“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 companies.” – Tom Carter,
Black Stone Minerals
In February of this year Blackstone completed a farmout
agreement in a portion of its Haynesville and Bossier shale
assets. What are the benefits for farming out your working interest instead of participating with a working interest in a well?
Is there an ideal working interest to mineral and royalty rights
mixture that you manage your business to?
CARTER: From the outset I have emphasized two things above
others. First, promote our minerals. Second, attain some level of input,
or what I like to call “navigational influence” in the timing of development of a property, much akin but not exactly like an operator.
We don’t wait for the phone to ring with a lease request. We do
a lot of that, but we work over our inventory to keep it as active as
possible. Industry players know we do this and because we are
active we get incoming and home-grown negotiations going on
large and small opportunities.
We also will keep participation rights not only for the economics,
but if we are a working interest partner we can work with the
operator to understand and prompt activity in a way not readily
doable exclusively as a mineral owner.
Now, the farmout in what we call Brent Miller, operated by XTO
in the Shelby Trough of the Haynesville/Bossier, was a very unique,
and in retrospect, successful new course for us. X TO and another
former major Haynesville player had a large lease from Black Stone.
The other operator decided they had had enough when commodity
prices fell and the learning curve on drilling and completion in that
play was in its infancy.
X TO, on the other hand, wanted to keep the play moving, albeit
cautiously, and asked us to step into the other partner’s 50% working
interest position. This working interest was more than four times
our typical working interest participation level and is very expensive
territory. But, at the time, we looked at this as an investment in
our own long-term potential, as not doing so would have significantly slowed development of that area.
Fast forward, XTO has done a great job with that play both
technically and in driving costs down. XTO has drilled and completed about 25 wells since we joined them and there are hundreds
more locations. Furthermore, the success there has had a very
positive effect on our broader acreage position in the area, and
business is booming in that play.
But if you just say, for example, that in a given well, we may have
a 15% royalty net revenue interest, and we keep adding 50% W.I.
on top of that, well, you just start messing with the chemistry of
our production profile. And we felt like the pump had been signifi-
cantly primed there to bring in low cost capital to drill alongside
XTO under a non-op co-investment strategy keeping the capex
going, but allowing BSM to curtail working interest as a percentage
of total and deploy that capital to other higher ROI mineral oppor-
tunities in that play and others.
Black Stone was able to remain fairly active during the
last two years despite the price downturn. How have you been
able to manage through the latest cycle without cutting your
CARTER: We are able to maintain and grow our common distribution for three reasons. First, we had a great coverage ratio for
common units, which are publicly traded, because the legacy owners
subordinated a significant piece of their returns to assure the public
of stable to growing returns. Second, our asset base has actually
continued to grow on a total production basis through this cycle
despite rig counts cratering. And lastly, our balance sheet was and
is clean and we were able to keep paying owners versus creditors.
There seems to be renewed interest in the Haynesville
from investors and operators alike. As a core operating area for
BSM with approximately 300 thousand net royalty acres targeting the play, what new developments in the play are you
seeing and is it economic today?
CARTER: The Haynesville/Bossier, after being a bit of a stepchild,
has absolutely come into its own with modest natural gas price
stability and the improvements in drilling and completion technology. We do absolutely have a tremendous base there and in the
last six months have experienced a five-fold increase in acreage
owned under defined development agreements. We see that as
the single largest growth source over the near future.
That said, in 2007, just 10 years ago, no one outside the geology
groups of a few leaders in that play even knew what the Haynesville/
Bossier was. That’s one of the advantages we see to our very large
and diverse portfolio of minerals: we consistently benefit from new
break-out development activity somewhere across our asset base.
We call these cost-free new growth opportunities “embedded drop
downs” and expect to continue to see more of them.
What is driving the renewed interest in the Haynesville?
CARTER: There are many factors to the rebirth of the Haynesville,
including stabilizing gas prices, developed infrastructure with international reach via LNG on the Gulf Coast, scale, and cost structure versus other plays of large size.
Many of the next-generation completion techniques honed in
other basins like the Bakken, Eagle Ford, and Permian were slow
to be deployed in the Haynesville. We are seeing the benefits of
those now. For example, XTO has cut frac stage lengths in half,