Item 1. Financial Statements 

 

Black Stone Minerals, L.P. (“BSM” or the “Partnership”) is a publicly traded Delaware limited partnership formed on September 16, 2014. On May 6, 2015, BSM completed its initial public offering (the “IPO”) of 22,500,000 common units representing limited partner interests at a price to the public of $19.00 per common unit. BSM received proceeds of $391.5 million from the sale of its common units, net of underwriting discount, structuring fee, and offering expenses (including costs previously incurred and capitalized). BSM used the net proceeds from the IPO to repay substantially all indebtedness outstanding under its Credit Facility, as defined in Note 7 – Credit Facility. On May 1, 2015, BSM’s common units began trading on the New York Stock Exchange under the symbol “BSM.”

Black Stone Minerals Company, L.P., a Delaware limited partnership, and its subsidiaries (collectively referred to as “BSMC” or the “Predecessor”) own oil and natural gas mineral interests in the United States ("U.S."). In connection with the IPO, BSMC was merged into a wholly owned subsidiary of BSM, with BSMC as the surviving entity. Pursuant to the merger, the Class A and Class B common units representing limited partner interests of the Predecessor were converted into an aggregate of 72,574,715 common units and 95,057,312 subordinated units of BSM at a conversion ratio of 12.9465:1 for 0.4329 common units and 0.5671 subordinated units, and the preferred units of BSMC were converted into an aggregate of 117,963 Series A redeemable preferred units of BSM at a conversion ratio of one to one. The merger was accounted for as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests. Unless otherwise stated or the context otherwise indicates, all references to the “Partnership” or similar expressions for time periods prior to the IPO refer to Black Stone Minerals Company, L.P. and its subsidiaries, the Predecessor, for accounting purposes. For time periods subsequent to the IPO, these terms refer to Black Stone Minerals, L.P. and its subsidiaries.

In addition to mineral interests, which make up the vast majority of the asset base, the Partnership’s assets also include nonparticipating and overriding royalty interests. These interests, which are non-cost-bearing, are collectively referred to as “mineral and royalty interests.” As of March 31,September 30, 2018, the Partnership’s mineral and royalty interests were located in 41 states and 64 onshore oil and natural gas producing basins of the continental U.S., including all of the major onshore producing basins. The Partnership also owns non-operated working interests in certain oil and natural gas properties.

The accompanying unaudited interim consolidated financial statements of the Partnership have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Partnership’s consolidated financial statements included in the Partnership’s 2017 Annual Report on Form 10-K.

The financial statements include the consolidated results of the Partnership. The results of operations for the threenine months ended March 31,September 30, 2018 are not necessarily indicative of the results to be expected for the full year.

In the opinion of management, all material adjustments, which are of a normal and recurring nature, necessary for the fair presentation of the financial results for all periods presented have been reflected. All intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior periods presented to conform to the current period financial statement presentation. The reclassifications have no effect on the consolidated financial position, results of operations, or cash flows of the Partnership.

The Partnership evaluates the significant terms of its investments to determine the method of accounting to be applied to each respective investment. Investments in which the Partnership has less than a 20% ownership interest and does not have control or exercise significant influence are accounted for under the cost method. The Partnership’s cost method investment is included in deferred charges and other long-term assets in the consolidated balance sheets. Investments in which the Partnership exercises control are consolidated, and the noncontrolling interests of such investments, which are not attributable directly or indirectly to the Partnership, are presented as a separate component of net income and equity in the accompanying consolidated financial statements.

The unaudited interim consolidated financial statements include undivided interests in oil and natural gas property rights. The Partnership accounts for its share of oil and natural gas property rights by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the accompanying unaudited interim consolidated balance sheets, statements of operations, and statements of cash flows.

The Partnership operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Partnership’s chief executive officer has been determined to be the chief operating decision maker and allocates resources and assesses performance based upon financial information at the consolidated level.

Significant accounting policies are disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no changes in such policies or the application of such policies during the threenine months ended March 31,September 30, 2018, with the exception of ASC 606, as defined below.

On February 21, 2017, the Partnership announced that it had entered into a farmout agreement with Canaan Resource Partners ("Canaan") which covers certain Haynesville and Haynesville/Bossier shale acreage in San Augustine County, Texas operated by XTO Energy Inc. The Partnership has an approximate 50% working interest in the acreage and is the largest mineral owner. A total of 18 wells are anticipated to be drilled over an initial phase, beginning with wells spud after January 1, 2017. As of March 31, 2018, 16 wells had been drilled during the initial phase. At its option, Canaan may participate in two additional phases with each phase continuing for the lesser of 2 years or until 20 wells have been drilled. Duringduring the first three phases of the agreement, Canaan willcan commit on a phase-by-phase basis andto fund 80%a portion of the Partnership's drilling and completion costs and will be assigned 80%to earn a percentage of the Partnership's working interestsinterest in such wells (40% working interest on an 8/8ths basis).drilled and completed during each phase. After the third phase, Canaan can earn 40%a percentage of the Partnership’sPartnership's working interest (20% working interest on an 8/8ths basis) in additional wells drilled in the area by continuingcommitting on a well-by-well basis to fund 40%a portion of the Partnership's costs for those wells on a well-by-well basis.each well. The Partnership will receive an overriding royalty interest (“ORRI”) before payout and an increased ORRI after payout on all wells drilled under the agreement.

