UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | ||||||||
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended June 30, 2020
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
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip code) | ||||||||||
| (Registrant’s telephone number, including area code) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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.
| ☒ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of July 31, 2020, there were 206,737,644 common units and 14,711,219 Series B cumulative convertible preferred units of the registrant outstanding.
TABLE OF CONTENTS
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ii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| June 30, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Commodity derivative assets | |||||||||||
| Assets held for sale | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| TOTAL CURRENT ASSETS | |||||||||||
| PROPERTY AND EQUIPMENT | |||||||||||
Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $ | |||||||||||
| Accumulated depreciation, depletion, amortization, and impairment | ( | ( | |||||||||
| Oil and natural gas properties, net | |||||||||||
Other property and equipment, net of accumulated depreciation of $ | |||||||||||
| NET PROPERTY AND EQUIPMENT | |||||||||||
| DEFERRED CHARGES AND OTHER LONG-TERM ASSETS | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES, MEZZANINE EQUITY, AND EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Commodity derivative liabilities | |||||||||||
| Other current liabilities | |||||||||||
| TOTAL CURRENT LIABILITIES | |||||||||||
| LONG–TERM LIABILITIES | |||||||||||
| Credit facility | |||||||||||
| Accrued incentive compensation | |||||||||||
| Commodity derivative liabilities | |||||||||||
| Asset retirement obligations | |||||||||||
| Other long-term liabilities | |||||||||||
| TOTAL LIABILITIES | |||||||||||
| COMMITMENTS AND CONTINGENCIES (Note 7) | |||||||||||
| MEZZANINE EQUITY | |||||||||||
Partners' equity – Series B cumulative convertible preferred units, | |||||||||||
| EQUITY | |||||||||||
| Partners' equity – general partner interest | |||||||||||
Partners' equity – common units, | |||||||||||
| TOTAL EQUITY | |||||||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY | $ | $ | |||||||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| REVENUE | |||||||||||||||||||||||
| Oil and condensate sales | $ | $ | $ | $ | |||||||||||||||||||
| Natural gas and natural gas liquids sales | |||||||||||||||||||||||
| Lease bonus and other income | |||||||||||||||||||||||
| Revenue from contracts with customers | |||||||||||||||||||||||
| Gain (loss) on commodity derivative instruments | ( | ( | |||||||||||||||||||||
| TOTAL REVENUE | |||||||||||||||||||||||
| OPERATING (INCOME) EXPENSE | |||||||||||||||||||||||
| Lease operating expense | |||||||||||||||||||||||
| Production costs and ad valorem taxes | |||||||||||||||||||||||
| Exploration expense | |||||||||||||||||||||||
| Depreciation, depletion, and amortization | |||||||||||||||||||||||
| Impairment of oil and natural gas properties | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Accretion of asset retirement obligations | |||||||||||||||||||||||
| TOTAL OPERATING EXPENSE | |||||||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||||||||||||
| Interest and investment income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense) | ( | ( | ( | ||||||||||||||||||||
| TOTAL OTHER EXPENSE | ( | ( | ( | ( | |||||||||||||||||||
| NET INCOME (LOSS) | ( | ||||||||||||||||||||||
| Distributions on Series B cumulative convertible preferred units | ( | ( | ( | ( | |||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON AND SUBORDINATED UNITS | $ | ( | $ | $ | $ | ||||||||||||||||||
| ALLOCATION OF NET INCOME (LOSS): | |||||||||||||||||||||||
| General partner interest | $ | $ | $ | $ | |||||||||||||||||||
| Common units | ( | ||||||||||||||||||||||
| Subordinated units | |||||||||||||||||||||||
| $ | ( | $ | $ | $ | |||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON AND SUBORDINATED UNIT: | |||||||||||||||||||||||
| Per common unit (basic) | $ | ( | $ | $ | $ | ||||||||||||||||||
| Weighted average common units outstanding (basic) | |||||||||||||||||||||||
| Per subordinated unit (basic) | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average subordinated units outstanding (basic) | |||||||||||||||||||||||
| Per common unit (diluted) | $ | ( | $ | $ | $ | ||||||||||||||||||
| Weighted average common units outstanding (diluted) | |||||||||||||||||||||||
| Per subordinated unit (diluted) | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average subordinated units outstanding (diluted) | |||||||||||||||||||||||
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 units | Partners' equity — common units | Total equity | |||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | $ | $ | |||||||||||||||
| Repurchases of common units | ( | ( | ( | ||||||||||||||
| Restricted units granted, net of forfeitures | — | — | |||||||||||||||
| Equity–based compensation | — | ||||||||||||||||
| Distributions | — | ( | ( | ||||||||||||||
