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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________ 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,Texas77002
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Units Representing Limited Partner InterestsBSMNew York Stock Exchange
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  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 and post such files). Yes  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 filerSmaller 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 is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
As of October 28, 2022, there were 209,406,927 common units and 14,711,219 Series B cumulative convertible preferred units of the registrant outstanding.



TABLE OF CONTENTS
 
  Page
 
 
 
 
 
 




ii


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements 


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 September 30, 2022December 31, 2021
ASSETS  
CURRENT ASSETS  
Cash and cash equivalents$838 $8,876 
Accounts receivable157,887 97,142 
Commodity derivative assets  
Prepaid expenses and other current assets2,238 1,956 
TOTAL CURRENT ASSETS160,963 107,974 
PROPERTY AND EQUIPMENT  
Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $925,839 and $937,395 at September 30, 2022 and December 31, 2021, respectively
3,001,540 3,001,627 
Accumulated depreciation, depletion, amortization, and impairment(1,904,294)(1,869,731)
Oil and natural gas properties, net1,097,246 1,131,896 
Other property and equipment, net of accumulated depreciation of $13,299 and $12,931 at September 30, 2022 and December 31, 2021, respectively
982 1,440 
NET PROPERTY AND EQUIPMENT1,098,228 1,133,336 
DEFERRED CHARGES AND OTHER LONG-TERM ASSETS11,537 6,611 
TOTAL ASSETS$1,270,728 $1,247,921 
LIABILITIES, MEZZANINE EQUITY, AND EQUITY 
CURRENT LIABILITIES 
Accounts payable$3,044 $5,944 
Accrued liabilities18,111 17,589 
Commodity derivative liabilities48,127 51,544 
Other current liabilities2,249 2,063 
TOTAL CURRENT LIABILITIES71,531 77,140 
LONG–TERM LIABILITIES 
Credit facility60,000 89,000 
Accrued incentive compensation1,414 838 
Commodity derivative liabilities1,825 2,001 
Asset retirement obligations12,588 12,561 
Other long-term liabilities1,782 2,752 
TOTAL LIABILITIES149,140 184,292 
COMMITMENTS AND CONTINGENCIES (Note 7)
MEZZANINE EQUITY  
Partners' equity – Series B cumulative convertible preferred units, 14,711 units outstanding at September 30, 2022 and December 31, 2021, respectively
298,361 298,361 
EQUITY 
Partners' equity – general partner interest  
Partners' equity – common units, 209,402 and 208,666 units outstanding at September 30, 2022 and December 31, 2021, respectively
823,227 765,268 
TOTAL EQUITY823,227 765,268 
TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY$1,270,728 $1,247,921 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1



BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per unit amounts)
Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
REVENUE  
Oil and condensate sales$80,240 $61,916 $250,367 $160,028 
Natural gas and natural gas liquids sales137,756 73,167 324,691 172,537 
Lease bonus and other income3,159 2,305 10,262 12,195 
Revenue from contracts with customers221,155 137,388 585,320 344,760 
Gain (loss) on commodity derivative instruments(4,726)(77,561)(152,095)(164,923)
TOTAL REVENUE216,429 59,827 433,225 179,837 
OPERATING (INCOME) EXPENSE  
Lease operating expense2,896 3,303 9,256 9,804 
Production costs and ad valorem taxes17,856 14,331 51,309 35,469 
Exploration expense10 5 192 1,080 
Depreciation, depletion, and amortization12,208 14,925 35,018 46,353 
General and administrative13,044 12,320 39,326 37,359 
Accretion of asset retirement obligations209 273 616 863 
(Gain) loss on sale of assets, net (2,850)(17)(2,850)
TOTAL OPERATING EXPENSE46,223 42,307 135,700 128,078 
INCOME (LOSS) FROM OPERATIONS170,206 17,520 297,525 51,759 
OTHER INCOME (EXPENSE) 
Interest and investment income20  22  
Interest expense(1,693)(1,359)(4,264)(4,197)
Other income (expense)(58)17 (22)231 
TOTAL OTHER EXPENSE(1,731)(1,342)(4,264)(3,966)
NET INCOME (LOSS)168,475 16,178 293,261 47,793 
Distributions on Series B cumulative convertible preferred units(5,250)(5,250)(15,750)(15,750)
NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON UNITS$163,225 $10,928 $277,511 $32,043 
ALLOCATION OF NET INCOME (LOSS):   
General partner interest$ $ $ $ 
Common units163,225 10,928 277,511 32,043 
 $163,225 $10,928 $277,511 $32,043 
NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON UNIT:  
Per common unit (basic)$0.78 $0.05 $1.33 $0.15 
Per common unit (diluted)$0.75 $0.05 $1.31 $0.15 
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
Weighted average common units outstanding (basic)209,402 208,653 209,374 208,018 
Weighted average common units outstanding (diluted)224,371 208,653 224,343 208,018 
 The accompanying notes are an integral part of these unaudited consolidated financial statements.
2



BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Common unitsPartners' equity — common unitsTotal equity
BALANCE AT DECEMBER 31, 2021208,666 $765,268 $765,268 
Repurchases of common units(262)(2,991)(2,991)
Restricted units granted, net of forfeitures988 — — 
Equity–based compensation— 6,659 6,659 
Distributions— (56,462)(56,462)
Charges to partners' equity for accrued distribution equivalent rights— (434)(434)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— (7,002)(7,002)
BALANCE AT MARCH 31, 2022209,392 $699,788 $699,788 
Restricted units granted, net of forfeitures7 — — 
Equity–based compensation— 2,273 2,273 
Distributions— (83,759)(83,759)
Charges to partners' equity for accrued distribution equivalent rights— (513)(513)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 131,788 131,788 
BALANCE AT JUNE 30, 2022209,399 $744,327 $744,327 
Restricted units granted, net of forfeitures3 — — 
Equity–based compensation— 4,084 4,084 
Distributions— (87,949)(87,949)
Charges to partners' equity for accrued distribution equivalent rights— (460)(460)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 168,475 168,475 
BALANCE AT SEPTEMBER 30, 2022209,402 $823,227 $823,227 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
3



BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Common unitsPartners' equity — common unitsTotal equity
BALANCE AT DECEMBER 31, 2020206,749 $760,606 $760,606 
Repurchases of common units(223)(1,957)(1,957)
Restricted units granted, net of forfeitures1,016 — — 
Equity–based compensation— 5,353 5,353 
Distributions— (36,272)(36,272)
Charges to partners' equity for accrued distribution equivalent rights— (237)(237)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 16,186 16,186 
BALANCE AT MARCH 31, 2021207,542 $738,429 $738,429 
Issuance of common units for property acquisitions1,088 10,766 10,766 
Restricted units granted, net of forfeitures7 — — 
Equity–based compensation— 2,820 2,820 
Distributions— (36,321)(36,321)
Charges to partners' equity for accrued distribution equivalent rights— (180)(180)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 15,429 15,429 
BALANCE AT JUNE 30, 2021208,637 $725,693 $725,693 
Restricted units granted, net of forfeitures23 — — 
Equity–based compensation— 2,903 2,903 
Distributions— (52,165)(52,165)
Charges to partners' equity for accrued distribution equivalent rights— (275)(275)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 16,178 16,178 
BALANCE AT SEPTEMBER 30, 2021208,660 $687,084 $687,084 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4



BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income (loss)$293,261 $47,793 
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Depreciation, depletion, and amortization35,018 46,353 
Accretion of asset retirement obligations616 863 
Amortization of deferred charges1,041 1,232 
(Gain) loss on commodity derivative instruments152,095 164,923 
Net cash (paid) received on settlement of commodity derivative instruments(162,567)(56,008)
Equity-based compensation11,809 9,705 
Exploratory dry hole expense 1,049 
(Gain) loss on sale of assets, net(17)(2,850)
Changes in operating assets and liabilities:
Accounts receivable(60,345)(26,066)
Prepaid expenses and other current assets(281)165 
Accounts payable, accrued liabilities, and other(1,592)(3,546)
Settlement of asset retirement obligations(488)(187)
NET CASH PROVIDED BY OPERATING ACTIVITIES268,550 183,426 
CASH FLOWS FROM INVESTING ACTIVITIES  
Acquisitions of oil and natural gas properties(132)(10,064)
Additions to oil and natural gas properties(11,811)(3,972)
Additions to oil and natural gas properties leasehold costs(32)(98)
Purchases of other property and equipment(50)(74)
Proceeds from the sale of oil and natural gas properties17 317 
Proceeds from farmouts of oil and natural gas properties11,331  
NET CASH USED IN INVESTING ACTIVITIES(677)(13,891)
CASH FLOWS FROM FINANCING ACTIVITIES  
Distributions to common unitholders(228,170)(124,758)
Distributions to Series B cumulative convertible preferred unitholders(15,750)(15,750)
Repurchases of common units(2,991)(1,957)
Borrowings under credit facility237,000 144,000 
Repayments under credit facility(266,000)(166,000)
Debt issuance costs and other (3,602)
NET CASH USED IN FINANCING ACTIVITIES(275,911)(168,067)
NET CHANGE IN CASH AND CASH EQUIVALENTS(8,038)1,468 
CASH AND CASH EQUIVALENTS – beginning of the period8,876 1,796 
CASH AND CASH EQUIVALENTS – end of the period$838 $3,264 
SUPPLEMENTAL DISCLOSURE  
Interest paid$3,203 $2,941 
 The accompanying notes are an integral part of these unaudited consolidated financial statements.
5


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Black Stone Minerals, L.P. (“BSM” or the “Partnership”) is a publicly traded Delaware limited partnership that owns oil and natural gas mineral interests, which make up the vast majority of the asset base. The Partnership's assets also include nonparticipating royalty interests and overriding royalty interests. These interests, which are substantially non-cost-bearing, are collectively referred to as “mineral and royalty interests.” The Partnership’s mineral and royalty interests are located in 41 states in the continental United States ("U.S."), including all of the major onshore producing basins. The Partnership also owns non-operated working interests in certain oil and natural gas properties. The Partnership's common units trade on the New York Stock Exchange under the symbol "BSM."
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Partnership have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Partnership’s consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Annual Report on Form 10-K").
The unaudited interim consolidated financial statements include the consolidated results of the Partnership. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year.
In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for the fair presentation of the financial results for all periods presented have been reflected. All intercompany balances and transactions have been eliminated.
The Partnership evaluates the significant terms of its investments to determine the method of accounting to be applied to each respective investment. Investments in which the Partnership has less than a 20% ownership interest and does not have control or exercise significant influence are accounted for using fair value or cost minus impairment if fair value is not readily determinable. Investments in which the Partnership exercises control are consolidated, and the noncontrolling interests of such investments, which are not attributable directly or indirectly to the Partnership, are presented as a separate component of net income (loss) and equity.
The unaudited interim consolidated financial statements include undivided interests in oil and natural gas property rights. The Partnership accounts for its share of oil and natural gas property rights by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the accompanying unaudited interim consolidated balance sheets, statements of operations, and statements of cash flows.
Segment Reporting
The Partnership operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Partnership’s chief executive officer has been determined to be the chief operating decision maker and allocates resources and assesses performance based upon financial information at the consolidated level.
6


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
Significant accounting policies are disclosed in the Partnership’s 2021 Annual Report on Form 10-K. There have been no changes in such policies or the application of such policies during the nine months ended September 30, 2022.
Accounts Receivable

