Black Stone Minerals, L.P. 10-Q

Item 1. Financial Statements BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 31, 2024 December 31, 2023 ASSETS CURRENT ASSETS Cash and cash equivalents $ 40,456 $ 70,282 Accounts receivable 72,428 82,253 Commodity derivative assets 30,741 38,273 Prepaid expenses and other current assets 2,540 2,319 TOTAL CURRENT ASSETS 146,165 193,127 PROPERTY AND EQUIPMENT Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $ 913,031 and $ 890,338 at March 31, 2024 and December 31, 2023, respectively 3,049,455 3,026,394 Accumulated depreciation, depletion, amortization, and impairment ( 1,972,524 ) ( 1,961,899 ) Oil and natural gas properties, net 1,076,931 1,064,495 Other property and equipment, net of accumulated depreciation of $ 14,270 and $ 14,163 at March 31, 2024 and December 31, 2023, respectively 938 1,007 NET PROPERTY AND EQUIPMENT 1,077,869 1,065,502 DEFERRED CHARGES AND OTHER LONG-TERM ASSETS 7,641 8,255 TOTAL ASSETS $ 1,231,675 $ 1,266,884 LIABILITIES, MEZZANINE EQUITY, AND EQUITY CURRENT LIABILITIES Accounts payable $ 5,844 $ 6,270 Accrued liabilities 7,380 17,003 Commodity derivative liabilities 12,782 1,229 Other current liabilities 1,374 1,334 TOTAL CURRENT LIABILITIES 27,380 25,836 LONG–TERM LIABILITIES Accrued incentive compensation 802 1,699 Commodity derivative liabilities 5,858 81 Asset retirement obligations 19,078 19,030 Other long-term liabilities 2,755 2,893 TOTAL LIABILITIES 55,873 49,539 COMMITMENTS AND CONTINGENCIES (Note 7) MEZZANINE EQUITY Partners' equity – Series B cumulative convertible preferred units, 14,711 units outstanding at March 31, 2024 and December 31, 2023 300,478 299,137 EQUITY Partners' equity – general partner interest — — Partners' equity – common units, 210,656 and 209,991 units outstanding at March 31, 2024 and December 31, 2023, respectively 875,324 918,208 TOTAL EQUITY 875,324 918,208 TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY $ 1,231,675 $ 1,266,884 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 March 31, 2024 2023 REVENUE Oil and condensate sales $ 71,224 $ 60,909 Natural gas and natural gas liquids sales 42,011 57,423 Lease bonus and other income 3,548 3,975 Revenue from contracts with customers 116,783 122,307 Gain (loss) on commodity derivative instruments ( 11,290 ) 52,271 TOTAL REVENUE 105,493 174,578 OPERATING (INCOME) EXPENSE Lease operating expense 2,432 2,668 Production costs and ad valorem taxes 13,038 12,667 Exploration expense 3 4 Depreciation, depletion, and amortization 11,639 11,147 General and administrative 14,090 12,648 Accretion of asset retirement obligations 317 245 TOTAL OPERATING EXPENSE 41,519 39,379 INCOME (LOSS) FROM OPERATIONS 63,974 135,199 OTHER INCOME (EXPENSE) Interest and investment income 670 157 Interest expense ( 629 ) ( 814 ) Other income (expense) ( 88 ) ( 99 ) TOTAL OTHER EXPENSE ( 47 ) ( 756 ) NET INCOME (LOSS) 63,927 134,443 Distributions on Series B cumulative convertible preferred units ( 7,367 ) ( 5,250 ) NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON UNITS $ 56,560 $ 129,193 ALLOCATION OF NET INCOME (LOSS): General partner interest $ — $ — Common units 56,560 129,193 $ 56,560 $ 129,193 NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON UNIT: Per common unit (basic) $ 0.27 $ 0.62 Per common unit (diluted) $ 0.27 $ 0.60 WEIGHTED AVERAGE COMMON UNITS OUTSTANDING: Weighted average common units outstanding (basic) 210,654 209,941 Weighted average common units outstanding (diluted) 210,654 224,910 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 BALANCE AT DECEMBER 31, 2023 209,991 $ 918,208 Repurchases of common units ( 287 ) ( 4,381 ) Restricted units granted, net of forfeitures 952 — Equity–based compensation — 5,431 Distributions — ( 99,899 ) Charges to partners' equity for accrued distribution equivalent rights — ( 595 ) Distributions on Series B cumulative convertible preferred units — ( 7,367 ) Net income (loss) — 63,927 BALANCE AT MARCH 31, 2024 210,656 $ 875,324 Common units Partners' equity BALANCE AT DECEMBER 31, 2022 209,407 $ 911,451 Repurchases of common units ( 358 ) ( 5,496 ) Restricted units granted, net of forfeitures 914 — Equity–based compensation — 5,052 Distributions — ( 99,600 ) Charges to partners' equity for accrued distribution equivalent rights — ( 733 ) Distributions on Series B cumulative convertible preferred units — ( 5,250 ) Net income (loss) — 134,443 BALANCE AT MARCH 31, 2023 209,963 $ 939,867 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 63,927 $ 134,443 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, and amortization 11,639 11,147 Accretion of asset retirement obligations 317 245 Amortization of deferred charges 268 255 (Gain) loss on commodity derivative instruments 11,290 ( 52,271 ) Net cash (paid) received on settlement of commodity derivative instruments 13,797 13,285 Equity-based compensation 2,383 2,118 Changes in operating assets and liabilities: Accounts receivable 9,851 41,588 Prepaid expenses and other current assets ( 220 ) ( 182 ) Accounts payable, accrued liabilities, and other ( 8,510 ) ( 13,333 ) Settlement of asset retirement obligations ( 282 ) ( 140 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 104,460 