Black Stone: Slightly Over $2 Per Unit In Projected 2023 DCF (NYSE:BSM)

Black Stone Minerals (NYSE:BSM) should be able to generate just over $2 per unit in distributable cash flow for 2023 at current strip. While natural gas prices remain relatively low, Black Stone’s 2023 hedges have over $0.45 per unit in value.

This should allow Black Stone to maintain its current $0.475 per unit quarterly distribution for now. For 2024, Black Stone’s distribution coverage could drop slightly below 1.0x if prices don’t improve compared to current strip of $70 WTI oil and $3.45 NYMEX gas. At those prices (and assuming 3% production growth), Black Stone would have a distribution coverage of 0.95x at current strip.

Black Stone can handle a slightly lower than 1.0x distribution coverage for a while due to its current lack of debt. I believe that Black Stone will likely maintain its distribution around current levels and estimate its value at $18.50 to $19.00 per unit in a long-term $75 WTI oil and $3.75 NYMEX gas scenario. This is slightly more than my previous estimates of its value due to the change from my earlier long-term commodity price estimates of $70 oil and $4 gas.

2023 Outlook At Current Strip

Black Stone expects approximately 38,000 BOEPD in total production during 2023, of which mid-90s percent would be mineral and royalty production, with working interest production accounting for the small remainder. Black Stone’s production is around 72% natural gas.

Black Stone’s royalty production is continuing to increase (expected 5% growth compared to 2022), helped by increased Shelby Trough development under its agreement with Aethon. Meanwhile, Black Stone’s working interest production is going down due to its strategic decision (from 2017) to farm-out participation in its working interest opportunities.

At current strip for 2023, I now expect Black Stone to generate $551 million in revenues after hedges. Black Stone has very strong hedges for the remainder of 2023, with 1.62 million barrels of oil swaps at $80.80 per barrel and 24,750 BBtu in natural gas swaps at $5.15 per MMBtu over the last three quarters. These hedges (and Black Stone’s realized settlements on its Q1 2023 hedges) have around $96 million in total value.

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This leads to a projection that Black Stone can generate $427 million in distributable cash flow ($2.03 per unit) in 2023.

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Notes On Distribution

Black Stone currently has a distribution of $0.475 per unit. Based on the above scenario, its distribution coverage would be 1.07x in 2023 at current strip. While the coverage ratio isn’t much above 1.0x, Black Stone only had $6 million in net debt ($4 million in cash and $10 million in credit facility borrowings) at the end of 2022.

Black Stone may not increase its distribution further though since its hedges for 2024 are not as strong as its 2023 hedges. So far, Black Stone has 1.08 million barrels of 2024 oil swaps at $69.79 per barrel and 21,960 BBtu in 2024 natural gas swaps at $3.64 per MMBtu over the last three quarters. These hedges cover approximately one-third of Black Stone’s production and have slightly positive value (around $4 million) at current 2024 strip.

If Black Stone’s production increases by 3% in 2024 compared to 2023, then it would end up with around $1.92 per unit in distributable cash flow ($0.48 per quarter) at my long-term commodity price estimates of $75 WTI oil and $3.75 NYMEX gas. At current strip (roughly $70 WTI oil and $3.45 NYMEX gas) instead, Black Stone would end up with approximately $1.80 per unit ($0.45 per quarter) in distributable cash flow.

Black Stone’s distribution coverage (at its current $0.475 per unit quarterly distribution) would be around 1.01x at $75 oil and $3.75 natural gas, and 0.95x at current 2024 strip.

Estimated Valuation

I’ve updated my long-term commodity price estimates to $75 WTI oil and $3.75 NYMEX gas. At those commodity prices, I’d estimate that Black Stone can be worth around $18.50 to $19.00 per unit.

Black Stone is projected to generate $1.96 per unit in unhedged distributable cash flow at those commodity prices and 2024 production levels that are estimated at 3% above 2023 production levels.

Black Stone’s distributable cash flow yield would be approximately 10.5% at a valuation of $18.75 per unit.

Conclusion

Black Stone Minerals looks capable of generating over $2 per unit in distributable cash flow in 2023 with the help of its hedges. Black Stone’s distributable cash flow may end up a bit lower in 2024 due to its hedges not providing as much value though.

I’d expect Black Stone to maintain its distribution at around $0.475 per unit for now. In a $70s oil and mid-$3 gas environment, Black Stone’s distribution coverage would be close to 1.0x.

Black Stone’s value is now estimated at $18.50 to $19.00 per unit based on my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas.