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Edited Transcript of BSM earnings conference call or presentation 7-May-19 2:00pm GMT

Q1 2019 Black Stone Minerals LP Earnings Call

Houston May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Black Stone Minerals LP earnings conference call or presentation Tuesday, May 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Collins

Black Stone Minerals, L.P. - VP of IR

* Brock E. Morris

Black Stone Minerals, L.P. - SVP of Engineering & Geology for Black Stone Minerals GP LLC

* Holbrook F. Dorn

Black Stone Minerals, L.P. - SVP of Business Development - Black Stone Minerals GP, L.L.C.

* Jeffrey P. Wood

Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC

* Thomas L. Carter

Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C

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Conference Call Participants

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* Brent Alexander-Charles Koaches

Raymond James & Associates, Inc., Research Division - Research Associate

* Kashy Oladipo Harrison

Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P

* Philip Stuart

Scotiabank Global Banking and Markets, Research Division - Analyst

* Timothy D. Howard

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. At this time, I would like to welcome everyone to the Q1 2019 Black Stone Minerals Earnings Conference Call. (Operator Instructions)

Thank you. I would now like to turn today's conference over to Mr. Brent Collins, Vice President of Investor Relations. Please go ahead, sir.

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Brent Collins, Black Stone Minerals, L.P. - VP of IR [2]

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Thank you, Shaune, and good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals First Quarter 2019 Earnings Conference Call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued yesterday afternoon.

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 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 10-Q, which will be filed later today.

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 release from yesterday, which can be found on our website at blackstoneminerals.com.

Company officials on the call this morning are Tom Carter, Chairman and CEO; Jeff Wood, President and CFO; Holbrook Dorn, Senior Vice President of Business Development; Brock Morris, Senior Vice President of Engineering and Geology; and Steve Putman, Senior Vice President and General Counsel.

I'll now turn the call over to Tom.

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [3]

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Thanks. Good morning, and thank you for joining us today. Black Stone Minerals had a solid first quarter to begin 2019 and our underlying business is performing well. We had 6.1 net well additions in the first quarter of '19, of which roughly half came from the Midland, Delaware and the Haynesville. The Bakken and the Eagle Ford were the next largest contributors, with the remainder coming from other assets across our portfolio. For perspective, we averaged 5.3 net wells during the same quarter in 2018. So what we saw in the first quarter is -- of this year is 15 -- a 15% increase.

From a rig perspective, at the end of the first quarter, we had a total of 119 drilling rigs operating on us. Over 1/3 of those were in the Midland Basin, with XTO, Pioneer, Endeavor and partially operating over half of that activity. A quarter of that total rig count was focused in the Delaware with XTO, Diamondback, Concho and Cimarex comprising half of the activity on our acreage.

In the Haynesville, we had 15 rigs operating in both Texas and Louisiana. The bulk of that activity is led by BP and XTO on our Shelby Trough assets in East Texas. We had 20 rigs or about 20% of the total operating across the Bakken, Eagle Ford and SCOOP/STACK plays.

Finally, we had 15 rigs operating typically run by private operators across our asset base outside of those areas. Things are very busy on our acreage and that work is translating into well adds, which lead to new sources of production volumes.

On the acquisition front, we purchased approximately $21 million of assets in the quarter, roughly 60% of that was in East Texas where we continue to bolt on to our Shelby Trough position. The remainder of the acquisitions in the quarter were in the Delaware Basin. Acquisitions are a big part of what we do, so I expect us to continue to look for acquisition opportunities.

I want to take a step back from the quarter and talk about the upcoming subordinated unit conversion. As most of you will know, we subordinated over half of our legacy ownership at the IPO in 2015 to demonstrate our confidence in our ability to grow the distribution over time and provide comfort to new investors that weren't very familiar with the mineral base business model. Since our IPO, new activity on our legacy assets combined with our active acquisition program has led to significant growth in production and cash flow. That in turn has allowed us to continue increasing distributions to unitholders. The common distribution increased at a compounded 11% rate since we went public. With the distribution that we are making later this month, the subordination period will end and the subunits will convert to common units on a one-for-one basis. We think that the conversion will be a positive and that it will simplify our capital structure and hopefully it will provide some additional trading liquidity for our units.

