Kimbell Royalty Q3 2024 Earnings Report

Kimbell Royalty EPS Results

• Actual EPS: $0.22
• Consensus EPS: $0.21
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.19

Kimbell Royalty Revenue Results

• Actual Revenue: $83.79 million
• Expected Revenue: $80.03 million
• Beat/Miss: Beat by +$3.76 million
• YoY Revenue Growth: +24.70%

Kimbell Royalty Announcement Details

• Quarter: Q3 2024
• Date: 11/7/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 11:00AM ET

Kimbell Royalty (NYSE:KRP) Partners, LP (NYSE: KRP) is a publicly traded master limited partnership that owns mineral and royalty interests in oil and natural gas properties across the United States. The partnership primarily generates revenue from its share of production and lease payments associated with properties developed and operated by third-party exploration and production companies.

Kimbell’s assets include mineral, overriding royalty, nonparticipating royalty and working interests. Its portfolio provides exposure to several major U.S. oil and gas regions, including the Permian Basin, Eagle Ford, Bakken, Haynesville, Marcellus and Utica shales, the Mid-Continent and the Rocky Mountain region. Because royalty interests generally do not require the owner to fund drilling and operating expenses, Kimbell’s business model is focused on acquiring and managing interests rather than directly operating wells.

The partnership was formed in 2015 and completed its initial public offering in 2017. Kimbell Royalty Partners is headquartered in Fort Worth, Texas, and is led by President and Chief Executive Officer Robert Ravnaas. Its strategy centers on building a diversified portfolio of U.S. mineral and royalty assets while benefiting from development activity conducted by its operating partners.

Kimbell Royalty Q3 2024 Earnings Call Transcript

Key Takeaways

• Declared Q3 cash distribution of $0.41 per common unit, representing a 100% return of capital and bringing total distributions to $11.45 per unit since the 2017 IPO.
• Drilling activity remained robust with 90 rigs (16% market share) actively drilling on Kimbell acreage and a record number of lease bonuses during the quarter.
• Net DUCs increased 34% quarter-over-quarter to 5.1 net DUCs, the second-highest level in company history, led by strong Permian Basin results.
• Maintained strong financial position with net debt to trailing EBITDA at 0.8x, $297.8 million of undrawn revolver capacity, and plans to redeem half of Apollo Preferred Stock in May 2025.
• Affirmed full-year 2024 guidance with production targeted at 24,000 BOE per day at midpoint, reflecting confidence in continued robust development.

Presentation

[Operator]

Greetings and welcome to Kimbell Royalty Partners' third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rick Black, Investor Relations. Thank you, Mr. Black. You may begin.

[Rick Black, EVP at Dennard Lascar Investor Relations]

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 2024, which ended on September 30th, 2024. 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 7th, 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 for 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.

[Rick Black, EVP at Dennard Lascar Investor Relations]

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 earnings 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's Chairman and Chief Executive Officer. Bob.

[Bob Ravnaas, Chairman and CEO at Kimbell Royalty Partners]

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 Blaine Rhynsburger, our Controller. We are pleased to report solid results for the quarter, which include declaring a third-quarter cash distribution of $0.41 per common unit. Returning value to unitholders is always our priority, and we are proud of the record we have established. Including the declared third-quarter distribution, Kimbell has returned $11.45 per unit in total cash distributed to common unitholders since our IPO in 2017. During the third quarter, drilling activity remained strong, with 90 rigs actively drilling on our acreage, which represents 16% market share of all land rigs drilling in the Lower 48.

[Bob Ravnaas, Chairman and CEO at Kimbell Royalty Partners]

