|Shares Out. (in M):||191||P/E||0||0|
|Market Cap (in $M):||2,900||P/FCF||13.3||12.0|
|Net Debt (in $M):||111||EBIT||0||0|
Summary: We are long Blackstone Minerals (BSM) and believe it is a misunderstood, defensive investment with unusually asymmetric upside given the business quality (it is a royalty company, not an E&P). We view this as a low risk +50-140% over the next 18-24 months (30-80% IRR) and believe it represents one of the best risk/reward skews we have come across in the market (high quality business, unlevered, aligned management, unique structure that protects downside, inexplicably discounted valuation vs. peers who have lower quality assets, clear explanation for why the mispricing exists). BSM is largely unlevered and pays a 7.5% dividend yield that is 2x covered at current depressed/trough commodity prices. The common dividend is contracted to grow a minimum of 9% per year through Q1 2019 and is insulated by the company’s unique subordinated unit structure (which is underappreciated by the market and adds a significant layer of downside protection, see discussion below). A further recovery in commodity prices offers upside optionality (especially for you gas bulls – production is 2/3 gas) but is not necessary to achieve our targeted return (in fact, given the protection of the subordinated unit structure, the return profile outlined here works down to oil at $30/bbl and gas at $2.00/mcf – so any improvement in commodities represents incremental upside). BSM is run by an owner-operator management team (who has been there since the company was founded in the early 1980s). Management collectively owns more than 20% of the company and has a long history of value creation through the cycles (note the share buybacks they executed in Q1 2016 at the market bottom along with the various acquisitions they were able to execute over the last year as the energy cycle troughed). Lastly, we also believe the company’s outsized exposure to the Haynesville Shale could be an underappreciated source of upside due to the increasing competitiveness of the play (we think now one of the most economic gas play behind the Marcellus/Utica) and its proximity to the growing gas demand in the Gulf Coast region (i.e. no differentials which have plagued economics for Marcellus/Utica producers).
What this opportunity exists: BSM was structured as a Master Limited Partnership and IPO’d in mid-2015 into the MLP bloodbath last year (however, it should be noted there are no general partner promote/splits at BSM, unlike most other MLPs). Given the losses sustained by investors in MLPs over the last year and the heavy retail/high net worth concentration of the MLP investor base, there has been apathy/disinterest around anything MLP-oriented and this dynamic has contributed to the mispricing of BSM. BSM is the largest U.S. holder of mineral interests and represents a very unique and high quality asset base that is virtually impossible to replicate. Mineral royalties are arguably the highest quality natural resource assets you can buy given they represent perpetuity call options and bear no capex or opex (in sharp contrast to the E&Ps that drill on their lands who bear all these costs as well as geological risk – which over time has rendered them very mediocre businesses). Despite this differentiated asset base, the company is covered by E&P analysts (and even worse E&P MLP analysts who cover business models that should never have existed like Linn Energy) who comp BSM against their E&P coverage universe despite the radically different business models. Despite being the largest and most diversified royalty portfolio with the highest quality asset base and most established management track record, BSM trades at a 50% discount to the 4 public royalty comparables (see below) on both yield and EV/EBITDA. A multiple in line with the group would imply +140% to the stock price.
Company Background: Black Stone Minerals is the largest U.S. owner of oil and gas perpetuity mineral interests. The company’s royalty portfolio spans 17 million gross acres in 41 states covering every major U.S. resource basin. The Company owns the mineral rights that oil and gas E&Ps lease in order to drill and produce hydrocarbons. When mineral rights are leased (usually for a three-year term), BSM receives an upfront cash payment (known as a lease bonus) and retains a royalty interest in all future production from the well. The royalty interest is free and clear of any capex or opex and typically entitles BSM to 20-25% of well production. Upon termination of lease, all future development rights revert to BSM to explore or lease again.
In addition to its royalty interest production, BSM has the option under its lease agreements to participate directly in the wells its lessors drill on a well by well basis (and bears its proportionate share of both opex and capex). This working interest business represents ~1/3 of total production but produces minimal current free cash flow given the upfront capex spend. As we will discuss below, we think this portion of the business is a key piece of the misunderstanding.
The company went public in Q2 2015 into the worst energy and MLP market since 2009 and has sold off meaningfully below its $19.00 IPO price (now $15.25). BSM has a minimally levered balance sheet and aims to be consolidator of royalty interests in a period of forced selling among E&Ps and other royalty interest holders. The company currently has rights to 30boe/d (net to them) of production, 2/3 of which is gas.
Misunderstood Business Model: At a cursory level, BSM could resemble a more traditional E&P MLP and is often grouped with those companies and is covered by E&P analysts. However there are important differences that make BSM and royalty trusts more generally a vastly higher quality business model than a traditional E&P / E&P MLP. There is no opex or capex associated with royalty revenue. In contrast to E&Ps, BSM simply collects a fee from third-party production on its land and effectively outsources all of the geological risk, technical expenses, capital outlays, and operating costs to others. And while BSM does plan to expand via land acquisitions (several announced already this year), drilling and new discoveries on its existing minerals provide a cost-free growth mechanism, which is in stark contrast to both midstream and E&P MLPs which grow only at significant capital cost. Royalties are a very high quality business and are in effect a “perpetuity call option” on future growth in production and in commodity prices.
