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EX-32.1 - EX-32.1 - Black Stone Minerals, L.P.bsm-ex321_6.htm
EX-31.2 - EX-31.2 - Black Stone Minerals, L.P.bsm-ex312_7.htm
EX-31.1 - EX-31.1 - Black Stone Minerals, L.P.bsm-ex311_8.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period _______________ to _______________

Commission File Number: 001-37362

 

Black Stone Minerals, L.P.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-1846692

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1001 Fannin Street, Suite 2020

Houston, Texas

 

77002

(Address of principal executive offices)

 

(Zip code)

(713) 445-3200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

 

Accelerated filer

¨

 

 

 

 

 

Non-accelerated filer

þ

(Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

As of November 6, 2015, there were 96,185,592 common limited partner units, 95,057,312 subordinated limited partner units, and 117,963 preferred units of the registrant outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

1

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2015 and 2014

2

 

 

 

 

 

 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2015

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

 

Item 4.

 

Controls and Procedures

27

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

29

 

 

 

 

Item 1A.

 

Risk Factors

29

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

29

 

 

 

 

 

 

Signatures

30

 

 

 

ii


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BLACK STONE MINERALS, L.P.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

 

September 30, 2015

 

 

December 31, 2014

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,570

 

 

$

14,803

 

Accounts receivable

 

 

52,347

 

 

 

74,092

 

Commodity derivative assets

 

 

34,336

 

 

 

37,471

 

Prepaid expenses and other current assets

 

 

1,404

 

 

 

8,538

 

TOTAL CURRENT ASSETS

 

 

93,657

 

 

 

134,904

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

 

Oil and natural gas properties, at cost, on the basis of the successful efforts method of accounting, includes unproved properties of $621,140 and $626,376 at September 30, 2015 and December 31, 2014, respectively

 

 

2,481,864

 

 

 

2,379,543

 

Accumulated depreciation, depletion and amortization, including impairment

 

 

(1,430,004

)

 

 

(1,191,861

)

Oil and natural gas properties, net

 

 

1,051,860

 

 

 

1,187,682

 

Other property and equipment, net of accumulated depreciation of $14,687 and $12,994 at September 30, 2015 and December 31, 2014, respectively

 

 

67

 

 

 

1,664

 

NET PROPERTY AND EQUIPMENT

 

 

1,051,927

 

 

 

1,189,346

 

DEFERRED CHARGES AND OTHER LONG-TERM ASSETS

 

 

15,862

 

 

 

2,532

 

TOTAL ASSETS

 

$

1,161,446

 

 

$

1,326,782

 

LIABILITIES, MEZZANINE EQUITY AND EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

28,108

 

 

$

29,415

 

Accrued liabilities

 

 

18,227

 

 

 

16,252

 

Accrued distribution payable to Predecessor unitholders

 

 

 

 

 

52,905

 

TOTAL CURRENT LIABILITIES

 

 

46,335

 

 

 

98,572

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Credit facility

 

 

43,000

 

 

 

394,000

 

Accrued incentive compensation

 

 

8,401

 

 

 

6,530

 

Deferred revenue

 

 

3,333

 

 

 

3,917

 

Asset retirement obligations

 

 

10,181

 

 

 

9,381

 

TOTAL LIABILITIES

 

 

111,250

 

 

 

512,400

 

COMMITMENTS AND CONTINGENCIES (Note 7)

 

 

 

 

 

 

 

 

MEZZANINE EQUITY

 

 

 

 

 

 

 

 

Partners' equity - redeemable preferred units, 118 and 157 units outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

120,936

 

 

 

161,165

 

EQUITY

 

 

 

 

 

 

 

 

Predecessor equity - common limited partner units, no units and 164,484 outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

 

 

 

653,217

 

Partners' equity - general partner units

 

 

 

 

 

 

Partners' equity - common limited partner units, 96,186 and no units outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

621,796

 

 

 

 

Partners' equity - subordinated limited partner units, 95,057 and no units outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

305,156

 

 

 

 

Noncontrolling interests

 

 

2,308

 

 

 

 

TOTAL EQUITY

 

 

929,260

 

 

 

