bsm-10q_20150331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

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

For the Quarterly Period Ended March 31, 2015

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, Texas

 

77002

(Address of principal executive offices)

 

(Zip code)

(713) 658-0647

(Registrant’s telephone number, including area code)

 

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  þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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  þ    No  ¨

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

 

Large accelerated filer

¨

 

Accelerated filer

¨

 

 

 

 

 

Non-accelerated filer

þ

(Do not check if a smaller reporting company)

Smaller reporting company

¨

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

As of May 29, 2015, there were 96,177,147 common limited partner units, 95,057,312 subordinated limited partner units, and 117,963 preferred units of the registrant outstanding.

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

1

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014

2

 

 

 

 

 

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2015

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

 

Item 4.

 

Controls and Procedures

24

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

25

 

 

 

 

Item 1A.

 

Risk Factors

25

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

Item 6.

 

Exhibits

25

 

 

 

 

 

 

Signatures

26

 

 

 

ii


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BLACK STONE MINERALS, L.P. PREDECESSOR

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,368

 

 

$

14,803

 

Accounts receivable

 

 

50,794

 

 

 

74,092

 

Commodity derivative assets

 

 

38,913

 

 

 

37,471

 

Prepaid expenses and other current assets

 

 

10,523

 

 

 

8,538

 

TOTAL CURRENT ASSETS

 

 

108,598

 

 

 

134,904

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

 

Oil and natural gas properties, at cost, on the basis of the successful efforts method of accounting, includes unproved properties of $625,392 and $626,376 at March 31, 2015 and December 31, 2014, respectively

 

 

2,394,096

 

 

 

2,379,543

 

Accumulated depreciation, depletion and amortization, including impairment

 

 

(1,232,584

)

 

 

(1,191,861

)

Oil and natural gas properties, net

 

 

1,161,512

 

 

 

1,187,682

 

Other property and equipment, net of accumulated depreciation of $13,558 and $12,994 at March 31, 2015 and December 31, 2014, respectively

 

 

1,098

 

 

 

1,664

 

NET PROPERTY AND EQUIPMENT

 

 

1,162,610

 

 

 

1,189,346

 

DEFERRED CHARGES AND OTHER LONG-TERM ASSETS

 

 

3,083

 

 

 

2,532

 

TOTAL ASSETS

 

$

1,274,291

 

 

$

1,326,782

 

LIABILITIES, MEZZANINE EQUITY AND EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

31,080

 

 

$

29,415

 

Accrued liabilities

 

 

12,165

 

 

 

16,252

 

Accrued partners' distribution payable

 

 

52,724

 

 

 

52,905

 

TOTAL CURRENT LIABILITIES

 

 

95,969

 

 

 

98,572

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Credit facilities

 

 

389,000

 

 

 

394,000

 

Accrued incentive compensation

 

 

3,714

 

 

 

6,530

 

Commodity derivative liabilities

 

 

37

 

 

 

 

Deferred revenue

 

 

3,813

 

 

 

3,917

 

Asset retirement obligations

 

 

9,621

 

 

 

9,381

 

TOTAL LIABILITIES

 

 

502,154

 

 

 

512,400

 

COMMITMENTS AND CONTINGENCIES (Note 7)

 

 

 

 

 

 

 

 

MEZZANINE EQUITY

 

 

 

 

 

 

 

 

Partners' equity - redeemable preferred units, 118 and 157 units outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

120,889

 

 

 

161,165

 

EQUITY

 

 

 

 

 

 

 

 

Partners' equity - general partner units

 

 

 

 

 

 

Partners' equity - common limited partner units, 167,767 and 164,484 units outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

648,672

 

 

 

650,598

 

Noncontrolling interests

 

 

2,576

 

 

 

2,619

 

TOTAL EQUITY

 

 

651,248

 

 

 

653,217

 

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY

 

$

1,274,291

 

 

$

1,326,782

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

1


 

BLACK STONE MINERALS, L.P. PREDECESSOR

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per unit amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

REVENUE

 

 

 

 

 

 

 

 

Oil and condensate sales

 

$

36,163

 

 

$

59,642

 

Natural gas and natural gas liquids sales

 

 

31,640

 

 

 

58,206

 

Gain (loss) on commodity derivative instruments

 

 

19,647

 