Despite these differences with traditional E&P companies, BSM has been lumped in with E&P MLPs which the market (correctly) views as impaired business models. Part of this may be due to the ~1/3 of BSM’s production is from working interest production (and not royalty interests), and which does require opex and capex. It should be emphasized that BSM has the option but not an obligation to participate alongside operators (meaning the working interest program is entirely discretionary). The working interest program allows BSM to “cherry pick” plays and participate in these wells on a “half-cycle economics” basis (i.e. the exploration and delineation risk is borne by the E&P company and BSM can choose to participate once the play has been de-risked). It is also worth noting that BSM’s working interest program represents <10% of its cash flow, implying that > 90% of the distributable cash underlying the dividend is from the pure royalty portfolio.
We believe that this option to invest in wells at BSM’s discretion is valuable for at least two reasons. First, it is simply an attractive use of capital given the information that BSM has when it makes drilling decisions (again they can simply cherry pick the best acreage in which to participate). Second, it lets the company control its own destiny to a degree, which is contrast to its royalty peers. It is difficult for royalty companies (much less analysts) to estimate their production growth because ultimately drilling budgets are out of their hands. BSM has said that over their history, production on their acreage has organically grown on average at a 5-6% annualized “same-store sales” level under their ownership, we acknowledge that there could be some lumpiness in their production results. This drilling program helps to smooth that lumpiness and provides a growth backstop. Evidence of this is their execution through this most recent downturn: BSM has managed to grow production despite the weak industry conditions (deepest and most elongated sector downturn in the last 50 years).
Significant discount to comps: While there are a few other royalty trust business models in the market both in the US and Canada, BSM differentiates itself in both size and scale. BSM is by far the biggest player and has far more geographic diversity. With the exception of Dorchester Minerals, the other royalty trusts are confined to a single region.
Despite offering geographic diversity, scale, hedge protection (BSM is the only one to use hedges), and a growing/protected dividend (more on that later) BSM trades at a significant discount (~50% below) vs. its peers. We think that this may be due to the capex associated with its working interest program, although bear in mind again that this is completely discretionary and this owner operator management team only engages when it sees attractive returns on that capital. In addition, Freehold Royalties has similar working interests as a mix of its production yet trades at a significantly higher multiple.
Dividend Structure Provides Growing Support: Like all MLPs, BSM pays out the nearly all of its cash flow in a given quarter as a distribution. BSM however has structured its dividend to protect the common units (50% of total units outstanding) over the subordinated units (also 50% of total units). The subordinated units, which are owned by the Company’s legacy shareholders and management, only get paid after all common units have received the Minimum Quarterly Distribution (MQD). There are no arrearages for Subordinated Units. For example, while BSMs cash flow covered 1.1x their Q1 2016 dividend paid to all units (common + subordinated), cash flow covered 1.9x the dividend paid to just common units. Said another way, in that period, cash flow would have had to decline 47% before the common dividend would be as risk. As noted above, this would require oil < $30/bbl and gas < $2.00/mcf.
The second nuance to the structure is dividend growth. BSM’s Minimum Quarterly Distribution (i.e. the amount that the common must get paid before the subordinated can get paid) is contracted to grow 9% per year through Q1 2019, after which the subordinated units will convert to common units at a ratio that guarantees the free cash flow of the company is adequate to maintain the Q1 2019 dividend run-rate. This structure is unprecedented in the world of MLPs and underappreciated by investors and sell-side analysts.
Haynesville Concentration is Positive for Gas Bulls: In 2015, ~25% of total production was from the Haynesville shale in North Louisiana and East Texas, and nearly all of the 2016 drilling capital budget will be spent in the Haynesville/Bossier. The Haynesville was an early beneficiary of the shale revolution, but has been little more than an after-thought over the past cycle due the rise of the Marcellus/Utica. However given the decline in liquids pricing (making dry gas more economic in comparison) and the onerous basis differentials seen in the northeast (in Dom South hub producers right now are getting ~$1.40/mcf less than they would in the Haynesville), interest in the area has picked up and the drilling and completion techniques that were perfected in the Marcellus/Utica are starting to be applied in the Haynesville.
If you are a gas bull, the exposure to the Haynesville is pretty attractive. As a refresher for those who haven’t been following, U.S. gas supply and demand are heading in different directions. Supply has been declining outside of the northeast for several years, and due to the poor realized economics in the northeast new drilling has slowed dramatically and production there has been started to roll over as well. The backlog of pipelines projects that will eventually alleviate the basis differentials in the northeast appear to be slowly moving to the right. Meanwhile, demand has been strong with record demand from power burn and looming LNG and Petchem projects in the Gulf Coast. This dynamic is potentially setting up the gas market to be undersupplied in the 2017-2018 timeframe, requiring a price signal to incentivize drilling. Given its geographic proximity to gas demand growth (i.e. no basis differentials in contrast to the Northeast) and encouraging well results (reflecting significant cost reductions and well productivity advancements over the last 1-2 years), we think the Haynesville should be a beneficiary of the gas bull thesis – along with the Marcellus/Utica, it will be next in line to dispatch on the cost curve. BSM’s largest partner in the Haynesville is XTO (ExxonMobil subsidiary), and our research indicates they have been seeing impressive well results there and are increasing rig counts. A bit of history on the Haynesville: it’s a pure dry gas shale play that was discovered in 2008 and was a focus for the industry from 2008-2011. However, the Haynesville was thereafter de-emphasized when drilling capex shifted to oil shale wells (which bring associated gas as a by-product) given the more attractive economics those plays were yielding at $110/bbl oil. The fall in oil combined with the application of recent technology advances from the oil shale plays to the basin has rekindled interest as the basin has rapidly moved back down the cost curve.
