and putting a great set of minerals together wasn’t easy, but it sure
had less traffic and capital than now.
Black Stone Minerals LP has a unique strategy for an
E&P company. What differentiates Black Stone Minerals from
traditional E&P companies, including MLPs?
CARTER: Let me answer that question this way. You describe us
as an E&P company… and I suppose we are, with some very fundamental differences from traditional E&Ps, be it an MLP or a
The main difference is the “E” in E&P. While “E” stands for Exploration and “P” for Production, “E” also stands for capital and
lease operating Expenditures. Many E&P C-corps and most of the
E&P MLPs ran into trouble because of the enormous capital required to acquire and develop oil and gas leases. Historically, of
course, much of those costs were financed with “low-cost” debt.
When we buy a mineral property for a multiple of cash flow, in
many respects our “E” dollars are spent on buying yet underdeveloped lands that have to work out later for our own returns to
materialize. That in some cases is a different risk profile from a
very large upfront land grab cost, followed by exploration wells
and seismic costs. And there is the perpetuity factor of owning
minerals versus leasehold. You get multiple kicks at the can if the
first pass fails.
Other than for acquisitions or in connection with our limited
working interest program, we have no capital or lease operating
costs. That bears repeating: we have zero non-discretionary capital
requirements. Our business is attracting other companies’ capital
on to our mineral acreage. In part because of this and in part because of our conservative philosophy around leverage, we maintain
relatively low debt balances compared to traditional E&P
At the end of the day we see our business as less risky over time
with lower unrisked IRRs and probably higher ROIs. We have
somewhat less control over the drill-bit, yet the trade-off is meaningfully more diversity of opportunity and inventory per capex
dollar spent. And last but not least, we pay an attractive, stable,
and growing distribution.
From the perspective of a mineral and royalty owner,
how do you see the industry changing? What is driving increased
interest in the mineral rights business?
CARTER: I really see the mineral and royalty business changing
in many ways that are industry wide. First, technology has really
been a game changer in the lower 48. Second, we have lands that
we have owned for years that have had quite good returns historically and that are being recharged by technology.
At the same time, one phenomenon that has changed for mineral
companies due to improvements in technology and the shale
revolution is this: so much more land in site specific areas has been
meaningfully de-risked, almost like a mining operation. That really
affects multiples of current cash flow one has to pay for minerals
in many plays. The Delaware Basin is an area that comes to mind.
I would also suggest that institutional capital is finding yield
and returns harder and harder to come by in a “lower long-term
return” environment and because of that there is probably more
capital chasing the set of opportunities and more shops working
this side of the street. In that sense, I am very glad we started when
we did, put together such a great footprint, and it just keeps on
giving. It could not be replicated easily today.
How do increases and decreases in oil and gas prices
affect your operations and financials? Are you more or less
exposed to commodity prices than traditional E&P MLPs?
CARTER: Commodity prices definitely affect us. The primary ways
are twofold: First, our greatest use of cash flow is our distribution,
not capex or interest or debt costs, so prices going down or up
have an effect on the amount we have available to pay out to our
unitholders. We are hedged fairly aggressively over a 12- to 18-month
cycle, to limit the impact of price exposure on our distribution.
Second, because we are dependent on third-party drilling capex
on our lands, more capital in the industry is better, and prices have
everything to do with that.
So we have both direct and indirect commodity exposure, but
with no capex or operating costs, and low leverage, we certainly
do not have the kind of existential exposure, if you will, that many
of the traditional E&P MLPs had.
Why don’t more publicly traded companies pursue the
mineral and royalty interest ownership strategy?
CARTER: There are larger E&P and international companies with
large legacy mineral positions built over generations – those include
Exxon, Chevron, BP, Devon, Noble… the list goes on. They really
like owning minerals, and it’s very hard to get them even to entertain
selling. Those companies are very large with big capital budgets
and so it’s hard for minerals to be core, but sometimes they are.
We’ve seen some examples of smaller C-corps buying minerals
in front of their drill bit. I think that is an interesting strategy, but
there is a limit to how broadly it can be applied. E&Ps are in the
business of drilling wells, so diverting capital to buy minerals when
you probably have existing leasehold that needs to be drilled is
something that will give a lot of management teams pause.
For the smaller aggregators, access to capital and the challenge
of actually acquiring minerals at attractive returns can be daunting.
It’s not for the faint of heart or three-year capital horizon players.
I’d also suggest that we have some ways to go before gaining
the proper level of understanding and appreciation for the minerals
business with the public market. Too many still paint us with the
same brush used for the E&P MLPs, and as I discussed earlier, we
are fundamentally different. I believe minerals assets, especially
those with sufficient scale and diversity, are a great fit for the MLP
structure. I suspect as we continue to perform and to educate
investors, public market reception will improve and additional
minerals companies will come into the sector.