Yet Another Value Podcast - Andrew Carreon from Emeth Value on Blackstone Minerals $BSM

Episode Date: June 10, 2021

Andrew Carreon, founder of Emeth Value, discusses his thesis on Blackstone Minerals (BSM). Key points include how some of the company's undeveloped acreage could be a massive call option, how rising commodity prices impact BSM's value, and how BSM compares to other loose peers.Side note: I had a puppy emergency for the last ten minutes of this podcast; you might see me glancing to the side a bit as my dog (Penny) tries to get my attention. I still think the conversation was great, but sorry for that!Emeth Value's website: https://www.emethvaluecapital.com/Chapters0:00 Intro1:00 Blackstone Minerals (BSM) overview4:40 How mineral rights work7:15 Contrasting BSM versus TPL11:50 How does BSM's acreage quality compare to TPL15:10 BSM's LP structure versus traditional C-corps18:55 Why BSM's NPV reserve calculation understates their value23:25 What commodity prices are currently baked into BSM's share price?31:30 Discussing BSM's GP33:10 How their capex / farm out agreements work37:45 Management's track record and pandemic performance43:25 Drilling outlook for BSM's acreage50:00 Diving into BSM's Austin Chalk acreage53:15 Puppy emergency driven conclusion

All right. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have the founder of Emmeth Value Capital. Andrew Carry on. Andrew, how's it going? It's going really well. Thanks for having me on the podcast. I've been a longtime fan of the blog. And it's really great to be here. Hey, look, anybody who is a fan of the vlog can come on. But let me, I appreciate the kind words, but let me turn that around and start this podcast the way I do every podcast. And that's by, pitching you, my guest, you know, we only started talking a couple months ago, I would say, but I've just really enjoyed our conversations. You know, you're a really clear thinker and you've got a wide breath. You know, I think our last conversation, we went from mega cap private equity players to a microcap Polish pizza company. So those are the type of investors I like to talk to, just anything in the world you can talk to and bounce ideas about them. So I'm excited to have you on today. I hope this is the first many and I think our listeners are going to enjoy this. So that out the way, let's turn to the company we're

to talk about today. The ticker is BSM. It's blackstone minerals. They're not the blackstone most people think of when they hear blackstone. But why don't you give us a quick overview, who BSM is and why you're so interested in them? Yeah, sure. Yeah. So blackstone minerals is the largest owner of oil and natural gas mineral rights in the United States. They have about 20 million gross mineral acres spread across 41 states and 62, about 62 onshore basins. So maybe for those that aren't familiar, perhaps a natural place to start would be to discuss, you know, what mineral rights are. So mineral rights are an asset class that are really somewhat unique to the United States and that a private individual can both own the surface of a property as well as the subsurface mineral interests, you know, all the way down to the core of the earth. In most other countries, governments pretty much have title to all those minerals.

In Canada, you can own minerals as well, but something like 89% of minerals are crown held, which means they're held by the government of Canada. And over time, these assets, you know, surface rights and mineral rights have become separable as landowners have effectively either sold their mineral, interests and retain their surface rights or kind of vice versa have, you know, sold their surface but kept their their mental rights. You know, going back historically, it's been very difficult to acquire mineral rights because they're often passed down through the family. There's a lot of sentiment involved, you know, it might be a ranch that has been, you know,

forever in kind of the bloodline. And actually at the at the 2020 AGM, Buffett kind of made a joke about this. He said, you know, if you live in Texas and your grandfather is close to dying, when he calls the grandchildren around the table, you know, the last thing he always says is don't sell the mineral rights. And can I ask a quick technical question? This doesn't particularly pertain to BSM. It's more mineral rights. But let's say you own a ranch and you sold me your mineral rights, right? And then they want to develop the ranch or something, right? You sell the ranch to Brian, third party B, whoever, and he develops the ranch into a mega mall or something for some reason. I can't go drill on those rights, right?

So, like, how do you work out the, I have the mineral rights, but things are getting built on it? Because somebody else owns the land, right? Somebody actually owns and can use that land. Right. Yeah. So mineral rights do give you part of it is the right to drill and produce on a specific piece of property. State by state, there are regulations around. how far offset a specific drill pad has to be away from, you know,

let's say a residential house or a commercial piece of property. So a lot of that kind of flows through regulations. And actually in Colorado right now, what you'll find is that state by state, you know, certain states are very oil and gas friendly and certain states are not. And that really plays a big role in how attractive, you know, mineral ownership is. Even, you know, kind of resources under the ground aside if you can get permits to drill in certain locations, et cetera, it's all part of it. And sorry, go ahead. Yeah.

