OIL AND NATURAL GAS PROPERTIES

9 Months Ended

Sep. 30, 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.

During the nine months ended September 30, 2024, the Partnership acquired mineral and royalty interests that consisted of primarily unproved oil and natural gas properties in the Gulf Coast land region from various sellers for an aggregate of $65.2 million, including capitalized direct transaction costs, and were considered asset acquisitions. The consideration paid consisted of $64.2 million in cash that was funded from operating activities and $1.0 million in equity that 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 the year ended December 31, 2023, the Partnership acquired mineral and royalty interests that consisted of unproved oil and natural gas properties in the Gulf Coast land region from various sellers for cash consideration of $14.6 million, including capitalized direct transaction costs, and were considered asset acquisitions. The consideration paid was funded with cash from operating activities.

Asset Exchange

In the third quarter of 2024, the Partnership closed on a transaction with a third-party operator whereby the Partnership received an oil and natural gas lease on approximately 8,000 net leasehold acres in East Texas in exchange for the assignment of approximately 51,000 undeveloped net mineral and royalty acres in Mississippi. The acreage surrendered in Mississippi constituted a partial disposition of unproved property and no gain or loss was recognized on the transaction.

Shelby Trough Development Agreements

In 2020 and 2021, BSM entered into Joint Exploration Agreements ("JEAs") with Aethon Energy ("Aethon") to develop certain portions of the Partnership's undeveloped acreage in San Augustine County and Angelina County in East Texas. The agreements provide for minimum annual well commitments by Aethon in exchange for reduced royalty rates and exclusive access to BSM's mineral and leasehold acreage in the contract areas. If Aethon drills more than the minimum commitment wells in a given program year, Aethon may reduce its minimum well commitment in future program years by the number of excess wells, which we refer to as "banked" wells. Aethon's ability to apply banked wells to reduce its drilling commitments is capped at three or four wells each year, depending on the JEA. The Partnership's development agreement and related drilling commitments covering its San Augustine County acreage are independent of the development agreement and associated commitments covering Angelina County.

Under the JEAs, 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 when natural gas prices fall below certain thresholds. In December 2023, the Partnership received notice that Aethon was exercising the time-out provisions under the JEAs in San Augustine and Angelina counties.

In September 2024, the Partnership entered into letter agreements with Aethon to amend the JEAs in San Augustine and Angelina counties. In those agreements, the parties agreed to revise the current program year drill schedules under each JEA, to extend the respective program years by nine months, and to withdraw the invocation of the time-out provisions. Aethon also released its rights under 25,000 acres from the parties' area of mutual interest defined in the original JEAs. Upon the satisfaction of the current program year performance deadlines as described in the letter agreements, Aethon will have an inventory of ten banked wells in Angelina and one banked well in San Augustine.

San Augustine County JEA

The original San Augustine JEA called for a minimum of five wells to be drilled in the initial program year, which began in September 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. As amended, the San Augustine JEA now provides for a minimum of nine wells to be drilled in the current (third) program year ending in May 2025, with a minimum of 12 wells to be drilled in the fourth program year scheduled to commence in June 2025 and each program year thereafter. As of September 30, 2024, Aethon had drilled three wells in the third program year under the San Augustine JEA.

Angelina County JEA

The original Angelina JEA called for a minimum of four wells to be drilled in the initial program year, which began in October 2020, 10 wells to be drilled in the second program year, and, thereafter, a minimum of 15 wells per year beginning with the third program year. As amended, the Angelina JEA now provides for a minimum 15 wells to be drilled in the current (fourth) program year ending in June 2025 and, each program year thereafter. As of September 30, 2024, Aethon had drilled four wells in the fourth program year under the Angelina JEA, two of which have been temporarily abandoned and scheduled for plugging as a result of mechanical issues.

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 capital providers while retaining value from these interests in the form of additional royalty income or retained economic interests. BSM's current farmout arrangements cover the Partnership's share of working interests under active development by Aethon in San Augustine County and Angelina County in East Texas.

San Augustine County Farmout

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 continue for a 10-year period, unless earlier terminated in accordance with the terms of the agreements. The JWM Farmout terminated in September 2024, and the Partnership expects to enter into a new farmout arrangement with respect to the interests covered by the JWM Farmout in the fourth quarter of 2024. The Partnership’s farmout counterparties were 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 farmout counterparties 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. 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.

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	%
Former JWM Interest	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	%
Former JWM Interest	10.0	%	2.5	%
Total	100.0	%	25.0	%

Angelina County Farmout

In November 2020, the Partnership entered into a farmout agreement (the "Pivotal Farmout") with Pivotal. The Pivotal Farmout 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.

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 nine months ended September 30, 2024 and 2023. See "Note 5 - Fair Value Measurements" for additional information.