Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 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 will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Brent Collins. Sir, please begin.

Thank you, Howard. Good morning to everyone and thank you for joining us either by phone or online for Black Stone Minerals second quarter 2018 earnings conference call. Today's call is being recorded and will be available on our website along with the earnings release that was issued yesterday afternoon. 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 factor 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 to the most directly comparable GAAP measures 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 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'll now turn the call over to Tom.

Thank you, Brent. Good morning and thanks for joining the call today. Second quarter was another strong quarter for Blackstone. Our production during the quarter set a new quarter record of 44.7 thousand barrels of oil equivalent per day, 5% higher than the first quarter of 2018. Oil volumes were essentially flat over the quarter. Gas volumes benefited from a high number of wells completed in our East Texas Haynesville/Bossier program as one of our major operators caught up on some delayed completion activity. Overall, we saw 11 Haynesville/Bossier wells in the Shelby Trough that were turned to sales during the second quarter which includes six wells spud in 2016 that predated our farmout agreements. Those pre-farmout wells have large working interest components to them in addition to the royalty contribution. With the completion of these wells all the new wells now been drilled and completed by XTO and BP in our program in the Shelby Trough are farmed out with no further CapEx required by us. Earlier this year we provided a multiyear production outlook that showed mineral and royalty production volumes growing at a compounded rate in the mid-teens from 2018. We're executing very well on our plan to drive mineral and royalty growth. Royalty volumes set a new quarterly record coming in at 31.1 thousand MBoe/d which is a 9% increase from last quarter and a strong 47% increase over royalty volumes in the second quarter of 2017. I mentioned BP's activity in the Haynesville Shelby Trough. BP has been an important partner with us in that area, given they just committed $10.5 billion to purchase HP's U.S. onshore assets it is a fair question to wonder if the development opportunities they are acquiring might siphon capital away from our acreage. We've heard from the top levels…

Okay, thanks Tom and just further to that good point about DCF yield versus just distributions I'll also point out that now with the increase in the distribution for the second quarter to $1.35 per unit annualized we have reached the last stage of our scheduled minimum quarterly distribution levels. So going forward we and the board will evaluate the appropriate amount to distribute versus retaining coverage based on the performance of the business and that's without the constraints of a pre-programmed MQD other than of course the new minimum level established at $1.35. Now this does not mean we are moving to a variable distribution model at this point, but rather the future distribution increases will be based on our financial performance rather than the preset MQD increases that we had in place at our IPO. Okay, so turning back to the business, we continued our strong momentum in 2018 by building on what was already a terrific first quarter. In the second quarter we recorded increases in production, adjusted EBITDA which crossed over $100 million dollars for the first time since we've been public, distributable cash flow and most importantly in distributions paid per unit. Tom covered our production volumes for the quarter, but I want to talk a little bit more about the mix of that production. We made the decision in 2016 to shift away from our working interest opportunities. We entered into two farmout agreements for our Shelby Trough working interest that ensured capital continues to flow to that area while almost completely eliminating our capital requirements there. In fact the last of our three farmout wells in the Shelby Trough came online this quarter. Our total working interest volumes were down over 15% from their peak in the second quarter 2017. Since we only…

[Operator Instructions] Our first question or comment comes from the line of Philip Stuart from Scotia Howard Weil. Your line is open.

Good morning guys. Congrats on another great quarter and a solid guidance increase.

Thanks Phil.

You know, as I'm looking out to 2019 on my numbers, even assuming a pretty substantial increase in the dividend, I'm just kind of trying to think about distribution coverage going forward and how you're going to balance that with acquisitions and maybe like where is a comfortable level for distribution coverage if we're trying to kind of come up with an implied dividend increase kind of in the outer years?