So if I bought, in our hypothetical scenario, if I bought the mineral rights to your ranch from you, would we have in the contract like, hey, you know, like here's here's the area around the thing where like that's designated for. the wells to drill in something and we won't build within, if it's Texas, I don't know, a thousand feet because regulations won't let you have a well within a thousand feet of a building. That would all be in the contract, I'd guess. It wouldn't be in the contract. So effectively, if you think about it, for instance, you could sell me the minerals, you could keep the land, and then you could sell the land again. So effectively as the mineral owner, you have a responsibility to work with surface owners to, you know, create as minimal as impact as you can, but you have the right to effectively drill, as long as you can get

it permitted with the state. Perfect. Okay. That makes sense. Yeah. Yeah. So Buffett kind of joked and it historically has been pretty difficult to acquire minerals. And for this reason, you know, it's a really highly fragmented industry. So by value, the largest publicly traded mineral owners only account for a few percent of the total minerals market. And measured by acreage, the ownership is materially less than 1%. So, you know, maybe thinking about another way, something like 12 million Americans receive oil and gas royalty checks every year, which is, you know, a pretty staggering figure. I mean, that's like how many Americans receive social security checks? It's got to be like, I don't know, 70 million. So we're

talking, I mean, that's just an insane number. It's approaching social security. Yeah, it's, it's a really big number. And if you think about, you know, some of these oil and gas wells, you know, in the Permian and parts of the Marcellus and Utica, you know, I've talked to folks who, uh, have wells that have produced for over a hundred years. Yeah. So, you know, these are, are things where, um, you know, your grandmother and great-grandmother could have been getting royalty checks and, you know, all of a sudden, you know, you're getting, you know, what, it might be $70 a month or something like that. But for some of these folks, you know, it's real income.

And, you know, it's, it's, it's, it's very, it's very fragmented in that sense. So that's actually a nice segue. So I want to talk BSM specifically in a second, but I think this will help give an overview. That was a great overview of the mineral rights, but the most common question, I know you're not on Twitter, so you couldn't see any of the questions at a time, but the most common question I got, and actually the question that I was reviewing the 10K reading it that popped into my mind is, how is BSM different than TPL, Texas Pacific Land Trust been a very, very popular name among value investors for the past 10, 15, 20 years?

The stock has done absolutely phenomenally, and we might talk about some of the reasons behind that. But how does BSM which is mineral rights differ from TPL? Yeah, so that's a good question. Yeah, so Texas-specific land trust is the stock we're talking about TPL. And, you know, maybe a quick background here is pretty funny. So in my former life, I worked for the University of Notre Dame Endowment, and we actually, you know, met with Horizon Kinetic several times. And, you know, one of my very first meetings was, you know, with the team there, talking about Texas Pacific Land Trust and Bitcoin, which to this day remains the most expensive

opportunity cost meeting I've ever had. But it's a good question because right now, TPL, I think, is something like a $12 billion enterprise value. If you look at, you know, the analysis, they've got a handful of different, unlike a pure mineral owner, like a BSM or Vipra energy or falcon minerals. There's a handful of mineral players, but TPL has surface acres, they've got mineral rights, and then they've also got water rights. And from pretty much every analysis that I've seen, you know, bulls on TPL pretty much peg the mineral rights as about 80% of the intrinsic value, something like 80, 85% of the intrinsic value. And this intrinsic value is basically from the mineral rights, which are entirely Permian Basin assets. So

Midland Basin, Delaware Basin, and the Central Basin platform. And what you'll find, like for instance, we say 20 million gross mineral acres for blackstone minerals, the tricky part is, is you can't just, you can't just put a blanket number on how much minerals are worth because it's, you know, it's like saying, you know, one acre of property in downtown Manhattan versus one acre of property in, you know, 10 buck two, Texas. They're not the same, you know, they're not the same value. And, you know, this, this is very, very true, even within basins. So, for instance, you know, the Midland and Delaware acreage is a lot. lot more valuable than the Central Basin platform acreage. And if you look at TPL's footprint,

they have something like 100,000 net mineral acres. And for anybody who spent time in the mineral space, one of the challenges you'll find, really, I think this goes for all of the energy industry, is that there's not a very standard way of how people define. mineral acres, net royalty acres, gross royalty acres, gross mineral acres, you know, standardized to one-eighth, not standardized. It can get confusing because what one person says is 100,000 net mineral acres, somebody else is saying, you know, 50,000, but actually they're the same exact thing. And you have to back into how those are being calculated.

So in this case, you know, they have about 100,000 net mineral acres, which if you believe that's 80% of the IV, let's say it's something like being valued today at like $9 billion. Today, you could effectively acquire, you could go out and buy every other publicly traded mineral company, which would give you two and a half X the amount of Permian. footprint in the Midland and Delaware with, you know, tens of millions of other gross mineral acres for free at half the cost of TPL. I mean, for me, there's just no way of, there's no way of making sense. I'm probably going to get some black for this, but there's, there's just no way of making sense of the valuation of TPL. Oh, the value investors are coming for you. Let me ask, let me ask one quick follow-up question on that then. So you said earlier, right, an acre, in Manhattan is very different than an acre in the middle of nowhere in Texas, right?