The following table presents information about the Partnership's accounts receivable:
September 30, 2022December 31, 2021
(in thousands)
Accounts receivable:
Revenues from contracts with customers$150,909 $93,005 
Other6,978 4,137 
Total accounts receivable$157,887 $97,142 
NOTE 3 - OIL AND NATURAL GAS PROPERTIES    
Acquisitions
Acquisitions of proved oil and natural gas properties and working interests are generally considered business combinations and are recorded at their estimated fair value as of the acquisition date. Acquisitions that consist of all or substantially all unproved oil and natural gas properties are generally considered asset acquisitions and are recorded at cost.
In May 2021, the Partnership 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 (as defined in Note 6 - Credit Facility) and funds from operating activities. The transaction was accounted for as a business combination with the assets acquired recorded at their estimated fair values as of the acquisition date. 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. The Partnership had no material acquisition activity during the nine months ended September 30, 2022.
Divestitures
In the third quarter of 2021, the Partnership closed on the divestiture of its 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. TLW's assets and liabilities consisted of oil and natural gas properties with a net book value of $3.0 million and asset retirement obligations with a book value of $5.7 million at the time of sale. The Partnership had no material divestiture activity during the nine months ended September 30, 2022.
Farmout Agreements
The Partnership has entered into farmout arrangements designed to reduce its working interest capital expenditures and thereby significantly lower its capital spending other than for mineral and royalty interest acquisitions. Under these agreements, the Partnership conveyed its 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, the Partnership entered into farmout arrangements with Canaan Resource Partners ("Canaan") and Pivotal Petroleum Partners ("Pivotal") in the Shelby Trough area of East Texas where the Partnership owns 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.
7


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

San Augustine Farmout
In March 2021, BSM and XTO reached an agreement to partition jointly owned working interests in the Brent Miller development area in San Augustine County. Under the partition agreement, BSM and XTO exchanged working interests 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, BSM and Aethon Energy ("Aethon") entered into an agreement to develop certain of the Partnership's 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 BSM's 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, ten wells to be drilled in the second and third program years, and, beginning with the fourth program year, a minimum of twelve wells per year thereafter. The Partnership's development agreement with Aethon and related drilling commitments covering its San Augustine County acreage is independent of the development agreement and associated commitments covering Angelina County discussed below.
In May 2021, the Partnership entered into a new farmout agreement (the "Canaan Farmout") with Canaan and in December 2021, the Partnership entered into a farmout agreement (the "Azul Farmout") with Azul-SA, LLC ("Azul"). In April 2022, the Partnership amended the Canaan Farmout and entered into a farmout agreement (the "JWM Farmout") with JWM Oil & Gas LLC ("JWM"). These agreements cover all of the Partnership's share of working interests under active development by Aethon in San Augustine County, Texas and continue for a ten year period, unless earlier terminated in accordance with the terms of the agreements. Canaan, Azul, and JWM will each earn a percentage of the Partnership's working interest in wells drilled and operated by Aethon within the contract area subject to the agreements. Canaan, Azul, and JWM 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 the Partnership's working interest for the duration of each farmout agreement. The Partnership will receive an overriding royalty interest ("ORRI") before payout and an increased ORRI after payout on all wells drilled under the farmout agreements. As of September 30, 2022, six wells have been spud by Aethon in the contract area subject to the Canaan, Azul, and JWM Farmouts.
The following tables present the working interests each farmout partner will earn within the contract area under the San Augustine farmout agreements:
Brent Miller Area
Farmout Partner% of Partnership's Working InterestMaximum % on an 8/8ths basis
Canaan64.0 %32.0 %
Azul20.0 %10.0 %
JWM16.0 %8.0 %
Total100.0 %50.0 %
Other Areas
Farmout Partner% of Partnership's Working InterestMaximum % on an 8/8ths basis
Canaan40.0 %10.0 %
Azul50.0 %12.5 %
JWM10.0 %2.5 %
Total100.0 %25.0 %