Yes Phil, this is Jeff. I mean we've kind of said on past calls that that kind of 1.15 range feels pretty comfortable to us. We're a little frustrated, we're clearly not getting paid for coverage here. We ran 1.3 coverage this quarter. That kind of goes to some of my prepared remarks, just about maybe moving us off of the preprogrammed MQD cycle that we had at the IPO, so look I think with continued performance of the business that we be comfortable bringing coverage down and then we probably have the flexibility now that subs are in full pay and we've hit the $1.35 level to think about distribution policy in a little more open way. So, like we've said over the long-term I think 1.1, 1.15 is a very comfortable level, but we'll continue to think about that as we move forward again it's been pretty apparent to us that we're not getting rewarded for these coverage dollars.

I would add one thing to that comment with respect to out years and distributions and coverage and totally and in line with what Jeff said around the coverage levels in the 1.1, 1.15 the real variable there is organic production growth on our existing asset base as opposed to acquisitions per se. And we are trying to be as proactive in that sense and the PepperJack project is one example of that, to take assets we have in our portfolio right now that has basically zero incremental CapEx involved with them and get those things into industry hands and be able to hopefully bring a lot of that into our production forecast that is not in there now, which would allow us to see production growth and revenue growth in excess of what we've got in our long-term model.

Okay, that makes a lot of sense. Any idea on potential timing of third-party development beginning at PepperJack?

Well, I would expect that assuming we get our current pending transaction closed which we expect that we will, we would see production commence on that on or about the end of the year. There would be significant 3D seismic work going on and after that we have as much as five or six wells a year, per year if the development continues. So that could turn into a - given the way the project has developed there are really two meaningful structures out there to be developed and we have quite a bit of minerals underneath it. So that's an example of where we could see volume increases in excess of what we've got in our model.

All right guys, I appreciate the color, congrats again on the quarter.

Thanks Phil.

Thank you. Our next question or comment comes from the line of Brent Koaches from Raymond James. Your line is open.

Hi, good morning guys. Congrats on another nice quarter. Just kind of sneaking higher level given your current liquidity position, is there any plans for sort of larger scale acquisitions for the rest of the year or should we expect sort of some of the more smaller scale stuff like that what was announced yesterday?

Holbrook, do you want to take the first shot at that one?

Certainly. We're looking at a number of sizable acquisitions as well as a myriad of smaller acquisitions and to date for this year we just haven’t been successful closing the bid gap on the larger transactions. But they are certainly on our radar and we're going to hopefully bring a few of those home.

Okay great, and then just thinking forward I know we're a few quarters away from the super conversion [ph] is there any kind of details or can you just kind of describe the mechanics of the conversion next year and just kind of what investors need to be aware of going forward?

Yes, Brent this is Jeff. I mean it's actually very simple at this point, it's like any traditional subordinated conversion. I mean as long as we continue, as long as we pay the $1.35 to both common at least $1.35 to both common and subs over the next four quarters, the subs will automatically convert around the time that we pay the first quarter 2019 distribution.

Okay fair enough, thanks for taking my questions. Congrats again on the quarter.

Thanks Brent.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Kashy Harrison from Piper Jaffrey. Your line is open.

Good morning everyone and thanks for taking my questions. So with the conclusion of the MQD phase of the distribution growth can you give us a sense of how frequently you plan on evaluating increases in distributions moving forward? Will this be a decision that's evaluated quarterly, semiannually or annually going forward?

Yes Kashy, this is Jeff. Look I – my sense is we've kind of guided over some of the longer terms in that 3% to 5% annualized distribution growth outside of say major acquisition or other big turns in the business. I think that was part of my commentary is that the expectation would be that we would discuss with the board every quarter what the correct distribution level would be, so that we wouldn't be, constrained may not be the right term. But as we said on the IPO we had a pretty unique feature in the MQD in that it increased every year by $0.10 up to this current level of $1.35 and so there was a good deal of preprogrammed growth and therefore the common buyer. So now I think it will be an interesting discussion every quarter as to what the appropriate level of distribution should be.

And I would just go back to comment I made earlier that the growth in those distributions is very much driven by growth in production and our pivot away from working interest and seeing those volumes decline, which they will when you put a gap [ph] into them masks the tremendous growth that we're sitting in our royalty production, and I think once that phenomenon works its way through the system, which it will, and we continue to work really hard on our organic existing asset base, we hope to be able to be beat those numbers in the future.

