10-Q: Black Stone Minerals Q2 Net Income Soars on Derivatives

Black Stone Minerals, L.P. reported a significant increase in second-quarter net income driven by commodity derivative gains, despite declines in production volumes and distributable cash flow.

Summary

• Net income for the second quarter of 2025 increased by 75.7% to $120.0 million, up from $68.3 million in the same period of 2024.
• Total revenue for Q2 2025 rose by 45.5% to $159.5 million, primarily due to a $52.8 million gain on commodity derivative instruments, compared to a $5.5 million loss in Q2 2024.
• Oil and condensate sales decreased by 24.5% to $55.8 million in Q2 2025, driven by a 9.4% reduction in production volumes (863 MBbls) and lower realized prices ($64.67/Bbl).
• Natural gas and natural gas liquids sales increased by 26.6% to $46.2 million in Q2 2025, benefiting from a 51.1% increase in realized natural gas prices ($3.37/Mcf), despite a 16.1% decrease in production volumes (13,710 MMcf).
• Adjusted EBITDA for Q2 2025 decreased by 16.0% to $84.2 million, and Distributable Cash Flow fell by 19.2% to $74.8 million.
• For the six months ended June 30, 2025, total revenue increased by 1.7% to $218.7 million, and net income increased by 2.8% to $136.0 million.
• Year-to-date production volumes for oil and condensate decreased by 15.8% to 1,579 MBbls, and natural gas decreased by 13.0% to 28,563 MMcf.
• The company acquired $45.4 million in mineral and royalty interests during the first six months of 2025, funded by $38.0 million in cash and $7.4 million in common unit issuances.
• Common unit distributions for Q2 2025 were approved at $0.30 per unit, a decrease from $0.3750 per unit in Q2 2024.
• The outstanding balance on the Credit Facility increased to $99.0 million at June 30, 2025, from $25.0 million at December 31, 2024, reducing available borrowings to $276.0 million.
• Entered into a new Joint Exploration Agreement (JEA) with Revenant Energy covering approximately 270,000 gross acres in East Texas, with escalating annual well commitments.
• Amended JEAs with Aethon, reducing the contract area to 210,000 gross acres and adjusting annual well commitments to 16 wells.
• The company remains in compliance with all financial covenants under its Credit Facility.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative. While net income saw a significant boost from derivative gains, this was largely an accounting effect. Underlying operational performance, as indicated by declining production volumes, lower Adjusted EBITDA, reduced Distributable Cash Flow, and decreased common unit distributions, points to a challenging period. Increased debt and reduced borrowing capacity also contribute to a cautious outlook, despite active asset management and new exploration agreements.

Positives

• Net income for Q2 2025 significantly increased by 75.7% to $120.0 million, primarily due to a substantial gain on commodity derivative instruments.
• Total revenue for Q2 2025 increased by 45.5% to $159.5 million, driven by favorable derivative performance.
• Natural gas and natural gas liquids sales increased by 26.6% in Q2 2025 due to higher realized commodity prices, despite lower production volumes.
• Lease bonus and other income for the six months ended June 30, 2025, increased by 39.6% to $11.6 million, reflecting strong leasing activity in the Permian Basin and proceeds from solar development waivers.
• Successfully completed multiple asset exchange transactions to consolidate a concentrated acreage position in East Texas.
• Entered into a new Joint Exploration Agreement (JEA) with Revenant Energy covering approximately 270,000 gross acres in East Texas, with annual well commitments escalating from 6 wells in 2026 to 25 wells per year from 2030 onwards.
• Secured a farmout agreement with an external capital provider for the 35% non-operated working interest in the Revenant JEA, limiting capital exposure.
• Maintained compliance with all financial covenants under the Credit Facility as of June 30, 2025.
• Aethon's development program in the Shelby Trough remains on track, with 15 gross (0.93 net) wells expected to turn to sales in the remainder of 2025 and early 2026.
• Anticipate 22 gross wells in the Permian Basin to turn to sales in the second half of 2025, with the remainder expected in the first half of 2026.