 

 

(5,995

)

Lease bonus and other income

 

 

3,611

 

 

 

15,559

 

TOTAL REVENUE

 

 

91,061

 

 

 

127,412

 

OPERATING (INCOME) EXPENSE

 

 

 

 

 

 

 

 

Lease operating expenses and other

 

 

6,172

 

 

 

4,869

 

Production costs and ad valorem taxes

 

 

8,256

 

 

 

10,586

 

Depreciation, depletion and amortization

 

 

27,891

 

 

 

23,134

 

Impairment of oil and natural gas properties

 

 

13,467

 

 

 

 

General and administrative

 

 

14,818

 

 

 

15,451

 

Accretion of asset retirement obligations

 

 

271

 

 

 

147

 

Gain on sale of assets

 

 

(7

)

 

 

 

TOTAL OPERATING EXPENSE

 

 

70,868

 

 

 

54,187

 

INCOME FROM OPERATIONS

 

 

20,193

 

 

 

73,225

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest and investment income

 

 

1

 

 

 

22

 

Interest expense

 

 

(2,945

)

 

 

(3,433

)

Other income

 

 

50

 

 

 

70

 

TOTAL OTHER EXPENSE

 

 

(2,894

)

 

 

(3,341

)

NET INCOME

 

 

17,299

 

 

 

69,884

 

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

(9

)

 

 

3

 

DIVIDENDS ON PREFERRED UNITS

 

 

(2,909

)

 

 

(3,882

)

NET INCOME ATTRIBUTABLE TO THE GENERAL PARTNER AND LIMITED PARTNERS

 

 

14,381

 

 

 

66,005

 

ALLOCATION OF NET INCOME ATTRIBUTABLE TO:

 

 

 

 

 

 

 

 

General partner interest

 

 

 

 

 

 

Common limited partner interest

 

 

14,381

 

 

 

66,005

 

 

 

$

14,381

 

 

$

66,005

 

NET INCOME ATTRIBUTABLE TO LIMITED PARTNERS PER UNIT:

 

 

 

 

 

 

 

 

Per common limited partner unit (basic and diluted)

 

$

0.09

 

 

$

0.40

 

Weighted average common limited partner units outstanding (basic and diluted)

 

 

167,452

 

 

 

164,585

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

2


 

BLACK STONE MINERALS, L.P. PREDECESSOR

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(In thousands)

 

 

 

Class A and Class B

common units

 

 

Partners' equity— common units

 

 

Noncontrolling

interest

 

 

Total

 

BALANCE AT DECEMBER 31, 2014

 

 

164,484

 

 

$

650,598

 

 

$

2,619

 

 

$

653,217

 

Conversion of redeemable preferred units

 

 

2,749

 

 

 

39,223

 

 

 

 

 

 

39,223

 

Restricted common units granted

 

 

562

 

 

 

 

 

 

 

 

 

 

Repurchases of common units

 

 

(28

)

 

 

(523

)

 

 

 

 

 

(523

)

Equity-based compensation

 

 

 

 

 

1,243

 

 

 

 

 

 

1,243

 

Distributions

 

 

 

 

 

(56,250

)

 

 

(52

)

 

 

(56,302

)

Net income

 

 

 

 

 

17,290

 

 

 

9

 

 

 

17,299

 

Dividends on preferred units

 

 

 

 

 

(2,909

)

 

 

 

 

 

(2,909

)

BALANCE AT MARCH 31, 2015

 

 

167,767

 

 

$

648,672

 

 

$

2,576

 

 

$

651,248

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

3


 

BLACK STONE MINERALS, L.P. PREDECESSOR

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

17,299

 

 

$

69,884

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization

 

 

27,891

 

 

 

23,134

 

Impairment of oil and natural gas properties

 

 

13,467

 

 

 

 

Accretion of asset retirement obligations

 

 

271

 

 

 

147

 

Amortization of deferred charges

 

 

241

 

 

 

241

 

(Gain) loss on commodity derivative instruments

 

 

(19,647

)

 

 

5,995

 

Net cash received (paid) on settlement of commodity derivative instruments

 

 

17,450

 

 

 

(2,084

)

Equity-based compensation

 

 

1,243

 

 

 

3,499

 

Gain on disposal of assets

 

 

(7

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

23,298

 