In addition, we had a record number of lease bonuses during the third quarter. This reflects increased operator interest in developing Kimbell's acreage. Line of sight wells continue to be well above the number of wells needed to maintain flat production, giving us confidence in the resilience of our production as we wrap up 2024. More specifically, the number of net DUCs increased by 34% quarter-over-quarter to 5.1 net DUCs, the second highest level in Kimbell's history, led by the Permian Basin. Finally, we are very optimistic about the future for Kimbell and its ability to drive unitholder value for years to come, and now I'll turn the call over to Davis.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Thanks, Bob. And good morning, everyone. In the third quarter, we once again generated strong results, maintained a substantial market share of the U.S. rig count, and achieved lease bonuses during the quarter that were the highest in our history. I'll start by reviewing our financial results from the quarter, beginning with oil, natural gas, and NGL revenues, which totaled $71.1 million. We had run rate production of 23,846 BOE per day, and we exited the quarter with 90 rigs actively drilling on our acreage, which represents approximately 16% market share of all land rigs drilling in the Continental United States. On the expense side, third quarter general and administrative expenses were $9.5 million, $5.6 million of which was cash G&A expense, or $2.57 per BOE. This continues to demonstrate operational discipline and positive operating leverage.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Net income in the third quarter was approximately $25.8 million, and net income attributable to common units was approximately $17.4 million, or $0.22 per common unit. Total third quarter consolidated Adjusted EBITDA was $63.1 million. You will find a reconciliation of both consolidated Adjusted EBITDA and cash available for distribution at the end of our news release. As Bob mentioned, today we announced a cash distribution of $0.41 per common unit for the third quarter. We estimate that approximately 100% of this distribution is expected to be considered return of capital and therefore not subject to dividend taxes, further enhancing the after-tax return to our common unitholders. 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.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Moving now to our balance sheet and liquidity. At September 30th, 2024, we had approximately $252.2 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing 12-month consolidated Adjusted EBITDA of approximately 0.8x. We had approximately $297.8 million in undrawn capacity under the secured revolving credit facility as of September 30th, 2024. We remain very comfortable with our strong financial position, the support of our expanding bank syndicate, and our financial flexibility. With this substantial liquidity, we are planning to redeem at least half of the Apollo preferred stock in May 2025. We believe this timing will optimize cost savings for the company as well as maintain conservative leverage and liquidity. Today, we are also affirming our 2024 guidance, which includes daily production at its midpoint of 24,000 BOE per day.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

As a reminder, our full guidance outlook was provided in the Q4 2023 earnings press release. We remain confident about the prospects for continued robust development as we progress through 2024, given the number of rigs actively drilling on our acreage, especially in the Permian. We continue to believe that our diversified portfolio of high-quality royalty assets across the leading U.S. basins will continue to drive value for our unitholders for years to come. With that, Operator, we are now ready for questions.

[Operator]

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, please restrict yourself to one question and one follow-up. One moment, please, while we poll for questions. The first question comes from the line of Tim Rezvan with KeyBanc Capital Markets Inc. Please go ahead.

[Tim Rezvan, Analyst at KeyBanc Capital Markets]

Good morning, folks, and thank you for taking my question.

[Bob Ravnaas, Chairman and CEO at Kimbell Royalty Partners]

Morning, Tim.

[Tim Rezvan, Analyst at KeyBanc Capital Markets]

Good morning.

[Bob Ravnaas, Chairman and CEO at Kimbell Royalty Partners]

I was hoping to start. I was expecting we'd hear comments on the preferred being partially redeemed this quarter. I believe you said May 2025, Davis. So I was curious if you could kind of walk through what it seems to be a little bit of a change from what you had commented on before. Kind of what's driving that? Is that an interest rate outlook or something else mechanical?

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Yeah, great question. As always, good job picking up on the detail. We ran the math with greater specificity following the last conference call, and we realized that it's actually more cost-efficient to redeem it in May than it is today. Just saves us a couple of million bucks when we kind of work through the mechanics of the math. So nothing's changed. The goal is still to take it out as soon as possible. We just realized that waiting four or five months would actually save the partnership a little bit of money.

[Tim Rezvan, Analyst at KeyBanc Capital Markets]

Okay. Okay. That's fair. So from a modeling perspective, is roughly half a good assumption to run with?

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Yes, and what I would say, Tim, just to hedge that a little bit, obviously, if something crazy happens in oil and gas markets, we might want to readdress taking it out at that time. But right now, barring some unforeseen events, that's absolutely the game plan. We talked about it on the board call yesterday.

[Tim Rezvan, Analyst at KeyBanc Capital Markets]

Okay. Okay. That's good to know. Appreciate that. And then as my follow-up, I noticed you did have the increase in net DUCs. It seemed to come at the expense of net permits, which went down about 1.4. But with that said, it's kind of been at that eight-ish level, the net DUCs and permits going forward. So just trying to understand, is that the right way to kind of think about those two together going forward as a visibility on activity? We're just trying to understand this increase a little better in the net DUCs.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Yeah. I think that's a fair way to think about it. Obviously, a DUC is more valuable than a permit. It's always nice to see the conversion from permits to DUCs. Things go up and down. I will say that the increase in DUCs recently has been encouraging, particularly as it pertains to Delaware Basin activity. So the big driver of that DUC increase is in Loving County. Those well results just start to pay off in Q4, so we'll start to see the impact of those, and good point on the permitting activity. Wouldn't be surprised to see that tick back up. It's just hard to predict, but very happy. I mean, we're at a near record, if not record, on the DUC activity, so continue to feel good about the production outlook over the near to medium term at this time.

[Tim Rezvan, Analyst at KeyBanc Capital Markets]

Okay. Thanks for the details.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Absolutely, Tim.

