Black Stone Minerals, L.P. 10-Q

Item 1. Financial Statements BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, 2022 December 31, 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 12,158 $ 8,876 Accounts receivable 140,569 97,142 Commodity derivative assets 316 — Prepaid expenses and other current assets 2,457 1,956 TOTAL CURRENT ASSETS 155,500 107,974 PROPERTY AND EQUIPMENT Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $ 925,707 and $ 937,395 at June 30, 2022 and December 31, 2021, respectively 3,000,991 3,001,627 Accumulated depreciation, depletion, amortization, and impairment ( 1,892,235 ) ( 1,869,731 ) Oil and natural gas properties, net 1,108,756 1,131,896 Other property and equipment, net of accumulated depreciation of $ 13,150 and $ 12,931 at June 30, 2022 and December 31, 2021, respectively 1,122 1,440 NET PROPERTY AND EQUIPMENT 1,109,878 1,133,336 DEFERRED CHARGES AND OTHER LONG-TERM ASSETS 7,315 6,611 TOTAL ASSETS $ 1,272,693 $ 1,247,921 LIABILITIES, MEZZANINE EQUITY, AND EQUITY CURRENT LIABILITIES Accounts payable $ 3,586 $ 5,944 Accrued liabilities 13,103 17,589 Commodity derivative liabilities 106,080 51,544 Other current liabilities 2,048 2,063 TOTAL CURRENT LIABILITIES 124,817 77,140 LONG–TERM LIABILITIES Credit facility 86,000 89,000 Accrued incentive compensation 1,063 838 Commodity derivative liabilities 3,422 2,001 Asset retirement obligations 12,599 12,561 Other long-term liabilities 2,104 2,752 TOTAL LIABILITIES 230,005 184,292 COMMITMENTS AND CONTINGENCIES (Note 7) MEZZANINE EQUITY Partners' equity – Series B cumulative convertible preferred units, 14,711 units outstanding at June 30, 2022 and December 31, 2021, respectively 298,361 298,361 EQUITY Partners' equity – general partner interest — — Partners' equity – common units, 209,399 and 208,666 units outstanding at June 30, 2022 and December 31, 2021, respectively 744,327 765,268 TOTAL EQUITY 744,327 765,268 TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY $ 1,272,693 $ 1,247,921 The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per unit amounts) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 REVENUE Oil and condensate sales $ 94,296 $ 53,936 $ 170,127 $ 98,112 Natural gas and natural gas liquids sales 111,181 56,481 186,935 99,370 Lease bonus and other income 2,244 7,505 7,103 9,890 Revenue from contracts with customers 207,721 117,922 364,165 207,372 Gain (loss) on commodity derivative instruments ( 27,349 ) ( 59,480 ) ( 147,369 ) ( 87,362 ) TOTAL REVENUE 180,372 58,442 216,796 120,010 OPERATING (INCOME) EXPENSE Lease operating expense 3,199 3,837 6,360 6,501 Production costs and ad valorem taxes 19,504 9,296 33,453 21,138 Exploration expense 2 2 182 1,075 Depreciation, depletion, and amortization 11,893 15,796 22,810 31,428 General and administrative 12,519 12,187 26,282 25,039 Accretion of asset retirement obligations 205 298 407 590 (Gain) loss on sale of assets, net ( 17 ) — ( 17 ) — TOTAL OPERATING EXPENSE 47,305 41,416 89,477 85,771 INCOME (LOSS) FROM OPERATIONS 133,067 17,026 127,319 34,239 OTHER INCOME (EXPENSE) Interest and investment income 2 — 2 — Interest expense ( 1,362 ) ( 1,628 ) ( 2,571 ) ( 2,838 ) Other income (expense) 81 31 36 214 TOTAL OTHER EXPENSE ( 1,279 ) ( 1,597 ) ( 2,533 ) ( 2,624 ) NET INCOME (LOSS) 131,788 15,429 124,786 31,615 Distributions on Series B cumulative convertible preferred units ( 5,250 ) ( 5,250 ) ( 10,500 ) ( 10,500 ) NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON UNITS $ 126,538 $ 10,179 $ 114,286 $ 21,115 ALLOCATION OF NET INCOME (LOSS): General partner interest $ — $ — $ — $ — Common units 126,538 10,179 114,286 21,115 $ 126,538 $ 10,179 $ 114,286 $ 21,115 NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON UNIT: Per common unit (basic) $ 0.60 $ 0.05 $ 0.55 $ 0.10 Per common unit (diluted) $ 0.59 $ 0.05 $ 0.55 $ 0.10 WEIGHTED AVERAGE COMMON UNITS OUTSTANDING: Weighted average common units outstanding (basic) 209,397 207,945 209,360 207,695 Weighted average common units outstanding (diluted) 224,366 207,945 209,360 207,695 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In thousands) Common units Partners' equity — common units Total equity BALANCE AT DECEMBER 31, 2021 208,666 $ 765,268 $ 765,268 Repurchases of common units ( 262 ) ( 2,991 ) ( 2,991 ) Restricted units granted, net of forfeitures 988 — — Equity–based compensation — 6,659 6,659 Distributions — ( 56,462 ) ( 56,462 ) Charges to partners' equity for accrued distribution equivalent rights — ( 434 ) ( 434 ) Distributions on Series B cumulative convertible preferred units — ( 5,250 ) ( 5,250 ) Net income (loss) — ( 7,002 ) ( 7,002 ) BALANCE AT MARCH 31, 2022 209,392 $ 699,788 $ 699,788 Restricted units granted, net of forfeitures 7 — — Equity–based compensation — 2,273 2,273 Distributions — ( 83,759 ) ( 83,759 ) Charges to partners' equity for accrued distribution equivalent rights — ( 513 ) ( 513 ) Distributions on Series B cumulative convertible preferred units — ( 5,250 ) ( 5,250 ) Net income (loss) — 131,788 131,788 BALANCE AT JUNE 30, 2022 209,399 $ 744,327 $ 744,327 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In thousands) Common units Partners' equity — common units Total equity BALANCE AT DECEMBER 31, 2020 206,749 $ 760,606 $ 760,606 Repurchases of common units ( 223 ) ( 1,957 ) ( 1,957 ) Restricted units granted, net of forfeitures 1,016 — — Equity–based compensation — 5,353 5,353 Distributions — ( 36,272 ) ( 36,272 ) Charges to partners' equity for accrued distribution equivalent rights — ( 237 ) ( 237 ) Distributions on Series