Kimbell Royalty Partners, LP (NYSE:KRP) Q3 2023 Earnings Call Transcript

Kimbell Royalty Partners, LP (NYSE:KRP) Q3 2023 Earnings Call Transcript November 2, 2023

Kimbell Royalty Partners, LP misses on earnings expectations. Reported EPS is $0.19 EPS, expectations were $0.35.

Operator: Greetings, and welcome to the Kimbell Royalty Partners Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Rick Black, Investor Relations for Kimbell Royalty Partners. Thank you. You may begin.

Rick Black: Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the third quarter of 2023, which ended on September 30, 2023. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the IR section of kimbellrp.com. Information recorded on this call speaks only as of today, November 2, 2023. So please be advised that any time sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. I would also like to remind you that the statements made in today’s discussion that are not historical facts, including statements of expectations or future events or future financial performance are considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

We will be making forward-looking statements as part of today’s call, which, by their nature, are uncertain and outside of the company’s control. Actual results may differ materially. Please refer to today’s earnings press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA and cash available for distribution. Reconciliations to the nearest GAAP measures can be found at the end of today’s press release. Kimbell assumes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Bob Ravnaas, Kimbell Royalty Partners’ Chairman and Chief Executive Officer.

Bob?

Bob Ravnaas: Thank you, Rick, and good morning, everyone. We appreciate you joining us on the call this morning. With me today are several members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our Chief Operating Officer; and Blayne Rhynsburger, our Controller. We are very pleased to announce another record quarter that included substantial growth in all key operating metrics. Our total production, including a full quarter from our recent $455 million acquisition from a private seller exceeded 23,000 BOE per day for the first time in our history. We are excited to have achieved this significant milestone as we continue to execute our strategic business model aimed at not only consolidating the U.S. oil and natural gas royalty sector, but also, and more importantly, generating long-term value for our unitholders.

The third quarter marked new all-time highs set in production, rig count, DUCs and permits. During the quarter, our production mix continued to materially shift towards liquids with oil and NGLs now representing 49% of our production, compared to 46% last quarter. Activity in our acreage remains strong, and we now have a 17% market share of the overall U.S. land rig count, the highest in our history. Even after giving effect to our most recent $455 million acquisition, we still have the best-in-class PDP decline rate of only 14%. At the end of the quarter, we had 9.3 net DUCs and permits reflecting the widest spread we’ve ever had of line-of-sight wells relative to the number of wells needed to maintain flat production of only 5.8 net wells per year.

This gives us confidence in the resilience in our production, as we wrap up 2023 and look at 2024. In short, we are extremely pleased with this quarter as well as our third quarter distribution of $0.51 that we declared today, an increase of 31% from last quarter. In September, we closed our largest acquisition in the company’s history. As we stated then and still believe today, this acquisition is expected to significantly enhance Kimbell’s positions in the best-performing, highest growth oil and gas basins in the Lower 48. The targeted portfolio of mineral and royalty interest complements our disciplined approach to M&A, combining excellent reservoir quality, near-term cash flow and long-term drilling upside. While this acquisition was immediately accretive to distributable cash flow per unit, we believe it will generate accelerated accretion in the future years.

We look forward to continuing our role as a major consolidator in the oil and natural gas royalty sector. I’ll now turn the call over to Davis to review our financials in more detail before we open the call to questions.

Davis Ravnaas: Thanks, Bob, and good morning, everyone. Kimbell performed extremely well in the third quarter and generated record daily production that marked a significant new milestone for Kimbell. Including a full quarter of the acquired production that Bob just discussed, the revenues of which will be received by Kimbell for the full quarter, run rate production was 23,531 BOE per day on a 6:1 basis. As a result of the significant incremental production and our expectations for the fourth quarter, today, we are boosting our production guidance range for Q4. In addition, we expect record low cash G&A per BOE at Q4, reflecting the positive operating leverage our business model generates. I’ll start by reviewing our financial results from the third quarter, beginning with oil, natural gas and NGL revenues of $69.2 million, an increase of 21.5%, compared to the second quarter.

Third quarter 2023 run rate average daily production was 19,777 BOE per day, including 18 days of production from our recent acquisition. This represents a 13% increase, compared to the second quarter run rate average daily production of 17,573 BOE per day. Our third quarter production mix was comprised of approximately 51% from natural gas and approximately 49% from liquids, or 34% from oil and 15% from NGLs. As of September 30, 2023, Kimbell’s major properties had 909 gross or 5.4 net DUCs and 805 gross, or 3.94 net permitted locations on its acreage. This data does not include our minor properties, which we estimate can add an additional 20% to the DUC and permit inventory. In addition, we exited the quarter with 99 rigs actively drilling on our acreage, and our market share of all land rigs drilling in the continental United States, represents approximately 17%, a new record.

