SEC Filing - Black Stone Minerals L.P.

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bsm-20211231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


☒			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 001-37362


Black Stone Minerals, L.P. (Exact Name of Registrant As Specified in its charter)


Delaware						47-1846692
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)
1001 Fannin Street, Suite 2020 Houston, Texas						77002
(Address of Principal Executive Offices)						(Zip Code)


(713) 445-3200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol (s)

Name of each exchange on which registered

Common Units Representing Limited Partner Interests

BSM

New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

☐

Non-Accelerated Filer

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The aggregate market value of the common units held by non-affiliates was $1,787,042,300 on June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, based on a closing price of $10.75 per unit as reported by the New York Stock Exchange on such date. As of February 18, 2022, 209,118,081 common units and 14,711,219 Series B cumulative convertible preferred units of the registrant were outstanding.

Documents Incorporated by Reference: Certain information called for in Items 10, 11, 12, 13, and 14 of Part III are incorporated by reference from the registrant’s definitive proxy statement for the annual meeting of unitholders.

BLACK STONE MINERALS, L.P.

TABLE OF CONTENTS


		PAGE
PART I

ITEMS 1 AND 2.	BUSINESS AND PROPERTIES	3
ITEM 1A.	RISK FACTORS	26
ITEM 1B.	UNRESOLVED STAFF COMMENTS	46
ITEM 3.	LEGAL PROCEEDINGS	46
ITEM 4.	MINE SAFETY DISCLOSURES	46

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNITHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES	47
ITEM 6.	RESERVED	50
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	51
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	66
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	66
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	66
ITEM 9A.	CONTROLS AND PROCEDURES	66
ITEM 9B.	OTHER INFORMATION	67

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	68
ITEM 11.	EXECUTIVE COMPENSATION	68
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS	68
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	68
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	68

PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	69

GLOSSARY OF TERMS

The following list includes a description of the meanings of some of the oil and gas industry terms used in this Annual Report on Form 10-K (“Annual Report”).

Authorization for Expenditures (AFE). A budgeting document, usually prepared by an operator, to list estimated expenses of drilling a well to a specified depth, casing point or geological objective, and then either completing or abandoning the well. This estimate of expenses is provided to partners for approval prior to commencement of drilling or subsequent operations.

Basin. A large depression on the earth’s surface in which sediments accumulate.

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume.

Bbl/d. Bbl per day.

Bcf. One billion cubic feet of natural gas.

Boe. Barrels of oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil. This “Btu-equivalent” conversion metric is based on an approximate energy equivalency and does not reflect the price or value relationship between oil and natural gas.

Boe/d. Boe per day.

British Thermal Unit (Btu). The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Completion. The process of treating a drilling well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.

Condensate. A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.

Crude oil. Liquid hydrocarbons retrieved from geological structures underground to be refined into fuel sources.

Delaware Act. Delaware Revised Uniform Limited Partnership Act.

Delay rental. Payment made to the lessor under a non-producing oil and natural gas lease at the end of each year to defer a drilling obligation and continue the lease for another year during its primary term.

Deterministic method. The method of estimating reserves or resources under which a single value for each parameter (from the geoscience, engineering, or economic data) in the reserves calculation is used in the reserves estimation procedure.

Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production.

Development costs. Capital costs incurred to obtain access to proved reserves and provide facilities for extracting, treating, gathering, and storing oil and natural gas.

Development well. A well drilled within the proved area of an oil and natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Differential. An adjustment to the price of oil or natural gas from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.

Dry hole or dry well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Economically producible. A resource that generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation.

Exploitation. A drilling or other project which may target proven or unproven reserves (such as probable or possible reserves), but which generally has a lower risk than that associated with exploration projects.

iii

GLOSSARY OF TERMS

Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.

Extension well. A well drilled to extend the limits of a known reservoir.

Farmout agreement. An agreement with a working interest owner, called the "farmor," whereby the farmor agrees to assign some or all of the working interest to another party, called the "farmee," in exchange for certain contractually agreed services with respect to such acreage or for payment for drilling operations on the acreage.

Field. An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Formation. A layer of rock which has distinct characteristics that differs from other nearby rock.

Gross acres or gross wells. The total acres or wells, as the case may be, in which an interest is owned.

Horizontal drilling. A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval.

Hydraulic fracturing. A process used to stimulate production of hydrocarbons. The process involves the injection of water, sand, and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production.

Lease bonus. Usually a one-time payment made to a mineral owner as consideration for the execution of an oil and natural gas lease.

Lease operating expense. All direct and allocated indirect costs of lifting hydrocarbons from a producing formation to the surface and preparing the hydrocarbons for delivery off the lease, constituting part of the current operating expenses of a working interest. Such costs include labor, supplies, repairs, maintenance, allocated overhead charges, workover costs, insurance, and other expenses incidental to production, but exclude lease acquisition or drilling or completion costs.

Liquefied natural gas (LNG). Natural gas that has been cooled to a liquid state for ease and safety of non-pressured storage or transport.

Log. A measurement that provides information on porosity, hydraulic conductivity, and fluid content of formations drilled in fluid-filled boreholes.

MBbls. One thousand barrels of oil or other liquid hydrocarbons.

MBoe. One thousand Boe.

MBoe/d. MBoe per day.

Mcf. One thousand cubic feet of natural gas.

Mineral interests. Real-property interests that 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.

MMBtu. Million British Thermal Units.

MMcf. Million cubic feet of natural gas.

Net acres or net wells. The sum of the fractional interest owned in gross acres or gross wells, respectively.

Net revenue interest. An owner’s interest in the revenues of a well after deducting proceeds allocated to royalty, overriding royalty, and other non-cost-bearing interests.

GLOSSARY OF TERMS

Natural gas. A combination of light hydrocarbons that exists in a gaseous state at atmospheric temperature and pressure. In nature, it is found in underground accumulations, and may potentially be dissolved in oil or may also be found in its gaseous state.

NGLs. Natural gas liquids.

Nonparticipating royalty interest (NPRI). A type of non-cost-bearing royalty interest, which is carved out of the mineral interest and represents 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.

NYMEX. New York Mercantile Exchange.

Oil. Crude oil and condensate.

Oil and natural gas properties. Tracts of land consisting of properties to be developed for oil and natural gas resource extraction.

Operator. The individual or company responsible for the exploration and/or production of an oil or natural gas well or lease.

Overriding royalty interest (ORRI). A fractional, undivided interest or right of participation in the oil or natural gas, or in the proceeds from the sale of the oil or gas, produced from a specified tract or tracts, which are limited in duration to the terms of an existing lease and which are not subject to any portion of the expense of development, operation, or maintenance.

Plugging and abandonment. Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.

Pooling. Pooling refers to an operator’s consolidation of multiple adjacent leased tracts, which may be covered by multiple leases with multiple lessors, in order to maximize drilling efficiency or to comply with state mandated well spacing requirements.

Production Costs. The production or operational costs incurred while extracting and producing, storing, and transporting oil and/or natural gas. Typically, these costs include wages for workers, facilities lease costs, equipment maintenance, well repairs, logistical support, applicable taxes, and insurance.

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.

Proved developed reserves. Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well, and through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Proved developed producing reserves (PDP). Proved reserves expected to be recovered from existing completion intervals in existing wells.

Proved reserves. The estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved undeveloped reserves (PUD). Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.

Reliable technology. A grouping of one or more technologies (including computation methods) that have been field tested and have been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

GLOSSARY OF TERMS

Reserves. Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to the market, and all permits and financing required to implement the project. Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir, or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Resource play or play. A set of discovered or prospective oil and/or natural gas accumulations sharing similar geologic, geographic, and temporal properties, such as source rock, reservoir structure, timing, trapping mechanism, and hydrocarbon type.

Royalty interest. An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any development or operating costs.

Seismic data. Seismic data is used by scientists to interpret the composition, fluid content, extent, and geometry of rocks in the subsurface. Seismic data is acquired by transmitting a signal from an energy source, such as dynamite or water, into the earth. The energy so transmitted is subsequently reflected beneath the earth’s surface and a receiver is used to collect and record these reflections.

Shale. A fine grained sedimentary rock formed by consolidation of clay- and silt-sized particles into thin, relatively impermeable layers. Shale can include relatively large amounts of organic material compared with other rock types and thus has the potential to become rich hydrocarbon source rock. Its fine grain size and lack of permeability can allow shale to form a good cap rock for hydrocarbon traps.

Spacing. The distance between wells producing from the same reservoir, often established by regulatory agencies.

Standardized measure. The present value of estimated future net revenue to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the Securities and Exchange Commission (using prices and costs in effect as of the date of estimation), less future development, production and income tax expenses, and discounted at 10% per annum to reflect the timing of future net revenue. Standardized measure does not give effect to derivative transactions.

Tight formation. A formation with low permeability that produces oil and/or natural gas with low flow rates for long periods of time.

Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

Working interest (WI). An operating interest that gives the owner the right to drill, produce, and conduct operating activities on the property, and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations.

Workover. Operations on a producing well to restore or increase production.

WTI. West Texas Intermediate oil, which is a light, sweet crude oil, characterized by an American Petroleum Institute (“API”) gravity between 39 and 41 and a sulfur content of approximately 0.4% by weight that is used as a benchmark for the other crude oils.

SUMMARY OF RISK FACTORS

The following is a brief summary of the principal factors that make an investment in us speculative or risky. For additional information regarding known material factors that could cause our actual results to differ from our projected results, please read Part I, Item 1A. “Risk Factors.”

•The COVID-19 pandemic has adversely affected our business, and the ultimate effect on our financial condition, results of operations, and cash distributions to unitholders will depend on future developments, which are highly uncertain and cannot be predicted;

•We may not generate sufficient cash from operations to pay distributions on our common units;

•The volatility of oil and natural gas prices, and the potential material reduction in demand for oil and natural gas due to factors beyond our control, greatly affects our financial condition, results of operations, and cash distributions to unitholders;

•There are inherent risks to our business related to our ability to identify, fund, complete, and integrate acquisitions, as well as risks related to completed acquisitions including our ability to obtain subsequent financing, satisfactory title to the assets we acquire, and the occurrence of significant changes to the assets we acquire, among others;

•Risks exists related to our unaffiliated operators on which we depend for exploration, development and production on the properties underlying our mineral and royalty interests and non-operated working interests, including their efficiency, their timely royalty payments, and their ability to obtain needed capital or financing;

•We may be unable to obtain needed capital or financing for acquisitions and our non-operated working interests;

•Our credit facility has substantial restrictions and financial covenants that may restrict our business and financing activities and our ability to pay distributions;

•Production-related risks may affect our business, including:

◦Production decline rates and ability to replace current and future production;

◦The willingness and ability of operators to develop or produce proved undeveloped drilling locations;

◦Yield rates for project areas on our properties in various stages of development;

◦The availability of certain materials, equipment, transportation, pipelines, and refining facilities;

◦The accuracy of our reserve estimates; and

◦Risks related to drilling and completion techniques for exploratory drilling in shale plays;

•We face ongoing environmental, legal and regulatory risks, including:

◦Potential reductions in demand for oil and natural gas resulting from conservation measures, technological advances and general concern about the environment;

◦Compliance with existing and newly-adopted laws and regulations at the federal, state and local levels;

◦Risks arising out of the threat of climate change;

◦Operating hazards and uninsured risks such as secondary liability for damage to the environment;

•We rely on a few key individuals whose absence or loss could adversely affect our business;

•Title to the properties in which we have an interest may be impaired by title defects;

•Our partnership agreement includes certain provisions which limit the rights of and pose other risks to our common unitholders, including:

◦The ability of the board of directors (the “Board”) of our general partner to modify or revoke our cash distribution policy;

◦The limitation on fiduciary duties owed by and potential liability of our general partner, its directors and executive officers to our unitholders;

◦The restriction of the voting rights of certain large unitholders;

◦Exclusive forum, venue, and jurisdiction provisions; and

◦Our ability to authorize the issuance of additional common units and other equity interests without common unitholder approval;

•Other risks to our unitholders include:

◦Actions taken by our general partner may affect the amount of cash generated from operations that is available for distribution to unitholders;

◦The market price of our common units could be adversely affected by certain events, including increases in interest rates and the sales of substantial amounts of our common units in the public or private markets;

◦Unitholders may have liability to repay distributions pursuant to Delaware law and common units may be subject to redemption; and

◦Tax-related risks;

•Finally, our business is subject to general risk factors likely common to most publicly-traded issuers.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Annual Report may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

•our ability to execute our business strategies;

•the scope and duration of the COVID-19 pandemic and actions taken by the governmental authorities and other parties in response to the pandemic;

•the volatility of realized oil and natural gas prices;

•the level of production on our properties;

•the overall supply and demand for oil and natural gas, and regional supply and demand factors, delays, or interruptions of production;

•our ability to replace our oil and natural gas reserves;

•our ability to identify, complete, and integrate acquisitions;

•general economic, business, or industry conditions, including slowdowns, domestically and internationally and volatility in the securities, capital, or credit markets;

•competition in the oil and natural gas industry;

•the level of drilling activity by our operators particularly in areas such as the Shelby Trough where we have concentrated acreage positions;

•the ability of our operators to obtain capital or financing needed for development and exploration operations;

•title defects in the properties in which we invest;

•the availability or cost of rigs, equipment, raw materials, supplies, oilfield services, or personnel;

•restrictions on the use of water for hydraulic fracturing;

•the availability of pipeline capacity and transportation facilities;

•the ability of our operators to comply with applicable governmental laws and regulations and to obtain permits and governmental approvals;

•federal and state legislative and regulatory initiatives relating to hydraulic fracturing;

•future operating results;

•future cash flows and liquidity, including our ability to generate sufficient cash to pay quarterly distributions;

•exploration and development drilling prospects, inventories, projects, and programs;

•operating hazards faced by our operators;

•the ability of our operators to keep pace with technological advancements;

•conservation measures and general concern about the environmental impact of the production and use of fossil fuels;

•cybersecurity incidents, including data security breaches or computer viruses; and

•certain factors discussed elsewhere in this Annual Report.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please read Part I, Item 1A. “Risk Factors.”

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise.

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

General

We are one of the largest owners and managers of oil and natural gas mineral interests in the United States ("U.S."). Our principal business is maximizing the value of our existing mineral and royalty assets through active management and expanding our asset base through acquisitions of additional mineral and royalty interests. We maximize value through marketing our mineral assets for lease, creatively structuring the terms on those leases to encourage and accelerate drilling activity, and selectively participating alongside our lessees on a working interest basis. We believe our large, diversified asset base and long-lived, non-cost-bearing mineral and royalty interests provide for stable production and reserves over time, allowing the majority of generated cash flow to be distributed to unitholders.

We own mineral interests in approximately 16.8 million gross acres, with an average 43.5% ownership interest in that acreage. We also own NPRIs in 1.8 million gross acres and ORRIs in 1.7 million gross acres. These non-cost-bearing interests, which we refer to collectively as our “mineral and royalty interests,” include ownership in over 70,000 producing wells. Our mineral and royalty interests are located in 41 states in the continental U.S., including all of the major onshore producing basins. Many of these interests are in active resource plays, including the Haynesville/Bossier shales in East Texas/Western Louisiana, the Wolfcamp/Spraberry/Bone Springs in the Permian Basin, the Bakken/Three Forks in the Williston Basin, and the Eagle Ford shale in South Texas. The combination of the breadth of our asset base, the long-lived, non-cost-bearing nature of our mineral and royalty interests, and our active management expose us to potential additional production and reserves from new and existing plays without being required to invest additional capital.

We are a publicly traded Delaware limited partnership formed on September 16, 2014. Our common units trade on the New York Stock Exchange under the symbol "BSM."

BSM files or furnishes annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to these reports with the U.S. Securities and Exchange Commission (“SEC”). Through our website, http://www.blackstoneminerals.com, we make available electronic copies of the documents we file or furnish to the SEC. Access to these electronic filings is available free of charge as soon as reasonably practicable after filing or furnishing them to the SEC.

PART I

Our Assets

As of December 31, 2021, our total estimated proved oil and natural gas reserves were 59,824 MBoe based on a reserve report prepared by Netherland, Sewell & Associates, Inc. (“NSAI”), an independent third-party petroleum engineering firm. Of the reserves as of December 31, 2021, approximately 94% were proved developed producing reserves and approximately 6% were proved undeveloped reserves. At December 31, 2021, our estimated proved reserves were 32% oil and 68% natural gas.

The locations of our oil and natural gas properties are presented on the following map. Additional information related to these properties is provided below under "Our Properties" based on major geographical region and by material resource play as denoted on the map below.

https://cdn.kscope.io/e7dbde255e987e0b5e29dcd79a95a01d-bsm-20211231_g1.jpg

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. Mineral interests generate the substantial majority of our revenue and are also the assets over which we have the most influence.

In addition to mineral interests, we also own 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, 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; and

•Overriding royalty interests (“ORRIs”), which 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.

We may own more than one type of mineral and royalty interest in the same tract of land. For example, where we own an ORRI in a lease on the same tract of land in which we own a mineral interest, our ORRI in that tract will relate to the same gross acres as our mineral interest in that tract. As of December 31, 2021, approximately 26% of our mineral and royalty interests are leased, calculated on a cumulative gross acreage basis for all three types of mineral and royalty interests.

The majority of our producing mineral and royalty interest acreage is pooled with third-party acreage to form pooled units. Pooling proportionately reduces our royalty interest in wells drilled in a pooled unit, and it proportionately increases the number of wells in which we have such reduced royalty interest.

Non-Operated Working Interests

We own non-operated working interests related to our mineral interests in various plays across our asset base. The majority of our working interest exposure is in the Haynesville/Bossier play in San Augustine County, Texas and Angelina County, Texas where we own non-operated working interests. In 2017, we entered into farmout arrangements (discussed below) for our entire working interest position in that area. We also hold working interests acquired through working interest participation rights, which we often include in the terms of our leases. This participation right complements our core mineral and royalty interest business because it allows us to realize additional value from our minerals. Under the terms of the relevant leases, 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.

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 13% of our total production volumes during the year ended December 31, 2021. As of December 31, 2021, we owned non-operated working interests in 5,045 gross (234 net) wells.

Our 2022 capital expenditure budget associated with our non-operated working interests is expected to be approximately $4.5 million. The majority of this capital is anticipated to be spent for workovers and recompletions on existing wells in which we own a working interest.

Farmout Agreements

We have entered into farmout arrangements designed to reduce our working interest capital expenditures and thereby significantly lower our capital spending other than for mineral and royalty interest acquisitions. Under these agreements, we conveyed our rights to participate in certain non-operated working interest opportunities to external capital providers while retaining value from these interests in the form of additional royalty income or retained economic interests.

In 2017, we entered into farmout arrangements with Canaan Resource Partners ("Canaan") and Pivotal Petroleum Partners ("Pivotal") in the Shelby Trough area of East Texas where we own a concentrated, relatively high-interest royalty position. This area was under active development by XTO Energy Inc. ("XTO") in San Augustine County, Texas and BPX Energy in Angelina County, Texas through 2019. These farmout agreements were superseded and replaced by the new farmout agreements discussed below.

San Augustine Farmout

In March 2021, we reached an agreement with XTO to partition jointly owned working interests in the San Augustine County development area. Under the partition agreement, we exchanged working interests with XTO in certain existing and proposed drilling units, resulting in each company holding 100% of the working interests in their respective partitioned units.

In May 2021, we entered into an agreement with Aethon Energy ("Aethon") to develop certain of our undeveloped acreage in San Augustine County, including the working interests resulting from the partition agreement discussed above. The agreement provides for minimum well commitments by Aethon in exchange for reduced royalty rates and exclusive access to our mineral and leasehold acreage in the contract area. The agreement calls for a minimum of five wells to be drilled in the initial program year, which began in the third quarter of 2021, increasing to a minimum of twelve wells per year beginning with the fourth program year. Our development agreement with Aethon and related drilling commitments covering our San Augustine County acreage is independent of the development agreement and associated commitments covering Angelina County discussed below.

In May 2021, we entered into a new farmout agreement (the "Canaan Farmout") with Canaan and in December 2021, we entered into a farmout agreement (the "Azul Farmout") with Azul-SA, LLC ("Azul"). These agreements each cover part of our share of working interests under active development by Aethon in San Augustine County, Texas. The Canaan and Azul Farmouts continue until May and December 2031, respectively, unless earlier terminated in accordance with the terms of the agreements. Canaan and Azul will each earn a percentage of our working interest in wells drilled and operated by Aethon within the contract area subject to the agreements. Canaan will earn 80% of our working interest in the partitioned acreage from XTO (up to a maximum of 40% on an 8/8ths basis) and 50% of our working interest in other areas (up to a maximum of 12.5% on an 8/8ths basis). Azul will earn the remaining 20% of our working interest in the partitioned acreage from XTO (up to a maximum of 10% on an 8/8ths basis) and the remaining 50% of our working interest in other areas (up to a maximum of 12.5% on an 8/8ths basis). Canaan and Azul are obligated to fund the development of wells drilled by Aethon in the initial program year, and thereafter, have certain rights and options to continue funding our working interest for the duration of each farmout agreement. We will receive an ORRI before payout and an increased ORRI after payout on all wells drilled under the Azul and Canaan Farmouts. As of December 31, 2021, three wells have been spud in the contract area subject to the Azul and Canaan Farmouts.

Angelina Farmout

In May 2020, we entered into an agreement with Aethon to develop certain portions of the area forfeited by BPX Energy in Angelina County, Texas. The agreement provides for minimum well commitments by Aethon in exchange for reduced royalty rates and exclusive access to our mineral and leasehold acreage in the contract area. The agreement calls for a minimum of four wells to be drilled in the initial program year, which began in the third quarter of 2020, increasing to a minimum of fifteen wells per year beginning with the third program year.

In November 2020, we entered into a new farmout agreement (the "Pivotal Farmout") with Pivotal. The Pivotal Farmout covers our share of working interest under active development by Aethon in Angelina County, Texas and continues until April 2028, unless earlier terminated in accordance to the terms of the agreement. Pivotal will earn 100% of our working interest (ranging from approximately 12.5% to 25% on an 8/8ths basis) in wells drilled and operated by Aethon within the contract area subject to the agreement. Pivotal is obligated to fund the development of all wells drilled by Aethon in the initial program year and thereafter, Pivotal has certain rights and options to continue funding our working interests for the duration of the Pivotal Farmout. Once Pivotal achieves a specified payout for a designated well group, we will obtain a majority of the original working interest in such well group. As of December 31, 2021, a total of eight wells have been spud in the contract area subject to the Pivotal Farmout.

Our Properties

BSM Land Regions

We divide the contiguous U.S. into major geographical regions that we 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.

The following tables present information about our mineral and royalty interests and working interests by BSM Land Region:


	Acreage as of December 31, 20211
	Mineral and Royalty Interests									Working Interests2
BSM Land Region	Mineral Interests			NPRIs			ORRIs
	Gross Acres	Net %3		Gross Acres	Net %4		Gross Acres	Net %4		Gross Acres	Net Acres
Gulf Coast	7,916,706	52.1	%	552,748	4.0	%	231,304	4.0	%	444,393	89,269
Southwestern U.S.	2,768,432	25.4	%	1,003,020	3.4	%	206,090	1.7	%	29,547	12,780
Rocky Mountains	2,122,397	15.4	%	242,999	3.1	%	910,080	2.5	%	93,952	16,174
Eastern U.S.	1,656,961	47.4	%	1,727	3.9	%	74,912	1.4	%	13,487	1,346
Mid-Continent	1,283,898	34.5	%	38,931	3.2	%	282,507	3.7	%	40,502	26,770
Western U.S.	1,025,566	89.2	%	331	0.3	%	32,965	2.9	%	—	—
Total	16,773,960	43.5	%	1,839,756	3.5	%	1,737,858	2.8	%	621,881	146,339

1 We may own more than one type of interest in the same tract of land. For example, where we have acquired non-operated working interests related to our mineral interests in a given tract, our working interest acreage in that tract will relate to the same acres as our mineral interest acreage in that tract. Consequently, some of the acreage shown for one type of interest may also be included in the acreage shown for another type of interest. Because of our non-operated working interests, overlap between working interest acreage and mineral and royalty interest acreage can be significant; overlap between the different types of mineral and royalty interests is not significant.

2 This excludes acreage for which we have incomplete seller records.

3 Refers to our average ownership interest. Ownership interest is the percentage that our undivided ownership interest in a tract bears to the entire tract. The average ownership interests shown reflect the weighted averages of our ownership interests in all tracts in the BSM Land Region. Our weighted average royalty interest for all of our mineral interests is approximately 18%, which may be multiplied by our ownership interest to approximate the average net royalty interest for our mineral interests.

4 Refers to our average royalty interest. Average royalty interest is equal to the weighted-average percentage of production or revenues (before operating costs) that we are entitled to on a tract-by-tract basis in the BSM Land Region. NPRIs may be denominated as a “fractional royalty,” which entitles the owner to the stated fraction of gross production, or a “fraction of royalty,” where the stated fraction is multiplied by the lease royalty. In cases where our land documentation does not specify the form of NPRI, we have assumed a fractional royalty for purposes of the average royalty interests shown above.


			Mineral and Royalty Interests			Working Interests
	Gross Well Count as of December 31, 20211		Average Daily Production (Boe/d) for the Year Ended December 31,			Average Daily Production (Boe/d) for the Year Ended December 31,
BSM Land Region	MRI Wells2	WI Wells	2021	2020	2019	2021	2020	2019
Gulf Coast	13,487	1,396	19,539	18,878	20,702	3,820	6,491	10,312
Southwestern U.S.	33,586	919	5,442	6,388	7,052	134	143	180
Rocky Mountains	15,079	2,023	5,138	4,983	5,463	585	680	678
Eastern U.S.	2,049	78	754	907	750	16	17	24
Mid-Continent	8,364	628	1,796	1,986	2,223	555	837	897
Western U.S.	851	1	267	273	257	—	—	1
Total	73,416	5,045	32,936	33,415	36,447	5,110	8,168	12,092

1 We own both mineral and royalty interests and working interests in 3,819 of the wells shown in each column above.

2 Refers to mineral and royalty interest wells.

Material Resource Plays

The following listing provides an overview of the resource plays we consider most material to our current and future business. These plays accounted for 75% of our aggregate production for the year ended December 31, 2021.

•Bakken/Three Forks. The Bakken shale and underlying Three Forks formation are located in the Williston Basin, which covers parts of North Dakota, South Dakota, and Montana in the U.S., and Saskatchewan and Manitoba in Canada. The U.S. portion of the Bakken/Three Forks play is within the Rocky Mountains BSM Land Region. We have significant exposure in these plays through our mineral and royalty interests as well as through our working interests.

•Haynesville/Bossier. The Haynesville/Bossier formation, located in East Texas and Western Louisiana, is within the Gulf Coast BSM Land Region and is one of the largest producing natural gas formations in the U.S. The play’s prospective acreage is evenly divided between East Texas and Western Louisiana, and while we have significant exposure through our mineral and royalty interests and working interests across the entire play, the majority of our acreage is located in East Texas, with a particular concentration in the prolific southern portion of the Shelby Trough in San Augustine, Nacogdoches, and Angelina Counties.

•Permian-Midland. The Midland Basin, which is a sub-basin within the Permian Basin, is located in West Texas in the Southwestern U.S. BSM Land Region. It is separated from the Delaware Basin to the west by a carbonate platform called the Central Basin Platform. We refer to the various Permian-aged resource plays within the Midland Basin as the Permian-Midland. These plays include the various members of the Spraberry and Wolfcamp formations. Our interests in the Permian-Midland resource plays are almost exclusively mineral and royalty interests.

•Permian-Delaware. The Delaware Basin, which is a sub-basin within the Permian Basin, is located in West Texas and Southeastern New Mexico in the Southwestern U.S. BSM Land Region. It is separated from the Midland Basin to the east by a carbonate platform called the Central Basin Platform. We refer to the various Permian-aged resource plays within the Delaware Basin as the Permian-Delaware. These plays include the various members of the Bone Springs, Avalon, and Wolfcamp formations. Our interests in the Permian-Delaware resource plays are almost exclusively mineral and royalty interests.

•Eagle Ford. The Eagle Ford shale is located in South Texas within the Gulf Coast BSM Land Region and produces from various depths between 4,000 and 14,000 feet.

The following tables present information about our mineral and royalty interests and non-operated working interests by material resource play.


	Acreage as of December 31, 20211
	Mineral and Royalty Interests									Working Interests2
Resource Play	Mineral Interests			NPRIs			ORRIs
	Gross Acres	Net %3		Gross Acres	Net %4		Gross Acres	Net %4		Gross Acres	Net Acres
Bakken/ Three Forks	396,564	17.1	%	38,384	1.0	%	12,817	1.3	%	51,900	7,191
Haynesville/Bossier	402,108	61.2	%	28,516	2.8	%	36,535	6.3	%	243,572	56,364
Permian-Midland	222,554	4.9	%	128,511	0.8	%	109,997	0.4	%	160	4
Permian-Delaware	133,827	9.4	%	36,355	0.7	%	5,243	3.1	%	2,482	991
Eagle Ford	67,404	14.4	%	106,729	1.1	%	48,440	2.2	%	1,147	87

2 This excludes acreage for which we have incomplete seller records.

3 Refers to our average ownership interest. Ownership interest is the percentage that our undivided ownership interest in a tract bears to the entire tract. The average ownership interests shown reflect the weighted averages of our ownership interests in all tracts in the resource play. Our weighted average royalty interest for all of our mineral interests is approximately 18%, which may be multiplied by our ownership interest to approximate the average net royalty interest for our mineral interests.

4 Refers to our average royalty interest. Average royalty interest is equal to the weighted-average percentage of production or revenues (before operating costs) that we are entitled to on a tract-by-tract basis in the resource play. NPRIs may be denominated as a “fractional royalty,” which entitles the owner to the stated fraction of gross production, or a “fraction of royalty,” where the stated fraction is multiplied by the lease royalty. In cases where our land documentation does not specify the form of NPRI, we have assumed a fractional royalty for purposes of the average royalty interests shown above.


			Mineral and Royalty Interests			Working Interests
	Gross Well Count as of December 31, 20211		Average Daily Production (Boe/d) for the Year Ended December 31,			Average Daily Production (Boe/d) for the Year Ended December 31,
Resource Play	MRI Wells2	WI Wells	2021	2020	2019	2021	2020	2019
Bakken/ Three Forks	4,048	494	3,848	3,694	4,150	408	485	541
Haynesville/Bossier	1,262	103	15,935	14,525	15,091	3,179	5,756	9,364
Permian-Midland	2,620	2	2,457	2,640	2,621	—	—	—
Permian-Delaware	759	5	1,725	2,136	2,932	39	39	52
Eagle Ford	957	25	838	1,137	1,631	15	9	12

1 We own both mineral and royalty interests and working interests in 594 of the wells shown in each column above.

2 Refers to mineral and royalty interest wells.

Estimated Proved Reserves

Evaluation and Review of Estimated Proved Reserves

The reserves estimates as of December 31, 2021, 2020, and 2019 shown herein have been independently evaluated by NSAI, a worldwide leader of petroleum property analysis for industry and financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No. F-2699. Within NSAI, the technical person primarily responsible for preparing the estimates set forth in the NSAI summary reserves report incorporated herein is Mr. Richard B. Talley, Jr. Mr. Talley, a Licensed Professional Engineer in the State of Texas (License No. 102425), has been practicing consulting petroleum engineering at NSAI since 2004 and has over five years of prior industry experience. He graduated from the University of Oklahoma in 1998 with a Bachelor of Science Degree in Mechanical Engineering and from Tulane University in 2001 with a Master of Business Administration Degree. As technical principal, Mr. Talley meets or exceeds the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers and is proficient in judiciously applying industry standard practices to engineering evaluations as well as applying SEC and other industry reserves definitions and guidelines. NSAI does not own an interest in us or any of our properties, nor is it employed by us on a contingent basis. A copy of NSAI’s estimated proved reserve report as of December 31, 2021 is attached as an exhibit to this Annual Report.

We maintain an internal staff of petroleum engineers and geoscience professionals who worked closely with our third-party reserve engineers to ensure the integrity, accuracy, and timeliness of the data used to calculate our estimated proved reserves. Our internal technical team members met with our third-party reserve engineers periodically during the period covered by the above referenced reserve report to discuss the assumptions and methods used in the reserve estimation process. We provided historical information to the third-party reserve engineers for our properties, such as oil and natural gas production, well test data, realized commodity prices, and operating and development costs. We also provided ownership interest information with respect to our properties. Garrett Gremillion, our Vice President, Engineering, was primarily responsible for overseeing the preparation of all of our reserve estimates for 2021 and 2020. Mr. Gremillion is a petroleum engineer with approximately 12 years of reservoir-engineering experience. Brock Morris, our former Senior Vice President, Engineering and Geology, was primarily responsible for overseeing the preparation of all of our reserve estimates for 2019. Mr. Morris is a petroleum engineer and had approximately 34 years of reservoir-engineering and operations experience as of December 31, 2019.

Our historical proved reserve estimates were prepared in accordance with our internal control procedures. Throughout the year, our technical team met with NSAI to review properties and discuss evaluation methods and assumptions used in the proved reserves estimates, in accordance with our prescribed internal control procedures. Our internal controls over the reserves estimation process include verification of input data used in the reserves evaluation software as well as reviews by our internal engineering staff and management, which include the following:

•Comparison of historical operating expenses from the lease operating statements to the operating costs input in the reserves database;

•Review of working interests, net revenue interests, and royalty interests in the reserves database against our well ownership system;

•Review of historical realized commodity prices and differentials from index prices compared to the differentials used in the reserves database;

•Evaluation of capital cost assumptions derived from Authority for Expenditure estimates received;

•Review of actual historical production volumes compared to projections in the reserve report;

•Discussion of material reserve variances among our internal reservoir engineers and our Vice President, Engineering; and

•Review of preliminary reserve estimates by our senior management with our internal technical staff.

Estimation of Proved Reserves

In accordance with rules and regulations of the SEC applicable to companies involved in oil and natural gas producing activities, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term “reasonable certainty” means deterministically, the quantities of oil and/or natural gas are much more likely to be achieved than not, and probabilistically, there should be at least a 90% probability of recovering volumes equal to or exceeding the estimate. All of our estimated proved reserves as of December 31, 2021, 2020, and 2019 are based on deterministic methods. Reasonable certainty can be established using techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by using reliable technology. Reliable technology is a grouping of one or more technologies (including computational methods) that have been field tested and have been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

To establish reasonable certainty with respect to our estimated net proved reserves, NSAI employed technologies including, but not limited to, well logs, core analysis, geologic maps, and available down hole pressure and production data, seismic data, and well test data. Reserves attributable to producing wells with sufficient production history were estimated using appropriate decline curves or other performance relationships. Reserves attributable to producing wells with limited production history and for undeveloped locations were estimated using performance from analogous wells in the surrounding area and geologic data to assess the reservoir continuity. In addition to assessing reservoir continuity, geologic data from well logs, core analyses, and seismic data were used to estimate original oil and natural gas in place.

Summary of Estimated Proved Reserves

Estimates of reserves are prepared using oil and natural gas prices equal to the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month within the year the estimates are prepared. For estimates of oil reserves, the average WTI spot oil prices used were $66.55, $39.54, and $55.85 per barrel as of December 31, 2021, 2020, and 2019, respectively. These average prices are adjusted for quality, transportation fees, and market differentials. For estimates of natural gas reserves, the average Henry Hub prices used were $3.60, $1.99, and $2.58 per MMBTU as of December 31, 2021, 2020, and 2019, respectively. These average prices are adjusted for energy content, transportation fees, and market differentials. Natural gas prices are also adjusted to account for NGL revenue since there is not sufficient data to account for NGL volumes separately in the reserve estimates. These reserve estimates exclude NGL quantities. When taking these adjustments into account, the average adjusted prices weighted by production over the remaining lives of the properties were $63.17 per barrel for oil and $3.37 per Mcf for natural gas as of December 31, 2021, $36.43 per barrel for oil and $1.60 per Mcf for natural gas as of December 31, 2020, and $52.15 per barrel for oil and $2.36 per Mcf for natural gas as of December 31, 2019.

Reserve estimates do not include any value for probable or possible reserves that may exist. The reserve estimates represent our net revenue interest and royalty interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses, and quantities of recoverable oil and natural gas may vary substantially from these estimates.

The following table presents our estimated proved oil and natural gas reserves:


	As of December 31,
	2021		2020		2019
	(Unaudited)
Estimated proved developed:
Oil (MBbls)	19,111		15,952		17,050
Natural gas (MMcf)	224,222		230,411		263,371
Total (MBoe)	56,481		54,354		60,945
Estimated proved undeveloped:
Oil (MBbls)	60		—		—
Natural gas (MMcf)	19,695		9,800		45,587
Total (MBoe)	3,343		1,633		7,598
Estimated proved reserves:
Oil (MBbls)	19,171		15,952		17,050
Natural gas (MMcf)	243,917		240,211		308,958
Total (MBoe)	59,824		55,987		68,543
Percent proved developed	94.4	%	97.1	%	88.9	%

Reserve engineering is and must be recognized as a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary for the same property. In addition, the results of drilling, testing, and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices, and future production rates and costs. Please read Part I, Item 1A. “Risk Factors.”

Additional information regarding our estimated proved reserves can be found in the notes to our consolidated financial statements included elsewhere in this Annual Report and the estimated proved reserve report as of December 31, 2021, which is included as an exhibit to this Annual Report.

Estimated Proved Undeveloped Reserves

As of December 31, 2021, our PUDs comprised 19,695 MMcf of natural gas and 60 MBbls of oil for a total of 3,343 MBoe. PUDs will be converted from undeveloped to developed as the applicable wells begin production.

The following table summarizes our changes in PUDs during the year ended December 31, 2021 (in MBoe):


			Estimated Proved Undeveloped Reserves
			(Unaudited)
As of December 31, 2020			1,633
Acquisitions of reserves			—
Divestiture of reserves			—
Extensions and discoveries			2,818
Revisions of previous estimates			27
Transfers to estimated proved developed			(1,135)
As of December 31, 2021			3,343

New PUD reserves totaling 2,818 MBoe were added during the year ended December 31, 2021, resulting from development activities in the Haynesville/Bossier and Austin Chalk plays. In 2021 we did not acquire or divest any PUD reserves.

During the year ended December 31, 2021, we had 27 MBoe of upward revisions to PUD reserves and converted 1,135 MBoe of PUD reserves to PDP reserves.

During the year ended December 31, 2021, no costs were incurred relating to the development of locations that were classified as PUDs as of December 31, 2020. Additionally, during the year ended December 31, 2021, we incurred $5.0 million drilling, completing, and recompleting other wells that were not classified as PUDs as of December 31, 2020. There are $0.9 million of estimated future development costs projected for the development of PUD reserves associated with our working interests as of December 31, 2021. All our PUD drilling locations as of December 31, 2021 are scheduled to be drilled within five years from the date the reserves were initially booked as proved undeveloped reserves.

We generally do not have evidence of approval of our operators’ development plans. As a result, our proved undeveloped reserve estimates are limited to those relatively few locations for which we have received and approved an AFE. As of December 31, 2021, our PUD reserves consists of 10 wells in various stages of drilling or completions. As of December 31, 2021, approximately 6% of our total proved reserves were classified as PUDs.

Oil and Natural Gas Production Prices and Production Costs

Production and Price History

For the year ended December 31, 2021, 26% of our production and 48% of our oil and natural gas revenues were related to oil and condensate production and sales, respectively. During the same period, natural gas and NGL sales were 74% of our production and 52% of our oil and natural gas revenues.

The following table sets forth information regarding production of oil and natural gas and certain price and cost information for each of the periods indicated:


	Year Ended December 31,
	2021		2020		2019
Production:
Oil and condensate (MBbls)	3,646		3,895		4,777
Natural gas (MMcf)1	61,445		67,945		77,635
Total (MBoe)	13,887		15,219		17,716
Average daily production (MBoe/d)	38.0		41.6		48.5
Realized Prices without Derivatives:
Oil and condensate (per Bbl)	$	64.67	$	38.16	$	55.20
Natural gas and natural gas liquids sales (per Mcf)1	$	4.16	$	2.04	$	2.57
Unit Cost per Boe:
Production costs and ad valorem taxes	$	3.59	$	2.86	$	3.42

1 As a mineral and royalty interest owner, we are often provided insufficient and inconsistent data by our operators. As a result, we are unable to reliably determine the total volumes of NGLs associated with the production of natural gas on our acreage. Accordingly, no NGL volumes are included in our reported production; however, revenue attributable to NGLs is included in our natural gas revenue and our calculation of realized prices for natural gas.

Productive Wells

Productive wells consist of producing wells, wells capable of production, and exploratory, development, or extension wells that are not dry wells.

The following table sets forth information about our mineral and royalty interest and working interest wells:


	Productive Wells as of December 31, 20211
	Mineral and Royalty Interests	Working Interests
Well Type	Gross	Gross	Net
Oil	51,079	3,520	58
Natural Gas	22,337	1,525	176
Total	73,416	5,045	234

1 We own both mineral and royalty interests and working interests in 3,819 gross wells.

Acreage

Mineral and Royalty Interests

The following table sets forth information relating to our acreage for our mineral and royalty interests as of December 31, 2021:


BSM Land Region	Developed Acreage1	Undeveloped Acreage1	Total Acreage1
Gulf Coast	1,025,005	7,675,753	8,700,758
Southwestern U.S.	1,267,167	2,710,375	3,977,542
Rocky Mountains	965,959	2,309,517	3,275,476
Eastern U.S.	154,663	1,578,937	1,733,600
Mid-Continent	754,790	850,546	1,605,336
Western U.S.	20,266	1,038,596	1,058,862
Total	4,187,850	16,163,724	20,351,574

1 Includes acreage for mineral interests, NPRIs, and ORRIs. We may own more than one type of interest in the same tract of land. For example, where we have acquired non-operated working interests related to our mineral interests in a given tract, our working interest acreage in that tract will relate to the same acres as our mineral interest acreage in that tract. Consequently, some of the acreage shown for one type of interest may also be included in the acreage shown for another type of interest. Because of our non-operated working interests, overlap between working interest acreage and mineral and royalty interest acreage can be significant; overlap between the different types of mineral and royalty interests is not significant.

Working Interests

The following table sets forth information relating to our acreage for our non-operated working interests as of December 31, 2021:


	Developed Acreage1		Undeveloped Acreage1		Total Acreage1
BSM Land Region	Gross	Net	Gross	Net	Gross	Net
Gulf Coast	233,569	37,130	210,824	52,139	444,393	89,269
Southwestern U.S.	15,881	11,750	13,666	1,030	29,547	12,780
Rocky Mountains	81,564	14,892	12,388	1,282	93,952	16,174
Eastern U.S.	13,408	1,346	79	—	13,487	1,346
Mid-Continent	38,996	23,710	1,506	3,060	40,502	26,770
Western U.S.	—	—	—	—	—	—
Total	383,418	88,828	238,463	57,511	621,881	146,339

The following table lists the net undeveloped acres, the net acres expiring in the years ending December 31, 2022, 2023, and 2024, and, where applicable, the net acres expiring that are subject to extension options:


	2022 Expirations		2023 Expirations		2024 Expirations
Net Undeveloped Acreage	Net Acreage without Ext. Opt.	Net Acreage with Ext. Opt.	Net Acreage without Ext. Opt.	Net Acreage with Ext. Opt.	Net Acreage without Ext. Opt.	Net Acreage with Ext. Opt.
57,511	6,757	3,735	6,728	2,673	1,588	195

Drilling Results for Our Working Interests

The following table sets forth information with respect to the number of wells in which we own a working interest completed on our properties during the periods indicated, excluding wells subject to our farmout agreements. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation among the number of productive wells drilled, the quantities of reserves found, and the economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return.


	Year Ended December 31,
	2021	2020	2019
Gross development wells:
Productive	2.0	—	—
Dry	—	—	—
Total	2.0	—	—
Net development wells:
Productive	0.2	—	—
Dry	—	—	—
Total	0.2	—	—
Gross exploratory wells:
Productive	—	—	1.0
Dry	1.0	—	—
Total	1.0	—	1.0
Net exploratory wells:
Productive	—	—	0.3
Dry	1.0	—	—
Total	1.0	—	0.3

As of December 31, 2021, we had one well in the process of drilling, completing or dewatering, or shut in awaiting infrastructure.

Environmental Matters

Oil and natural gas exploration, development, and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment or occupational health and safety. These laws and regulations have the potential to impact production on our properties, which could materially adversely affect our business and our prospects. Numerous federal, state, and local governmental agencies, such as the U.S. Environmental Protection Agency (“EPA”), issue regulations that carry substantial administrative, civil, and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities, and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically sensitive, and other protected areas, require action to prevent, or remediate pollution from current or historic operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses, and authorizations, require that additional pollution controls be installed, and impose substantial liabilities for pollution resulting from operations. The strict, joint, and several liability nature of such laws and regulations could impose liability upon our operators, or us as working interest owners if the operator fails to perform, regardless of fault. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons, or other waste products into the environment. In addition, many environmental statues contain citizen suit provisions, and environmental groups frequently use these provisions to oppose oil and natural gas exploration and development activities and related projects. The long-term trend in environmental regulation has been towards more stringent regulations, and any changes that impact our operators and result in more stringent and costly pollution control or waste handling, storage, transport, disposal, or cleanup requirements could materially adversely affect our business and prospects. Below is a summary of environmental laws applicable to operations on our properties.

Waste Handling

The Resource Conservation and Recovery Act, as amended (“RCRA”), and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development, and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal, and cleanup of hazardous and non- hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development, and production of oil and natural gas are exempt from regulation as hazardous wastes under RCRA, these wastes typically constitute “solid wastes” that are subject to less stringent non-hazardous waste requirements. However, it is possible that RCRA could be amended or the EPA or state environmental agencies could adopt policies to require oil and natural gas exploration, development, and production wastes to become subject to more stringent waste handling requirements. Any changes in the laws and regulations could have a material adverse effect on our operators’ capital expenditures and operating expenses, which in turn could affect production from our properties and adversely affect our business and prospects.

Remediation of Hazardous Substances

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the “Superfund” law, and analogous state laws generally impose strict, joint, and several liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility (which can include working interest owners), a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” may be subject to strict and joint and several liability for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Oil and natural gas exploration and production activities on our properties use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold our operators, or us as working interest owners if the operator fails to perform, responsible under CERCLA and comparable state statutes for all or part of the costs to clean-up sites at which these “hazardous substances” have been released.

Water Discharges

The Federal Water Pollution Control Act of 1972, also known as the “Clean Water Act” (“CWA”), the Safe Drinking Water Act (“SDWA”), the Oil Pollution Act (“OPA”), and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. In June 2015, the EPA and the U.S. Army Corps of Engineers (the “Corps”) published a final rule attempting to clarify the federal jurisdictional reach over waters of the United States ("WOTUS"). In January 2020, a new WOTUS rule was finalized to replace the 2015 rule. Both the 2015 and 2020 rulemaking have been subject to legal challenge, and the Biden administration has announced plans to establish its own definition of WOTUS. Most recently, the EPA and the Corps published a proposed rulemaking to revoke the 2020 rule in favor of a pre-2015 definition until a new definition is proposed, which the Biden administration has announced is underway, Additionally, in January 2022, the Supreme Court agreed to hear a case on the scope and authority of the CWA and the definition of WOTUS. Therefore, the scope of jurisdiction under the CWA is uncertain at this time, and any increase in scope could result in increased costs or delays with respect to obtaining permits for certain activities for our operators. In addition, spill prevention, control, and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture, or leak. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges.

The OPA is the primary federal law for oil spill liability. The OPA contains numerous requirements relating to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict, joint, and several liability for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs of responding to a release of oil into surface waters.

In addition, the SDWA grants the EPA broad authority to take action to protect public health when an underground source of drinking water is threatened with pollution that presents an imminent and substantial endangerment to humans, which could result in orders prohibiting or limiting the operations of oil and natural gas production facilities. The EPA has asserted regulatory authority pursuant to the SDWA's Underground Injection Control ("UIC") program over hydraulic fracturing activities involving the use of diesel fuel in fracturing fluids and issued guidance covering such activities. The SDWA also regulates saltwater disposal wells under the UIC Program. Recent concerns related to the operation of saltwater disposal wells and induced seismicity have led some states to impose limits on the total volume of produced water such wells can dispose of, order disposal wells to cease operations, or limited the construction of new wells. These seismic events have also resulted in environmental groups and local residents filing lawsuits against operators in areas where the events occur seeking damages and injunctions limiting or prohibiting saltwater disposal well construction activities and operations. A lack of saltwater disposal wells in production areas could result in increased disposal costs for our operators if they are forced to transport produced water by truck, pipeline, or other method over long distances, or force them to curtail operations.

Noncompliance with the Clean Water Act, SDWA, or the OPA may result in substantial administrative, civil, and criminal penalties, as well as injunctive obligations, all of which could affect production from our properties and adversely affect our business and prospects.

Air Emissions

The federal Clean Air Act ("CAA") and comparable state laws and regulations regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, in October 2015, the EPA lowered the National Ambient Air Quality Standard, (“NAAQS”) for ozone from 75 to 70 parts per billion for both the 8- hour primary and secondary standards, and the agency completed attainment/non-attainment designations in July 2018. In December 2020, the EPA announced that it was retaining without revision the 2015 NAAQS for ozone, however, the Biden administration has announced plans to formally review this decision and consider instituting a more stringent standard. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit the ability of our operators to obtain such permits, and result in increased

expenditures for pollution control equipment, the costs of which could be significant. Separately, in June 2016, the EPA finalized rules regarding criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and natural gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for oil and natural gas producers and impact production on our properties, and federal and state regulatory agencies can impose administrative, civil, and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. Moreover, obtaining or renewing permits has the potential to delay the development of oil and natural gas exploration and development projects. All of these factors could impact production on our properties and adversely affect our business and results of operations.

Climate Change

The threat of climate change continues to attract considerable attention in the United States and in foreign countries, numerous proposals have been made and could continue to be made at the international, national, regional, and state levels of government to monitor and limit existing emissions of greenhouse gases ("GHGs") as well as to restrict or eliminate such future emissions. As a result, our operations as well as the operations of our operators are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs.

In the United States, no comprehensive climate change legislation has been implemented at the federal level. However, the current administration has highlighted addressing climate change as a priority and has issued several executive orders addressing climate change, including one that calls for substantial action on climate change, such as the increased use of zero-emission vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry, and increased emphasis on climate-related risks across government agencies and economic sectors. Moreover, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources and require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States. The regulation of methane from oil and gas facilities has been subject to uncertainty in recent years. The current administration has also issued an executive order calling for the suspension, revision, or rescission, of a September 2020 rule rescinding certain methane standards and removing transmission and storage segments from the source category for certain regulations, and the reinstatement or issuance of methane emissions standards for new, modified, and existing oil and gas facilities. In November 2021, the EPA issued a proposed rule that, if finalized, would establish OOOO(b) new source and, OOOO(c) first-time existing source standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Operators of affected facilities will have to comply with specific standards of performance to include leak detection using optical gas imaging and subsequent repair requirements, and reduction of emissions by 95% through capture and control systems. The EPA plans to issue a supplemental proposal in 2022 containing additional requirements not included in the November 2021 proposed rule and anticipates the issuance of a final rule by the end of the year.

Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored "Paris Agreement," requires member states to submit non-binding, individually determined reduction goals every five years after 2020. Although the United States had withdrawn from the Paris Agreement, the current administration recommitted the United States to the agreement by executive order and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally at the 26th Conference of Parties (“COP26”) in Glasgow in November 2021, the United States and the European Union jointly announced the launch of a Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30% from 2020 levels by 2030, including “all feasible reductions” in the energy sector. The impacts of these actions remain unclear at this time.

Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by some candidates now in political office. These have included promises to limit emissions and curtail certain production of oil and natural gas. Other actions that could be pursued by the current administration may include the imposition of more restrictive requirements for the establishment of pipeline infrastructure or the permitting of LNG export facilities, as well as more restrictive GHG emission limitations for oil and gas facilities. Litigation risks are also increasing as a number of cities and other local governments have sought to bring suit against the largest oil and natural gas companies in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or alleging that the companies have been aware of the adverse effects of climate change for some time but failed to adequately disclose such impacts to their investors or customers.

There are also increasing financial risks for fossil fuel producers as shareholders currently invested in fossil-fuel energy companies may elect in the future to shift some or all of their investments into non-energy related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, financial institutions may be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. In late 2020, the Federal Reserve joined the Network for Greening the Financial System ("NGFS"), a consortium of financial regulators focused on addressing climate-related risks in the financial sector. Subsequently, in November 2021, the Federal Reserve issued a statement in support of the efforts of the NGFS to identify key issues and potential solutions for the climate-related challenges most relevant to central banks and supervisory authorities.

Limitation of investments in and financing for fossil fuel energy companies could result in the restriction, delay, or cancellation of drilling programs or development or production activities.

The adoption and implementation of new or more stringent international, federal or state legislation, regulations, or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate the GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for oil and natural gas, which could reduce the profitability of our interests. Additionally, political, litigation, and financial risks may result in our oil and natural gas operators restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or impairing their ability to continue to operate in an economic manner, which also could reduce the profitability of our interests. One or more of these developments could have a material adverse effect on our business, financial condition, or results of operation.

Climate change may also result in various physical risks, such as the increased frequency of intensity of extreme weather events or changes in meteorological and hydrological patterns, that could adversely impact our operations, as well as those of our operators. Such physical risks may result in damage to operators’ facilities or otherwise adversely impact their operations, such as if they become subject to water use curtailments in response to drought, or demand for their products, such as to the extent warmer winters reduce the demand for heating purposes.