653,217

 

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY

 

$

1,161,446

 

 

$

1,326,782

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

BLACK STONE MINERALS, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per unit amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and condensate sales

 

$

44,128

 

 

$

71,089

 

 

$

126,584

 

 

$

195,665

 

Natural gas and natural gas liquids sales

 

 

32,191

 

 

 

45,914

 

 

 

92,799

 

 

 

156,554

 

Gain on commodity derivative instruments

 

 

56,430

 

 

 

8,682

 

 

 

57,450

 

 

 

339

 

Lease bonus and other income

 

 

4,271

 

 

 

7,110

 

 

 

16,051

 

 

 

26,586

 

TOTAL REVENUE

 

 

137,020

 

 

 

132,795

 

 

 

292,884

 

 

 

379,144

 

OPERATING (INCOME) EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expense

 

 

4,924

 

 

 

6,037

 

 

 

16,540

 

 

 

15,707

 

Production costs and ad valorem taxes

 

 

8,175

 

 

 

12,181

 

 

 

26,250

 

 

 

33,589

 

Exploration expense

 

 

1,817

 

 

 

440

 

 

 

2,014

 

 

 

444

 

Depreciation, depletion and amortization

 

 

23,288

 

 

 

37,065

 

 

 

83,414

 

 

 

84,058

 

Impairment of oil and natural gas properties

 

 

24,854

 

 

 

 

 

 

156,683

 

 

 

 

General and administrative

 

 

18,994

 

 

 

15,644

 

 

 

53,530

 

 

 

45,607

 

Accretion of asset retirement obligations

 

 

265

 

 

 

148

 

 

 

805

 

 

 

443

 

(Gain) loss on sale of assets, net

 

 

4

 

 

 

 

 

 

(20

)

 

 

 

TOTAL OPERATING EXPENSE

 

 

82,321

 

 

 

71,515

 

 

 

339,216

 

 

 

179,848

 

INCOME (LOSS) FROM OPERATIONS

 

 

54,699

 

 

 

61,280

 

 

 

(46,332

)

 

 

199,296

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income

 

 

18

 

 

 

3

 

 

 

46

 

 

 

27

 

Interest expense

 

 

(870

)

 

 

(3,440

)

 

 

(5,530

)

 

 

(10,292

)

Other income

 

 

45

 

 

 

62

 

 

 

241

 

 

 

869

 

TOTAL OTHER EXPENSE

 

 

(807

)

 

 

(3,375

)

 

 

(5,243

)

 

 

(9,396

)

NET INCOME (LOSS)

 

 

53,892

 

 

 

57,905

 

 

 

(51,575

)

 

 

189,900

 

NET INCOME ATTRIBUTABLE TO PREDECESSOR

 

 

 

 

 

(57,905

)

 

 

(450

)

 

 

(189,900

)

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS SUBSEQUENT TO INITIAL PUBLIC OFFERING

 

 

(3

)

 

 

 

 

 

137

 

 

 

 

DISTRIBUTIONS ON PREFERRED UNITS SUBSEQUENT TO INITIAL PUBLIC OFFERING

 

 

(2,973

)

 

 

 

 

 

(4,783

)

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND LIMITED PARTNERS SUBSEQUENT TO INITIAL PUBLIC OFFERING

 

$

50,916

 

 

$

 

 

$

(56,671

)

 

$

 

ALLOCATION OF NET INCOME (LOSS) SUBSEQUENT TO INITIAL PUBLIC OFFERING ATTRIBUTABLE TO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General partner interest

 

$

 

 

 

 

 

 

$

 

 

 

 

 

Common limited partner interests

 

 

25,608

 

 

 

 

 

 

 

(28,502

)

 

 

 

 

Subordinated limited partner interests

 

 

25,308

 

 

 

 

 

 

 

(28,169

)

 

 

 

 

 

 

$

50,916

 

 

 

 

 

 

$

(56,671

)

 

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER UNIT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common limited partner unit (basic and diluted)

 

$

0.27

 

 

 

 

 

 

$

(0.30

)

 

 

 

 

Weighted average common limited partner units outstanding

   (basic and diluted)

 