And the first thing that jumps out to me is, yes, you did the math where you could buy every other publicly traded mineral rights entity for about what TPL's mineral rights are worth and get two and a half times the acreage. But the first thing that jumps out to me, you know, if they've got just the best acreage, right, like we know that there's oil just gushing out of the places where they have rights, whereas, you know, BSM, maybe it's got some good ones, maybe it's got some bad ones, all that sort of stuff. So is there a notable quality difference in TPL versus what the other other guys own? I actually think TPL's acreage is worse. Yeah. So if you look at,

for instance, Viper, Viper Energy, benom, VNOM, is pretty much a direct comp to TPL. They have about a hundred thousand net mineral acres in the Permian. And one of the things that you obviously have to look at is county by county, where is their footprint? You know, you have different, like you said, different levels of productivity, County Bay County. You got different levels of oil cut versus natural gas county by county. And then well spacing differs wherever you are. So one of the things that really stands out to me when I look at TPL is, you know, versus, let's say, a viper and versus a blackstone minerals, is how these mineral owners define what is and what is not Midland and Delaware Basin.

So if you look at TPL, they're pretty aggressive on how they outline specifically the Delaware basin. So a lot of the acreage that I see that's kind of in the Pekos-Reeves, Culberson area, you know, on the fringes of those counties is not great stuff. In fact, if, if, you know, if BSM drew their outline the same way, they would have a lot of, they would have acreage that would be counted into their number. That's not today. Yep.

So I would argue very strongly that both blackstone minerals, permian assets in specific, are higher quality than T.P. They have a smaller footprint, but they also have assets and, you know, 50 other basins. And then I would also argue that Vipers footprint is higher quality, although one thing you could say about Vipers is that they're a slight, they're more developed. So I think TPL would say there's something like 7% developed today, and Vipers is probably more like 20. and BSM is probably in that 20 range as well. And is it better to be more developed or less developed? If you think the acreage is going to get developed, then it's better to be less developed.

Yep. Okay. Yeah. Cool. Let me ask one last question, not to turn this into a TPL versus BSM podcast, so I want to dive into BSM, but this is actually another question that comes up for for good things. BSM, I believe Viper and a lot of these other guys, they are publicly traded partnerships, right?

which means you get a K-1, and there's other issues with publicly traded partnerships. But most of those relates to corporate governance. We can talk about them. But I think the main issue is it's K-1. TPL, a year or two ago, converted from a partnership to a C-Corp, which makes them eligible for indices, eliminates that K-1. I think that's when their stock really started to race after they converted. So do you think the difference in valuation that you see, is it because, is it almost exclusively

because of that C-Corp versus limited partnership issue, or do you see it as something else going on? Yeah, so actually, Viper converted to a C-Corp. They were an MLP structure. They converted. Blackstone is still an MLP structure where you get a K-1. And I think, you know, this is a very common thing that comes up. And I think it's absolutely a reason for, you know,

for their. being a evaluation differential. If you think about, you know, going back to, you know, the listed alts that we've talked about before, like a KKR or Blackstone, you know, the private equity player, those players also used to be passed through entities that converted to Seacorps. And I think they have subsequently seen a huge amount of interest in their, you know, in their stock. So, you know, it's a tough, it's a tough debate because.

effectively, at least at this point, any way you slice it by converting to a C-Corp, you're giving up cash flow. So it is a cash flow decreasing exercise, but the question is, are you going to make up for it in multiple? I think that's been pretty well proven out. The reason I don't mind owning a past through entity structure, even if it has a discount, is because they're paying you effectively all of the cash flow. And it's effectively like owning a bond that you think might yield 7% or might yield 25% and in any given year you really don't know, but you feel pretty confident that it's going to be between that figure and probably is going to last somewhere like 25 to 30 years. You know, the only other thing I'd add just on that C-Corp, the limited partnership to

C-Corp thing. It's just so funny to me that literally slightly complicated taxes can be the difference between slightly complicated taxes, and I guess index inclusion, can be the difference between multiples this big. I mean, we're literally looking other things that happen, but the private equity players have basically tripled since they converted from LPs to C-Corps. TPL, I think it's the same. It tripled. And yeah, it took a little time and there were good fundamental backdrops. But I mean, there's no doubt that these can, no doubt in my mind, these conversions. have created so much alpha. And it just, it seems crazy that just the change that actually decreases your tax tax tax, because now you're getting double tax, it's crazy that it can

result in that much of a multiple boost to me. Yeah, for sure. I think, I think TPL has other things going on. Because if you look at like, you know, if you look at Falcon minerals, if you look at Viper or some of these other ones, they're, you know, they're all Sea Corps. But I would say that they're still materially underpriced compared to TPL. And I don't, I don't necessarily think that means that TPL is overpriced. I just think that generally speaking, the rest of the mineral players are, you know, really attractively priced. Perfect. So let's, I think that was a great overview. I'm glad we did that. Let's turn back to BSM, right? You, you said several times, you think they're underpriced. You did a little bit where you comp into TPL. So let's talk, you know, when I was

doing the work on this. The first thing I did was I opened up the 10K, and as an attention to the 10K, they've got the NPV of their reserves. It came out to 500 million. Now, that was done when oil was at 40, oils at 70. But even if I doubled that, right, that's a billion versus a two and a half billion EVs. So I know I'm missing something when I was doing that math, and I've got a lot of suspicions of what that is, but I'll let you, I'll turn it over to you. How do you value this thing? Obviously, you've got a big position, two and a half million enterprise. What do you think it's worth? How do you think through that? Yeah. So, I would say for mineral owners in specific, looking at the SEC reserves is pretty much a useless exercise.

One of the things about that is that, you know, operators are not required to even report that to mineral owners, what they find in provable or not provable reserves. So, you know, you're not collecting all the data, and it also doesn't account for, you know, all the acreage where wells, haven't been drilled, but where, you know, operators have leased acreage. And then on top of that, all the unleased acreage. So, so when you're thinking about, I guess, you know, how to value BSM, you know, it's definitely a bit of a heavy lifting exercise given how large the asset base is, But what we're really trying to pencil in is by basin and by county, how many remaining well locations there are, what you think the ultimate recoveries will be for those wells, how fast those wells will get drilled. And then whenever you expect those wells to get drilled, what you think commodity prices will be.

So I think, and then in addition to that, you have, you know, for BSM, 60,000 wells currently that are produced. that have some kind of natural rate of decline. So, you know, so one of the really nice things about owning mineral rights versus the energy industry more broadly is that, you know, if I think about, you know, energy as a whole, particularly upstream energy, one of the things that I think people inevitably find is that, you know, there's always four or five more variables than you thought of. You know, you think it's complex, and then there's five things you'd never thought of. The really nice thing about minerals is, you know, there are really only two things that determine your revenue, and that is the price of the commodity and how much production there is.

And because, you know, because it's effectively a capexless, you know, exercise, and because there are almost no real operating expenditures, most of that revenue just becomes free cash flow. So basically what we're saying is, you know, we're valuing a stream of free cash flow. What we need to know is how many wells are going to be produced, our current base of wells, how much is they're going to, are those wells going to produce?

And then what are commodity prices going to be? And the good news is, is that, you know, if you do the math on, you know, to not have free cash flow, as a mineral owner, what that would mean for upstream, you know, you would be bankrupt several times over, you know, you'd be talking, you know, in a single dollar barrels of oil for a sustained period of time and, you know, the sense MCF and gas. So in order for upstream to produce, you know, economically, and that's a whole other topic in itself.

It's about saying upstream produces economically as a thing. Yeah, that's a funny one. But, you know, in order for them to survive, to even just get by, you're kind of swimming in cash as a mineral owner. It's top of the capital stack. Perfect. So, no, that all makes tons of sense. And again, that's the great thing about mineral rights.

Like, you're worried about inflation? Go buy a mineral rights owner because if these commodities go up, it goes straight through to their bottom line. But let me push. bit. So, you know, $10 per share is BSM's price, I think, as we kind of record this conversation. Like, you've done lots of work on these wells and stuff. And I know it's really difficult to kind of all this up. But at $10 per share, what oil price do you think it's kind of baked in where you would probably break even at $10 per share? Does that make sense? Yeah. So one thing about one of the

things, you know, let's say you're looking at the mineral space in general, you know, what are some of the reasons why you would be attracted to BSM versus, you know, a VNOM or a TPL or any of these other ones. One of the things is that blackstone minerals, unlike the others, is heavily gas weighted. So you mentioned what oil price would they break even? One of the things to keep in mind is that 75% of the production for BSM is natural gas. And I really like that. I really like that for a number of reasons. One is that, you know, oil has a lot of factors that I think, um, besides obviously, you know, being a little bit in the crosshairs with transportation shifting to electric vehicles, you have this big, um, kind of unknown with OPEC and how OPEC is going to treat you,

right? In, in oil, even with the, um, you know, really great productivity games we've seen and you know, the declining break-even prices in the Permian and other places, like in the Eagleford, which are, you know, probably high $20 a barrel break-evens, we are still not the global low-producer and oil and we're not, you know, we're up the cost curve. And in natural gas, you know, the U.S. is one of the lowest cost producers in certain areas of the U.S., you know, might be the lowest cost producer. And so it's cleaner burning than, you know, a lot of other fossil fuels. As electric vehicles ramp up, we're going to need more natural gas, you know, even with the increase in renewables, they're intermittent. You need, you need, you need baseload power. So I think there's a lot of

