Earnings Call Transcript - BSM Q2 2025

Operator, Operator

Thank you for joining us. My name is Bailey, and I will be your conference operator today. I would like to welcome everyone to the Blackstone Minerals Second Quarter 2025 Earnings Conference Call. I will now hand the call over to Mark Meaux, Director of Finance. You may begin.

Mark Meaux, Director of Finance

Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Blackstone Minerals Second Quarter 2025 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 of our 2024 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of these 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 be found on our website at www.blackstoneminerals.com. Joining me from the call or on the call from the company are Tom Carter, Chairman, CEO, and President; Taylor DeWalch, Senior Vice President and Chief Financial Officer; Steve Putman, Senior Vice President and General Counsel; Fowler Carter, Senior Vice President, Corporate Development; and Chris Bonner, Vice President and Chief Accounting Officer. I'll now turn the call over to Tom.

Thomas L. Carter, CEO

Thank you, Mark. Good morning, and thanks to all for joining our quarterly earnings call. Before we discuss results for the second quarter, I'd like to highlight the excellent work done by the team over the last two years, which ultimately has led to the recent announcement of the development agreement with Revenant as well as ongoing marketing efforts in the Shelby Trough. Through our subsurface evaluation, we determined that there is substantial expansion of the Shelby Trough and an extension towards the Western Haynesville. We're excited for Revenant to begin development, and we're actively marketing an additional 180,000 gross acre area to well-known and well-capitalized operators. These new developments, coupled with our existing agreements, are expected to more than double our drilling obligations in the area over the next five years, providing significant natural gas growth for the partnership amid a strong demand outlook in the region. Our grassroots acquisition program supporting these expansion areas also continues to progress well. We've added $31 million in minerals and royalty acquisitions during the quarter, bringing our total acquisitions since September of '23 to about $172 million. During the second half of 2025, we're confident that we will continue to identify and execute on accretive opportunities, which enhance our existing asset position and add long-term value for our shareholders. We previously announced a distribution of $0.30 per unit for the quarter. The reduction was driven by slower natural gas production growth in 2025, primarily in the Haynesville/Bossier. However, we have line of sight to production growth in 2026 and beyond through our various development agreements and high interest activity growth as outlined in our earnings release. Ultimately, our expectation for increased activity, combined with a strong demand outlook, provides a clear path to future distribution increases. We remain encouraged about the outlook for the partnership, maintaining a clean balance sheet and ample liquidity enables us to continue our commercial strategy, including targeted grassroots acquisitions and working with operators to achieve full field development across our assets. The outlook for natural gas is constructive, reinforced by growing global demand for LNG. In addition, our robust oil portfolio across multiple basins provides a solid foundation for long-term as well. With that, I'll turn it over to Taylor to walk through the financial details of the quarter.

H. Taylor DeWalch, CFO

Thanks, Tom. Good morning, everyone. Mineral royalty production was 33,200 BOE per day in the second quarter, and total production volumes were 34,600 BOE per day. Net income was $120 million for the second quarter, with adjusted EBITDA coming in at $84.2 million. Fifty-five percent of oil and gas revenue in the quarter came from oil and condensate production. As mentioned previously, we declared a distribution of $0.30 per unit for the quarter or $1.20 on an annualized basis. Distributable cash flow for the quarter was $74.8 million, which represents 1.18 times coverage for the period. In conjunction with the earnings release, we provided revised 2025 production guidance yesterday. As we look at realized production for the first half of 2025, combined with our forecast for the second half of the year, we expect production for the full year to average between 33,000 and 35,000 BOE per day. Our new guidance reflects slower-than-expected natural gas production growth, particularly in the Shelby Trough and Haynesville/Bossier play. However, as Tom mentioned earlier, the outlook for natural gas remains robust and we remain confident that our diversified asset base, highlighted by our high-interest acreage and development agreements in the expanding Shelby Trough provides a path to increase production and distributions. Therefore, we forecast production growth in 2026 of an incremental 3,000 to 5,000 BOE per day over 2025 revised guidance. During the quarter, operators continued to actively develop our acreage through existing agreements and the accelerated drilling agreements. Additionally, the large project we're monitoring in the Permian Basin by Coterra remains on track to add meaningful oil volumes to our production base. These projects, in addition to our agreement with Revenant and the expanded Shelby Trough, provide BSM a pathway to increase production, ultimately enabling us to increase the distribution to its previous high watermark. Although slower gas production growth posed challenges in the first half of the year, we remain confident that our commercial strategy positions us well to deliver sustainable long-term value for our shareholders. With that, I'd like to open the call for questions.

