0001628280-19-010065.txt : 20190806 0001628280-19-010065.hdr.sgml : 20190806 20190806125445 ACCESSION NUMBER: 0001628280-19-010065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 63 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190806 DATE AS OF CHANGE: 20190806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Black Stone Minerals, L.P. CENTRAL INDEX KEY: 0001621434 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 471846692 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37362 FILM NUMBER: 191001217 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STREET, SUITE 2020 CITY: HOUSTON STATE: TX ZIP: 77022 BUSINESS PHONE: (713)658-0647 MAIL ADDRESS: STREET 1: 1001 FANNIN STREET, SUITE 2020 CITY: HOUSTON STATE: TX ZIP: 77022 10-Q 1 bsm6302019form10qdoc.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
  
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________ to _______________
Commission File Number: 001-37362
Black Stone Minerals, L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
 
47-1846692
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
1001 Fannin Street, Suite 2020
 
77002
Houston,
Texas
 
 
(Address of principal executive offices)
 
(Zip code)
(713) 
445-3200
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Units Representing Limited Partner Interests
 
BSM
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
 
Large accelerated filer
 
 
Accelerated filer
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
As of July 30, 2019, there were 205,961,594 common units and 14,711,219 Series B cumulative convertible preferred units of the registrant outstanding.
 



TABLE OF CONTENTS
 





ii


PART I – FINANCIAL INFORMATION


Item 1. Financial Statements 


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 

 
 

CURRENT ASSETS
 
 

 
 

Cash and cash equivalents
 
$
3,906

 
$
5,414

Accounts receivable
 
95,958

 
113,148

Commodity derivative assets
 
24,441

 
37,970

Prepaid expenses and other current assets
 
1,977

 
1,001

TOTAL CURRENT ASSETS
 
126,282

 
157,533

PROPERTY AND EQUIPMENT
 
 

 
 

Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $1,089,576 and $1,063,883 at June 30, 2019 and December 31, 2018, respectively
 
3,501,789

 
3,441,188

Accumulated depreciation, depletion, amortization, and impairment
 
(1,921,674
)
 
(1,865,692
)
Oil and natural gas properties, net
 
1,580,115

 
1,575,496

Other property and equipment, net of accumulated depreciation of $11,267 and $11,048 at June 30, 2019 and December 31, 2018, respectively
 
2,319

 
385

NET PROPERTY AND EQUIPMENT
 
1,582,434

 
1,575,881

DEFERRED CHARGES AND OTHER LONG-TERM ASSETS
 
15,839

 
16,710

TOTAL ASSETS
 
$
1,724,555

 
$
1,750,124

LIABILITIES, MEZZANINE EQUITY, AND EQUITY
 
 
 
 

CURRENT LIABILITIES
 
 
 
 

Accounts payable
 
$
5,911

 
$
4,149

Accrued liabilities
 
39,105

 
60,089

Other current liabilities
 
957

 
528

TOTAL CURRENT LIABILITIES
 
45,973

 
64,766

LONG–TERM LIABILITIES
 
 
 
 

Credit facility
 
436,000

 
410,000

Accrued incentive compensation
 
1,395

 
1,813

Commodity derivative liabilities
 
45

 

Asset retirement obligations
 
15,377

 
14,948

Other long-term liabilities
 
81,750

 
55,973

TOTAL LIABILITIES
 
580,540

 
547,500

COMMITMENTS AND CONTINGENCIES (Note 8)
 


 


MEZZANINE EQUITY
 
 

 
 

Partners' equity – Series B cumulative convertible preferred units, 14,711 and 14,711 units outstanding at June 30, 2019 and December 31, 2018, respectively
 
298,361

 
298,361

EQUITY
 
 
 
 

Partners' equity – general partner interest
 

 

Partners' equity – common units, 205,956 and 108,363 units outstanding at June 30, 2019 and December 31, 2018, respectively
 
845,654

 
714,823

Partners' equity – subordinated units, zero and 96,329 units outstanding at June 30, 2019 and December 31, 2018, respectively
 

 
189,440

TOTAL EQUITY
 
845,654

 
904,263

TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY
 
$
1,724,555

 
$
1,750,124

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,
 
 
2019
 
2018
 
2019
 
2018
REVENUE

 


 

 
 
 
 