Guidance Revision: Q1 results were strong, and the company indicated that they may be revising guidance with its Q2 results.
Owner Operator Management Team: Board of Directors, affiliates, and management own >20% of company. CEO Tommy Carter owns ~10% of units (split 50/50 between common and subordinated) creating a strong incentive to preserve and grow the distribution and allocate capital prudently. Importantly, because of his split ownership of both share classes, he has no incentive to game the subordinated share conversion mechanism.
Valuation: Valuing a perpetuity call-option that a royalty interest represents is a difficult exercise. The reality is that these royalty trusts (and MLPs more generally) typically trade on a yield basis. Using that short hand, we see substantial upside if this were to even approach the yields that its comps trade at (average of 3.5% yield), using the guaranteed $1.35/unit dividend in 2018.
Q2 earnings (raise production guidance)
Investor re-engagement on yield-oriented investments that is occuring across the market as yields have fallen
|Subject||Re: PDP decline rate|
|Entry||07/25/2016 04:05 PM|
Thistle - I'd push back hard on your conclusions about underlying decline rates. The company has very broad/diversified exposure (17mm gross acres across >60 plays, and only ~15-20% of their acreage is currently leased). The region they label "Louisiana-Mississippi Salt Basin" in their 10-K has 5-6mm of their 17mm gross acres (~30%) but only contributes ~20% of production. Furthermore, this region also includes the Haynesville and Bosier shale where they have significant acreage - and the Haynesville/Bosier is the primary contributor to their production from that region. The old conventional salt dome drilling you describe has long been in decline for the industry and was surpassed years ago by the shale plays. Separately, the Haynesville shale itself in particular went through a period of rapid growth (2008-2012) and then rapid decline and has stabilized around 5-6 bcf/d now that the play is through the high decline rate phase (the first few years of well production). All this equates to a lower PDP decline rate out of these mature assets (the "long tail" in a royalty stream).
However, the best proof that they have manageable decline rates is in their current production rate: they grew production +4% in Q1 despite the largest drilling downturn in the industry since the mid 1980s (the current 460 active rig count in the U.S. is the lower than where the rig count bottomed in the 1999 downturn). If the declines rates were anywhere near what you described you would have seen lower production give the massive (-75%) decline in drilling activity over the last 18 months. Also if we are right on the Haynesville (see Tudor Pickering report on this week that reaches the same conclusion we laid out in our note), this could be a source of production upside for BSM.
If you look at page 75 of their S-1, they show their royalty production since 1980 on a same-store sales basis - you'll see that over that period of time the assets have shown consistent growth.
Also keep in mind the common/subordinated equity structure - this is unique to BSM and creates a huge margin of safety relative to other royalty companies.
|Subject||Haynesville shale renaissance|
|Entry||08/04/2016 08:37 AM|
Chesapeake reported today and offered a lot of new disclosure on the economics in the Haynesville given the improved well technology. When you combine these results with the superior economics (no basis differentials vs. the Marcellus/Utica) it underscores why the play is likely in my view to become the leading dry gas play ex-Marcellus/Utica (which are pipeline constrained and will grow with pipeline expansions). As noted BSM has huge optionality here.
|Subject||Q2 beat and raise|
|Entry||08/08/2016 05:22 PM|
BSM reported $74mm in EBITDA vs. consensus of $51mm and raised production guidance for 2016 by +9% (from previous 29,000 boe/d to 31,500 boe/d). Importantly very little of the Q2 production growth came from the two acquisitions they closed at the end of the quarter ($122mm combined acquisitions from Freeport-McMoRan and other Wattenberg sellers). They also called out higher leasing activity in the Haynesville shale as one of the drivers for the strong leasing revenue ($15.1mm in Q2 2016 vs. $8.2mm in Q2 2015). I'm sure they will elaborate more on the call tomorrow about what they are seeing in the Haynesville broadly.
Dividend was raised +10%.
|Entry||02/13/2017 02:13 PM|
Hey jso1123, updated thoughts on BSM?
|Subject||Re: Still following?|
|Entry||02/13/2017 03:27 PM|
Still really like it, actually bought some more today. I think they are going to get the working interest production off balance sheet that could go a long way to driving the multiple higher. I also think the risk is to the upside on production vs. consensus if you look at what is going on in their underlying plays.
|Subject||Re: Re: Still following?|
|Entry||02/13/2017 04:08 PM|
Thanks for update jso. What have they said on getting working interest off BS? How would they accomplish?
