Black Stone Minerals - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 was operationally soft on volumes but financially strong on GAAP due to a sizable unrealized hedge gain; oil & gas revenue fell 6% sequentially to $102.0M while net income surged to $120.0M on a $52.8M derivative gain.
• The Partnership cut the quarterly distribution 20% to $0.30, citing slower-than-expected gas-weighted activity; coverage rose to ~1.18x, with total debt reduced to $71.0M by August 1 on stronger cash generation.
• 2025 total production guidance was lowered to 33–35 MBoe/d from 38–41 MBoe/d, reflecting delayed gas activity, but management sees a multi-year ramp from new Shelby Trough development agreements and expects production to grow in 2026 with potential to surpass prior distribution highs over the next six years.
• Versus S&P Global consensus, Q2 revenue and EPS missed: revenue $102.0M vs $112.6M and Primary EPS 0.2794* vs 0.325; the miss was driven by lower volumes despite supportive commodity prices; EBITDA was broadly in line depending on definition (company Adjusted EBITDA $84.2M).
• Near-term stock narrative hinges on the lowered 2025 guide and distribution cut vs the structural growth story from Revenant and marketed acreage that more than doubles development obligations over five years; Investor Day in September is a potential catalyst.

What Went Well and What Went Wrong

What Went Well

• Hedge mark-to-market drove GAAP strength: $52.8M derivative gain (including $49.6M unrealized), lifting net income to $120.0M from $15.9M in Q1.
• Adjusted EBITDA held resilient at $84.2M despite lower volumes and realized prices, essentially flat sequentially (+2% q/q).
• Strategic positioning in Shelby Trough expanded: Revenant agreement covering ~270,000 gross acres with obligations ramping from 6 wells in 2026 to 25 per year over five years; additional ~180,000 gross acres being marketed to push west toward Western Haynesville.
• “Through these new areas and the existing Shelby Trough agreements, we see contractual development obligations more than doubling over the next five years.” — Thomas L. Carter, Jr..

What Went Wrong

• Volumes slipped: mineral & royalty production fell to 33.2 MBoe/d (−3% q/q, −13% y/y); total production 34.6 MBoe/d (−3% q/q, −14% y/y).
• Distribution cut: $0.30 per unit (−20% q/q) as slower gas-weighted activity and delayed ramps pressured near-term cash generation; coverage improved to ~1.18x.
• 2025 guide reset: total production guidance lowered to 33–35 MBoe/d (from 38–41); management cited Aethon cadence changes and timing to spool multiple operators and infrastructure before ramping activity.

Transcript

Speaker 5

Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Black Stone Minerals second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star and one. I would now like to turn the call over to Mark Meaux, Director of Finance. You may begin.

Speaker 3

Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals second quarter 2025 earnings conference call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night. Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations, and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday and the risk factors section of our 2024 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.

Reconciliation of these measures to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at www.blackstoneminerals.com. Joining me on the call from the company are Tom Carter, Chairman, CEO and President, Taylor DeWalch, Senior Vice President, Chief Financial Officer, Steve Putman, Senior Vice President and General Counsel, Valar Carter, Senior Vice President, Corporate Development, and Chris Bonner, Vice President and Chief Accounting Officer. I'll now turn the call over to Tom.

Speaker 0

Thank you, Mark. Good morning and thanks to all for joining our quarterly earnings call. Before we discuss results for the second quarter, I'd like to highlight the excellent work done by the team over the last two years, which ultimately has led to the recent announced development agreement with Revenant Energy, as well as ongoing marketing efforts in the Shelby Trough. Through our subsurface evaluation, we've determined that the substantial expansion of the Shelby Trough and extension towards the Western Haynesville. We're excited for Revenant Energy to begin development, and we're actively marketing an additional 180,000 gross acre area to well-known and well-capitalized operators. These new developments, coupled with our existing agreements, are expected to more than double our drilling obligations in the area over the next five years, providing significant natural gas growth for the partnership amid a strong demand outlook in the region.

Our grassroots acquisition program supporting these expansion areas also continues to progress well. We've added $31 million in mineral and royalty acquisitions during the quarter, bringing our total acquisitions since September of 2023 to about $172 million. During the second half of 2025, we're confident that we will continue to identify and execute on accretive opportunities, which enhance our existing asset position and add long-term value for our shareholders. We previously announced a distribution of $0.30 per unit for the quarter. The reduction was driven by slower natural gas production growth in 2025, primarily in the Haynesville boulder. However, we have line of sight to production growth in 2026 and beyond through our various development agreements and high-interest activity growth, as outlined in our earnings release. Ultimately, our expectation for increased activity, combined with strong demand outlook, provides a clear path to future distribution increases.

