Good day ladies and gentlemen and welcome to the Q1 2018 Black Stone Minerals LP Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions for to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Brent Collins, Vice President of Investor Relations. Sir, you may begin.

Thank you, Jamie. Good morning to everyone and thank you for joining us either by phone or online for Black Stone Minerals first quarter 2018 earnings conference call. Today's call is being recorded and will be available on our Web site along with the earnings release which was issued yesterday afternoon. Before we start, I like to advice 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 on file in our forward-looking statements. For discussion of these risks, you should refer to the cautionary information about forward-statements in our press release from yesterday and the Risk Factors section of our 10-Q which will be filed later today. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures and 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 Web site, at blackstoneminerals.com. Company officials on the call this morning are Tom Carter, Chairman, President and CEO; Jeff Wood, Senior Vice President and CFO; Holbrook Dorn, Senior Vice President of Business Development; Brock Morris, Senior Vice President of Engineering and Geology; and Steve Putman, Senior Vice President and General Counsel. I will now turn the call over to Tom.

Thanks Brent. Good morning and thanks for joining us today. Black Stone continues to build on the strong momentum that we had at the end of 2017 as we move into and through 2018. Our production during the quarter was at an all time high of just over 42,000 barrels of oil equipment per day. That's 11% higher than Q4 2017. This was driven partly by higher levels of activity broadly across our asset base. We averaged 122 gross well adds per month for the quarter which is a 62% increase to the 2017 average of 75 gross well adds per month. Our net revenue points adds were up commensurately and were 60% set higher in the quarter compared with our 2017 average. We had a particularly strong production contribution from the Bakken Three Forks this quarter. That play saw increasing levels of activity over the last year and now production from the plays back to within a few percent of its peak in late 2014. Also note that the asset we acquired from Noble at the end of 2017 is performing above expectations. The result is that we are ahead of where we thought we would be at this point the year with respect to production. Record production combined with favorable commodity price backdrops led to new records for both adjusted EBITDA and distributable cash flow of $95 million and $83.4 million respectively. On the acquisition front, we continue to be successful adding complementary acreage to our portfolio. We invested around $32 million during the quarter about 70% of what is related to a single acquisition in the Midland Basin. The balance was spent bolting on to our East Texas Shelby Trough acquisition position. We're pleased with our ability to continue to find attractive acquisition opportunities in this competitive…

Hi. Thank you, Tom, and good morning everyone. As Tom mentioned, we're off to a great start to 2018 with the first quarter operating and financial results that we reported yesterday afternoon. Total production at 42.4 Boe per day was up 11% from last quarter. We saw big gains in our legacy Bakken production and so far production coming from the properties acquired from Noble late last year is running ahead of our expectations. Now the 42.4 Boe per day is within our production guidance range that we provided for the full year, but we originally expected a lower starting point and to ramp up through the year to achieve those levels. So we're very encouraged by what we're seeing early on. Even more encouraging, the production growth was driven more by oil volumes, which were up almost 25% over last quarter and by royalty volumes those were up 15% compared to only a 3% increase in working interest production. Now these numbers will move around a bit throughout the year including for the second quarter as we expect a number of Shelby Trough, Haynesville/Bossier wells will turn to sales and those wells are typically dry gas and ones where we own both royalty and working interest. We also benefited from improved commodity prices. Index prices for oil and gas increased in the quarter, but we also saw improved differentials so that our net realized price before hedges increased 17% over the fourth quarter. Now we're obviously keeping a close eye on differentials particularly out of the Permian, but we did not see much of an impact of that in the first quarter while we did see shrinking differentials in the Bakken. In total, we posted over $125 million of oil and gas revenues for the quarter and lease bonus…

Certainly. [Operator Instructions] Our first question comes from Brent Koaches with Raymond James. Your line is now open.

Hey, good morning guys. Congratulations on a great quarter. Certainly came in a lot higher than we were expecting on production. Just curious if you could sort of start off by giving maybe a little bit more color on activity in the Bakken maybe which areas were particularly strong. And then, what that says about full year guidance going forward should we expect maybe some updates later this year. What are you thinking about that?

Hi, Brent. This is Holbrook. I'll take that. I think what we saw on the Bakken was just a considerable build up of docks over the last few years finally getting converted to completed wells on top of just increased rig counts in the play generally. But we've got a large position in the Bakken a lot of that down the gut of [indiscernible] and frankly that's where we've seen a lot of activity. We are seeing folks start to reach out into what I would consider to be less core parts of the Bakken with these higher prices. So we're excited about that to see those areas start to attract capital again.

