Oil and Natural Gas Properties Acquisitions

12 Months Ended

Dec. 31, 2019

Oil and Natural Gas Properties Acquisitions

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 year ended December 31, 2019, the Partnership closed on multiple acquisitions of mineral and royalty interests for total consideration of $44.0 million.

Acquisitions that were considered business combinations were primarily located in the Permian Basin. These acquisitions were funded with borrowings under the Partnership's Credit Facility (as defined in Note 8 - Credit Facility) and funds from operating activities. Acquisition related costs of $0.1 million were expensed and included in the General and administrative expense line item of the consolidated statement of operations for the year ended December 31, 2019. The following table summarizes these acquisitions:


	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

In addition, during 2019, the Partnership acquired mineral and royalty interests that were considered asset acquisitions from various sellers for an aggregate of $31.6 million. These acquisitions were primarily located in East Texas and the Permian Basin. The cash portion of the consideration paid for these acquisitions of $30.7 million was funded with borrowings under the Partnership's 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 Partnership's Credit Facility and funds from operating activities. Acquisition related costs of $0.2 million were expensed and included in the General and administrative expense line item of the consolidated statement of operations for the year ended December 31, 2018. The following table summarizes these acquisitions:


	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 were considered asset acquisitions from various sellers for an aggregate of $58.2 million. These acquisitions 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 Partnership's 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 and merged the subsidiaries into its existing structure. This acquisition was funded with borrowings under the Partnership's Credit Facility and funds from operating activities.

Noble Acquisition

On November 28, 2017 (the "Close Date"), Black Stone Minerals Company, L.P. ("BSMC"), a wholly owned subsidiary of BSM, closed on the acquisition of (i) certain mineral interests and other non-cost bearing royalty interests from Noble Energy Inc., Noble Energy Wyco, LLC, and Rosetta Resources Operating LP and (ii) one hundred percent (100%) of the issued and outstanding securities of Samedan Royalty, LLC ("Samedan") from Noble Energy US Holdings, LLC, collectively, the "Noble Acquisition."

The mineral interests and other non-cost bearing royalty interests acquired in the Noble Acquisition, including interests owned by Samedan (the "Noble Assets") include approximately 1.1 million gross (140,000 net) mineral acres, 380,000 gross acres of non-participating royalty interests, and 600,000 gross acres of overriding royalty interests collectively spread over 20 states with significant concentrations in Texas, Oklahoma, and North Dakota.

The Partnership funded the $335 million purchase price (before customary post-closing adjustments) using (i) approximately $300 million in proceeds from its issuance of 14,711,219 Series B cumulative convertible preferred units to Mineral Royalties One, L.L.C., an affiliate of The Carlyle Group ("the Purchaser"), in a private placement which also closed on November 28, 2017, and (ii) approximately $35 million from borrowings under its Credit Facility. See additional discussion of the Series B cumulative convertible preferred units in Note 12 – Preferred Units.

The transaction was accounted for as a business combination using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The final determination of fair value was completed in 2018 after post-closing purchase price adjustments were finalized. Since December 31, 2017, the Partnership has recorded an adjustment to the purchase price to reduce the amount allocated to unproved properties by $3.2 million, which reduces the Acquisitions of oil and natural gas properties line item of the consolidated statement of cash flows for the year ended December 31, 2018.

The following table summarizes the final allocation of the fair value of the assets acquired and the acquisition-related costs.


	Assets Acquired
	Proved		Unproved		Net Working Capital		Total Fair Value		Cash Consideration Paid¹		Acquisition-Related Costs²
	(in thousands)
Noble Assets	$	68,877	$	256,542	$	5,917	$	331,336	$	331,336	$	247

¹ Represents cash consideration paid on the Close Date, as adjusted for the $3.2 million purchase price adjustment recorded during the year ended December 31, 2018.

² Acquisition-related costs were expensed and included in the General and administrative expense line item of the consolidated statement of operations for the year ended December 31, 2017.

The fair value of the Noble Assets was measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties include estimates of: (i) oil and natural gas reserves; (ii) future commodity prices; (iii) estimated future cash flows; and (iv) market-based weighted average cost of capital. These inputs require significant judgments and estimates by the Partnership's management at the time of the valuation and are the most sensitive and subject to change.

Actual and Pro Forma Impact of Noble Acquisition (Unaudited)

Revenue attributable to the Noble Acquisition included in the Partnership's consolidated statement of operations for the year ended December 31, 2017 was $2.8 million. The following table presents unaudited pro forma information for the Partnership as if the Noble Acquisition occurred on January 1, 2016.


