Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the Black Stone Minerals Second Quarter 2026 Earnings Conference Call. I will now hand the conference over to Natalie Liddell, Vice President, Corporate Planning. Natalie, please go ahead.
Good morning. Thank you for joining us either by phone or online for Black Stone Minerals Second Quarter 2026 Earnings Conference Call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night. Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday and the Risk Factors section of our 2025 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of these measures to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at www.blackstoneminerals.com. Joining me on the call from the company are Taylor DeWalch, Co-CEO and President; Fowler Carter, Co-CEO and President; Steve Putman, Senior Vice President and General Counsel; and Chris Bonner, Senior Vice President, Chief Financial Officer and Treasurer. I'll now turn the call over to Taylor.
Thanks, Natalie. Good morning, and thank you for joining us. We made meaningful progress during the second quarter as we continue to execute our differentiated strategy. We advanced development activity across our Shelby Trough and Haynesville expansion position, remained active with mineral acquisitions and continued creating value across our broader portfolio through leasing, marketing and asset management efforts. We also announced a 7% increase in our quarterly distribution, reflecting the strength of our business and our commitment to delivering sustainable returns to unitholders. More broadly, activity across our core areas is moving in the right direction. Adamas continues to execute on its development program. Revenant progressed activity during the quarter, and Caturus has now begun operations on acreage covered by its agreement. We also see increasing operator activity throughout the Haynesville. At the same time, strong oil production from the Permian and Bakken, coupled with higher oil pricing, contributed meaningfully to our results during the quarter and further highlights the benefit of Black Stone's diversified portfolio. As we've stated previously, we believe 2026 represents an important inflection point for the partnership. While production dipped from the first quarter, we are encouraged by the activity underway across our acreage and remain focused on converting that activity into sustainable production, cash flow and long-term value creation for our unitholders. With that, I'll turn it over to Fowler to discuss our commercial and operational activity.
Thanks, Taylor. We continue to make progress across our commercial initiatives during the second quarter while further strengthening our position in the Shelby Trough and Haynesville expansion area. Our acquisition program remained active with about $40 million of mineral and royalty acquisitions completed during the quarter. Since launching our acquisition program nearly three years ago, we have deployed almost $300 million, primarily focused on acreage within or adjacent to our core development areas. We continue to see opportunities that complement our existing position and increase our exposure to future development activity. Beyond acquisitions, our leasing and asset management efforts generated meaningful value during the first half of the year. Strong leasing activity produced approximately $13 million of lease bonus and other income, significantly exceeding our expectations at the start of this year. We also benefited from an initiative launched late last year to review deduct-free lease provisions, resulting in approximately $6.5 million of refunds collected to date. These efforts highlight the value of actively managing our mineral and royalty portfolio. As Taylor mentioned earlier, development across our Shelby Trough and Haynesville expansion position continued to advance during the quarter. Adamas operated two rigs on our acreage at quarter end and turned four wells to sales in July. We expect another eight wells to come online during the remainder of 2026, and Adamas plans to drill 17 wells under the new program year that began in July. Revenant continued its development program during the quarter and spud two additional wells despite a reduction in its first-year drilling commitment following the previously disclosed well control incident. Activity is also beginning to emerge under our agreement with Caturus, which currently has a pilot well underway in Cherokee County and expects to commence development drilling during the second half of 2026. In addition, we continue to have fruitful discussions with a prospective operator regarding a new development that could further expand our contracted development footprint across the Shelby Trough and Haynesville expansion area. On a broader basis, activity across the Haynesville increased during the quarter. We continue to see operators evaluating and pursuing opportunities throughout the play, and the number of active rigs on our Haynesville and Shelby Trough acreage increased significantly during the quarter. We remain encouraged by the level of industry interest across our acreage footprint and the opportunities we see to further expand development activity over time. Strong results from Expand's Bobby Yancey well in Houston County and drilling activity in Anderson County further support our subsurface thesis of the connection between the Shelby Trough and Western Haynesville and reinforce the long-term development potential of our Haynesville expansion acreage. Outside of the Shelby Trough, Blue Arrow continues to advance development in the Southern Delaware Basin. Three wells were turned to sales during the quarter with the remaining 22 wells in the program expected online during the second half of 2026 and into 2027. We also saw strong contributions from our Permian and Bakken acreage during the quarter, benefiting from solid production and higher oil prices. Overall, we are pleased with the progress across our commercial initiatives and believe the activity we are seeing today continues to support our longer-term production growth outlook. With that, I'll turn it over to Chris to cover the financial results.
Thanks, Taylor, and good morning. Mineral royalty production during the quarter averaged 32.5 MBoe per day, while total production averaged 33.5 MBoe per day. Production declined from the first quarter, primarily due to lower natural gas mineral and royalty volumes in the Haynesville. As Taylor mentioned, production trends do not always move in a straight line as development activity progresses and wells come online at different points throughout the year, and we remain confident in the overall trajectory of the business towards growing production and distributions. Commodity prices remained supportive during the quarter, particularly for oil. Our average realized price, excluding the impact of derivative settlements, increased 7% from last quarter to $37.82 per Boe. Higher oil pricing and production helped offset the impact of lower gas volumes and contributed to strong cash flow generation during the period. As a result, net income for the quarter was approximately $106 million, adjusted EBITDA totaled $91 million and distributable cash flow was $80 million. Oil and condensate accounted for 65% of our oil and gas revenues. As previously announced, we declared a distribution of $0.32 per unit for the quarter or $1.28 on an annualized basis. Strong production from our oil-weighted assets and improved commodity pricing supported our results, allowing us to increase the distribution while maintaining 1.18x coverage for the quarter. This balanced approach supports both continued investment in accretive growth opportunities and our goal of delivering sustainable distribution growth over time. As Taylor and Fowler discussed, we continue to see encouraging results across our core acreage from development programs in the Shelby Trough and Haynesville expansion area to opportunities across the broader portfolio. We believe our diversified asset base, disciplined commercial strategy, growing development footprint and strategic position near Gulf Coast demand centers support our ability to deliver sustainable long-term value for unitholders. With that, we'll open it up for questions.
