Black Stone Minerals, L.P. ($BSM)
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Black Stone Minerals, L.P. ($BSM)
"Royalty Play With Over 20 Million Acres of Opportunity"
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Before I begin discuss Black Stone Minerals, I would like to point out that I’m not Macro Expert (not even novice) and I’m not an Oil & Gas Expert (not even novice).
In my humble opinion Black Stone Minerals have both quantitative and qualitative aspects that I look in companies … as long as you don’t go deep into rabbit hole of macro-world-and-commodity-price-predictions.
With that out of the way…
What’s inside…
Company (elevator pitch)
About BSM
Management
Competitors
Financials & Metrics
Thesis
Personal Touch
Conclusion
Holdings Disclosure
Disclaimer is at the end.
1. Company (elevator pitch)
“Do you like royalty companies that have no debt, high insider ownership, high dividend yield, high return on invested capital, low P/E and high gross margin with high free cash flow?”
“You do?!”
“Well do I have a stock for you…”
2. About BSM
Black Stone Minerals, L.P. (“BSM”) BSM 0.00%↑ roots go as far as 1876 via W.T. Carter when W.T.C. was established as lumbar company. Fast forward to 1968 and W.T.C. shifted it’s focus to oil and gas. Moving forward to 1998 (no longer W.T.C., by now its BSM) Black Stone Minerals shifts its business model to focus on minerals and royalty business, and finally in 2015 BSM goes public via IPO and becomes largest publicly traded mineral and royalty company in United States.
Moving into 20223, BSM is one of the largest owners and managers of oil and natural gas (largely focusing on natural gas) mineral interests in the United States.
The whole point of BSM is to collect royalty and interest on everything that belongs to BSM (plus when appropriate to hedge the risk of oil & gas) and do it in the way that benefits BSM (meaning if needed to, sometimes give different land/interest on certain minerals to different customers or ((sometimes)) even to the same customer but at different terms due to XYZ reasons) while expanding its asset base through acquisitions of additional mineral and royalty interests, and keep repeating (as long as possible) while returning profits in the form of a dividends (… at least so far that has been the game-plan).
Black Stone Minerals owns mineral interests in approximately 16.8 million gross acres, with an average 43.5% ownership interest in that acreage. They also own Nonparticipating royalty interest (NPRIs) in 1.8 million gross acres and Overriding royalty interest (ORRIs) in 1.6 million gross acres. BSM owns mineral interests and royalty interests in 41 states in United States, including all of the major onshore producing basins.
BSM divides U.S. into major geographical regions that they refer to as "BSM Land Regions." The following provides an overview of these regions:
Gulf Coast. The Gulf Coast region consists of the land area along the Gulf of Mexico from South Texas through Florida. This region includes the Western Gulf (onshore), East Texas Basin, Louisiana-Mississippi Salt Basin, and South Florida Basin.
Southwestern U.S. The Southwestern U.S. region consists of the land area north of the Mexico-United States border from Central Texas westward through Arizona. This region includes the Permian Basin, Fort Worth Basin, Bend Arch, Palo Duro Basin, Dalhart Basin, and Marfa Basin.
Rocky Mountains. The Rocky Mountains region consists of the land area along the Rocky Mountains from Northern New Mexico through Montana and North Dakota. This region includes the Williston Basin, Montana Thrust Belt, Bighorn Basin, Powder River Basin, Greater Green River Basin, Denver-Julesburg Basin, Uinta-Piceance Basin, Park Basin, Paradox Basin, San Juan Basin, and Raton Basin.
Eastern U.S. The Eastern U.S. region consists of the land area east of the Mississippi River and north of the Gulf Coast region. This region includes the Michigan Basin, Illinois Basin, Appalachian Basin, and Black Warrior Basin.
Mid-Continent. The Mid-Continent region extends from Oklahoma north through Minnesota. This region includes the Anadarko Basin, Arkoma Basin, Forest City Basin, Cherokee Platform, Marietta Basin, and Ardmore Basin.