| Charges to partners' equity for accrued distribution equivalent rights | — | ( | ( | ||||||||||||||
| Distributions on Series B cumulative convertible preferred units | — | ( | ( | ||||||||||||||
| Net income (loss) | — | ||||||||||||||||
| BALANCE AT MARCH 31, 2020 | $ | $ | |||||||||||||||
| Repurchases of common units | ( | ( | |||||||||||||||
| Restricted units granted, net of forfeitures | — | — | |||||||||||||||
| Equity–based compensation | — | ||||||||||||||||
| Distributions | — | ( | ( | ||||||||||||||
| Charges to partners' equity for accrued distribution equivalent rights | — | ( | ( | ||||||||||||||
| Distributions on Series B cumulative convertible preferred units | — | ( | ( | ||||||||||||||
| Net income (loss) | — | ( | ( | ||||||||||||||
| BALANCE AT JUNE 30, 2020 | $ | $ | |||||||||||||||
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 units | Subordinated units | Partners' equity — common units | Partners' equity — subordinated units | Total equity | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2018 | $ | $ | $ | ||||||||||||||||||||||||||
| Repurchases of common units | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Issuance of common units, net of offering costs | — | — | ( | — | ( | ||||||||||||||||||||||||
| Issuance of common units for property acquisitions | — | — | |||||||||||||||||||||||||||
| Restricted units granted, net of forfeitures | — | — | — | — | |||||||||||||||||||||||||
| Equity–based compensation | — | — | — | ||||||||||||||||||||||||||
| Distributions | — | — | ( | ( | ( | ||||||||||||||||||||||||
| Charges to partners' equity for accrued distribution equivalent rights | — | — | ( | — | ( | ||||||||||||||||||||||||
| Distributions on Series B cumulative convertible preferred units | — | — | ( | — | ( | ||||||||||||||||||||||||
| Net income (loss) | — | — | |||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2019 | $ | $ | $ | ||||||||||||||||||||||||||
| Conversion of subordinated units | ( | ( | |||||||||||||||||||||||||||
| Repurchases of common units | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Restricted units granted, net of forfeitures | — | — | — | — | |||||||||||||||||||||||||
| Equity–based compensation | — | — | — | ||||||||||||||||||||||||||
| Distributions | — | — | ( | ( | ( | ||||||||||||||||||||||||
| Charges to partners' equity for accrued distribution equivalent rights | — | — | ( | — | ( | ||||||||||||||||||||||||
| Distributions on Series B cumulative convertible preferred units | — | — | ( | — | ( | ||||||||||||||||||||||||
| Net income (loss) | — | — | |||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2019 | $ | $ | $ | ||||||||||||||||||||||||||
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)
| Six Months Ended June 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | $ | |||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation, depletion, and amortization | |||||||||||
| Impairment of oil and natural gas properties | |||||||||||
| Accretion of asset retirement obligations | |||||||||||
| Amortization of deferred charges | |||||||||||
| (Gain) loss on commodity derivative instruments | ( | ||||||||||
| Net cash (paid) received on settlement of commodity derivative instruments | |||||||||||
| Equity-based compensation | ( | ||||||||||
| Exploratory dry hole expense | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable, accrued liabilities, and other | ( | ( | |||||||||
| Settlement of asset retirement obligations | ( | ( | |||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Acquisitions of oil and natural gas properties | ( | ( | |||||||||
| Additions to oil and natural gas properties | ( | ( | |||||||||
| Additions to oil and natural gas properties leasehold costs | ( | ( | |||||||||
| Purchases of other property and equipment | ( | ( | |||||||||
| Proceeds from the sale of oil and natural gas properties | |||||||||||
| Proceeds from farmouts of oil and natural gas properties | |||||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from issuance of common units, net of offering costs | ( | ||||||||||
| Distributions to common and subordinated unitholders | ( | ( | |||||||||
| Distributions to Series B cumulative convertible preferred unitholders | ( | ( | |||||||||
| Distribution equivalents paid | ( | ||||||||||
| Repurchases of common units | ( | ( | |||||||||
| Borrowings under credit facility | |||||||||||
| Repayments under credit facility | ( | ( | |||||||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ( | |||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS – beginning of the period | |||||||||||
| CASH AND CASH EQUIVALENTS – end of the period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE | |||||||||||
| Interest paid | $ | $ | |||||||||
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, 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, 2019 ("2019 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 six months ended June 30, 2020 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 2019 Annual Report on Form 10-K. There have been no changes in such policies or the application of such policies during the six months ended June 30, 2020.
