Kimbell Royalty Partners, LP (NYSE:KRP) Q4 2023 Earnings Call Transcript

Kimbell Royalty Partners, LP (NYSE:KRP) Q4 2023 Earnings Call Transcript February 21, 2024

Kimbell Royalty Partners, LP misses on earnings expectations. Reported EPS is $0.08 EPS, expectations were $0.32. KRP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Kimbell Royalty Partners Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, with Investor Relations. Thank you, sir. 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 fourth quarter 2023 ended on December 31, 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, February 21, 2024. 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’s provision of the Private Securities Litigation Reform Act of 1995.

We will be making statements that are forward-looking 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 release for our disclosure on forward-looking statements. These factors and other uncertainties and risks are detailed 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 earnings release. Kimbell assumes no obligation to publicly update or revise any forward-looking statements. And with that, 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 year for Kimball. In 2023, we completed our largest acquisition to date, which was immediately accretive to distributable cash flow per common unit and the acquisition substantially bolstered the Permian as our leading basin in terms of production, active rig count, DUCs, permits and undrilled inventory. In addition, we increased the borrowing base and elected commitments on our revolving credit facility to $550 million, further enhancing our liquidity and conservative capital structure.

We are also very pleased to report that we paid out $1.73 per common unit in tax advantage quarterly distributions during 2023 and paid down approximately $49.9 million on our credit facility. We ended the year with a strong fourth quarter that reflected significant sequential organic growth over the third quarter due to a number of high interest wells coming online in the Permian and Haynesville. We expect to continue this operational momentum as we progress through 2024, given that our rig count remains near record highs with 98 rigs actively drilling in the U.S. Turning now to production growth. It is remarkable to reflect on our growth since our IPO, as we have now grown production from 3,116 BOE per day to 24,332 BOE per day, an increase of 681%.

As evidenced by our significant acquisition activity in 2023, we expect to continue our role as a major consolidator in the highly fragmented U.S. oil and natural gas royalty sector. And we estimate the total size of the market to be nearly $1 trillion. As I’ve stated in the past, there are only a handful of public entities in the U.S. and Canada that have the financial resources, infrastructure, network and technical expertise to complete large-scale multi-basin acquisitions. We believe that we are still in the early stages of this consolidation and will actively seek out targets that fit within our acquisition profile. We are very excited about the opportunities to expand in the future and deliver unitholder value for years to come. I’ll now turn the call over to Davis and Matt.

Davis Ravnaas: Thanks, Bob, and good morning, everyone. I’d like to start by reiterating the sentiment that Bob expressed. This was a great year for Kimbell as we finished 2023 with a very strong fourth quarter as well as setting new records in several of our financial and operating metrics. I’ll start by reviewing our financial results from the fourth quarter, beginning with oil, natural gas and NGL revenues of $83.9 million, an increase of 21.2% compared to the third quarter and a record for the company. In the fourth quarter, we generated record daily production that marked another significant milestone for Kimball. Run rate production for Q4 2023 was a record at 24,332 BOE per day on a 6 to 1 basis which reflected 3.4% organic growth from Q3 2023 run rate production.

As of December 31, 2023, Kimbell’s major properties had 807 gross or 4.55 net DUCs and 727 gross or 3.83 net permitted locations on our acreage. Not including minor properties, which we estimate could add an additional 15%. In addition, we exited the quarter with 98 rigs actively drilling on our acreage, which represents approximately 16.3% market share of all land rigs drilling in the continental United States. On the expense side, fourth quarter general and administrative expenses were $9.1 million, $5.8 million of which was cash G&A expense. Excluding the impact of approximately $0.8 million and integration-related expenses associated with the third quarter acquired production, cash G&A per BOE was $2.25. Fourth quarter net income was approximately $17.8 million of net income attributable to common units was approximately $9.8 million as compared to $18.5 million and $13.6 million, respectively, from last quarter.

Total fourth quarter consolidated adjusted EBITDA was a record at $69 million which was up approximately 24% from last quarter. 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 $0.43 per common unit for the fourth 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 pay down a portion of the outstanding borrowings under Kimbell’s secured revolving credit facility. Moving now to our balance sheet and liquidity. As a reminder, on December 8, we increased the borrowing base and aggregate commitments under our secured revolving credit facility from $400 million to $550 million in connection with the fall redetermination.

At December 31, 2023, we had an approximately $294.2 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 1 times. Kimbell had approximately $255.8 million and undrawn capacity under its secured revolving credit facility as of December 31. We are very comfortable with our strong financial position, the support of our expanding bank syndicate and our financial flexibility. We are also releasing 2024 guidance, which includes daily production at its midpoint of 24,000 BOE per day. We feel very confident about the prospects for continued robust development given the number of rigs actively drilling on our acreage as well as the commentary we are hearing from several operators about their expected development activity in 2024, especially in the Permian.

