Kimbell Royalty Partners Q2 2023 Earnings Call Transcript

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August 2, 2023

There are 7 speakers on the call.

Operator

And welcome to the Kimball Royalty Partners Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, a listen to Rick Black, Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty to the call to review financial and operational results for the Q2 2023 ended June 30, 2023.

Speaker 2

This call

Speaker 1

is also being webcast and can be accessed through the audio link on the Events and Presentations page of the IR section of kimballrp.com. Information recorded on this call speaks only as of today, August 2, 2023. So please be advised that any time sensitive information can no longer be accurate I would also like to remind you that statements made in today's to the 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. Listen only mode. 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.

Speaker 1

The actual results may differ materially. Please refer to today's earnings press release for our disclosures 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, listen, 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.

Speaker 1

Kimball assumes no obligation to publicly update or revise any forward looking statements. I would now like to turn the call over to Bob Ravenous, to Kimbell Realty Partners' Chairman and Chief Executive Officer. Bob?

Speaker 3

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 Ravnus, our President and Chief Financial Officer Matt Daley, our Chief Operating Officer and Blaine Reinsberger, our Controller. We are very pleased with another record quarter and continue to build on momentum from Q1 and the recently closed listen to the company's Rolodie acquisition. Notably, our Q2 production mix materially shifted towards oil, which represented 33% on a 6:one basis, up from 29% in the Q1.

Speaker 3

Activity in our acreage remains resilient listen despite a lower overall U. S. Land rig count. In fact, we now have the highest market share ever of the overall U. S.

Speaker 3

Land rig count at 13.8%. After giving effect to our 2 most recent acquisitions, the Permian Basin leads all categories in terms of production, listen to the inventory, rig count and line of sight wells. Production in the Permian grew by 48% quarter over quarter, listen, reflecting a full quarter of the MB Minerals acquisition with the Permian rig count increasing by 11% during the same period. And we are very pleased to report that we maintain a superior 5 year annual PDP decline rate of 13% that only requires an estimated 4.9 net wells annually to maintain flat production. Overall, we had a great quarter listen and are right on track to meet our targets for the year.

Speaker 3

Our Q2 2023 distribution of $0.39 represents an increase of 11% from Q1 and demonstrates our ongoing focus and commitment to enhancing unitholder value. As we head into the second half of the years, as well as looking out toward 2024, we will continue to execute on our strategy to drive growth both through organic development and our disciplined acquisition strategy that is both a consistent and proven method at Kimbell. We also expect to continue benefiting from our diverse portfolio with low PDP decline rates coupled with upside drilling locations. As a major consolidator in the highly fragmented U. S.

Speaker 3

Oil and natural gas royalty sector, we remain bullish about the long term prospects in this space and our role in it. We believe the future opportunities for Kimball are very bright and will extend for many years to come. I'll now turn the call over to Davis to review our financials in more detail before we open the call to questions.

Speaker 2

Listen. Thanks, Bob, and good morning, everyone. Kimball performed very well in the 2nd quarter and generated record run rate daily listen to the question, surpassing a new milestone for the company of over 18,000 BOE per day on a 6:one basis, including a full quarter of the MB Minerals acquisition. We are also pleased to report that we have amended and extended are in a listen to our secured revolving credit facility through June 2027 and increased the borrowing base and elected commitments listen from $350,000,000 to $400,000,000 an increase of 14%. We are also affirming our full year 2023 guidance listen that was previously disclosed in our May 18 press release.

Speaker 2

I'll start by reviewing our financial results from the 2nd quarter, beginning with oil, natural gas and NGL revenues of $57,000,000 a decrease of 0.8% from the 1st quarter, primarily due to a decline in realized commodity prices. 2nd quarter 2023 average daily production listen to the call. Was 18,145 BOE per day, again on a 6:one basis, which consisted of 5.72 BOE per day listen only mode. We are pleased with the results related to prior period production recognized during the quarter and 17,573 BOE per day of run rate production. Listen The prior period production recognized this quarter was attributable to past production that came into pay status during Q2 2023.

Speaker 2

Listen. Our record setting our record second quarter run rate daily production of 17,573 BOE per day, listen An increase of 3.3 percent from Q1 2023 was comprised of 45 days listen of MB Minerals production and was approximately 54% from natural gas and approximately 46% from liquids. And that's 33% from oil and 13% from NGLs. Including a full Q2 2023 impact to 554 Boe per day. As of June 30, 2023, Kimbell's major properties had listen to 767 gross and 3.89 net drilled but uncompleted wells as well as 734 gross and 2.97 net permits on its acreage.