Oil and condensate sales

$
74,072


$
77,225

 
$
131,776

 
$
150,208

Natural gas and natural gas liquids sales

53,642


53,854

 
115,282

 
107,099

Lease bonus and other income

6,717


11,577

 
12,362

 
16,176

Revenue from contracts with customers

134,431


142,656

 
259,420

 
273,483

Gain (loss) on commodity derivative instruments

29,187


(33,347
)
 
(11,996
)
 
(49,680
)
TOTAL REVENUE

163,618


109,309

 
247,424

 
223,803

OPERATING (INCOME) EXPENSE

 


 

 
 
 
 
Lease operating expense

3,849


4,290

 
9,141

 
8,538

Production costs and ad valorem taxes

14,450


14,373

 
29,042

 
29,298

Exploration expense

304


6,745

 
308

 
6,748

Depreciation, depletion, and amortization

29,725


30,292

 
57,558

 
58,862

General and administrative

14,347


19,812

 
35,561

 
38,333

Accretion of asset retirement obligations

277


273

 
554

 
542

(Gain) loss on sale of assets, net




 

 
(2
)
TOTAL OPERATING EXPENSE

62,952


75,785

 
132,164

 
142,319

INCOME (LOSS) FROM OPERATIONS

100,666


33,524

 
115,260

 
81,484

OTHER INCOME (EXPENSE)

 

 

 
 
 
 
Interest and investment income

47


37

 
93

 
70

Interest expense

(5,652
)

(5,280
)
 
(11,177
)
 
(9,801
)
Other income (expense)

26


409

 
(72
)
 
(1,106
)
TOTAL OTHER EXPENSE

(5,579
)

(4,834
)
 
(11,156
)
 
(10,837
)
NET INCOME (LOSS)

95,087


28,690

 
104,104

 
70,647

Net (income) loss attributable to noncontrolling interests



48

 

 
22

Distributions on Series A redeemable preferred units




 

 
(25
)
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 AND SUBORDINATED UNITS

$
89,837


$
23,488

 
$
93,604

 
$
60,144

ALLOCATION OF NET INCOME (LOSS):

 


 

 
 
 
 
General partner interest

$


$

 
$

 
$

Common units

67,718


17,540

 
69,611

 
41,877

Subordinated units

22,119


5,948

 
23,993

 
18,267

 

$
89,837


$
23,488

 
$
93,604

 
$
60,144

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

 


 

 
 
 
 
Per common unit (basic)

$
0.45


$
0.17

 
$
0.54

 
$
0.40

Weighted average common units outstanding (basic)

150,101


105,250

 
129,873

 
104,516

Per subordinated unit (basic)

$
0.39


$
0.06

 
$
0.32

 
$
0.19

Weighted average subordinated units outstanding (basic)

56,104


96,329

 
76,105

 
95,864

Per common unit (diluted)

$
0.44


$
0.17

 
$
0.54

 
$
0.40

Weighted average common units outstanding (diluted)

165,070


105,250

 
129,873

 
104,516

Per subordinated unit (diluted)

$
0.39


$
0.06

 
$
0.32

 
$
0.19

Weighted average subordinated units outstanding (diluted)

56,104


96,329

 
76,105

 
95,864

 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
 
Subordinated units
 
Partners' equity — common units
 
Partners' equity — subordinated units
 
Total equity
BALANCE AT DECEMBER 31, 2018
 
108,363

 
96,329

 
$
714,823

 
$
189,440

 
$
904,263

Repurchases of common and subordinated units
 
(588
)
 

 
(10,110
)
 

 
(10,110
)
Issuance of common units, net of offering costs
 

 

 
(43
)
 

 
(43
)
Issuance of common units for property acquisitions
 
57

 

 
943

 

 
943

Restricted units granted, net of forfeitures
 
1,545

 

 

 

 

Equity–based compensation
 

 

 
13,669

 

 
13,669

Distributions
 

 

 
(40,275
)
 
(35,642
)
 
(75,917
)
Charges to partners' equity for accrued distribution equivalent rights
 

 

 
(1,044
)
 

 
(1,044
)
Distributions on Series B cumulative convertible preferred units
 

 

 
(5,250
)
 

 
(5,250
)
Net income (loss)
 

 

 
7,155

 
1,862

 
9,017

BALANCE AT MARCH 31, 2019
 
109,377

 
96,329

 
$
679,868

 
$
155,660

 
$
835,528

Conversion of subordinated units
 
96,329

 
(96,329
)
 