Questions and answers
Your first question comes from the line of Tim Rezvan with KeyBanc.
This is Jon on for Tim. So we were surprised to see the distribution increase this quarter, but you showed you had a lot of coverage on that $0.32 distribution. Just given Black Stone's tradition of trying to maintain a fixed distribution, what's driving your confidence in being able to fund that bigger payout going forward? Is it visibility on stronger oil volumes that we saw? Is it your outlook on gas activity ramping? Or is it something else?
Jon, this is Taylor. You hit the nail on the head. It's a bit of all of the above. We do try to increase distributions when we have confidence that we're going to be able to maintain them, and that's where we sit today. When we look out to the forecast, we're excited about the coming ramp in production that we've alluded to via our development agreements, as well as the strong results to date this year from our oil assets. So I'd say it's a combination of both, and we have confidence in the 7% increase this quarter.
Okay. Just to follow off that, and you discussed this a little in your prepared remarks. Can you give an update on where you stand with any future Haynesville agreements? Are you looking to formally bring in any other operators as Adamas, Revenant and Caturus are kind of in the steady state?
Yes, I'll touch on that quickly. We've been marketing additional acreage in the Shelby Trough to expand on the success we've had to date with operators. That marketing has gone very well, and we're getting close to being able to disclose more information regarding formally signing another agreement with a Haynesville operator.
Okay. That's great. And sorry, if I could just sneak one more in. On leverage, it's inched up from zero in 2024 to a little over half a turn now with $300 million of preferred still on the balance sheet. Just looking at the next window to address the preferreds coming in a little over a year, how are you thinking about the capital structure longer term, given the payments on those preferreds?
Sure. More broadly, when thinking about capital allocation, we've been spending most of our time and resources focused on the expanding Shelby Trough, and we're excited about our bolt-on acquisition program that we've been executing for a while. We still have peer-leading leverage that we'd like to maintain. As we look to the future, we take into consideration our agreement with Apollo on the preferred. As we approach the next open window, we're continuing to evaluate uses of capital and how the preferred fits into that.
I would just add that we're continuing to advance our acquisition program in the Shelby Trough. That's where we've been using our debt recently. As that progresses and we look into next year, we'll evaluate our options with the preferred and what makes the most sense.
Your next question comes from the line of John Annis with Texas Capital.
For my first one, starting with production: can you walk us through the drivers of the stronger-than-expected oil volumes and the decline in Haynesville gas volumes during the quarter? And how are you thinking about the production trajectory carrying into the second half?
I can start with that. Regarding oil production, we've seen some price-driven activity, particularly operators turning DUCs to sales, and we have benefited from that. On the gas side, we have some higher interest positions within the Shelby Trough, so depending on the timing of when some of those wells come on, that makes our production a bit lumpy. We've also seen variability in activity. With the recent increase in rig counts on our acreage, we are confident that activity will turn into higher production as our development programs advance under our contracted agreements. We're also encouraged by our medium- to long-term outlook on gas there.
Yes. Thanks, Chris. When you look at our portfolio, it's valuable to have both oil and gas assets. That diversity played into the strong results in the first part of this year and the significant leasing across the Permian, the Bakken and elsewhere. One area getting more attention is the Woodford Barnett, where we've seen more leasing. We're driving resource expansion in the Haynesville and focusing on development agreements there, while also participating in resource expansion in other plays. That is benefiting us in leasing dollars today, and ultimately production and activity down the line.
I appreciate all that color. For my follow-up, we've seen a significant increase in activity across your 3-County Shelby Trough area, which I think stands at roughly 19 rigs today. What do you think is driving that acceleration despite the softer gas type? How much of that activity reflects operators delineating acreage today to support future development commitments?
Good question. I think it's a bit of both. Some operators are seeing attractive returns in the current environment, and there are incentives to delineate and honor commitments under our development agreements. There's clearly an industry pull toward the Shelby Trough as inventory is dwindling in the legacy Haynesville, and that dynamic should continue. We're excited about the trajectory of activity over the next couple of years and into 2029 and 2030 as the industry seeks natural gas inventory to supply upcoming demand. We believe our assets are well positioned given their proximity to the Gulf Coast and the backdrop of increasing power demand. There's continued industry interest in the Shelby Trough and expanding Haynesville, and our acreage is well positioned to capture market share and benefit over time.
We have reached the end of our question-and-answer session. I will now turn the call back to Taylor for closing remarks.
Thanks, everybody, for joining us this morning. As we've talked about, we're excited to continue executing our differentiated strategy across our diverse portfolio. We remain confident in our trajectory and in our effort to return as much value to our unitholders as we can. We look forward to speaking with you again next quarter. Thanks.
This concludes today's call. Thank you for attending. You may now disconnect.