Executive Summary / Key Takeaways

• Black Stone Minerals (BSM) is strategically repositioning for long-term natural gas growth, focusing on its vast, non-cost-bearing mineral and royalty interests in the expanded Shelby Trough and Haynesville/Bossier plays, driven by increasing LNG and power demand.
• The company's asset-light, royalty-based business model provides a competitive advantage through high gross profit margins (69.14% TTM) and strong cash flow generation, enabling consistent distributions and strategic acquisitions without significant operational capital expenditure.
• Recent development agreements with operators like Revenant Energy and amended agreements with Aethon Energy, alongside ongoing marketing of additional acreage, are projected to more than double annual drilling rates in the Shelby Trough within five years.
• Despite a temporary dip in Q1 2025 distribution coverage due to a strategic seismic purchase and slower natural gas production growth in early 2025, BSM maintains a robust balance sheet and forecasts incremental production growth of 3,000 to 5,000 BOE per day in 2026.
• The company's leadership succession plan and extended credit facility underscore a commitment to long-term stability and strategic execution, positioning BSM to capitalize on a constructive natural gas outlook and deliver sustainable unitholder value.

A Century of Subsurface Expertise: Black Stone Minerals' Enduring Royalty Model

Black Stone Minerals, L.P. ($BSM), founded in 1876, stands as one of the largest owners and managers of oil and natural gas mineral interests in the United States. Its core business revolves around maximizing the value of an extensive portfolio of mineral and royalty assets, which are substantially non-cost-bearing. This asset-light model, encompassing interests in approximately 16.8 million gross acres across 41 states, provides a stable revenue stream primarily from oil and natural gas sales, supplemented by lease bonus and other income. The company's long history and deep understanding of subsurface geology form the bedrock of its strategy, allowing it to actively manage its assets by marketing them for lease and creatively structuring terms to encourage and accelerate drilling activity.

The company's strategic positioning is particularly compelling in the current energy landscape, where broad industry trends are creating tailwinds for natural gas. The burgeoning demand for natural gas, driven by increasing LNG exports and the power needs of an AI-driven data center boom, presents a significant opportunity for BSM. The EIA forecasts average net natural gas exports of 16 Bcf per day for the remainder of 2025 and 16.30 Bcf per day for 2026, reflecting the impact of new LNG export projects. BSM, with significant assets in close proximity to Gulf Coast LNG facilities, is uniquely positioned to benefit from this "looming call on gas supply."

BSM's competitive advantage is rooted in its differentiated business model. Unlike integrated oil and gas companies such as EQT Corporation (NYSE:EQT), Devon Energy (NYSE:DVN), or Occidental Petroleum (NYSE:OXY), BSM primarily holds passive mineral and royalty interests. This allows BSM to avoid the direct operational risks and capital-intensive demands of drilling, production, and exploration that its competitors face. This model translates into significantly lower operating expenses and higher gross profit margins, which stood at an impressive 69.14% on a TTM basis. In contrast, active producers like EQT and Devon incur substantial costs related to equipment, maintenance, and exploration.

While BSM may not match the rapid growth rates of actively developing competitors, its strategy emphasizes stability and consistent cash flow generation. Its extensive geographic diversification across 41 states provides resilience against regional downturns, a notable differentiator compared to EQT's more basin-focused strategy. BSM's cost leadership, derived from its non-operating model, allows it to maintain stronger cash flow and potentially exploit weaknesses in competitors' higher cost structures. However, BSM's dependence on commodity prices and limited in-house technological capabilities for extraction are vulnerabilities. While it invests in subsurface evaluation, it relies on its operating partners for advanced drilling techniques, which could lead to lags in innovation speed compared to integrated players.

Strategic Expansion and Operational Momentum

BSM's strategic initiatives are designed to leverage its foundational strengths and capitalize on the constructive natural gas outlook. A key focus is the expansion of its footprint in the Shelby Trough and the broader Haynesville/Bossier play. The company has undertaken extensive subsurface evaluation, identifying a "substantial expansion of the Shelby Trough and extension towards the Western Haynesville," where commercial shale packages are observed to be "thicker" and "deeper" than in traditional areas. This geological insight underpins BSM's "grass-roots acquisition program," which has seen approximately $193 million in mineral and royalty acquisitions since September 2023, primarily in the Gulf Coast region.

To accelerate development on its high-interest acreage, BSM employs Joint Exploration Agreements (JEAs) and Accelerated Drilling Agreements (ADAs). These agreements incentivize operators to commit to minimum annual drilling programs in exchange for development rights or a modest reduction in royalty burden. In May 2025, BSM entered into a new JEA with Revenant Energy for its expanded Shelby Trough acreage, with escalating well commitments starting at 6 wells in 2026 and increasing to 25 wells by 2030 and beyond. Concurrently, existing development agreements with Aethon Energy were amended, providing for a combined annual minimum drilling commitment of 16 wells. BSM is also actively marketing an additional 220,000 gross acres, with a framework agreement expected to add the equivalent of 12 additional wells annually by 2030. These combined efforts are projected to "more than double the current annual drilling rate in the expanded Shelby Trough in the next 5 years," aiming for over 50 wells drilled per year in the region.