B cumulative convertible preferred units — ( 5,250 ) ( 5,250 ) Net income (loss) — 16,186 16,186 BALANCE AT MARCH 31, 2021 207,542 $ 738,429 $ 738,429 Issuance of common units for property acquisitions 1,088 10,766 10,766 Restricted units granted, net of forfeitures 7 — — Equity–based compensation — 2,820 2,820 Distributions — ( 36,321 ) ( 36,321 ) Charges to partners' equity for accrued distribution equivalent rights — ( 180 ) ( 180 ) Distributions on Series B cumulative convertible preferred units — ( 5,250 ) ( 5,250 ) Net income (loss) — 15,429 15,429 BALANCE AT JUNE 30, 2021 208,637 $ 725,693 $ 725,693 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 124,786 $ 31,615 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, and amortization 22,810 31,428 Accretion of asset retirement obligations 407 590 Amortization of deferred charges 694 884 (Gain) loss on commodity derivative instruments 147,369 87,362 Net cash (paid) received on settlement of commodity derivative instruments ( 93,696 ) ( 21,868 ) Equity-based compensation 7,275 6,533 Exploratory dry hole expense — 1,049 (Gain) loss on sale of assets, net ( 17 ) — Changes in operating assets and liabilities: Accounts receivable ( 43,192 ) ( 6,159 ) Prepaid expenses and other current assets ( 501 ) ( 448 ) Accounts payable, accrued liabilities, and other ( 5,359 ) ( 5,247 ) Settlement of asset retirement obligations ( 437 ) ( 160 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 160,139 125,579 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of oil and natural gas properties — ( 10,064 ) Additions to oil and natural gas properties ( 10,072 ) ( 2,606 ) Additions to oil and natural gas properties leasehold costs — ( 21 ) Purchases of other property and equipment ( 41 ) ( 63 ) Proceeds from the sale of oil and natural gas properties 17 — Proceeds from farmouts of oil and natural gas properties 9,951 — NET CASH USED IN INVESTING ACTIVITIES ( 145 ) ( 12,754 ) CASH FLOWS FROM FINANCING ACTIVITIES Distributions to common unitholders ( 140,221 ) ( 72,593 ) Distributions to Series B cumulative convertible preferred unitholders ( 10,500 ) ( 10,500 ) Repurchases of common units ( 2,991 ) ( 1,957 ) Borrowings under credit facility 153,000 84,000 Repayments under credit facility ( 156,000 ) ( 109,000 ) Debt issuance costs and other — ( 3,528 ) NET CASH USED IN FINANCING ACTIVITIES ( 156,712 ) ( 113,578 ) NET CHANGE IN CASH AND CASH EQUIVALENTS 3,282 ( 753 ) CASH AND CASH EQUIVALENTS – beginning of the period 8,876 1,796 CASH AND CASH EQUIVALENTS – end of the period $ 12,158 $ 1,043 SUPPLEMENTAL DISCLOSURE Interest paid $ 1,864 $ 1,944 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS AND BASIS OF PRESENTATION Description of the Business Black Stone Minerals, L.P. (“BSM” or the “Partnership”) is a publicly traded Delaware limited partnership that owns oil and natural gas mineral interests, which make up the vast majority of the asset base. The Partnership's assets also include nonparticipating royalty interests and overriding royalty interests. These interests, which are substantially non-cost-bearing, are collectively referred to as “mineral and royalty interests.” The Partnership’s mineral and royalty interests are located in 41 states in the continental United States ("U.S."), including all of the major onshore producing basins. The Partnership also owns non-operated working interests in certain oil and natural gas properties. The Partnership's common units trade on the New York Stock Exchange under the symbol "BSM." Basis of Presentation The accompanying unaudited interim consolidated financial statements of the Partnership 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 GAAP. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Partnership’s consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Annual Report on Form 10-K"). The unaudited interim consolidated financial statements include the consolidated results of the Partnership. The results of operations for the six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year. In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for the fair presentation of the financial results for all periods presented have been reflected. All intercompany balances and transactions have been eliminated. The Partnership evaluates the significant terms of its investments to determine the method of accounting to be applied to each respective investment. Investments in which the Partnership has less than a 20 % ownership interest and does not have control or exercise significant influence are accounted for using fair value or cost minus impairment if fair value is not readily determinable. Investments in which the Partnership exercises control are consolidated, and the noncontrolling interests of such investments, which are not attributable directly or indirectly to the Partnership, are presented as a separate component of net income (loss) and equity. The unaudited interim consolidated financial statements include undivided interests in oil and natural gas property rights. The Partnership 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 unaudited interim consolidated balance sheets, statements of operations, and statements of cash flows. Segment Reporting The Partnership 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 Partnership’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. 