8


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Angelina Farmout
In May 2020, the Partnership entered into a development 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 the Partnership's 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, ten wells to be drilled in the second program year, and, beginning with the third program year, fifteen wells per year thereafter.
In November 2020, the Partnership entered into a new farmout agreement (the "Pivotal Farmout") with Pivotal. The Pivotal Farmout covers the Partnership's 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 the Partnership's 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 the Partnership's working interests for the duration of the Pivotal Farmout. Once Pivotal achieves a specified payout for a designated well group, the Partnership will obtain a majority of the original working interest in such well group. As of September 30, 2022, sixteen wells have been spud by Aethon in the contract area subject to the Pivotal Farmout.
Impairment of Oil and Natural Gas Properties
Proved and unproved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of those properties. When assessing producing properties for impairment, the Partnership compares the expected undiscounted projected future cash flows of the producing properties to the carrying amount of the producing properties to determine recoverability. When the carrying amount exceeds its estimated undiscounted future cash flows, the carrying amount is written down to its fair value, which is measured as the present value of the projected future cash flows of such properties.
The Partnership recognized no impairment of oil and natural gas properties for the three and nine months ended September 30, 2022 and 2021, respectively. See Note 5 - Fair Value Measurements for further discussion.
NOTE 4 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses oil and natural gas commodity derivative financial instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts and other contractual arrangements. A fixed-price swap contract between the Partnership and the counterparty specifies a fixed commodity price and a future settlement date. A costless collar contract between the Partnership and the counterparty specifies a floor and a ceiling commodity price and a future settlement date. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty. The Partnership does not enter into derivative instruments for speculative purposes.
As of September 30, 2022, the Partnership’s open derivative contracts consisted of fixed-price swap contracts. The Partnership has not designated any of its contracts as fair value or cash flow hedges. Accordingly, the changes in the fair value of the contracts are included in the consolidated statement of operations in the period of the change. All derivative gains and losses from the Partnership’s derivative contracts have been recognized in revenue in the Partnership's accompanying consolidated statements of operations. Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Partnership’s accompanying consolidated balance sheets as of September 30, 2022 and December 31, 2021. See Note 5 - Fair Value Measurements for further discussion.    
The Partnership's derivative contracts expose it to credit risk in the event of nonperformance by counterparties that may adversely impact the fair value of the Partnership's commodity derivative assets. While the Partnership does not require its derivative contract counterparties to post collateral, the Partnership does evaluate the credit standing of such counterparties as deemed appropriate. This evaluation includes reviewing a counterparty’s credit rating and latest financial information. As of September 30, 2022, the Partnership had seven counterparties, all of which are rated Baa1 or better by Moody’s and are lenders under the Credit Facility.
9


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The tables below summarize the fair values and classifications of the Partnership’s derivative instruments, as well as the gross recognized derivative assets, liabilities, and amounts offset in the consolidated balance sheets as of each date:
September 30, 2022
ClassificationBalance Sheet LocationGross
Fair Value
Effect of Counterparty NettingNet Carrying Value on Balance Sheet
  (in thousands)
Assets:
    
Current asset
Commodity derivative assets$15,678 $(15,678)$ 
Long-term asset
Deferred charges and other long-term assets9,008 (2,129)6,879 
 Total assets
 $24,686 $(17,807)$6,879 
Liabilities:
    
Current liability
Commodity derivative liabilities$63,805 $(15,678)$48,127 
Long-term liability
Commodity derivative liabilities3,954 (2,129)1,825 
Total liabilities
 $67,759 $(17,807)$49,952 
December 31, 2021
ClassificationBalance Sheet LocationGross
Fair Value
Effect of Counterparty NettingNet Carrying Value on Balance Sheet
  (in thousands)
Assets:
    
Current asset
Commodity derivative assets$ $ $ 
Long-term asset
Deferred charges and other long-term assets   
 Total assets
 $ $ $ 
Liabilities:
    