Operator, Operator

Your first question comes from John Annis with Texas Capital.

John Annis, Analyst

For my first one, we have been surprised as well by the subdued activity response in the first half to higher natural gas prices. But with the recent pickup in gas-directed rigs, I wanted to ask if you could provide any color on any green shoots you're seeing in terms of activity increasing on your acreage and how you see this in the Revenant agreement starting in '26 and the Permian development coming online, setting up the production trajectory next year?

H. Taylor DeWalch, CFO

Sure, John. Thanks for the question. Overall, we are seeing the same thing a lot of folks are seeing with some subdued activity. I think some of that's probably borne from the response we saw in '24 versus 2025. Of course, across the Haynesville and Bossier, we've seen some wells coming online kind of spread out throughout the basin. I think for us, we're most focused on the activity and the development agreements that we called out in our earnings release and talked about on the call a little bit earlier. So we're excited to see Revenant get to work with their first wells being spud likely at the beginning of 2026. And those six wells that they're obligated to drill throughout 2026, as well as the ongoing activity from some of the other operators that we mentioned throughout the Shelby Trough and also our agreements on some of the other acreage that we have line of sight to throughout the Haynesville and the Bossier. So excited about the activity that we see here in the coming quarters and more to come from that.

John Annis, Analyst

Terrific. For my follow-up, I wanted to dig into your comments in the release on the subsurface work you've done to delineate new areas in the Shelby Trough. How does the geology compare to your understanding of what the Western Haynesville is today just in terms of depth, temperatures, and EURs?

H. Taylor DeWalch, CFO

Yes. Thanks, John. That's a great question. As Tom mentioned, the team has spent the last couple of years really digging into how the Shelby Trough expands outside of some of our existing development areas. We're getting excited about the real potential of that play to further expand all around the Shelby Trough as well as westward towards the Western Haynesville. We do see some analogous subsurface characteristics as we think about the western part of the Shelby Trough and how that connects to some of the things that we're seeing going on in the Western Haynesville. The formations are getting thicker. They are getting a bit deeper. But in the Shelby Trough, we have quite a few different places for development at different depths and different temperatures. So I think what we're most excited about is to see both the increasing productivity and EURs in the Western Haynesville as well as the operational efficiencies and results that are being gained in the Western Haynesville and how that can tie to further development of the Shelby Trough as we think about developing this expanded region within the area.

Thomas L. Carter, CEO

I'd like to add to that just a little industry color in some of the work that we're doing, talking with capital providers and operators in this area of what I would call the Western Shelby Trough going towards the eastern part of the Western Haynesville. Sorry for all the geographic directions there. But people are moving the Western Haynesville to the East, and there's been activity out there and a lot of buying of acreage. And our efforts have been moving the Shelby Trough to the West. We're seeing a lot of commonality in subsurface. It's really hard to get people on the frontier edges of these things to talk much about what they're seeing in their step-out drilling. One of the larger operators out there, the other day, we were in a conversation with them, and we made some comments about what we're seeing moving west in the Shelby Trough relative to what they may have been seeing moving east in the Western Haynesville. We were pleased to get a response that was something like this: they see the comparison of those two areas the same way we do. In other words, they may bridge across that area and ultimately be one and the same.