6 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant Accounting Policies Significant accounting policies are disclosed in the Partnership’s 2021 Annual Report on Form 10-K. There have been no changes in such policies or the application of such policies during the six months ended June 30, 2022. Accounts Receivable The following table presents information about the Partnership's accounts receivable: June 30, 2022 December 31, 2021 (in thousands) Accounts receivable: Revenues from contracts with customers $ 134,278 $ 93,005 Other 6,291 4,137 Total accounts receivable $ 140,569 $ 97,142 NOTE 3 - OIL AND NATURAL GAS PROPERTIES Acquisitions Acquisitions of proved oil and natural gas properties and working interests are generally considered business combinations and are recorded at their estimated fair value as of the acquisition date. Acquisitions that consist of all or substantially all unproved oil and natural gas properties are generally considered asset acquisitions and are recorded at cost. In May 2021, the Partnership closed an acquisition of mineral and royalty acreage in the northern Midland Basin for total consideration of $ 20.8 million. The purchase price consisted of $ 10.0 million in cash and $ 10.8 million in common units of the Partnership. The cash consideration was funded with borrowings under the Credit Facility (as defined in Note 6 - Credit Facility) and funds from operating activities. The transaction was accounted for as a business combination with the assets acquired recorded at their estimated fair values as of the acquisition date. The assets acquired consisted of $ 4.9 million of proved oil and natural gas properties, $ 15.6 million of unproved oil and natural gas properties, and $ 0.3 million of net working capital. The Partnership had no acquisition activity during the six months ended June 30, 2022. Divestitures In the third quarter of 2021, the Partnership closed on the divestiture of its wholly owned subsidiary, TLW Investments, L.L.C. ("TLW"), effective September 1, 2021 for total proceeds of $ 0.2 million. TLW holds non-operating working interests and overriding royalty interests primarily located in Oklahoma and Texas. TLW's assets and liabilities consisted of oil and natural gas properties with a net book value of $ 3.0 million and asset retirement obligations with a book value of $ 5.7 million at the time of sale. The Partnership had no material divestiture activity during the six months ended June 30, 2022. Farmout Agreements The Partnership has entered into farmout arrangements designed to reduce its working interest capital expenditures and thereby significantly lower its capital spending other than for mineral and royalty interest acquisitions. Under these agreements, the Partnership conveyed its rights to participate in certain non-operated working interest opportunities to external capital providers while retaining value from these interests in the form of additional royalty income or retained economic interests. In 2017, the Partnership entered into farmout arrangements with Canaan Resource Partners ("Canaan") and Pivotal Petroleum Partners ("Pivotal") in the Shelby Trough area of East Texas where the Partnership owns a concentrated, relatively high-interest royalty position. This area was under active development by XTO Energy Inc. ("XTO") in San Augustine County, Texas and BPX Energy in Angelina County, Texas through 2019. These farmout agreements were superseded and replaced by the new farmout agreements discussed below. 7 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS San Augustine Farmout In March 2021, BSM and XTO reached an agreement to partition jointly owned working interests in the Brent Miller development area in San Augustine County. Under the partition agreement, BSM and XTO exchanged working interests in certain existing and proposed drilling units, resulting in each company holding 100 % of the working interests in their respective partitioned units. In May 2021, BSM and Aethon Energy ("Aethon") entered into an agreement to develop certain of the Partnership's undeveloped acreage in San Augustine County, including the working interests resulting from the partition agreement discussed above. The agreement provides for minimum well commitments by Aethon in exchange for reduced royalty rates and exclusive access to BSM's mineral and leasehold acreage in the contract area. The agreement calls for a minimum of five wells to be drilled in the initial program year, which began in the third quarter of 2021, increasing to a minimum of twelve wells per year beginning with the fourth program year. The Partnership's development agreement with Aethon and related drilling commitments covering its San Augustine County acreage is independent of the development agreement and associated commitments covering Angelina County discussed below. In May 2021, the Partnership entered into a new farmout agreement (the "Canaan Farmout") with Canaan and in December 2021, the Partnership entered into a farmout agreement (the "Azul Farmout") with Azul-SA, LLC ("Azul"). In April 2022, the Partnership amended the Canaan Farmout and entered into a farmout agreement (the "JWM Farmout") with JWM Oil & Gas LLC ("JWM"). These agreements cover all of the Partnership's share of working interests under active development by Aethon in San Augustine County, Texas and continue for a ten year period, unless earlier terminated in accordance with the terms of the agreements. Canaan, Azul, and JWM will each earn a percentage of the Partnership's working interest in wells drilled and operated by Aethon within the contract area subject to the agreements. Canaan, Azul, and JWM are obligated to fund the development of wells drilled by Aethon in the