142,149

 
(142,149
)
 

Repurchases of common and subordinated units
 
(377
)
 

 
(6,164
)
 

 
(6,164
)
Restricted units granted, net of forfeitures
 
627

 

 

 

 

Equity–based compensation
 

 

 
3,332

 

 
3,332

Distributions
 

 

 
(40,471
)
 
(35,642
)
 
(76,113
)
Charges to partners' equity for accrued distribution equivalent rights
 

 

 
(766
)
 

 
(766
)
Distributions on Series B cumulative convertible preferred units
 

 

 
(5,250
)
 

 
(5,250
)
Net income (loss)
 

 

 
72,956

 
22,131

 
95,087

BALANCE AT JUNE 30, 2019
 
205,956

 

 
$
845,654

 
$

 
$
845,654

 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
 
Subordinated units
 
Partners' equity — common units
 
Partners' equity — subordinated units
 
Non-Controlling Interests
 
Total equity
BALANCE AT DECEMBER 31, 2017
 
103,456

 
95,388

 
$
603,116

 
$
164,138

 
$
867

 
$
768,121

Conversion of Series A redeemable preferred units
 
736

 
964

 
10,498

 
13,750

 

 
24,248

Repurchases of common and subordinated units
 
(451
)
 
(23
)
 
(8,099
)
 
(342
)
 

 
(8,441
)
Issuance of common units, net of offering costs
 
8

 

 
138

 

 

 
138

Restricted units granted, net of forfeitures
 
1,177

 

 

 

 

 

Equity–based compensation1
 

 

 
18,075

 
219

 

 
18,294

Distributions
 

 

 
(32,581
)
 
(19,912
)
 
(52
)
 
(52,545
)
Charges to partners' equity for accrued distribution equivalent rights
 

 

 
(661
)
 

 

 
(661
)
Distributions on Series A redeemable preferred units
 

 

 
(13
)
 
(12
)
 

 
(25
)
Distributions on Series B cumulative convertible preferred units
 

 

 
(5,250
)
 

 

 
(5,250
)
Net income (loss)
 

 

 
29,592

 
12,338

 
27

 
41,957

BALANCE AT MARCH 31, 2018
 
104,926

 
96,329

 
$
614,815

 
$
170,179

 
$
842

 
$
785,836

Repurchases of common and subordinated units
 
(35
)
 

 
(630
)
 

 

 
(630
)
Issuance of common units, net of offering costs
 
509

 

 
8,929

 

 

 
8,929

Restricted units granted, net of forfeitures
 
94

 

 

 

 

 

Equity–based compensation1
 

 

 
8,521

 

 

 
8,521

Distributions
 

 

 
(33,011
)
 
(20,109
)
 
(62
)
 
(53,182
)
Charges to partners' equity for accrued distribution equivalent rights
 

 

 
(643
)
 

 

 
(643
)
Distributions on Series B cumulative convertible preferred units
 

 

 
(5,250
)
 

 

 
(5,250
)
Net income (loss)
 

 

 
22,798

 
5,941

 
(49
)
 
28,690

BALANCE AT JUNE 30, 2018
 
105,494

 
96,329

 
$
615,529

 
$
156,011

 
$
731

 
$
772,271

1  
The change in Partners' equity for equity-based compensation during the six-month period ended June 30, 2018 was incorrectly allocated between Partners' equity - common units and Partners' equity - subordinated units in the Partnership's prior reports. The Partnership concluded that this error was not material to any of the prior reporting periods. As such, the revision for this correction has been made to the prior periods presented.
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,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net income (loss)
 
$
104,104

 
$
70,647

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

Depreciation, depletion, and amortization
 
57,558

 
58,862

Accretion of asset retirement obligations
 
554

 
542

Amortization of deferred charges
 
516

 
422

(Gain) loss on commodity derivative instruments
 
11,996

 
49,680

Net cash (paid) received on settlement of commodity derivative instruments
 
4,674

 
(10,665
)
Equity-based compensation
 
13,039

 
15,350

Exploratory dry hole expense
 
3

 
6,743

Deferred rent
 

 
321

(Gain) loss on sale of assets, net
 

 
(2
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
17,212

 
(17,915
)
Prepaid expenses and other current assets
 
(976
)
 
(428
)
Accounts payable, accrued liabilities, and other
 
(7,405
)
 
2,826

Settlement of asset retirement obligations
 
(299
)
 