Before turning the call over to Jeff, I'll say that I feel very good about how Black Stone is positioned for the future. There is growing appreciation in the investment community of the mineral and royalty business and as proven -- a proven leader in the space, I think that will result in opportunities for us. We have a tremendous set of assets, an experienced management team and are well positioned financially with a strong balance sheet.

With that, I'll turn the call over to Jeff.

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [4]

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Thank you, Tom. Good morning, everyone. So we reported total production for the first quarter of 46,800 BOE per day, that's in the middle of our guidance range for the full year. And while we're in line with guidance, production was down a bit from what we reported last quarter. So I just want to give a little color and context around that.

We took a onetime charge against production and revenue in the first quarter related to a change in estimates of certain of our revenue accruals. This nonrecurring adjustment negatively impacted our first quarter reported production by about 2,000 BOE per day. Without that impact, we would have been slightly above the high end of our full year production guidance range of 45,000 to 48,000 BOE per day. Now our guidance does include the expectation that we'll see some shut-ins on our Shelby Trough acreage related to offset drilling and fracking operations during the middle of this year as well as the expectation that our working interest volumes will continue to decline as we are no longer investing any capital into that part of the business. As usual, we will give any updates to our guidance levels to the extent that they're needed with our second quarter results. For now we don't see any changes to what we've put out in February.

Spot prices for oil and gas were lower in the first quarter relative to 4Q of '18 and differentials for oil widened. As a result, our realized prices were down about 15% quarter-over-quarter. Our crude prices have rebounded significantly since the first of the year and differentials have come in as well. So pricing at least for oil looks more positive today.

The large loss on commodity derivatives that we've posted for the first quarter was all unrealized caused by the forward curve for oil moving up substantially from December 31 of '18 to March 31 of 2019. So none of that loss impacts adjusted EBITDA or our distributable cash flow.

We've posted approximately $120 million in oil and gas revenues and $5.6 million of lease bonus for the quarter. I do want to point out that, that lease bonus amount suggests a run rate a little bit under our guidance of $30 million to $40 million for the full year of 2019. Lease bonus does tend to be somewhat unpredictable and lumpy, so we're not reading too much into that at this point. But I will point out that we're trying to move to structure deals where possible to have a more robust and defined well commitments and lower upfront lease bonuses that's versus the traditional model of maximizing lease bonus and turning over all development timing to the operator. We see that as a win-win, but it could impact our lease bonus numbers. That's something we'll keep an eye on and we'll come back to you with updated guidance next quarter, if needed.

Overall, adjust EBITDA for the first quarter, including the impact of that receivables adjustment I mentioned earlier, was $95 million and distributable cash flow for the quarter was $82 million. Distributions for the quarter of $0.37 per unit or $1.48 on an annualized basis, and our distribution coverage for the quarter was just under 1.1x.

Turning to the balance sheet. Our overall leverage level and liquidity position remain in great shape. As of the end of the quarter, we had $435 million of debt outstanding and our debt to trailing 12-month EBITDAX ratio was under 1.1x.

We had $240 million of liquidity available to us at quarter-end based on the $675 million borrowing base. And as of this past Friday, we had paid down the revolver balance to below $400 million, so our liquidity number has increased since then.

As a final point, I want to say it's very gratifying to see the increased attention minerals is garnering within the energy space and with the broader investment community. We've been hitting the conference circuit pretty hard lately and repeatedly hear that the minerals sector has come to the forefront of investor interests. We think the growing public mineral space will benefit Black Stone by putting a spotlight on all the strength of our business model.

And with that, I will turn the call over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Brent Koaches from Raymond James.

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Brent Alexander-Charles Koaches, Raymond James & Associates, Inc., Research Division - Research Associate [2]

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Just curious and it seems like inevitably every quarter we kind of come back to the distribution coverage question. But with the conversion about to happen on the subunits, is there -- has there been any changes that you guys have discussed on the policy or kind of how you think about coverage going forward?

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [3]

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No, Brent. Thanks for the question. This is Jeff. No real change there. Our thoughts about coverage is a little lower this quarter than it has been in the past, but we continue to see value in retaining some cash flow for balance sheet management and acquisition funding. So I think you'll see us continue to do that going forward. The idea is to kind of have a stable and growing distribution while retaining some cash for those items.