initial program year, and thereafter, have certain rights and options to continue funding the Partnership's working interest for the duration of each farmout agreement. The Partnership will receive an overriding royalty interest ("ORRI") before payout and an increased ORRI after payout on all wells drilled under the farmout agreements. As of June 30, 2022, six wells have been spud by Aethon in the contract area subject to the Canaan, Azul, and JWM Farmouts. The following tables present the working interests each farmout partner will earn within the contract area under the San Augustine farmout agreements: Brent Miller Area Farmout Partner % of Partnership's Working Interest Maximum % on an 8/8ths basis Canaan 64.0 % 32.0 % Azul 20.0 % 10.0 % JWM 16.0 % 8.0 % Total 100.0 % 50.0 % Other Areas Farmout Partner % of Partnership's Working Interest Maximum % on an 8/8ths basis Canaan 40.0 % 10.0 % Azul 50.0 % 12.5 % JWM 10.0 % 2.5 % Total 100.0 % 25.0 % 8 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Angelina Farmout In May 2020, the Partnership entered into a development agreement with Aethon to develop certain portions of the area forfeited by BPX Energy in Angelina County, Texas. The agreement provides for minimum well commitments by Aethon in exchange for reduced royalty rates and exclusive access to the Partnership's mineral and leasehold acreage in the contract area. The agreement calls for a minimum of four wells to be drilled in the initial program year, which began in the third quarter of 2020, increasing to a minimum of fifteen wells per year beginning with the third program year. In November 2020, the Partnership entered into a new farmout agreement (the "Pivotal Farmout") with Pivotal. The Pivotal Farmout covers the Partnership's share of working interest under active development by Aethon in Angelina County, Texas and continues until April 2028, unless earlier terminated in accordance to the terms of the agreement. Pivotal will earn 100 % of the Partnership's working interest (ranging from approximately 12.5 % to 25 % on an 8/8ths basis) in wells drilled and operated by Aethon within the contract area subject to the agreement. Pivotal is obligated to fund the development of all wells drilled by Aethon in the initial program year and thereafter, Pivotal has certain rights and options to continue funding the Partnership's working interests for the duration of the Pivotal Farmout. Once Pivotal achieves a specified payout for a designated well group, the Partnership will obtain a majority of the original working interest in such well group. As of June 30, 2022, fourteen wells have been spud by Aethon in the contract area subject to the Pivotal Farmout. Impairment of Oil and Natural Gas Properties Proved and unproved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of those properties. When assessing producing properties for impairment, the Partnership compares the expected undiscounted projected future cash flows of the producing properties to the carrying amount of the producing properties to determine recoverability. When the carrying amount exceeds its estimated undiscounted future cash flows, the carrying amount is written down to its fair value, which is measured as the present value of the projected future cash flows of such properties. The Partnership recognized no impairment of oil and natural gas properties for the three and six months ended June 30, 2022 and 2021, respectively. See Note 5 - Fair Value Measurements for further discussion. NOTE 4 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses oil and natural gas commodity derivative financial instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts and other contractual arrangements. A fixed-price swap contract between the Partnership and the counterparty specifies a fixed commodity price and a future settlement date. A costless collar contract between the Partnership and the counterparty specifies a floor and a ceiling commodity price and a future settlement date. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty. The Partnership does not enter into derivative instruments for speculative purposes. As of June 30, 2022, the Partnership’s open derivative contracts consisted of fixed-price swap contracts. The Partnership has not designated any of its contracts as fair value or cash flow hedges. Accordingly, the changes in the fair value of the contracts are included in the consolidated statement of operations in the period of the change. All derivative gains and losses from the Partnership’s derivative contracts have been recognized in revenue in the Partnership's accompanying consolidated statements of operations. Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Partnership’s accompanying consolidated balance sheets as of June 30, 2022 and December 31, 2021. See Note 5 - Fair Value Measurements for further discussion. The Partnership's derivative contracts expose it to credit risk in the event of nonperformance by counterparties that may adversely impact the fair value of the Partnership's commodity derivative assets. While the Partnership does not require its derivative contract counterparties to post collateral, the Partnership does evaluate the credit standing of such counterparties as deemed appropriate. This evaluation includes reviewing a counterparty’s credit rating and latest financial information. As of June 30, 2022, the Partnership had seven counterparties, all of which are rated Baa1 or better by Moody’s and are lenders under the Credit Facility. 