Executive Summary / Key Takeaways

• Strategic Transformation Underway: Black Stone Minerals is actively transforming its asset base through targeted acquisitions and diversified operator agreements, particularly in the expanded Shelby Trough, aiming to significantly boost natural gas production and long-term value despite recent headwinds.
• Subsurface Expertise as a Core Differentiator: BSM leverages advanced subsurface evaluation, including seismic data, to identify and de-risk high-potential acreage, enabling strategic acquisitions and structuring attractive development agreements that accelerate drilling and enhance its competitive moat.
• Near-Term Production Headwinds, Strong 2026+ Outlook: Slower natural gas production in H1 2025, stemming from past operator slowdowns, led to a revised 2025 guidance of 33,000-35,000 BOE/day and a distribution reduction. However, new agreements and Permian activity forecast an incremental 3,000-5,000 BOE/day growth in 2026.
• Diversified Portfolio and Financial Prudence: A robust oil portfolio provides stability, while a clean balance sheet and ample liquidity support strategic acquisitions and development. The company's hedging strategy mitigates commodity price volatility, as evidenced by significant derivative gains in Q2 2025.
• LNG Demand Fuels Long-Term Gas Thesis: The constructive outlook for natural gas, driven by growing global LNG demand and increasing U.S. exports (EIA forecasts 15.1 Bcf/day for H2 2025 and 16.0 Bcf/day for 2026), underpins BSM's strategic focus on gas-weighted acreage development.

The Enduring Power of Subsurface Insight: Black Stone Minerals' Strategic Evolution

Black Stone Minerals, L.P. (NYSE:BSM) stands as a venerable institution in the U.S. energy landscape, tracing its roots back to 1876. As one of the largest owners and managers of oil and natural gas mineral interests in the United States, BSM's core business revolves around maximizing the value of its extensive, substantially non-cost-bearing mineral and royalty assets. This is achieved through active management, which includes marketing mineral assets for lease and creatively structuring lease terms to encourage and accelerate drilling activity. The company's long history has endowed it with an unparalleled understanding of the subsurface, a foundational strength that continues to shape its strategic responses to evolving market dynamics.

BSM's strategic journey has been marked by a consistent focus on expanding its asset footprint, particularly in the prolific Gulf Coast region. Since September 2023, the company has executed a targeted grassroots acquisition program, primarily concentrating on the Shelby Trough area. This program has been a significant driver of expansion, with approximately $172 million in minerals and royalty assets acquired by the second quarter of 2025, strategically building contiguous acreage positions to facilitate long-term development by operators. This approach is a direct response to the anticipated growth in LNG demand, positioning BSM to capitalize on the region's natural gas potential.

Technological Edge: Unlocking Value Through Subsurface Evaluation

While BSM is not an operator in the traditional sense, its "technological differentiation" lies in its sophisticated subsurface evaluation capabilities and data-driven asset management. The company invests significantly in geological and geophysical costs, including seismic data acquisition projects, which are expensed as incurred. For instance, the first six months of 2025 saw a one-time $4.0 million purchase of seismic data, contributing to a notable increase in exploration expenses.

This investment in subsurface technology provides tangible benefits. The team has spent years "digging into how the Shelby Trough expands outside of some of our existing development areas." This deep geological understanding has revealed a "substantial expansion of the Shelby Trough and extension towards the Western Haynesville," characterized by thicker, deeper formations with increasing productivity. This insight is critical for de-risking new acreage and attracting well-capitalized operators. The strategic implication for investors is clear: BSM's subsurface expertise acts as a competitive moat, enabling it to identify and acquire high-potential assets and structure advantageous development agreements that directly translate into future production growth and enhanced financial performance.

Competitive Landscape: A Differentiated Approach

BSM operates within a competitive landscape that includes other mineral and royalty interest companies like Viper Energy Partners (VNOM) and larger integrated energy companies such as Occidental Petroleum (OXY) and ConocoPhillips (COP). BSM's business model, primarily focused on non-cost-bearing mineral and royalty interests, offers a distinct advantage in capital efficiency compared to the capital-intensive operating models of OXY and COP. This allows BSM to potentially achieve superior margins by avoiding the direct costs and operational risks associated with drilling and production.

Compared to VNOM, which also focuses on mineral and royalty interests, BSM's extensive historical presence and diversified asset base across 41 states provide a broader revenue stream and greater operational resilience. While VNOM may exhibit more aggressive growth agility through acquisitions, BSM's conservative yet strategic grassroots acquisition program, particularly in the Shelby Trough, builds a long-term inventory of high-interest development opportunities. BSM's strategy of actively diversifying its operator base, moving from a primary reliance on a single operator like Aethon to fostering relationships with "4 or 5 active operators," further mitigates operator-specific risks and enhances its competitive standing. This approach aims for a "cumulative set of contractually required wells that are well north of the mid-20s that Aethon had 1.5 years ago."

Financial Performance: Navigating Volatility with Strategic Adjustments

BSM's financial performance in the first half of 2025 reflects a period of strategic adjustment amid commodity price volatility. For the three months ended June 30, 2025, total revenue surged by 45.5% to $159.49 million, largely driven by a significant $52.78 million gain on commodity derivative instruments, contrasting with a $5.55 million gain in the prior-year period. This highlights the effectiveness of BSM's hedging strategy in mitigating price fluctuations. Natural gas and NGL sales also saw a robust 26.6% increase to $46.19 million, despite a 16.1% decrease in natural gas production volumes to 13,710 MMcf. This was offset by a 24.5% decline in oil and condensate sales to $55.81 million, primarily due to lower production volumes (down 9.4% to 863 MBbls) and realized commodity prices (down 16.6% to $64.67/Bbl).