reasons to think that, you know, even with a much greener future, that we're going to have natural gas part of that kind of equation for a very long period of time. And their natural gas footprint largely comes from their Haynesville assets, which is really the crown jewel of blackstone minerals portfolio. So I think one thing that people, you know, kind of forget is that there's this kind of myopic focus on like, you know, Permian, Permian, Permian, you know, tell me how much acreage you have in the Permian, which has been awesome for a long period of time. But if you look at on a per acre basis, you know, how much, like let's say a thousand acres in the Haynesville where you might be able to drill six wells that each

have, you know, 20 BCF of ultimate recovery, you know, that's probably worth half as much as an acre in the Permian. And, you know, Blackstone Minerals has 250,000 net acres in the Haynesville, which is, you know, more than TPL, if you say there were half, that's more than TPL's whole Permian footprint. So obviously it depends on what you think are going to be national gas prices versus oil, et cetera. but um you know one of the one of the things that i think is really attractive about vsm is is this natural gas footprint that aside they have a very big exposure in the permian they've got a very big exposure in the bachan um and they have a lot of other you know what i've called non resource plays that are outside the major kind of um you know hot plays right now that um

you know, that are effectively, you know, steady, eddy oil and gas plays that, you know, your smaller independence are just trying to keep wells producing or drilling here and there. So at $10 a share today, we're at roughly a 10% distributable cash flow yield. So roughly a 10% yield pre-tax. today if you look forward on the strip for natural gas you know we've had some increasing commodity prices I think for the next 18 months the strip is close to three bucks for natural gas and for oil it might be like 65 bucks you know I think I haven't refreshed the math in a little bit but I think if you basically were to pencil a

out two to three more years of wells being drilled and then say not another well is ever drilled on blackstone minerals property again, you would get back that $10. Okay. So let me just push into that math and make sure I was understanding correctly. So one of the things you said, $10 per share today, 10% free cash flow. If I'm referring to the like kind of LTM, distributable free cash flow, and they pay about 70 cents per share of that, you know, 10% on $10 is a dollar, dollar in distributed free cash flow. They pay about 70 cents per share as a dividend and 30 cents per share they

keep to do whatever they want. So you're just talking about the LTM economics, which includes very low oil prices, lots of craziness. Am I kind of breaking that down correctly? That's right. And then what you were saying was if we fast forward two to three years and the strip stays kind of where it is right now and, you know, all the wells that they have drilling and come online, you think in two to three years, they would have done enough to kind of take in $10 per share and distributable cash with this. No, no, no, sorry. What I was saying is that, okay, so I see what you're saying.

You're saying on a break even. So what I was saying is what would have to happen for you to only get your $10 back, your return of capital. So I guess what I was saying is that I think if production is flat for three years and then not another well is drilled ever again and you just run all the wells into decline, you'd get back $10 over time in the digital cash flow. Okay, so the way you're looking at it is right now when you buy BSM,

assuming strips stays flat, all the wells decline, no new production, you think you could get your cashback, which gives you a call option on any new drilling or oil and gas prices skyrocketing. Obviously, there is a little bit of a foot where maybe the wells decline faster or oil and gas prices tank again, but, you know, it seems a good bet that at least new drills wills will be drilled, right? And you're getting that completely free up optionality. Right. So I guess the basically the upside is, you know, in a base case, I would expect there to be

20 years plus of drilling inventory on their Permian and Haynesville assets. And I'm saying that if they only drill those for the next two to three years and then run at those wells into the client that they have from there, you get your money back. So you basically are getting 18 years of free upside. Fascinating. That's fascinating. Yeah. Look, I know tons of people when you came on who were like, this is a really interesting stock, and they were peppering with questions. And I had started to see why when I was researching it, but you can really see it fried out. And I just love that free call option on the well drilling and prices going on. Um, what about, let me ask two basic questions that I was a little confused by just reading

the 10K. So, look, this is a limited partnership. There's a general partner. Uh, am I correct, you know, just reading the 10K, I didn't get a sense of who owned the general partner. And I'm not sure if it matters, because I don't think the general partner gets any economics. Am I misunderstanding that? Yeah, there's not a, it is an MLP structure, but it, there is not the typical, you know, MLP-L-P-G-GP-GP kind of with the IDR structure. That doesn't exist. It's been consolidated. Okay.

So does BSM technically own the GP? Yes, exactly. Okay. Anyone who's done work in MLPs, Andrew was on to what I was asking right away. The structures can get really bad. So it's, it can, in fact, this is kind of the blunder. the whole midstream space, you know, over the past, you know, these IDR structures that basically are just, you know, created to take advantage of the LP.