|Subject||Re: Re: Re: Still following?|
|Entry||02/13/2017 04:30 PM|
Not sure, only speculating based on their alluding to it last call. But if you look at Dorchester Minerals that's prob a good case study. My thought is you sell the working interest program to a private buyer who agrees to give you a net profits interest above a hurdle rate. That way BSM can exercise its call option on taking part in wells and sell down to one or a couple of private market buyers but retain a profits interest that is free of any capex. So FCF would be royalty EBITDA and a capex-free net profits interest. I think mgmt here is great and real owner-operators that understand capital allocation so I trust this works out the right way for shareholders. Note they bought back stock in Q1 2016 while everyone in the industry was hiding under their desks - pretty bold for an MLP (b/c of the commitment to maintain a dividend). Most MLPs were out doing what most management teams and boards do at cycle bottoms which is issue expensive equity and preferreds to delever so that they are positioned to over-lever themselves at the next cycle peak buying assets.
|Subject||Re: Re: Re: Re: Still following?|
|Entry||02/13/2017 05:48 PM|
Couldn't agree more :) Thanks for your thoughts.
|Subject||Re: Comparable, Big Picture Question|
|Entry||02/15/2017 11:23 AM|
No strong views on Viper. I see argument for it being cheap but I also think it has a healthy dose of MLP financial engineering (i.e. it is a very small asset base - ~100,0000 gross acres vs. BSM at >17 million gross acres) but the acreage is well located (all Permian) so it has a higher near-term organic growth rate.
Mineral rights are an absolutely amazing business model - it's a perpetuity call option with the ultimate "capital lite" business model. If you look at BSM's acreage, production has grown organically ~6-7% on a "same-store sales" basis on average since the partnership was founded ~35 years ago in the early 1980s and the royalty owner spends $0 capex and is indifferent to cost inflation (in fact you root for it as a mineral owner b/c it means higher commodity prices over time which you participate in as you skim off 15-20% of production free and clear of opex/capex). US energy production grows over time, at various points in time different basins emerge as low cost and will outperform for periods of time (Barnett, Haynesville, now Permian/Marcellus) so I like owning a broad basket with exposure to all basins as it's a better hedge to shifting economics. Think about it in our business - imagine if you owned a perpetuity call option on all 500 stocks in the S&P? Over time earnings grow, some businesses will flame out of course but most will grow earnings 5-6% per year and you get that upside in perpetuity. That's why its so hard to get these mineral rights and accumulate big portfolios - people who own them (often rich families) never sell them. BSM's portfolio can't be replicated. Most important question to ask is whether those acres are located in basins that will ultimately see growing production. Given the US is broadly one of the lowest cost producers of energy in the world, I'm confident that US production will grow for the intermediate to long-term and thus holding a broad basket of mineral rights across multiple basins in the lowest cost producer is a great and irreplicable position to have.
|Subject||Re: Comparable, Big Picture Question|
|Entry||02/15/2017 11:29 AM|
Also note VNOM has a $1.7b market cap and BSM has a $3.3b (assuming sub units convert fully to common) yet BSM has a much broader and asset base. And they have >1mm gross Permian acres vs. VNOM 100,000 gross acres. So I would argue NAV on BSM more attractive. But I get right now VNOM's 100,000 acres are in the "sweet spot" with 80% being drilled by Diamondback (their sponsor) and RSPP so it has a higher organic growth rate and those people view as a better growth profile over next few years.
|Entry||02/28/2017 09:44 AM|
Updated thoughts post earnings? My quick read of earnings was they missed but mostly due to a hedge mtm...?
|Subject||Q1 earnings update|
|Entry||05/11/2017 10:17 AM|
BSM posted a very positive quarter - production grew +17% q/q due to the aggressive drilling in the Haynesville that we referenced in our original write-up that is now showing up as higher volumes. In addition, they executed a major farm-out of their acreage to a large operator (we think BP) that will add +5,000-6,000 BOE/d to royalty production over the next 2 years (+25% increase in their base royalty volumes from this deal alone). EBITDA beat consensus by a healthy amount and they are 1.5x covered on total dividends and 2.5x on common dividends. Leasing bonuses surprised to the upside which is a healthy indicator of future drilling on their land. The dividend goes to $1.25 next quarter which implies an almost 8% dividend yield. The balance sheet is 1.3x levered with ~$200mm in revolver capacity so liquidity and leverage are in a good place.
This situation screens very cheap - an almost 8% dividend yield that is growing ~10% organically, 1x levered b/s, no general partner IDRs, and mgmt that owns a lot of stock (25% held by insiders) and are clearly good operators and know how to incentivize drilling/activity on their lands in tough times (they managed to grow royalty production by +10% in 2016 despite a 75% drop in the industry rig count in 2015/2016).
It's also worth noting that they are moving working interest production off balance sheet (note the deal they did with Canaan Resources last quarter) with the goal of moving royalty production from current 60-65% to 75%+ of total volumes. I anticipate they will do more of these deals in the years ahead.
|Subject||Spoke with IR yesterday|
|Entry||06/16/2017 03:15 PM|
I realized I knew the guy and called him up. Spoke for 90 minutes. I agree this is stupid cheap. Seems pretty clear (as you point out) that the reasons for the mispricing are the non-op working interests, Haynesville burned a lot of investors previously, subordination protections take a few minutes of reading to understand (and of course I missed it in my VNOM comp table too), and frankly you just can't model it - it's a "trust me" situation with respect to management guidance but the counter to that is the absolutely massive insider ownership. IR told me the stakes owned by Stuart Alexander, Tom Carter, Bill Mathis, John Longmaid and Jerry Kyle are their personal money, not legacy institutional investors in the pre-IPO Black Stone. That's $225mm right there.
