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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, 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
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 77002
Houston,Texas
(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 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 October 30, 2020, there were 206,748,889 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, 2020December 31, 2019
ASSETS  
CURRENT ASSETS  
Cash and cash equivalents$3,057 $8,119 
Accounts receivable48,497 78,214 
Commodity derivative assets8,569 14,790 
Prepaid expenses and other current assets1,798 1,168 
TOTAL CURRENT ASSETS61,921 102,291 
PROPERTY AND EQUIPMENT  
Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $947,229 and $1,073,447 at September 30, 2020 and December 31, 2019, respectively
3,158,203 3,302,340 
Accumulated depreciation, depletion, amortization, and impairment(1,967,661)(1,870,412)
Oil and natural gas properties, net1,190,542 1,431,928 
Other property and equipment, net of accumulated depreciation of $12,132 and $11,622 at September 30, 2020 and December 31, 2019, respectively
1,805 2,300 
NET PROPERTY AND EQUIPMENT1,192,347 1,434,228 
DEFERRED CHARGES AND OTHER LONG-TERM ASSETS5,748 8,689 
TOTAL ASSETS$1,260,016 $1,545,208 
LIABILITIES, MEZZANINE EQUITY, AND EQUITY 
CURRENT LIABILITIES 
Accounts payable$3,537 $5,309 
Accrued liabilities12,476 22,702 
Commodity derivative liabilities3,662 159 
Other current liabilities1,623 1,633 
TOTAL CURRENT LIABILITIES21,298 29,803 
LONG–TERM LIABILITIES 
Credit facility147,000 394,000 
Accrued incentive compensation668 2,110 
Commodity derivative liabilities6,729 18 
Asset retirement obligations16,972 15,653 
Other long-term liabilities4,355 6,820 
TOTAL LIABILITIES197,022 448,404 
COMMITMENTS AND CONTINGENCIES (Note 7)
MEZZANINE EQUITY  
Partners' equity – Series B cumulative convertible preferred units, 14,711 units outstanding at September 30, 2020 and December 31, 2019
298,361 298,361 
EQUITY 
Partners' equity – general partner interest  
Partners' equity – common units, 206,738 and 205,960 units outstanding at September 30, 2020 and December 31, 2019, respectively
764,633 798,443 
TOTAL EQUITY764,633 798,443 
TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY$1,260,016 $1,545,208 
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,
 2020201920202019
REVENUE  
Oil and condensate sales$34,335 $68,255 $111,845 $200,031 
Natural gas and natural gas liquids sales29,107 41,340 96,060 156,622 
Lease bonus and other income1,386 3,484 7,669 15,846 
Revenue from contracts with customers64,828 113,079 215,574 372,499 
Gain (loss) on commodity derivative instruments(21,086)24,290 49,751 12,294 
TOTAL REVENUE43,742 137,369 265,325 384,793 
OPERATING (INCOME) EXPENSE  
Lease operating expense3,160 4,356 10,280 13,497 
Production costs and ad valorem taxes9,905 15,877 31,836 44,919 
Exploration expense4 64 28 372 
Depreciation, depletion, and amortization19,823 27,375 62,198 84,933 
Impairment of oil and natural gas properties  51,031  
General and administrative9,381 14,189 32,738 49,750 
Accretion of asset retirement obligations286 275 836 829 
(Gain) loss on sale of assets, net(24,045) (24,045) 
TOTAL OPERATING EXPENSE18,514 62,136 164,902 194,300 
INCOME (LOSS) FROM OPERATIONS25,228 75,233 100,423 190,493 
OTHER INCOME (EXPENSE) 
Interest and investment income1 44 35 137 
Interest expense(1,664)(5,395)(9,055)(16,572)
Other income (expense)168 365 71 293 
TOTAL OTHER EXPENSE(1,495)(4,986)(8,949)(16,142)
NET INCOME (LOSS)23,733 70,247 91,474 174,351 
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 AND SUBORDINATED UNITS$18,483 $64,997 $75,724 $158,601 
ALLOCATION OF NET INCOME (LOSS):   
General partner interest$ $ $ $ 
Common units18,483 64,997 75,724 134,608 
Subordinated units   23,993 
 $18,483 $64,997 $75,724 $158,601 
NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON AND SUBORDINATED UNIT:  
Per common unit (basic)$0.09 $0.32 $0.37 $0.87 
Weighted average common units outstanding (basic)206,732 205,957 206,690 155,513 
Per subordinated unit (basic)$ $ $ $0.48 
Weighted average subordinated units outstanding (basic)   50,458 
Per common unit (diluted)$0.09 $0.32 $0.37 $0.87 
Weighted average common units outstanding (diluted)206,732 205,957 206,690 155,513 
Per subordinated unit (diluted)$ $ $ $0.48 
Weighted average subordinated units outstanding (diluted)   50,458 
 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, 2019205,960 $798,443 $798,443 
Repurchases of common units(503)(5,029)(5,029)
Restricted units granted, net of forfeitures1,238 — — 
Equity–based compensation— 1,159 1,159 
Distributions— (61,641)(61,641)
Charges to partners' equity for accrued distribution equivalent rights— (68)(68)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 76,112 76,112 
BALANCE AT MARCH 31, 2020206,695 $803,726 $803,726 
Repurchases of common units (6)(6)
Restricted units granted, net of forfeitures14 — — 
Equity–based compensation— 2,292 2,292 