9 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The tables below summarize the fair values and classifications of the Partnership’s derivative instruments, as well as the gross recognized derivative assets, liabilities, and amounts offset in the consolidated balance sheets as of each date: June 30, 2022 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 $ 702 $ ( 386 ) $ 316 Long-term asset Deferred charges and other long-term assets 2,886 ( 918 ) 1,968 Total assets $ 3,588 $ ( 1,304 ) $ 2,284 Liabilities: Current liability Commodity derivative liabilities $ 106,466 $ ( 386 ) $ 106,080 Long-term liability Commodity derivative liabilities 4,340 ( 918 ) 3,422 Total liabilities $ 110,806 $ ( 1,304 ) $ 109,502 December 31, 2021 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 $ — $ — $ — Long-term asset Deferred charges and other long-term assets — — — Total assets $ — $ — $ — Liabilities: Current liability Commodity derivative liabilities $ 51,544 $ — $ 51,544 Long-term liability Commodity derivative liabilities 2,001 — 2,001 Total liabilities $ 53,545 $ — $ 53,545 10 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Changes in the fair values of the Partnership’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations and consolidated statements of cash flows and consist of the following for the periods presented: Three Months Ended June 30, Six Months Ended June 30, Derivatives not designated as hedging instruments 2022 2021 2022 2021 (in thousands) Beginning fair value of commodity derivative instruments $ ( 142,321 ) $ ( 43,376 ) $ ( 53,545 ) $ ( 20,017 ) Gain (loss) on oil derivative instruments ( 16,275 ) ( 34,215 ) ( 65,117 ) ( 59,069 ) Gain (loss) on natural gas derivative instruments ( 11,074 ) ( 25,265 ) ( 82,252 ) ( 28,293 ) Net cash paid (received) on settlements of oil derivative instruments 26,345 15,910 42,237 20,412 Net cash paid (received) on settlements of natural gas derivative instruments 36,107 1,435 51,459 1,456 Net change in fair value of commodity derivative instruments 35,103 ( 42,135 ) ( 53,673 ) ( 65,494 ) Ending fair value of commodity derivative instruments $ ( 107,218 ) $ ( 85,511 ) $ ( 107,218 ) $ ( 85,511 ) The Partnership had the following open derivative contracts for oil as of June 30, 2022: Weighted Average Price (Per Bbl) Range (Per Bbl) Period and Type of Contract Volume (Bbl) Low High Oil Swap Contracts: 2022 Second Quarter 220,000 66.47 55.29 83.91 Third Quarter 660,000 66.47 55.29 83.91 Fourth Quarter 660,000 66.47 55.29 83.91 2023 First Quarter 180,000 $ 80.40 $ 78.00 $ 82.80 Second Quarter 90,000 $ 89.50 $ 89.50 89.50 Third Quarter 90,000 $ 89.50 $ 89.50 89.50 Fourth Quarter 90,000 $ 89.50 $ 89.50 89.50 11 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The Partnership had the following open derivative contracts for natural gas as of June 30, 2022: Weighted Average Price (Per MMBtu) Range (Per MMBtu) Period and Type of Contract Volume (MMBtu) Low High Natural Gas Swap Contracts: 2022 Second Quarter — $ — $ — $ — Third Quarter 9,000,000 3.12 2.80 4.30 Fourth Quarter 9,000,000 3.12 2.80 4.30 2023 First Quarter 4,500,000 $ 4.19 $ 3.28 $ 5.05 Second Quarter 3,640,000 4.16 3.28 5.05 Third Quarter 3,680,000 4.16 3.28 5.05 Fourth Quarter 3,680,000 4.16 3.28 5.05 The Partnership entered into the following derivative contracts for natural gas subsequent to June 30, 2022: Weighted Average Price (Per MMBtu) Range (Per MMBtu) Period and Type of Contract Volume (MMBtu) Low High Natural Gas Swap Contracts: 2023 First Quarter 2,700,000 $ 5.61 $ 5.10 $ 6.00 Second Quarter 2,730,000 5.61 5.10 6.00 Third Quarter 2,760,000 5.61 5.10 6.00 Fourth Quarter 2,760,000 5.61 5.10 6.00 NOTE 5 - FAIR VALUE MEASUREMENTS Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurement , establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: Level 1 —Unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 —Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 —Inputs that are unobservable and significant to the fair value measurement (including the Partnership’s own assumptions in determining fair value). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 12 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The carrying value of the Partnership's cash and cash equivalents, receivables, and payables approximate fair value due to the short-term nature of the instruments. The estimated carrying value of all debt as of June 30, 2022 and December 31, 2021 approximated the fair value due to variable market rates of interest. These debt fair values, which are Level 3 measurements, were estimated based on the Partnership’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimated fair values of the Partnership’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. Assets and Liabilities Measured at Fair Value on a Recurring Basis The Partnership estimated the fair value of commodity derivative financial instruments using the market approach via a model that uses inputs that are observable in the market or can be derived from, or corroborated by, observable data. See Note 4 - Commodity Derivative Financial Instruments for further discussion. The following table presents information about the Partnership’s assets and liabilities measured at fair value on a recurring basis: Fair Value Measurements Using Effect of Counterparty Netting Total Level 1 Level 2 Level 3 (in thousands) As of June 30, 2022 Financial Assets Commodity derivative instruments $ — $ 3,588 $ — $ ( 1,304 ) $ 2,284 Financial Liabilities Commodity derivative instruments $ — $ 110,806 $ — $ ( 1,304 ) $ 109,502 As of