The other thing that seems to have spooked some people is BSM has apparently been talking about their interest in doing a secondary at the right price to pay down the revolver. I guess investors want to see a specific acquisition for the use of proceeds, but the issue with BSM is they have done a bunch of modest deals on the "credit card" so there isn't one flagship deal to point to. It's just optics.
As far as the working interest stuff I think that is the main hangup. It's not necessarily bad stuff because you don't have all the land/seismic/science costs that are such a black hole for capital at many E&P companies, but I think the valuation would be helped significantly if they got rid of it. If they're going to make capital investments I would just as soon see them redirect that money towards share repurchases anyway.
Crazy that Prairie Sky trades at such a premium to this given both have significant gas exposure. Maybe just maybe they have some better rock up there but the differentials are overwhelmingly in favor of BSM. IR at BSM and basically everyone else I talk to agree that PSK gets the premium because of liquidity and there is more of a captive investor base up there. The CEO talks a good time too. He says all the right things. Seems outstanding. The working interest is an issue but is it really worth 13 turns of EBITDA and giving up >500 bps of yield to avoid it and take on punitive gas differentials? Not even close.
With respect to the Permian, slide 18 of BSM's Jun-01-2017 has that map of their Permian holdings. I was wrong that the 488,053 gross/41,092 net royalty acres is scattered all over the basins. That represents just the stuff inside the Midland/Delaware, not the Central Basin Platform or the arch. There are a few very nice pockets. Even if that's just 5,000 net mineral acres, at $100k/acre that's $500mm.
I like Viper better, but I like this too. Nice catch.
|Entry||09/27/2017 06:20 PM|
jso1123, seeing your post on WLKP reminded me... BSM is yet another quality energy security I own a ton of that is getting no respect. The only things I dislike about it at this point are that G&A is way too high (I visited their offices in August - very nice) and probably won't be coming down any time soon, and all the production growth has been coming from the working interest volumes. Q2'17 mineral volumes were -1.5% y/y and working interest volumes were +59.9% y/y. However, mineral growth is probably on its way given the Haynesville rig ramp. (Amazing that the Haynesville is running the same number of rigs as the Marcellus right now.)
Have you gotten any feedback on BSM from the buy side or sell side lately? I'm still trying to figure out if there's a legitimate fundamental reason why PSK (or TPL) should trade so much richer than BSM and VNOM.
The company gave me some data points on the operator economics of the XTO Haynesville program in Augustine County. EURs per 1k' are ~2.2 Bcfe, so a 7.5k' lateral delivers a gross EUR of 16.5 Bcfe. A royalty in the low double digits gets you to unit F&D costs of $0.80-0.85/mcfe. Netbacks in the high $2s per mcfe generate a well-level recycle ratio of 3.0 - 3.5x. Prettay prettay good.
|Subject||Re: Still cheap...|
|Entry||09/28/2017 12:35 PM|
Snarfy- i still own and really like it, especially right now. I think the story is actually better today than when I pitched it a year ago. Obviously the dividend is higher but they made it through the 2015/2016 downturn (rig count fell -75%) and grew royalty production through that downturn. On that point, I have different numbers than you - Royalty production (excluding working interest volumes) grew +5.1% in 2015, +2.1% in 2016, and they are guiding +9.0% this year (2017). Q2 2017 was +3.3%. In 2016, despite the big downturn they had +10% entry to exit royalty volume growth.
They have also clarified they are going to convert the subordinated units at 65% (inline with current dividend). That means shares outstanding are 163mm (in total), market cap is $2.8b (at $17.15 current price), net debt is $0.4b, EV is $3.2b. 2018 EBITDA is $310mm (consensus $303mm) so EV/EBITDA = 10.4x. 2018 Equity FCF = ~$1.80 using 165mm shares (10.3% FCF yield) and dividend is $1.33 as per step-up (+9% growth) = 7.7% dividend yield and 1.35x coverage. Leverage is 1.2x. I honestly find these numbers somewhat astounding given that royalties trade in the private markets at 5-6% FCF yields per our conversations with brokers and given how expensive markets are how little value is out there broadly. Energy private equity funds have raised billions of dollars to buy these royalties - someone should just buy BSM! (https://www.bloomberg.com/news/articles/2017-07-13/collecting-cash-from-shale-without-spending-a-penny-on-drilling)
Capital allocation has been excellent and what you would expect from an owner-operator firm where insiders own 25% and don't have GP/IDR overrides. They actually bought back stock in Q1 2016 (amazing for am MLP paying out dividends) when energy was at trough and did a number of opportunistic acquisitions like buying out FCX's Permian royalties in Q1 2016 when oil was $35 and copper <$2.00/lb and people thought FCX might go bankrupt. Have done a number of other royalty acquisitions.