Distributions— (16,679)(16,679)
Charges to partners' equity for accrued distribution equivalent rights— (31)(31)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— (8,371)(8,371)
BALANCE AT JUNE 30, 2020206,709 $775,681 $775,681 
Restricted units granted, net of forfeitures29 — — 
Equity–based compensation— 1,613 1,613 
Distributions— (31,011)(31,011)
Charges to partners' equity for accrued distribution equivalent rights— (133)(133)
Distributions on Series B cumulative convertible preferred units— (5,250)(5,250)
Net income (loss)— 23,733 23,733 
BALANCE AT SEPTEMBER 30, 2020206,738 $764,633 $764,633 
 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 unitsSubordinated unitsPartners' equity — common unitsPartners' equity — subordinated unitsTotal equity
BALANCE AT DECEMBER 31, 2018108,363 96,329 $714,823 $189,440 $904,263 
Repurchases of common units(588)— (10,110)— (10,110)
Issuance of common units, net of offering costs— — (43)— (43)
Issuance of common units for property acquisitions57 — 943 — 943 
Restricted units granted, net of forfeitures1,545 — — — — 
Equity–based compensation— — 13,669 — 13,669 
Distributions— — (40,275)(35,642)(75,917)
Charges to partners' equity for accrued distribution equivalent rights— — (1,044)— (1,044)
Distributions on Series B cumulative convertible preferred units— — (5,250)— (5,250)
Net income (loss)— — 7,155 1,862 9,017 
BALANCE AT MARCH 31, 2019109,377 96,329 $679,868 $155,660 $835,528 
Conversion of subordinated units96,329 (96,329)142,149 (142,149) 
Repurchases of common units(377)— (6,164)— (6,164)
Restricted units granted, net of forfeitures627 — — — — 
Equity–based compensation— — 3,332 — 3,332 
Distributions— — (40,471)(35,642)(76,113)
Charges to partners' equity for accrued distribution equivalent rights— — (766)— (766)
Distributions on Series B cumulative convertible preferred units— — (5,250)— (5,250)
Net income (loss)— — 72,956 22,131 95,087 
BALANCE AT JUNE 30, 2019205,956  $845,654 $ $845,654 
Restricted units granted, net of forfeitures(4)— — — — 
Equity–based compensation— — 3,385  3,385 
Distributions— — (76,204) (76,204)
Charges to partners' equity for accrued distribution equivalent rights— — (511)— (511)
Distributions on Series B cumulative convertible preferred units— — (5,250)— (5,250)
Net income (loss)— — 70,247  70,247 
BALANCE AT SEPTEMBER 30, 2019205,952  $837,321 $ $837,321 
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,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income (loss)$91,474 $174,351 
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Depreciation, depletion, and amortization62,198 84,933 
Impairment of oil and natural gas properties51,031  
Accretion of asset retirement obligations836 829 
Amortization of deferred charges781 779 
(Gain) loss on commodity derivative instruments(49,751)(12,294)
Net cash (paid) received on settlement of commodity derivative instruments66,794 18,320 
Equity-based compensation1,405 16,906 
Exploratory dry hole expense 3 
(Gain) loss on sale of assets, net(24,045) 
Changes in operating assets and liabilities:
Accounts receivable29,844 28,454 
Prepaid expenses and other current assets(630)(471)
Accounts payable, accrued liabilities, and other(8,353)(5,172)
Settlement of asset retirement obligations(170)(328)
NET CASH PROVIDED BY OPERATING ACTIVITIES221,414 306,310 
CASH FLOWS FROM INVESTING ACTIVITIES  
Acquisitions of oil and natural gas properties(28)(42,969)
Additions to oil and natural gas properties(4,223)(63,606)
Additions to oil and natural gas properties leasehold costs(782)(933)
Purchases of other property and equipment(15)(2,452)
Proceeds from the sale of oil and natural gas properties151,513 550 
Proceeds from farmouts of oil and natural gas properties4,175 60,577 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES150,640 (48,833)
CASH FLOWS FROM FINANCING ACTIVITIES  
Proceeds from issuance of common units, net of offering costs (43)
Distributions to common and subordinated unitholders(109,331)(228,234)
Distributions to Series B cumulative convertible preferred unitholders(15,750)(15,750)
Distribution equivalents paid (2,982)
Repurchases of common units(5,035)(16,916)
Borrowings under credit facility124,000 252,500 
Repayments under credit facility(371,000)(249,500)
NET CASH USED IN FINANCING ACTIVITIES(377,116)(260,925)
NET CHANGE IN CASH AND CASH EQUIVALENTS(5,062)(3,448)
CASH AND CASH EQUIVALENTS – beginning of the period8,119 5,414 
CASH AND CASH EQUIVALENTS – end of the period$3,057 $1,966 
SUPPLEMENTAL DISCLOSURE  
Interest paid$8,371 $15,854 
 The accompanying notes are an integral part of these unaudited consolidated financial statements.
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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 nine months ended September 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.
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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 nine months ended September 30, 2020.
Accounts Receivable