Operator, Operator

Your next question comes from the line of Timothy Rezvan with KeyBanc Capital Markets.

Timothy A. Rezvan, Analyst

I wanted to approach one of the first questions from a different angle. Tom, you and the team have a unique perspective on the overall Haynesville activity. We've observed a steady increase in the rig count throughout the year, and production has risen by over Bcf a day from the recent low. We're trying to reconcile this with the updated production guidance, which indicates a potential decline in the latter half of the year. Did something change in your agreement with Aethon? Or could you help clarify why your acreage is not benefiting from the increase we're witnessing?

Thomas L. Carter, CEO

Well, I'll be glad to answer that. Let's start with late '23. That was a low point in gas prices and Aethon called for a time-out, which allowed them to slow down their drilling activity. That event takes about 18 to 24 months to show up in production volume declines, and that's what we saw in late '24 and '25. We have restructured our agreement with Aethon from mid-20s wells per year to high teens per year. But in addition to that, we also carved back some strategically important and close-in development acreage that we have packaged with other acreage and are working to place with another operator. When you add all these things up from having Aethon as really a primary operator with drilling expectations of around mid-20s per year going to high teens, and then you layer Revenant on top of that with a buildup to 20-plus per year, and another operator coming in with maybe 20 wells per year, it takes time to spool that activity up because you've got infrastructure issues and all sorts of things. These projects take 20-plus years to fully develop. We're very excited about this; yes, there is a little bit less coming from Aethon, but that's been by design. We are trying to have four or five active operators out there and a cumulative set of contractually required wells that are well north of the mid-20s that Aethon had 1.5 years ago. We are constantly reshuffling and restructuring to add operators and capital, and we see staggering numbers of wells in '28, '29, and '30. It's just going to take a while for it to build up.

H. Taylor DeWalch, CFO

If I might just add on to this, when you're looking at the rest of the Haynesville and some of the activity, I might just mention we've seen some activity pick up from some of the private operators in the Haynesville and also have seen a number of deferred TILs or DUCs that have come online from expand. Really, when you look at where that activity is relative to some of our higher interest acreage, we're going to see some of that activity come through from production. Of course, there's always a little bit of a time delay between first production and the royalty company receiving that production. But really it comes back to our high-interest acreage and our line of sight to that development regarding all the things Tom was just speaking to.

Timothy A. Rezvan, Analyst

Okay. That's very helpful insight. I appreciate that. And my follow-up is sort of related to that. With the second acreage position being marketed, you did mention in the release more than doubling the development obligation. So you threw out some numbers here. Can you help us sort of understand in marketing? Are you trying to get to kind of a 40 to 50 per year cadence? I'm just trying to get some numbers around kind of how you're thinking about this ramp into the end of the decade.

Thomas L. Carter, CEO

I'll answer that. And the answer is yes, and then some.

Timothy A. Rezvan, Analyst

Okay. And if I could just ask one last question, a housekeeping one. I noticed you mentioned the potential production outlook for 2026. Should we expect a similar natural gas skew to that production? I know you've discussed the Coterra pad coming online. I’m trying to understand how to think about the skew. That’s all I had.

Thomas L. Carter, CEO

Yes. Thanks, Tim. That's a great question. The Coterra volumes are certainly going to help from an oil standpoint along with just the rest of our kind of oil-weighted activity. I really think that when you look at the rest of '25 going into '26, we're probably closer to kind of where we were in '24 as opposed to where we were in Q1 '25, so probably more like 25%, 26% oil volumes as we're looking out.

Operator, Operator

And there are no further questions at this time. Tom Carter, I will turn the call back over to you.

Thomas L. Carter, CEO

All right. Thank you very much, and we really appreciate everyone joining us today for the call. We look forward to speaking with you in the future as we move into what we think are pretty exciting forward-looking times. Thank you.

Operator, Operator

This does conclude today's conference call. You may now disconnect.