Black Stone Minerals, L.P.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

Black Stone Minerals, L.P. is a publicly traded limited partnership that owns and manages oil and natural gas mineral interests across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Black Stone Minerals operates as a pure-play mineral and royalty interest company with no operational activities like drilling. It primarily focuses on acquiring and managing mineral and royalty interests, rather than directly extracting oil and gas.

Business Overview

Black Stone Minerals generates revenue from mineral and royalty interests, meaning they get a cut of revenue from oil and gas production on land where they own the mineral rights. This makes the company highly dependent on commodity prices and the production activities of the operators that lease their acreage.

Revenues: BSM’s revenue is primarily derived from royalties on oil and natural gas production, including natural gas liquids (NGLs). These revenues are subject to fluctuations based on production volumes, well productivity, and commodity prices.
Geographic operations: The Partnership’s assets are concentrated in oil and natural gas plays in the contiguous United States, mainly in Texas, Oklahoma, Louisiana, New Mexico, and Montana. A substantial portion of their assets are concentrated in three specific regions: the Permian, the Haynesville, and the Eagle Ford, with a significant amount of total interest held in the Permian.
Industry Trends: The oil and gas industry is known for its cyclical nature with prices and production heavily influenced by global supply and demand, geopolitical events, and technological advancements. The industry is also seeing a shift towards renewable and cleaner energy, which may affect long-term demand. Production continues to become more efficient with new methods, and costs are still rising at some parts due to the market and labor constraints.
Margins: BSM’s margins can be high when energy prices are elevated, because the bulk of revenues come from royalties and don’t include the costs of production. However, when prices fall, margins may decline as the overall royalty income decreases.
Competitive Landscape: The competitive landscape is characterized by numerous exploration and production companies, mineral owners, and financial operators. Many of these companies have a wider spread of operations, unlike BSM which focuses mainly on mineral and royalty interests. There is a high degree of competition for acquiring mineral rights, although this activity may be more concentrated in high-producing areas.
What Makes BSM Different?: BSM is unique in its position as an owner of mineral rights who does not have direct operational costs. They make money by leasing mineral rights and generating a stream of income without the capital expenditures and overhead of exploration and production. This model allows them to capture value with limited upfront cost and minimal operational expenses.

Moat Analysis and Rating: 1/5

BSM has almost no moat. They are just a collection of mineral rights. This doesn’t create a sustainable competitive advantage, as they are just a toll-taker and do not provide any service or value creation. The only thing the company does is to acquire mineral rights in new areas, and there are lots of companies who do that.

Lack of Differentiation: Mineral rights themselves are not a differentiated product. Any mineral and royalty interest seller has the power to sell the leases to whoever they choose. This makes the business model easy to replicate.
No Switching Costs or Network Effects: Customers, or operators leasing the acreage, can choose which land and mineral interest company they work with, and their switching costs are very low. They are more interested in locations than in specific companies. There’s no network effect for this business.
No Cost Advantage: Although BSM doesn’t have operational costs, they still have acquisition costs and other expenses of management. Other companies may acquire mineral rights at lower costs and can be more cost efficient overall.

Risks to the Moat and Business Resilience

BSM faces significant risks due to its reliance on commodity markets, which are inherently volatile and difficult to predict, and the company is vulnerable to the cyclical nature of these markets.

Commodity Price Fluctuations: As BSM receives royalties based on a percentage of production volume and price, downturns in oil and natural gas prices directly and immediately reduce revenue, which can affect their margins.
Decline in Production Volumes: A fall in production volumes can occur for many reasons: whether the operators stop their operations on the acreage, technical issues, environmental or regulatory pressure, etc. Any of these can be a threat to the stability of BSM’s income.
Geopolitical and Regulatory Risks: Government actions can impact commodity prices, such as policies affecting extraction. Also changes in the policies concerning oil and gas, or environmental regulations, can hurt the production, therefore the royalties.
Competition for Acquisitions: Competition for mineral rights is high and can cause BSM to overpay for new acquisitions, lowering expected future returns. Also the smaller the pie gets, meaning the limited pool of attractive areas decreases, the less competitive the business is and more challenging to grow.
Operational Failures: A poorly managed business would have very volatile results.
Business Resilience: Although BSM is very sensitive to commodity prices and production volumes, since the expenses of operations are minimal, it has a relatively high resilience to temporary downturns. However, if the low prices persist long term, then BSM would have trouble sustaining its dividends.