 

 

(16,882

)

Prepaid expenses and other current assets

 

 

(365

)

 

 

(333

)

Accounts payable and accrued liabilities

 

 

(6,620

)

 

 

(6,914

)

Deferred revenue

 

 

(104

)

 

 

(2,516

)

Settlement of asset retirement obligations

 

 

(58

)

 

 

(8

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

74,359

 

 

 

74,163

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

 

(13,612

)

 

 

(13,966

)

Purchase of other property and equipment

 

 

 

 

 

(60

)

Proceeds from the sale of oil and natural gas properties

 

 

406

 

 

 

5,439

 

Acquisitions of oil and natural gas properties

 

 

 

 

 

(29,431

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(13,206

)

 

 

(38,018

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Distributions to common equity owners

 

 

(56,483

)

 

 

(55,517

)

Repurchase of common equity units

 

 

(523

)

 

 

(406

)

Dividends on preferred units

 

 

(3,962

)

 

 

(3,968

)

Net (repayments) borrowings under senior line of credit

 

 

(5,000

)

 

 

11,500

 

Note receivable-officers

 

 

 

 

 

101

 

Payments incurred for initial public offering

 

 

(1,620

)

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

 

 

(67,588

)

 

 

(48,290

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(6,435

)

 

 

(12,145

)

CASH AND CASH EQUIVALENTS - beginning of the period

 

 

14,803

 

 

 

30,123

 

CASH AND CASH EQUIVALENTS - end of the period

 

$

8,368

 

 

$

17,978

 

SUPPLEMENTAL DISCLOSURE

 

 

 

 

 

 

 

 

Interest paid

 

$

2,664

 

 

$

3,187

 

NON-CASH ACTIVITIES

 

 

 

 

 

 

 

 

Property additions financed through accounts payable and accrued liabilities

 

$

15,512

 

 

$

23,332

 

Liabilities assumed as consideration for oil and natural gas properties acquired

 

$

 

 

$

7,000

 

Deferred revenue settled through acquisition of oil and natural gas properties

 

$

 

 

$

(2,657

)

Asset retirement obligations incurred

 

$

27

 

 

$

31

 

Accrued distributions payable

 

$

(181

)

 

$

806

 

Conversion of redeemable preferred units

 

$

(39,223

)

 

$

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

4


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Black Stone Minerals Company, L.P., a Delaware limited partnership, and its subsidiaries (collectively referred to as “BSMC” or the “Predecessor”) own oil and natural gas mineral interests in the United States (“U.S.”). Black Stone Minerals, L.P. (“BSM”) is a publicly traded Delaware limited partnership formed on September 16, 2014. On May 6, 2015, BSM completed its initial public offering (the “IPO”) of 22,500,000 common units representing limited partner interests at a price to the public of $19.00 per common unit. BSM received proceeds of $391.6 million from the sale of its common units, net of underwriting discount, structuring fee, and estimated offering expenses (including costs previously incurred and capitalized). BSM used the net proceeds from the IPO to repay substantially all indebtedness outstanding under its credit facility. On May 1, 2015, BSM’s common units began trading on the New York Stock Exchange under the symbol “BSM.”

In connection with the IPO, BSMC was merged into a wholly owned subsidiary of BSM, with BSMC as the surviving entity. Pursuant to the merger, the Class A and Class B common units representing limited partner interests of the Predecessor were converted into an aggregate of 72,574,715 common units and 95,057,312 subordinated units of BSM at a conversion ratio of 12.9465:1 for 0.4329 common units and 0.5671 subordinated units, and the preferred units of BSMC were converted into an aggregate of 117,963 preferred units of BSM at a conversion ratio of one to one. The merger is accounted for as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests. Unless otherwise stated or the context otherwise indicates, all references to the “Company” or similar expressions for time periods prior to the IPO refer to Black Stone Minerals Company, L.P. and its subsidiaries, the Predecessor, for accounting purposes. For time periods subsequent to the IPO, these terms refer to Black Stone Minerals, L.P. and its subsidiaries.

In addition to mineral interests, the Company’s assets include nonparticipating and overriding royalty interests. These non-cost-bearing interests are collectively referred to as “mineral and royalty interests.” As of March 31, 2015, the Company’s mineral and royalty interests are located in most of the major onshore oil and natural gas producing basins spread across 41 states and 62 onshore oil and natural gas producing basins of the continental U.S. The Company also owns non-operated working interests in certain oil and natural gas properties.