You know, I was in private equity, private credit before this job. And at the height of the MLP craze, I was just screaming to everyone. We need to buy the debt on all of these things, right? Because the GPs do not care one iota about the minority shareholders. They will issue shares all day long and the debt even right now if it looks like it's 50% debt to equity two years from now they're going to have issued so much freaking equity because that's how they they were getting paid neither here nor are there but uh just let me ask you another agreement um you mentioned they're they don't really have to fund anything they own these mineral rights they've got a lot of discussion in their 10k and i'm sorry to dig into the weeds for some listeners who might not care but a lot

discussion on farmouts agree farm out agreements funding their cutbacks which didn't jive with my mental model so can you just kind of walk through that yeah absolutely it's good it's good question so going back to the IPO um bsm was somewhat of a hybrid in that they had all these mineral rights but they also would selectively take non-operative working interests in wells on their acreage And basically it was, you know, let's say XTO, which is a subsidiary of Exxon, was drilling on their acreage in the Haynesville. They would have the right to go to XTO and say, hey, we want to, you know, fund 30% of the CAPEX of this well for 30% of the economics. And they would cherry pick, you know, they would cherry pick places to do that. and historically had a great track record doing that.

They also used it as a tool, and this is something that differentiates blackstone minerals from, you know, others. They've also used it as a tool to basically kickstart and de-risk certain parts of their acreage. So they did this with both, you know, they did this with their, what they call their Shelby Trough acreage in East Texas, which is, you know, the Texas portion of the Hainesville in, Nacadoches, St. Augustine and Angelina counties were basically they decided to do a 50-50 JV with XCO to say, hey, you know, you're not going to go develop this all on your own.

We think this is incredible rock. We're going to fund 50% of the CAPEX for you to, you know, to delineate this acreage and de-risk it. And they've done that a few times. And actually, you know, BSM has actually, in certain cases, just went out and drilled their own well. And then basically sold that well to an operator and said, hey, look, this is a good well. You take this and run with it from here. So they've done things like that to kick, to kick acreage into production and to kick it into, you know, operator's view.

And the real play there would be, I, you know, I'm BSM. and I go fund, do well, I fund it. And the real play is, I don't really care about that well. I mean, I want it to do well. But if they prove that there's good gas reserves there, then people are going to go build 30, 50, 100 wells around that. So the real play is, as you said, getting that land kick started so that you can get economics on 100 wells from them. Exactly. Exactly. And, you know, one of the critical, critical inputs to owning minerals is time, right? You might have great rock. You might have great reserves, but, you know, something, something produced 15 years from now and something produced tomorrow is hugely different in value. So, you know, this is all a

tool to say, how can we pull forward as much activity onto our acreage, you know, versus, you know, versus other acreage? And this is something that BSM is very active in doing. And in fact, like in the, you know, in Louisiana Hainesville, they're pretty active in going to operators and saying, hey, you know, you've got us here, here, and here on your drill schedule for the next 18 months, you know, tell us how we can make it work to move that up. You know, we'll, we'll, you know, give you a 2% royalty break here. And then we'll do this here. So they're very aggressive in doing that. Going back about maybe two or three years, they started basically realizing that the whole working interest story was complicating, you know, was complicating the view for a lot of

investors. So they decided to basically farm out their remaining obligations, their remaining cap-ex obligations to other upstream companies who wanted to participate in, you know, future wells drilled in those areas. And then, you know, basically they're, you know, in a few years, they'll be, again, a pure, just a pure mineral owner. Perfect. Perfect. Let me ask you, let's ship now, obviously, BSM, like the assets are there, the value is there. So there's that. But this company has done a lot of acquisitions, a lot of mergers, M&A in the past. I think at some point, you know, if they're just sending that cash to you, that's one thing. But because they do M&A, you've got to evaluate the management team.

Obviously, there's also hedging oil and gas prices. And a lot of pushback I got. And I think I kind of agree with this, though I'm not an expert, is the company didn't exactly cover themselves in glory during the crisis. You know, they shifted mode to they just paid down all this debt. They didn't really get aggressive. they put on oil hedges at a bad time. So how do you view the management team both as a whole and their crisis era performance in particular?

Yeah. So BSM is led by, you know, Tom Carter, who's the, you know, the original asset base of Blackstone Minerals was the Carter family lumber company in East Texas, which basically they, you know, like I said before, they sold off the lumber property. but kept the mineral rights under those properties and actually ended up acquiring a few other lumber companies and keeping, you know, doing the same thing, selling the surface acres, keeping the minerals. And, you know, and it just grew from there and actually ended up managing kind of traditional kind of private equity style GPLP partnerships on

behalf of endowments and pensions, et cetera. And then eventually rolled all of those into, you know, what became BSM, the largest mineral rights company. So, so, you know, the team at BSM has a huge amount of experience. That being said, that experience comes with a lot of battle scars. And, you know, what you're referring to is basically selling, you know, they sold basically 10,000 net acres in the Permian in the height of the crisis for 150. million dollars and how much would that be worth today do you think gosh it's hard to say i think what it's worth today and the cash flow would produce or probably i think they'd probably have to pay

double to buy it back maybe more um it was definitely value destructive there's just no way around it it was it was a poor decision they were not even very levered at that point they were very well hedged They could have just sold their hedge book, honestly. And just to point out, like, you said they sold it for $150 million, think it's worth $300 million, double. So that's $150 million of value destruction. This is a $2.5 billion enterprise value company. So this isn't Google investing it.

