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Dec 10
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Coney, thanks for sharing your insights here. We are putting our thoughts on this into our next piece. Stay tuned!

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I read the Annual Report in more depth and noticed my math was wrong on the GP ownership, but Pocahontas is an affiliate. Anyway, they are a ways off 80% ownership and with how little the stock trades daily, management would drive the stock price way up buying their way to the 80%. I think it’s not much of a risk now that I’ve dug deeper. I look forward to seeing your take and thanks again for all of the phenomenal research!! :)

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Thank you for the update SB!

> NRP’s Q3 earnings call had no questions from analysts. Zero. Either the company’s results and future plans are predictable or no one is paying attention. We’d argue both are true.

Well put! NRP has been very consistent when discussing their capital allocation priorities over the past year. The fact that few are paying attention is (to me) an indication of future potential rerate.

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Great write up! Came across your substack while researching NRP. Are you guys worried about the GP’s call option to buyout the LP if it and it’s “affiliates” own 80% or more of the stock? If “affiliates” include the board of directors, then They’re already near or past 80%.

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Do you mind sharing your math behind that last sentence?

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file:///var/mobile/Library/SMS/Attachments/3e/14/C3B9F7AC-4EF5-4BDD-9C99-6CEA40723A0D/0.jpeg

Hopefully that attachment works, if not I can email it. GP owns 15% of business and directors and officers as a group own 28.7%. That comes out to 43.7%. Then Western Pocahontas Corp and LP own a combined 27.5%. They’re not directly affiliated but Corbin Robertson III is on their BoD and I can’t find ownership information on Western Pocahontas. If they’re an affiliate, then that comes out to 71.2%. Sorry my quick math was off, but it is getting close to 80%. I don’t think there are any worries about the call option IF Western Pocahontas isn’t considered an “affiliate”. But because a relative of the CEO is on the board, I didn’t know if you guys had any insight on that?

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I was reading PBT's 10-K this weekend and noticed the planned capex budget in 2024 is an astounding $301 million, which more than doubled the capex in 2023 and 2022. That means unless production and/or oil price rise significantly in 2024 we may actually see a decrease in royalty income for distribution. I don't know if this has to do with the heavy selling of PBT today; after all, the 10-K was released last Thursday and there does not seem to be any other catalyst. Whether the cash produced in the future discounted to today due to the increasing capex will be more than $301 million is unknown and not within our control. I believe your investment thesis was that the increased production due to the previous capex will result in a lot more royalty income once capex subsides. It seems like the near-term catalyst is delayed by at least one year given the massive planned capex in 2024. On the other hand, as you mentioned previously there is a tailwind for oil price due to consistent demand and lower supply in the near future due to underinvestment so PBT might benefit from the ever increasing production in 2024 and 2025 should crude oil price increases. Vicki Hollub, CEO of Occidental, recently mentioned that the oil market will face a supply shortage by the end of 2025 because the world is not replacing crude reserves fast enough. It looks like Blackbeard Inc. is doing the opposite with heavy investment. I would love to hear your thought on whether the massive increase in capex in 2024 alters your investment thesis for PBT, and whether you think this is a positive development.

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Haiyu, great comment, thanks for reaching out and for your insights.

Yes, $301 million is a very large budget for capital expenditures. Larger than we expected. This would be $50 million greater than 2023's total revenue from the Waddell Ranch. This development is fascinating.

Here is what the 10K says:

"Blackbeard has advised the Trustee that the capital expenditures budget for 2024 has not been finalized; however, Blackbeard provided the Trustee with a preliminary capital expenditures budget of approximately $301 million (gross) and development plan reflecting the number of wells it expects to drill in 2024. Blackbeard has advised the Trustee there are expected to be 95 new drill wells and 24 recompletions in 2024 as compared to 77 new drill wells (gross) and 142 recompletion (gross) in 2023."

A couple things:

First, the budget is call preliminary. We doubt the final estimate will come in much changed, but its worth noting that its not final yet.

Second, Blackbeard appears to be expecting to be able to pay in excess of $380 million (capex +lease op+tax) in 2024. $380 million would be a 50% increase over 2023's $250 million in revenue. We doubt Blackbeard is betting that on an increase in commodity prices. As such, they seem to be projecting a large increase in production over the next year. An increase in price would just be icing on the cake.

So our thesis remains largely in tact-that is a great play over a couple years-but depending on how production/price/costs balance out, the timeline could be pushed to the right. But not out of sight of long-term investors.

All the best out there!

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