137,155 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of oil and natural gas properties ( 22,966 ) — Additions to oil and natural gas properties ( 285 ) ( 1,932 ) Additions to oil and natural gas properties leasehold costs ( 753 ) — Purchases of other property and equipment ( 39 ) ( 22 ) Proceeds from the sale of oil and natural gas properties 79 — NET CASH USED IN INVESTING ACTIVITIES ( 23,964 ) ( 1,954 ) CASH FLOWS FROM FINANCING ACTIVITIES Distributions to common unitholders ( 99,899 ) ( 99,600 ) Distributions to Series B cumulative convertible preferred unitholders ( 6,026 ) ( 5,250 ) Repurchases of common units ( 4,381 ) ( 5,496 ) Borrowings under credit facility 6,000 50,000 Repayments under credit facility ( 6,000 ) ( 60,000 ) Debt issuance costs and other ( 16 ) ( 12 ) NET CASH USED IN FINANCING ACTIVITIES ( 110,322 ) ( 120,358 ) NET CHANGE IN CASH AND CASH EQUIVALENTS ( 29,826 ) 14,843 CASH AND CASH EQUIVALENTS – beginning of the period 70,282 4,307 CASH AND CASH EQUIVALENTS – end of the period $ 40,456 $ 19,150 SUPPLEMENTAL DISCLOSURE Interest paid $ 361 $ 588 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 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, 2023 ("2023 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 three months ended March 31, 2024 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 in the accompanying unaudited interim consolidated financial statements. 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. 5 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 2023 Annual Report on Form 10-K. There have been no changes in such policies or the application of such policies during the three months ended March 31, 2024. Accounts Receivable The following table presents information about the Partnership's accounts receivable: March 31, 2024 December 31, 2023 (in thousands) Accounts receivable: Revenues from contracts with customers $ 68,312 $ 77,560 Other 4,116 4,693 Total accounts receivable $ 72,428 $ 82,253 Recent Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segments Disclosures (Topic 280), which updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments provide new segment disclosure requirements for entities with a single reportable segment. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Partnership does not plan to early adopt and expects the new guidance will not have a material impact on the Partnership's consolidated financial statements and related disclosures. NOTE 3 - OIL AND NATURAL GAS PROPERTIES Divestitures The Partnership had no material divestiture activity during 2023 or the three months ended March 31, 2024. 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 the first quarter of 2024, the Partnership acquired mineral and royalty interests that consisted of substantially all unproved oil and natural gas properties from various sellers for cash consideration of $ 23.0 million, including capitalized direct transaction costs. These acquisitions were considered asset acquisitions, were primarily located in the Gulf Coast land region, and were funded with cash from operating activities. During the year ended December 31, 2023, the Partnership acquired mineral and royalty interests that consisted of unproved oil and natural gas properties from various sellers for cash consideration of $ 14.6 million, including capitalized direct transaction costs. These acquisitions were considered asset acquisitions, were primarily located in the Gulf Coast land region, and were funded with cash from operating activities. Farmout Agreements The Partnership has entered into farmout arrangements designed to reduce its working interest capital expenditures and thereby significantly lowering 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 6 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS capital providers while retaining value from these interests in the form of additional royalty income or retained economic interests. San Augustine Farmout In May 2021, BSM and Aethon Energy ("Aethon") entered into an agreement to develop certain portions of the Partnership's undeveloped acreage in San Augustine County, Texas. 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, 10 wells to be drilled in the second and third program years, and, thereafter, a minimum of 12 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 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 10 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 March 31, 2024, 20 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 % 7 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Angelina Farmout In May 2020, BSM and Aethon entered into an agreement to develop certain portions of the Partnership's undeveloped acreage 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, 10 wells to be drilled in the second program year, and, beginning with the third program year, 15 wells per year beginning thereafter. In November 2020, the Partnership entered into a 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 March 31, 2024, 45 wells have been spud by Aethon in the contract area subject to the Pivotal Farmout. Aethon Time-Out In December 2023, the Partnership received notice that Aethon was exercising the "time-out" provisions under its joint exploration agreements with BSM in Angelina and San Augustine counties in East Texas. When natural gas prices fall below specified thresholds, Aethon may elect to temporarily suspend its drilling obligations for up to nine consecutive months and a maximum of 18 total months in any 48-month period. The current program year under each agreement is paused during the suspension period such that the program year may extend beyond 12 calendar months. Aethon has not previously invoked the time-out provisions under the agreements. 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 did not recognize any impairment of oil and natural gas properties for the three months ended March 31, 2024 and 2023. See "Note 5 - Fair Value Measurements" for additional information. 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. 8 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS As of March 31, 2024, 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 March 31, 2024 and December 31, 2023. See "Note 5 - Fair Value Measurements" for additional information. 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 March 31, 2024, the Partnership had seven counterparties, all of which are rated Baa2 or better by Moody’s and are lenders under the Credit Facility. 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: March 31, 2024 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 $ 36,665 $ ( 5,924 ) $ 30,741 Long-term asset Deferred charges and other long-term assets 512 ( 365 ) 147 Total assets $ 37,177 $ ( 6,289 ) $ 30,888 Liabilities: Current liability Commodity derivative liabilities $ 18,706 $ ( 5,924 ) $ 12,782 Long-term liability Commodity derivative liabilities 6,223 ( 365 ) 5,858 Total liabilities $ 24,929 $ ( 6,289 ) $ 18,640 December 31, 2023 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 $ 41,485 $ ( 3,212 ) $ 38,273 Long-term asset Deferred charges and other long-term assets 498 ( 126 ) 372 Total assets $ 41,983 $ ( 3,338 ) $ 38,645 Liabilities: Current liability Commodity derivative liabilities $ 4,441 $ ( 3,212 ) $ 1,229 Long-term liability Commodity derivative liabilities 207 ( 126 ) 81 Total liabilities $ 4,648 $ ( 3,338 ) $ 1,310 9 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 March 31, Derivatives not designated as hedging instruments 2024 2023 (in thousands) Beginning fair value of commodity derivative instruments $ 37,335 $ 28,941 Gain (loss) on oil derivative instruments ( 23,230 ) 7,422 Gain (loss) on natural gas derivative instruments 11,940 44,849 Net cash paid (received) on settlements of oil derivative instruments ( 121 ) 1,400 Net cash paid (received) on settlements of natural gas derivative instruments ( 13,676 ) ( 14,685 ) Net change in fair value of commodity derivative instruments ( 25,087 ) 38,986 Ending fair value of commodity derivative instruments $ 12,248 $ 67,927 The Partnership had the following open derivative contracts for oil as of March 31, 2024: Weighted Average Price (Per Bbl) Range (Per Bbl) Period and Type of Contract Volume (Bbl) Low High Oil Swap Contracts: 2024 First Quarter 190,000 $ 71.45 $ 67.00 $ 81.00 Second Quarter 570,000 71.45 67.00 81.00 Third Quarter 570,000 71.45 67.00 81.00 Fourth Quarter 570,000 71.45 67.00 81.00 2025 First Quarter 555,000 $ 71.22 $ 70.02 $ 73.15 Second Quarter 555,000 71.22 70.02 73.15 Third Quarter 555,000 71.22 70.02 73.15 Fourth Quarter 555,000 71.22 70.02 73.15 The Partnership had the following open derivative contracts for natural gas as of March 31, 2024: Weighted Average Price (Per MMBtu) Range (Per MMBtu) Period and Type of Contract Volume (MMBtu) Low High Natural Gas Swap Contracts: 2024 Second Quarter 10,465,000 $ 3.55 $ 3.00 $ 3.76 Third Quarter 10,580,000 3.55 3.00 3.76 Fourth Quarter 10,580,000 3.55 3.00 3.76 2025 First Quarter 7,200,000 $ 3.39 $ 3.34 $ 3.65 Second Quarter 7,280,000 3.39 3.34 3.65 Third Quarter 11,040,000 3.45 3.34 3.65 Fourth Quarter 11,040,000 3.45 3.34 3.65 10 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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. There were no transfers into, or out of, the three levels of fair value hierarchy for the three months ended March 31, 2024 and 2023. 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 March 31, 2024 and December 31, 2023 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 additional information. 11 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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 March 31, 2024 Financial Assets Commodity derivative instruments $ — $ 37,177 $ — $ ( 6,289 ) $ 30,888 Financial Liabilities Commodity derivative instruments $ — $ 24,929 $ — $ ( 6,289 ) $ 18,640 As of December 31, 2023 Financial Assets Commodity derivative instruments $ — $ 41,983 $ — $ ( 3,338 ) $ 38,645 Financial Liabilities Commodity derivative instruments $ — $ 4,648 $ — $ ( 3,338 ) $ 1,310 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 had no business combinations for the three months ended March 31, 2024 or the year ended December 31, 2023. See "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. 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. 