This is almost 10% of the company. Right. Yeah. No, I mean, I think it is over conservatism. You know, they have this stance on debt where they feel like, you know, you know, this is not going down on my watch. This is, you know, like I said, it's, it's the Carter family. It's been in the family forever.

They're very debt-averse. Yeah, yeah. If anything, this is a space which should be able to support some debt. So one of the things that's a little bit difficult about BSM is that, you know, it's absolutely not an ideal cap structure. You know, this company should be able to support some debt. what they were worried about and, you know, what they were worried about was basically because their revolver is based on improved reserves, which they have no control over as a

mineral company, they didn't know what that, when the redetermination came up, you know, what that revolver would get redetermined to. And if they would be effectively, you know, forced into within a three month or two months time frame to start fire selling assets. So and when you go back to, you know, March and April of 2020, you know, it, in hindsight, it's easy to say, gosh, they destroy a lot of value and there's no doubt about it. It was, you know, it did. And the toughest part is that, you know, they weren't necessarily over levered. But, you know, it was a a crazy environment. It did feel like, you know, we have no idea how long this is going to last.

And, you know, it was better than selling off, you know, other acreage, which at that point would have been a much higher discount than, you know, kind of Permian assets. People just forget, I mean, look, obviously, high touch 2020, right? But people forget in April of last year, especially, oil went negative. You know, I personally, I think most of us said best case for a vaccine, end of 2021, and we ended up rolling out by 2020. Like, we had no clue. And everybody was wiping down pizza boxes, right? Like, we just had no idea what was going on.

So, yeah, they didn't cover themselves in glory. But did people see oil going negative? You know, like weird stuff was happening. And at least they made sure, you know, plenty of people did bad deals. Expedia raised money at absolute bottom, Airbnb, all these guys. But at least they made sure they were staying alive. And, you know, yeah, it was bad in hindsight, but oftentimes the worst thing you can do is just sit still and do nothing, right? Because if you do that, all of a sudden, you are a fire seller.

Let me follow that one up with a softball question. Oil and gas prices have risen a lot over, especially the past six months. The economic outlook's gotten better. Can you talk about just like the drilling outlook here? Because I think it just continues to get better. Yeah. Yeah. No, I think one of the most exciting things about VSM is that, um,

You know, a lot has changed in the past, you know, it has been, you know, tough to let go some of those Permian assets, but a lot has changed, particularly in the East Texas region in the past, you know, we'll call it 12 months. So, you know, a very big exposure for BSM, like I mentioned, is they're Hainesville assets. And those assets are roughly split up between about 125,000 net acres in the Louisiana side of the Hainesville, which to some extent are really just on autopilot and then 125,000 that acres in the Shelby Trough area, which is a little bit more early stage in terms of its development. But, you know, if you look at the well results on the, in the Shelby Trough, you know, Angelina County in specific, you know, these are monster, you know, really, really attractive. active wells that probably, you know, you know, our top, top tier in the Haynesville payback rates-wise. And they had two operators, BP and XTO, who effectively, you know, decided to, you know,

stop, stop drilling on their, on their Shelby Trough acreage. And they just penciled in agreements with Athon to basically pick up where those operators left off. And one of the things that's really attractive about those agreements is that they have structured well commitments. So oftentimes when you sign a mineral and gas lease with an operator, usually their initial three-year term, but can be extended if the operator keeps production and drilling at a pretty minimal level. What BSM has opted to do is effectively give Athon Energy, who's the new operator, a discounted royalty rate of, let's say, 15%, instead of the typical 20, in exchange for a drill schedule commitment. So if you look at the drill schedule commitment, it basically goes from five to six wells in this coming 12 months to 27 wells in the next four years. And when you pencil out the numbers for those wells, they are very material. Can you just ballpark it?

Yeah. So, I mean, if you think about a typical, you know, if you think about a typical well in that area, it generally does something like five to seven BCF in gas in the first 12 months leading to something like 20, to 25 BCF over the life of the well. So a 20 BCF well at, let's say, $3 gas over the fullness of time is, you know, $60 million. As a royalty owner, let's say you get 15% of that. So let's call it $9 million, I guess maybe using easy numbers, 10 million.