Western U.S. The Western U.S. region consists of the land area west of the Rocky Mountains and Southwestern U.S. regions. This region includes the San Joaquin Basin, Santa Maria Basin, Ventura Basin, Los Angeles Basin, Sacramento Basin, and Eastern Great Basin.
As of the end of 2022, BSM’s total estimated proved oil and natural gas reserves were 64,115 MBoe. Of those total reserves approximately 91% were proved developed reserves and approximately 9% were proved undeveloped reserves. BSM’s estimated proved reserves were 30% oil and 70% natural gas.
A bit more on Black Stone Minerals assets via their 2022 10K:
Mineral and Royalty Interests
Mineral interests are real-property interests that are typically perpetual and grant ownership of the oil and natural gas under a tract of land and the rights to explore for, develop, and produce oil and natural gas on that land or to lease those exploration and development rights to a third party. When those rights are leased, usually for a three-year term, we typically receive an upfront cash payment, known as lease bonus, and we retain a royalty interest, which entitles us to a cost-free percentage (usually ranging from 20% to 25%) of production or revenue from production. A lessee can extend the lease beyond the initial lease term with continuous drilling, production, or other operating activities or by making an extension payment. When drilling and production ceases, the lease terminates, allowing us to lease the exploration and development rights to another party.
In addition to mineral interests, we also own other types of non-cost-bearing royalty interests, which include:
• NPRIs are royalty interests that are carved out of the mineral estate and represent the right, which is typically perpetual, to receive a fixed, cost-free percentage of production or revenue from production, without an associated right to lease or receive lease bonus.
• ORRIs are royalty interests that burden working interests and represent the right to receive a fixed, cost-free percentage of production or revenue from production from a lease. ORRIs remain in effect until the associated leases expire.
Non-Operated Working Interests
Beginning in 2017, we significantly reduced the number of wells in which we participate with a working interest. We generally farm out or sell these participation rights to third parties and often retain some form of non-cost-bearing interest in those wells, such as an overriding royalty interest.
When we participate in non-operated working interest opportunities, we are required to pay our portion of the costs associated with drilling and operating these wells. Working interest production represented 8% of our total production volumes during the year ended December 31, 2022. As of December 31, 2022, we owned non-operated working interests in 3,186 gross (177 net) wells.
3. Management
At the beginning I mentioned that before Black Stone Minerals was Black Stone Minerals, BSM was W.T. Carter …
Mr Thomas L. Carter, Jr., the Carter family.
Although Glassdoor should not be a proxy for anything but only one point out of many … Majority of what was written about Mr Carter and BSM (on Glassdoor) was positive.
Notable Board Members:
James Whitehead - He has been Director of Black Stone Minerals GP (before working as Alternative Investments Manager at R. Lacy / Crain Energy, Mr Whitehead was Director, Enterprise Operations of BSM for 14 years) since Jul 2023 and owns 6,173,548 shares of BSM or about 3%.
Alexander Stuart - He has been an Independent Director of Black Stone Minerals GP LLC, the General Partner of Black Stone Minerals, L.P. since March 2015. He served as a Director of Black Stone Natural Resources, L.L.C. (“BSNR”) from 1990 to 2015. Mr Stuart owns 7,416,197 shares of BSM or about 3.5%.
John Longmaid - He has been an Independent Director of Black Stone Minerals GP LLC, the General Partner of Black Stone Minerals, L.P. since March 2015. He served as a Director of W.T. Carter & Bro. from 1984 to 2015. Mr Longmaid owns 3,808,978 shares of BSM or almost 2%.
William Mathis - He has been Independent Director of Black Stone Minerals GP LLC, the General Partner of Black Stone Minerals, L.P. since March 2015. Mr. Mathis served as a Director of Black Stone Natural Resources, L.L.C. (“BSNR”) from 2009 to 2015. Mr Mathis owns 2,111,941 shares of BSM or about 1%.
Collectively Insiders of Black Stone Minerals own almost 18% of the BSM 0.00%↑ shares.
4. Competitors
For Black Stone Minerals, competition is not only other public and private companies (other Trusts, MLPs, etc.) that are in the oil & gas sector but also alternative sources of energy like coal, nuclear, solar, etc. that all can be price sensitive.