Since the inception of the agreement, the Partnership has received $24.8$62.2 million from Canaan under the agreement. All amounts received are included in the Long-term liabilities – otherOther long-term liabilities line item of the March 31,September 30, 2018 and December 31, 2017 consolidated balance sheets,sheet, as none of the drilled wells had been completed nor had anyno working interest had been assigned to Canaan as of that date. Subsequent to September 30, 2018, the Partnership assigned to Canaan working interests in wells drilled and completed during the initial phase, reducing the Other long-term liabilities balance sheet dates herein.associated with the Canaan farmout agreement.

On November 21, 2017, wethe Partnership entered into a farmout agreement with a portfolio company of Tailwater Capital, LLC, Pivotal Petroleum Partners (“Pivotal”), that covers substantially all of the Partnership's remaining working interests under active development in the Shelby Trough area of East Texas targeting the Haynesville and its Haynesville/Bossier shale acreage after giving effect to the Canaan Farmout (discussed above) over the next eight years. In wells operated by XTO Energy Inc. in San Augustine County, Texas, Pivotal will earn the Partnership's remaining approximate 20% working interest (10% working interest on an 8/8th basis) not covered by the Canaan Farmout, as well as 100% of the Partnership's working interests (ranging from approximately 12.5% to 25% on an 8/8ths basis) in wells operated by its other major operator in the area. Initially, Pivotal will be obligated to fund the development of up to 80 wells across several development areas and then will have options to continue funding the Partnership's working interest across those areas for the duration of the eight year term. After the funding of a designated group of wells by Pivotal and once Pivotal achieves a specified payout for such well group, the Partnership will obtain a majority of the original working interest in the designated group of wells.

Since the inception of the agreement, the Partnership has received $12.4$35.5 million from Pivotal under the agreement. All amounts received areAs of September 30, 2018, the Partnership had assigned to Pivotal working interests in wells drilled and completed during the initial phase, and as such, only $27.5 million is included in the Long-term liabilities – otherOther long-term liabilities line item of the March 31, 2018 andconsolidated balance sheet.

As of December 31, 2017, all amounts received from Canaan and Pivotal under the agreements were included in the Other long-term liabilities line item of the consolidated balance sheets,sheet, as none of the drilled wells had been completed nor had anyno working interest had been assigned to Canaan or Pivotal as of the balance sheet dates herein.that date.

The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses oil and natural gas derivative instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts and other contractual arrangements. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty. The Partnership does not enter into derivative instruments for speculative purposes.

As of March 31,September 30, 2018, the Partnership’s open derivative contracts consisted of only fixed-price-swapfixed-price swap contracts and costless collar contracts. A fixed-price-swapfixed-price swap contract between the Partnership and the counterparty specifies a fixed commodity price and a future settlement date. A costless collar contract between the Partnership and the counterparty specifies a floor and a ceiling commodity price and a future settlement date. The Partnership has not designated any of its contracts as fair value or cash flow hedges. Accordingly, any changes in the fair value of the contracts are included in the consolidated statement of operations in the period of the change. All derivative gains and losses from the Partnership’s derivative contracts have been recognized in revenue in the Partnership's accompanying consolidated statements of operations. Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Partnership’s accompanying consolidated balance sheets as of March 31,September 30, 2018 and December 31, 2017. See Note 6 – Fair Value Measurements for further discussion.    

Changes in the fair values of the Partnership’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations and are as follows:follows (in thousands):

TheSubsequent to September 30, 2018, the Partnership had the following openentered into gas derivative contracts for natural gas asan average of March 31, 2018:608,333 MMBtu per month in 2019 at a weighted average price of $2.85 per MMBtu.

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

Level 2—Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers into, or out of, the three levels of the fair value hierarchy for the threenine months ended March 31,September 30, 2018 or the year ended December 31, 2017.

The carrying value of the Partnership's cash and cash equivalents, receivables, and payables approximate fair value due to the short-term nature of the instruments. The estimated carrying value of all debt as of March 31,September 30, 2018 and December 31, 2017 approximated the fair value due to variable market rates of interest. These debt fair values, which are Level 3 measurements, were estimated based on the Partnership’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimated fair values of the Partnership’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.

The Partnership estimated the fair value of derivative instruments using the market approach via a model that uses inputs that are observable in the market or can be derived from, or corroborated by, observable data. See Note 5 – Commodity Derivative Financial Instruments for further discussion.

The following table presents information about the Partnership’s assets and liabilities measured at fair value on a recurring basis: