Black Stone Minerals LP (BSM, Financial) is one of the largest owners of oil and natural gas mineral interests in the United States. The company’s current financials are exceptional with sales coming in at $612 million and net income of $406 million for the recent quarter. The gross margin is 87% with most of that translating into net profit and then pushed out as quarterly dividends.
The company does all this with just 93 employees across land assets in over 41 states and 60 productive basins and very little debt. Black Stone’s footprint covers both established and emerging oil and gas deals that could position the company well to deliver long-term growth and returns for shareholders.
A high yield investment
The forward dividend yield is nearly 11%, and considering the state of the economy as well as the company's own financial growth, I don't think that's likely to go down in the near future. The next round of payments is coming late February, and while operating profits factor into Black Stone's ability to pay dividends, the one negative that could influence performance is the company’s derivatives trading.
Derivatives danger
The derivatives unit has not been doing well recently. For instance, in the first quarter, Black Stone generated $157 million in revenues from oil and gas sales and lease bonuses, but lost $120 million on commodity derivative trading. In the second quarter, it made $207.7 million from oil and gas revenue, but lost $27.3 million on derivatives trading.
Yet, despite this whole business segment seeming like a huge drawdown, it has not been a real issue to Black Stone's bottom line. In fact, there may be a time when this trading actually works to the benefit of profitability. For now, it looks more like a hedge against price downturns.
A shift in regulation
Other factors that impact the company include expectations for oil and gas prices, which are dependent on the overall economic outlook. The U.S. still has the world’s largest estimated oil reserves, topping 264 billion barrels, half of it shale oil (Saudi Arabia has an estimated 212 billion barrels), but shale reserves are much harder and costlier to extract, plus regulation plays a critical factor as well.
Today, the U.S. produces 18.8 million barrels of oil and gas per day while consuming 20.5 million barrels. Due to current rules on production, we import the difference, yet that is going change. The Biden Administration, after 18 months going in the other direction, now wants domestic oil companies to produce more oil and gas to help keep the price of gasoline down and help replenish the nation's Strategic Petroleum Reserve. That’s good news for Black Stone Minerals because in aggregate, the company’s 20 million acres of mineral assets can remain highly profitable at lower prices.
A hedge against recession
Even if there is a recession on the horizon, Black Stone's shares are trading low enough to provide a high yield whether the market pushes its stock lower or not. One thing is for sure, the modern world is a hungry beast that constantly demands more energy. Currently, in the U.S., we get 61% of our electricity from fossil fuels according to the Energy Information Administration, mostly from natural gas and coal. Even if half the population eventually chooses electric vehicles over the current gas powered ones, that won't change the makeup of utility electricty sources in the slightest.
The entire economy depends heavily on crude oil for thousands of other products from plastics (which are everywhere) to nail polish and glue to solar panels and wind turbine blades. Nearly everything you own or rely upon has oil in it. Over time, it may be slowly phased out from use in automobiles and airplanes and utilities, but it will likely never be completely taken off the market.
The fact of the matter is, society cannot function at our current level of comfort without fossil fuels, and it won't be able to for a very long time. Natural gas still contributes nearly 40% of the total electricity in the U.S. Coal is second, then nuclear, and only then does wind come in fourth place. I think many people are underestimating the outlook for oil and gas stocks.
To that note, with Black Stone stock trading at 8 times forward earnings estimates while boasting an incredible amount of profitability, I believe the stock is deeply undervalued. In 2023, profits look set to increase thanks to increased production (reported in the third quarter) from the number of its operating rigs increasing from 81 to 92. With its properties heavily geared toward natural gas, these producers moved fast to bring new wells online and take advantage of current prices.
The bottom line
Black Stone Minerals will be around for as long as its land produces fossil fuels, which in the coming year at least should increase distributable cash flow and total distributions. This could also help imrpove the undervalued share price, and I expect an improvement in the dividend yield in the future on solid growth investments. Once a rig is in operation, it generally produces at a profit for a long time.
Management is fully aligned with shareholders, with insiders and the family of the CEO, Thomas Carter, owning more than 30% of shares. In fact, since last August, Carter has continued to buy Black Stone shares, accumulating an additional 250,000 shares between $15 to $17 per share. The old saying goes, insiders sell for many reasons, but they only buy for one (this doesn't always hold up, but it usually does).
