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Black Stone Minerals' Cash Flow From Natural Gas Could Spike With Its 10.5% Yield

Barchart - Tue Sep 20, 10:52AM CDT
Natural Gas - Natural Gas Flare at Night

Black Stone Minerals (BSM) is one of the few equities worth buying now. It claims to be the largest pure-play oil and gas mineral and royalty owner in the U.S. Not only does it have a huge 10.5% dividend yield, but there is reason to believe the company could raise its dividends next year.

The energy producer generates massive cash flow mostly from natural gas, which comprises 80% of its energy production - the rest coming from oil. It also has just a smaller number of hedges which, so far have only brought losses for the company. 

They were put on too early this year, and since then the price of natural gas has spiked from the mid-$4.00 range to $7.70 now, down from a peak of $9.15 earlier in Sept.

That means Black Stone Minerals could raise its dividends, pushing the 10.5% yield higher unless the stock rises. For example, the company's latest quarterly dividend was 42 cents per share. On an annualized basis, that works out to $1.68 per share, and at today's price (Sept. 20) of just below $16.00 ($16.00), that provides a dividend yield of 10.5%.

Black Stone Minerals - Investor Presentation

Analysts See Higher Dividends

Analysts now project that Black Stone Minerals will make $1.65 per share this year and up to $2.28 next year. That gives BSM stock a very cheap price-to-earnings multiple of just 7.0x for next year.

Moreover, given that BSM has to pay out 90% of its earnings as dividends, that could raise the dividend to $2.06 per share. Unless the stock rises, that would push BSM to a 12.9% dividend yield.

In fact, one analyst at Seeking Alpha now projects that it could make $510 million in distributable cash flow or $2.44 per share in 2023. This is due to a lower number of loss-making hedges it has for 2023. So taking 90% of that number, the dividend could rise to $2.20 per share.

Here is what that means for BSM stock. Even if we use a 10% dividend yield, the stock could be worth $22.00 per share (i.e., $2.20/0.10=$22.00). That implies that the stock could rise over 37.5% from $16 to $22.00 per share.

And, of course, at a lower dividend yield of say 8.5%, the stock could peak at $25.88 (i.e., $2.20/0.08 = $25.88). That implies a potential upside of 62% from here.

BSM - Barchart

Where This Leaves Investors in BSM Stock

BSM stock is up 3% this past month and up over 49% YTD. Every quarter the company resets its dividend based on its natural gas production (and some oil) and after deducting the losses it makes from hedges. Analysts project the company will make 43 cents per share this quarter ending Sept. 30, up from 41 cents last quarter.

That might mean the company keeps its dividend stable at 42 cents per share, solidifying its 10.5% dividend yield. Given analysts' projections for higher earnings next year, this also makes the stock very cheap.

Value investors are now carefully studying this energy stock, which also has a low level of debt. The potential for dividend hikes could provide significant upside for BSM stock.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.