December 31, 2021 Financial Assets Commodity derivative instruments $ — $ — $ — $ — $ — Financial Liabilities Commodity derivative instruments $ — $ 53,545 $ — $ — $ 53,545 Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Nonfinancial assets and liabilities measured at fair value on a non-recurring basis include certain nonfinancial assets and liabilities as may be acquired in a business combination and measurements of oil and natural gas property values for assessment of impairment. The determination of the fair values of proved and unproved properties acquired in business combinations are estimated by discounting projected future cash flows. The factors used to determine fair value include estimates of economic reserves, future operating and development costs, future commodity prices, timing of future production, and a risk-adjusted discount rate. The Partnership has designated these measurements as Level 3. The Partnership’s fair value assessments for recent acquisitions are included in Note 3 - Oil and Natural Gas Properties. Oil and natural gas properties are measured at fair value on a non-recurring basis using the income approach when assessing for impairment. The factors used to determine fair value include estimates of proved reserves, future commodity prices, timing of future production, operating costs, future capital expenditures, and a risk-adjusted discount rate. The Partnership’s estimates of fair value have been determined at discrete points in time based on relevant market data. These estimates involve uncertainty, particularly in the current volatile market, and cannot be determined with precision. Changes to these estimates, particularly related to economic reserves, future commodity prices, and timing of future production could result in additional impairment charges in the future. There were no significant changes in valuation techniques or related inputs as of June 30, 2022 or December 31, 2021. 13 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - CREDIT FACILITY The Partnership maintains a senior secured revolving credit agreement, as amended (the “Credit Facility”). The Credit Facility has an aggregate maximum credit amount of $ 1.0 billion and terminates on November 1, 2024. The commitment of the lenders equals the lesser of the aggregate maximum credit amount and the borrowing base. The amount of the borrowing base is redetermined semi-annually, usually in October and April, and is derived from the value of the Partnership’s oil and natural gas properties as determined by the lender syndicate using pricing assumptions that often differ from the current market for future prices. The Partnership and the lenders (at the direction of two-thirds of the lenders) each have discretion to request a borrowing base redetermination one time between scheduled redeterminations. The Partnership also has the right to request a redetermination following the acquisition of oil and natural gas properties in excess of 10 % of the value of the borrowing base immediately prior to such acquisition. The October 2021 and April 2022 borrowing base redeterminations reaffirmed the borrowing base at $ 400.0 million. The next semi-annual redetermination is scheduled for October 2022. Outstanding borrowings under the Credit Facility bear interest at a floating rate elected by the Partnership equal to an alternative base rate (which is equal to the greatest of the Prime Rate, the Federal Funds effective rate plus 0.50 %, or 1-month LIBOR plus 1.00 %) or LIBOR, in each case, plus the applicable margin. As of December 31, 2021 and June 30, 2022, the applicable margin for the alternative base rate ranged from 1.50 % to 2.50 % and the applicable margin for LIBOR ranged from 2.50 % to 3.50 %, depending on the borrowings outstanding in relation to the borrowing base. The weighted-average interest rate of the Credit Facility was 4.12 % and 2.61 % as of June 30, 2022 and December 31, 2021, respectively. Accrued interest is payable at the end of each calendar quarter or at the end of each interest period, unless the interest period is longer than 90 days, in which case interest is payable at the end of every 90-day period. In addition, a commitment fee is payable at the end of each calendar quarter based on either a rate of 0.375 % if the borrowing base utilization percentage is less than 50 %, or 0.500 % per annum if the borrowing base utilization percentage is equal to or greater than 50 %. The Credit Facility is secured by substantially all of the Partnership’s oil and natural gas production and assets. The Credit Facility contains various limitations on future borrowings, leases, hedging, and sales of assets. Additionally, the Credit Facility requires the Partnership to maintain a current ratio of not less than 1.0 :1.0 and a ratio of total debt to EBITDAX (Earnings before Interest, Taxes, Depreciation, Amortization, and Exploration) of not more than 3.5 :1.0. Distributions are not permitted if there is a default under the Credit Facility (including the failure to satisfy one of the financial covenants), if the availability under the Credit Facility is less than 10 % of the lenders' commitments, or if total debt to EBITDAX is greater than 3.0 . As of June 30, 2022, the Partnership was in compliance with all financial covenants in the Credit Facility. The aggregate principal balance outstanding was $ 86.0 million and $ 89.0 million at June 30, 2022 and December 31, 2021, respectively. The unused portion of the available borrowings under the Credit Facility were $ 314.0 million and $ 311.0 