Kimbell Royalty Q1 2024 Earnings Call Transcript

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May 2, 2024

Key Takeaways

  • Operational momentum drove new quarterly records in daily production (24,678 BOE/d), revenue ($87.5 M) and adjusted EBITDA ($74.1 M), with 1.4% organic q/q growth and 98 rigs active (16.3% of U.S. land rigs).
  • Declared a Q1 distribution of $0.49 per common unit, up 14% q/q, with ~79% treated as return of capital; maintained a 75% payout of cash available for distribution, directing 25% to debt repayment.
  • Maintained financial strength with net debt to trailing-12-month adjusted EBITDA at 1x, $285 M drawn on the revolving credit facility and $264.6 M of undrawn capacity.
  • Reaffirmed 2024 guidance at a midpoint of 24,000 BOE/d production, citing a near-record rig count, robust DUC and permit inventory, and positive operator sentiment.
  • Noted a muted M&A environment so far, with the majority of sizable opportunities in the Permian and potential for $100 M+ deals, while bid-ask spreads reflect oil backwardation and NAV accretion dynamics.
AI Generated. May Contain Errors.
Earnings Conference Call
Kimbell Royalty Q1 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Greetings, and welcome to Kimbell Royalty Partners First 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Rick Black, Investor Relations. Thank you, Mr. Black. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to the Kempo Royalty Partners conference call to review financial and operational results for the Q1 2024 ended March 31, 2024. This call is also being webcast and it 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, which is May 2, 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 provisions by the Private Securities Litigation Reform Act of 1995.

Speaker 1

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 as well as 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.

Speaker 1

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 Ravenous, Kimbell Realty Partners' Chairman and Chief Executive Officer. Bob?

Speaker 2

Thank you, Rick, and good morning, everyone. We appreciate you joining us on the call this morning. Me today are several members of our senior management team, including Davis Ravnus, our President and Chief Financial Officer Matt Daly, our Chief Operating Officer and Blaine Rhinesburger, our Controller. We had another excellent quarter. Following on the operational momentum from 2023, we achieved several new quarterly records in terms of daily production, revenue and EBITDA.

Speaker 2

Strong organic run rate production growth this quarter exceeded the midpoint of guidance and we exited the quarter with a near record number of rigs drilling on our acreage. In addition, our line of sight wells continue to be well above the number needed to maintain flat production, giving us confidence in the resilience of our production as we progress through 2024. Today, we were also very pleased to announce a $0.49 distribution per common unit, a 14% increase compared to last quarter. We are proud of the Kimbell track record of delivering value to our unitholders in the form of quarterly cash distributions. Furthermore, we expect that approximately 79% of this distribution will be considered return of capital and not subject to dividend taxes, further enhancing the after tax return to our common unitholders.

Speaker 2

As we look forward in 2024 and beyond, we remain bullish on the U. S. Oil and natural gas industry, our role as a leading consolidator in the sector and the prospects for Kimball to generate long term unitholder value. I'll now turn the call over to Davis.

Speaker 3

Thanks, Bob, and good morning, everyone. We had another great quarter here at Kimball as we built upon our 2023 success by delivering another strong quarter of new records for daily production, revenue and EBITDA. I'll start by reviewing our financial results from the quarter, beginning with oil, natural gas and NGL revenues, which totaled 87,500,000 an increase of 4.2% compared to the 4th quarter. This marks the highest quarterly revenue in our history. In the Q1, we had run rate production of 24,678 BOE per day, which reflected 1.4% organic growth from Q4 2023 or 5.6% organic growth on an annualized basis.

Speaker 3

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, 1st quarter general and administrative expenses were $15,200,000 of which was cash G and A expense or $2.57 per BOE. Unit based compensation in the Q1, which is a non cash G and A expense was $3,700,000 or 1.64 dollars

Speaker 4

per BOE.

Speaker 3

Net income in the Q1 was approximately $9,300,000 and net income attributable to common units was approximately $3,200,000 or $0.04 per common unit. Total first quarter consolidated adjusted EBITDA was a record at 74,100,000 dollars and was up approximately 7.4% from last quarter. You will find a reconciliation 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 $0.49 per common unit for the Q1. 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.

Speaker 3

Moving now to our balance sheet and liquidity. At March 31, 2024, we had approximately 285 point $4,000,000 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 1x. We had approximately $264,600,000 in undrawn capacity under the secured revolving credit facility as of March 31, 2024. We remain very comfortable with our strong financial position, the support of our expanding bank syndicate and our financial flexibility.

Speaker 3

Today, we are also affirming our 2024 guidance, which includes daily production at its midpoint of 24,000 BOE per day. As a reminder, our full guidance outlook was provided in the Q4 2023 earnings press release. We feel confident about the prospects for continued robust development given the number of rigs actively drilling on our acreage as well as the operator commentary we are hearing around their expected development activity in 2024, especially in the Permian. We continue to believe that industry trends, overall demand for energy and positive operator sentiment represent a positive outlook for the royalties and mineral space and Kimbell specifically. We are pleased with our start to 20 24 we are focused on a long term horizon for continued growth and opportunities to enhance unitholder value.