The following table presents information about the Partnership's accounts receivable:
September 30, 2020December 31, 2019
(in thousands)
Accounts receivable:
Revenues from contracts with customers$41,627 $71,022 
Other6,870 7,192 
Total accounts receivable$48,497 $78,214 
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.
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - OIL AND NATURAL GAS PROPERTIES    
Divestitures
In the third quarter of 2020, the Partnership closed two separate divestitures of certain mineral and royalty properties in the Permian Basin for total proceeds, after closing adjustments, of $150.2 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 for net proceeds of approximately $54.5 million. 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 for net proceeds of approximately $95.7 million. The total book value of the assets divested through these transactions was $126.2 million at the time of sale. The Partnership recognized a $24.0 million gain associated with the divestitures included in the (Gain) loss on sale of assets, net line item of the consolidated statement of operations for the three and nine months ended September 30, 2020.
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 nine months ended September 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 AcquiredConsideration Paid
ProvedUnprovedNet Working CapitalTotal Fair ValueCash
(in thousands)
February$173 $8,437 $1 $8,611 $8,611 
March24   24 24 
June527 3,268  3,795 3,795 
Total fair value$724 $11,705 $1 $12,430 $12,430 
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.
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Canaan Farmout
In February 2017, the Partnership 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. During the first three phases of the farmout 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 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.
Canaan has participated in a total of 37 wells under the farmout agreement through September 30, 2020 covering two election phases. In 2019, XTO Energy Inc. suspended its development activities in the area due to low natural gas prices. Canaan has the right to elect to continue its participation in a third phase covering up to 20 future wells drilled under the farmout agreement should XTO Energy Inc. resume drilling activity.
Pivotal Farmout
In November 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 September 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 began in the third quarter of 2020, increasing to a minimum of 15 wells per year beginning with the third program year. The Partnership expects to enter into a new farmout agreement with Pivotal to incorporate the Aethon development agreement on similar terms as in the original Pivotal farmout agreement.
From the inception of the farmout agreements through September 30, 2020, the Partnership has received $90.3 million and $119.2 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 September 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
9


