Black Stone Minerals, L.P. 10-Q

Item 1A. Risk Factors In addition to the other information set forth in this report, readers should carefully consider the risks under the heading “Risk Factors” in our 2019 Annual Report on Form 10-K. Except to the extent updated below, there has been no material change in our risk factors from those described in our 2019 Annual Report on Form 10-K. These risks, as updated below, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations. Risks Related to our Business The COVID-19 pandemic and the significant decline in commodity prices in the first half of 2020 has adversely affected our business, and the ultimate effect on our financial condition, results of operations, and cash distributions to unitholders will depend on future developments, which are highly uncertain and cannot be predicted. The COVID-19 pandemic has adversely affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. As a result, there has been a significant reduction in demand for and prices of oil, natural gas and natural gas liquids ("NGLs"). In the first quarter of 2020 and into the second quarter of 2020, oil prices fell sharply and dramatically, due in part to significantly decreased demand as a result of the COVID-19 pandemic and the announcement by Saudi Arabia of a significant increase in its maximum oil production capacity as well as the announcement by Russia that previously agreed upon oil production cuts between members of the Organization of the Petroleum Exporting Countries and its broader partners (“OPEC+”) would expire on April 1, 2020, and the ensuing expiration thereof. Agreed-upon production cuts by OPEC+ along with declining U.S. production have helped to correct the supply and demand imbalance; however, these reductions are not expected to be enough in the near-term to offset the significant inventory build caused by demand destruction from the COVID-19 pandemic in the first half of 2020. Prices for oil were over $60 per barrel at the beginning of 2020 before declining significantly through March and further declining into April. While oil prices modestly recovered in June and July 2020, a reversal of recent improvements or a prolonged period at current prices may materially and adversely affect our financial condition, results of operations, and cash distributions to unitholders. The impact of the COVID-19 pandemic has negatively affected the oil and natural gas business environment, significantly reducing prices of oil, natural gas and NGLs. While we use derivative instruments to partially mitigate the impact of commodity price volatility, our revenues and operating results depend significantly upon the prevailing prices for oil and natural gas. The current price environment has caused some of our operators’ wells to become uneconomic, which has resulted, or may result in the future, in suspension of production from those wells or a significant reduction in or no royalty revenues from existing production. Some operators may also attempt to shut in producing wells and avoid lease termination or payment of shut-in royalties by claiming force majeure, if provided for in the applicable lease. Because these shut-ins have happened so recently, and no operator has, to our knowledge, claimed force majeure, we have not been able to quantify their impact on our future revenues. The current price environment also caused us to determine that certain depletable units consisting of mature oil producing properties were impaired. Therefore, we recognized impairment of oil and natural gas properties of $ 51.0 million for the six months ended June 30, 2020. Additionally, the borrowing base under the Credit Facility, which takes into consideration the estimated loan value of our oil and natural gas properties, was reduced from $ 650.0 million to $ 460.0 million, effective May 1, 2020. Effective July 21, 2020, in connection with the closing of our two asset sales in the Permian Basin, the borrowing base was further reduced to $ 430.0 million. In a prolonged period of low commodity prices, we may be required to impair additional properties and the borrowing base under our Credit Facility could be further reduced. In light of the challenging business environment and uncertainty caused by the pandemic, the board of directors of our general partner (the "Board") also approved a reduction in the quarterly distribution for the first quarter of 2020 to increase the amount of retained free cash flow for debt reduction and balance sheet protection. The Board approved an increase in the quarterly distribution for the second quarter of 2020 but the distribution remains below 2019 levels. 37 We enter into derivative instruments to partially mitigate the impact of commodity price volatility on our cash generated from operations. Any declines in production or production forecasts as a result of low commodity prices in light of COVID-19 pandemic and global oversupply could limit our ability to hedge future volumes. To protect the health and well-being of our workforce in the wake of COVID-19, we have implemented remote work arrangements for all employees. To the extent circumstances require us to maintain remote work arrangements indefinitely, our operational efficiency could be adversely affected, which could in turn adversely affect our financial condition and results of operations. The extent to which the COVID-19 pandemic adversely affects our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None.