Accounts Receivable
The following table presents information about the Partnership's accounts receivable:
| June 30, 2020 | December 31, 2019 | |||||||||||||
| (in thousands) | ||||||||||||||
| Accounts receivable: | ||||||||||||||
| Revenues from contracts with customers | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Total accounts receivable | $ | $ | ||||||||||||
Recent Accounting Pronouncements
On January 1, 2020, the Partnership adopted Accounting Standards Update ("ASU") 2018-13, Fair Value Measurements (Topic 820), which removed, modified, and added certain required disclosures on fair value measurements. The adoption of this update had no impact on the Partnership's financial position, results of operations, or liquidity.
NOTE 3 - OIL AND NATURAL GAS PROPERTIES
Assets Held for Sale
In June 2020, the Partnership announced it had entered into two separate agreements to sell certain mineral and royalty properties in the Permian Basin. These transactions subsequently closed in July 2020 for total proceeds, after closing adjustments, of $150.1 million.
One of these transactions, effective May 1, 2020, involved the sale of the Partnership's mineral and royalty interest in specific tracts in Midland County, Texas to a private buyer for gross proceeds of approximately $55 million ("Divestiture A"). The other transaction, effective July 1, 2020, involved the sale of an undivided interest across parts of the Partnership's Delaware Basin and Midland Basin positions to Pegasus Resources, LLC, a portfolio company of EnCap Investments, for gross proceeds of approximately $100 million ("Divestiture B"). The book value of the assets divested through these transactions are classified as held for sale in the consolidated balance sheet as of June 30, 2020.
Assets held for sale consisted of the following as of June 30, 2020:
| Divestiture A | Divestiture B | Total | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Accounts Receivable | $ | $ | $ | |||||||||||||||||
| Oil and natural gas properties | ||||||||||||||||||||
| Unproved properties | ||||||||||||||||||||
| Proved properties, net | ||||||||||||||||||||
| Total Assets Held for Sale | $ | $ | $ | |||||||||||||||||
The assets held for sale as of June 30, 2020 do not qualify for discontinued operations as they do not represent a strategic shift that will have a major effect on the Partnership's operations or financial results.
7
BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
2020 Acquisitions
The Partnership had no acquisition activity during the six months ended June 30, 2020.
2019 Acquisitions
During the year ended December 31, 2019, the Partnership closed on multiple acquisitions of mineral and royalty interests for total consideration of $44.0 million. Acquisitions that were considered business combinations were primarily located in the Permian Basin. These acquisitions were funded with borrowings under the Credit Facility (as defined in Note 6 - Credit Facility) and funds from operating activities. Acquisition related costs of less than $0.1 million were expensed and included in the General and administrative line item of the consolidated statement of operations for the year ended December 31, 2019. The following table summarizes these acquisitions:
| Assets Acquired | Consideration Paid | ||||||||||||||||||||||||||||
| Proved | Unproved | Net Working Capital | Total Fair Value | Cash | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| February | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| March | |||||||||||||||||||||||||||||
| June | |||||||||||||||||||||||||||||
| Total fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
In addition, during 2019, the Partnership acquired mineral and royalty interests that were considered asset acquisitions from various sellers for an aggregate of $31.6 million. These acquisitions were primarily located in East Texas and the Permian Basin. The cash portion of the consideration paid for these acquisitions of $30.7 million was funded with borrowings under the Credit Facility and funds from operating activities, and $0.9 million was funded through the issuance of common units of the Partnership based on the fair values of the common units issued on the acquisition dates.
Farmout Agreements
In 2017, the Partnership entered into two farmout arrangements designed to reduce its working interest capital expenditures and thereby significantly lower its capital spending other than for royalty and mineral 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.
Canaan Farmout
On February 21, 2017, the Partnership announced that it had entered into a farmout agreement with Canaan Resource Partners ("Canaan") which covers certain Haynesville and Bossier shale acreage in San Augustine County, Texas operated by XTO Energy Inc., a subsidiary of Exxon Mobil Corporation. The Partnership has an approximate 50 % working interest in the acreage and is the largest mineral owner. A total of 20 wells were drilled over an initial phase, beginning with wells spud after January 1, 2017. Canaan elected to participate in an additional phase that began in September 2018 and continues for the lesser of 2 years or until 20 wells have been drilled. As of June 30, 2020, a total of 17 wells have been drilled during the second phase. After the completion of the second phase, Canaan will have the option to elect to participate in a similar third phase. During the first three phases of the agreement, Canaan commits on a phase-by-phase basis and funds 80 % of the Partnership's drilling and completion costs and is assigned 80 % of the Partnership's working interests in such wells (40 % working interest on an 8/8ths basis) as the wells are drilled. After the third phase, Canaan can earn 40 % of the Partnership’s working interest (20 % working interest on an 8/8ths basis) in additional wells drilled in the area by continuing to fund 40 % of the Partnership's costs for those
8
BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
wells on a well-by-well basis. The Partnership receives an overriding royalty interest (“ORRI”) before payout and an increased ORRI after payout on all wells drilled under the agreement.