million at June 30, 2022 and December 31, 2021, respectively. The 1-week and 2-month U.S. dollar LIBOR settings ceased to be published after December 31, 2021 and the U.K. Financial Conduct Authority intends to stop persuading or compelling banks to submit LIBOR rates for the remaining U.S. dollar settings after June 30, 2023. Our Credit Facility uses the 1-month LIBOR setting and includes provisions to determine a replacement rate for LIBOR if necessary during its term, based on the secured overnight financing rate published by the Federal Reserve Bank of New York (“SOFR”). We currently do not expect the transition from LIBOR to have a material impact on us. NOTE 7 - COMMITMENTS AND CONTINGENCIES Environmental Matters The Partnership’s business includes activities that are subject to U.S. federal, state, and local environmental regulations with regard to air, land, and water quality and other environmental matters. The Partnership does not consider the potential remediation costs that could result from issues identified in any environmental site assessments to be significant to the consolidated financial statements, and no provision for potential remediation costs has been recorded. 14 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Litigation From time to time, the Partnership is involved in legal actions and claims arising in the ordinary course of business. The Partnership believes existing claims as of June 30, 2022 will be resolved without material adverse effect on the Partnership’s financial condition or operations. NOTE 8 - INCENTIVE COMPENSATION The table below summarizes incentive compensation expense recorded in the General and administrative line item of the consolidated statements of operations for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Cash—short and long-term incentive plans $ 1,963 $ 1,729 $ 2,959 $ 3,114 Equity-based compensation—restricted common units 1,049 1,037 1,976 1,986 Equity-based compensation—restricted performance units 1,144 1,697 4,237 3,858 Board of Directors incentive plan 531 337 1,062 689 Total incentive compensation expense $ 4,687 $ 4,800 $ 10,234 $ 9,647 In the first quarter of 2022, the board of directors of the Partnership's general partner (the "Board") approved a grant of awards to all employees dependent on the achievement of an aspirational production target to be measured in the fourth quarter of 2025 (the "Aspirational Awards"). The Aspirational Awards include performance cash awards and performance equity awards in the form of restricted performance units. To the extent earned, each performance unit represents the right to receive one common unit. The performance cash awards and performance units are eligible to become earned at the end of the requisite service period on December 31, 2025 if the minimum performance metrics are achieved. The minimum performance metrics are at least 42 Mboe per day of average daily royalty production in either the fourth quarter or the month of December of 2025 while maintaining a net debt to EBITDA ratio less than or equal to 1.0 on December 31, 2025. Average daily royalty production does not include production attributable to acquisitions consummated during the performance period. Compensation expense related to the Aspirational Awards will be recorded over the service period when achievement of the performance condition is probable. Total compensation expense to be recognized over the life of the Aspirational Awards consists of $ 5.0 million for the performance cash awards and $ 17.1 million for the performance equity awards ( 1,476,943 performance units with a weighted-average grant date fair value of $ 11.58 per unit). As of June 30, 2022, the Partnership determined achievement of the performance condition was not yet probable and no expense was recognized. NOTE 9 - PREFERRED UNITS Series B Cumulative Convertible Preferred Units On November 28, 2017, the Partnership issued and sold in a private placement 14,711,219 Series B cumulative convertible preferred units representing limited partner interests in the Partnership for a cash purchase price of $ 20.3926 per Series B cumulative convertible preferred unit, resulting in total proceeds of approximately $ 300.0 million. The Series B cumulative convertible preferred units are entitled to an annual distribution of 7 %, payable on a quarterly basis in arrears. The Series B cumulative convertible preferred units may be converted by each holder at its option, in whole or in part, into common units on a one -for-one basis at the purchase price of $ 20.3926 , adjusted to give effect to any accrued but unpaid accumulated distributions on the applicable Series B cumulative convertible preferred units through the most recent declaration date. However, the Partnership shall not be obligated to honor any request for such conversion if such request does not involve an underlying value of common units of at least $ 10.0 million based on the closing trading price of common units on the trading day immediately preceding the conversion notice date, or such lesser amount to the extent such exercise covers all of a holder's Series B cumulative convertible preferred units. The Series B cumulative convertible preferred units had a carrying value of $ 298.4 million, including accrued distributions of $ 5.3 million, as of June 30, 2022 and December 31, 2021. The Series B cumulative convertible preferred units are classified 15 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS as mezzanine equity on the consolidated balance sheets since certain