Hydraulic Fracturing

Our operators engage in hydraulic fracturing, a common practice that is used to stimulate production of hydrocarbons from tight formations, including shales. The process involves the injection of water, sand, and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. The process is typically regulated by state oil and natural gas commissions, but recently the EPA and other federal agencies have asserted jurisdiction over certain aspects of hydraulic fracturing. For example, the EPA issued effluent limitation guidelines in June 2016 that prohibit the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants.

In December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources. The final report concluded that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain limited circumstances. The EPA has not proposed to take any action in response to the report’s findings.

Several states where we own interests in oil and gas producing properties, including Colorado, North Dakota, Louisiana, Oklahoma, and Texas, have adopted regulations that could restrict or prohibit hydraulic fracturing in certain circumstances or require the disclosure of the composition of hydraulic-fracturing fluids. For example, both Texas and Oklahoma have imposed certain limits on the permitting or operation of disposal wells in areas with increased instances of induced seismic events. These existing or any new legal requirements establishing seismic permitting requirements or similar restrictions on the construction or operation of disposal wells for the injection of produced water likely will result in added costs to comply and affect our operators’ rate of production, which in turn could have a material adverse effect on our results of operations and financial position. In addition to state laws, local land use restrictions, such as city ordinances, may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. For example, in April 2019, Colorado adopted legislation that requires the Colorado Oil and Gas Conservation Commission ("COGCC") to prioritize public health and environmental concerns in its decisions and delegates considerable new authority to local governments to regulate surface impacts.

In keeping with this legislation, the COGCC in November 2020 adopted revisions to several regulations to increase protections for public health, safety, welfare, wildlife, and environmental matters. These revisions established more stringent setbacks (2,000 feet instead of 500-feet) on new oil and gas development and elimination of routine flaring and venting of natural gas at new or existing wells across the state, each subject to only limited exceptions. Some local communities have

adopted, or are considering adopting, additional restrictions for oil and gas activities, such as requiring greater setbacks. Additionally, on December 17, 2021, the Colorado Air Quality Control Commissions adopted regulations aimed at curbing methane emissions from oil and gas operations to include setting methane emission limits per 1,000 barrels of oil equivalent produced, more frequent inspections, and limits on emissions during maintenance. We cannot predict what additional state or local requirements may be imposed in the future on oil and gas operations in the states in which we own interests. In the event state, local, or municipal legal restrictions are adopted in areas where our operators conduct operations, our operators may incur substantial costs to comply with these requirements, which may be significant in nature, experience delays, or curtailment in the pursuit of exploration, development, or production activities and perhaps even be precluded from the drilling of wells.

There has been increasing public controversy regarding hydraulic fracturing with regard to increased risks of induced seismicity, the use of fracturing fluids, impacts on drinking water supplies, use of water, and the potential for impacts to surface water, groundwater, and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic-fracturing practices. If new laws or regulations are adopted that significantly restrict hydraulic fracturing, those laws could make it more difficult or costly for our operators to perform fracturing to stimulate production from tight formations. In addition, if hydraulic fracturing is further regulated at the federal or state level, fracturing activities on our properties could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements, and also to attendant permitting delays and potential increases in costs. Legislative changes could cause operators to incur substantial compliance costs. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal or state legislation governing hydraulic fracturing.

Occupational Safety and Health Act

The Occupational Safety and Health Act (“OSHA”) and comparable state laws and regulations govern the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard, the Emergency Planning and Community Right to Know Act and implementing regulations, and similar state statutes and regulations require that information be maintained about hazardous materials used or produced in operations on our properties and that this information be provided to employees, state and local government authorities, and citizens.

Endangered Species

The Endangered Species Act (“ESA”) and analogous state laws restrict activities that may affect endangered or threatened species or their habitats. Pursuant to a settlement with environmental groups, the U.S. Fish and Wildlife Service (“USFWS”) was required to determine whether over 250 species required listing as threatened or endangered under the ESA. USFWS agreed to complete the review by the end of the agency's 2017 fiscal year. The agency missed the deadline but continues its review, therefore the potential remains for new species to be listed under the ESA. Some of our properties may be located in areas that are or may be designated as habitats for endangered or threatened species, and previously unprotected species may later be designated as threatened or endangered in areas where we hold interests. For example, recently, there have been renewed calls to review protections currently in place for the Dunes Sagebrush Lizard, whose habitat includes portions of the Permian Basin, and to reconsider listing the species under the ESA. Likewise, there have been calls to review protections in place for the Greater Sage Grouse, which can be found across a large swath of the northwestern United States in oil and gas producing states. The listing of either of these species, or any others, in areas where we hold interests could cause our operators to incur increased costs arising from species protection measures, delay the completion of exploration and production activities, and/or result in limitations on operating activities that could have an adverse impact on our business.

Title to Properties

Prior to completing an acquisition of oil and natural gas properties, we perform title reviews on high-value tracts. Our title reviews are meant to confirm quantum of oil and natural gas properties being acquired, lease status, and royalties as well as encumbrances and other related burdens. Depending on the materiality of properties, we may obtain a title opinion if we believe additional title due diligence is necessary. As a result, title examinations have been obtained on a significant portion of our properties. After an acquisition, we review the assignments from the seller for scrivener’s and other errors and execute and record corrective assignments as necessary.

In addition to our initial title work, our operators conduct a thorough title examination prior to leasing and drilling a well. Should our operators’ title work uncover any title defects, either we or our operators will perform curative work with respect to such defects. Our operators generally will not commence drilling operations on a property until any material title defects on such property have been cured.

We believe that the title to our assets is satisfactory in all material respects. Although title to these properties is subject to encumbrances in some cases, such as customary interests generally retained in connection with the acquisition of real property, customary royalty interests and contract terms and restrictions, liens under operating agreements, liens related to environmental liabilities associated with historical operations, liens for current taxes and other burdens, easements, restrictions, and minor encumbrances customary in the oil and natural gas industry, we believe that none of these liens, restrictions, easements, burdens, and encumbrances will materially detract from the value of these properties or from our interest in these properties or materially interfere with our use of these properties in the operation of our business. In addition, we believe that we have obtained sufficient rights-of-way grants and permits from public authorities and private parties for us to operate our business in all material respects.

Marketing and Major Customers

If we were to lose a significant customer, such loss could impact revenue derived from our mineral and royalty interest or working interest properties. The loss of any single lessee is mitigated by our diversified customer base. The following table indicates our significant customers that accounted for 10% or more of our total oil and natural gas revenues for the periods indicated:


	Year Ended December 31,
	2021	2020	2019
XTO Energy Inc.	19%	20%	18%

Competition

The oil and natural gas business is highly competitive in the exploration for and acquisition of reserves, the acquisition of minerals and oil and natural gas leases, and personnel required to find and produce reserves. Many companies not only explore for and produce oil and natural gas, but also conduct midstream and refining operations and market petroleum and other products on a regional, national, or worldwide basis. Certain of our competitors may possess financial or other resources substantially larger than we possess. Our ability to acquire additional minerals and properties and to discover reserves in the future will be dependent upon our ability to identify and evaluate suitable acquisition prospects and to consummate transactions in a highly competitive environment. Oil and natural gas products compete with other sources of energy available to customers, primarily based on price. These alternate sources of energy include coal, nuclear, solar, and wind. Changes in the availability or price of oil and natural gas or other sources of energy, as well as business conditions, conservation, legislation, regulations, and the ability to convert to alternate fuels and other sources of energy may affect the demand for oil and natural gas.

Seasonal Nature of Business

Weather conditions affect the demand for, and prices of, natural gas and can also delay drilling activities, disrupting our overall business plans. Demand for natural gas is typically higher during the winter, resulting in higher natural gas prices for our natural gas production during our first and fourth quarters. Certain natural gas users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can lessen seasonal demand fluctuations. Seasonal weather conditions can limit drilling and producing activities and other oil and natural gas operations in a portion of our operating areas. Due to these seasonal fluctuations, our results of operations for individual quarterly periods may not be indicative of the results that we may realize on an annual basis.

Human Capital

Overview and Structure. We consider our workforce to be our most important asset, and we have sought to structure our hiring practices, compensation and benefits programs, and employee practices to attract and retain high-quality personnel and to provide a comfortable and collegial work environment. We continue to invest in our employees by providing training opportunities, promoting diversity and inclusion, and maintaining focus on corporate ethics. We are managed and operated by the Board and executive officers of our general partner. All our employees, including our executive officers, are employees of Black Stone Natural Resources Management Company (“Black Stone Management”).

Headcount. We rely principally on full-time employees but use independent contractors as needed to assist with special projects. As of December 31, 2021, Black Stone Management had 93 full-time employees and 15 contractors. Our largest departments are Accounting and Land Administration, which account for 34 and 20 respectively, of our full-time employee base. None of Black Stone Management’s employees are represented by labor unions or covered by any collective bargaining agreements.

Recruiting. As a small, tight-knit community, our employees have broad responsibilities and we encourage continuing development in their careers. When new opportunities arise within our organization, we may look within our organization for talent to fill those needs, ask for referrals from our team (who understand the diverse skill sets, high energy and forward-thinking attitude that contributes to delivering exceptional results), or work with recruiters who specialize in the areas of our vacancies.

Compensation. As part of our efforts to hire and retain highly qualified employees, we have structured compensation and benefits programs that, we believe, are extremely competitive and reward outstanding performance. In addition to the incentive programs in place for our named executive officers, which are described in detail in our proxy statement, we have structured a cash-bonus program for non-officer employees that is dependent on an employee’s individual performance and our performance as a company. Our “extended leadership” group, consisting of 19 employees, also receives restricted-unit and performance-unit awards to encourage retention and align compensation with our company performance.

Healthcare and Other Benefits. We provide a robust suite of benefits to our employees covering all aspects of life, including 401(k) matching, medical-insurance options, and programs to encourage and support the whole person, including physical, mental and emotional, financial, social, career, and community service initiatives. Within these listed programs we provide, free to all employees, dental and vision insurance covering an employee’s entire family, caregiver support benefits, a personal financial wellness program, a tuition-reimbursement program, a building-provided fitness center as well as two recently introduced programs: employee health care advocacy services and a wellness program providing employees the ability to earn lifestyle rewards for participating in healthy activities.

COVID and Great Resignation. In March 2020, in response to the COVID pandemic, we implemented remote work arrangements for the majority of our employees. The added flexibility to work remotely, coming to the office when needed or for specific in-person meetings, as well as establishing core business hours for added flexibility, has been positively received by our workforce and provided a greater work-life balance during trying times. We believe these decisions, the above stated information and the stability of our company, has allowed us to retain over 96% of our workforce between March 2020 and December 31, 2021. Our robust compensation and benefits programs have allowed us to continue to recruit top-quality employees during this time.

Facilities

Our principal office location is in Houston, Texas and consists of 55,862 square feet of leased space.

ITEM 1A. Risk Factors

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks were to occur, our financial condition, results of operations, cash flows, and ability to make distributions could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline, and holders of our units could lose all or part of their investment.

COVID-19

The COVID-19 pandemic and the effect on our financial condition, results of operations, and cash distributions to unitholders will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic has adversely affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. With widespread availability of vaccines, the U.S. Centers for Disease Control and Prevention has revised its guidance, travel restrictions have started to lift, and businesses have reopened. However, the COVID-19 pandemic continues to evolve and the extent to which our operating and financial results will continue to be affected will depend on various factors beyond our control, such as the duration, severity, and sustained geographic resurgence of the virus; the emergence of new variants; and the success of actions to contain the virus and its variants, or treat its impact.

The impact of the COVID-19 pandemic has negatively affected the oil and natural gas business environment, primarily by causing a reduction in commercial activity and travel worldwide thereby lowering energy demand. This, in turn, resulted in

periods of significantly lower market prices for oil, natural gas, and natural gas liquids. While we use derivative instruments to partially mitigate the impact of commodity price volatility, our revenues and operating results depend significantly upon the prevailing prices for oil and natural gas. Commodity prices improved in late 2020 and fully recovered in 2021, causing many of our operators to resume their drilling and completion activity on our acreage. However, the current business environment remains uncertain and a reversal of these improvements may materially and adversely affect our financial condition, results of operations, and cash distributions to unitholders.

The price environment in 2020 resulting from the COVID-19 pandemic, including the sharp decline in oil prices that began in March 2020, caused us to determine that certain depletable units consisting of mature oil producing properties were impaired as of March 31, 2020. Therefore, we recognized impairment of oil and natural gas properties of $51.0 million in the first quarter of 2020. Additionally, the borrowing base under the Credit Facility (as defined below) takes into consideration the estimated loan value of our oil and natural gas properties. Effective November 3, 2020, the borrowing base redetermination reduced the borrowing base from $430.0 million to $400.0 million. The April and October 2021 borrowing base redeterminations reaffirmed the borrowing base at $400.0 million. The next borrowing base redetermination is scheduled for April 2022. In a prolonged period of low commodity prices, we may be required to impair additional properties and the borrowing base under our Credit Facility could be further reduced.

We enter into derivative instruments to partially mitigate the impact of commodity price volatility on our cash generated from operations. Any declines in production or production forecasts in light of the COVID-19 pandemic could limit our ability to hedge future volumes.

To protect the health and well-being of our workforce in the wake of COVID-19, we have maintained remote work arrangements for all employees. To the extent circumstances require us to maintain remote work arrangements indefinitely, our operational efficiency could be adversely affected, which could in turn adversely affect our financial condition and results of operations.

The extent to which the COVID-19 pandemic adversely affects our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Cash Distributions

We may not generate sufficient cash from operations to pay distributions on our common units. If we make distributions, the holders of our Series B cumulative convertible preferred units have priority with respect to rights to share in those distributions over our common unitholders for so long as our Series B cumulative convertible preferred units are outstanding.

We may not generate sufficient cash from operations each quarter to pay distributions to our common unitholders. Our Series B cumulative convertible preferred unitholders have priority with respect to rights to share in distributions over our common unitholders for so long as our Series B cumulative convertible preferred units are outstanding. Furthermore, our partnership agreement does not require us to pay distributions to our common unitholders on a quarterly basis or otherwise. The amount of cash to be distributed each quarter will be determined by the Board.

The amount of cash we are able to distribute each quarter principally depends upon the amount of revenues we generate, which are largely dependent upon the prices that our operators realize from the sale of oil and natural gas. The actual amount of cash we are able to distribute each quarter will be reduced by principal and interest payments on our outstanding debt, working-capital requirements, and other cash needs. In addition, we may restrict distributions, in whole or in part, to fund acquisitions and participation in working interests. If over the long term we do not retain cash for capital expenditures in amounts necessary to maintain our asset base, a portion of future distributions will represent distribution of our assets and the value of our common units could be adversely affected. Withholding cash for our capital expenditures may have an adverse impact on the cash distributions in the quarter in which amounts are withheld.

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read Part II, Item 5. “Market for Registrant’s Common Equity, Related Unitholder Matters, and Issuer Purchases of Equity Securities — Cash Distribution Policy.”

The amount of cash we distribute to holders of our units depends primarily on our cash generated from operations and not our profitability, which may prevent us from making cash distributions during periods when we record net income.

The amount of cash we distribute depends primarily upon our cash generated from operations and not solely on profitability, which may be affected by non-cash items. As a result, we may make cash distributions during periods in which we record net losses for financial accounting purposes and may be unable to make cash distributions during periods in which we record net income.

Price of Oil and Natural Gas

The volatility of oil and natural gas prices due to factors beyond our control greatly affects our financial condition, results of operations, and cash distributions to unitholders.

Our revenues, operating results, cash distributions to unitholders, and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty, and a variety of additional factors that are beyond our control, including:

•the domestic and foreign supply of and demand for oil and natural gas;

•market expectations about future prices of oil and natural gas;

•the level of global oil and natural gas exploration and production;

•the cost of exploring for, developing, producing, and delivering oil and natural gas;

•the price and quantity of foreign imports and exports of oil and natural gas;

•political and economic conditions in oil producing regions, including the Middle East, Africa, South America, and Russia;

•the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

•trading in oil and natural gas derivative contracts;

•the level of consumer product demand;

•weather conditions and natural disasters;

•technological advances affecting energy consumption;

•domestic and foreign governmental regulations and taxes;

•the continued threat of terrorism and the impact of military and other action, including U.S. military operations in the Middle East;

•the proximity, cost, availability, and capacity of oil and natural gas pipelines and other transportation facilities;

•the price and availability of alternative fuels; and

•overall domestic and global economic conditions.

These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. The table below demonstrates such volatility for the periods presented.


	Year Ended December 31, 2021				During the Five Years Prior to 2021				As of December 31,
	High2		Low		High3		Low4		2021		2020		2019
WTI spot crude oil ($/Bbl)1	$	85.64	$	47.47	$	77.41	$	8.91	$	75.33	$	48.35	$	61.14
Henry Hub spot natural gas ($/MMBtu)1	23.86		2.43		6.24		1.33		3.82		2.36		2.09

1 Source: EIA

2 High price for Henry Hub was due to temporary supply and demand imbalances caused by the February 2021 winter storm.

3 High prices for WTI and Henry Hub were in 2018.

4 Low prices for WTI and Henry Hub were in 2020. Excludes the period in April 2020 when WTI briefly traded in negative territory.

Any prolonged substantial decline in the price of oil and natural gas will likely have a material adverse effect on our financial condition, results of operations, and cash distributions to unitholders. We may use various derivative instruments in connection with anticipated oil and natural gas sales to minimize the impact of commodity price fluctuations. However, we cannot always hedge the entire exposure of our operations from commodity price volatility. To the extent we do not hedge against commodity price volatility, or our hedges are not effective, our results of operations and financial position may be diminished.

In addition, lower oil and natural gas prices may also reduce the amount of oil and natural gas that can be produced economically by our operators. This scenario may result in our having to make substantial downward adjustments to our estimated proved reserves, which could negatively impact our borrowing base and our ability to fund our operations. If this occurs or if production estimates change or exploration or development results deteriorate, successful efforts method of accounting principles may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Our operators could also determine during periods of low commodity prices to shut in or curtail production from wells on our properties. In addition, they could determine during periods of low commodity prices to plug and abandon marginal wells that otherwise may have been allowed to continue to produce for a longer period under conditions of higher prices. Specifically, they may abandon any well if they reasonably believe that the well can no longer produce oil or natural gas in commercially paying quantities.