And Brent, this is Jeff. I just say in terms of guidance, I think we're going to do what we typically do. This is early in the year. No doubt it was a great start probably a little better than we had originally anticipated as well due to Bakken and some of the just performance from the acquisition. So we're very encouraged from where we are to start this year. We want to give it a little more time here. So I think the plan would be to look at things after the second quarter and determine if there was need to revise guidance at that point.

Okay. Fair enough. Thanks for that color. Just as a follow-up and we saw in the non-GAAP reconciliations an item there for income tax expense. I'm just curious if you maybe could sort of detail on what the item relates to. And then, as far as the C-corp conversion definitely appreciate your comments in the prepared section. I'm just curious if you could comment on what kind of things you're looking at from the Viper conversion, what you will basically evaluate in relation to your own business and I can appreciate that Viper's significantly different from Black Stone in terms of the Diamondback sponsor et cetera. So just any kind of color you can give on that process. Thanks.

Sure. Brent, this is Jeff. I'll take a first stab at those and then let others jump in if they'd like to. First of all, the income tax expense, congrats on reading the document in such detail. We did a simplification some of our corporate structure. I mean it's kind of getting into the minutiae but we had an internal series of transactions early in the year to just simplify the structure. There were a couple of income tax paying structures within that and it just released that. So that I guess all I'd say is that income tax expense should be a one time item we don't expect to see anything on a go forward basis. So that's that. On the C-corp conversion as Tom said, this is something that we're actively evaluating. I'll just give my opinion I thought that the way the Diamondback and Viper structured that they did have a really nice job to move that cash tax exposure away from Viper's, so there would not be a near term impact to Viper unit holders. We don't have a similar situation. So again, as Tom mentioned as a mineral company with a lot of revenues and relatively low cost and relatively low CapEx, we do generate taxable income. So what we really have to be comfortable with in making that sort of decision. Well, there's a number of things. One, we'd have to be really comfortable that the increased liquidity and the other benefits of being in that structure would create enough yield compression to offset the tax leakage we would have at the entity level. Again, it's just a value play at the end of the day. So we would like to see that maybe play out a little further. And then second, frankly, we just would like to get more comfortable that this that the changes in the tax code will be sticky. What we would not want to do is convert to a C-corp, C corporate tax rates go back into the 30 plus percent range and then not really have a clear avenue to get back to the MLP structure, which is still provide advantages to the total tax picture. So there's other comments, but that sort of I'm thinking at this point.

I would just add that -- this is Tom. I'd just add one thing. I mean of all -- the looking and studying we have done hasn't convinced us yet the C-corp space for somebody like us is a high correlation event to more investors, more liquidity, greater access to capital, it may be, but it's not, it's not crystal clear at this point for sure. The second thing is, one thing that I personally think is sure is that the different parties get control of Congress from time to time. And I think the tax code will be changed again in the future and probably not in a direction that is benefiting to the structure that's there right now. So I don't, once you step over that line it's very expensive to go back.

Fair enough. That makes a lot of sense. I think you guys are looking at the right way and we definitely look forward to seeing what the outcome is. Again congrats on last quarter and thanks for taking my questions.

Thank you, Brent.

Thank you. [Operator Instructions] Our next question comes from Kashy Harrison with Piper Jaffray. Your line is now open.

Good morning, gentlemen. Thanks for taking my question and congrats on the quarter.

Good morning.

With the subordination period and minimum quarterly distribution period almost at an end. I was wondering if you could just help us think through how you look at distribution growth falling the converts once the subordinate units become common units. Just how do you conceptually think about distribution growth over a multi-year period of time?

Well, as we have said in some of our guidance in the past we see multi-year growth in the 3% to 5% range for common units after the conversion. As in the past, we hope that is conservative and we would work to have a better growth rate than that. But that's our model right now. With respect to whether we have a variable distribution or a fixed distribution that's a question that we haven't fully answered yet. I think all MLPs at the end of the day are variable. They may not be variable quarter-to-quarter because they're just distributing what they've earned and some do that. Historically, the way we have even before the public platform with the subordinated units, we like to look at our annual forecast and a multi-year forecast and set a growing distribution that sees adequate to good coverage every quarter. And as long as we've got the coverage in a good way -- maybe vary the coverage a little bit more than varying the distribution quarter-to-quarter i.e., we would hope to tell the investing public what we see coming up and try to stick to it as best we can if that answers your question.

That's very helpful. And maybe just as a follow up in terms of a -- let's call it a minimum coverage ratio that you would be comfortable with assuming prices are in a respectable place call it a 50 to 60 even 60 to 70. What do you think that coverage ratio would look like just as in minimum?