provisions of redemption are outside the control of the Partnership. NOTE 10 - EARNINGS PER UNIT The Partnership applies the two-class method for purposes of calculating earnings per unit (“EPU”). The holders of the Partnership’s restricted common units have all the rights of a unitholder, including non-forfeitable distribution rights. As participating securities, the restricted common units are included in the calculation of basic earnings per unit. For the periods presented, the amount of earnings allocated to these participating units was not material. Net income (loss) attributable to the Partnership is allocated to the Partnership’s general partner and the common unitholders in proportion to their pro rata ownership after giving effect to distributions, if any, declared during the period. The Partnership assesses the Series B cumulative convertible preferred units on an as-converted basis for the purpose of calculating diluted EPU. The Partnership’s restricted performance unit awards are contingently issuable units that are considered in the calculation of diluted EPU. The Partnership assesses the number of units that would be issuable, if any, under the terms of the arrangement if the end of the reporting period were the end of the contingency period. The following table sets forth the computation of basic and diluted earnings per common unit: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands, except per unit amounts) NET INCOME (LOSS) $ 131,788 $ 15,429 $ 124,786 $ 31,615 Distributions on Series B cumulative convertible preferred units ( 5,250 ) ( 5,250 ) ( 10,500 ) ( 10,500 ) NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON UNITS $ 126,538 $ 10,179 $ 114,286 $ 21,115 ALLOCATION OF NET INCOME (LOSS): General partner interest $ — $ — $ — $ — Common units 126,538 10,179 114,286 21,115 $ 126,538 $ 10,179 $ 114,286 $ 21,115 NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON UNIT: Per common unit (basic) $ 0.60 $ 0.05 $ 0.55 $ 0.10 Per common unit (diluted) 1 $ 0.59 $ 0.05 $ 0.55 $ 0.10 WEIGHTED AVERAGE COMMON UNITS OUTSTANDING: Weighted average common units outstanding (basic) 209,397 207,945 209,360 207,695 Effect of dilutive securities 14,969 — — — Weighted average common units outstanding (diluted) 224,366 207,945 209,360 207,695 1 For the Three Months Ended June 30, 2022, diluted net income (loss) attributable to common units included distributions on Series B cumulative convertible preferred units of $ 5.3 million. 16 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following units of potentially dilutive securities were excluded from the computation of diluted weighted average units outstanding because their inclusion would be anti-dilutive: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Potentially dilutive securities (common units): Series B cumulative convertible preferred units on an as-converted basis — 14,969 14,969 14,969 NOTE 11 - COMMON UNITS Common Units The common units represent limited partner interests in the Partnership. The holders of common units are entitled to participate in distributions and exercise the rights and privileges provided to limited partners holding common units under the partnership agreement. The partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 15 % or more of any class of units then outstanding, other than the limited partners in Black Stone Minerals Company, L.P. prior to the IPO, their transferees, persons who acquired such units with the prior approval of the Board, holders of Series B cumulative convertible preferred units in connection with any vote, consent or approval of the Series B cumulative convertible preferred units as a separate class, and persons who own 15 % or more of any class as a result of any redemption or purchase of any other person's units or similar action by the Partnership or any conversion of the Series B cumulative convertible preferred units at the Partnership's option or in connection with a change of control, may not vote on any matter. The partnership agreement generally provides that any distributions are paid each quarter in the following manner: • first , to the holders of the Series B cumulative convertible preferred units in an amount equal to 7 % per annum, subject to certain adjustments; and • second , to the holders of common units. The following table provides information about the Partnership's per unit distributions to common unitholders: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Distributions declared and paid per common unit $ 0.4000 $ 0.1750 $ 0.6700 $ 0.3500 Common Unit Repurchase Program On November 5, 2018, the Board authorized the repurchase of up to $ 75.0 million in common units. The repurchase program authorizes the Partnership to make repurchases on a discretionary basis as determined by management, subject to market conditions, applicable legal requirements, available liquidity, and other appropriate factors. The Partnership made no repurchases under this program for the six months ended June 30, 2022. As of June 30, 2022, the Partnership has repurchased $ 4.2 million in common units under the repurchase program since inception. The repurchase program is funded from the Partnership's cash on hand or availability on the Credit Facility. Any repurchased units are canceled. NOTE 12 - SUBSEQUENT EVENTS On July 25, 2022, the Board approved a distribution for the three months ended June 30, 2022 of $ 0.42 per common unit. Distributions will be payable on August 19, 2022 to unitholders of record at the close of business on August 12, 2022. 17