Black Stone Minerals - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered stable operations: mineral & royalty production rose 5% QoQ to 34.7 MBoe/d; total production was 36.3 MBoe/d, with oil & gas revenue $100.2M, net income $91.7M, Adjusted EBITDA $86.3M, and DCF $76.8M.
• EPS modestly beat S&P Global consensus, while revenue missed: $0.40 actual vs $0.29 consensus EPS (beat), and $100.2M revenue vs $104.0M consensus (miss) (consensus values marked with asterisks).
• Distribution held at $0.30/unit (1.21x coverage); leverage improved post-quarter with debt reduced to $73M by Oct 31; maturity of the revolver extended to 2030 and $580M borrowing base reaffirmed.
• Narrative pivot: near-term volumes aided by Permian oil strength; multi-year gas growth underpinned by Shelby Trough/Western Haynesville development agreements; 2025 production guidance maintained at 33–35 MBoe/d from the call.

What Went Well and What Went Wrong

What Went Well

• Production mix/volumes: Mineral & royalty volumes rose 5% QoQ to 34.7 MBoe/d; total production 36.3 MBoe/d, supported by strong Permian oil volumes.
• Cash generation and coverage: Adjusted EBITDA was $86.3M and DCF $76.8M; distribution of $0.30/unit equated to 1.21x coverage—excess cash helped fund acquisitions and preserve balance sheet flexibility.
• Balance sheet/liquidity: Credit facility maturity extended to 2030; borrowing base reaffirmed at $580M; debt fell from $95M at 9/30 to $73M by 10/31.

Management quotes:

• “We had a successful third quarter… mineral and royalty production of 34,700 BOE per day, an increase of 5% over the prior quarter… Distributable cash flow… 1.21x coverage…”.
• “The partnership's outlook remains strong, anchored by long term contract development in our high interest Shelby Trough acreage…”.

What Went Wrong

• Revenue softness vs expectations: Oil & gas revenue declined 2% QoQ to $100.2M and missed S&P Global consensus (~$104.0M), despite higher volumes, reflecting lower realized prices QoQ ($30.01/boe vs $32.40 in Q2).
• Price headwinds: Average realized price/boe fell 7% QoQ (to $30.01), pressuring oil & gas revenue despite derivative gains.
• Continued reliance on non-GAAP tailwinds: Commodity derivative gains were $27.3M (incl. $20.4M unrealized), a step down from Q2’s $52.8M gain; non-cash hedge swings complicate earnings comparability.

Transcript

Operator (participant)

Thank you for standing by. My name is Van, and I will be your conference operator today. At this time, I would like to welcome everyone to Black Stone Minerals' third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker 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, press star one again. Thank you. I will now turn the call over to Mark Meaux, Director of Finance. You may now begin, sir.

Mark Meaux (Director of Finance)

Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals' third 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 Factor 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 those 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 and Treasurer; Steve Putman, Senior Vice President and General Counsel; Fowler Carter, Senior Vice President, Corporate Development; and Chris Bonner, Vice President, Chief Accounting Officer. I'll now turn the call over to Tom.

Tom Carter (President, CEO, and Chairman)

Thank you very much, Mark. Good morning, and thank you all for joining us on the third quarter earnings call. Before we discuss our financial and operating results, I'd like to congratulate Fowler Carter, Taylor DeWalch, and Chris Bonner on their announced upcoming promotions. I'm excited for and confident in their leadership as we look to the continued growth and success of Black Stone for many years to come. I'm looking forward to my new role as Executive Chair as well and will continue to provide strategic guidance to the management and lead the board. Thank you to all of our employees who continue to work very hard day in and day out to drive Black Stone's success and position us for an exciting future. We continue to pursue acquisitions through the Haynesville expansion around Shelby Trough, and we're looking forward to Revenant's development getting underway in early 2026.

We also continue to work towards solidifying another development agreement covering 220,000 gross acres in between Aethon's development in the Shelby Trough and Expand's development in the Western Haynesville. Unscripted, I also add we are working on yet another package that we hope to assemble and market in the not-too-distant future. The recently announced Expand Energy horizontal well and successful pilot well, in addition to the ongoing development throughout the Western Haynesville, provide even further confidence in the Haynesville expansion play and long runway of inventory. As mentioned previously, we expect these development agreements to ultimately drive over 50 wells drilled in the expanded Shelby Trough per year, providing significant gas growth for the partnership and a constructive outlook for demand in the region, and this is in conjunction with ongoing great opportunities coming up in other areas in our properties.

We remain focused on this significant growth opportunity that results in the increasing production and distribution outlook for years ahead. With that, I'll hand it over to Fowler to walk through the operational updates.

Fowler Carter (SVP of Corporate Development)

Thank you, Tom, Dad, and good morning to everyone. During the quarter, we progressed our commercial initiatives across the expanded Shelby Trough, including working with Revenant Energy on their inaugural development program beginning early next year. Our marketing efforts on an additional 220,000 gross acres are progressing well with a framework agreement that would add the equivalent of 12 additional wells annually to our acreage by 2030. We expect these new developments, coupled with our existing agreements, to more than double the current annual drilling rate in the expanded Shelby Trough in the next five years. There is also the opportunity for our operating partners to exceed their annual well commitments, and we are excited about the multiple decades of development inventory in this play. Our grass-roots acquisition program also continues to progress well.