Current liability
Commodity derivative liabilities$51,544 $ $51,544 
Long-term liability
Commodity derivative liabilities2,001  2,001 
Total liabilities
 $53,545 $ $53,545 
10


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Changes in the fair values of the Partnership’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations and consolidated statements of cash flows and consist of the following for the periods presented:
 Three Months Ended September 30,Nine Months Ended September 30,
Derivatives not designated as hedging instruments2022202120222021
(in thousands)
Beginning fair value of commodity derivative instruments$(107,218)$(85,511)$(53,545)$(20,017)
Gain (loss) on oil derivative instruments32,022 (10,227)(33,096)(69,296)
Gain (loss) on natural gas derivative instruments(36,748)(67,334)(118,999)(95,627)
Net cash paid (received) on settlements of oil derivative instruments23,275 20,811 65,512 41,223 
Net cash paid (received) on settlements of natural gas derivative instruments45,596 13,329 97,055 14,785 
Net change in fair value of commodity derivative instruments64,145 (43,421)10,472 (108,915)
Ending fair value of commodity derivative instruments$(43,073)$(128,932)$(43,073)$(128,932)
The Partnership had the following open derivative contracts for oil as of September 30, 2022:
 Weighted Average Price (Per Bbl)Range (Per Bbl)
Period and Type of ContractVolume (Bbl)LowHigh
Oil Swap Contracts:    
2022    
Third Quarter220,000 $66.47 $55.29 $83.91 
Fourth Quarter660,000 66.47 55.29 83.91 
2023
First Quarter510,000 $79.16 $73.00 $85.93 
Second Quarter420,000 80.84 73.00 89.50 
Third Quarter420,000 80.84 73.00 89.50 
Fourth Quarter420,000 80.84 73.00 89.50 

11


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Partnership had the following open derivative contracts for natural gas as of September 30, 2022:
 Weighted Average Price (Per MMBtu)Range (Per MMBtu)
Period and Type of ContractVolume (MMBtu)LowHigh
Natural Gas Swap Contracts:    
2022    
Fourth Quarter9,000,000 $3.12 $2.80 $4.30 
2023
First Quarter9,000,000 $5.07 $3.28 $6.59 
Second Quarter8,190,000 5.15 3.28 6.59 
Third Quarter8,280,000 5.15 3.28 6.59 
Fourth Quarter8,280,000 5.15 3.28 6.59 


