Royalty lp yields 7%, with good coverage, major growth, goes ex-dividend soon – black stone minerals lp (nyse bsm) seeking alpha kansas gas service bill pay


Looking for a high dividend yield backed by growth? We went looking further afield for high-yielders with strong growth this week, and we came across Black Stone Minerals LP ( BSM), a Houston-based company founded in 1876, which has grown to be Black Stone Minerals, L.P. It is the "largest publicly traded yield vehicle focused on oil and gas mineral and royalty interests in the United States, with over 20 million mineral and royalty acres with interests in 41 states and 64 producing basins. As of December 31, 2017, the company had a total estimated proved oil and natural gas reserves of 67,945 barrels of oil equivalent."

Unlike other royalty yield plays you may have come across, BSM is actively managed, with no "end date," and its management has steadily built up the company’s asset base to its present status, in which they have interests in most of the major energy producing areas in the US:

In 2017, management made its biggest acquisition to date, buying mineral interests and other non-cost bearing royalty interests from Noble Energy (NYSE: NBL) for $335M. The acquisition complemented BSM’s existing holdings, significantly increased its Permian basin presence, and also broadened its Williston Basin in Mid-Continent portfolios:

In addition to its mineral interests, and over-riding royalty interests (an interest in the proceeds or revenue from the oil & gas minerals sold, but not in the minerals themselves), BSM also owns other types of non-cost-bearing royalty interests, which include:

"Nonparticipating royalty interests (“NPRIs”), which are royalty interests that are carved out of the mineral estate and represent the right, 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."

"Working interests related to our mineral interests in various plays across our asset base. We are typically granted a unit-by-unit, or a well-by-well option to participate on a non-operated working-interest basis in drilling opportunities on our mineral acreage. This right to participate in a unit or well is exercisable at our sole discretion. We generally only exercise this option when the results from prior drilling and production activities have substantially reduced the economic risk associated with development drilling and where we believe the probability of achieving attractive economic returns is high. The majority of these assets are focused in the Anadarko Basin, and to a lesser extent, in the Permian and Powder River Basins."

Management didn’t issue EBITDA or DCF guidance, as they don’t forecast prices, so the big question becomes whether or not energy prices will be stable, higher or lower in the balance of 2018 and in 2019, when the subordinated units are supposed to convert.

Here’s some more fuel for the fire – the above guidance doesn’t include acquisitions, which given management’s history, there’s probably a pretty good chance that they’ll acquire more assets. So, they also issued five-year guidance, including acquisitions, which kicks up the volume projections a bit higher:

"Based on this pre-acquisition outlook and improved commodity prices, Black Stone expects to be in a position to convert the subordinated units into common units on a one-to-one basis, while growing distributions and remaining strong and maintaining strong coverage ratios following distribution."

"The board’s view right now and why we felt that was an appropriate time to come out with an updated view, I think, the board’s intention now would be to bring the subs distribution to parity with the common when we move to the $.35 MQD with the second quarter of 2018."

So, it looks like management will move the common and subordinated payout to $.35 for the August Q2 distribution. We should hear more details about the conversion and upcoming distributions when BSM reports its Q1 ’18 earnings on May 7th, followed by the Q2 call on May 8th. Positive Developments:

"BP PLC on its most recent quarterly earnings call out of the UK, specifically cited our area of the Shelby Trough, which they call SoHa for South Haynesville, as possibly the most lucrative gas play in the United States. Further they stated that they plan to direct over half of BP’s 2018 capital budget for the lower 48 to this area."

"We farmed out substantially all of our future working interest in the Shelby Trough which allows Black Stone to benefit as a mineral owner from the development of the Haynesville/Bossier play while transitioning the production and cash flow base away from working interest participation. I mentioned our goal to de-emphasize the working interest program and replace those volumes with mineral and royalties."

"The Haynesville/Bossier was the largest contributor to our mineral and royalty production in the fourth quarter of 2016. A year later, it still is and we have grown that by over 50%. In the Permian, we’ve more than tripled our mineral and royalty production year-over-year."

"With completion of the two working interest farmouts last year, we now expect that our net working interest capex will follow the relatively de minimis levels by mid-18, and as a result we no longer plan to track DCF after working interest capex." (Source: Q4 ’17 earnings call) Performance:

Since its earnings are tied to a mix of oil and natural gas, BSM doesn’t exactly track either commodity. Like many other MLPs, BSM’s price/unit has perked up a bit over the past month, but it’s still down slightly year-to-date: Analysts’ Price Targets:

At a price/DCF of 12.09, and a price/book of 4.60, BSM doesn’t look particularly cheap. It also has an EV/EBITDA of 12.86, which is higher than most of the other energy-related LP’s we cover. However, its 7% distribution yield dwarfs its industry’s average yield of .50%. Some of the peers that BSM included in its industry comps are Newfield Exploration Company, ( NFX), PDC Energy, (PDC), Chesapeake Energy, ( CHK), and Range Resources ( RRC). Financials:

"As of the end of the quarter, we had $388 million of debt outstanding, and our debt to trailing 12 months EBITDAX was about 1.3 times and that’s consistent with last quarter. We had over $150 million of liquidity available to us at quarter end and during the fourth quarter, we closed on an amended credit facility with our existing bank group debt, among other things, it extends the maturity date until November of 2022." (Source: Q4 ’17 earnings call)

We rate BSM a hold. This is an interesting, dynamic company, with good growth prospects, but the future distribution coverage is giving us the "cloudy, ask again later" message on the old magic 8 ball. Put this one on your watch list, until after the Q1 ’18 earnings call, when the conversion issue, and hopefully, the DCF/distribution coverage picture, become clearer.

CLARIFICATION: We have two investing services. Our independent, legacy site,, has been specializing in increasing yields via selling options on quality high dividend stocks since 2009. Option yields have improved a great deal in 2018, due to higher market volatility.