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 are determined at discrete points in time based on relevant market data. These estimates involve uncertainty, and cannot be determined with precision. There were no significant changes in valuation techniques or related inputs as of March 31, 2024 or December 31, 2023. There were no assets measured at fair value on a non-recurring basis for the three months ended March 31, 2024 or the year ended December 31, 2023. 12 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 October 31, 2027. The commitment of the lenders equals the least of the aggregate maximum credit amount, the then-effective borrowing base, and the aggregate elected commitment, as it may be adjusted from time to time. 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 borrowing base is also adjusted if we terminate our hedge positions or sell oil and natural gas property interests that have a combined value exceeding 5 % of the current borrowing base. In these circumstances, the borrowing base will be adjusted by the value attributed to the terminated hedge positions or the oil and natural gas property interests sold in the most recent borrowing base. The April 2023 borrowing base redetermination reaffirmed the borrowing base at $ 550.0 million. The subsequent redeterminations increased the borrowing base to $ 580.0 million in October 2023 and reaffirmed the borrowing base in April 2024. After each redetermination we elected to maintain cash commitments at $ 375.0 million. The next semi-annual redetermination is scheduled for October 2024. The Partnership’s borrowings under the Credit Facility bear interest at a floating rate determined by the type of loan the Partnership has elected to take: a secured overnight financing rate ("SOFR") loan or a base-rate loan. Both types of loans bear interest at a reference rate plus a margin that varies with the amount of borrowings outstanding under the Credit Facility. The reference rate for SOFR loans is equal to SOFR as published by the Federal Reserve Bank of New York, adjusted for the borrowing term, plus 0.10 %, which is referred to as Adjusted Term SOFR. The reference rate for base rate loans is the highest of (a) Wells Fargo’s prime commercial lending rate for that day, (2) the Federal Funds Rate in effect on that day plus 0.50 %, and (c) the Adjusted Term SOFR for a one-month tenor, plus 1.00 %. As of December 31, 2023 and March 31, 2024, the applicable margin for the base rate loans ranged from 1.50 % to 2.50 %, and the margin for SOFR loans ranged from 2.50 % to 3.50 %. The Partnership is obligated to pay a quarterly commitment fee ranging from a 0.375 % to 0.500 % annualized rate on the unused portion of the borrowing base, depending on the amount of the borrowings outstanding in relation to the borrowing base. Principal may be optionally repaid from time to time without premium or penalty, other than customary SOFR breakage, and is required to be paid (a) if the amount outstanding exceeds the borrowing base, whether due to a borrowing base redetermination or otherwise, in some cases subject to a cure period, or (b) at the maturity date. The weighted-average interest rate of the Credit Facility was 7.92 % during the three months ended March 31, 2024 and 7.36 % for the twelve months ended December 31, 2023. 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. 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 March 31, 2024, the Partnership was in compliance with all financial covenants in the Credit Facility. There was no aggregate principal balance outstanding at March 31, 2024 and December 31, 2023, respectively. The unused portion of the available borrowings under the Credit Facility was $ 375.0 million at March 31, 2024 and December 31, 2023 . 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. 13 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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 unaudited interim consolidated financial statements, and no provision for potential remediation costs has been recorded. 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 March 31, 2024 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 March 31, 2024 2023 (in thousands) Cash—short and long-term incentive plans $ 1,260 $ 1,079 Equity-based compensation—restricted common units 996 954 Equity-based compensation—restricted performance units 738 633 Board of Directors incentive plan 649 531 Total incentive compensation expense $ 3,643 $ 3,197 For the three months ended March 31, 2024, the Partnership repurchased 286,761 common units at a weighted average price of $ 15.28 per unit for the purpose of satisfying tax withholding obligations upon the vesting of certain long-term incentive equity awards held by our executive officers and certain other employees. Specifically, when an employee's equity award vests, the Partnership withholds a portion of the units to cover the employee's tax liability. 