You know, basically what you're saying is, is that, You know, they have something like 500 to 600 locations remaining in that area. You're going to get the 27 wells gross, which they have a 50% holding in that area. So it's about 13.5 wells on a net basis, 13 and a half wells on a net basis that pay you 10 million over the lifetime. And about 40% of that 10 million comes in the first year. So it's very material. And, you know, I think when you do the math, just on the, you know, just on that acreage, you know, I think you get the market cap back pretty close to it, depending on your, depending on your assumptions for natural gas prices. And I think the, you know, there's a lot of reasons to be really, you know, the Shelby Trough acreage aside.

and I think the drill schedule is really attracted there. But just if you think about the Hainesville as a basin competitively, there's a lot of reasons to be really excited about it because, you know, with Biden coming into administration, one of the things that I think is pretty much inevitable is that building new takeaway capacity is just exceptionally difficult. And, you know, we've had this huge, huge amount of growth from the Marcellus and Utica natural gas

area. And, you know, they're right at about 35 BCF of takeaway capacity. And they are pretty much maxed out, you know, this year. In fact, there's been a lot of, you know, headlines about, you know, the, a couple different pipeline projects, which had been, you know, five, six years in the running and billions of dollars, basically just giving up because they can't, you know, when you're trying to cross five different states to get to the Gulf Coast, which is the, you know, the biggest demand center, it just isn't possible to get that pipeline done. So I'm of the view that, you know,

the Northeast gas is kind of at a standstill with the capacity that they have. You know, the Gulf coast is already a very heavy industrial center for gas. We are at 12 BCF a day of LNG exports right now with another 12 LNG of LNG projects basically in final investment decision that are probably going to come in the next five years. So regionally speaking, which is, you know, natural gas is very much a local, you know, a local game. The rock has to be good, but you also have to be able to get your gas to market. And in that sense, the Hainesville is just an exceptionally well-placed asset. And then the other thing, what I would say is that, you know, regarding their kind of asset base, something that's gotten a lot of press is their Austin

Chalk Acridge. And their Austin Chalk Acridge is just to the south of few counties of the Shelby Trough in Texas. And And, you know, this has gotten a lot of a press from a few different operators who are drilling across the Austin Chalk, some folks in the old Giddings field in kind of like Washington counties, Texas. And then like EOG, you know, made, had a lot of buzz around, I think in the old Persol field in Webb County, Texas, you know, drilling in the chalk basically saying that they think it's the lowest cost natural gas play in the country. how much do they own there so BSM has 200,000 net mineral acres in the chalk so basically they have three different they have three different operators that have committed to drilling 12 wells in the next 12 months to basically delineate the chalk in their area which is the old brooklyn field which is basically Tyler County Tyler County Tech

Texas, more specifically, and then Jasper and Newton counties. And I think something that's really important is that BSM would kind of say, you know, these, this is not really a kind of exploratory project in a sense, because if you look at where everybody else has had success, they are, they're in old, you know, really successful conventional fields. Yep. And they're basically going into those. successful conventional fields, drilling new horizontals with new completion methods

and seeing what the new results are. And they're pretty much virgin rock pressure. And we only have one well online in the Tyler, Texas right now, but it's already a $25 million well. Wow. And they've got 12 drilling with the upside for maybe hundreds in this average. Yeah. So basically, and they've been a little hesitant, I mean, for a good reason to give a lot of details. But, you know, I think it's in the fullness of time, you know, a billion dollar plus revenue opportunity. Fascinating. On a two and a half billion dollar company. Wow. And I think this is another question that comes up is that, you know, you go back 24 months or 12 months even, you know, people weren't talking about the chalk. It's. was just another part of their 15 million gross mineral acres that were unleased.

And, you know, a lot of people ask, like, well, how do you, how do you even think about that unleased, you know, asset base? Yep, yep. And it's very hard to know when certain things are going to come into play and when certain things aren't, but I think it's a free option, right? Like, as you said, 24 months ago, no one thought about chalk. And now I was ballparking the math in my head and you're talking hundreds and hundreds of millions of dollars

potentially coming from this. Right, right. Well, hey, Andrew, I have really enjoyed this. I have a couple more questions, but unfortunately, I am having a puppy emergency, it appears. And so we got through 90% of this, I think. This was super fascinating. The good news is the puppy emergency

will just have to be an excuse to bring you on next time. We can talk microcat pizza or megapat private equity. The puppy comes first. I fully support that. It was great to chat. And Andrew, since you're one of the weirdos who aren't on Twitter, how can people reach out to you if they want to follow up on the heels of this conversation? Yeah, you could find me on LinkedIn. Feel free to shoot me a message in LinkedIn or I have a website.

It's mth value capital.com. Cool. Well, I will have the website in the show notes for anyone who wants to reach out to them then. Andrew carry on for Emmeth Value. Thank you so much for coming on and looking forward to chatting in the near future. Thanks, Andrew. It was great to chat. Thank you.