(57
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
200,976

 
176,326

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Acquisitions of oil and natural gas properties
 
(40,676
)
 
(56,069
)
Additions to oil and natural gas properties
 
(50,121
)
 
(73,675
)
Additions to oil and natural gas properties leasehold costs
 
(871
)
 
(3,799
)
Purchases of other property and equipment
 
(2,152
)
 
(5
)
Proceeds from the sale of oil and natural gas properties
 
320

 
1,255

Proceeds from farmouts of oil and natural gas properties
 
47,487

 
41,034

NET CASH USED IN INVESTING ACTIVITIES
 
(46,013
)
 
(91,259
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from issuance of common units, net of offering costs
 
(43
)
 
9,067

Distributions to common and subordinated unitholders
 
(152,030
)
 
(105,785
)
Distributions to Series A redeemable preferred unitholders
 

 
(690
)
Distributions to Series B cumulative convertible preferred unitholders
 
(10,500
)
 
(7,175
)
Distributions to noncontrolling interests
 

 
(114
)
Distribution equivalents paid
 
(2,982
)
 

Redemptions of Series A redeemable preferred units
 

 
(2,115
)
Repurchases of common and subordinated units
 
(16,916
)
 
(9,071
)
Borrowings under credit facility
 
172,500

 
175,000

Repayments under credit facility
 
(146,500
)
 
(142,000
)
Debt issuance costs and other
 

 
(755
)
NET CASH USED IN FINANCING ACTIVITIES
 
(156,471
)
 
(83,638
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
 
(1,508
)
 
1,429

CASH AND CASH EQUIVALENTS – beginning of the period
 
5,414

 
5,642

CASH AND CASH EQUIVALENTS – end of the period
 
$
3,906

 
$
7,071

SUPPLEMENTAL DISCLOSURE
 
 
 
 
Interest paid
 
$
10,618

 
$
9,364

 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, 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, 2018 ("2018 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, 2019 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.

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 2018 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, 2019, with the exception of ASC 842, as defined below.
Accounts Receivable

The following table presents information about the Partnership's accounts receivable:
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
 
 
(in thousands)
Accounts receivable:
 
 
 
 
Revenues from contracts with customers
 
$
89,727

 
$
107,804

Other
 
6,231

 
5,344

Total accounts receivable
 
$
95,958

 
$
113,148


Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842"), that supersedes Accounting Standards Codification ("ASC") 840, Leases by requiring lessees to recognize lease assets and lease liabilities classified as operating leases on the balance sheet. See Note 3 - Impact of ASC 842 Adoption for further details related to the Partnership's adoption of this standard.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which will remove, modify, and add certain required disclosures on fair value measurements. As amended, Topic 820 will no longer require the disclosure of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. In addition, certain modifications to current disclosure requirements will be made, including clarifying that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Certain disclosure requirements will also be added, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in place of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The new standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Partnership does not plan to early adopt and is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
NOTE 3 — IMPACT OF ASC 842 ADOPTION
Leases
On January 1, 2019, the Partnership adopted ASC 842 using the modified retrospective method. ASC 842 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the previous guidance. The Partnership used January 1, 2019, the beginning of the period of adoption, as its date of initial application. The Partnership elected the package of practical expedients upon transition which will retain the lease classification for leases and any unamortized initial direct costs that existed prior to the adoption of the standard.
The adoption of the standard resulted in the recognition of operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheet as of January 1, 2019. ROU assets and operating lease liabilities were less than 1% of the Partnership's total assets as of June 30, 2019 and were not considered material to the Partnership. There was no related impact on the consolidated statement of operations. The standard had no impact on the Partnership’s debt covenant compliance under existing agreements.