On a over multiple quarters, I mean I think they can -- it should be one at least every quarter, but you may have quarters where it's slightly below that, if you're in a cycle where over a cycle you have good coverage and when I say good coverage, I'm talking about 1.1 or better, I hope better, 1.2, 1.3 and some quarters you may have better than that.

Yes. That's very helpful. Thank you. And congrats.

Especially when you think about the volatility in bonus income, which is a little bit of a unique thing for us relative to other MLPs that can cause your coverage to bounce around a lot.

Got you. Thank you very much. That's helpful.

Thank you. And our next question comes from Tim Howard with Stifel. Your line is now open.

Thanks for taking our question. Could you speak a little bit to realize prices to the NYMEX, we estimate the crude differential has narrowed over the past four quarters down to about $1.50 this quarter while all natural gas than at any premium for about five quarters, just interested in the drivers of each and if you could provide any expectation going forward. We would appreciate it.

Tim, I will start. This is Jeff. Yes. So a couple of things that we've seen. One is as I mentioned some shrinking crude differentials in the Bakken and I think frankly that's just a matter of [Dapple] [ph] and other takeaway getting a little better there. We are again as I mentioned watching the levels of differentials in the Permian, we haven't really seen much of an impact on oil yet from pumping differentials, but it's something that we're paying a lot of attention to. I think on a go forward basis that will be a driver -- due differentials widened in the Permian, do our producers have firm transportation that gets them there. So it's really -- it's a step or two removed obviously from our direct participation there but that will be a driver and we would think that the Bakken differential should stay at this current lower rate versus historical. On the gas side, I think a lot of what you're seeing in the gas realization has ticked up a bit, it's just the additional value of the NGL products, which are at least the heavier stuff is more tied to crude so that has run up. Just as a reminder, we don't report liquids volume separately. We show that as a price adjustment to our gas volumes. So that has a pretty big impact as liquid prices move around.

Okay. Thanks.

Thank you. And our next question comes from Philip Stuart with Howard Weil. Your line is now open.

Good morning, guys. Congrats on the great quarter. Circling back to production, I guess I was a bit surprised to see the outperformance in 1Q, just given some of the commentary from the E&P companies so far during 1Q earnings kind of noting weather issues in both the Permian and the Bakken affecting production. So I guess the question is kind of two-fold are you all able to quantify the impact that maybe weather had on production. And I guess it wasn't meaningful. And then, as we look at completions in general, it also seems like a lot of completions for E&P companies were more weighted towards 2Q and 3Q, I just wondering if you all are kind of seeing that on your acreage?

This is Holbrook I can take the completion question. In the Bakken, we feel like we saw a rush of completions in the fourth quarter given the nature of our mineral position there being very large from a growth footprint perspective, smaller in net perspective still very large significant mineral efficient overall. We don't have a strong of insight in that particular position on the given well. And a lot of the wells are held on under confidential status with the [NDIT] [ph], while we work with our operators to get as close to real-time information as we can. I'll tell you in the Eagle Ford we do -- we did see the way in completions and we're seeing that pick up considerably in the second quarter and actually frankly the end of the first quarter. So it really just varies by play. The Permian has been fairly consistent. We didn't really see a lot of weather the way that we could feel and that's probably because our interest is not really concentrated one or two hands. Just the diversification aspect are the benefits of that. And then in the Haynesville, we are now seeing a round of completions that are about to run through. So we feel really good about Q1 and we think that's a great foundation to build off the rest of the year.

Okay. Good deal. And then, I guess another question and more on the acquisition front, where you all seeing kind of the most intriguing opportunities maybe outside of the Permian and the Shelby Trough?

This is Holbrook, again. I would say that I think the best dollars are putting to work in my opinion right now is probably the Shelby Trough, the Permian is extremely competitive and that market's gotten very, very efficient. And a lot of other folks -- there has been a lot of capital had shown up for other liquid oil rich place whether the DJ or the Bakken. And we've seen kind of prices tick up across lower 48 in the mineral market over the last six months.

Okay. That makes sense. I appreciate the time.

We are trying to continue to focus where we have an edge. I think we have an edge.

Thanks.

Thank you. [Operator Instructions] We'll wait a moment to see if any final questions appear in the queue. And I'm showing no further questions in the queue at this time.

Okay. Well, in that case, this is Tom. I just thank you all for joining the call today. And we're going to do our best to keep the momentum going throughout '18 and '19. Thank you so much for joining us.

Ladies and gentlemen, this does conclude your program and you may all disconnect. Speakers; please stay on the line. Everyone else, have a great day.