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. I’d like to thank the incredibly hard-working, dedicated and talented team here at Kimball for continually driving growth and enhancing the value of our organization for all stakeholders. In addition, we work with the best advisers and financial institutions in the business. And we greatly appreciate these partnerships that contribute to the company’s success. With that, operator, we are now ready for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Neal Dingmann with Truist Securities. Please proceed with your question.

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Q&A Session

Neal Dingmann : You all just talk about activity and what you’re thinking for this year and focus area. Thank you. I think I was on mute. Joe, a nice quarter. My question is around —

Davis Ravnaas: Hey, Neal. You might be on mute. Operator?

Operator: Okay. We can go to the next question while we wait for Neal and bring them back in. Our next question is from Tim Rezvan with KeyBanc. Please proceed with your question.

Jon Mardini: Hi. This is Jon Mardini on for Tim. You mentioned earlier in your press release –

Davis Ravnaas: Hi.

Jon Mardini: Hey, you mentioned earlier that the industry is in early stages of consolidation that you’re excited about the opportunities to expand. Can you just talk about what you’re seeing in the marketplace now and why you’re so confident?

Davis Ravnaas: Sure. Happy to do that. I would say that every year since our IPO and even before that, we’ve been surprised by M&A volume. Last year was an enormous year across the entire sector for consolidation within Minerals. Continues to surprise us to the positive. We’re seeing more teams. Most recently, a trend we’ve seen is a lot of family offices that are getting increasingly involved in minerals. That’s driving consolidation, particularly amongst smaller deals that are being rolled up into the larger portfolios. We are regularly in contact with those groups. We’re meeting new groups constantly. Nearly all of them have a plan to exit at some point in the future. And so that’s why we continue to believe that larger institutional buyers like ourselves, specifically the public companies will continue to benefit from a robust seller pipeline.

It’s tough getting deals done in this space, but we continue to see that trend as being a positive one. We think it will continue, and we think it will grow as things continue. I mean if you look at just the overall market that’s been captured by the public companies, it’s still de minimis, low single digits of the overall market size. So we just think it’s inevitable that consolidation continues.

Jon Mardini: No, that’s great. Thanks for the details. And so the Permian is clearly your organic growth opportunity today. You talked about this a little bit, but can you just expand on what you’re saying from operators and in terms of activity and cycle times. Are you seeing any stock builds or is activity still proceeding at the normal rate?

Davis Ravnaas: Yeah. Good question. So we feel better today than we ever have about the near-term catalyst for development on our acreage. So we have net DUCs and permits of 8.4 compared to 5.8 needed to maintain flat production on our asset profile. So that would suggest that we have ample opportunity here to not only keep production volumes flat, but particularly for them to grow. That being said, everybody is aware of what’s been happening in the natural gas space recently. You’re correct that we have pivoted, not necessarily deliberately, but we have pivoted and just benefited from some really nice acquisitions in the Permian Basin over the last two years. So our companies become increasingly oil-weighted, were less dependent on line and specifically the Haynesville for our growth versus where we were a few years ago.

I think that’s a good place to be right now, just given the dynamics in the natural gas space, I kind of wish that some of these operators would bring back drilling to a certain extent and maybe keep the gas in the ground on our acreage and theirs until natural gas accommodates a more positive price here. But we think that the Permian producers are going to keep production flat as a general theme, some will be growing production. I think our acreage will grow better than the average producers will, just by evidence of the number of DUCs we have relative to our PDP decline maintenance level. So feel good about the Permian the Haynesville is a smaller position that we have today, but still feel good about the Haynesville. We have a lot of DUCs there.

So overall, feel good about the direction of the company. I think what you see in our guidance like always, is a conservative view on development. It’s just always challenging as a mineral owner with no developmental control over the assets to pinpoint exactly what growth is going to be, particularly in such a volatile environment like we’re in today on the natural gas side and even oil but more recently. So a conservative guide, feel good about it though. We don’t think it’s unduly conservative and feel very confident in our assets in the near term horizon for them.

Jon Mardini: No that’s great. Thanks for having that up. I’ll hand it back.

Operator: Our next question comes from Derek Woodfield with Stifel. Please proceed with your question.

Derrick Whitfield : Thanks and good morning, all.

Davis Ravnaas: Good morning, Derrick.

Derrick Whitfield : Hey, good morning. Given the considerable M&A we’ve witnessed across the Permian and Haynesville over the last six months. I wanted to ask your thoughts on the impacts it could have on your business?

Davis Ravnaas: That’s a great question. Immediate reaction to that is that we’ll see a more disciplined approach to growth. So I think if I had to guess, I’d say that growth will be — we will feel more confident about those combined companies on a consolidated basis for their ability to maintain production levels. I think that what you’ll see less of is the hyperbolic shale growth of prior years, unless, of course, we see some sort of material macro event that increases oil and gas prices. We tend to see that happen pretty quickly on our acreage. But overall, we’re absolutely sans the [ph] consolidation. We get that question all the time. And we view it as we’d rather have our assets developed by folks with stronger balance sheets, with more liquidity in their stock, access to capital markets, investment-grade ratings, all those wonderful things that support a healthy operator.