Approximately 48% of our 2021 oil and natural gas revenues were derived from oil and condensate sales. Any future decreases in prices of oil may adversely affect our cash generated from operations, results of operations, financial position, and our ability to pay quarterly distributions on our common units, perhaps materially.

During the ten years prior to December 31, 2021, WTI market prices at Cushing, Oklahoma have ranged from a high of $110.62 per Bbl in 2013 to a low of $8.91 per Bbl in 2020. On December 31, 2021, the WTI spot market price of oil was $75.33. The changes in the price of oil have been caused by many factors, including periods of increasing U.S. oil production from unconventional (shale) reserves, periods of investment restraint from U.S. oil and natural gas producers, actions taken by members of the Organization of the Petroleum Exporting Countries and its broader partners ("OPEC+"), and recent fluctuations in demand as a result of the COVID-19 pandemic. If prices for oil are depressed for an extended period of time or there are future declines, we may be required to write down the value of our oil and natural gas properties in addition to impairments taken during 2015, 2016, and 2020, and some of our undeveloped locations may no longer be economically viable. In addition, sustained low prices for oil may negatively impact the value of our estimated proved reserves and the amount that we are allowed to borrow under our Credit Facility and reduce the amounts of cash we would otherwise have available to pay expenses, fund capital expenditures, make distributions to our unitholders, and service our indebtedness. See "—Covid-19— The COVID-19 pandemic has adversely affected our business, and the ultimate effect on our financial condition, results of

operations, and cash distributions to unitholders will depend on future developments, which are highly uncertain and cannot be predicted.”

Approximately 52% of our 2021 oil and natural gas revenues were derived from natural gas and natural gas liquids sales. Any future decreases in prices of natural gas may adversely affect our cash generated from operations, results of operations, financial position, and our ability to pay quarterly distributions on our common units, perhaps materially.

During the ten years prior to December 31, 2021, natural gas prices at Henry Hub have ranged from a high of $23.86 per MMBtu in 2021 to a low of $1.33 per MMBtu in 2020. On December 31, 2021, the Henry Hub spot market price of natural gas was $3.82 per MMBtu. The changes in the price of natural gas have been caused by many factors, including periods of increasing U.S. natural gas production from unconventional (shale) reserves, periods of investment restraint from U.S. oil and natural gas producers, seasonal changes in demand for heating by residential and commercial customers, rising levels of U.S. natural gas exports, and recent fluctuations in demand as a result of the COVID-19 pandemic. If prices for natural gas are depressed for an extended period of time or there are future declines, we may be required to further write down the value of our oil and natural gas properties in addition to impairments taken during 2015, 2016, and 2020, and some of our undeveloped locations may no longer be economically viable. In addition, sustained low prices for natural gas may negatively impact the value of our estimated proved reserves and the amount that we are allowed to borrow under our Credit Facility and reduce the amounts of cash we would otherwise have available to pay expenses, make distributions to our unitholders, and service our indebtedness. See "—Covid-19— The COVID-19 pandemic has adversely affected our business, and the ultimate effect on our financial condition, results of operations, and cash distributions to unitholders will depend on future developments, which are highly uncertain and cannot be predicted.”

Acquisitions

Our failure to successfully identify, complete, and integrate acquisitions could adversely affect our growth, results of operations, and cash distributions to unitholders.

We depend partly on acquisitions to grow our reserves, production, and cash generated from operations. Our decision to acquire a property will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic data, and other information, the results of which are often inconclusive and subject to various interpretations. The successful acquisition of properties requires an assessment of several factors, including:

•recoverable reserves;

•future oil and natural gas prices and their applicable differentials;

•development plans;

•operating costs; and

•potential environmental and other liabilities.

The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, if applicable, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms.

There is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain financing. In addition, compliance with regulatory requirements may impose substantial additional obligations on our operators, causing them to expend additional time and resources in compliance activities, and potentially increase our operators’ exposure to penalties or fines for non-compliance with additional legal requirements. Further, the process of integrating acquired assets may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources.

No assurance can be given that we will be able to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms, or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully, or to minimize

any unforeseen operational difficulties could have a material adverse effect on our financial condition, results of operations, and cash distributions to unitholders. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our growth, results of operations, and cash distributions to unitholders.

Any acquisitions of additional mineral and royalty interests that we complete will be subject to substantial risks.

Even if we do make acquisitions that we believe will increase our cash generated from operations, these acquisitions may nevertheless result in a decrease in our cash distributions per unit. Any acquisition involves potential risks, including, among other things:

•the validity of our assumptions about estimated proved reserves, future production, prices, revenues, capital expenditures, operating expenses, and costs;

•a decrease in our liquidity by using a significant portion of our cash generated from operations or borrowing capacity to finance acquisitions;

•a significant increase in our interest expense or financial leverage if we incur debt to finance acquisitions;

•the assumption of unknown liabilities, losses, or costs for which we are not indemnified or for which any indemnity we receive is inadequate;

•mistaken assumptions about the overall cost of equity or debt;

•our ability to obtain satisfactory title to the assets we acquire;

•an inability to hire, train, or retain qualified personnel to manage and operate our growing business and assets; and

•the occurrence of other significant changes, such as impairment of oil and natural gas properties, goodwill or other intangible assets, asset devaluation, or restructuring charges.

Access to Capital and Financing

Acquisitions, funding our non-operated working interests, and our operators’ development activities of our leases will require substantial capital, and we and our operators may be unable to obtain needed capital or financing on satisfactory terms or at all.

The oil and natural gas industry is capital intensive. We have made and may make in the future substantial capital expenditures in connection with the acquisition of mineral and royalty interests and, to a lesser extent, participation in our non-operated working interests. To date, we have financed capital expenditures primarily with funding from cash generated by operations, limited borrowings under our Credit Facility, executed farmout agreements, and the issuance of equity securities.

In the future, we may restrict distributions to fund acquisitions and participation in our working interests but eventually we may need capital in excess of the amounts we retain in our business or borrow under our Credit Facility. We cannot assure you that we will be able to access external capital on terms favorable to us or at all. If we are unable to fund our capital requirements, we may be unable to complete acquisitions, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our results of operation and cash distributions to unitholders.

Most of our operators are also dependent on the availability of external debt and equity financing sources to maintain their drilling programs. If those financing sources are not available to the operators on favorable terms or at all, then we expect the development of our properties to be adversely affected. If the development of our properties is adversely affected, then revenues from our mineral and royalty interests and non-operated working interests may decline.

Our Credit Facility has substantial restrictions and financial covenants that may restrict our business and financing activities and our ability to pay distributions.

Our Credit Facility limits the amounts we can borrow to a borrowing base amount, as determined by the lenders at their sole discretion based on their valuation of our proved reserves and their internal criteria. The borrowing base is redetermined at least semi-annually, and the available borrowing amount could be decreased as a result of such redeterminations. Decreases in the available borrowing amount could result from declines in oil and natural gas prices, operating difficulties or increased costs, decreases in reserves, lending requirements, or regulations or certain other circumstances. As of December 31, 2021, we had outstanding borrowings of $89.0 million and the aggregate maximum credit amounts of the lenders were $1.0 billion. Our borrowing base determined by the lenders under our Credit Facility in October 2021 is $400.0 million and the next semi-annual redetermination is scheduled for April 2022. A future decrease in our borrowing base could be substantial and could be to a

level below our then-outstanding borrowings. Outstanding borrowings in excess of the borrowing base are required to be repaid in five equal monthly payments, or we are required to pledge other oil and natural gas properties as additional collateral, within 30 days following notice from the administrative agent of the new or adjusted borrowing base. If we do not have sufficient funds on hand for repayment, we may be required to seek a waiver or amendment from our lenders, refinance our Credit Facility, or sell assets, debt, or equity. We may not be able to obtain such financing or complete such transactions on terms acceptable to us or at all. Failure to make the required repayment could result in a default under our Credit Facility, which could materially adversely affect our business, financial condition, results of operations, and distributions to our unitholders.

The operating and financial restrictions and covenants in our Credit Facility restrict, and any future financing agreements likely will restrict, our ability to finance future operations or capital needs, engage in, expand, or pursue our business activities, or pay distributions. Our Credit Facility restricts, and any future Credit Facility likely will restrict, our ability to:

•incur indebtedness;

•grant liens;

•make certain acquisitions and investments;

•enter into hedging arrangements;

•enter into transactions with our affiliates;

•make distributions to our unitholders; or

•enter into a merger, consolidation, or sale of assets.

Our Credit Facility restricts our ability to make distributions to unitholders or to repurchase units unless after giving effect to such distribution or repurchase, there is no event of default under our Credit Facility and our outstanding borrowings are not in excess of our borrowing base. While we currently are not restricted by our Credit Facility from declaring a distribution, we may be restricted from paying a distribution in the future.

We also are required to comply with certain financial covenants and ratios under the Credit Facility. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control, such as reduced oil and natural gas prices. If we violate any of the restrictions, covenants, ratios, or tests in our Credit Facility, a significant portion of our indebtedness may become immediately due and payable, our ability to make distributions will be inhibited, and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, our obligations under our Credit Facility are secured by substantially all of our assets, and if we are unable to repay our indebtedness under our Credit Facility, the lenders can seek to foreclose on our assets.

On March 5, 2021, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks

to submit LIBOR rates after December 31, 2021 for the 1-week and 2-month U.S. dollar settings and after June 30, 2023 for the

remaining U.S. dollar settings. Our Credit Facility includes provisions to determine a replacement rate for LIBOR if necessary

during its term, based on the secured overnight financing rate published by the Federal Reserve Bank of New York (“SOFR”).

We currently do not expect the transition from LIBOR to have a material impact on us. Please read “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Credit Facility” for a description of the interest rate on outstanding borrowings under our Credit Facility.

We expect to distribute a substantial majority of the cash we generate from operations each quarter, which could limit our ability to grow and make acquisitions.

We expect to distribute a substantial majority of the cash we generate from operations each quarter. As a result, we will have limited cash generated from operations to reinvest in our business or to fund acquisitions, and we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and growth capital expenditures. If we are unable to finance growth externally, our distribution policy will significantly impair our ability to grow.

If we issue additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. Other than limitations restricting our ability to issue units ranking senior or on parity with our Series B cumulative convertible preferred units, there are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units with respect to distributions. The incurrence of additional commercial borrowings or other debt to finance our growth would result in increased interest expense and required principal repayments, which, in turn, may

reduce the cash that we have available to distribute to our unitholders. Please read Part II, Item 5. “Market for Registrant’s Common Equity, Related Unitholder Matters, and Issuer Purchases of Equity Securities — Cash Distribution Policy.”

Production

Unless we replace the oil and natural gas produced from our properties, our cash generated from operations and our ability to make distributions to our common unitholders could be adversely affected.

Producing oil and natural gas wells are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and our operators’ production thereof and our cash generated from operations and ability to make distributions are highly dependent on the successful development and exploitation of our reserves. The production decline rates of our properties may be significantly higher than estimated if the wells on our properties do not produce as expected. We may also not be able to find, acquire, or develop additional reserves to replace the current and future production of our properties at economically acceptable terms, which would adversely affect our business, financial condition, results of operations, and cash distributions to our common unitholders.

We either have little or no control over the timing of future drilling with respect to our mineral and royalty interests and non-operated working interests.

Our proved undeveloped reserves may not be developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations, and the decision to pursue development of a proved undeveloped drilling location will be made by the operator and not by us. The reserve data included in the reserve report of our engineer assume that substantial capital expenditures are required to develop the reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled, or that the results of the development will be as estimated. Delays in the development of our reserves, increases in costs to drill and develop our reserves, or decreases in commodity prices will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our undeveloped reserves as unproved reserves.

Project areas on our properties, which are in various stages of development, may not yield oil or natural gas in commercially viable quantities.

Project areas on our properties are in various stages of development, ranging from project areas with current drilling or production activity to project areas that have limited drilling or production history. If the wells in the process of being completed do not produce sufficient revenues or if dry holes are drilled, our financial condition, results of operations, and cash distributions to unitholders may be adversely affected.

The unavailability, high cost, or shortages of rigs, equipment, raw materials, supplies, or personnel may restrict or result in increased costs for operators related to developing and operating our properties.

The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials, supplies, and personnel. When shortages occur, the costs and delivery times of rigs, equipment, and supplies increase and demand for, and wage rates of, qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, our operators rely on independent third-party service providers to provide many of the services and equipment necessary to drill new wells. If our operators are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer. Shortages of drilling rigs, equipment, raw materials, supplies, personnel, trucking services, tubulars, fracking and completion services, and production equipment could delay or restrict our operators’ exploration and development operations, which in turn could have a material adverse effect on our financial condition, results of operations, and cash distributions to unitholders.

The marketability of oil and natural gas production is dependent upon transportation, pipelines, and refining facilities, which neither we nor many of our operators control. Any limitation in the availability of those facilities could interfere with our or our operators’ ability to market our or our operators’ production and could harm our business.

The marketability of our or our operators’ production depends in part on the availability, proximity, and capacity of pipelines, tanker trucks, and other transportation methods, and processing and refining facilities owned by third parties. The amount of oil that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage, or lack of available capacity on these systems, tanker truck availability, and extreme weather conditions. Also, the shipment of our or our operators’ oil and natural

gas on third-party pipelines may be curtailed or delayed if it does not meet the quality specifications of the pipeline owners. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we or our operators are provided only with limited, if any, notice as to when these circumstances will arise and their duration. Any significant curtailment in gathering system or transportation, processing, or refining-facility capacity could reduce our or our operators’ ability to market oil production and have a material adverse effect on our financial condition, results of operations, and cash distributions to unitholders. Our or our operators’ access to transportation options and the prices we or our operators receive can also be affected by federal and state regulation—including regulation of oil production, transportation, and pipeline safety—as well by general economic conditions and changes in supply and demand. In addition, the third parties on whom we or our operators rely for transportation services are subject to complex federal, state, tribal, and local laws that could adversely affect the cost, manner, or feasibility of conducting our business.

Our estimated reserves are based on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

Oil and natural gas reserve engineering is not an exact science and requires subjective estimates of underground accumulations of oil and natural gas and assumptions concerning future oil and natural gas prices, production levels, ultimate recoveries, and operating and development costs. As a result, estimated quantities of proved reserves, projections of future production rates, and the timing of development expenditures may be incorrect. Our estimates of proved reserves and related valuations as of December 31, 2021, 2020, and 2019 were prepared by NSAI, a third-party petroleum engineering firm, which conducted a detailed review of our properties for the period covered by its reserve report using information provided by us. Over time, we may make material changes to reserve estimates taking into account the results of actual drilling, testing, and production. Also, certain assumptions regarding future oil and natural gas prices, production levels, and operating and development costs may prove incorrect. Any significant variance from these assumptions to actual figures could greatly affect our estimates of reserves and future cash generated from operations. Numerous changes over time to the assumptions on which our reserve estimates are based, as described above, often result in the actual quantities of oil and natural gas that are ultimately recovered being different from our reserve estimates.

The estimates of reserves as of December 31, 2021, 2020, and 2019 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the years ended December 31, 2021, 2020, and 2019, respectively, in accordance with the SEC guidelines applicable to reserve estimates for those periods. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for unproved undeveloped acreage.

The results of exploratory drilling in shale plays will be subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production.

Our operators use the latest drilling and completion techniques in their operations, and these techniques come with inherent risks, including being unable to land the well bore in the desired drilling zone and being unable to fracture stimulate the planned number of stages, and being unable to run tools through the well bore. In addition, to the extent our operators engage in horizontal drilling, those activities may adversely affect their ability to successfully drill in identified vertical drilling locations. Furthermore, certain of the new techniques that our operators may adopt, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before these wells begin producing. The results of drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently our operators will be less able to predict future drilling results in these areas.

Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our operators’ drilling results are weaker than anticipated or they are unable to execute their drilling program on our properties, our operating and financial results in these areas may be lower than we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline, and our results of operations and cash distributions to unitholders could be adversely affected.

We depend on various unaffiliated operators for all exploration, development, and production on the properties underlying our mineral and royalty interests and non-operated working interests. Substantially all our revenue is derived from the sale of oil and natural gas production from producing wells in which we own a royalty interest or a non-operated working interest. A reduction in the expected number of wells to be drilled on our acreage by these operators or the failure of our operators to adequately and efficiently develop and operate our acreage could have an adverse effect on our results of operations.

Our assets consist of mineral and royalty interests and non-operated working interests. For the year ended December 31, 2021, we received revenue from over 1,000 operators. The failure of our operators to adequately or efficiently perform operations or an operator’s failure to act in ways that are in our best interests could reduce production and revenues. Our operators are often not obligated to undertake any development activities other than those required to maintain their leases on our acreage. In the absence of a specific contractual obligation, any development and production activities will be subject to their reasonable discretion. Our operators could determine to drill and complete fewer wells on our acreage than is currently expected. The success and timing of drilling and development activities on our properties, and whether the operators elect to drill any additional wells on our acreage, depends on a number of factors largely outside of our control, including:

•the capital costs required for drilling activities by our operators, which could be significantly more than anticipated;

•the ability of our operators to access capital;

•prevailing commodity prices;

•the availability of suitable drilling equipment, production and transportation infrastructure, and qualified operating personnel;

•the operators’ expertise, operating efficiency, and financial resources;

•approval of other participants in drilling wells;

•the operators’ expected return on investment in wells drilled on our acreage as compared to opportunities in other areas;

•the selection of technology;

•the selection of counterparties for the marketing and sale of production; and

•the rate of production of the reserves.

The operators may elect not to undertake development activities, or may undertake these activities in an unanticipated fashion, which may result in significant fluctuations in our results of operations and cash distributions to our unitholders. Sustained reductions in production by the operators on our properties may also adversely affect our results of operations and cash distributions to unitholders.

Cessation or protracted slowdown of activity in the Shelby Trough area could adversely affect our results of operations.