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Brent Alexander-Charles Koaches, Raymond James & Associates, Inc., Research Division - Research Associate [4]

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Okay. Fair enough. Just then thinking on the acquisition side, I know you talked about $21 million of acquisitions this quarter. Last year, 2018, it was about $150 million. Can you just maybe talk about your kind of outlook on the acquisition market? Maybe what you're seeing in the field? And kind of just your outlook for 2018, should we sort of -- or for 2019, should we sort of expect similar levels this year as last year?

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Holbrook F. Dorn, Black Stone Minerals, L.P. - SVP of Business Development - Black Stone Minerals GP, L.L.C. [5]

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Brent, this is Holbrook, I'll take that. Yes, Q1 was a little slower than expected; just the market was a little tighter. But things feel like they've opened up a bit. The acquisition market is lumpy and sometimes there's not as much to buy or there's not as much that you want to buy as other times. And right now, it feels like we're hitting our stride, and we kind of manually predict we can put away $150 million comfortably with some outsized years in between. So we'll just see.

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Brent Alexander-Charles Koaches, Raymond James & Associates, Inc., Research Division - Research Associate [6]

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Okay. And do you think that you would target the use of cash for those acquisitions going forward? Or is equity going to be a bigger part of the mix?

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Holbrook F. Dorn, Black Stone Minerals, L.P. - SVP of Business Development - Black Stone Minerals GP, L.L.C. [7]

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Equity is always part of the conversation. So it's just a mix. It depends on what the seller is interested in. We've got a lot of success using equity in the past few years.

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [8]

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And Brent, this is Jeff. I think you've seen that just become sort of more and more common across the space. There's a lot of benefits to a seller taking back equity including the potential to carry over a tax base, defer recognition of the gain and continue distribution, broaden exposure to minerals. So we have, as Holbrook said, we've seen a lot of success there and would hope to continue to utilize that going forward.

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Operator [9]

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Your next question comes from the line of TJ Schultz from RBC Capital Markets.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Jeff, I think you said you'd have a guidance update next quarter, but nothing really changed as you look at it today. I guess two questions there. First, was the revenue accrual impact considered in the guidance for the year? And then second, if you do expect an update next quarter, when you look at the shut-ins you're expecting in the Shelby area and then the kind of lease bonus structural shift you mentioned, are those the primary points of focus on guidance? Anything notably different than what you were seeing a couple months ago or just anything else we should be watching for?

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [11]

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Yes, thanks, TJ. So the accrual adjustment was not considered in guidance. So that's just something we're going to have to run a little faster to make up for over the course of the year. As you mentioned, as I said in my prepared remarks, what was included in guidance and sometimes this can -- the timing of this is tough to know with perfect insight, but we do expect some shut-ins in the Shelby Trough area as a couple of our operators look to do some more infill drilling work there. So yes, I mean it's kind of our normal course, TJ, that we'll look to update guidance on the second quarter. For now, I think you've hit it, the big pieces that we're kind of keeping our eye on are lease bonus probably more than anything.

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [12]

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I would just -- this is Tom, I'd just add that with respect to our statements about evolution of structure in leasing, it's not a given that our bonus income will be less than it's been in past because that is a number that's hard to predict. And we have for some time had substantial lease transactions that have not been fully loaded for bonus but more geared towards drilling. And so how the mix really plays out as we continue to evolve remains to be seen.

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Operator [13]

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(Operator Instructions) Our next question comes from the line of Philip Stuart from Scotia Howard.

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Philip Stuart, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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Just going back to the lease bonus one more time. I know you all talked about earlier on the call that you're kind of giving up some on the kind of front-end lease bonus payment for more security, I guess, in terms of the development of the given acreage that's being leased. Can you talk about how long you all have been implementing that strategy? Is it something that you have done more in the last 6 months? Or is that kind of been the strategy and we're just kind of seeing that play out more now? I mean I think it makes sense to give up a little bit more on the lease bonus to have more visibility on the actual development plan on the underlying leases, just trying to figure out if that's something new or if that's kind of been ongoing for a while now.

