The WT Carter properties, which were held in the Carter family since the 1880s, included approximately 175,000 fee mineral acres principally in East Texas. In 1998, these properties were rolled up into Black Stone Minerals as owners sought diversification, professional management and future growth. The acquisition of the former Kirby Lumber Company mineral estate from Santa Fe Energy in March 1992 was Black Stone’s first third-party acquisition and expanded its existing core area in East Texas. Through the Kirby acquisition, Black Stone acquired an estimated 558,000 additional gross mineral acres.
WT Carter / Kirby’s success has been driven primarily by the discovery of five major producing fields. The Double A Wells Field was discovered by a predecessor to Black Stone in 1984. W.T. Carter & Bro. continued to develop the field until 1996, when it sold its working interest in the field to Comstock while maintaining its mineral rights. Mariner discovered the Pine Island Bayou/Sandy Lake Field in 1994 in Jefferson County, Texas. Anadarko/UPR discovered and continues to develop Brookeland Field across Jasper, Newton, Polk and Tyler Counties, Texas, and the field is currently seeing a high level of drilling activity and success. Although Anadarko recently sold the mature production in the Brookeland Field to EV Energy Partners, the field continues to remain active. Two other major fields are the Constitution and East Sour Lake Fields, both located in Hardin County, Texas.
In early 1999, Black Stone acquired the mineral assets of Southern Minerals Corporation, comprised of approximately 520,000 acres in southern Mississippi, New Mexico and Texas. SMC represents diversified mineral interests whose success has not been driven by any single well or unit. The most significant operator on SMC thus far has been focused on the Poplarville Field in Pearl River County, Mississippi. Substantial production is also derived from Hugoton Basin reserves in the Texas Panhandle.
In 1999, Black Stone purchased approximately 45,000 acres concentrated in the Rio Grande Valley of South Texas and also including acreage in 12 other states. The properties represented family holdings and to accommodate the needs of the seller, a creative structure was used that included partial cash and partial equity. Production has principally been from the Deep Frio formation in the Santa Ana/Marks Field in South Texas, including Hidalgo County.
Through an ongoing relationship between Black Stone management and the management of Prize Energy Resources, L.P., an opportunity to acquire a mineral package was devised to help facilitate the acquisition of Pioneer Natural Resources from Prize. In September 1999, Black Stone acquired 1.5 million gross mineral acres in 30 states in a tax-advantaged transaction with 66% of the purchase price paid in cash and the remainder in a like-kind exchange of properties. The Prize acquisition includes long-life producing royalty and working interests in over 2,000 wells as well as non-producing fee mineral acreage providing a significant addition to Black Stone’s mineral footprint. Most production from Prize has come from properties in Oklahoma, Kansas, and Texas. Drilling has been focused in the Hugoton Field, Stanton County, Kansas and the Kinderhook Field, Hansford County, Texas.
In December 2000 Black Stone acquired 620,000 gross mineral acres in an all cash transaction. The Prince properties include interests in over 2,200 wells and are characterized by long-life production stemming from a diverse set of properties in Texas, North Dakota, Michigan, New Mexico, Wyoming, Oklahoma and other states. The largest unit is the Cedar Hills unit producing from the Red River Formation in Bowman County, North Dakota. The package also included all fee mineral properties formerly held by the Wiser Oil Company.
In 2001, Kempner Minerals, L.P. contributed its mineral assets to Black Stone in exchange for partnership units in Black Stone. The Kempner fee mineral properties provided Black Stone an additional 54,000 gross acres throughout Texas and include interests in over 60 wells. The most prolific well drilled on Kempner is the Staley-Mangold Unit #2 oil well originally drilled by Stephens & Johnson in Archer County, Texas in 1937. This well continues to produce oil and holds the largest share of value in Kempner’s current estimated PV10. The Pure Resources-operated Monroe Gas Unit in Ward County, Texas, which accounted for 25% of the acquisition’s value at the time of purchase, continues to exceed expectations through upward reserve revisions.
Black Stone acquired approximately 700,000 gross mineral acres in September 2001 in an all-cash transaction. This mineral package had previously been targeted for acquisition by Black Stone, but Cortez was the successful acquiror at the time. Approximately one year later, Cortez sold the mineral interests, royalties and minor working interest properties to Black Stone. The Cortez acquisition holds interest in over 1,200 wells characterized mostly by mid- to long-life production. The mineral acreage covers many states including Texas, Michigan, and Oklahoma and including the Permian Basin, Mid-Continent and the Eastern United States.
In November 2002, Fund I acquired 940,000 gross mineral acres from Ocean Energy in an all-cash transaction. The package represented a diverse spread of properties covering 22 states but concentrated in the Mid-Continent and Texas. The properties had a strong current cash flow component in addition to significant upside potential through future drilling in prolific areas. Black Stone was able to complete the acquisition at a highly competitive price and the seller, who was in the process of being purchased by Devon, was able to receive a higher price for the assets than Devon had assigned.