[Operator]

Thank you. Next question comes from the line of Bertrand Donnes with Truist Securities. Please go ahead.

[Bertrand Donnes, Analyst at Truist Securities]

Hey, good morning. Thanks for taking my questions. What basins are you guys seeing the most opportunities for M&A? And are you still looking for maybe blocky acreage, or is there maybe more value in picking up small interest across your position and doing all the consolidating yourself? And then just part of that would be, with the election behind us, does that maybe mark a pickup in M&A as some of the uncertainty has been removed?

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Yeah. Great question. I would say that, well, a lot of thoughts there. I'll try to keep it brief. Obviously, our sandbox is the Lower 48. So we're looking at every basin. We're always asking ourselves, what's the most efficient way to deploy capital to maximize the risk-adjusted return to our investors? So sometimes that's the Permian Basin. Sometimes it's not. The Permian's wonderful. Everybody knows it's wonderful. So it can sometimes be too expensive. But I would continue to see, just because of the pipeline of opportunities, I would say the Permian continues to be the most attractive. And we're just going to continue to make conservative bids. And as you know from following us for a while now, every once in a while, we win. Every once in a while, a competitor won't show up, or maybe they're full because they did a deal recently.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

I would say we started to see an uptick in a basin that we're not particularly exposed to in a meaningful way, which is Appalachia, and just on your point about the election, one thing we talked about yesterday was the view toward increased infrastructure and LNG exports becoming a more bullish story. Maybe that Appalachian story makes a little bit more sense for us now than it did historically. It's also a basin that's not traditionally played by a lot of our competitors. So that could be a place where you could see some activity from us going forward. That being said, continue to look at opportunities all across the board. On the smaller deals, we really want to use our balance sheet to make larger, more impactful acquisitions. We're reluctant to draw $10 million-$40 million a quarter on smaller acquisitions on your revolver.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

It's just really easy to see leverage creep up, and then you're not there with cash available to transact on bigger deals. And it takes us the same amount of time to analyze a larger transaction as it does a smaller one. And I would also add to that, I think the competition for some of the smaller acquisitions, let's call it less than $5 million bucks, is significantly greater than acquisitions over $50. So at this time, we don't really see the benefit of increased consolidation efforts on the micro level, both from a balance sheet perspective, but also from competitive dynamics.

[Bertrand Donnes, Analyst at Truist Securities]

That's really great detail. And then just the follow-up is your quarterly lease bonus is obviously impressive, but you guys noted in there that maybe there's increased operator interest. Is that what you're attributing to? Is it maybe those operators have run through some of their Tier one acreage already? And should we go back down to normalized levels, or is this maybe a trend that goes forward? Thanks.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

The big driver of this quarter's leasing activity was in the Mid-Continent. Part of that, the new Cherokee Shale play, which we hope is successful because we have such a robust footprint up there, so hopefully that continues to pay off. A good thought on the tier two acreage. Yes, I think that will continue to be more meaningful. If I had to give you an answer over time, I think that you'll start to see folks expanding their exploratory efforts beyond what is already delineated and known, so I think that's a good thought. It'll be interesting to see if that continues to pick up in subsequent quarters. We'll obviously keep you guys posted.

[Bertrand Donnes, Analyst at Truist Securities]

That makes sense. Thanks.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Thank you.

[Operator]

Thank you. Next question comes from the line of Noah Hungness with Bank of America. Please go ahead.

[Noah Hungness, Analyst at Bank of America]

Morning, guys. Just one question for me. I wanted to ask just a clarification question on the high NRI wells in Loving County. So should we expect that to come online in 4Q and then really start to see the impact at the start of 2025?

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Sure. Matt, correct me if I'm wrong here. Those wells are actually already producing. We just expect to start receiving production and cash flow in Q4, and I'll just add that so far, the results are very encouraging. Unsurprisingly, it's one of, if not the best, most productive counties in the United States. Very encouraging initial results from that. We're very happy to see the production.

[Noah Hungness, Analyst at Bank of America]

Awesome. Thanks.

[Davis Ravnaas, President and CFO at Kimbell Royalty Partners]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor over to the management for closing comments.

[Rick Black, EVP at Dennard Lascar Investor Relations]

We thank you all for joining us this morning, and we look forward to speaking with you again next quarter. This completes today's call.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Bob Ravnaas, Chairman and CEO
• Davis Ravnaas, President and CFO

Analysts

• Rick Black, EVP at Dennard Lascar Investor Relations
• Tim Rezvan, Analyst at KeyBanc Capital Markets
• Bertrand Donnes, Analyst at Truist Securities
• Noah Hungness, Analyst at Bank of America