We added $20 million in mineral and royalty acquisitions during the quarter, bringing our total acquisitions since September 2023 to roughly $193 million. We have line of sight to additional accretive acquisition opportunities in the near term, which we expect to enhance our existing asset position in the Shelby Trough and to add long-term value for our unit holders. While 2025 development activity has slowed across the U.S., we are optimistic looking ahead to 2026, given our existing and pending development agreements across our high-interest acreage in the Shelby Trough. Turning to the Permian, the large project we're monitoring remains on track to add meaningful oil volumes to our production base. We are also tracking several new projects on our high-interest acreage that are expected to add additional liquids volumes in the next 12 to 18 months.

We believe that these projects, in addition to our agreements in the Shelby Trough, provide Black Stone a path to increase production and, in turn, higher distributions. With all of that, I'll turn it over to Taylor to walk through the financial details of the quarter.

Taylor DeWalch (SVP and CFO)

Thanks, Fowler. And good morning, everyone. We had a successful third quarter with mineral and royalty production of 34,700 BOE per day, an increase of 5% over the prior quarter. The increase in production quarter-over-quarter was driven by strong volumes in the Permian Basin. Total production volumes were 36,300 BOE per day. While we currently sit near the high end of the range, production guidance for 2025 is unchanged at 33,000-35,000 BOE per day. We continue to monitor activity levels and commodity price dynamics as we look towards the fourth quarter of 2025 and full year 2026 production and distributions. Net income was $91.7 million for the third quarter, with Adjusted EBITDA at $86.3 million. 57% of oil and gas revenue in the quarter came from oil and condensate production.

As previously announced, 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 $76.8 million, which represents 1.21x coverage for the period. The excess coverage was used to partially fund acquisitions and maintain a solid financial and leverage position. As Tom mentioned earlier, the partnership's outlook remains strong, anchored by long-term contract development in our high-interest Shelby Trough acreage, as well as our core legacy assets across the U.S. In addition, with increasing demand from LNG and power, the outlook for natural gas is increasingly constructive over the next decade. With significant assets in close proximity to LNG facilities, Black Stone is in a prime position to benefit from the looming call on gas supply.

In conclusion, we had a solid quarter bolstered by strong oil volumes from our Permian assets, which ultimately produced robust coverage of the announced distribution. Going forward, we remain confident that our existing acreage positions, coupled with our commercial strategy in the expanded Shelby Trough, will provide a strong foundation to deliver sustainable long-term value for unit holders. With that, we'd like to open the call for questions.

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Our first question comes from the line of John Annis from Texas Capital. Please go ahead.

John Annis (VP of Equity Research)

Hey, good morning all, and congratulations to everyone on their new roles.

Taylor DeWalch (SVP and CFO)

Thanks, John.

John Annis (VP of Equity Research)

For my first question, on the acres currently being marketed in the KLX area, I think on the September update call, you mentioned that you were on the one-yard line with getting a deal across. I was hoping if you could provide a quick update on where those discussions currently sit. And secondly, if you've seen any increased interest in potential commitments to the development following Expand's entry into the Western Haynesville. And then maybe just building off of Tom's remark that you're also working on assembling another package, is there any additional color that you could share at this time?

Fowler Carter (SVP of Corporate Development)

Well, I'll start with the one-yard line comment. We were at the one-yard line, and now we're at the half-yard line. So it's progressed, and we expect to hopefully have that wrapped up here in the next couple of weeks. But we'll let y'all know how that goes, and we'll announce that information accordingly. Remind me your second part of your question before we go on to the expanded area that Dad mentioned.

John Annis (VP of Equity Research)

Yeah, just if you've been seeing any increased interest in potential commitments just following Expand's announcement. In their entry into the Western Haynesville.

Fowler Carter (SVP of Corporate Development)

We'd say interest remains robust across this whole area, and increased commitment. You know what I'm comfortable saying about that is that our operating partners have the ability to flex up above and beyond their minimum annual commitments, and so you can certainly see some relative outperformance there.

John Annis (VP of Equity Research)

Terrific. Is there any color that you could offer on the package that you're working on assembling that you mentioned in the prepared remarks?

Fowler Carter (SVP of Corporate Development)

I'm going to let Dad take that one because he's real excited about it.

Tom Carter (President, CEO, and Chairman)

You know, if you look at the Shelby Trough in the Western Haynesville and now the Expand well, the Yancey well, which is about 20%-30% further to the east than any of the wells that have been drilled so far, moving back into almost north central Houston County. And then you go into Trinity County, Cherokee County, Angelina County, Polk County, Tyler County, San Augustine County, Sabine County. There is so much inventory potential out there that really hasn't even been scratched yet. And folks keep putting blocks together, and we've done a lot of homework on the subsurface all the way across to the Western Haynesville. And everything that keeps happening thus far has been positive to more positive than what one could expect.

We see some very, very interesting geologic things happening as you move further west from the traditional Shelby Trough, where there is significant expansion between the base of the Knowles Lime and the top of the Cotton Valley. If I'm saying that.

Fowler Carter (SVP of Corporate Development)

Smackover.

Tom Carter (President, CEO, and Chairman)

Smackover. Excuse me. Cotton Valley also, but Smackover. And that phenomenon is what's been driving moving eastward into the Western Haynesville, so I think I said this last time, these packages of shale that are commercial are thicker in that expanded area, and we have existing acreage that we think is deeper than the traditional work that's been done in the Shelby Trough, but that is not inconsistent with what's been going on in the Western Haynesville, and it's in our inventory, and we're working it hard and looking forward to taking it out to capital development in the future.

John Annis (VP of Equity Research)

I appreciate all the color. For my follow-up, with the strong volume growth this quarter, how should we think about volumes trending in the fourth quarter and into 2026 with the wells that are expected to be turned in line from Aethon and the Permian development project? And then maybe more broadly, just how would you compare what you're seeing in terms of gas-directed activity across your acreage relative to earlier in the year?

Taylor DeWalch (SVP and CFO)

Yeah, thanks, John. So like I said in my prepared remarks, I mean, we didn't update for your guidance at this point. So we're still being pretty thoughtful about the activity that's going on across our assets, whether it's Aethon or larger developments out in the Permian. I'd say where we start to get excited is to see Aethon volumes coming online and then kind of throughout the fourth quarter into the beginning of next year, along with the large development in the Permian, which is Coterra, and seeing their wells start to come online recently, but more completely as we think about kind of the beginning of next year. So overall, I think it's going to be an interesting several months, kind of winter season, to watch activity levels, especially in the natural gas-focused basins, and to see how that plays into full year 2026 volumes.

Tom Carter (President, CEO, and Chairman)

I would add also, recently, we put out a multi-year forecast, which is somewhat unusual for a publicly traded company. I would just encourage the marketplace to not focus so much on the next six to 12 months, but to focus on the next five years, because, as I said earlier, this is a massive reservoir. It takes time to spool it up and evaluate it and spool it up. We really are excited about the slow, methodic, thoughtful early stages of some of these new transactions that we've done. Every one of those, with success, will grow in well counts by two- to three-fold, as well as layering new projects in there. So when you talk about share value and share activity, that's a real good question because I don't know how much the average person wants to get out in front of the market.

If what we're seeing is valid, and as I said before, if the natural gas markets are as everybody seems to think they're going to be, i.e., less volatile and more secure in the future, the time to buy our shares is now, not two years from now.

John Annis (VP of Equity Research)

Terrific. Thanks for the time.

Tom Carter (President, CEO, and Chairman)

Thanks, John.

Operator (participant)

Our next question comes from the line of Tim Rezvan from KeyBanc Capital Markets. Please go ahead.

Tim Rezvan (Managing Director of Equity Research)

Good morning, folks. Congrats to everybody on the new roles and Tom on your transition. Some of my questions were addressed by the prior analysts, but I wanted to ask. You mentioned more Permian production coming. As a two-stream reporter, we've noticed that your natural gas differentials have weakened. I'm guessing that's due to exposure to Waha. And as you think about, I know the Haynesville is sort of the longer-term story, but a lot of producers are getting beaten up by the challenges at Waha that may not resolve until 2027. So can you talk about anything you're doing? I know you've been playing vanilla hedges in the past. Do you intend to just sort of ride this out, or is there anything you can do because gas is still over 70% of your production? Just curious on that.

Taylor DeWalch (SVP and CFO)

Yeah, thanks, Tim. This is Taylor. I'd say, like you said, I mean, our hedging strategy remains consistent, the way that we've been thinking about it. And I think when you think about our natural gas volumes, so much of that is coming from the Haynesville and from the Shelby Trough. Where we've got good exposure to Henry Hub, I think, relative to, as you mentioned, kind of some of the dynamics that are going on with Waha and the Permian. And I think when we think about Waha and we think about just general Permian production. Really what gets us excited is to see the ongoing development on high-interest acreage and then ongoing development across the full suite of assets. Because as we touched on in the investor presentation in September. We're really well aligned with the top operators in the Permian.

And so we continue to see robust activity from those folks. And then also just going back to some of these a little bit more bespoke high-interest developments that we have in the Permian, so excited to see those volumes come online. So overall, continuing to maintain our consistent strategy as we're thinking about pricing and activity levels.

Tim Rezvan (Managing Director of Equity Research)

Okay. So from a modeling perspective, do you think that on a two-stream basis, being at a discount to benchmark Henry Hub, is that going to be the reality over the next year if Waha sort of stays where it is? That's what I'm trying to get at.

Taylor DeWalch (SVP and CFO)

Yeah. I mean. Like I said, that's what we're thinking about it, and that's why we've got a robust hedge strategy.

Tim Rezvan (Managing Director of Equity Research)

Okay. Okay. I'll leave it there. Thank you.

Taylor DeWalch (SVP and CFO)

Thanks.