The Ocean mineral package includes interests in over 3,000 wells with a mid-life production stream in the Mid-Continent and Texas. As a result of active mineral management, the bonus income and production has far exceeded the acquisition projections. Most leasing has occurred in Roger Mills and Beckham Counties in Oklahoma where the primary operator is Chesapeake Energy. Since the time of acquisition, a total of 1,368 wells have been added on Ocean acreage in 13 different states. Over 40% of these wells were added in Oklahoma, and of those, over one third were added in Roger Mills County. Chesapeake and ConocoPhillips, formerly Burlington Resources, are the major operators in Oklahoma. Approximately 25% of the wells have been added in Texas, primarily in Panola, Freestone and Wheeler Counties, and over 15% have been added in Montana with over one half in Blaine County and others mainly in Hill and Choteau Counties. Devon Energy is the main operator in both Texas and in Montana.
Fund I closed its second acquisition in early 2004, acquiring over 2.5 million acres from Toreador Resources Corp. The assets, which included the Matador Ranches located in West Texas, were located in 16 states and concentrated in Alabama, Mississippi and Texas.
Toreador had used its royalty and fee mineral properties as a source of funding for its international operations before deciding to monetize them in a sale to Black Stone. Fund I closed its second acquisition on January 14, 2004 in an all-cash transaction. The acquisition included 2.58 million gross mineral acres in Texas, Oklahoma, and the Gulf Coast, with about one-half of the production and upside potential in Mississippi. The timely nature of this transaction for Toreador, which was in need of greater financial flexibility, allowed Black Stone to be opportunistic and pay an attractive price for these fee mineral properties.
The Toreador minerals package holds interests in over 600 wells located in Texas, Oklahoma, and the Gulf Coast. Most activity since the acquisition has taken place in Jefferson County, Mississippi, where operators include EOG and Penn Virginia and in the Texas Panhandle, where various small independents operate.
In mid-2004 Black Stone purchased the Pure Resources (“Pure”) mineral estate, previously acquired from International Paper. The assets covered an estimated 6.2 million acres, are concentrated in the Gulf Coast and include properties in 10 states. The package included large, contiguous acreage blocks that had largely remained unleased and thus were highly attractive to Black Stone because of the potential to actively induce activity across the minerals. In order to provide the seller flexibility to attempt to create a 1031 tax advantaged transaction, Black Stone delayed closing up to nine months from the effective date. The acquisition was the third and final one for Fund I, which was fully deployed upon closing, and the first for Black Stone Natural Resources II, Black Stone’s second institutionally supported partnership. The balance of the purchase price was acquired by additional affiliated single-purpose investment vehicles.
Leasing and drilling activity have been very strong. Since closing through September 30, 2007, 304 wells have been added on Pure acreage. One hundred and forty-five (145) wells have been added in Texas with over half in Polk and Tyler Counties. The Austin Chalk play has had a significant impact on the superior performance of this acquisition. Louisiana has seen the second highest level of activity with approximately 40% of Pure’s added wells, primarily in DeSoto Parish with Winchester Production being the main operator. Other wells have been added in Alabama and Mississippi and in numerous other states.
In 2003, Black Stone solicited KFOC to sell its mineral and royalty properties in the DJ Basin, which consists of seven pay zones, is long-lived and is the largest field in Colorado. In June 2004, KFOC held an auction of these properties, allowing for separate bids for the working interests and the overriding royalty interests. On October 1, 2004, Fund II acquired overriding royalty interests in approximately 120 producing wells and lands located in three counties.
In late 2004, Fund II closed on the acquisition of a package of mineral interests in four producing units, covering 2,560 acres in Vernon Field, Jackson Parish, Louisiana. Fund II bought 351 acres carved out of four units and royalties covering all of the units. At the time of the acquisition, 21 wells were known to be producing and another five wells commenced production soon after closing and Anadarko Petroleum Corporation was the operator. Anadarko sold its Vernon properties to EXCO Resources in early 2007 and the new operators plans are not known at this time.
In mid-2005, Fund II and an affiliated single-purpose investment vehicle executed a Term Royalty agreement with Energy Corporation of America (“ECA”). The agreement provides for a 90 percent royalty interest in 312 long-life, producing gas wells, located in the Appalachian Basin in West Virginia, Pennsylvania and Kentucky. Black Stone also acquired a 50 percent royalty interest in 181 development wells to be drilled by ECA in Kentucky and West Virginia. The term of the agreement is for 20 years, after which the interests will revert back to ECA. Eight (8) wells remain to be drilled under the commitment and it is expected that these wells will be drilled and completed before June 30, 2008. ECA has begun drilling certain wells to a deeper formation called the Marcellus shale which was not originally contemplated but has recently become active with operators in the area.