We remain encouraged about the outlook for the partnership. Maintaining a clean balance sheet and ample liquidity enables us to continue our commercial strategy, including targeted grassroots acquisitions and working with operators to achieve full field development across our assets. The outlook for natural gas is constructive, reinforced by growing global demand for LNG. In addition, our robust oil portfolio across multiple basins provides a solid foundation for the long term as well. With that, I'll turn it over to Taylor to walk through the financial details of the quarter.

Speaker 2

Thanks, Tom. Good morning, everyone. Mineral royalty production was 33,200 BOE per day in the second quarter, and total production volumes were 34,600 BOE per day. Net income was $120 million for the second quarter, with adjusted EBITDA coming in at $84.2 million. 55% of oil and gas revenue in the quarter came from oil and condensate production. As mentioned previously, we declared a distribution of $0.30 per unit for the quarter, or $1.20 on an annualized basis. Distributable cash flow for the quarter was $74.8 million, which represents 1.18 times coverage for the period. In conjunction with the earnings release, we provided revised 2025 production guidance yesterday. As we look at realized production for the first half of 2025, combined with our forecast for the second half of the year, we expect production for the full year to average between 33,000 and 35,000 BOE per day.

Our new guidance reflects slower than expected natural gas production growth, particularly in the Shelby Trough and Haynesville boulder play. However, as Tom mentioned earlier, the outlook for natural gas remains robust, and we remain confident that our diversified asset base, highlighted by our high-interest acreage and development agreements in the expanding Shelby Trough, provides a path to increased production and distributions. Therefore, we forecast production growth in 2026 of an incremental 3,000 to 5,000 BOE per day over 2025 revised guidance. During the quarter, operators continue to actively develop our acreage through existing agreements and the accelerated drilling agreements. Additionally, the large project we're monitoring in the Permian Basin by Cotera remains on track to add meaningful oil volumes to our production base.

These projects, in addition to our agreement with Revenant Energy and the expanded Shelby Trough, provide Black Stone Minerals a pathway to increased production, ultimately enabling us to increase the distribution to its previous high watermark. Although slower gas production growth posed challenges in the first half of the year, we remain confident that our commercial strategy positions us well to deliver sustainable long-term value for our shareholders. With that, I'd like to open the call for questions.

Speaker 5

At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. Your first question comes from the line of John Ennis with Texas Capital. Your line is open.

Good morning all, and thanks for taking my questions. For my first one, we have been surprised as well by the subdued activity response in the first half to higher natural gas prices. With the recent pickup in gas-directed rigs, I wanted to ask if you could provide any color on any green shoots you're seeing in terms of activity increasing on your acreage and how you see this and the Revenant Energy agreement starting in 2026 and the Permian development coming online, setting up the production trajectory next year.

Speaker 2

Sure, John. Thanks for the question. I think overall, we are seeing the same thing a lot of folks are seeing with some subdued activity. I think some of that's probably born from the response we saw in 2024 versus 2025. Of course, across the Haynesville and Bossier, we've seen some wells coming online, kind of spread out throughout the basin. I think for us, we're most focused on the activity and the development agreements that we called out in our earnings release and talked about on the call a little bit earlier.

We're excited to see Revenant Energy get to work with their first wells being spud, likely at the beginning of 2026, and those six wells that they're obligated to drill throughout 2026, as well as the ongoing activity from some of the other operators that we mentioned throughout the Shelby Trough, and also our agreements on some of the other acreage that we have line of sight to throughout the Haynesville and the Bossier. Excited about the activity that we see here in the coming quarters, and more to come from that.

Terrific. For my follow-up, I wanted to dig into your comments in the release on the subsurface work you've done to delineate new areas in the Shelby Trough. How does the geology compare to your understanding of what the Western Haynesville is today, just in terms of depths, temperatures, and EURs?

Yeah, thanks, John. That's a great question. As Tom mentioned, the team has spent the last couple of years really digging into how the Shelby Trough expands outside of some of our existing development areas. We're getting excited about the real potential of that play to further expand all around the Shelby Trough, as well as westward towards the Western Haynesville. We do see some analogous subsurface characteristics as we think about the western part of the Shelby Trough and how that connects to some of the things that we're seeing going on in the Western Haynesville. The formations are getting thicker, they are getting a bit deeper, but in the Shelby Trough, we have quite a few different places for development at different depths and different temperatures.

I think what we're most excited about is to see both the increasing productivity and EURs in the Western Haynesville, as well as the operational efficiencies and results that are being gained in the Western Haynesville, and how that can tie to further development of the Shelby Trough as we think about developing this expanded region within the area.