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [15]

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This is Tom. I'll take that. Well, to answer that question, I could talk for an hour or so about that business model, but I'll try to put it this way. It's not only transparency and control what we have called in some of our investor presentations, navigational influence on where and when rigs go out there, but it also has to do with the economics of given plays. And for example, the per well economics in the Haynesville are not necessarily the same as the per well economics in the Delaware. And so to compete for capital, one place where you can adjust your economics is in what the upfront cost of the lease is. So that's a part of it. But I would say that over the course of our history from time to time, especially on larger transactions and when I say larger, where we have blocks with full or near full interest as opposed to smaller interest over a broad area, we have structured drilling commitments a little bit differently than industry norm and sometimes that has seen diminution in bonus income in favor of significant well commitments.

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Philip Stuart, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. I think that makes a lot of sense. And then I guess my next question is more just on general activity in the Permian. Obviously, it's becoming a more and more important area for Black Stone given the amount of money that you guys have invested there over the last 2 years. It seems like anecdotally from listening to the E&P calls kind of during 1Q that most operators' completion schedules are a little bit more back-end weighted than front-end weighted. Is that what you guys are seeing kind of on your side of things?

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [17]

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You know what, we're seeing kind of a steady level of activity throughout the year to be honest with you. As people move to full development mode, it's probably going to get a little bit lumpier and lumpier or as time goes on as rigs just hit on one pad and drill out a full 1,280 or stand up 640, whatever you have it. But so far we've been fortunate where we feel like we're kind of on the front-end of that curve. So we're expecting a pretty active year in both the Midland and the Delaware throughout '19.

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Philip Stuart, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Okay. I appreciate the color there. And if I could, just one more and I'm sorry if you all touched on this earlier on in the call, I was a little late joining. But any update on the PepperJack?

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Brock E. Morris, Black Stone Minerals, L.P. - SVP of Engineering & Geology for Black Stone Minerals GP LLC [19]

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Sure. This is Brock Morris. The well has been completed and has been producing for a few weeks without tubing. The well is currently shut in. They're in the process of running tubing. Fortunately, it's making a little bit more hydrocarbon liquids that we anticipated and the rates were kind of below the critical flow rates for liquid loading. So they'll be running the tubing and back online by the end of this week.

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Philip Stuart, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Okay. So next update there would maybe be on the next earnings call?

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Brock E. Morris, Black Stone Minerals, L.P. - SVP of Engineering & Geology for Black Stone Minerals GP LLC [21]

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Yes. We should have enough data to kind of see what that well and the development of the prospect is going to look like.

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Operator [22]

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Your next question comes from the line of Kashy Harrison from Simmons Energy.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [23]

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So Tom, in your prepared remarks, you highlighted the 11% distribution growth over the past several years. Any early thoughts on how we should be thinking about distribution growth post conversion?

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [24]

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Well, I think in prior calls and presentations that we have made, we have signaled an expectation for 3% to 5% distribution growth over the foreseeable future. And certainly, we strive every day to do better than that. But I think that is an -- that's our stated outlook at this time and we sure aim to do better than that.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [25]

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Okay. That's great color there. And then Holbrook, as you alluded to the -- there's been more activity in the mineral space. It does seem like it's heating up. I was just wondering, has increased competition begun to impact the opportunity set and the ability to earn the returns on invested capital that you've been able to get over the past several years? Is competition impacting -- beginning to impact returns?

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Holbrook F. Dorn, Black Stone Minerals, L.P. - SVP of Business Development - Black Stone Minerals GP, L.L.C. [26]

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The short answer is we've had a great last 5 years of deploying capital and buying some really high-quality assets that have outperformed our underwriting despite billions of dollars coming into the space. So, so far we've been able to find our spot fairly successfully. And we'll see what the future holds, but it hasn't slowed us down yet.

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [27]

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I would add, having been buying minerals since the late '80s, it's always been competitive.

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [28]

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And Kashy, I would point -- this is Jeff. I would point out there's been just a tremendous influx of private equity money that's come into the space over the past 3, 4 or 5 years. So I mean, the competition has been here for a while. All during this time that, as Holbrook said, we think we've made a number of really attractive deals.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [29]

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Got you. No, that's helpful. And then maybe another one for Holbrook, more of a nuanced question. The Austin Chalk that you highlighted in the press release, was that Texas? Was that Louisiana? And if it wasn't Texas, what counties was that referencing?