But here are just some of many competitors: California Resources, CNX Resources, Northern Oil and Gas, Magnolia Oil & Gas, Earthstone Energy, Vista Energy, Vermilion Energy, Hess Midstream, Crescent Energy, etc.
Here is some examples:
Hess Midstream HESM 0.00%↑ - about 2B Market Cap with about 3B in Debt
Magnolia Oil & Gas MGY 0.00%↑ - about 4B Market Cap with about .5B in Debt
Northern Oil and Gas NOG 0.00%↑ - About 4B Market Cap with about 1.5B in Debt
California Resources CRC 0.00%↑ - About 4B Market Cap with about .5B in Debt
Earthstone Energy ESTE 0.00%↑ - About 3B Market Cap with about 1B in Debt
When it comes to BSM 0.00%↑ , I would say they are well positioned against competition.
5. Financials & Metrics
As of October 20th, Black Stone Minerals Market Cap was $3,746.03M.
6. Thesis
Thesis is very simple. This is a royalty company that recently paid down all of it debt, management is being conservative and given my “buy in price” I’m receiving almost 12% dividend.
At least in my life-time, I believe we will still need things like oil and gas and given that we as people most likely will NOT be conservative and will actually be using MORE of oil and gas, this will play out in benefit to Black Stone Minerals, both domestically and internationally.
As long as natural gas will stay above $2 , Black Stone Minerals should be fine.
Commodity prices is the biggest risk…
As I mentioned before I’m not an Oil & Gas Expert and I don’t want to be and I do not need to be, what I need to do is pick great companies and managers that are knowledgeable and have “skin in the game” and seeing how Mr Thomas L. Carter, Jr owns almost seven percent of the company, I think its in his best interest to keep things in a way that will be beneficial to BSM and with 40 years in Oil & Gas business, I think we can call Mr Carter, the Oil & Gas Expert.
7. Personal Touch
Does This Company Meets The Check List Requirements?
Yes.
Is this WONDERFUL , GOOD, OKAY, OR BAD Business?
I cant call this a WONDERFUL business only because it depends on commodity prices (of oil and gas). Ex the commodity pricing and this is a wonderful company.
Famous Investor’s Holding?
Although currently cant be confirmed, at the beginning of the year (2023) Vitaliy Katsenelson held (have mentioned holding) BSM in his fund or in his client’s accounts.
Margin of Safety Price?
Margin of Safety is about $15.
Fair Value?
Based on my model, Fair Value is around $30.
Holding Period?
As long as management is returning most of the capital back to the shareholders (via dividends or smart buybacks) + doesn’t add any large about of debt, I will be holding the shares.
8. Conclusion
Black Stone Minerals is a great business that is ran by conservative and knowledgeable management. BSM scans great for things that I look for in the company. Company does not require”much” to keep doing what its doing and the obvious risk is the commodity prices (more specific natural gas) but if management can hedge well during “bad times” the good times will take care of themselves.
I do want to mention that I’m monitoring how management is handling the high pay out for the dividends, so any increase in dividends (with same low nat. gas prices) or taking on a lot of debt to pay for dividends would be a red flag for me, but given how conservative management can be, I don’t think they would go that route.
I would not be against management “lowering dividend pay out or not paying dividends” if macro gets worse for the company as long as I believe management can navigate “bad times” and see better future. This is not a dividend play only (but it is defensive play), if the price of the BSM’s stock would go “way lower (major sell off?)” I would rather that management buy back stock and lower the share count and in that way enhance shareholder value.
Lastly BSM 0.00%↑ does give K-1s so for international investors this might not be a good fit or for US investors who do not want hassle with their taxes.
PS most numbers and charts are pre the latest 10-Q, but that does not change anything, much.
9. Holdings Disclosure
At the time of this publication, I do own shares of BSM 0.00%↑ .
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Disclaimer
The information in this article is provided for informational and educational purposes only.
The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.
Black Stone Minerals, L.P. ($BSM)
Great article. I almost didn't read it because oil and gas is outside my circle of competence, but I can understand a royalty company. Thank you!
Great breakdown and analysis of the business YZ!