Also the market has completed missed the implications of the BP deal in the Haynesville. That deal alone is going to add ~5,000 boe/d to royalty production over the next 2 years (+25% increase in total royalty production). And this is from one deal alone. This isn't being modeled in street #s.
|Subject||Re: Re: Still cheap...|
|Entry||09/28/2017 12:56 PM|
Agreed. I own a ton of it. Not sure what the hell the market wants. Apparently I missed the BP deal too. What is the story?
|Subject||Re: Re: Re: Still cheap...|
|Entry||09/28/2017 02:38 PM|
BP did a big farm in on their royalty acreage, announced on Q1 call (in May). They discuss it on the transcript. This one deal is going to add +5,000-6,000 BOE/d of royalty production starting in 2018 and ramping from there (none of this is in 2017 guidance). Quote from conference call (May 2017):
"This new development program that we have with a major operator out there will take every bit of 9 to 15 months to spool up in terms of its overall activity level. But as we said earlier, we see that activity level maybe getting into the 5,000 to 6,000 BOE per day range, and that would be well into the future and outside of our guidance cycle this year. And I think it's safe to say that virtually none of those volumes are included in our 2017 numbers."
Given they are guiding 22,500 BOE/d of royalty production, this is a really massive increase from this one deal alone (22-27% increase). This means 2018 estimates are way too low given analysts have EBITDA flat.
But given its energy no one seems to care! What a crazy mispricing.
Also keep in mind the 10.3% FCF yield is coming from the 15% of their acreage that is producing. The other 85% is unleased/fallow. While a lot of that is unlikely to be drilled anytime soon, it definitely has value as mineral rights in oil and gas prospective basins. If you backed the asset value of those fallow leases out of the EV, you'd be creating the leased and producing royalty interests at an even cheaper valuation.
|Entry||11/24/2017 06:50 PM|
I'm coming up with a value of $27/unit at $50 WTI/$3 HH. Let me know what you think of this methodology:
The cash distributions you will get out of the business over the next couple of years are more or less locked in, so to my mind the value
Downside: I sensitized the terminal value around WTI and the multiple placed on the cash flows since those two inputs
|Subject||The ATM program|
|Entry||11/25/2017 07:16 PM|
I was pissed to see them issue $31.3mm of equity during Q3, when earlier in the quarter the CFO told me they were of no mind to be issuing equity at these levels. However, IR told me most of that issuance was to a large Canadian investor who wanted to accumulate a stake but couldn't do it in the open market due to the relatively light trading volume of $2mm/d, and they felt that investor would be a good long-term holder to cultivate. I can appreciate that reasoning. Not sure why they couldn't just explain that on the call.
There is possibly an interesting angle to that cross-border purchase. It's tempting to use Canadian royalty bellwether PSK as a comp for L48 vehicles like BSM and VNOM because it trades at such a premium and if it could ever close it would represent a lot of upside. In fact, I think BSM and VNOM should actually trade at a premium to PSK. However, if U.S. investors don't care about minerals and if the Canadian investors who value PSK so highly don't come down here, the gap won't close. Perhaps this investment signals growing awareness up north of the value proposition available down here? If so, maybe there's hope the gap can start to close.
|Subject||Re: The ATM program|
|Entry||11/27/2017 10:50 AM|
snarfy - i'm largely in agreement with how you are looking at it. I think today's announcement probably had some bearing on their willingness to issue equity. pretty much everything about today's news is positive - the business has now transitioned to fully asset-lite (no more working interest spend and they get a promote on working interest spend by these partners of $100mm/year after achieving a preferred return), the acquisition is FCF/share accretive and the valuation looks attractive (10x EBITDA) and will accelerate their move to an all royalty model which should drive multiple higher. Plus Carlyle prefs are cheaper than issuing equity, interesting it came from the mezz group who probably looked at the 1x levered balances sheet and figured they were investing in investment grade debt with 7%+ yields and upside optionality.
|Subject||Re: Re: The ATM program|
|Entry||11/27/2017 12:33 PM|
Yeah the ATM issuance makes more sense in hindsight now. Maybe it's not a coincidence that the proceeds just about plug the gap between the proceeds from $300mm convertible preferred and the $340mm purchase price. Agreed on the positivity of today's news. The purchase price looks awfully low for NBL at 10x cash flow, but perhaps this highlights BSM's ability to create upside by marketing the assets to operators - upside that would not have been nearly as material to NBL, and not worth their time to focus on.
|Subject||Re: tax bill implications|
|Entry||12/06/2017 10:51 AM|
Positive if it goes through as written in the House or Senate bill. The House bill is more favorable because they reduce the pass through tax rate lower than Senate (25% vs. 30%). But in either case, the tax advantages of pass through entities are preserved vs. a C-corp (20% tax then dividen tax on distributions = after-tax profits after double taxation < a 25% or 30% pass through tax)
|Entry||01/03/2018 09:40 PM|
I realize lots of folks use income statement or cash flow statement based metrics (yield + coverage ratios, EV/EBITDA, Price to FCF, etc.) to value oil & gas assets, and also that I'm old and grumpy. That said, these metrics are lazy and often misleading/meaningless when applied to depleting assets, particularly with oil & gas because the asset base turns over so quickly. These guys are investing in working interests and they're buying new royalty interests all the time. Meanwhile, spot prices are changing, futures prices are changing, price of oil vs gas for btu-equivalent production is changing, and decline rates are changing due to new properties and/or changes in productivity of fracs or re-fracs. Mgmt's skill & luck at finding new investments will change as well. Comparable companies will rarely have the same rock, and they certainly won't have the same mgmt. All that means you can't value this like you do a widget factory.