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Holbrook F. Dorn, Black Stone Minerals, L.P. - SVP of Business Development - Black Stone Minerals GP, L.L.C. [30]

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That was in Tyler County, Texas, which is East Texas. We own a ton of minerals from Giddings Field to the Texas-Louisiana state line. As you can guess, all through the timber belt there which is all Chalk country. That's where Old Brooklyn field was, pressure chalk play in Anadarko was running with Bakken from '04 to '07-ish probably. So we have a tremendous amount of chalk exposure if that play continues to take off in that part of the fairway. But then over in Louisiana, we have significant exposure there as well, not only surrounding the Equinor position but also offsetting Marathon's pilot well up there just north of where EOG is permitted their second well and then throughout that whole chalk TMS fairway. So we're big cheerleaders for the play. And if it does work, we should be beneficiaries.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [31]

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That sounds very exciting. We'll be following up with you on that on other calls. And then maybe just a final one for anyone on the call. I was just curious, how many months or years of visibility do you have with respect to the operators you mentioned earlier in the Shelby Trough? Just trying to get a sense of how much visibility they're giving you. How they are thinking about activity not just for this year or next year? Just something to get a sense of how the Shelby is going to evolve over time.

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [32]

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This is Tom. I'll take a shot at that. You know in the Shelby Trough, our contracts with our operators are all well count calibrated and there are incentives around well counts. I think we have very good visibility about what our operators will do as long as the economics of the properties are viable to their capital structure. So I think the way to answer that question is if you think gas is going to stay in the $2.50 to $3.50 range over the next 5 years, I think we have a very good view as to how many wells will be drilled out there. Greater than that, more, less than $2.50, things can slow down.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [33]

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I like it. That's very helpful. Sorry, go ahead.

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [34]

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Within a good solid rate of return, we compete very well for capital out there and our -- all of our operators are incented too on rig count.

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Operator [35]

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Your next question comes from Tim Howard from Stifel.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [36]

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I'm sorry if I missed this, but could you talk to how the rig count has changed since the 4Q update? Where you've seen additions and subtractions? And then could you also discuss how the operator breakdown is between private and public companies? And maybe how that's evolved over the last 6, 12 months?

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Holbrook F. Dorn, Black Stone Minerals, L.P. - SVP of Business Development - Black Stone Minerals GP, L.L.C. [37]

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I don't have my rig count numbers for last quarter in front of me. I can tell you, we're expecting increased activity throughout our Permian assets in '19 versus '18. And we're also expecting increases in activity in the Shelby Trough. This is Holbrook, by the way, excuse me. It -- operator, public versus private, it really just depends on where you are. And the Permian, that's really gone to a public-dominated space. I don't know if you're very familiar with the Haynesville, but the Louisiana-Haynesville today is really dominated by private equity-backed companies. And so that's who's driving most of the activity on our Louisiana-Haynesville assets.

Within the Shelby Trough, we really just have 2 primary operators in BP and Exxon XTO. And then the Bakken is a little bit more of a mix of private and public, but I would say the public guys are still the dominating force in that play. Eagle Ford lastly is going to be dominated by public companies for the most part. And then once you get outside of kind of your core resource plays and more into the conventional world, that's -- you're going to see more private operators driving that activity.

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Jeffrey P. Wood, Black Stone Minerals, L.P. - President & CFO of Black Stone Minerals GP LLC [38]

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And Tim, this is Jeff. We had -- we were overall just slightly up on active rigs kind of quarter-over-quarter just very slightly. And we had increases across all of our major resource plays and a bit of a decrease in number of active rigs quarter-over-quarter on sort of everything else. So it's sort of what you would expect, the major resource plays continue to draw the majority of capital. And so we saw increases in each of those 4 major plays of Permian, Haynesville, Bakken and Eagle Ford and a little bit of a decline in active rigs on the others.

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Operator [39]

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(Operator Instructions)

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Thomas L. Carter, Black Stone Minerals, L.P. - Chairman & CEO of Black Stone Minerals GP L.L.C [40]

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Okay. I guess that's the end of the Q&A. And as always, we thank you for dialing in to our call and your interest in Black Stone. And we look forward to talking with you next quarter.

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Operator [41]

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This concludes today's conference, you may now disconnect.