Pivotal Farmout
On November 21, 2017, the Partnership entered into a farmout agreement with Pivotal Petroleum Partners (“Pivotal”), a portfolio company of Tailwater Capital, LLC. The farmout agreement covers substantially all of the Partnership's remaining working interests under active development in the Shelby Trough area of East Texas, targeting the Haynesville and Bossier shale acreage (after giving effect to the Canaan Farmout), until November 2025. Pivotal will earn the Partnership's remaining working interest in wells operated by XTO Energy Inc. in San Augustine County, Texas not covered by the Canaan Farmout (10 % working interest on an 8/8th basis), as well as 100 % of the Partnership's working interests (ranging from approximately 12.5 % to 25 % on an 8/8ths basis) in wells operated by BPX Energy in San Augustine and Angelina counties, Texas. Initially, Pivotal is obligated to fund the development of up to 80 wells, in designated well groups, across several development areas and then has options to continue funding the Partnership's working interest across those areas for the duration of the farmout agreement. 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 June 30, 2020, a total of 68 wells have been drilled in the contract area. The Partnership's development agreement with BPX Energy terminated in 2019 with respect to the majority of the Partnership's acreage covered by the farmout agreement with Pivotal. As such, Pivotal retains minimal rights or obligations related to the farmout for that area. In the second quarter of 2020, the Partnership entered into a development agreement with Aethon Energy ("Aethon") to develop certain portions of the area forfeited by BPX Energy in Angelina County, Texas. The agreement provides for minimum well commitments by Aethon in exchange for reduced royalty rates and exclusive access to our mineral and leasehold acreage in the contract area. The agreement calls for a minimum of four wells to be drilled in the initial program year, which begins in the third quarter of 2020, increasing to a minimum of 15 wells per year beginning with the third program year. The Partnership remains engaged with Pivotal around farmout opportunities in the area forfeited by BPX Energy, including the acreage covered by the Aethon development agreement.
From the inception of the farmout agreements through June 30, 2020, the Partnership has received $90.3 million and $119.1 million from Canaan and Pivotal, respectively, under the agreements. When such reimbursements are received prior to assigning the wells to Canaan and Pivotal, the Partnership records the amounts as increases to Oil and natural gas properties and Other long-term liabilities. When working interests in farmout wells are assigned to Canaan and Pivotal, the Partnership's Oil and natural gas properties and Other long-term liabilities are reduced by the reimbursed capital costs. As of June 30, 2020 and December 31, 2019, $0.1 million and $1.7 million, respectively, was included in the Other long-term liabilities line item of the consolidated balance sheets for reimbursements received associated with farmed-out working interests not yet assigned to Canaan and Pivotal.
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.
There was a collapse in oil prices during the first quarter of 2020 due to geopolitical events that increased supply at the same time demand weakened due to the impact of the COVID-19 pandemic. The Partnership determined these events and circumstances indicated a possible decline in the recoverability of the carrying value of certain proved properties and recoverability testing determined that certain depletable units consisting of mature oil producing properties were impaired as of March 31, 2020.
The Partnership recognized no impairment of oil and natural gas properties for the three months ended June 30, 2020 and $51.0 million of impairment of oil and natural gas properties for the six months ended June 30, 2020. No impairment of oil and natural gas properties was recognized during 2019. See Note 5 - Fair Value Measurements for further discussion.
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. 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 June 30, 2020, the Partnership’s open derivative contracts consisted of fixed-price swap contracts and costless collar contracts. 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 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 June 30, 2020 and December 31, 2019. 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 June 30, 2020, the Partnership had nine counterparties, all of which are rated Baa1 or better by Moody’s and are lenders under the Credit Facility.
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:
| June 30, 2020 | ||||||||||||||||||||||||||
| Classification | Balance Sheet Location | Gross Fair Value | Effect of Counterparty Netting | Net 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 | $ | $ | ( | $ | |||||||||||||||||||||
Long-term liability | Commodity derivative liabilities | ( | ||||||||||||||||||||||||
Total liabilities | $ | $ | ( | $ | ||||||||||||||||||||||
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| December 31, 2019 | ||||||||||||||||||||||||||
| Classification | Balance Sheet Location | Gross Fair Value | Effect of Counterparty Netting | Net Carrying Value on Balance Sheet | ||||||||||||||||||||||