 

96,186

 

 

 

 

 

 

 

96,183

 

 

 

 

 

Per subordinated limited partner unit (basic and diluted)

 

$

0.27

 

 

 

 

 

 

$

(0.30

)

 

 

 

 

Weighted average subordinated limited partner units outstanding

   (basic and diluted)

 

 

95,057

 

 

 

 

 

 

 

95,057

 

 

 

 

 

DISTRIBUTIONS DECLARED AND PAID SUBSEQUENT TO INITIAL PUBLIC OFFERING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common limited partner unit

 

$

0.1615

 

 

 

 

 

 

$

0.1615

 

 

 

 

 

Per subordinated limited partner unit

 

$

0.1615

 

 

 

 

 

 

$

0.1615

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

2


 

BLACK STONE MINERALS, L.P.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(In thousands)

 

 

 

Predecessor

 

 

Black Stone Minerals, L.P.

 

 

 

Common units

 

 

Total equity

 

 

Common units

 

 

Subordinated units

 

 

Partners' equity— common units

 

 

Partners' equity— subordinated units

 

 

Noncontrolling

interests

 

 

Total equity

 

BALANCE AT DECEMBER 31, 2014

 

 

164,484

 

 

$

653,217

 

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

653,217

 

Conversion of Predecessor redeemable preferred units

 

 

2,750

 

 

 

39,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,240

 

Restricted Predecessor units granted

 

 

562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases of Predecessor units

 

 

(164

)

 

 

(3,015

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,015

)

Distributions to Predecessor unitholders and noncontrolling interests

 

 

 

 

 

(73,205

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(73,205

)

Distributions on Predecessor preferred units

 

 

 

 

 

(4,040

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,040

)

Net income attributable to Predecessor

 

 

 

 

 

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

450

 

Allocation of Predecessor units and equity

 

 

(167,632

)

 

 

(612,647

)

 

 

72,575

 

 

 

95,057

 

 

 

264,235

 

 

 

345,875

 

 

 

2,537

 

 

 

 

Issuance of common units for initial public offering, net of offering costs

 

 

 

 

 

 

 

 

22,500

 

 

 

 

 

 

391,500

 

 

 

 

 

 

 

 

 

391,500

 

Restricted common units granted

 

 

 

 

 

 

 

 

1,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,250

 

 

 

2,802

 

 

 

 

 

 

13,052

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,534

)

 

 

(15,352

)

 

 

(92

)

 

 

(30,978

)

Charges to Partners' equity for accrued distribution equivalent rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(153

)

 

 

 

 

 

 

 

 

(153

)

Net loss subsequent to initial public offering

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,096

)

 

 

(25,792

)

 

 

(137

)

 

 

(52,025

)

Distributions on preferred units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,406

)

 

 

(2,377

)

 

 

 

 

 

(4,783

)

BALANCE AT SEPTEMBER 30, 2015

 

 

 

 

$

 

 

 

96,186

 

 

 

95,057

 

 

$

621,796

 

 

$

305,156

 

 

$

2,308

 

 

$

929,260

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

BLACK STONE MINERALS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(51,575

)

 

$

189,900

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization

 

 

83,414

 

 

 

84,058

 

Impairment of oil and natural gas properties

 

 

156,683

 

 

 

 

Accretion of asset retirement obligations

 

 

805

 

 

 

443

 

Amortization of deferred charges

 

 

724

 

 

 

726

 

Gain on commodity derivative instruments

 

 

(57,450

)

 

 

(339

)

Net cash received (paid) on settlement of commodity derivative instruments

 

 

46,532

 

 

 

(3,369

)

Equity-based compensation

 

 

13,052

 

 

 

7,452

 

Gain on sale of assets, net

 

 

(20

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

22,485

 

 

 

(133

)

Prepaid expenses and other current assets

 

 

(453

)

 

 

(4,178

)

Accounts payable and accrued liabilities

 

 

3,674

 

 

 

6,373

 

Deferred revenue

 

 

(584

)

 

 

(2,516

)

Settlement of asset retirement obligations

 

 

(122

)

 

 

(19

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

217,165

 

 

 

278,398

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

 