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

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 September 30, 2020 and $51.0 million of impairment of oil and natural gas properties for the nine months ended September 30, 2020. No impairment of oil and natural gas properties was recognized during 2019. 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. 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, 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 September 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 September 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.
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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, 2020
ClassificationBalance Sheet LocationGross
Fair Value
Effect of Counterparty NettingNet Carrying Value on Balance Sheet
  (in thousands)
Assets:
    
Current asset
Commodity derivative assets$19,935 $(11,366)$8,569 
Long-term asset
Deferred charges and other long-term assets   
 Total assets
 $19,935 $(11,366)$8,569 
Liabilities:
    
Current liability
Commodity derivative liabilities$15,028 $(11,366)$3,662 
Long-term liability
Commodity derivative liabilities6,729  6,729 
Total liabilities
 $21,757 $(11,366)$10,391 

December 31, 2019
ClassificationBalance Sheet LocationGross
Fair Value
Effect of Counterparty NettingNet Carrying Value on Balance Sheet
  (in thousands)
Assets:
    
Current asset
Commodity derivative assets$19,028 $(4,238)$14,790 
Long-term asset
Deferred charges and other long-term assets713 (105)608 
 Total assets
 $19,741 $(4,343)$15,398 
Liabilities:
    
Current liability
Commodity derivative liabilities$4,397 $(4,238)$159 
Long-term liability
Commodity derivative liabilities123 (105)18 
Total liabilities
 $4,520 $(4,343)$177 
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 instruments2020201920202019
(in thousands)
Beginning fair value of commodity derivative instruments$40,552 $31,368 $15,221 $48,038 
Gain (loss) on oil derivative instruments(5,864)18,132 50,300 (13,224)
Gain (loss) on natural gas derivative instruments(15,222)6,158 (549)25,518 
Net cash paid (received) on settlements of oil derivative instruments(13,954)(2,938)(42,270)(5,748)
Net cash paid (received) on settlements of natural gas derivative instruments(7,334)(10,708)(24,524)(12,572)
Net change in fair value of commodity derivative instruments(42,374)10,644 (17,043)(6,026)
Ending fair value of commodity derivative instruments$(1,822)$42,012 $(1,822)$42,012 
11


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

The Partnership had the following open derivative contracts for oil as of September 30, 2020:
 Weighted Average Price (Per Bbl)Range (Per Bbl)
Period and Type of ContractVolume (Bbl)LowHigh
Oil Swap Contracts:    
2020    
Third Quarter210,000 $57.32 $54.92 $58.65 
Fourth Quarter630,000 57.32 54.92 58.65 
2021
First Quarter480,000 $36.18 $32.64 $37.92 
Second Quarter480,000 36.18 32.64 37.92 
Third Quarter480,000 36.18 32.64 37.92 
Fourth Quarter480,000 36.18 32.64 37.92 

Weighted Average
Floor Price (Per Bbl)
Weighted Average
Ceiling Price (Per Bbl)
Period and Type of ContractVolume (Bbl)
Oil Collar Contracts:
2020
Third Quarter70,000 $56.43 $67.14 
Fourth Quarter210,000 56.43 67.14 
The Partnership had the following open derivative contracts for natural gas as of September 30, 2020:
 Weighted Average Price (Per MMBtu)Range (Per MMBtu)
Period and Type of ContractVolume (MMBtu)LowHigh
Natural Gas Swap Contracts:    
2020    
Fourth Quarter10,120,000 $2.69 $2.55 $2.74 
2021
First Quarter9,000,000 $2.65 $2.52 $2.85 
Second Quarter9,100,000 2.65 2.52 2.85 
Third Quarter9,200,000 2.65 2.52 2.85 
Fourth Quarter9,200,000 2.65 2.52 2.85 
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BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Partnership entered into the following derivative contracts for natural gas subsequent to September 30, 2020:
 Weighted Average Price (Per MMBtu)Range (Per MMBtu)
Period and Type of ContractVolume (MMBtu)LowHigh
Natural Gas Swap Contracts:    
2021
First Quarter900,000 $3.08 $3.08 $3.08 
Second Quarter910,000 3.08 3.08 3.08 
Third Quarter920,000 3.08 3.08 3.08 
Fourth Quarter920,000 3.08 3.08 3.08 

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 asse