BSM could be dirt cheap for all I know. Mgmt's large stake, no IDRs, seniority of public units, etc. are all good signs. but IMO one should begin valuing an oil & gas company using the PV-10 or comparable acreage. then, unless you'll have or could get control of the properties, one ought to look at mgmt's track record if they have enough history. BSM has been run by the same guy since about 1980 so there's plenty of history. Ideally, one calculates an IRR using a terminal value (i.e. cash inflow in the IRR calc) based either on the PV-10 or comparable acreage. Second best is calculating the historical recycle ratios. Have either of you seen or attempted anything like this?
Thanks and sorry for the rant.
|Subject||Re: valuation metrics|
|Entry||01/04/2018 08:08 AM|
Hi mpk - I think it's a reasonable rant for sure so no reason to apologize. However I disagree with the premise on royalty assets - the framework you are using absolutely works for valuing E&Ps. But royalties are perpetuity assets that are constantly drilled and re-drilled over the years at no cost to the owner which is fundamentally different than the value of a capital-intensive E&P model where to grow you have to drill new wells to offset the declines of prior ones. Since 1980, BSM's organic volume growth on their royalty acreage has been around a 5% CAGR on a like-for-like basis. I think they can continue grow at this level going forward (company says the same and has demonstrated it through 2016-2017 despite the severe cyclical decline in US drilling activity over that period).
Taking a step back: overall US production volumes (esp gas but since 2009 oil as well) have grown through time. The US hasn't added any acreage in land mass - that means the same regions are producing more volume per acre. Royalty owners take a skim on that with no capex/opex. The sources of production growth can shift basin-to-basin based on technology, etc, but long-term the US is now one of the world's lowest cost hydrocarbon producers and will be a growing exporter - a negative trend for global oil and gas prices but bullish for North American volume growth. This is a very bullish long-term trend for US midstream infrastructure and royalty owners.
Take the Permian right now as an example (one of the current growth engines for the industry). A mere 5 years ago this basin had been left for dead - it was viewed as one of the oldest, most mature oil basins that was in perpetual decline (Friday Night Lights stuff). If we had had this discussion in 2010 and you had valued a royalty acre there on the DCF of existing wells and no more you'd have missed out on enormous upside.
Similarly with BSM look at their Haynesville acreage - that region is undergoing a significant renaissance that no one saw underway even 2 years ago. Production is growing rapidly and rig count has gone from like 10 rigs to 40 in the last year. Had you valued BSM's Haynesville acreage when they went public on the DCF of existing wells there and assumed no operators come and drill there again you'd have missed out on enormous upside here as well. The deal that BSM did with BP this summer is going to growing their OVERALL royalty production by +25% over the next 18 months. From that one deal alone. That deal still isn't in any street models btw.
The E&P business is a terrible business but the royalty business is an amazing business. For E&P operator to benefit from growth in these regions, they have to deploy a lot of capital through drilling new wells. But not for royalty owners.
Because basin attractiveness is a moving target and shifts basin to basin over time, I think the broadly diversified royalty companies are the best way to own the space and should trade at a premium. In the case of BSM, you have a bizarre dynamic where it is trading at a massive discount to where private market values for royalty assets are transacting (BSM is a 9% FCF yield vs. 5% range where private royalty assets are trading when you speak with brokers/private market buyers). I just don't see how that dynamic persists for much longer.
Just my thoughts
|Subject||Re: Re: valuation metrics|
|Entry||01/04/2018 10:29 AM|
Jso - is my understanding that there is a finite amount of oil/gas in the ground in a certain area. If you suck out most of the oil/gas (or frack it or flood it or whatever), while you still own the rights, wouldn’t that lease be less valuable to the next guy?
Is this incorrect?
|Subject||Re: Re: Re: valuation metrics|
|Entry||01/04/2018 11:45 AM|
Yes that is incorrect
oil and gas exists in multiple layers/zones etc. what is uneconomic in one environment (commodity prices, location, and with current technology) can be totally economic in a different environment. This is the story of the shale revolution. Look at the Marcellus and Permian for the most obvious current examples. They are two of the oldest oil and gas regions in the world (in fact the very first oil well was discovered in Pennsylvania). Now both are booming again - same acreage, same basins. Just different zones.
Oil reservoirs in the US aren’t like balloons that you stick a straw in them, they deflate, then go empty. The are thousands and thousands of layered zones stacked on top of each other. Shale is low permeability zones that were previously skipped to get to higher permeability areas (which translated to lower cost before fracking technology)
|Subject||Re: Re: valuation metrics|
|Entry||01/04/2018 06:45 PM|
thanks jso- i see your point. let's just say that technology always finds a way to make production economic on BSM lands. we still have to think about mgmt and capital allocation, as about half of the cash they generate is being plowed back in to the biz. (from 2012 - 2016, capex was about 55% of cash from operations)
has anyone been able to find financials prior to 2012? i.e. from the previous private incarnations of this thing? thanks
|Subject||There Will Always Be A Detroit|
|Entry||01/04/2018 09:54 PM|
Hi, guys --
I own some of this stuff but am not 100% sure why, other than references to private market values that I haven't personally verified and a great story that I have questions about.
In any short period, these guys' revenues is equal to volume * price. If oil/gas up, they make more money. If oil/gas goes down, they make less. Just like everybody else.