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 $ 5.6 million for the performance cash awards and $ 14.7 million for the performance equity awards ( 1,220,201 performance units with a weighted-average grant date fair value of $ 12.03 per unit). As of March 31, 2024, 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 $ 20.39 per Series B cumulative convertible preferred unit, resulting in total proceeds of approximately $ 300.0 million. The Series B cumulative convertible preferred units were initially entitled to quarterly distributions in an amount equal to 7.0 % of the face amount of the preferred units per annum (the "Distribution Rate"). On November 28, 2023, the Distribution Rate was adjusted to 9.8 % and will be readjusted every two years thereafter (each, a "Readjustment Date"). The rate set on each 14 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Readjustment Date is equal to the greater of (i) the distribution rate in effect immediately prior to the relevant Readjustment Date and (ii) the 10-year Treasury Rate as of such Readjustment Date plus 5.5 % per annum; provided, however, that for any quarter in which quarterly distributions are accrued but unpaid, the then-distribution rate shall be increased by 2.0 % per annum for such quarter. The Partnership cannot pay any distributions on any junior securities, including common units, prior to paying the quarterly distribution payable to the preferred units, including any previously accrued and unpaid distributions. 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 $ 20.39 , 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 Partnership has the option to redeem all or a portion (equal to or greater than $ 100 million) of the Series B cumulative convertible preferred units for a 90 day period beginning on each Readjustment Date at a redemption price of $ 20.39 per Series B cumulative convertible preferred unit, which is equal to par value. The Series B cumulative convertible preferred units had a carrying value of $ 300.5 million, including accrued distributions of $ 7.4 million, as of March 31, 2024 and a carrying value of $ 299.1 million, including accrued distributions of $ 6.0 million, as of December 31, 2023. The Series B cumulative convertible preferred units are classified 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. 15 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the computation of basic and diluted earnings per common unit: Three Months Ended March 31, 2024 2023 (in thousands, except per unit amounts) NET INCOME (LOSS) $ 63,927 $ 134,443 Distributions on Series B cumulative convertible preferred units ( 7,367 ) ( 5,250 ) NET INCOME (LOSS) ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON UNITS $ 56,560 $ 129,193 ALLOCATION OF NET INCOME (LOSS): General partner interest $ — $ — Common units 56,560 129,193 $ 56,560 $ 129,193 NUMERATOR: Numerator for basic EPU - Net income (loss) attributable to common unitholders $ 56,560 $ 129,193 Effect of dilutive securities — 5,250 Numerator for diluted EPU - net income (loss) attributable to common unitholders after the effect of dilutive securities $ 56,560 $ 134,443 DENOMINATOR: Denominator for basic EPU - weighted average common units outstanding (basic) 210,654 209,941 Effect of dilutive securities — 14,969 Denominator for diluted EPU - weighted average number of common units outstanding after the effect of dilutive securities 210,654 224,910 NET INCOME (LOSS) ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON UNIT: Per common unit (basic) $ 0.27 $ 0.62 Per common unit (diluted) $ 0.27 $ 0.60 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 March 31, 2024 2023 (in thousands) Potentially dilutive securities (common units): Series B cumulative convertible preferred units on an as-converted basis 15,072 — 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. 16 BLACK STONE MINERALS, L.P. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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 beginning on November 28, 2023 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 9.8 % of the face amount of the preferred units per annum, subject to readjustment on each Readjustment Date; 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 March 31, 2024 2023 Distributions declared and paid per common unit $ 0.4750 $ 0.4750 Common Unit Repurchase Program On October 30, 2023, the Board authorized a $ 150.0 million unit repurchase program, terminating its existing $ 75.0 million program authorized in 2018. The unit repurchase program authorizes the Partnership to make repurchases on a discretionary basis as determined by management, subject to market condition, applicable legal requirements, available liquidity, and other appropriate factors. The Partnership made no repurchases under this program for the three months ended March 31, 2024. The program is funded from the Partnership’s cash on hand or through borrowings under the credit facility. Any repurchased units are canceled. NOTE 12 - SUBSEQUENT EVENTS Distribution On April 17, 2024, the Board approved a distribution for the three months ended March 31, 2024 of $ 0.375 per common unit. Distributions will be payable on May 17, 2024 to unitholders of record at the close of business on May 10, 2024. Acquisitions Subsequent to March 31, 2024, the Partnership acquired mineral and royalty interests from various sellers for cash consideration of $ 12.3 million. These acquisitions were funded with cash from operating activities. 17