In 2021, we generated 16% of our royalty revenues and 40% of our working interest revenues from three operators in the Shelby Trough area of the Haynesville play in East Texas, where we own a concentrated, relatively high-interest royalty position. Only one of these operators has an active drilling program on this acreage. Geographic and operator concentration heightens the effect of operational risks, including:

•operators’ diversion of drilling capital to other areas, where our royalty interest is less meaningful or nonexistent;

•adverse changes to the operators’ financial positions;

•unanticipated geographic or environmental constraints in the Shelby Trough; or

•delay or cancellation of construction or operation of LNG export facilities in the Gulf of Mexico.

If any of these risks are realized and production is not replaced by another operator in this area or another area, production may decrease, reducing cash generated from operations and cash available for distribution.

We may experience delays in the payment of royalties and be unable to replace operators that do not make required royalty payments, and we may not be able to terminate our leases with defaulting lessees if any of the operators on those leases declare bankruptcy.

A failure on the part of the operators to make royalty payments gives us the right to terminate the lease, repossess the property, and enforce payment obligations under the lease. If we repossessed any of our properties, we would seek a replacement operator. However, we might not be able to find a replacement operator and, if we did, we might not be able to

enter into a new lease on favorable terms within a reasonable period of time. In addition, the outgoing operator could be subject to bankruptcy proceedings, in which case our right to enforce or terminate the lease for any defaults, including non-payment, may be substantially delayed or otherwise impaired.

Environmental, Legal and Regulatory Risks

Conservation measures, technological advances, and general concern about the environmental impact of the production and use of fossil fuels could materially reduce demand for oil and natural gas and adversely affect our results of operations and the trading market for our common units.

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy, and energy-generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations, and cash distributions to unitholders. It is also possible that the concerns about the production and use of fossil fuels will reduce the number of investors willing to own our common units, adversely affecting the market price of our common units.

Oil and natural gas operations are subject to various governmental laws and regulations, including those directed at the threat of climate change. Compliance with these laws and regulations can be burdensome and expensive, and failure to comply could result in significant liabilities, which could reduce cash distributions to our unitholders.

Operations on the properties in which we hold interests are subject to various federal, state, and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include drilling operations, production and distribution activities, discharges or releases of pollutants or wastes, plugging and abandonment of wells, maintenance and decommissioning of other facilities, the spacing of wells, unitization and pooling of properties, and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and natural gas. In addition, the production, handling, storage and transportation of oil and natural gas, as well as the remediation, emission, and disposal of oil and natural gas wastes, by-products thereof, and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state, and local laws and regulations primarily relating to protection of worker health and safety, natural resources, and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil, or criminal penalties, permit revocations, requirements for additional pollution controls, and injunctions limiting or prohibiting some or all of the operations on our properties. Moreover, these laws and regulations have generally imposed increasingly strict requirements related to water use and disposal, air pollution control, and waste management.

Laws and regulations governing exploration and production may also affect production levels. Our operators must comply with federal and state laws and regulations governing conservation matters, including:

•provisions related to the unitization or pooling of the oil and natural gas properties;

•the establishment of maximum rates of production from wells;

•the spacing of wells;

•the plugging and abandonment of wells; and

•the removal of related production equipment.

Additionally, federal and state regulatory authorities may expand or alter applicable pipeline-safety laws and regulations, compliance with which may require increased capital costs for third-party oil and natural gas transporters. These transporters may attempt to pass on such costs to our operators, which in turn could affect profitability on the properties in which we own mineral and royalty interests.

Our operators must also comply with laws and regulations prohibiting fraud and market manipulations in energy markets. To the extent the operators of our properties are shippers on interstate pipelines, they must comply with the tariffs of those pipelines and with federal policies related to the use of interstate capacity.

Our operators may be required to make significant expenditures to comply with the governmental laws and regulations described above. We believe the trend of more expansive and stricter environmental legislation and regulations will continue. Please read Part I, Items 1 and 2. “Business and Properties — Environmental Matters” for a description of the laws and

regulations that affect our operators and that may affect us. These and other potential regulations could increase the operating costs of our operators and delay production, which could reduce the amount of cash distributions to our unitholders.

Louisiana mineral servitudes are subject to reversion to the surface owner after ten years’ nonuse.

We own mineral servitudes covering several hundred thousand acres in Louisiana. A mineral servitude is created in Louisiana when the mineral rights are separated from the ownership of the surface, whether by sale or reservation. These mineral servitudes, once created, are subject to a ten-year prescription of nonuse. During the ten-year period, the mineral-servitude owner has to conduct good-faith operations on the servitude for the discovery and production of minerals, or the mineral servitude “prescribes,” and the mineral rights associated with that servitude revert to the surface owner. A good-faith operation for the discovery and production of minerals, even one resulting in a dry hole, conducted within the ten-year period will interrupt the prescription of nonuse and restart the running of the ten-year prescriptive period. If the operation results in production, prescription is interrupted as long as the production continues or operations are conducted in good faith to secure or restore production. If any of our mineral servitudes are prescribed by operation of Louisiana law, our operating results may be adversely affected.

Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs, additional operating restrictions or delays, and fewer potential drilling locations.

Our operators engage in hydraulic fracturing. Hydraulic fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations, including shales. The process involves the injection of water, sand, and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. The federal SDWA regulates the underground injection of substances through the Underground Injection Control (“UIC”) program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic-fracturing process is typically regulated by state oil and natural gas commissions. However, the EPA has published effluent limit guidelines prohibiting the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants.

Additionally, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources. The final report concluded that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain limited circumstances. The EPA has not proposed to take any action in response to the report’s findings.

Several states where we own interests in oil and natural gas producing properties, including Colorado, North Dakota, Louisiana, Oklahoma, and Texas, have adopted regulations that could restrict or prohibit hydraulic fracturing in certain circumstances or require the disclosure of the composition of hydraulic-fracturing fluids. For example, in Texas, the RRC published a final rule in October 2014 governing permitting or re-permitting of disposal wells that require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic cross sections, and structure maps relating to the disposal area in question. If the permittee or an applicant of a disposal well permit fails to demonstrate that the injected fluids are confined to the disposal zone or if scientific data indicates such a disposal well is likely to be or determined to be contributing to seismic activity, then the RRC may deny, modify, suspend, or terminate the permit application or existing operating permit for that well. In September 2021, the RRC issued a notice to operators in the Midland area to reduce saltwater disposal well actions and provide certain data to the Commission. Oklahoma, similarly, has imposed strict limits on the operation of disposal wells in areas with increased instances of induced seismic events. These existing or any new legal requirements establishing seismic permitting requirements or similar restrictions on the construction or operation of disposal wells for the injection of produced water likely will result in added costs to comply and affect our operators’ rate of production, which in turn could have a material adverse effect on our results of operations and financial position. In addition to state laws, local land use restrictions, such as city ordinances, may restrict or prohibit the performance of well drilling in general or hydraulic fracturing in particular. For example, in April 2019, Colorado adopted legislation that requires the COGCC to prioritize public health and environmental concerns in its decisions and delegates considerable new authority to local governments to regulate surface impacts. In keeping with this legislation, the COGCC in November 2020 adopted revisions to several regulations to increase protections for public health, safety, welfare, wildlife, and environmental matters. These revisions established more stringent setbacks (2,000 feet instead of 500 feet) on new oil and gas development and elimination of routine flaring and venting of natural gas at new or existing wells across the state, each subject to only limited exceptions.Some local communities have adopted additional restrictions for oil and gas activities, such as requiring greater setbacks. We cannot predict what additional state or local requirements may be imposed in the future on oil and gas operations in the states in which we own interests. In the event state, local, or municipal legal restrictions are adopted in areas where our operators conduct operations, our operators may incur substantial costs to comply with these requirements, which may be significant in nature, experience delays, or curtailment in the pursuit of exploration, development, or production activities and perhaps even be precluded from the drilling of wells.

Operating hazards and uninsured risks may result in substantial losses to us or our operators, and any losses could adversely affect our results of operations and cash distributions to unitholders.

We may be secondarily liable for damage to the environment caused by our operators. The operations of our operators will be subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses, and environmental hazards such as oil spills, natural gas leaks and ruptures, or discharges of toxic gases. In addition, their operations will be subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage, or potential underground migration of fracturing fluids, including chemical additives. The occurrence of any of these events could result in substantial losses to our operators due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations, and repairs required to resume operations.

In accordance with what we believe to be customary industry practice, we maintain insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations, or cash distributions to unitholders. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. We may also be liable for environmental damage caused by previous owners of properties purchased by us, which liabilities may not be covered by insurance.

We may not have coverage if we are unaware of a sudden and accidental pollution event and unable to report the “occurrence” to our insurance providers within the time frame required under our insurance policy. We do not have, and do not intend to obtain, coverage for gradual, long-term pollution events. In addition, these policies do not provide coverage for all liabilities, and we cannot assure our unitholders that the insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations, and cash distributions to unitholders.

Increasing attention to environmental, social and governance (ESG) matters may impact our business

Increasing attention to, and social expectations on, companies to address climate change and other environmental and social impacts, investor and societal explanations regarding voluntary ESG disclosures, and increased consumer demand for alternative forms of energy may result in increased costs, reduced demand for our products, reduced profits, increased investigations and litigation, and negative impacts on our unit price and access to capital markets. Increasing attention to climate change and environmental conservation, for example, may result in demand shifts for oil and natural gas products and additional governmental investigations and private litigation against us. To the extent that societal pressures or political or other factors are involved, it is possible that such liability could be imposed without regard to our causation or contribution to the asserted damage, or other mitigating factors.

Additionally, we may receive pressure from investors, lenders, or other groups to adopt more aggressive climate or other ESG-related goals, but we cannot guarantee that we will be able to implement such goals because of potential costs or technical or operational obstacles.

In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us or our customers and to the diversion of investment or other industries which could have a negative impact on our unit price and/or our access to and costs of capital. Moreover, to the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively or recruit or retain employees, which may adversely affect our operations.

Key Persons

We rely on a few key individuals whose absence or loss could adversely affect our business.

Many key responsibilities within our business have been assigned to a small number of individuals. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team could disrupt our business, and if we are unable to manage an orderly transition, our business may be adversely affected.

Further, we do not maintain “key person” life insurance policies on any of our executive team or other key personnel. As a result, we are not insured against any losses resulting from the death of these key individuals.

Title Defects

Title to the properties in which we have an interest may be impaired by title defects.

No assurance can be given that we will not suffer a monetary loss from title defects or title failure. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss.

Risks to Unitholders under Our Partnership Agreement

The Board may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all on our common units. If we make distributions, our Series B cumulative convertible unitholders have priority with respect to rights to share in those distributions over our common unitholders for so long as our Series B cumulative convertible preferred units are outstanding.

Our partnership agreement generally provides that any distributions are paid each quarter as follows: (i) first, to the holders of Series B cumulative convertible preferred units equal to 7% per annum, subject to certain adjustments, and (ii) second, to the holders of common units. However, the Board could elect not to pay distributions for one or more quarters or at all. Please read Part II, Item 5. “Market for Registrant’s Common Equity, Related Unitholder Matters, and Issuer Purchases of Equity Securities — Cash Distribution Policy.”

Our partnership agreement does not require us to pay any distributions at all on our common units. Accordingly, investors are cautioned not to place undue reliance on the permanence of any distribution policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders. The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the Board. If we make distributions, our Series B cumulative convertible preferred unitholders have priority with respect to rights to share in those distributions over our common unitholders for so long as our Series B cumulative convertible preferred units are outstanding. Please read Part II, Item 5. “Market for Registrant’s Common Equity, Related Unitholder Matters, and Issuer Purchases of Equity Securities — Cash Distribution Policy — Series B Cumulative Convertible Preferred Units.”

Our partnership agreement eliminates the fiduciary duties that might otherwise be owed to the partnership and its partners by our general partner and its directors and executive officers under Delaware law.

Our partnership agreement contains provisions that eliminate the fiduciary duties that might otherwise be owed by our general partner and its directors and executive officers. For example, our partnership agreement provides that our general partner and its directors and executive officers have no duties to the partnership or its partners except as expressly set forth in the partnership agreement. In place of default fiduciary duties, our partnership agreement imposes a contractual standard requiring our general partner and its directors and executive officers to act in good faith, meaning they cannot cause the general partner to take an action that they subjectively believe is adverse to our interests. Such contractual standards allow our general partner and its directors and executive officers to manage and operate our business with greater flexibility and to subject the

actions and determinations of our general partner and its directors and executive officers to lesser legal or judicial scrutiny than would be the case if state law fiduciary standards were applicable.

Our partnership agreement restricts the situations in which remedies may be available to our unitholders for actions taken that might constitute breaches of duty under applicable Delaware law and breaches of the contractual obligations in our partnership agreement.

Our partnership agreement restricts the potential liability of our general partner and its directors and executive officers to our unitholders. For example, our partnership agreement provides that our general partner and its directors and executive officers will not be liable for monetary damages to us or our limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in willful misconduct or fraud or, with respect to any criminal conduct, with the knowledge that its conduct was unlawful.

Unitholders are bound by the provisions of our partnership agreement, including the provisions described above.

Our partnership agreement restricts the voting rights of unitholders owning 15% or more of our units, subject to certain exceptions.

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 15% or more of any class of units then outstanding, other than the limited partners in BSMC prior to the IPO, their transferees, persons who acquired such units with the prior approval of the Board, holders of Series B cumulative convertible preferred units in connection with any vote, consent or approval of the Series B cumulative convertible preferred units as a separate class, and persons who own 15% or more of any class as a result of any redemption or purchase of any other person's units or similar action by us or any conversion of the Series B cumulative convertible preferred units at our option or in connection with a change of control may not vote on any matter.

Our partnership agreement includes exclusive forum, venue, and jurisdiction provisions. By purchasing a common unit, a limited partner is irrevocably consenting to these provisions regarding claims, suits, actions, or proceedings, and submitting to the exclusive jurisdiction of Delaware courts.

Our partnership agreement is governed by Delaware law. Our partnership agreement includes exclusive forum, venue, and jurisdiction provisions designating Delaware courts as the exclusive venue for all claims, suits, actions, or proceedings arising out of or relating in any way to the partnership agreement, brought in a derivative manner on behalf of the partnership, asserting a claim of breach of a fiduciary or other duty owed by any director, officer, or other employee of the partnership or the general partner, or owed by the general partner to the partnership or the partners, asserting a claim arising pursuant to any provision of the Delaware Act, or asserting a claim governed by the internal affairs doctrine. By purchasing a common unit, a limited partner is irrevocably consenting to these provisions regarding claims, suits, actions, or proceedings and submitting to the exclusive jurisdiction of Delaware courts. If a dispute were to arise between a limited partner and us or our officers, directors, or employees, the limited partner may be required to pursue its legal remedies in Delaware, which may be an inconvenient or distant location and which is considered to be a more corporate-friendly environment.

We may issue additional common units and other equity interests without common unitholder approval, which would dilute holders of common units. However, subject to certain exceptions, our partnership agreement does not authorize us to issue units ranking senior to or at parity with our Series B cumulative convertible preferred units without Series B cumulative convertible preferred unitholder approval.

Under our partnership agreement, we are authorized to issue an unlimited number of additional interests, including common units, without a vote of the unitholders other than, in certain instances, approval of holders of our Series B cumulative convertible preferred units. Our issuance of additional common units or other equity interests of equal or senior rank will have the following effects:

•the proportionate ownership interest of common unitholders in us immediately prior to the issuance will decrease;

•the amount of cash distributions on each common unit may decrease;

•the ratio of our taxable income to distributions may increase;

•the relative voting strength of each previously outstanding common unit may be diminished; and

•the market price of the common units may decline.

However, subject to certain exceptions, our partnership agreement does not authorize us to issue securities having preferences or rights with priority over or on a parity with the Series B cumulative convertible preferred units with respect to rights to share in distributions, redemption obligations, or redemption rights without Series B cumulative convertible preferred unitholder approval.

Distributions to Unitholders; Price of Units and Other Risks

Actions taken by our general partner may affect the amount of cash generated from operations that is available for distribution to unitholders.

The amount of cash generated from operations available for distribution to unitholders is affected by decisions of our general partner regarding such matters as:

•amount and timing of asset purchases and sales;

•cash expenditures;

•borrowings and repayment of current and future indebtedness;

•issuance of additional units; and

•the creation, reduction, or increase of reserves in any quarter.

In addition, borrowings by us do not constitute a breach of any duty owed by our general partner to our unitholders.

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets.

As of December 31, 2021, we had 208,665,648 common units and 14,711,219 Series B cumulative convertible preferred units outstanding. Each holder may elect to convert all or any portion of its Series B cumulative convertible preferred units into common units on a one-for-one basis, subject to customary anti-dilution adjustments, an adjustment for any distributions that have accrued but not been paid when due, and certain other restrictions. Under certain conditions, we may elect to convert all or any portion of the Series B cumulative convertible preferred units into common units. As of December 31, 2021 and through the date of this filing, we had not met all such conditions and therefore were not eligible to exercise our conversion right for the Series B cumulative convertible preferred units. Sales by holders of a substantial number of our common units in the public markets, or the perception that these sales might occur, could have a material adverse effect on the price of our common units or impair our ability to obtain capital through an offering of equity securities.

Increases in interest rates may cause the market price of our common units to decline.

An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular, for yield-based equity investments such as our common units. Any such increase in interest rates or reduction in demand for our common units resulting from other investment opportunities may cause the trading price of our common units to decline.

Unitholders may have liability to repay distributions.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

The NYSE does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

Because we are a publicly traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. In addition, because we are a publicly traded partnership, the NYSE does not require us to obtain unitholder

approval prior to certain unit issuances. Accordingly, unitholders will not have the same protections afforded to stockholders of certain corporations that are subject to all of the NYSE’s corporate governance requirements.

If a unitholder is not an Eligible Holder, the common units of such unitholder may be subject to redemption.

We have adopted certain requirements regarding those investors who may own our units. Eligible Holders are limited partners (a) whose, or whose owners’, U.S. federal income tax status does not have or is not reasonably likely to have a material adverse effect on the rates chargeable by us to customers and (b) whose ownership could not result in our loss of ownership in any material part of our assets, as determined by our general partner with the advice of counsel. If an investor is not an Eligible Holder, in certain circumstances as set forth in our partnership agreement, units held by such investor may be redeemed by us at the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.