For the six months ended June 30, 2025, total revenue increased by a modest 1.7% to $218.75 million. Net income for Q2 2025 was $120.03 million, a substantial increase from $68.32 million in Q2 2024. Adjusted EBITDA for Q2 2025 was $84.15 million, down from $100.25 million in Q2 2024, reflecting the underlying production trends. Distributable cash flow for the quarter stood at $74.79 million, providing a healthy 1.18x coverage. However, Q1 2025 saw a slightly lower coverage of 0.93x, attributed to a unique seismic license purchase.

Operating expenses saw some shifts: lease operating expenses increased due to nonrecurring workovers, while production costs and ad valorem taxes decreased due to lower oil prices and reduced production. Exploration expenses notably increased in Q2 2025 due to seismic data acquisition projects, underscoring the company's investment in its subsurface evaluation capabilities.

Liquidity and Capital Allocation: Fueling Future Growth

BSM maintains a strong financial position, characterized by a clean balance sheet and ample liquidity. Its primary liquidity sources are cash generated from operations and a $1.0 billion senior secured revolving credit facility, which terminates in October 2027. The borrowing base was reaffirmed at $580 million in April 2025, with elected cash commitments of $375 million. As of June 30, 2025, the outstanding balance on the credit facility was $99.0 million, leaving $276.0 million in unused available borrowings. The company remains in compliance with all debt covenants, including a current ratio of not less than 1.00:1.00 and a total debt to EBITDAX ratio of not more than 3.50:1.00.

Capital allocation prioritizes distributions to unitholders, debt reduction, and strategic investments. Acquisitions are funded through a mix of cash from operations and equity. In the first six months of 2025, $45.4 million in mineral and royalty interests were acquired, with $38.0 million in cash and $7.4 million in common unit issuance. The company also has the option to redeem its Series B cumulative convertible preferred units, with the next window opening in November 2025, potentially using future equity or debt issuances.

Outlook and Guidance: A Path to Renewed Growth

BSM's outlook for 2025 and beyond is shaped by a strategic pivot to accelerate natural gas development. The company revised its 2025 production guidance to an average of 33,000 to 35,000 BOE per day, down from prior expectations. This adjustment reflects "slower-than-expected natural gas production growth, particularly in the Shelby Trough and Haynesville/Bossier play," a consequence of a "time-out" in drilling activity by a key operator, Aethon, in late 2023 due to low gas prices. This slowdown typically impacts production volumes with an 18-24 month lag.

However, management has a clear "line of sight to production growth in 2026 and beyond." They forecast an incremental production growth of 3,000 to 5,000 BOE per day in 2026 over the revised 2025 guidance. This growth is underpinned by several key initiatives:

• Shelby Trough Expansion: The new Joint Exploration Agreement (JEA) with Revenant Energy, signed in May 2025, covers approximately 270,000 gross acres and includes escalating annual well commitments, starting with a minimum of 6 wells in 2026 and rising to 25 wells per year by 2030 and beyond. First wells are expected to be spud in early 2026.
• Operator Diversification: BSM has amended its existing JEAs with Aethon, reducing their annual well commitment to 16 wells and carving back over 50,000 gross acres. This freed-up acreage is being actively marketed to other "well-known and well-capitalized operators," with the goal of having "4 or 5 active operators" in the area, ultimately "more than doubling our drilling obligations" over the next five years.
• Permian Basin Development: A large operator, Coterra (CTRA), is progressing a significant development in Culberson County, Texas, with over 34 gross wells planned. 30 wells have been spud, and 22 gross wells are anticipated to turn to sales in the second half of 2025, with the remainder in the first half of 2026, adding "meaningful oil volumes."
• Accelerated Drilling Agreements (ADAs): These targeted agreements in the Louisiana Haynesville continue to bring wells online, with 7 total ADA wells turned to sales by Q2 2025 and another 2 expected in Q3 2025.

The 2025 capital expenditure budget for non-operated working interests is approximately $2.3 million (net of farmout reimbursements), with $0.3 million already invested. The production mix for 2026 is expected to return to approximately 25-26% oil volumes, similar to 2024 levels.

Risks and Considerations

Despite the compelling growth narrative, investors should consider several risks. Commodity price volatility remains a primary concern, as BSM's revenues are directly tied to oil and natural gas prices, though hedging mitigates some of this exposure. The success of new development agreements and the ability to attract additional operators to the Shelby Trough are crucial for realizing projected production growth. Furthermore, the "dynamic nature of events, including uncertainty regarding changes in trade policies," could impact global demand and commodity prices. While BSM's credit risk from counterparties and operators is deemed acceptable, any non-performance could affect financial results.

Conclusion

Black Stone Minerals is in a period of strategic re-alignment, leveraging its deep subsurface expertise and extensive asset base to capitalize on the long-term natural gas demand outlook, particularly in the expanding Shelby Trough. While recent natural gas production headwinds have impacted 2025 guidance and led to a distribution adjustment, the company's proactive approach to diversifying its operator base, structuring new development agreements, and continuing its targeted acquisition program lays a clear foundation for renewed growth. The anticipated ramp-up in drilling activity from partners like Revenant and the significant Permian development by Coterra provide a strong line of sight to increased production and, ultimately, a path to higher distributions in 2026 and beyond. BSM's blend of historical strength, strategic foresight, and financial prudence positions it as a compelling investment for those seeking exposure to the evolving U.S. energy landscape, driven by its unique ability to unearth value through its differentiated asset management and subsurface insights.