Negatives

• Oil and condensate sales decreased by 24.5% in Q2 2025 and 27.0% year-to-date, primarily due to lower production volumes and realized commodity prices.
• Overall production volumes for oil, natural gas, and equivalents decreased significantly in Q2 2025 (oil -9.4%, natural gas -16.1%, equivalents -14.4%) and year-to-date (oil -15.8%, natural gas -13.0%, equivalents -13.7%).
• Adjusted EBITDA decreased by 16.0% in Q2 2025 to $84.2 million and by 18.6% year-to-date to $166.3 million.
• Distributable Cash Flow decreased by 19.2% in Q2 2025 to $74.8 million and by 21.4% year-to-date to $148.5 million.
• Common unit distributions for Q2 2025 were reduced to $0.30 per unit, down from $0.3750 per unit in Q2 2024.
• Interest expense increased significantly by 262.6% in Q2 2025 to $2.3 million and by 192.2% year-to-date to $3.7 million, due to higher average outstanding borrowings under the Credit Facility.
• The aggregate principal balance outstanding on the Credit Facility increased to $99.0 million at June 30, 2025, from $25.0 million at December 31, 2024.
• Unused portion of available borrowings under the Credit Facility decreased to $276.0 million at June 30, 2025, from $350.0 million at December 31, 2024.
• Exploration expense increased substantially in Q2 2025 and year-to-date, primarily due to additional costs related to seismic data acquisition projects.

Risks

• Volatility of realized oil and natural gas prices, which are influenced by global supply and demand dynamics, economic conditions, and trade policies.
• Dependence on the level of drilling activity by third-party operators on the company's acreage, particularly in concentrated areas like the Haynesville.
• The ability of operators to obtain necessary capital or financing for development and exploration operations.
• Potential for title defects in the properties in which the company invests.
• Availability and cost of rigs, equipment, raw materials, supplies, oilfield services, or personnel.
• Restrictions on the use of water for hydraulic fracturing, which could impact drilling operations.
• Availability of pipeline capacity and transportation facilities for oil and natural gas.
• The ability of operators to comply with applicable governmental laws and regulations and to obtain necessary permits and approvals.
• Impact of federal and state legislative and regulatory initiatives relating to hydraulic fracturing.
• Effects of domestic and foreign trade policies, including tariffs and other controls on imports or exports of energy products.
• Operating hazards faced by operators, including environmental incidents and accidents.
• The ability of operators to keep pace with technological advancements in the industry.
• Impact of conservation measures and general concern about the environmental impact of the production and use of fossil fuels.
• Exposure to cybersecurity incidents, including data security breaches or computer viruses.
• Credit risk in the event of nonperformance by counterparties to derivative contracts and from receivables generated by operators.
• Exposure to changes in interest rates on indebtedness under the Credit Facility.

Future Outlook

The U.S. Energy Information Administration (EIA) forecasts average natural gas exports to increase to 15.1 Bcf per day for the remainder of 2025 and 16.0 Bcf per day for 2026, driven by new LNG export projects. EIA also expects natural gas inventories to rise to 3.9 Tcf by the end of October 2025, which would be 3% higher than the five-year average. The company's operators, Aethon and Revenant, have ongoing development programs, with 15 gross (0.93 net) Aethon wells expected to turn to sales in late 2025 and early 2026, and 22 gross Permian Basin wells anticipated to turn to sales in the second half of 2025. The next semi-annual borrowing base redetermination for the Credit Facility is scheduled for October 2025. The company intends to continuously monitor production and commodity prices to add additional hedges and plans to finance future acquisitions and working interest capital needs through cash from operations, Credit Facility borrowings, and potential future equity or debt issuances.

Management Comments

• Our principal business is maximizing the value of our existing portfolio of mineral and royalty assets through active management.
• We maximize value through marketing our mineral assets for lease and creatively structuring the terms on those leases to encourage and accelerate drilling activity.
• We believe our large, diversified asset base and long-lived, non-cost-bearing mineral and royalty interests provide for stable production and reserves over time, allowing the majority of generated cash flow to be distributed to unitholders.
• Alongside our primary focus on traditional revenue streams from our asset base, we will continue to explore the relevance of our assets in energy transition, including opportunities in renewable energy and carbon sequestration.
• We intend to continuously monitor the production from our assets and the commodity price environment, and will, from time to time, add additional hedges within the percentages described above related to such production.
• We do not enter into derivative instruments for speculative purposes.