I'm not sure why we should think about mineral rights as being different from any other kind of interest in land. Owning land is a perpetual option on somebody wanting to build something on your land. Owning mineral rights is a perpetual option on somebody wanting to drill something on your land. Saying "mineral rights is better than E&P" is kind of like saying, "Land ownership is better than development". I mean, sure, I'm not going to argue against, but in some risk/leverage/whatever neutral framework, doesn't it all come out in wash?
Circling back to the most recent conversations, let's take it that the Haynesville was thought to played out, but now due to a confluex of technology, price and know-how and know-where, it turns out that more can be extracted. Haynesville mineral rights owner definitely got another long draw off the pipe! But why is this different from owning land in Detroit? That an option is perpetual doesn't necessarily make it better, at some price, etc. OK, let's value E&Ps off a PV10. Let's acknowledge that rights owners are worth more than E&Ps. Should we value them off a PV11? PV12? PVXX? What?
The "No additional cap-ex" argument never made any sense to me in an efficient markets framework; you buy steel instead of land.
I'm open to the argument that, because these guys are essentially buying options, you can insanely outperform more short term strategies over long periods of time; is that the real thesis here?
|Subject||Re: Re: Re: valuation metrics|
|Entry||01/05/2018 12:56 PM|
They had a working interest program they overlaid on their royalty business where they could cherry pick wells to take stakes in. They are exiting this due to feedback from the market that the working interest investments are the reason the stock has such a depressed multiple. They did two transactions this year to have third parties take their working interest and give them a capex-free profit share. Capex will be $0 by mid-2018 (see last transcript).
|Subject||Re: There Will Always Be A Detroit|
|Entry||01/05/2018 03:01 PM|
My conclusion here - as it is with so many thihgs - is that it's all a question of price. The capex-free nature of royalty ownership argues for a higher multiple of cash flow vs a working interest. so does the potential for new zones becoming economic on your land, or improved recovery from zones that have already seen primary and/or secondary production. the question is therefore, "how much higher?"
My gut feeling is that this stock - er, unit - is gonna work. Assuming flat oil & gas prices, we could simply look at the yield on BSM and conclude that it's cheap if the trend in production volumes from their land continues (i.e. flat-to-increasing).
But can we? These guys are plowing half of cash flow back into acquisition of new royalty interests, and therefore the asset base is continually evolving. Apparently we just don't know what their track record has been at that game. Keep in mind that the chart on page 73 shows the history of what they own TODAY - i.e. this isn't exactly the asset base they've owned from the beginning. Prior to the shale revolution, gas production in the US was on the decline. One would think that the rights they've been buying are on land in today's big shale plays, and therefore might have better historical production trends than on other land they've owned where conventional production used to be strong but the source rock just hasn't been amenable to fracking (yet).
In skimming through the S-1 as well as all the sellside initiation reports I could find, I never saw any mention of mgmt's track record aside from the last 5 years. But they've been at this for like 37 years. I'm not sure what to make of that.
|Subject||Re: Re: There Will Always Be A Detroit|
|Entry||01/12/2018 04:02 PM|
In my view there are two types of upstream entrepreneurs that last that long in the business. The first kind are the guys who churn through investors but they are able to stay in the game because they know how to promote the allure of the treasure hunt. You can tell who they are when you see them at conferences. They mainly talk about the next prospect, the next big thing, etc. They never talk about metrics that matter to per share value creation. They never talk about how they built their organization or what their approach to capital allocation is. They're always spinning - here's why something that looks shitty actually has a great future, etc. Always looking for new investors who can carry them for another around.
The second kind are guys like Tom Carter at BSM or Joe Foran at MTDR who accumulate investors over the years. Those guys are able to build up a base of investors who stick with them because at the end of the day they put up returns. Look at BSM's board. A number of those guys have been invested with Carter for years and they keep a shit ton of money in BSM. So yeah it would be nice to see Tom's numbers since his inception in the early 1980s but it's not a "tell". The inside ownership is the "tell".
|Subject||Re: Re: Re: There Will Always Be A Detroit|
|Entry||01/12/2018 07:23 PM|
I agree Snarfy. When we underwrote this we spent a lot of time with them onboard houston. It’s a real owner operator culture - insiders control 20-25% of the company and capital allocation has been excellent (they bought back stock in q1 2016 when other MLPs were all issuing it).
|Subject||Re: Re: Re: There Will Always Be A Detroit|
|Entry||01/12/2018 09:23 PM|
ok thanks. how do you know they've been invested with Carter for years? is that disclosed somewhere?
|Subject||Re: Re: There Will Always Be A Detroit|
|Entry||01/13/2018 09:27 AM|
bowd57, since you create your anecdotal example using detroit, here is my anecdotal counter-example. An 'aquantance' of mine was contacted some years ago by a texas attorney. Apparently his parents had sold some texas ranch land in the late sixties but maintained mineral rights. Turns out that although they had no idea they owned it, he and his 4 siblings still had claim on the mineral rights... nearly 50 years later. Fracking tech now creates six figure income - bag of money just fell out of the sky. Will say I prefer owning them directly not via a company that reinvests proceeds. Beyond that valued like any investment - value creaton for investor depends upon what you pay vs. what you get, etc.