While natural gas production growth faced headwinds in early 2025, partly due to Aethon's "time-out" in late 2023, BSM has strategically restructured its operator relationships. The company is actively "reshuffling and restructuring to add operators and capital and well count," aiming for "4 or 5 active operators" to ensure a higher and more consistent cumulative well count over the long term. In the Permian Basin, BSM is monitoring a large-scale development by Coterra (CTRA), which includes 34 gross (1.22 net) wells on BSM acreage. 5 gross (0.18 net) wells were turned to sales in Q3 2025, with 13 gross (0.47 net) wells anticipated in Q4 2025 and the remainder in H1 2026, contributing "meaningful oil volumes" to the production base.

Financial Resilience and Strategic Capital Allocation

Black Stone Minerals' financial performance in the first nine months of 2025 reflects a dynamic commodity environment and strategic investments. For the three months ended September 30, 2025, total revenue decreased to $132.47 million from $134.86 million in the prior-year period, primarily due to a reduced gain on commodity derivative instruments and lower oil and condensate sales. Oil and condensate sales declined by 10.8% to $57.09 million, despite a 4.2% increase in production volumes, due to lower realized prices. Conversely, natural gas and natural gas liquids sales increased by 16.3% to $43.09 million, driven by higher realized commodity prices, partially offsetting a 5.3% decrease in production volumes. Lease bonus and other income saw a significant increase of 133.6% to $5.01 million, largely from Permian Basin and Haynesville/Bossier leasing activity.

For the nine months ended September 30, 2025, total revenue slightly increased to $351.22 million from $349.97 million in the prior-year period. This was primarily driven by a 27.7% increase in natural gas and NGL sales to $147.51 million and a 58.8% increase in lease bonus and other income to $16.65 million, partially offset by a 22.1% decrease in oil and condensate sales to $162.99 million. Net income for the nine months ended September 30, 2025, was $227.71 million, compared to $224.98 million in the prior-year period.

Adjusted EBITDA for Q3 2025 was $86.28 million, leading to a distributable cash flow of $76.76 million, representing a 1.21x coverage for the period. This excess coverage was strategically used to partially fund acquisitions and maintain a solid financial position. For the nine months ended September 30, 2025, cash flows provided by operating activities decreased to $245.07 million from $298.09 million in the prior-year period, primarily due to reduced oil sales and lower cash from derivative settlements. Net cash used in investing activities slightly decreased to $63.39 million, mainly due to reduced payments for oil and gas property acquisitions.

BSM maintains a strong balance sheet, with total debt of $95 million as of September 30, 2025, and a debt-to-equity ratio of 0.00 (TTM). This compares favorably to integrated producers who often carry higher debt burdens due to their capital-intensive operations. The company's Credit Facility, with an aggregate maximum credit amount of $1 billion, was amended in October 2025 to extend its maturity to October 31, 2030, and its borrowing base was reaffirmed at $580 million, providing ample liquidity. The 2025 capital expenditure budget for non-operated working interests is approximately $2.30 million, with $0.60 million invested in the first nine months, demonstrating a disciplined approach to capital deployment.

Outlook and Risks: A Long-Term Growth Trajectory

Black Stone Minerals' outlook is anchored by its long-term strategy in the expanded Shelby Trough and Permian Basin. Production guidance for 2025 remains unchanged at 33,000 to 35,000 BOE per day. Looking ahead, the company forecasts incremental production growth in 2026 of 3,000 to 5,000 BOE per day over its revised 2025 guidance, with oil volumes expected to constitute approximately 25%-26% of total production. Management encourages investors to focus on the "next 5 years" rather than short-term fluctuations, emphasizing the multi-decade development inventory in the Shelby Trough.

Key risks to this outlook include commodity price volatility. While natural gas prices saw support from cold weather in Q1 2025 and higher summer power pricing, a slight decline occurred in Q3 2025 due to milder weather. Oil prices decreased in the first nine months of 2025 due to weakening global demand and trade tensions. BSM uses fixed-price swap contracts to partially mitigate this risk, but revenues remain significantly dependent on prevailing prices. The weakening of natural gas differentials, potentially due to Waha exposure, is also a factor to monitor, though BSM's significant Haynesville and Shelby Trough volumes have good exposure to Henry Hub. Credit risk from counterparty nonperformance on derivative contracts and from operators' receivables also exists, though BSM evaluates its counterparties.

Conclusion

Black Stone Minerals is strategically positioned to capitalize on the long-term demand for natural gas, particularly through its expanding high-interest acreage in the Shelby Trough. The company's unique, asset-light royalty model provides a strong foundation of stable cash flow and high profitability, differentiating it from more capital-intensive competitors. While short-term production growth has faced challenges, BSM's proactive approach to diversifying its operator base and securing new development agreements is expected to drive significant drilling activity and production increases in the coming years. The recent leadership succession and extended credit facility further reinforce BSM's commitment to long-term value creation. For discerning investors seeking exposure to the energy sector with a focus on stable income and strategic growth, BSM presents a compelling opportunity to participate in the unfolding natural gas narrative, particularly as global demand for LNG and power continues to rise.