Speaker 2

This data does not include our minor properties, which we estimate could add an additional 20% to the DUC and permit inventory. Listen. In addition, we exited the quarter with 90 rigs actively drilling on our acreage and our market share of all land rigs drilling in the continental United States are in a listen for 2 $0.90 per BOE. Unit based compensation in the 2nd quarter, which is a non cash G and A expense was $3,300,000 or $2.06 per BOE, dollars 2.06 per BOE. 2nd quarter net income was approximately $17,800,000 Total second quarter consolidated adjusted EBITDA was $45,000,000 You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release.

Speaker 2

Today, we announced a cash distribution of $0.39 per common unit for the 2nd quarter. This represents a cash distribution payment to common unitholders of 75% of cash available for distribution and the remaining 25% will be used to pay down a portion of the listen to the outstanding borrowings under Kimbell's secured revolving credit facility. Since May 2020, excluding this upcoming Q2 payment, to Kimbell has paid down approximately $108,600,000 of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution for debt pay down. Moving now to our balance sheet and liquidity. On June 13, we amended our existing credit agreement to, among other things, increase the borrowing base and elected commitment amount from $350,000,000 to $400,000,000 on the secured revolver and extend the maturity to June 2027.

Speaker 2

As of June 30, we had approximately $269,600,000 in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative approach with net debt to trailing 12 month consolidated adjusted EBITDA of 1.1 times, listen. With approximately $130,400,000 in undrawn capacity under our secured revolving credit listen. We are very comfortable with our strong financial position, the support of our expanding bank syndicate and our financial flexibility. With that, operator, we are now ready for questions.

Operator

Thank you. Listen and answer session. Our first question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Speaker 4

Thanks and good morning all.

Speaker 2

Listen. Good morning, Derek.

Speaker 4

This is my first question. I wanted to focus on your growth trajectory based on your improving net DUC and listen to the commentary in your strong Q2 oil production performance. How do you see the trajectory of volumes over the next 6 to 12 months?

Speaker 2

Listen. Always hard to answer that question, Derek, and we try to be conservative with our guidance. You're correct that listen. The ratio of net DUCs to permits that we have on our acreage relative to what's required to keep it flat continues to trend in a positive direction. Listen.

Speaker 2

You're further right that the oil weighting amongst that mix continues to increase and improve. We don't like to take listen to 3 to 6 months views on what that development cadence might be. We as mineral owners, one of the weaknesses of our business model, there aren't very many of them, but one of the listen to this lack of developmental control. So we've reiterated guidance, but you're certainly correct that, we may be too conservative in how we're thinking about this. Listen.

Speaker 2

Matt or Andrew, Bob, anybody want to add anything?

Speaker 5

Yes. I would just say that that's correct. I mean the 6.86 net DUCs and permits is well above the

Speaker 6

to 4.9 to stay flat.

Speaker 5

I mean oil prices are good, so you may start to see some accelerated completions at DUCs at the year end and gas as we get into Q4 with the gas curve and contango prices are higher in Q4 as well, so you may see some of that as well. So but I would agree with Davis. Listen. We stand by our guidance for Q3 and Q4, which has a midpoint production of 19,000 BOE per day.

Speaker 4

Listen. Great. And then looking at the gas side of the ledger, your Haynesville rig activity has been particularly resilient despite lower gas prices. What do you guys attribute to that resiliency? Acreage quality, public company exposure, some combination of the 2?

Speaker 4

Any thoughts you could share?

Speaker 2

Listen. Yes, great question. We were I mean, frankly, we were positively surprised. I wouldn't use the word surprised, but we were pleased To see that, just given the fact that everybody else that seems to be reporting is seeing a lot of disappointing production declines in the basin. Listen position that we picked up from Haymaker back in 2018.

Speaker 2

It's just an incredible core Haynesville asset. Listen and we would probably argue that our production should and will continue to be more resilient than other folks. I think we have a lower PDP decline rate on our Haynesville position relative to a lot of other people too. So it doesn't require quite as much well, We will outperform, I should say, on balance the more hyper drilling folks that have newer flush production with higher decline rates. Listen.

Speaker 2

So we're kind of in a nice balanced spot with a lower PDP decline rate, but still a healthy amount of activity. We got asked that question yesterday on listen call and the mix between privates and publics continues to kind of shift up and down. I'm not sure I would directly attribute our resilience to our specific mix between public and privates, except insofar to say as, we have a healthy mix. Listen. They're all, for the most part, very good operators and it's just a great asset.

Speaker 2

I mean, it's just an asset that's kind of core to our business that just continues to perform. And we've got years years of inventory there, which is obviously a nice and very exciting thing. Anybody else want to chip in on that?

Speaker 5

I mean, in Q1, as you pointed out, we had a listen. Pretty large increase in the rig count of the Haynesville. It increased from by 6 rigs in Q1 even with relatively low gas prices. And then Q2, the rig count went down slightly into the Haynesville. But as David said, I mean, the operating activity remains robust there, mainly because the economics are so strong and a lot of these folks are able to hedge into against the contango curve, which has gas in the mid-3s going into the 4s in the future.