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. 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 U.S. GAAP. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Company’s annual consolidated financial statements and related notes included in its final prospectus (the “Prospectus”) dated April 30, 2015 and filed with the SEC, pursuant to Rule 424(b) under the Securities Act of 1933 (the “Securities Act”), on May 1, 2015. Certain reclassifications have been made to the prior periods presented to conform to the current period financial statement presentation. The reclassifications have no effect on the consolidated financial position, results of operations, or cash flows of the Company. In the opinion of management, all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for the periods presented have been reflected. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year.

The Company evaluates significant terms of its investments to determine the method of accounting applied to the investments. Investments in which the Company has less than a 20% ownership interest and does not have control or exercise significant influence are accounted for under the cost method. The Company’s cost method investment is included in deferred charges and other long-term assets in the consolidated balance sheets. Investments in which the Company exercises control are consolidated, and the noncontrolling interests of such investments, which are not attributable directly or indirectly to the Company, are presented as a separate component of net income and equity in the accompanying consolidated financial statements.

The consolidated financial statements include undivided interests in oil and natural gas property rights. The Company 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 consolidated balance sheets, statements of operations, and cash flow statements.

5


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Segment reporting: The Company 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 Company’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.

 

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: Our significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the years ended December 31, 2014 and 2013 included in the Prospectus. There have been no changes in such policies or the application of such policies during the quarter ended March 31, 2015.

New accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update on a comprehensive new revenue recognition standard that will supersede Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new accounting guidance creates a framework under which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period. The accounting standard will be effective for reporting periods beginning after December 15, 2016 for public companies. However, in April 2015, the FASB tentatively decided to defer the effective date by one year to be effective for annual reporting periods beginning after December 15, 2017. The Company is evaluating the impact that the new accounting guidance will have on its consolidated financial position, results of operations, and cash flows and has not yet determined the method by which it will adopt the standard.

In April 2015, the FASB issued an accounting standards update that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the impact of adopting this guidance will be material to the Company’s consolidated financial statements and related disclosures.

In April 2015, the FASB issued an accounting standards update that specifies that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required.  The guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the impact of adopting this guidance will be material to the Company’s consolidated financial statements and related disclosures.

 

 

6


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3—ASSET RETIREMENT OBLIGATIONS

The asset retirement obligation (“ARO”) liability reflects the present value of estimated costs of dismantlement, removal, site reclamation, and similar activities associated with the Company’s oil and natural gas properties. The Company utilizes current retirement costs to estimate the expected cash outflows for retirement obligations. The Company estimates the ultimate productive life of its properties, a risk-adjusted discount rate, and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and natural gas property balance. The following table describes changes to the Company’s ARO liability during the period:

 

 

 

For the three months ended

 

 

 

March 31, 2015

 

 

 

(In thousands)

 

Beginning asset retirement obligations

 

$

9,381

 

Liabilities incurred

 

 

27

 

Liabilities settled

 

 

(58

)

Accretion expense

 

 

271

 

Ending asset retirement obligations

 

$

9,621

 

 

 

NOTE 4—DERIVATIVES AND FINANCIAL INSTRUMENTS

The Company’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the given commodity price risk associated with its operations, the Company uses derivative instruments. From time to time, such instruments may include fixed-price contracts, variable to fixed-price swaps, costless collars, and other contractual arrangements. The Company does not enter into derivative instruments for speculative purposes.

Costless collars are a combination of a purchased put option and a sold call option, in which the premiums net to zero. With a costless collar, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the exercise price of the purchased put. The Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the exercise price for the sold call of the collar. The settlement paid or received is the difference between the market price on the settlement date and the related exercise price. The Company has also entered into commodity derivative instruments in the form of fixed price swap contracts. A fixed price swap contract between the Company and a counterparty specifies a fixed commodity price and a future settlement date. The Company will receive from, or pay to, the counterparty the difference between the fixed swap price and the market price on the settlement date. All derivative instruments that have not yet been settled in cash are reflected as either assets or liabilities in the Company’s accompanying consolidated balance sheets as of March 31, 2015 and December 31, 2014. See Note 5 – Fair Value Measurement for further discussion.