In 2005, Fund II closed the purchase of a package of overriding royalty interests (“ORRI”) located in the Antrim Shale in Michigan from O’Neal Resources. The package consisted of ORRIs in multiple units covering approximately 9,000 acres and producing from the Antrim Shale in northeast Michigan. At the time of the acquisition, the majority of production was from 60 gas wells within two units, Churchill Point and Comstock Hills. There were also some minor working interests included in the acquisition.
In June 2007, Dominion Exploration & Production, the largest operator of O’Neal wells, sold its interest to Loews Corporation. The new operator’s plans are not known as to the O’Neal acreage at this time.
In January 2006, Fund II purchased 2,306 mineral acres over the Barnett Shale in Johnson County, Texas. Although all of the acreage was held by production, a large number of proved undeveloped locations remain, as well as additional upside potential from infill drilling. The acquisition included 19 PDP wells, 5 wells drilling, 16 PUD locations and 6 probable locations. Chesapeake Energy is the sole operator on the properties.
Chesapeake’s original plans for the area included drilling on 1,000’ lateral spacing, but based on production performance to date they have decided to downspace to 500’ lateral spacing where appropriate. In addition, some operators are researching the feasibility of 250’ spacing but Chesapeake has not yet announced similar plans. Based on the higher number of wells and the potential for additional drilling, we expect that ultimate recoverable reserves will exceed our original expectations.
In October 2006, Fund II closed on the purchase of an undivided 75% interest in 640 acres in Tyler County, Texas. The acreage is located in the central western Texas portion of the Austin Chalk play and all 640 acres are leased to Plains Exploration & Production Company. The acquisition was a strategic acquisition as it was directly adjacent to existing assets and acreage.
In November 2006, Fund II purchased mineral interests in 27,020 non-producing acres in Amite, Adams, Franklin and Jefferson Counties, Mississippi in proximity of the Floyd Marine Shale play.
In November 2006, Fund II purchased 6,900 mineral acres in Denton, Tarrant, Johnson, Hood, Parker, Palo Pinto, Somerville, Bosque and Erath Counties, Texas; 4,550 mineral acres in Texas and Cimarron Counties, Oklahoma; and 300 mineral acres in Conway County, Arkansas.
At the time of purchase, approximately 53% of the acreage was leased to operators including Devon, Burlington, EOG and El Paso. In addition, there are approximately 320 PDP wells principally producing from the Barnett Shale, with interests varying from 0.005% to 10.38%.
In December 2006, Fund II closed on the purchase of a package of non-operated working interests in Carthage Field, Panola County, Texas. The acquisition included interests in 176 PDP, 10 PDNP and 20 PUD wells, primarily operated by Chevron and BP. Since closing, 27 wells have been added on Tensas Delta acreage and BP has indicated that approximately 6 to 12 wells will be drilled on this acreage in 2008.
On December 28, 2006 Fund II closed on the purchase of overriding royalty interests covering 20,800 gross acres in Newark East Field, Johnson County, Texas. The acquisition included 147 PDP wells, 11 PDNP wells, and 183 PUD wells. Chesapeake Energy is the sole operator on the properties. The ORRIs in part cover the acreage acquired in the Mize transaction in January 2006 thus increasing Fund II’s interest in those properties.
In 2007, Fund II along with an affiliated special purpose vehicle purchased a large package of mineral interests, overriding royalty interests and non-operated working interests in the Rockies. The properties include approximately 150,000 acres of federal and private lands located in Wyoming and several other Western states. The majority of the assets consist of ORRIs in the Pinedale Anticline Field in Wyoming.
The assets’ value is comprised of 96% ORRIs and 4% working interests. The majority of the acquisition value is derived from the Pinedale Anticline Field located in Sublette County, Wyoming. In Pinedale, seventy-five (75) PDP wells were producing at acquisition and significant drilling opportunities exists as the majority of the acreage has been drilled on 40 or 80 acre spacing. Shell, BP and Williams are the operators for the Pinedale properties. Additional assets include ORRIs in the Prairie Dog / Recluse Field, the Madden Deep Unit and Coal Gulch, all located in Wyoming.
In 2007 Fund II purchased a package of non-operated working interests in Southeast Poteau Field in Le Flore County, Oklahoma. These coal-bed methane properties are situated under approximately 7,621 gross (2,600 net) contiguous acres and are focused on the Hartshorne. At acquisition, there were 14 vertical and 54 horizontal PDP wells and 33 PUDs.
In December 2007 Black Stone purchased a diversified package of non-operated working interests in 15 states. This transaction will be the first transaction placed in our third institutionally supported fund, Black Stone Natural Resources III, which held a first close in December.