This 8.6% Yielder Is Making a Turnaround
A High-Yield Opportunity?
If you’ve been following this column, you’d know that I like to check out the beaten-down stocks because some of them offer the biggest yields on the market. Moreover, if a down-and-out high-yield company manages to make a turnaround, investors could lock in some capital gains on top of collecting oversized dividends.
And that could be what’s happening with Black Stone Minerals LP (NYSE:BSM) right now.
Headquartered in Houston, Texas, Black Stone Minerals is one of the largest owners of oil and natural gas mineral interests in America. The partnership has more than 20 million mineral and royalty acres, with interests in 41 states. By leasing out mineral and royalty interests, Black Stone can generate cash flow and return most of that cash to investors. (Source: “Annual Meeting Presentation June 2020,” Black Stone Minerals LP, last accessed August 3, 2020.)
Now, you can probably see where this story is going. Oil and gas prices have been on a roller coaster ride so far this year. With the added shock from the COVID-19 pandemic, a lot of companies in the energy industry have been struggling. Last year, capital spending by oil and gas exploration and production (E&P) companies in the U.S. was estimated to be $76.0 billion. This year, E&P capital spending is projected to decline by 40% to just $46.0 billion. (Source: Ibid.)
It should be noted that Black Stone Minerals was quick to take action. In February 2020—before the pandemic started sending shock waves across markets, the partnership announced that it was taking several steps to lower its controllable costs, including reducing the size of its workforce, as well as its executive and board compensation. (Source: “Black Stone Minerals, L.P. Announces Fourth Quarter and Full Year 2019 Results; Provides Guidance for 2020,” Black Stone Minerals LP, February 24, 2020.)
Another thing the partnership decided to reduce was the cash distribution to unitholders. In 2019, Black Stone Minerals stock had a quarterly distribution rate of $0.37 per unit. In February 2020, the partnership paid $0.30 per unit.
In May, the amount dropped to just $0.08 per unit. The reason behind the distribution cuts was to “increase the amount of retained free cash flow for debt reduction and balance sheet protection.” (Source: “Black Stone Minerals, L.P. Declares Distribution for Common Units and Schedules Earnings Call to Discuss First Quarter 2020 Results,” Black Stone Minerals LP, April 22, 2020.)
The strategy worked. In the first quarter of 2020, Black Stone’s distributable cash flow was approximately four times the amount needed to cover the cash distribution attributable to the quarter. (Source: “Black Stone Minerals, L.P. Reports First Quarter Results,” Black Stone Minerals LP, May 4, 2020.)
However, as you would expect, the stock market sell-off, the oil and gas price downturn, and the distribution cuts weren’t really considered good news by market participants. BSM stock was not a hot commodity, to say the least.
But now things could be about to change.
On July 27, the partnership announced that the board of directors of its general partner approved a cash distribution of $0.15 per unit attributable to the second quarter of 2020. The distribution will be paid on August 21 to unitholders of record as of August 14. (Source: “Black Stone Minerals, L.P. Announces Update on Previously Announced Asset Sales, Declares Distribution for Common Units, and Schedules Earnings Call to Discuss Second Quarter 2020 Results,” Black Stone Minerals LP, July 27, 2020.)
In other words, the partnership just raised its payout by 88%.
“We are pleased to return more cash to our unitholders this quarter through higher distributions despite the ongoing challenges facing the energy industry. Given the significant reduction in our debt over the course of this year and our strong commodity hedge position, the Board felt comfortable increasing our payout ratio,” said Chairman and Chief Executive Officer Thomas L. Carter, Jr.
He added, “We will continue to balance our conservative focus on debt levels with the objective to deliver further distribution increases as industry conditions improve.” (Source: Ibid.)
Investors liked the news. In the trading session following the distribution hike announcement, Black Stone Minerals stock surged 9.1%.
Bottom Line on Black Stone Minerals LP
Trading at $7.05 apiece, BSM stock offers an annual distribution yield of 8.6%.
If commodity prices further improve and capital spending by E&P firms starts picking up again, I wouldn’t be surprised to see more distribution increases from Black Stone Minerals LP.