Industry Context

The oil and natural gas industry experienced mixed commodity price trends in the first half of 2025. Oil prices decreased compared to the prior year, primarily due to weakening global demand, changes in trade policies, escalating trade tensions between the United States and China, and an oversupplied market as OPEC+ unwound production cuts and non-OPEC+ producers increased output. Conversely, natural gas prices increased, supported by unusually cold weather in Q1 2025 driving higher heating demand and lower storage levels, as well as higher wholesale power pricing. The U.S. rotary rig count showed a decrease in oil rigs but an increase in natural gas rigs, indicating a shift in drilling focus. Natural gas exports significantly increased, with EIA forecasting continued growth due to new LNG export projects, which could further support natural gas prices. Natural gas storage levels are expected to rise to 3.9 Tcf by October 2025, 3% above the five-year average.

Comparison to Industry Standards

• The company's hedging strategy, allowing up to 90% of expected future volumes for the first 24 months, 70% for months 25-36, and 50% for months 37-48, aligns with common risk management practices in the oil and gas industry to mitigate commodity price volatility.
• The Credit Facility's financial covenants, including a current ratio of not less than 1.0:1.0 and a total debt to EBITDAX ratio of not more than 3.5:1.0, are standard benchmarks for assessing financial health and leverage within the energy sector.
• The company's focus on mineral and royalty interests, which are substantially non-cost-bearing, provides a business model with lower operational expenditure exposure compared to traditional E&P companies with significant operated working interests.
• Development activity by operators like Aethon and EXCO Resources Inc. in the Shelby Trough and a large operator in the Permian Basin reflects ongoing drilling and completion trends in key U.S. onshore producing basins, comparable to activity seen across other mineral and royalty interest owners.

Management Changes

Legal Proceedings

• The company is involved in routine litigation, disputes, or claims arising in the ordinary course of business.
• Management believes existing claims as of June 30, 2025, will be resolved without material adverse effect on the company's financial condition or operations.

Stakeholder Impact

• Shareholders (Common Unitholders): Experienced a reduction in quarterly distributions from $0.3750 to $0.30 per unit. Potential for future equity issuances could lead to dilution.
• Preferred Unitholders: Continue to receive distributions at the adjusted 9.8% rate, with a potential redemption window opening in November 2025, which could involve future equity or debt issuances.
• Employees: General and administrative expenses increased due to higher cash and equity-based compensation, but also included certain one-time personnel-related costs and a separation agreement.
• Creditors: The company increased its borrowings under the Credit Facility, but remains in compliance with all debt covenants, indicating continued financial stability from a lending perspective.
• Operators: Continued engagement through development agreements (Aethon, Revenant, EXCO Resources Inc.) indicates ongoing business relationships and opportunities for drilling activity on the company's acreage.

Next Steps

• Monitor Aethon's development program, with 15 gross (0.93 net) wells expected to turn to sales during the remainder of 2025 and early 2026.
• Expect another 2 gross (0.13 net) wells under Accelerated Drilling Agreements (ADAs) to turn to sales during the third quarter of 2025.
• Anticipate 22 gross wells in the Permian Basin to turn to sales in the second half of 2025, with the remainder expected in the first half of 2026.
• Aethon expects to drill 15 wells in the next program year starting July 2025.
• The next semi-annual borrowing base redetermination for the Credit Facility is scheduled for October 2025.
• The next redemption window for Series B cumulative convertible preferred units opens on November 28, 2025.
• Continuously monitor production from assets and the commodity price environment to add additional hedges within allowed percentages.
• Evaluate the impact of the new FASB ASU 2024-03 on disclosures, effective for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027.

Key Dates

Recommendation

The filing presents a mixed financial picture. While net income saw a substantial increase due to derivative gains, this was offset by declines in core operational metrics such as production volumes, Adjusted EBITDA, and Distributable Cash Flow. The reduction in common unit distributions is a negative signal for income-focused investors. The increase in Credit Facility borrowings and associated interest expense also warrants caution. However, the company is actively managing its asset base through strategic acquisitions and new joint exploration agreements, which could provide long-term growth. The compliance with debt covenants and active hedging program demonstrate sound financial management. Given the conflicting signals of strong accounting profits versus weaker underlying operational cash flow and reduced distributions, a 'hold' recommendation is appropriate, suggesting investors monitor future operational improvements and commodity price stability.

Keywords

Oil and gas, Mineral interests, Royalty interests, Energy, Exploration, Production, SEC filing, 10-Q, Black Stone Minerals, BSM, Commodity prices, Derivatives, Shelby Trough, Haynesville, Permian Basin, Asset acquisition, Joint exploration agreement, JEA, Farmout, Distributions, Credit facility