	For the Year Ended December 31,
	2017		2016
	(in thousands, except per unit amounts)
Revenue and other income	$	468,103	$	288,772
Net income (loss)	$	178,970	$	33,264
Net income (loss) attributable to noncontrolling interests	34		12
Distributions on Series A redeemable preferred units	(3,117)		(5,763)
Distributions on Series B cumulative convertible preferred units	(21,000)		(21,000)
Net income (loss) attributable to the general partner and common and subordinated units	$	154,887	$	6,513
Allocation of net income (loss):
General partner interest	—		—
Common units	99,776		20,696
Subordinated units	55,111		(14,183)
	$	154,887	$	6,513
Net income (loss) attributable to limited partners per common and subordinated unit:
Per common unit (basic)	$	1.02	$	0.22
Per subordinated unit (basic)	$	0.58	$	(0.15)
Per common unit (diluted)	$	1.02	$	0.22
Per subordinated unit (diluted)	$	0.58	$	(0.15)

The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Noble Acquisition and are factually supportable. The unaudited pro forma consolidated results are not necessarily indicative of what the Partnership's consolidated results of operations would have been had the acquisition been completed on January 1, 2016. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations for the combined company. The unaudited pro forma consolidated results reflect the following pro forma adjustments:

•Adjustments to recognize incremental revenue, production costs and ad valorem taxes, and DD&A expense attributable to the Noble Assets.

•Adjustment to recognize additional interest expense associated with the incremental borrowings under the Partnership's Credit Facility.

•Adjustment to recognize the quarterly distribution associated with the issuance of 14,711,219 Series B cumulative convertible preferred units.

•The Series B cumulative convertible preferred units were excluded from the calculation of pro forma diluted earnings per common unit for the periods presented above due to their antidilutive effect under the if-converted method.

•The Series B cumulative convertible preferred units do not have any impact to earnings per subordinated unit.

2017 Acquisitions

In addition to the Noble Acquisition, the Partnership closed on multiple acquisitions of mineral and royalty interests, which were also considered business combinations, during the year ended December 31, 2017. These acquisitions were primarily focused in the Delaware Basin and East Texas. The cash portion of the consideration paid for these acquisitions was funded with borrowings under the Partnership's Credit Facility and funds from operating activities. The following table summarizes these acquisitions:


	Assets Acquired														Consideration Paid
	Proved		Unproved		Net Working Capital		Total Fair Value		Cash		Fair Value of Common Units Issued		Acquisition-Related Costs¹
	(in thousands)
January	$	5,135	$	34,008	$	263	$	39,406	$	27,380	$	12,026	$	1,162
June	5,006		45,477		—		50,483		4,802		45,681		1,481
August	3,277		9,984		—		13,261		4,289		8,972		107
September	3,120		—		—		3,120		3,120		—		—
Total fair value	$	16,538	$	89,469	$	263	$	106,270	$	39,591	$	66,679	$	2,750

¹ Acquisition-related costs were expensed and included in the General and administrative expense line item of the consolidated statement of operations for the year ended December 31, 2017.

In addition, the Partnership acquired mineral and royalty interests that were considered asset acquisitions from various sellers in East Texas as reflected in the table below. The cash portion of the consideration paid for these acquisitions was funded via borrowings under the Partnership's Credit Facility.


	Assets Acquired		Consideration Paid
	Unproved		Cash		Fair Value of Common Units Issued
	(in thousands)
Q1 2017	$	21,189	$	21,017	$	172
Q2 2017	13,329		13,329		—
Q3 2017	19,946		15,205		4,741
Q4 2017	2,267		2,137		130
Total acquired	$	56,731	$	51,688	$	5,043

Farmout Agreements

In 2017, the Partnership entered into two 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.

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. ("XTO Energy"), 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 earlier of 2 years or until 20 wells have been drilled. As of December 31, 2019, a total of 17 wells have been drilled during the second phase. 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 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 December 31, 2019, the Partnership has received $90.0 million from Canaan under the agreement as reimbursement for capital costs associated with farmed-out working interests. When such reimbursements are received prior to assigning the wells to Canaan, the Partnership records the amounts as increases to Oil and natural gas properties and Other long-term liabilities. 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 December 31, 2019, $0.9 million was included in the Other long-term liabilities line item of the consolidated balance sheet for reimbursements received associated with farmed-out working interests not yet assigned to Canaan.

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 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 BPX Energy in San Augustine and Angelina counties, Texas. Initially, Pivotal is obligated to fund the development of up to 80 wells, in designated well groups, 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. 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 December 31, 2019, a total of 68 wells have been drilled in the contract area and the Partnership has received $115.2 million from Pivotal under the agreement as reimbursement for capital costs associated with farmed-out working interests. When such reimbursements are received prior to assigning the wells to Pivotal, the Partnership records the amounts as increases to Oil and natural gas properties and Other long-term liabilities. 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 December 31, 2019, $0.9 million was included in the Other long-term liabilities line item of the consolidated balance sheet for reimbursements received associated with farmed-out working interests not yet assigned to Pivotal. The Partnership's development agreement with BPX Energy terminated in 2019 with respect to the majority of the Partnership's acreage covered by the agreement. As such, Pivotal retains minimal rights or obligations related to the farmout for that area. The Partnership remains engaged with Pivotal around farmout opportunities with potential new operators in the area forfeited by BPX Energy.

As of December 31, 2018, $11.6 million and $41.2 million were included in the Other long-term liability line item of the consolidated balance sheet related to the farmout agreements with Canaan and Pivotal, respectively.