Tax-Related Risks

Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, and not being subject to a material amount of entity-level taxation. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for U.S. federal income tax purposes or we were to become subject to entity-level taxation for state tax purposes, then our cash distributions to common unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, we will be treated as a corporation for U.S. federal income tax purposes unless we satisfy the “qualifying income” requirement within Section 7704(d)(1)(E) of the Internal Revenue Code. Based upon our current operations and current Treasury Regulations, we believe that we satisfy the qualifying income requirement. However, we have not requested, and do not plan to request, a ruling from the IRS on this or any other matter affecting us. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate. Distributions to our common unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, or deductions would flow through to our common unitholders. Because an entity-level tax would be imposed upon us as a corporation, cash distributions to our common unitholders would be substantially reduced. In addition, changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise, and other forms of taxation. Imposition of any of those taxes may substantially reduce the cash distributions to our common unitholders. Therefore, treatment of us as a corporation or the assessment of a material amount of entity-level taxation would result in a material reduction in the anticipated cash generated from our operations and after-tax return to our common unitholders, likely causing a substantial reduction in the value of our common units.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial, or administrative changes and differing interpretations, possibly applied on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative, or judicial changes or differing interpretations at any time. From time to time, members of Congress propose and consider substantive changes to the existing U.S. federal income tax laws that would affect publicly traded partnerships, including proposals that would eliminate our ability to qualify for partnership tax treatment. Recent proposals have provided for the expansion of the qualifying income exception for publicly traded partnerships in certain circumstances and other proposals have provided for the total elimination of the qualifying income exception upon which we rely for our partnership tax treatment. In addition, the Treasury Department has issued, and in the future may issue, regulations interpreting those laws that affect publicly traded partnerships. There can be no assurance that there will not be further changes to U.S. federal income tax laws or the Treasury Department's interpretation of the qualifying income rules in a manner that could impact our ability to qualify as a partnership in the future.

Any modification to the U.S. federal income tax laws or interpretations thereof may be applied retroactively and could make it more difficult or impossible for us to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals

will ultimately be enacted or adopted. Any such changes could negatively impact the value of an investment in our common units. You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on your investment in our common units.

Future legislation may result in the elimination of certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and production. Additionally, future federal or state legislation may impose new or increased taxes or fees on oil and natural gas extraction.

From time to time, legislation has been proposed that would, if enacted into law, make significant changes to tax laws, including to certain key U.S. federal income tax provisions currently available to oil and gas companies. Such legislative changes have included, but not been limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; and (iii) an extension of the amortization period for certain geological and geophysical expenditures. Congress could consider, and could include, some or all of these proposals as part of future tax reform legislation. Moreover, other more general features of tax reform legislation, including changes to cost recovery rules and to the deductibility of interest expense may be developed that also would change the taxation of oil and gas companies. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these proposals or any similar changes in U.S. federal income tax laws could increase costs or eliminate or postpone certain tax deductions that currently are available to us or our services providers with respect to oil and gas development. Any such changes could have an adverse effect on the Company’s financial position, results of operations, and cash flows.

If the IRS were to contest the U.S. federal income tax positions we take, it may adversely affect the market for our common units, and the costs of any such contest would reduce cash available for distribution to our common unitholders.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for U.S. federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely affect the market for our common units and the price at which they trade. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our common unitholders and thus will be borne indirectly by our common unitholders.

If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case cash available for distribution to our common unitholders might be substantially reduced and our current and former common unitholders may be required to indemnify us for any taxes (including any applicable penalties and interest) resulting from such audit adjustments that were paid on such common unitholders' behalf.

Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes an audit adjustment to our income tax return, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. To the extent possible under the new rules, our general partner may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if we are eligible, issue a revised information statement to each common unitholder and former common unitholder with respect to an audited and adjusted return. Although our general partner may elect to have our common unitholders and former common unitholders take such audit adjustment into account and pay any resulting taxes (including applicable penalties or interest) in accordance with their interests in us during the tax year under audit, there can be no assurance that such election will be practical, permissible, or effective in all circumstances. As a result, our current common unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if such common unitholders did not own common units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties, and interest, cash available for distribution to our common unitholders might be substantially reduced and our current and former common unitholders may be required to indemnify us for any taxes (including any applicable penalties and interest) resulting from such audit adjustment that were paid on such common unitholders' behalf. These rules are not applicable for tax years beginning on or prior to December 31, 2017.

Even if you, as a common unitholder, do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

You will be required to pay U.S. federal income taxes and, in some cases, state and local income taxes, on your share of our taxable income, whether or not you receive cash distributions from us. For example, if we sell assets and use the proceeds to repay existing debt or fund capital expenditures, you may be allocated taxable income and gain resulting from the sale and our cash available for distribution would not increase. Similarly, taking advantage of opportunities to reduce our existing debt, such as debt exchanges, debt repurchases, or modifications of our existing debt could result in “cancellation of indebtedness income” being allocated to our common unitholders as taxable income without any increase in our cash available for distribution. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax due from you with respect to that income.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of prior excess distributions with respect to the common units you sell will, in effect, become taxable income to you if you sell your common units at a price greater than your tax basis in those common units, even if the price you receive is less than your original cost. In addition, because the amount realized includes a common unitholder’s share of our nonrecourse liabilities, if you sell your common units, you may incur a tax liability in excess of the amount of cash you receive from the sale.

A substantial portion of the amount realized from the sale of your common units, whether or not representing gain, may be taxed as ordinary income to you due to potential recapture items, including depreciation recapture. Thus, you may recognize both ordinary income and capital loss from the sale of your common units if the amount realized on a sale of your common units is less than your adjusted basis in the common units. Net capital loss may only offset capital gains and, in the case of individuals, up to $3,000 of ordinary income per year. In the taxable period in which you sell your common units, you may recognize ordinary income from our allocations of income and gain to you occurring prior to the sale and from recapture items that generally cannot be offset by any capital loss recognized upon the sale of common units.

Unitholders may be subject to limitation on their ability to deduct interest expense incurred by us.

In general, we are entitled to a deduction for interest paid or accrued on indebtedness properly allocable to our trade or business during our taxable year. However, under the Tax Cuts and Jobs Act, for taxable years beginning after December 31, 2017, our deduction for “business interest” is limited to the sum of our business interest income and 30% of our “adjusted taxable income.” For the purposes of this limitation, our adjusted taxable income is computed without regard to any business interest expense or business interest income, and in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion to the extent such depreciation, amortization, or depletion is not capitalized into cost of goods sold with respect to inventory.

If our “business interest” is subject to limitation under these rules, our unitholders will be limited in their ability to deduct their share of any interest expense that has been allocated to them. As a result, unitholders may be subject to limitation on their ability to deduct interest expense incurred by us.

Tax-exempt entities face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in our common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs) raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from U.S. federal income tax, including IRAs and other retirement plans, may be unrelated business taxable income and may be taxable to them. Tax-exempt entities should consult a tax advisor before investing in our common units.

Non-U.S. common unitholders will be subject to U.S. taxes and withholding with respect to their income and gain from owning our common units.

Non-U.S. common unitholders are generally taxed and subject to income tax filing requirements by the United States on income effectively connected with a U.S. trade or business (“effectively connected income”). Income allocated to our common unitholders and any gain from the sale of our common units will generally be considered to be “effectively connected” with a U.S. trade or business. As a result, distributions to a non-U.S. common unitholder will be subject to withholding at the highest

applicable effective tax rate and a non-U.S. common unitholder who sells or otherwise disposes of a common unit will also be subject to U.S. federal income tax on the gain realized from the sale or disposition of that common unit.

Moreover, the transferee of an interest in a partnership that is engaged in a U.S. trade or business is generally required to withhold 10% of the "amount" realized by the transferor unless the transferor certifies that it is not a foreign person.

While the determination of a partner's "amount realized" generally includes any decrease of a partner’s share of the partnership’s liabilities, the Treasury regulations provide that the "amount realized" on a transfer of an interest in a publicly traded partnership, such as our units, will generally be the amount of gross proceeds paid to the broker effecting the applicable transfer on behalf of the transferor, and thus will be determined without regard to any decrease in that partner's share of publicly traded partnership's liabilities. The Treasury regulations and other guidance from the IRS provide that withholding on a transfer of an interest in a publicly traded partnership will not be imposed on a transfer that occurs prior to January 1, 2023. Thereafter, the obligation to withhold on a transfer of interests in a publicly traded partnership that is effected through a broker is imposed on the transferor’s broker. Current and future prospective non-U.S. common unitholders should consult their tax advisors regarding the impact of these rules on an investment in our common units.

We treat each purchaser of common units as having the same tax benefits without regard to the common units actually purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of our common units and because of other reasons, we have adopted depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns.

We generally prorate our items of income, gain, loss, and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month (the “Allocation Date”), instead of on the basis of the date a particular common unit is transferred. Similarly, we generally allocate (i) certain deductions for depreciation of capital additions, (ii) gain or loss realized on a sale or other disposition of our assets, and (iii) in the discretion of the general partner, any other extraordinary item of income, gain, loss, or deduction based upon ownership on the Allocation Date. Treasury Regulations allow a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of our proration method. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our common unitholders.

A common unitholder whose common units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of common units) may be considered to have disposed of those common units. If so, such common unitholder would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and could recognize gain or loss from the disposition.

Because there are no specific rules governing the U.S. federal income tax consequences of loaning a partnership interest, a common unitholder whose common units are the subject of a securities loan may be considered to have disposed of the loaned common units. In that case, the common unitholder may no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the common unitholder may recognize gain or loss from this disposition. Moreover, during the period of the loan, any of our income, gain, loss, or deduction with respect to those common units may not be reportable by the common unitholder and any cash distributions received by the common unitholder as to those common units could be fully taxable as ordinary income. Common unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to consult a tax advisor to determine whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

You, as a common unitholder, may be subject to state and local taxes and return filing requirements in jurisdictions where you do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, you likely will be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance, or intangible taxes that are imposed by the various jurisdictions in which

we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. We own assets and conduct business in several states, many of which impose a personal income tax and also impose income taxes on corporations and other entities. You may be required to file state and local income tax returns and pay state and local income taxes in these jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may own assets or conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is your responsibility to file all U.S. federal, foreign, state, and local tax returns and pay any taxes due in these jurisdictions. You should consult with your own tax advisors regarding the filing of such tax returns, the payment of such taxes and the deductibility of any taxes paid.

Although we believe our common unitholders are entitled to a 20% deduction related to qualified business income, application of the deduction to royalty income is not free from doubt.

For taxable years beginning after December 31, 2017 and ending on or before December 31, 2025, an individual common unitholder is entitled to a deduction equal to 20% of his or her allocable share of our "qualified business income". Although we expect most of our income to qualify for this deduction, application of these rules to income from mineral interests, such as royalty income, is not entirely clear. The IRS may challenge our treatment of royalty income as qualifying for the deduction.

Although our counsel has advised us that under current law our royalty income should qualify for the deduction, no assurances can be given that the IRS will not challenge our treatment of royalty income as qualifying for the deduction.

General Risk Factors

We have and will continue to incur increased costs as a result of being a publicly traded partnership.

As a publicly traded partnership, we have and will continue to incur significant legal, accounting, and other expenses that we did not incur prior to the IPO. In addition, the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to maintain various corporate governance practices that further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available to distribute to our unitholders will be affected by the costs associated with being a publicly traded partnership.

Following the IPO, we became subject to the public reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). These requirements have increased our legal and financial compliance costs.

The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

The market price of our common units may be influenced by many factors, some of which are beyond our control, including those described elsewhere in these risk factors.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud, and operate successfully as a publicly traded partnership. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future, or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act. For example, Section 404 requires us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common units.

Various security risks, including cybersecurity threats, data breaches, and other disruptions, could significantly affect us.

Various security risks, including cyber attacks on businesses, have escalated in recent years. As one of the largest owners and managers of oil and natural gas mineral interests in the United States, we rely on electronic systems and networks to control and manage our business and have multiple layers of security to monitor, mitigate and manage these risks. However, these systems and networks, as well as our operators’ systems and networks and third-party infrastructure and operations, such as pipelines and transportation facilities, may be subject to sophisticated and deliberate security attacks and security breaches, which could lead to the corruption or loss of sensitive and valuable data or other disruptions. If we or our operators were to experience an attack or a breach and security measures failed, the potential consequences to our businesses and the communities in which we operate could be significant, including the corruption or loss of sensitive and valuable data, legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, damage to our reputation, and other disruptions of our operations, any of which could adversely affect our business. In addition, as cyber attacks become increasingly sophisticated, and the regulatory framework for data privacy and security worldwide continues to evolve and develop, we may incur significant costs to modify, upgrade or enhance our security measures and we may face difficulties in fully anticipating or implementing adequate security measures or new or revised mandated processes and in generally mitigating potential harm. Further, any actual or perceived failure to comply with any new or existing laws, regulations and other obligations could result in fines, penalties or other liability.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 3. LEGAL PROCEEDINGS

Although we may, from time to time, be involved in various legal claims arising out of our operations in the normal course of business, we do not believe that the resolution of these matters will have a material adverse impact on our financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNITHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common units are listed on the NYSE under the symbol “BSM.” As of February 18, 2022, there were 209,118,081 common units outstanding held by 429 holders of record. Because many of our common units are held by brokers and other institutions on behalf of unitholders, we are unable to estimate the total number of unitholders represented by these holders of record. As of February 18, 2022, we also had outstanding 14,711,219 Series B cumulative convertible preferred units. There is no established public market in which the Series B cumulative convertible preferred units are traded.

Common Unit Performance Graph

The graph below compares the cumulative five-year total return to unitholders on our common units as compared to the cumulative five-year total returns on the S&P 500 index, the S&P Oil & Gas Exploration & Production index, and the Alerian MLP index. The graph assumes that the value of the investment in our common units was $100.00 on December 30, 2016. Cumulative return is computed assuming reinvestment of distributions.

We are changing our industry index from the Alerian MLP index to the S&P Oil & Gas Exploration & Production index for the year ended December 31, 2021. The Alerian MLP index was initially selected because it indexed a representative sample of master limited partnerships, but it has become a midstream-focused index over time and no longer presents a meaningful comparison. This year, we are presenting both indices in accordance with SEC rules, which require that if a company selects a different index from that used in the immediately preceding fiscal year, the company’s unit performance must be compared against both the newly selected index and previous index in the year of change.

https://cdn.kscope.io/e7dbde255e987e0b5e29dcd79a95a01d-bsm-20211231_g2.jpg

Comparison of Cumulative Total Return

Assumes Initial Investment of $100


	As of December 31,
	2016		2017		2018		2019		2020		2021
Black Stone Minerals, L.P.	$	100.00	$	102.30	$	94.46	$	84.24	$	47.31	$	77.60
S&P 500 Index	100.00		121.83		116.49		153.17		181.35		233.41
S&P Oil & Gas E&P Index	100.00		90.53		65.09		58.93		37.76		62.89
Alerian MLP Index	100.00		93.48		81.87		87.24		62.21		87.20

The information in this Annual Report appearing under the heading “Common Unit Performance Graph” is being furnished pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201(e) of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act.

Securities Authorized for Issuance under Equity Compensation Plans

See the information incorporated by reference under “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters” regarding securities authorized for issuance under our equity compensation plans.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Cash Distribution Policy

Our partnership agreement generally provides that any distributions are paid each quarter in the following manner:

•first, to the holders of the Series B cumulative convertible preferred units in an amount equal to 7% per annum, subject to certain adjustments; and

•second, to the holders of common units.

The amount of cash to be distributed each quarter will be determined by the Board following the end of that quarter after a review of our cash generated from operations for such quarter. We expect that we will distribute a substantial majority of the cash generated from our operations each quarter. The cash generated from operations for each quarter will generally equal our Adjusted EBITDA for the quarter, less cash needed for debt service, other contractual obligations, fixed charges, and reserves for future operating or capital needs that the Board may determine are appropriate. It is our intent, for at least the next several years, to finance most of our acquisitions and working interest capital needs with cash generated from operations, borrowings under our Credit Facility, our executed farmout agreements, and, in certain circumstances, proceeds from future equity and debt issuances. We may also borrow to make distributions to our unitholders where, for example, we believe that the distribution level is sustainable over the long term, but short-term factors may cause cash generated from operations to be insufficient to pay distributions at the then-current distribution levels on our common units. The Board can change the amount of the quarterly distributions, if any, at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis on our common units. Please read Part I, Item 1A. “Risk Factors — Risks Inherent in an Investment in Us — The Board may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all on our common units. If we make distributions, our Series B cumulative convertible preferred unitholders have priority with respect to rights to share in those distributions over our common unitholders for so long as our Series B cumulative convertible preferred units are outstanding.” For a description of the relative rights and privileges of our Series B cumulative convertible preferred units to distributions, please read "Series B Cumulative Convertible Preferred Units" below.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that we will make cash distributions to our unitholders. Our cash distribution policy may be changed at any time by the Board and is subject to certain restrictions, including the following:

•Our common unitholders have no contractual or other legal right to receive cash distributions from us on a quarterly or other basis, and if distributions are paid, common unitholders will receive distributions only to the extent the distribution amount exceeds distributions that are required to be paid to our Series B cumulative convertible preferred unitholders.

•Among other covenants, our Credit Facility requires we maintain a ratio of total debt to EBITDAX of 3.50:1.00 or less and a current ratio of 1.00:1.00 or greater. Our Credit Facility restricts our distributions if there is a default under our Credit Facility, if the availability under our Credit Facility is less than 10% of the lender's commitments, or if total debt to EBITDAX is greater than 3.0. If we are unable to comply with these financial covenants or if we breach any other covenant under our Credit Facility or any future debt agreements, we could be prohibited from making distributions notwithstanding our stated distribution policy.

•Our general partner has the authority to establish cash reserves for the prudent conduct of our business, and the establishment of, or increase in, those reserves could result in a reduction in cash distributions to our unitholders. Our partnership agreement does not limit the amount of cash reserves that our general partner may establish. Any decision to establish cash reserves made by our general partner will be binding on our unitholders.

•Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

•We may lack sufficient cash to pay distributions to our unitholders due to shortfalls in cash generated from operations attributable to a number of operational, commercial, or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, working-capital requirements, and anticipated cash needs.