(42,401

)

 

 

(57,427

)

Purchase of other property and equipment

 

 

(96

)

 

 

(312

)

Proceeds from the sale of oil and natural gas properties

 

 

432

 

 

 

10,625

 

Acquisitions of oil and natural gas properties

 

 

(62,157

)

 

 

(45,431

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(104,222

)

 

 

(92,545

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from issuance of common units of Black Stone Minerals, L.P., net of offering costs

 

 

399,087

 

 

 

 

Distributions to Predecessor unitholders

 

 

(126,383

)

 

 

(170,117

)

Distributions to Black Stone Minerals, L.P. common and subordinated unitholders

 

 

(30,886

)

 

 

 

Distributions to preferred unitholders

 

 

(9,812

)

 

 

(11,769

)

Distributions to noncontrolling interests

 

 

(167

)

 

 

 

Repurchases of Predecessor units

 

 

(3,015

)

 

 

(5,199

)

Net repayments under senior line of credit

 

 

(351,000

)

 

 

(21,000

)

Note receivable-officers

 

 

 

 

 

101

 

NET CASH USED IN FINANCING ACTIVITIES

 

 

(122,176

)

 

 

(207,984

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(9,233

)

 

 

(22,131

)

CASH AND CASH EQUIVALENTS - beginning of the period

 

 

14,803

 

 

 

30,123

 

CASH AND CASH EQUIVALENTS - end of the period

 

$

5,570

 

 

$

7,992

 

SUPPLEMENTAL DISCLOSURE

 

 

 

 

 

 

 

 

Interest paid

 

$

4,794

 

 

$

9,721

 

NON-CASH ACTIVITIES

 

 

 

 

 

 

 

 

Accrued Predecessor distributions payable

 

$

(53,248

)

 

$

(1,155

)

Conversion of redeemable preferred units

 

$

(39,240

)

 

$

(221

)

Accrued distributions payable for preferred units

 

$

(989

)

 

$

(6

)

Property additions and acquisitions financed through accounts payable and accrued liabilities

 

$

12,844

 

 

$

22,086

 

Public offering costs capitalized and offset against proceeds from initial public offering

 

$

7,587

 

 

$

 

Accrued distribution equivalent rights

 

$

153

 

 

$

 

Asset retirement obligations incurred

 

$

117

 

 

$

99

 

Liabilities assumed as consideration for oil and natural gas properties acquired

 

$

 

 

$

7,000

 

Acquisition of oil and natural gas properties financed through issuance of common units

 

$

 

 

$

2,258

 

Deferred revenue settled through acquisition of oil and natural gas properties

 

$

 

 

$

(2,657

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


BLACK STONE MINERALS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Black Stone Minerals, L.P. (“BSM”) 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. 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. 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 preferred units of BSM at a conversion ratio of one to one. The merger is 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 “Company” 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, the Company’s assets include nonparticipating and overriding royalty interests. These non-cost-bearing interests are collectively referred to as “mineral and royalty interests.” As of September 30, 2015, the Company’s mineral and royalty interests are located in most of the major onshore oil and natural gas producing basins spread across 41 states and 62 onshore oil and natural gas producing basins of the continental U.S. The Company also owns non-operated working interests in certain oil and natural gas properties.

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States 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 Company’s annual consolidated financial statements and related notes included in its final prospectus (the “Prospectus”) dated April 30, 2015 and filed with the SEC, pursuant to Rule 424(b) under the Securities Act of 1933 (the “Securities Act”), on May 1, 2015. The financial statements include the consolidated results of the Company. BSM’s general partner, Black Stone Minerals GP, L.L.C., is a wholly owned subsidiary. 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 Company. In the opinion of management, all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for the periods presented have been reflected. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year.

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

The consolidated financial statements include undivided interests in oil and natural gas property rights. The Company 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 consolidated balance sheets, statements of operations, and statements of cash flows.

5


BLACK STONE MINERALS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Segment reporting: The Company 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 Company’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.

 

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: Our significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the years ended December 31, 2014 and 2013 included in the Prospectus. There have been no changes in such policies or the application of such policies during the nine months ended September 30, 2015.

New accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update on a comprehensive new revenue recognition standard that will supersede Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new accounting guidance creates a framework under which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation, and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period. In July 2015, the FASB decided to defer the original effective date by one year to be effective for annual reporting periods beginning after December 15, 2017 instead of December 15, 2016 for public entities. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures and has not yet determined the method by which it will adopt the standard.

In April 2015, the FASB issued an accounting standards update that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the impact of adopting this guidance will be material to the Company’s consolidated financial statements and related disclosures.

In April 2015, the FASB issued an accounting standards update that specifies that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required.  The guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the impact of adopting this guidance will be material to the Company’s consolidated financial statements and related disclosures.

In September 2015, the FASB issued an accounting standards update that requires that adjustments to provisional amounts identified during the measurement period of a business combination be recognized in the reporting period in which those adjustments are determined, including the effect on earnings, if any, calculated as if the accounting had been completed at the acquisition date. This eliminates the previous requirement to retrospectively account for such adjustments. The new standard also requires additional disclosures related to the income statement effects of adjustments to provisional amounts identified during the measurement period. The guidance is effective for public companies during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the impact of adopting this guidance will be material to the Company’s consolidated financial statements and related disclosures.

 

 

NOTE 3—ASSET RETIREMENT OBLIGATIONS

The asset retirement obligation (“ARO”) liability reflects the present value of estimated costs of dismantlement, removal, site reclamation, and similar activities associated with the Company’s working-interest oil and natural gas properties. The Company

6


BLACK STONE MINERALS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

utilizes current retirement costs to estimate the expected cash outflows for retirement obligations. The Company estimates the ultimate productive life of its properties, a risk-adjusted discount rate, and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and natural gas property balance. The following table describes changes to the Company’s ARO liability during the period:

 

 

 

For the nine months ended

 

 

 

September 30, 2015

 

 

 

(In thousands)

 

Beginning asset retirement obligations

 

$

9,381

 

Liabilities incurred

 

 

117

 

Liabilities settled

 

 

(122

)

Accretion expense

 

 

805

 

Ending asset retirement obligations

 

$

10,181

 

 

 

NOTE 4—DERIVATIVES AND FINANCIAL INSTRUMENTS

The Company’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate these price fluctuations, the Company uses commodity derivative instruments. From time to time, such instruments may include fixed-price swaps, costless collars, fixed-price contracts, and other contractual arrangements. The Company does not enter into derivative instruments for speculative purposes.

A fixed-price-swap contract between the Company and the counterparty specifies a fixed commodity price and a future settlement date. The Company will receive from, or pay to, the counterparty the difference between the fixed swap price and the market price on the settlement date. Costless collars are a combination of a purchased put option and a sold call option, in which the premiums net to zero. With a costless collar, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the exercise price of the purchased put. The Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the exercise price for the sold call of the collar. The settlement paid or received is the difference between the market price on the settlement date and the related exercise price. All derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Company’s accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014. See Note 5 – Fair Value Measurement for further discussion.

The table below summarizes the fair value and classification of the Company’s derivative instruments:

 

As of September 30, 2015

 

Classification

 

Balance Sheet Location

 

Gross Fair

Value

 

 

Effect of

Counterparty

Netting

 

 

Net Carrying

Value on

Balance Sheet

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

34,336

 

 

$

 

 

$

34,336

 

Long-term asset

 

Deferred charges and other

long-term assets

 

 

14,053

 

 

 

 

 

 

14,053

 

Total assets

 

 

 

$

48,389

 

 

$

 

 

$

48,389

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liability

 

Commodity derivative liabilities

 

$

 

 

$

 

 

$

 

Long-term liability

 

Commodity derivative liabilities

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

$

 

 

$

 

 

$

 

7


BLACK STONE MINERALS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

As of December 31, 2014

 

Classification

 

Balance Sheet Location

 

Gross Fair

Value

 

 

Effect of

Counterparty

Netting

 

 

Net Carrying

Value on

Balance Sheet

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

37,656

 

 

$

(185

)

 

$

37,471

 

Long-term asset

 

Deferred charges and other

long-term assets

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

$