The table below summarizes the fair value and classification of the Company’s derivative instruments:

 

As of March 31, 2015

 

(In thousands)

 

Classification

 

Balance Sheet Location

 

Gross Fair

Value

 

 

Effect of

Counterparty

Netting

 

 

Net Carrying

Value on

Balance Sheet

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

39,055

 

 

$

(142

)

 

$

38,913

 

Non-current asset

 

Deferred charges and other long-term assets

 

 

992

 

 

 

(200

)

 

 

792

 

Total assets

 

 

 

$

40,047

 

 

$

(342

)

 

$

39,705

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liability

 

Commodity derivative liabilities

 

$

142

 

 

$

(142

)

 

$

 

Non-current liability

 

Commodity derivative liabilities

 

 

237

 

 

 

(200

)

 

 

37

 

Total liabilities

 

 

 

$

379

 

 

$

(342

)

 

$

37

 

7


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

As of December 31, 2014

 

(In thousands)

 

Classification

 

Balance Sheet Location

 

Gross Fair

Value

 

 

Effect of

Counterparty

Netting

 

 

Net Carrying

Value on

Balance Sheet

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

37,656

 

 

$

(185

)

 

$

37,471

 

Non-current asset

 

Deferred charges and other long-term assets

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

$

37,656

 

 

$

(185

)

 

$

37,471

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liability

 

Commodity derivative liability

 

$

185

 

 

$

(185

)

 

$

 

Non-current liability

 

Commodity derivative liability

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

$

185

 

 

$

(185

)

 

$

 

Changes in the fair values of the Company’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations. Changes in the fair value of the Company’s commodity derivative instruments (both assets and liabilities) are as follows:

 

 

 

For the three months ended March 31,

 

Derivatives not designated as hedging instruments under ASC 815

 

2015

 

 

2014

 

 

 

(In thousands)

 

Beginning fair value of commodity derivative instruments

 

$

37,471

 

 

$

(1,812

)

Gain (loss) on oil derivative instruments

 

 

13,019

 

 

 

(1,551

)

Gain (loss) on natural gas derivative instruments

 

 

6,628

 

 

 

(4,444

)

Net cash (received) paid on settlements of oil derivative

   instruments

 

 

(11,509

)

 

 

18

 

Net cash (received) paid on settlements of natural gas

   derivative instruments

 

 

(5,941

)

 

 

2,066

 

Net change in fair value of commodity derivative

   instruments

 

 

2,197

 

 

 

(3,911

)

Ending fair value of commodity derivative instruments

 

$

39,668

 

 

$

(5,723

)

The Company had the following open derivative contracts for oil as of March 31, 2015:

 

 

 

Volume

 

 

Weighted Average

 

 

Range (Per Bbl)

 

Period and Type of Contract

 

(Bbl)

 

 

(Per Bbl)

 

 

Low

 

 

High

 

Oil Collars:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Call Options

 

 

625,000

 

 

$

102.02

 

 

$

99.05

 

 

$

104.00

 

Put Options

 

 

625,000

 

 

$

84.88

 

 

$

80.00

 

 

$

90.00

 

Oil Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts:

 

 

1,106,000

 

 

$

58.71

 

 

$

52.05

 

 

$

61.71

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts:

 

 

1,540,000

 

 

$

57.98

 

 

$

54.80

 

 

$

60.41

 

8


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company had the following open derivative contracts for natural gas as of March 31, 2015:

 

 

 

Volume

 

 

Weighted Average

 

 

Range (Per MMBtu)

 

Period and Type of Contract

 

(MMBtu)

 

 

(Per MMBtu)

 

 

Low

 

 

High

 

Natural Gas Collars:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Call Options

 

 

3,640,000

 

 

$

4.82

 

 

$

4.51

 

 

$

5.13

 

Put Options

 

 

3,640,000

 

 

$

3.81

 

 

$

3.50

 

 

$

4.00

 

Natural Gas Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts:

 

 

18,580,000

 

 

$

3.12

 

 

$

2.72

 

 

$

3.53

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts:

 

 

22,450,000

 

 

$

3.18

 

 

$

3.03

 

 

$

3.41

 

 

 

NOTE 5—FAIR VALUE MEASUREMENT

ASC 820, Fair Value Measurement, defines fair value 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 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 Company’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 Company’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. There were no transfers into, or out of, the three levels of the fair value hierarchy for the three months ended March 31, 2015 or the year ended December 31, 2014.