Speaker 5

Listen. And if I could maybe squeeze one more in.

Speaker 4

With regard to your decision to dissolve the Tiger Acquisition Corp. In Q2, Should we consider the chapter fully closed on that pursuit? Or do you think there's still an opportunity longer term to pursue a symbiotic E and P and mineral relationship?

Speaker 2

Listen. Yes, great question. Thank you for asking that. No, the idea is not dead. The idea in its form, which was the STACK form under Tiger that has listen concluded, but we still are very interested in building our own operating company to work alongside Kimball or partnering to another operating company just to realize, well, really to address your first question, which is lack of developmental insight, it would just be wonderful to have a relationship listen with an operator where we can have more transparency on development cadence, but then also joint bid acquisitions that listen either have high net revenue interests where an override could be carved out appropriately and or a situation where a listen.

Speaker 2

Working interest partner actually owns the mineral ownership and also owns the working interest. So we still think the idea has a lot of merit and it's listen. Something that we would love to do, so I wouldn't put the final nail in the coffin on that by any means.

Speaker 4

Listen. Very helpful. Thanks for your time.

Speaker 2

Thank you for your questions.

Operator

Our next question comes from the line of a list of Leerink with Raymond James. Please proceed with your question.

Speaker 6

Hey, guys. Thanks for taking my question. I kind of wanted to piggyback off of Derek's listen to the question. Obviously, you all saw a very smaller decrease relatively to the or quarter over listen relatively to the U. S.

Speaker 6

Total. And I want to ask on Permian specifically listen about kind of how rigs fell quarter over quarter and if you all saw listen to similar levels from 1Q to 2Q there.

Speaker 5

Yes, I'll take that. This is Matt. I mean the Permian rig count listen. Went up by 5 rigs quarter over quarter. We had 50 rigs out of the 90 were in the Permian Basin.

Speaker 5

As you're correct, listen. The market share went up from 12.8 percent to 13.8 percent, the highest market share ever for the company. The Eagle Ford rig count went up list quarter over quarter. We did see a drop of 4 in the Haynesville, not surprisingly due to low gas prices. Listen.

Speaker 5

But in the Permian specifically, the major operators ExxonMobil has 9 rigs, Oxy has 5 rigs, Diamondback has 4 rigs. Listen. Overall, on our rig count for All Basins, 63% of those are public companies. During the pandemic, it was actually 63%, 60 of 55% private companies and now the public companies have come back and sort of running the show here. But again, very happy to see that the rig count modestly dropped, market share went up, Permian is very, very strong in terms of activity with some leading operators.

Speaker 5

So, this shows the resilience of the quality of our acreage.

Speaker 6

Listen. Great. Appreciate the color on that. And guys, slightly off topic, the one talking point as of late has been partnership to C Corp conversion. And I'd love to get your thoughts on this, specifically from potential index exposure standpoint.

Speaker 2

Yes. So we converted to a C Corp, as you know, for listen to the call. A couple of years ago, I think that's been a positive development. Would always consider anything that makes sense for our company and our unitholders, but we are very happy with our structure and we believe that the structure we have in place allows us to make decisions listen very quickly and very easily. And I think that helps explain frankly our just really good success over the last several years on to the M and A front.

Speaker 2

We've made a number of acquisitions that have really helped the company and grown us exponentially. So listen. Happy with our structure, but certainly aware of that phenomenon.

Speaker 6

Yes. That totally makes sense. Thank you, guys.

Operator

Listen. There are no further questions in the queue. I'd like to hand the call back over to listen to Bob Ravides for closing remarks.

Speaker 3

We thank you all for joining us this morning and we look forward to speaking with you again when we report 3rd quarter results. This completes today's call.

Operator

Ladies and gentlemen, this does conclude today's teleconference.

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Key Takeaways

  • Record run-rate production: Q2 daily volumes surpassed 18,000 BOE/d on a 6:1 basis, including a full quarter contribution from the MB Minerals acquisition.
  • Higher oil weighting: Oil mix climbed to 33% of production from 29% in Q1, while Permian Basin output jumped 48% quarter-over-quarter.
  • Distribution increase: Q2 cash distribution rose 11% to $0.39 per unit, underscoring the company’s focus on unitholder returns.
  • Enhanced liquidity: The secured revolving credit facility was extended to June 2027, with the borrowing base raised 14% to $400 million and net debt/EBITDA at 1.1×.
  • Revenue headwinds: Oil, natural gas and NGL revenues slipped 0.8% from Q1 due to lower realized commodity prices.
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Earnings Conference Call
Kimbell Royalty Partners Q2 2023
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