Shelby Trough Expansion And Operator Diversification Will Drive Drilling

Key Takeaways

• Strategic drilling expansion, portfolio growth, and operator diversification are set to boost production, lower risk, and drive long-term revenue increases.
  
• The royalty-focused model with low costs supports higher margins, stable earnings, and stronger returns as global energy demand and commodity prices recover.
  
• Concentrated assets, reliance on third parties, acquisition demands, and shifting regulatory and energy trends all raise risks to production, earnings stability, and long-term income growth.

Catalysts

Owns and manages oil and natural gas mineral interests.

• The expansion of the Shelby Trough and new development agreements (notably with Revenant) are expected to more than double drilling obligations over the next five years, which should drive significant growth in natural gas volumes as global LNG demand rises-positively impacting future revenues and distributable cash flows.
  
• Continued strategic acquisitions and active marketing of 180,000 new gross acres to well-capitalized operators could boost the quality and scale of Black Stone's portfolio, further leveraging advances in horizontal drilling and hydraulic fracturing to enhance production and margins.
  
• Ongoing operator diversification through the onboarding of multiple top-tier operators (transitioning from a single operator to several with over 20 well obligations per year each) reduces concentration risk and sets up a pipeline of increased drilling activity through the end of the decade, underpinning long-term revenue growth.
  
• The predominance of a royalty and mineral interest model, with minimal direct operating costs, positions Black Stone to capture higher net margins and stable earnings as commodity prices rebound and production ramps up, particularly as global energy demand for both oil and gas remains resilient.
  
• Prudent balance sheet management and a clear path toward production and distribution growth (with production forecasted to grow 3,000–5,000 BOE/day in 2026 and beyond) suggest future increases in distributions and total shareholder returns, supporting valuation recovery through increased earnings stability.

Black Stone Minerals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Black Stone Minerals's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 59.4% today to 56.5% in 3 years time.
• Analysts expect earnings to reach $315.2 million (and earnings per share of $1.28) by about August 2028, up from $245.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 11.0x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Black Stone Minerals Future Earnings Per Share Growth

Risks

• The company's production guidance for 2025 was revised lower due to slower-than-expected natural gas production growth, particularly in key regions like the Shelby Trough and Haynesville/Bossier; continued underperformance or operational delays could lead to stagnating or declining revenues and distributable cash flow.
  
• Black Stone Minerals' asset base is heavily concentrated in specific basins (e.g., Haynesville, Bossier, Permian), which increases exposure to localized geological, operational, and pricing risks that can result in volatile or reduced net margins and earnings if development or commodity pricing in these regions disappoints.
  
• Dependence on third-party operators for mineral and royalty production introduces risk, as seen in Aethon's decision to reduce drilling obligations and slow activity; if new or existing operators are unwilling or unable to maintain or increase drilling, production volumes and thus long-term royalty income may decline.
  
• While management describes a constructive outlook for natural gas due to LNG demand, long-term secular trends such as the global transition to renewables, increasing ESG constraints, and heightened climate regulations may erode oil and gas demand and investor appetite, pressuring valuations, revenue growth, and capital access over time.
  
• Significant capital deployment on acquisitions ($172 million since September 2023) to support production and reserves replacement is required to offset legacy asset depletion; failure to secure accretive, high-quality new assets at attractive prices could lead to lower earnings growth and weaker distribution sustainability in the long run.

Valuation

• The analysts have a consensus price target of $14.0 for Black Stone Minerals based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $558.3 million, earnings will come to $315.2 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $12.72, the analyst price target of $14.0 is 9.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.