Speaker 0

I'd like to add to that just a little industry color. In some of the work that we're doing, talking with capital providers and operators in this area of what I would call the Western Shelby Trough, going towards the eastern part of the Western Haynesville, sorry for all the geographic directions there, but people are moving the Western Haynesville to the east, and there's been activity out there and a lot of buying of acreage. Our efforts have been moving the Shelby Trough to the west, and we're seeing a lot of commonality in subsurface. It's really hard to get people on the frontier edges of these things to talk much about what they're seeing in their step-out drilling.

One of the larger operators out there, the other day, we were in a conversation with them, and we made some comments about what we're seeing moving west in the Shelby Trough relative to what they may have been seeing moving east in the Western Haynesville. We were pleased to get a response that was something like this, that they see the comparison of those two areas the same way we do. In other words, that they may bridge across that area and ultimately be one and the same.

I appreciate it. I'll leave it there. Thanks, guys.

Speaker 2

Thanks.

Speaker 5

Your next question comes from the line of Timothy Resvin with KeyBanc Capital Markets. Your line is open.

Good morning, folks. Thank you for taking my question. I wanted to take a little different tact on one of the first questions. Tom, you and the team have a pretty unique lens into broader Haynesville activity. We've seen the rig count increase steadily throughout the year. Production is up about over a BCF a day from the recent trough. We're trying to understand how to square that with the kind of updated production guidance, which suggests even potentially another leg down in the back half of the year. Did something change further in your agreement with Aethon Energy? I was wondering if you could help kind of understand why your acreage is not really participating in this uplift we're seeing.

Speaker 0

I'll be glad to answer that. Let's start with late 2023. That was a low stand, a recent low stand in gas prices, and Aethon Energy called for a timeout, which allowed them to slow down their drilling activity. That event takes about 18 to 24 months to show up in production volume declines, and that's what we saw in late 2024 and 2025. We have restructured our agreement with Aethon Energy from mid-20s wells per year to high teens per year. In addition to that, we also carved back some strategically important and close-end development acreage that we have packaged with other acreage and are working to place with another operator.

When you add all these things up from having Aethon Energy as really a primary operator with drilling expectations of around mid-20s per year going to high teens, and then you layer Revenant Energy on top of that with a build-up to 20+ per year, and then you add on top of that another operator coming in with maybe 20 wells per year, it takes time to spool that activity up because you've got infrastructure issues, you've got all sorts of things, and these are projects that take 20+ years to fully develop. We are very excited about, yes, there is a little bit less coming from Aethon Energy, but that's been by design.

We are trying to have four or five active operators out there and a cumulative set of contractually required wells that are well north of the mid-20s that Aethon Energy had a year and a half ago. We are constantly reshuffling and restructuring to add operators and capital and well count out there. We see some really potentially staggering number of wells in 2028, 2029, and 2030. It's just going to take a while for it to build up.

Speaker 2

Yeah. Tim, if I might just add on, when you're looking at the rest of the Haynesville and some of the activity, I might just mention, we've seen some activity pick up, some rigs pick up from some of the private operators in the Haynesville, and then also certainly have seen a number of deferred tills or docks that have come online from Expand. When you just look at where that activity is relative to some of our higher interest acreage, we're going to see some of that activity that comes through from production. Of course, there's always a little bit of a time delay between first production and royalty company receiving that production. It comes back to our high interest acreage and our line of sight to that development to all the things Tom was just speaking to.

Okay. That's very helpful insight. I appreciate that. My follow-up is sort of related to that. With the second acreage position being marketed, you did mention in the release more than doubling the development obligation. You threw out some numbers here. Can you help us sort of understand, in marketing, are you trying to get to kind of a 40 to 50 per year cadence? I'm just trying to get some numbers around kind of how you're thinking about this ramp into the end of the decade. Thanks.

Speaker 0

I'll answer that. The answer is yes, and then some.

Okay. Okay. If I could just make a final one, a housekeeping one, I did see you mentioned potential 2026 production outlook. Should we assume a similar skew to the natural gas skew to that production? I know you've talked a lot about this Cotera ad coming online. Just trying to understand how we can think about the skew. That's all I had. Thank you.

Speaker 2

Yeah. Thanks, Tim. That's a great question. The Cotera volumes are certainly going to help from an oil standpoint, along with just the rest of our kind of oil-weighted activity. I really think that when you look at the rest of 2025 going into 2026, we're probably closer to kind of where we were in 2024 as opposed to where we were in Q1 2025. Probably more like 25% to 26% oil volumes as we're looking out.

Thank you.

Speaker 5

There are no further questions at this time. Tom Carter, I will turn the call back over to you.

Speaker 0

All right. Thank you very much. We really appreciate everyone joining us today for the call. We look forward to speaking with you in the future as we move into these, what we think are pretty exciting forward-looking times. Thank you.

Speaker 5

This does conclude today's conference call. You may now disconnect.