unit. Aethon Energy has suspended its Shelby Trough drilling obligations, and while it may still drill some wells while its drilling obligations are paused, its development pace will be reduced for a while. This is not expected to have much effect on Black Stone's 2024 production, as Aethon has a significant number of DUCs that will be turned in-line during 2024. However, it may have more impact on 2025 (and later) production, so I have slightly reduced Black Stone's value to account for this near-term development slowdown.
In December 2023, Aethon Energy notified Black Stone that it was exercising its option to suspend its Shelby Trough drilling obligations. Aethon has the option to suspend drilling obligations for up to 9 consecutive months (and a maximum of 18 total months within a 48 month period) once natural gas prices fall below certain (not publicly disclosed) levels.
Aethon first entered into the development agreement with Black Stone back in May 2020 for activity in Angelina County and then signed a separate development agreement for San Augustine County in May 2021. This is the first time that Aethon has exercised its option to suspend its drilling obligations.
Although Aethon has suspended its drilling obligations (which require it to drill at least a certain number of wells per program year), Black Stone said that Aethon may still drill some lesser number of wells during the time-out period.
Black Stone also mentioned that Aethon has a substantial number (approximately 30) of wells that are already in development and that it expects those wells to be completed and turned in-line without any significant changes to the prior schedule. Thus, Black Stone doesn't expect Aethon's drilling pause to have a noticeable impact in 2024. It is working with Aethon to assess the impact of the reduced near-term drilling on 2025 production levels though.
Despite weak natural gas prices and Aethon's suspension of drilling obligations, Black Stone still expects decent 2024 production results as Aethon's DUCs are turned in-line.
As mentioned earlier, Aethon's reduced 2024 drilling activity may hit Black Stone's 2025 results more than its 2024 results.
Black Stone currently expects 41,000 BOEPD in 2024 production at guidance midpoint. This would be a 3% increase in total production (although a modest decline in oil production) from its 2023 average production. Black Stone's 2024 production guidance also suggests roughly flat total production growth from Q4 2023 levels and a 12% decrease in oil production compared to Q4 2023 levels.
I think that Black Stone's oil percentage will likely end up a bit higher than its guidance for 24% oil in 2024 though. I am modeling Black Stone's 2024 results below based on the midpoint of its guidance and using 24% oil.
However, each 1% increase in its oil cut (such as from 24% oil to 25% oil) increases Black Stone's projected 2024 free cash flow by around $7 million to $8 million. I can see Black Stone's 2024 oil cut ending up at 25% to 26%, so its free cash flow could be around $7 million to $15 million better than what I have modeled below.
The current strip for 2024 is around $76 to $77 WTI oil along with around $2.45 NYMEX gas. Black Stone tends to realize well above NYMEX for its natural gas since it reports on a two-stream basis, with the more valuable NGLs included in the natural gas number.
At current strip prices, Black Stone is projected to generate $499 million in revenues before hedges. Black Stone's 2024 hedges add another $35 million in estimated value. Black Stone has approximately 61% of its 2024 natural gas production hedged at an average swap price of $3.55 and 63% of its 2024 oil production hedged at an average swap price of $71.45.
Type | Barrels/Mcf | Realized $ Per Barrel/Mcf | Revenue ($ Million) |
Oil (Barrels) | 3,591,600 | $75.50 | $271 |
Natural Gas [MCF] | 68,240,400 | $3.10 | $212 |
Lease Bonus and Other Income | $13 | ||
Net Interest Income | $3 | ||
Hedge Value | $35 | ||
Total | $534 |
This results in a projection that Black Stone will generate $391 million in distributable cash flow in 2024 at current strip prices and based on the midpoint of its guidance. With a bit over 210 million outstanding common units, this works out to $1.86 per unit in 2024 distributable cash flow.
For comparison, Black Stone's current $0.475 per unit quarterly distribution adds up to $1.90 per unit per year. In this scenario, Black Stone's distribution coverage is 0.98x and it is projected to distribute $8 million more than its distributable cash flow.
If Black Stone's oil cut ends up at 25% instead of its 24% guidance (all else unchanged), it will end up with distribution coverage of 1.0x.
Also, Black Stone's distribution coverage could be increased slightly by repurchasing common units with its $70 million in cash on hand, although that impact would be partially offset by reduced interest income.
$ Million | |
Lease Operating Expense | $11 |
Production Costs And Ad Valorem Taxes | $58 |
Cash G&A | $45 |
Preferred Distributions | $29 |
Total Expenses | $143 |
I have marginally decreased my estimate of Black Stone's value to a new range of $18.75 to $19.25 per unit. This is $0.25 per unit lower than my prior estimate of Black Stone's value.
My long-term (after 2024) commodity prices of $75 WTI oil and $3.75 NYMEX gas remain unchanged. Black Stone's 2024 production guidance was 4% higher than what I previously modeled, but its lowered oil cut guidance reduces the total value of its production a bit.
Black Stone should be able to maintain its current quarterly distribution of $0.475 per unit during 2024 with near 1.0x distribution coverage. For 2025, if its production remains the same as its 2024 guidance, Black Stone would end up with 1.0x distribution coverage at current 2025 strip prices. If the reduced near-term Aethon drilling results in production declines in 2025, then Black Stone's distribution coverage may fall below 1.0x. A 5% reduction in 2025 natural gas production (all else held equal) would drop its distribution coverage to 0.97x.
Black Stone Minerals looks to be on track to end up with close to 1.0x distribution coverage in 2024 at current strip. It is over 60% hedged on oil and natural gas, so that will reduce the impact of commodity price changes on its distributable cash flow. If Black Stone's oil cut ends up better than guidance that could push it to 1.0x (or slightly better) distribution coverage for 2024.
Natural gas strip prices are improved for 2025 so Black Stone would end up with around 1.0x distribution coverage at current 2025 strip if production stayed flat compared to 2024 levels. Aethon's near-term reduction in drilling activity may push Black Stone's 2025 production levels below 2024 levels though.
I now estimate Black Stone's value at $18.75 to $19.25 per unit, which is a slight reduction to account for the potential impact from the reduced Aethon development activity.