Financial Analysis

Overall BSM’s financial strength is moderate. The company has good liquidity, low level of debt, but is heavily susceptible to commodity prices.

Revenues: BSM’s total revenues have been quite volatile. In 2021, for instance, they reached a high of over $600 million due to higher commodity prices, but in the recent quarter, they have declined to $198 million due to price drops. A large portion of their revenues is derived from oil sales, which are very vulnerable to price swings. The lack of consistency makes it very hard to estimate future growth of the company.
Profitability: Margins are also variable due to reliance on commodity prices. In 2021 the adjusted EBITDA margins were high at 81.9% and 78.5% in 2022 and reached a low of 66.8% in the recent quarter. These margins are far superior to regular oil and gas producers due to their limited operational costs. But these fluctuations can still make valuation more difficult, since those margins can very quickly become smaller if energy prices decline.
Balance Sheet:
- Liquidity: BSM has good liquidity with more than $300 million of cash on hand.
- Debt: BSM also has total debt of $345 million, which is very manageable for a company of this size and profitability. The debt maturity is also balanced well over a longer period.
- Capital Expenditures: The company has minimal capital expenditures, because most of the operations are done by the lessees. The lack of significant capital expenditures give extra flexibility.
- Total Shareholders Equity: BSM had total equity of almost $1.2 billion, indicating a decent balance sheet.

Understandability Rating: 3 / 5

Although BSM’s core business model of owning and leasing mineral rights is not very complicated to understand, it is quite hard to analyze the company and predict its future financial and operating results. Therefore, the understandability is moderately complex.

While BSM operates in a straightforward manner (buying and leasing mineral rights), the oil and gas market and its many fluctuations are complex to understand and analyze, given the numerous forces driving it.
The different types of mineral interests and how they affect revenues are complex to understand and difficult to analyze and foresee.
BSM also utilizes a very particular accounting structure (Master Limited Partnership), which is unusual to many investors, making it a bit more difficult to fully grasp.

Balance Sheet Health Rating: 4 / 5

BSM has a very decent financial health with low debt and high liquidity. The company has a solid asset structure, though its profitability and cash flow generation are inherently tied to oil and gas prices, exposing them to market volatility.

Good Liquidity: The company maintains a substantial cash position, which would be enough to cover its liabilities. This gives them security in difficult situations or market drops, while also letting them be flexible to capitalize on new acquisition opportunities.
Low Debt: The debt is managed very conservatively and is relatively low for the company size. This ensures the company does not have trouble with financial obligations.
Moderate Asset Base: The assets are quite tangible and are mostly made up of mineral rights, which are relatively stable. The values may differ depending on market value though.
Vulnerability: Their high exposure to oil and gas markets makes their financials highly susceptible to volatility and market shocks.
Overall Soundness: On the whole, their balance sheet is very healthy and offers a comfortable level of stability to the company, while at the same time giving the flexibility to operate.

Recent Concerns and Management’s Response

Impact of Commodity Prices: The most recent concerns are about the company’s performance in a difficult market. Earnings and dividends were lower than previous quarters, showing the direct influence the market has on BSM’s financials. Management has acknowledged this and is working to control costs and improve efficiency.
Acquisitions: Management continues to look at acquisitions, although the deal flow has slowed down considerably due to a combination of lack of quality acquisition opportunities, and the cost of capital. They intend to be disciplined about any new acquisitions.