Got it, that's super helpful color there guys, I really appreciate it. And then I wanted to say congratulations on the PepperJack exploration project, I was wondering if you could help us think through how you conceptually think about the ultimate returns on the investments assuming you are able to successfully get third-party operators to drill on the acreage and you're able to receive the benefits of the mineral royalty ownership?

Well, I'll take a stab at that. With what we found in the PepperJack A, which is still untested, but we have a very good, solid suite of logs on it and it looks like some very nearby analogies and we expect that that well may be something in the 20 BCF range and that's been corroborated by an independent outside engineering evaluation and we own 100% of the minerals under that, and so we think that we are, if you will, playing on house money at this point in time. With that well behind us, and we have proven up an area, we have gone a long way, let me restate that, gone a long way with one well to proving up an area that covers maybe as much as 4000 to 5000 acres where some of it we own full interest minerals in that we acquired us as long ago as 1992 and we've gotten eight or nine times our money back on that mineral acquisition since we did it. So I would say the returns are infinite.

And Kashy this is Jeff. Let me just add one point to that. We talk a lot about this, as I think it's a point that's missed by a lot of investors and this idea that of these embedded dropdowns in the asset base because we've included all of the undeveloped acreage in the company at the time that we IPO-ed. So you know, the PepperJack is just another example of that. Right? If you look back at the time of the IPO, the Shelby Trough area that we talk about all the time really wasn't producing, it was hardly producing anything and it's now our largest production area and all of that has come in to benefit of Black Stone without us having to kind of "drop it down" from the sponsor and stated that could have retained that. And PepperJack is just another example of this and it's frankly one of the key things that we try to do here is put some of that undeveloped acreage into development and those are cost free dropdowns for our shareholders and I think it's a real point of differentiation between us and some of the peers out there.

That's fantastic color. Thanks for the history on PepperJack and congratulations on a strong quarter.

Thanks so much.

Thank you. Our next question or comment comes from the line of Tim Howard from Stifel. Your line is open.

Hi, thanks for taking our question and apologies if you already clarified this. But does Black Stone have the option to kind of move to a more variable distribution policy before 2Q 2019 when the subordinated can convert or is the policy set until that conversion?

Now it's kind of the best of all worlds for common shareholders in that we can really do whatever we want with the distribution as long as we pay a minimum of $1.35 annualized to the common.

Okay, so we could potentially see the policy shift in 3Q 2018 given there is no more kind of working interest funding going forward, is that fair?

Sure.

Okay, got it.

Yes, I mean it's not really a policy shift. You could see a distribution increase, but you couldn’t see a policy shift that would say, hey we're going to take both common and subs down to about 20 for example.

Yes got it.

It could go up, not down.

Yes, it can go up, but not down.

All right that makes sense, that's what we want to hear. And then just a little bit on the hedging strategy, we saw the cost was covered in 2020, did you anticipate that being - kind of playing a larger role in your hedging strategy going forward?

Look, I think we're going to stay relatively vanilla in our hedging strategy. That is just one more aspect to provide a little more stability to the distribution. You know we thought that the way that oil was moving, especially with some of the backwardation in curves to leave a little upside while still maintaining I think 55 is the bottom end of that collar, just made some sense. So that's not a fundamental shift away from our hedging strategy of only using swaps, but it's just you one more tool in the toolkit. But I would not, we're not - I would expect us to start moving anything exotic. It was just we thought there was a little more attractive terms than the straight swap.

Got it. And then just on long term production guidance, would you anticipate updating that once per year?

I think we'll, we haven't made a firm decision on that Tim; however, and we're going to update that five-year guidance if we think we'll just do that as it is appropriate, but there's not a set policy today on how often we will provide updates.

Okay, great. Thanks for taking our questions.

Thank you, Tim.

Thank you. [Operator Instructions]

Okay, thanks everyone for joining the call today and we look forward to speaking with you in the future.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.