On the expense side, general and administrative expenses for Kimbell were $10.4 million, $7 million of which was cash G&A expense. Excluding the impact of approximately $1.5 million in transaction-related expenses associated with the acquired production and including a full quarter impact of the acquired production, cash G&A per BOE was $2.55, a new record low for the company. Third quarter net income was approximately $18.5 million and net income attributable to common units was approximately $13.6 million, as compared to $17.8 million and $13.5 million, respectively, from last quarter. Total third quarter consolidated adjusted EBITDA was $55.8 million, up from $45 million last quarter, including the acquired production from the effective date of June 1, 2023, through September 30, 2023, Q3, 2023 consolidated adjusted EBITDA was $71.6 million.

You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release. Today, we announced a cash distribution of $0.51 per common unit for the third quarter. This represents a cash distribution payment to common unitholders that equates to 75% of cash available for distribution and the remaining 25% will be used to paydown a portion of the outstanding borrowings under Kimbell’s secured revolving credit facility. We expect that approximately 55% of our third quarter 2023 distribution should not constitute dividends for U.S. federal income tax purposes, but instead are estimated to constitute nontaxable reductions, to the basis of each distribution recipients’ ownership interest in Kimbell common units.

Please refer to today’s earnings release for additional commentary related to taxes. Moving now to our balance sheet and liquidity. As a reminder, on June 13, we amended our existing credit agreement to, among other things, increase the borrowing base and elected commitment amount from $350 million to $400 million on the secured revolver and extend the maturity to June 2027. As of September 30, 2023, we had approximately $310.4 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing 12 months consolidated adjusted EBITDA of 0.9 times. Kimbell had approximately $89.6 million in undrawn capacity under its secured revolving credit facility as of September 30, 2023.

We are very comfortable with our strong financial position, the support of our expanding base syndicates and our financial flexibility. We remain very bullish about our industry and our company, as we see a long horizon for continued growth and opportunities, to enhance shareholder value. With that, operator, we are now ready for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Derrick Whitfield: Thanks and good morning all.

Bob Ravnaas: Hi good morning.

Davis Ravnaas: Good morning, Derrick

Derrick Whitfield: With my first question, I wanted to focus on your growth trajectory. Looking beyond Q4, with line of sight inventories far exceeding your maintenance requirement, it feels like there’s quite a bit of upside to continue to forecast given that we’re largely holding production flat in Q4. Is that a reasonable statement?

Davis Ravnaas: It’s a great question. It’s a great point. As you know, it’s always challenging to say the least to predict growth and production volumes as a royalty company, just given the fact that we don’t have, obviously, control over DUC completion dates, permit conversions, et cetera. That being said, your point is well founded. So, we now have more kind of line of sight wells relative to maintenance wells to keep production flat than I believe we’ve ever had in company history as a ratio. So that would suggest robust growth going forward, or at least certainly more than we’ve had in the past on an organic basis. What you’ll probably see from us as we dig into the numbers and provide continued guidance for 2024, is a conservative view on production. That being said, your point is well stated and justified, and I don’t disagree with the premise. Matt, anybody else want to jump in there on any thoughts?

Matthew Daly: Yes. Yes. I mean I would just say that looking at Q3, we had very good conversions to PDP in the Permian, Haynesville and Eagle Ford. Excluding the acquisition we made in Q3, our legacy production actually grew 2% quarter-over-quarter between Q2 and Q3. So that’s 8% annualized growth organically for our legacy production. So that’s a great growth quarter there. But looking forward, as Davis said, you’re correct. I mean, we have a record number of line of sight wells right now, 9.34. We only need 5.8 net wells to stay flat. That’s the highest spread in the company history. So, we feel very good about not only the resilience of Q4 production, but also the potential for organic growth as we wrap up ’23 and going to ’24.

Davis Ravnaas: Derrick, it’s a balance. We don’t want to be unduly conservative, but we also don’t want to be overly aggressive. So, we do our best when issuing guidance just given the obvious kind of lack of operational control. I hope that’s fair in your view.

Derrick Whitfield: It is. And with my follow-up, clearly, understanding that the interest is driving [ph] on the largest transaction you guys have done in the history of the company. I wanted to ask if you could characterize the competitive landscape for M&A at present and your interest in participating in it? And has the recent, I guess, surge or firming in commodity prices change the bid as dynamics out in the market?

Davis Ravnaas: Great question. So I would say just first and foremost, in my opinion, this was a historic year for M&A in the royalty sector, not just ourselves, but also our peers. I think, have done a fabulous job of consolidating and getting private minerals into the public sector. So it’s been a big year overall. I think that the competitive dynamic for larger packages, like the ones that we would be targeting is probably the most favorable to buyers that I’ve seen in quite some time. I would actually argue in many ways and we see this that some of the smaller deals that come across, our desk are priced competitively than larger deals. And so I think that a lot of aggregators are going to have some difficulty putting together packages where they pay, let’s call it, 10 times cash flow and then try to sell to someone else, like a meaningful multiple greater than that, like 12 times.