Fair Value on a Recurring Basis

The Company estimated the fair value of derivative 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 – Derivatives and Financial Instruments for further discussion.

9


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:

 

 

 

Fair Value Measurements Using

 

 

Effect of

Counterparty

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Netting

 

 

Total

 

 

 

(In thousands)

 

As of March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

$

 

 

$

40,047

 

 

$

 

 

$

(342

)

 

$

39,705

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

 

 

 

 

379

 

 

 

 

 

 

(342

)

 

$

37

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

$

 

 

$

37,656

 

 

$

 

 

$

(185

)

 

$

37,471

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

 

 

 

 

185

 

 

 

 

 

 

(185

)

 

$

 

Fair Value on a Non-Recurring Basis

The determination of the fair values of proved and unproved properties acquired in purchase transactions are prepared by estimating discounted cash flow projections. The factors used to determine fair value include estimates of economic reserves, future operating and development costs, future commodity prices, and a market-based weighted average cost of capital.

Oil and natural gas properties are measured at fair value on a nonrecurring basis using the income approach. 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. Significant Level 3 assumptions used to determine fair value include estimates of proved reserves, future commodity prices, the timing and amount of future production and capital expenditures, and a discount rate commensurate with the risk associated with the respective oil and natural gas properties.

The Company’s estimates of fair value have been determined at discrete points in time based on relevant market data. These estimates involve uncertainty and cannot be determined with precision. There were no significant changes in valuation techniques or related inputs as of March 31, 2015 or December 31, 2014.

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis:

 

 

 

Fair Value Measurements Using

 

 

Net Book

 

 

Impairment

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

 

Loss

 

 

 

(In thousands)

 

As of March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired oil and natural gas properties

 

$

 

 

$

 

 

$

17,826

 

 

$

31,293

 

 

$

13,467

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired oil and natural gas properties

 

$

 

 

$

 

 

$

81,864

 

 

$

199,794

 

 

$

117,930

 

The estimated fair value of all debt as of March 31, 2015 and December 31, 2014 approximated the carrying value. These fair values, which are Level 3 measurements, were estimated based on the Company’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.

 

 

NOTE 6—RELATED PARTY TRANSACTIONS

The Company executed promissory notes dated April 15, 2010, in the amount of $0.5 million to officers of the Company. The promissory notes related to the acquisition of a partnership interest in a former affiliate by the officers, and the notes were collateralized by a security interest in the Company. The aggregate outstanding note balance and interest receivable of $0.1 million was received during the quarter ended March 31, 2014.

 

10


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 7—COMMITMENTS AND CONTINGENCIES

Environmental Matters

The Company’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 Company does not consider the estimated remediation costs that could result from any environmental site assessments to be significant to the consolidated balance sheet or statement of operations of the Company. No provision for potential remediation costs is reflected in the consolidated financial statements.

Litigation

From time to time, the Company is involved in legal actions and claims arising in the ordinary course of business. The Company believes these claims will be resolved without material adverse effect to the Company’s consolidated balance sheet, statement of operations or cash flows.

 

 

NOTE 8—CREDIT FACILITY

In September 2006, the Company entered into a credit agreement (the “Senior Line of Credit”) with a syndicate of lenders. During the first quarter of 2012, the Senior Line of Credit was amended to extend the term of the facility to February 3, 2017, at which time all unpaid principal and interest is due. On June 28, 2013, the terms of the Senior Line of Credit were amended to increase the maximum credit amount from the original $600.0 million to $1.0 billion. The borrowing base was $700.0 million at both March 31, 2015 and December 31, 2014, respectively. Our semi-annual borrowing base redetermination process resulted in a decrease of the borrowing base to $600.0 million, effective April 10, 2015. The borrowing base is based on the value of the Company’s oil and natural gas properties. Proceeds from the Senior Line of Credit are used for the acquisition of oil and natural gas properties and for other general business purposes.