7


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The Partnership determines if an arrangement is a lease at inception by considering whether (1) explicitly or implicitly identified assets have been deployed in the agreement and (2) the Partnership obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the agreement. Operating leases are included in Deferred charges and other long-term assets, Other current liabilities, and Other long-term liabilities in the consolidated balance sheets. As of June 30, 2019, none of the Partnership’s leases were classified as financing leases.
ROU assets represent the Partnership’s right to use an underlying asset for the lease term and operating lease liabilities represent the Partnership’s obligation to make lease payments arising from the lease. ROU assets are recognized at commencement date and consist of the present value of remaining lease payments over the lease term, initial direct costs, prepaid lease payments less any lease incentives. Operating lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. The Partnership uses the implicit rate, when readily determinable, or its incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments.
The lease terms may include periods covered by options to extend the lease when it is reasonably certain that the Partnership will exercise that option and periods covered by options to terminate the lease when it is not reasonably certain that the Partnership will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Partnership made an accounting policy election to not recognize leases with terms of less than twelve months on the consolidated balance sheets and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. In the event that the Partnership’s assumptions and expectations change, it may have to revise its ROU assets and operating lease liabilities.
NOTE 4 — OIL AND NATURAL GAS PROPERTIES    
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.
2019 Acquisitions
During the six months ended June 30, 2019, the Partnership closed on multiple acquisitions of mineral and royalty interests for total consideration of $41.6 million.
Acquisitions that were considered business combinations were primarily located in the Permian Basin. These acquisitions were funded with borrowings under the Credit Facility (as defined in Note 7 - Credit Facility) and funds from operating activities. Acquisition related costs of less than $0.1 million were expensed and included in the General and administrative line item of the consolidated statement of operations for the six months ended June 30, 2019. The following table summarizes these acquisitions which were considered business combinations:
 
Assets Acquired
 
Consideration Paid
 
Proved
 
Unproved
 
Net Working Capital
 
Total Fair Value
 
Cash
 
(in thousands)
February
$
173

 
$
8,437

 
$
1

 
$
8,611

 
$
8,611

March
24

 

 

 
24

 
24

June
527

 
3,268

 

 
3,795

 
3,795

Total fair value
$
724


$
11,705


$
1


$
12,430


$
12,430



8


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In addition, during the six months ended June 30, 2019, the Partnership acquired mineral and royalty interests that consisted of substantially all unproved oil and natural gas properties from various sellers for an aggregate of $29.2 million. These acquisitions were considered asset acquisitions and were primarily located in East Texas and the Permian Basin. The cash portion of the consideration paid for these acquisitions of $28.3 million was funded with borrowings under the Credit Facility and funds from operating activities, and $0.9 million was funded through the issuance of common units of the Partnership based on the fair values of the common units issued on the acquisition dates.
2018 Acquisitions

During the year ended December 31, 2018, the Partnership closed on multiple acquisitions of mineral and royalty interests for total consideration of $149.9 million.
Acquisitions that were considered business combinations were primarily located in the Permian Basin. The cash portion of the consideration paid for these acquisitions was funded with borrowings under the Credit Facility and funds from operating activities. Acquisition related costs of $0.2 million were expensed and included in the General and administrative line item of the consolidated statement of operations for the year ended December 31, 2018. The following table summarizes these acquisitions which were considered business combinations:
 
Assets Acquired
 
Consideration Paid
 
Proved
 
Unproved
 
Net Working Capital
 
Total Fair Value
 
Cash
 
Fair Value of Common Units Issued
 
(in thousands)
March
$
984

 
$
21,452

 
$
133

 
$
22,569

 
$
22,569

 
$

June
883

 
13,688

 
8

 
14,579

 
14,579

 

July
4,349

 
7,944

 
215

 
12,508

 
3,764

 
8,744

August
5,000

 
34,673

 
74

 
39,747

 
26,461

 
13,286

September
1,176

 

 

 
1,176

 
1,176

 

November
1,166

 

 

 
1,166

 
1,166

 

Total fair value
$
13,558

 
$
77,757

 
$
430

 
$
91,745

 
$
69,715

 
$
22,030


In addition, during 2018, the Partnership acquired mineral and royalty interests that consisted of substantially all unproved oil and natural gas properties from various sellers for an aggregate of $58.2 million. These acquisitions were considered asset acquisitions and were primarily located in East Texas and the Permian Basin. The cash portion of the consideration paid for these acquisitions of $57.6 million was funded with borrowings under the Credit Facility and funds from operating activities, and $0.6 million was funded through the issuance of common units of the Partnership based on the fair values of the common units issued on the acquisition dates.