The Partnership entered into the following derivative contracts for oil subsequent to September 30, 2022:
 Weighted Average Price (Per Bbl)Range (Per Bbl)
Period and Type of ContractVolume (Bbl)LowHigh
Oil Swap Contracts:    
2023
First Quarter60,000 $77.50 $77.50 $77.50 
Second Quarter60,000 77.50 77.50 77.50 
Third Quarter60,000 77.50 77.50 77.50 
Fourth Quarter60,000 77.50 77.50 77.50 
NOTE 5 - FAIR VALUE MEASUREMENTS
Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurement, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.
ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Partnership’s own assumptions in determining fair value).
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The carrying value of the Partnership's cash and cash equivalents, receivables, and payables approximate fair value due to the short-term nature of the instruments. The estimated carrying value of all debt as of September 30, 2022 and December 31, 2021 approximated the fair value due to variable market rates of interest. These debt fair values, which are Level 3 measurements, were estimated based on the Partnership’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimated fair values of the Partnership’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Partnership estimated the fair value of commodity derivative financial instruments using the market approach via a model that uses inputs that are observable in the market or can be derived from, or corroborated by, observable data. See Note 4 - Commodity Derivative Financial Instruments for further discussion.
The following table presents information about the Partnership’s assets and liabilities measured at fair value on a recurring basis: 
 Fair Value Measurements UsingEffect of Counterparty NettingTotal
 Level 1Level 2Level 3
 (in thousands)
As of September 30, 2022     
Financial Assets     
Commodity derivative instruments$ $24,686 $ $(17,807)$6,879 
Financial Liabilities     
Commodity derivative instruments$ $67,759 $ $(17,807)$49,952 
As of December 31, 2021     
Financial Assets     
Commodity derivative instruments$ $ $ $ $ 
Financial Liabilities     
Commodity derivative instruments$ $53,545 $ $ $53,545 
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Nonfinancial assets and liabilities measured at fair value on a non-recurring basis include certain nonfinancial assets and liabilities as may be acquired in a business combination and measurements of oil and natural gas property values for assessment of impairment.
The determination of the fair values of proved and unproved properties acquired in business combinations are estimated by discounting projected future cash flows. The factors used to determine fair value include estimates of economic reserves, future operating and development costs, future commodity prices, timing of future production, and a risk-adjusted discount rate. The Partnership has designated these measurements as Level 3. The Partnership’s fair value assessments for recent acquisitions are included in Note 3 - Oil and Natural Gas Properties.
Oil and natural gas properties are measured at fair value on a non-recurring basis using the income approach when assessing for impairment. The factors used to determine fair value include estimates of proved reserves, future commodity prices, timing of future production, operating costs, future capital expenditures, and a risk-adjusted discount rate.
The Partnership’s estimates of fair value have been determined at discrete points in time based on relevant market data. These estimates involve uncertainty, particularly in the current volatile market, and cannot be determined with precision. Changes to these estimates, particularly related to economic reserves, future commodity prices, and timing of future production could result in additional impairment charges in the future. There were no significant changes in valuation techniques or related inputs as of September 30, 2022 or December 31, 2021.
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - CREDIT FACILITY
The Partnership maintains a senior secured revolving credit agreement, as amended (the “Credit Facility”). The Credit Facility has an aggregate maximum credit amount of $1.0 billion. The commitment of the lenders equals the least of the aggregate maximum credit amount, the then-effective borrowing base, and the aggregate elected commitment, as it may be adjusted from time to time. The amount of the borrowing base is redetermined semi-annually, usually in October and April, and is derived from the value of the Partnership’s oil and natural gas properties as determined by the lender syndicate using pricing assumptions that often differ from the current market for future prices. The Partnership and the lenders (at the direction of two-thirds of the lenders) each have discretion to request a borrowing base redetermination one time between scheduled redeterminations. The Partnership also has the right to request a redetermination following the acquisition of oil and natural gas properties in excess of 10% of the value of the borrowing base immediately prior to such acquisition. The October 2021 and April 2022 borrowing base redeterminations reaffirmed the borrowing base at $400.0 million. In October 2022, the Partnership revised and amended the Credit Facility to extend the maturity date from November 1, 2024 to October 31, 2027. Concurrent with the Credit Facility amendment, the borrowing base under the Credit Facility was increased to $550.0 million and the Partnership elected to lower commitments under the Credit Facility from $400.0 million to $375.0 million. No other significant terms were changed as part of the amendment. Please see Item 5 of Part II of this quarterly report for a more detailed description of the amendment to the Credit Facility. The next semi-annual redetermination is scheduled for April 2023.