On January 23, 2015, the Senior Line of Credit was amended and restated. Borrowings under the Senior Line of Credit bear interest at LIBOR plus a margin between 1.50% and 2.50%, or prime rate plus a margin between 0.50% and 1.50%, with the margin depending on the borrowing base utilization percentage of the loan. The prime rate is determined to be the higher of the financial institution’s prime rate or the federal funds effective rate plus 0.50% per annum. The weighted average interest rate of the Senior Line of Credit was 2.18% and 2.41% as of March 31, 2015 and December 31, 2014, 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 0.50% per annum if the borrowing base utilization percentage is equal to or greater than 50%. The Senior Line of Credit is secured by a majority of the Company’s oil and natural gas production and assets.

The Senior Line of Credit contains various restrictions on future borrowings, leases and sales of assets. Additionally, the Senior Line of Credit requires the Company 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. As of March 31, 2015, the Company was in compliance with all financial covenants in the Senior Line of Credit.

The aggregate principal balance outstanding was $389.0 million and $394.0 million at March 31, 2015 and December 31, 2014, respectively. The unused portion of the available borrowings under the Senior Line of Credit was $311.0 million and $306.0 million at March 31, 2015 and December 31, 2014, respectively. Refer to Note 1 – Business and Basis of Presentation for discussion of the use of proceeds from the IPO that occurred subsequent to March 31, 2015.

 

 

NOTE 9—REDEEMABLE PREFERRED UNITS

The Company has 117,980 and 157,203 preferred units outstanding with a book value of $120.9 million and $161.2 million as of March 31, 2015 and December 31, 2014, respectively, which includes accrued and unpaid dividends of $2.9 million and $4.0 million as of March 31, 2015 and December 31, 2014, respectively. The preferred units are classified as mezzanine equity on the consolidated balance sheets since redemption is outside the control of the Company. The preferred units are entitled to an annual dividend coupon of 10% of the funded capital of the preferred units payable on a quarterly basis in arrears. The Company accrued dividends on the preferred units of $2.9 million and $3.9 million for the quarters ended March 31, 2015 and 2014, respectively.

11


BLACK STONE MINERALS, L.P. PREDECESSOR

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The preferred units are convertible into common units at any time at the option of the preferred unitholders. The preferred units have an adjusted initial conversion price of $14.2683 and an adjusted initial conversion rate of 70.0858 common units per preferred unit, which reflects the reverse split described in Note 1 – Business and Basis of Presentation but does not give pro forma effect to the capital restructuring related to the IPO. In the event the preferred unitholders have not converted all of the preferred units by December 31, 2014, the owners of the preferred units can elect to have the Company redeem up to 25% per year of its preferred units at face value, plus any accrued and unpaid dividends, on December 31 of each year from 2014 to 2017. The Company shall have the right, at its sole option, to redeem an amount of preferred units equal to the units being redeemed by an owner of preferred units on each December 31. Any amount of a given year’s 25% of preferred units not redeemed on December 31 shall automatically convert to common units on January 1 of the following year. On January 1, 2015 and during the quarter ended March 31, 2015, 39,223 preferred units totaling $39.2 million were automatically converted into 2,748,974 common units. No preferred units were converted into common units during the quarter ended March 31, 2014.

 

 

NOTE 10—EARNINGS PER UNIT

Class A and Class B common units have been combined as a single class for purposes of basic and diluted earnings per unit (“EPU”) as they contain the same economic rights and preferences. The holders of the Company’s restricted common units have all the rights of a unitholder, including non-forfeitable distribution rights. As participating securities, the restricted common units are included in the calculation of basic earnings per unit using the two-class method. For the periods presented, the amount of earnings allocated to the participating restricted common units was not material. The redeemable preferred units can be converted into 8.3 million common units and 11.0 million common units as of March 31, 2015 and 2014, respectively. At March 31, 2015 and 2014, if the redeemable preferred units were converted to common units, their effect would be anti-dilutive. Therefore, the redeemable preferred units are not included in the diluted EPU calculation. The following table reflects the retrospective application of the reverse split described in Note 1 – Business and Basis of Presentation but does not give pro forma effect to the capital restructuring related to the IPO.

The following table sets forth the computation of basic and diluted earnings per unit:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

 

 

(In thousands, except per unit

amounts)

 

Net income

 

$

17,299

 

 

$

69,884

 

Net (income) loss attributable to noncontrolling interests

 

 

(9

)

 

 

3