We expect to continue to distribute a substantial majority of our cash from operations to our unitholders on a quarterly basis, after, among other things, the establishment of cash reserves. To fund our growth, we may eventually need capital in excess of the amounts we may retain in our business or borrow under our Credit Facility. To the extent efforts to access capital externally are unsuccessful, our ability to grow could be significantly impaired.

Any distributions paid on our common units with respect to a quarter will be paid within 60 days after the end of such quarter.

Subordinated Units

The limited partners of BSM’s Predecessor acquired all of our subordinated units in connection with our IPO. The subordination period under the partnership agreement ended on the first business day after we earned and paid an aggregate amount of at least $1.35 (the annualized minimum quarterly distribution applicable for quarterly periods ending March 31, 2019 and thereafter) multiplied by the total number of outstanding common and subordinated units for a period of four consecutive, non-overlapping quarters ending on or after March 31, 2019, and there were no outstanding arrearages on our common units. This test was met upon the payment of the distribution for the first quarter of 2019. Accordingly, 96,328,836 subordinated units converted into 96,328,836 common units on May 24, 2019 and common units are no longer entitled to arrearages.

Series B Cumulative Convertible Preferred Units

The holders of our Series B cumulative convertible preferred units receive cumulative quarterly distributions in an amount equal to 7.0% of the face amount of the preferred units per annum (the “Distribution Rate”), provided that the Distribution Rate will be adjusted as follows: commencing on November 28, 2023 and readjusting every two years thereafter (each, a “Readjustment Date”), the rate will equal the greater of (i) the Distribution Rate in effect immediately prior to the relevant Readjustment Date and (ii) the 10-year Treasury Rate as of such Readjustment Date plus 5.5% per annum; provided, however, that for any quarter in which quarterly distributions are accrued but unpaid, the then-Distribution Rate shall be increased by 2.0% per annum for such quarter. We cannot pay any distributions on any junior securities, including any of our common units, prior to paying the quarterly distribution payable to the preferred units, including any previously accrued and unpaid distributions.

ITEM 6. RESERVED

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto presented elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” and “Part I, Item 1A. Risk Factors.” This discussion includes a comparison of our results of operations and liquidity and capital resources for 2021 and 2020. For the discussion of changes from 2019 to 2020 and other financial information related to 2019, refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K, which was filed with the SEC on February 23, 2021.

Overview

We are one of the largest owners and managers of oil and natural gas mineral interests in the United States. Our principal business is maximizing the value of our existing portfolio of mineral and royalty assets through active management and expanding our asset base through acquisitions of additional mineral and royalty interests. We maximize value through marketing our mineral assets for lease, creatively structuring the terms on those leases to encourage and accelerate drilling activity, and selectively participating alongside our lessees on a working interest basis. We believe our large, diversified asset base and long-lived, non-cost-bearing mineral and royalty interests provide for stable production and reserves over time, allowing the majority of generated cash flow to be distributed to unitholders.

As of December 31, 2021, our mineral and royalty interests were located in 41 states in the continental United States including all of the major onshore producing basins. These non-cost-bearing interests include ownership in over 70,000 producing wells. We also own non-operated working interests, a significant portion of which are on our positions where we also have a mineral and royalty interest. We recognize oil and natural gas revenue from our mineral and royalty and non-operated working interests in producing wells when control of the oil and natural gas produced is transferred to the customer and collectability of the sales price is reasonably assured. Our other sources of revenue include mineral lease bonus and delay rentals, which are recognized as revenue according to the terms of the lease agreements.

Recent Developments

TLW Divestiture

In the third quarter of 2021, we closed on the divestiture of our wholly owned subsidiary, TLW Investments, L.L.C.

("TLW"), effective September 1, 2021 for total proceeds of $0.2 million. TLW holds non-operating working interests and

overriding royalty interests primarily located in Oklahoma and Texas.

Acquisitions

In the second quarter of 2021, we closed an acquisition of mineral and royalty acreage in the northern Midland Basin for

total consideration of $20.8 million. The purchase price consisted of $10.0 million in cash and $10.8 million in common units

of the Partnership. The cash consideration was funded with borrowings under the Credit Facility and funds from operating

activities. The assets acquired consisted of $4.9 million of proved oil and natural gas properties, $15.6 million of unproved oil

and natural gas properties, and $0.3 million of net working capital.

Shelby Trough Update

In Angelina County, Texas, two wells are currently producing under our development agreement with Aethon, and another eight wells are being drilled or completed. Aethon is currently drilling three wells under the separate development agreement covering San Augustine County, Texas.

Austin Chalk Update

We entered into agreements with multiple operators to drill wells using advanced fracturing and completion techniques in the areas of the Austin Chalk in East Texas where we have significant acreage positions. Five wells have been drilled and turned to sales, and another two wells are in various stages of drilling or completion under these agreements. Early results from

these wells, while showing some variability, demonstrate that higher-intensity completions can significantly improve well performance relative to prior generation completion technology and the performance of unstimulated wells.

Business Environment

The information below is designed to give a broad overview of the oil and natural gas business environment as it affects us.

COVID-19 Pandemic and Market Conditions

The COVID-19 pandemic has adversely affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. With widespread availability of vaccines, the U.S. Centers for Disease Control and Prevention has revised its guidance, travel restrictions have started to lift, and businesses have reopened. In the wake of a rise in COVID-19 cases resulting from new variants, we have maintained remote work arrangements for all employees. Employees are allowed the flexibility of going to the office when following health and safety guidelines established by the company. We do not expect these arrangements to negatively impact our ability to maintain operations. We continue to prioritize the health and safety of our workforce through frequent cleaning of common spaces, appropriate physical distancing measures, and other best practices as recommended by federal, state, and local officials.

Commodity Prices and Demand

Oil and natural gas prices have been historically volatile based upon the dynamics of supply and demand. To manage the variability in cash flows associated with the projected sale of our oil and natural gas production, we use various derivative instruments, which have recently consisted of fixed-price swap contracts and costless collar contracts. During the year ended December 31, 2021, the WTI oil spot prices ranged from a high of $85.64 per Bbl on October 26, 2021 to a low of $47.47 per Bbl on January 4, 2021. During the year ended December 31, 2021, Henry Hub spot natural gas prices ranged from a high of $23.86 per MMBtu on February 17, 2021 to a low of $2.43 per MMBtu on April 5, 2021.

periods of significantly lower market prices for oil, natural gas, and natural gas liquids. Commodity prices improved in late 2020 and fully recovered in 2021, reflecting expectations of rising demand as both COVID-19 vaccination rates and global economic activity increased, combined with ongoing crude oil production limits from members of the Organization of the Petroleum Exporting Countries and its broader partners. The improvement in commodity prices caused many of our operators to resume their drilling and completion activity on our acreage. However, the current price environment remains uncertain as responses to the COVID-19 pandemic continue to evolve. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist. While we use derivative instruments to partially mitigate the impact of commodity price volatility, our revenues and operating results depend significantly upon the prevailing prices for oil and natural gas.

The price environment in 2020, including the sharp decline in oil prices that began in March 2020, also caused us to determine that certain depletable units consisting of mature oil producing properties were impaired as of March 31, 2020. Therefore, we recognized impairment of oil and natural gas properties of $51.0 million in the first quarter of 2020. Additionally, the borrowing base under the Credit Facility takes into consideration the estimated loan value of our oil and natural gas properties. Effective November 3, 2020, the borrowing base redetermination reduced the borrowing base from $430.0 million to $400.0 million. The April and October 2021 borrowing base redeterminations reaffirmed the borrowing base at $400.0 million. The next borrowing base redetermination is scheduled for April 2022. In a prolonged period of low commodity prices, we may be required to impair additional properties and the borrowing base under our Credit Facility could be further reduced.

The following table reflects commodity prices at the end of each quarter presented:


	2021
Benchmark Prices	Fourth Quarter		Third Quarter		Second Quarter		First Quarter
WTI spot crude oil ($/Bbl)1	$	75.33	$	75.22	$	73.52	$	59.19
Henry Hub spot natural gas ($/MMBtu)1	$	3.82	$	5.58	$	3.79	$	2.52

1 Source: EIA

Rig Count

As we are not the operator of record on any producing properties, drilling on our acreage is dependent upon the exploration and production companies that lease our acreage. In addition to drilling plans that we seek from our operators, we also monitor rig counts in an effort to identify existing and future leasing and drilling activity on our acreage.

The following table shows the rig count at the end of each quarter presented:


	2021
U.S. Rotary Rig Count1	Fourth Quarter	Third Quarter	Second Quarter	First Quarter
Oil	480	421	372	324
Natural gas	106	99	98	92
Other	—	1	—	1
Total	586	521	470	417

1 Source: Baker Hughes Incorporated

Natural Gas Storage

A substantial portion of our revenue is derived from sales of oil production attributable to our interests; however, the majority of our production is natural gas. Natural gas prices are significantly influenced by storage levels throughout the year. Accordingly, we monitor the natural gas storage reports regularly in the evaluation of our business and its outlook.

Historically, natural gas supply and demand fluctuates on a seasonal basis. From April to October, when the weather is warmer and natural gas demand is lower, natural gas storage levels generally increase. From November to March, storage levels typically decline as utility companies draw natural gas from storage to meet increased heating demand due to colder weather. In order to maintain sufficient storage levels for increased seasonal demand, a portion of natural gas production during the summer months must be used for storage injection. The portion of production used for storage varies from year to year depending on the demand from the previous winter and the demand for electricity used for cooling during the summer months. The EIA forecasts that inventories will conclude the withdrawal season, which is the end of March 2022, at 1.8 Tcf, or 8% higher than the five-year average. The EIA expects inventories will rise to 3.7 Tcf at the end of October 2022, which would be within 1% of the five-year average.

The following table shows natural gas storage volumes by region at the end of each quarter presented:


	2021
Region1	Fourth Quarter	Third Quarter	Second Quarter	First Quarter
	(Bcf)
East	767	779	513	307
Midwest	893	934	623	401
Mountain	172	201	173	112
Pacific	219	243	244	194
South Central	1,143	1,013	1,005	749
Total	3,194	3,170	2,558	1,763

1 Source: EIA

Natural Gas Exports

Rising levels of U.S. natural gas exports have been a growing source of demand, particularly in the Gulf Coast region where the majority of our natural gas is produced. The EIA expects natural gas exports will reach record highs in 2022 and continue to grow in 2023 due to a combination of both rising LNG exports and increases in pipeline exports to Mexico. Net natural gas exports averaged 10.7 Bcf per day in 2021 and the EIA forecasts that they will increase to 13.4 Bcf per day in 2022 and 14.3 Bcf per day in 2023.

How We Evaluate Our Operations

We use a variety of operational and financial measures to assess our performance. Among the measures considered by management are the following:

•volumes of oil and natural gas produced;

•commodity prices including the effect of derivative instruments; and

•Adjusted EBITDA and Distributable cash flow.

Volumes of Oil and Natural Gas Produced

In order to track and assess the performance of our assets, we monitor and analyze our production volumes from the various basins and plays that constitute our extensive asset base. We also regularly compare projected volumes to actual reported volumes and investigate unexpected variances.

Commodity Prices

Factors Affecting the Sales Price of Oil and Natural Gas

The prices we receive for oil, natural gas, and NGLs vary by geographical area. The relative prices of these products are determined by the factors affecting global and regional supply and demand dynamics, such as economic conditions, production levels, availability of transportation, weather cycles, and other factors. In addition, realized prices are influenced by product quality and proximity to consuming and refining markets. Any differences between realized prices and NYMEX prices are referred to as differentials. All our production is derived from properties located in the United States.

•Oil. The substantial majority of our oil production is sold at prevailing market prices, which fluctuate in response to many factors that are outside of our control. NYMEX light sweet crude oil, commonly referred to as WTI, is the prevailing domestic oil pricing index. The majority of our oil production is priced at the prevailing market price with the final realized price affected by both quality and location differentials.

The chemical composition of oil plays an important role in its refining and subsequent sale as petroleum products. As a result, variations in chemical composition relative to the benchmark oil, usually WTI, will result in price adjustments, which are often referred to as quality differentials. The characteristics that most significantly affect quality differentials include the density of the oil, as characterized by its API gravity, and the presence and concentration of impurities, such as sulfur.

Location differentials generally result from transportation costs based on the produced oil’s proximity to consuming and refining markets and major trading points.

•Natural Gas. The NYMEX price quoted at Henry Hub is a widely used benchmark for the pricing of natural gas in the United States. The actual volumetric prices realized from the sale of natural gas differ from the quoted NYMEX price as a result of quality and location differentials.

Quality differentials result from the heating value of natural gas measured in Btus and the presence of impurities, such as hydrogen sulfide, carbon dioxide, and nitrogen. Natural gas containing ethane and heavier hydrocarbons has a higher Btu value and will realize a higher volumetric price than natural gas which is predominantly methane, which has a lower Btu value. Natural gas with a higher concentration of impurities will realize a lower volumetric price due to the presence of the impurities in the natural gas when sold or the cost of treating the natural gas to meet pipeline quality specifications.

Natural gas, which currently has a limited global transportation system, is subject to price variances based on local supply and demand conditions and the cost to transport natural gas to end user markets. The rise in LNG exports from the United States has increased demand for domestic natural gas production and had a positive impact on natural gas prices. The EIA expects high levels of U.S. LNG exports to continue into 2022, averaging 16% above 2021 levels. The EIA forecast reflects the assumption that global natural gas demand remains strong and that expected additional U.S. LNG export capacity comes online.

Hedging

We enter into derivative instruments to partially mitigate the impact of commodity price volatility on our cash generated from operations. From time to time, such instruments may include variable-to-fixed-price swaps, fixed-price contracts, costless collars, and other contractual arrangements. The impact of these derivative instruments could affect the amount of revenue we ultimately realize.

Our open derivative contracts consist of fixed-price swap contracts. Under fixed-price swap contracts, a counterparty is required to make a payment to us if the settlement price is less than the swap strike price. Conversely, we are required to make a payment to the counterparty if the settlement price is greater than the swap strike price. If we have multiple contracts outstanding with a single counterparty, unless restricted by our agreement, we will net settle the contract payments.

We may employ contractual arrangements other than fixed-price swap contracts in the future to mitigate the impact of price fluctuations. If commodity prices decline in the future, our hedging contracts will partially mitigate the effect of lower prices on our future revenue. Our open oil and natural gas derivative contracts as of December 31, 2021 are detailed in Note 5 – Commodity Derivative Financial Instruments to our consolidated financial statements included elsewhere in this Annual Report.

Pursuant to the terms of our Credit Facility, we are allowed to hedge certain percentages of expected future monthly production volumes equal to the lesser of (i) internally forecasted production and (ii) the average of reported production for the most recent three months.

We are allowed, but not required, to hedge up to 90% of such volumes for the first 24 months, 70% for months 25 through 36, and 50% for months 37 through 48. As of December 31, 2021, we had hedged 63% of our available oil and condensate hedge volumes for 2022 and 65% and 14% of our available natural gas hedge volumes for 2022 and 2023, respectively.

We intend to continuously monitor the production from our assets and the commodity price environment, and will, from time to time, add additional hedges within the percentages described above related to such production. We do not enter into derivative instruments for speculative purposes.

Non-GAAP Financial Measures

Adjusted EBITDA and Distributable cash flow are supplemental non-GAAP financial measures used by our management and external users of our financial statements such as investors, research analysts, and others, to assess the financial performance of our assets and our ability to sustain distributions over the long term without regard to financing methods, capital structure, or historical cost basis.

We define Adjusted EBITDA as net income (loss) before interest expense, income taxes, and depreciation, depletion, and amortization adjusted for impairment of oil and natural gas properties, accretion of asset retirement obligations, unrealized gains and losses on commodity derivative instruments, non-cash equity-based compensation, and gains and losses on sales of assets. We define Distributable cash flow as Adjusted EBITDA plus or minus amounts for certain non-cash operating activities, cash interest expense, distributions to noncontrolling interests and preferred unitholders, and restructuring charges.

Adjusted EBITDA and Distributable cash flow should not be considered an alternative to, or more meaningful than, net income (loss), income (loss) from operations, cash flows from operating activities, or any other measure of financial performance presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. as measures of our financial performance.

Adjusted EBITDA and Distributable cash flow have important limitations as analytical tools because they exclude some but not all items that affect net income (loss), the most directly comparable GAAP financial measure. Our computation of Adjusted EBITDA and Distributable cash flow may differ from computations of similarly titled measures of other companies.

The following table presents a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA and Distributable cash flow for the periods indicated:


	Year Ended December 31,
	2021		2020
	(in thousands)
Net income (loss)	$	181,987	$	121,819
Adjustments to reconcile to Adjusted EBITDA:
Depreciation, depletion, and amortization	61,019		82,018
Impairment of oil and natural gas properties	—		51,031
Interest expense	5,638		10,408
Income tax expense (benefit)	(135)		8
Accretion of asset retirement obligations	1,073		1,131
Equity-based compensation	12,218		3,727
Unrealized (gain) loss on commodity derivative instruments	33,528		35,238
(Gain) loss on sale of assets, net	(2,850)		(24,045)
Adjusted EBITDA	292,478		281,335
Adjustments to reconcile to Distributable cash flow:
Change in deferred revenue	(18)		(391)
Cash interest expense	(4,059)		(9,364)
Preferred unit distributions	(21,000)		(21,000)
Restructuring charges	—		4,815
Distributable cash flow	$	267,401	$	255,395

Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table shows our production, revenue, and operating expenses for the periods presented:


	Year Ended December 31,
	2021		2020		Variance
	(dollars in thousands, except for realized prices)
Production:
Oil and condensate (MBbls)	3,646		3,895		(249)		(6.4)	%
Natural gas (MMcf)1	61,445		67,945		(6,500)		(9.6)	%
Equivalents (MBoe)	13,887		15,219		(1,332)		(8.8)	%
Equivalents/day (MBoe)	38.0		41.6		(3.6)		(8.7)	%
Realized prices, without derivatives:
Oil and condensate ($/Bbl)	$	64.67	$	38.16	$	26.51	69.5	%