Outstanding borrowings under the Credit Facility bear interest at a floating rate elected by the Partnership equal to an alternative base rate (which is equal to the greatest of the Prime Rate, the Federal Funds effective rate plus 0.50%, or 1-month LIBOR plus 1.00%) or LIBOR, in each case, plus the applicable margin. As of December 31, 2021 and September 30, 2022, the applicable margin for the alternative base rate ranged from 1.50% to 2.50% and the applicable margin for LIBOR ranged from 2.50% to 3.50%, depending on the borrowings outstanding in relation to the borrowing base. In October 2022, the Credit Facility was amended to replace the LIBOR rate with the secured overnight financing rate published by the Federal Reserve Bank of New York ("SOFR").
The weighted-average interest rate of the Credit Facility was 5.50% and 2.61% as of September 30, 2022 and December 31, 2021, respectively. Accrued interest is payable at the end of each calendar quarter or at the end of each interest period, unless the interest period is longer than 90 days, in which case interest is payable at the end of every 90-day period. In addition, a commitment fee is payable at the end of each calendar quarter based on either a rate of 0.375% if the borrowing base utilization percentage is less than 50%, or 0.500% per annum if the borrowing base utilization percentage is equal to or greater than 50%. The Credit Facility is secured by substantially all of the Partnership’s oil and natural gas production and assets.
The Credit Facility contains various limitations on future borrowings, leases, hedging, and sales of assets. Additionally, the Credit Facility requires the Partnership to maintain a current ratio of not less than 1.0:1.0 and a ratio of total debt to EBITDAX (Earnings before Interest, Taxes, Depreciation, Amortization, and Exploration) of not more than 3.5:1.0. Distributions are not permitted if there is a default under the Credit Facility (including the failure to satisfy one of the financial covenants), if the availability under the Credit Facility is less than 10% of the lenders' commitments, or if total debt to EBITDAX is greater than 3.0. As of September 30, 2022, the Partnership was in compliance with all financial covenants in the Credit Facility.
The aggregate principal balance outstanding was $60.0 million and $89.0 million at September 30, 2022 and December 31, 2021, respectively. The unused portion of the available borrowings under the Credit Facility were $340.0 million and $311.0 million at September 30, 2022 and December 31, 2021, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Partnership’s business includes activities that are subject to U.S. federal, state, and local environmental regulations with regard to air, land, and water quality and other environmental matters.
The Partnership does not consider the potential remediation costs that could result from issues identified in any environmental site assessments to be significant to the consolidated financial statements, and no provision for potential remediation costs has been recorded.
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Litigation
From time to time, the Partnership is involved in legal actions and claims arising in the ordinary course of business. The Partnership believes existing claims as of September 30, 2022 will be resolved without material adverse effect on the Partnership’s financial condition or operations. 
NOTE 8 - INCENTIVE COMPENSATION
The table below summarizes incentive compensation expense recorded in the General and administrative line item of the consolidated statements of operations for the periods presented:
 Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
 (in thousands)
Cash—short and long-term incentive plans$1,422 $2,118 $4,381 $5,232 
Equity-based compensation—restricted common units1,054 1,073 3,030 3,059 
Equity-based compensation—restricted performance units2,949 1,762 7,186 5,620 
Board of Directors incentive plan531 337 1,593 1,026 
 Total incentive compensation expense
$5,956 $5,290 $16,190 $14,937 
In the first quarter of 2022, the board of directors of the Partnership's general partner (the "Board") approved a grant of awards to all employees dependent on the achievement of an aspirational production target to be measured in the fourth quarter of 2025 (the "Aspirational Awards"). The Aspirational Awards include performance cash awards and performance equity awards in the form of restricted performance units. To the extent earned, each performance unit represents the right to receive one common unit. The performance cash awards and performance units are eligible to become earned at the end of the requisite service period on December 31, 2025 if the minimum performance metrics are achieved. The minimum performance metrics are at least 42 Mboe per day of average daily royalty production in either the fourth quarter or the month of December of 2025 while maintaining a net debt to EBITDA ratio less than or equal to 1.0 on December 31, 2025. Average daily royalty production does not include production attributable to acquisitions consummated during the performance period. Compensation expense related to the Aspirational Awards will be recorded over the service period when achievement of the performance condition is probable. Total compensation expense to be recognized over the life of the Aspirational Awards consists of $5.0 million for the performance cash awards and $16.4 million for the performance equity awards (1,412,008 performance units with a weighted-average grant date fair value of $11.58 per unit). As of September 30, 2022, the Partnership determined achievement of the performance condition was not yet probable and no expense was recognized.
NOTE 9 - PREFERRED UNITS
Series B Cumulative Convertible Preferred Units
On November 28,