During 2018, the Partnership acquired the remaining noncontrolling interest in certain subsidiaries for $1.7 million in cash and merged the subsidiaries into its existing structure.
Farmout Agreements
Canaan Farmout
On February 21, 2017, the Partnership announced that it had entered into a farmout agreement with Canaan Resource Partners ("Canaan") which covers certain Haynesville and Bossier shale acreage in San Augustine County, Texas operated by XTO Energy Inc., a subsidiary of Exxon Mobil Corporation. The Partnership has an approximate 50% working interest in the acreage and is the largest mineral owner. A total of 20 wells were drilled over an initial phase, beginning with wells spud after January 1, 2017. Canaan elected to participate in an additional phase that began in September 2018 and continues for the lesser of 2 years or until 20 wells have been drilled. After the completion of the second phase, Canaan will have the option to elect to participate in a similar third phase. During the first three phases of the agreement, Canaan commits on a phase-by-phase basis and funds 80% of the Partnership's drilling and completion costs and is assigned 80% of the Partnership's working interests in such wells (40% working interest on an 8/8ths basis) as the wells are drilled. After the third phase, Canaan can earn 40% of the Partnership’s working interest (20% working interest on an 8/8ths basis) in additional wells drilled in the area by continuing to

9


BLACK STONE MINERALS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


fund 40% of the Partnership's costs for those wells on a well-by-well basis. The Partnership receives an overriding royalty interest (“ORRI”) before payout and an increased ORRI after payout on all wells drilled under the agreement. From the inception of the agreement through June 30, 2019, the Partnership has received $89.2 million from Canaan under the agreement. When working interests in farmout wells are assigned to Canaan, the Partnership's Oil and natural gas properties and Other long-term liabilities are reduced by the reimbursed capital costs. As of June 30, 2019, the Partnership had assigned to Canaan working interests in certain wells drilled and completed, and as such, $0.9 million of the farmout reimbursements received from Canaan are included in the Other long-term liabilities line item of the consolidated balance sheet.
Pivotal Farmout
On November 21, 2017, the Partnership entered into a farmout agreement with Pivotal Petroleum Partners (“Pivotal”), a portfolio company of Tailwater Capital, LLC. The farmout agreement covers substantially all of the Partnership's remaining working interests under active development in the Shelby Trough area of East Texas, targeting the Haynesville and Bossier shale acreage (after giving effect to the Canaan Farmout), until November 2025. Pivotal will earn the Partnership's remaining working interest in wells operated by XTO Energy Inc. in San Augustine County, Texas not covered by the Canaan Farmout (10% working interest on an 8/8th basis), as well as 100% of the Partnership's working interests (ranging from approximately 12.5% to 25% on an 8/8ths basis) in wells operated by its other major operator in San Augustine and Angelina counties, Texas. Initially, Pivotal is obligated to fund the development of up to 80 wells across several development areas and then has options to continue funding the Partnership's working interest across those areas for the duration of the farmout agreement. Pivotal will fund designated groups of wells. 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. From the inception of the agreement through June 30, 2019, the Partnership received $102.0 million from Pivotal under the agreement. When working interests in farmout wells are assigned to Pivotal, the Partnership's Oil and natural gas properties and Other long-term liabilities are reduced by the reimbursed capital costs. As of June 30, 2019, the Partnership had assigned to Pivotal working interests in certain wells drilled and completed, and as such, $75.0 million of the farmout reimbursements received from Pivotal are included in the Other long-term liabilities line item of the consolidated balance sheet.
As of December 31, 2018, $11.6 million and $41.2 million were included in the Other long-term liabilities line item of the consolidated balance sheet related to the farmout agreements with Canaan and Pivotal, respectively.
NOTE 5 — 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. 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, 2019, the Partnership’s open derivative contracts consisted of fixed-price swap contracts and costless collar contracts. 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 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, 2019 and December 31, 2018. See Note 6 – 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, 2019, the Partnership had nine counterparties, all of which are rated Baa1 or better by Moody’s and are lenders under the Credit Facility.

10


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, 2019
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
 
$
26,959

 
$
(2,518
)
 
$
24,441

Long-term asset
 
Deferred charges and other long-term assets
 
7,932

 
(960
)
 
6,972

 Total assets
 
 
 
$
34,891

 
$
(3,478
)
 
$
31,413

Liabilities:
 
 
 
 

 
 

 
 

Current liability
 
Commodity derivative liabilities
 
$
2,518

 
$
(2,518
)
 
$

Long-term liability
 
Commodity derivative liabilities
 
1,005

 
(960
)
 
45

Total liabilities
 
 
 
$
3,523

 
$
(3,478
)
 
$
45

 
 
 
 
December 31, 2018
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
 
$
38,746

 
$
(776
)
 
$
37,970

Long-term asset