Black Stone Minerals Co. LP is one of the largest privately held owners of fee minerals and royalty interests in the U.S., with ownership in more than 53,000 wells in 41 states, spread across 18 million gross acres. At any given time, approximately 5% of U.S. rigs are working on its properties.

The heart of Black Stone’s assets lie in East Texas and the Upper Gulf Coast, although it has interests in every major onshore basin, including approximately 400,000 acres in the Bakken—and even 745,883 net acres in Nevada.

The company is proactive in getting its minerals into commerce: a large land and technical staff manages the minerals using creative leasing arrangements and the development and/or review of prospects, and it shares its vast 3-D seismic dataset with prospective operators. A contingent of landmen is constantly in contact with E&P companies with proposals to lease and drill.

It’s a yield vehicle (currently about 6%) that distributes about 65% of its cash flow to its shareholders/limited partners and uses the rest to acquire new assets. It could be described as a strong yield vehicle with growth potential not unlike a private master limited partnership.

Hallie Vanderhider is the president and chief operating officer of the Houston company, which is funded by institutions such as Rice and Stanford universities, the Mayo Clinic and the Texas Children’s Hospital Foundation, along with well-known family offices across the country, as well as many local Houstonians and other high-net-worth individuals. We visited with her to find out more.

Investor Explain the background of your recent $1.4-billion exchange offer.

Vanderhider If there is a take away-regarding this transaction, I would say that it provides our shareholders stability in our yield through significant increased cash flow, and the critical mass to move quickly on significant mineral acquisitions without putting undue pressure on the balance sheet.

Over the past 20 years, Black Stone has expanded its mineral and royalty ownership through a series of acquisitions initially financed internally and then through multiple private-equity and co-investment funds for a total of 11 vehicles. Several of these vehicles were maturing in 2014, so we thought we’d get out ahead of the curve. For most of our investors, owning minerals and royalties (that can last into perpetuity) via a private-equity fund that is short-term doesn’t really work that well.

Investor How did you proceed?

Vanderhider In 2010 we decided not to continue to raise private equity because of the significant growth that the company had experienced in the previous decade. But this left some of our investors without a way to continue to invest in the space with us in the more traditional sense. So, we gave them a choice: exchange their interests in the funds for interests in Black Stone itself, monetize their interests through a sale for cash; or, they could remain in the fund until maturity.

In structuring the transaction, we worked closely with a group of investors on matters believed to be common to all LPs. Ultimately, the transaction resulted in approximately $1.3 billion in exchanges of interests, the acquisition of approximately $0.3 billion of LP interests, and approximately $0.1 billion have remained in the funds.

Concurrently with the exchange transaction, we undertook an equity raise. To date we have raised approximately $345 million with a goal of $400 million, which we anticipate achieving this month.

Investor By owning a piece of Black Stone it- self, what do they get?

Vanderhider It means they have an interest in every cash-flow stream we have. There are no general partner splits or incentive distribution rights (IDRs), so they come in on the same basis as I do, or as Tom Carter, our chief executive, does. In short, whether it was through an exchange or the purchase of new equity, our investors now own units in a large, diversified collection of oil and gas assets with an attractive current yield and strong upside potential.

Investor What is the resulting value of Black Stone?

Vanderhider Through its direct ownership in assets as well as those that were exchanged in the recent transaction and the addition of new equity, Black Stone is valued at approximately $3.8 billion. That’s based on a strip price at year-end 2012.

Investor Are you still in the hunt for more acquisitions?

Vanderhider. Absolutely. We’d like to spend about $100 million a year on acquisitions and a like amount on drillbit capex.

Investor But you don’t ever operate?

Vanderhider We are not an operator, but our ownership of nonoperated working interests has grown in recent years to generate about 30% of our revenues. Most of this is through the ownership of our mineral position. When somebody comes to us with a lease proposal, if it is in a high-margin area like the Bakken, for example, we often opt to contribute the acreage rather than lease. If it’s in an area where we’re less comfortable, like a new emerging play, we might lease with the option to participate later.

Investor How has the shale boom affected you?

Vanderhider There’s been a lot of activity on our minerals, although a lot of it is held by production (HBP) in the shallower zones. Also, given the significant amount of capital required to develop these shale plays, some people are willing to let their acreage go to us. A significant amount of private equity is sitting on the sidelines willing to fund conventional and unconventional drilling, so we expect to see increasing activity on all our minerals.

Remember 2008, when there was such a leasing frenzy in the Haynesville? At that time, we retained the right to participate in some of those wells, and did so to preserve the optionality in the units, even when the return was only 10% or less. We have gone non-consent on a few wells, but as a rule, we participated.

Now, most of those leases are past their primary term and are in continuous development. Because we think it will be more economic when gas prices move up a bit, we have found creative ways to allow our operators to hold the leases without drilling the wells by paying an advance royalty to us and getting a credit when drilling resumes.

Investor What future do you expect for the Haynesville?

Vanderhider We don’t expect that to be drilled to any significant degree until an operator can get a 15% return, so not for several years, because we’re not counting on a big near-term increase in the gas price. In the past couple of months the rig count there has actually increased. Exco recently sent us an AFE (authorization for expenditure) for seven wells and another large operator told us they hope to bring six rigs back to the Haynesville.

Investor Would you consider going public one day?

Vanderhider We don’t think our assets fit that model all that well. So much of our value is derived from nonproducing mineral interests, and we don’t think the Street would recognize that value. If you look back over 20 years, our production replaces itself every year, based on third-party drilling that costs us zero.

Investor Those East Texas properties date from the old timber business you had for many years.

Vanderhider Yes. Tom Carter’s great-grandfather started the timber business in 1867. In 1968 the family sold the timber and the surface, but retained the minerals. Tom began managing those assets and acquiring additional assets in the 1980s. Since then we’ve spent about $1.4 billion acquiring fee mineral and royalty acreage. It’s a great mousetrap.

Investor How are the low natural gas prices affecting you?

Vanderhider We are a long-term natural gas play, there’s no doubt about it. We believe in gas, although we don’t believe it will get to $8—nor is that necessary. Some 70% of our reserves and production are gas, but 70% of our revenues are from oil and liquids. We’ll make it on volumes, so a $4 to $5 price is no problem. We do hedge, but it is to protect our yield.

Investor You’ve said Black Stone has a lot of optionality.

Vanderhider Clearly, from these new shales, we’ve learned that something you don’t know about today could be huge tomorrow, so I view this company and our minerals as an option on developing technology.

In 2005, no one had any idea of the magnitude of the Bakken in its current form, but now, with new frac technology, we estimate that play is worth about $600 million net to us. We think the Haynesville is worth $1.3 billion. We want to continue to grow our reserves and production, and we can do that by the drillbit or by making an acquisition.

Investor Where are you watching next?

Vanderhider We’d like to see the Brown Dense and the Tuscaloosa Marine shale start to work. But I think it’ll take more technology to help us. A large independent is drilling its first Brown Dense well, so we’re eager to hear about it. We haven’t quite cracked the code yet, but we will. History would tell you there’s no reason not to be optimistic.