Speaker 3

We are proud of our hard work, dedicated and talented team here at Kimbell and we greatly appreciate their continued contributions to driving growth and enhancing the value of our organization for all stakeholders. In addition, we work with some of the best financial advisors and 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 The first question comes from the line of Nate Pendleton with Stifel. Please go ahead.

Speaker 5

Good morning and congrats on the strong quarter. Hey, thanks. Good morning. My first question, I wanted to get your perspective on the M and A market and specifically in what basins and at what potential deal size are you seeing the best opportunities?

Speaker 3

Yes. Thanks for the question. Relatively muted start to the year on the M and A front. And I just to directly answer your question, most of the opportunities that are out there that are of scale are in the Permian. So wouldn't be surprised to see a couple of larger deals, let's call it $100,000,000 plus deals consummated over the balance of the remaining year in the Permian.

Speaker 3

But so far, it's been a relatively slow start. Not entirely sure why that's the case. Some years are more robust than others. Last year was a large one for us. This one so far for ourselves and our peers appears to be relatively muted.

Speaker 3

But things change quickly. Sometimes some of the private equity portfolio companies see an opportunity to exit and a window to exit decide to rush quickly. So it could change, but so far relatively muted. And of the opportunities that we are seeing, they tend to be Permian focused.

Speaker 5

Got it. Thanks for the color. And for my follow-up, looking into your activity metrics, it appears rig activity on your Mid Con assets remains quite strong. Can you provide any color as to what you're seeing on the ground in the basin?

Speaker 3

Yes, good question. We as you know, we love our Mid Con position, the majority of which we acquired through Long Point. And I think that's a basin that you'll continue to see surprising activity levels, but more robust than I think people expect going forward. The basin really got beat down over the last several years, tremendously out of favor. There was a lot of negative PR over just some strange occurrences that happened in that basin at the corporate level.

Speaker 3

But great wells and I think you'll see positive contributions from increased improved differentials. There's great takeaway capacity there. There's operators there that continue to drive efficiencies into play. I'll pause there. I mean anything that you'd like to add to that Matt or anyone else?

Speaker 4

Yes. I mean, I just like the fact that we had expected the Haynesville rigs went down between Q4 and Q1. We've heard all the companies talking about cutting back in CapEx in that basin. So we are expecting that. But interesting, the Mid Con actually grew pretty dramatically like you said from 17 rigs to 23 rigs between Q4 and Q1.

Speaker 4

And so more than offset that nicely. So overall, rig count for the company stayed flat at 98 rigs between Q4 and Q1, a very, very high level of activity near an all time record for us. So it just kind of shows the benefits of having this diversified model where you have maybe one slowdown in say the Haynesville, but then the Mid Con steps up is where it takes over for that. Totally agree.

Speaker 5

Absolutely. Well, I'll pass it back. Thanks for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. Next question comes from the line of Trafait Lamar with Raymond James. Please go ahead.

Speaker 6

Hey guys, thanks for taking my questions. Maybe the first one. Yes, thanks. Yes, maybe the first one kind of a follow-up on the M and A topic. You mentioned some potential opportunities in the Permian.

Speaker 6

Given kind of the opposite nature of the forward curves for oil and gas, can you all kind of talk about maybe what you're seeing on a bid ask spread level for oily versus gassy assets?

Speaker 3

Yes, that's a great question. We haven't seen candidly, not a lot of gas assets of scale have come to market recently. I think that that's driven by a few different factors. 1, a lot of the larger Haynesville players have exited in recent years. We picked up our big Haynesville position back in 2018.

Speaker 3

There's been a few other folks that have sold in the last few years. Appalachia from a minerals perspective has been challenging. A lot of very small interests that have to be aggregated over smaller acreage footprints. So we just haven't seen as many high quality large mineral packages in the Appalachian Basin. I would say that on the oil front, what you're asking is actually a really good nuanced question because you'll see deals on a backwardated curve that can be very attractive on an accretion basis for cash flow over the next couple of years.

Speaker 3

But then on a NAV basis, if you really are running things on strip, which is what we do, it can be more challenging to do NAV accretive deals. So that's creating some disparity, I think, between lower multiples on initial cash flow from the bid perspective than perhaps the ask, if that makes sense. And so I think that is a little bit of a challenge. But look, I think sellers are sophisticated. They're looking at the same numbers we are.

Speaker 3

I do think deals will continue to get done that make both sides happy. So nothing that we're terribly concerned about in terms of too wide of a bid ask spread. Just on the M and A front, it just so far this year, it just hasn't there hasn't been a whole lot that's come to market yet. But again, these the M and A environment ebbs and flows, so nothing that we're terribly concerned about.

Speaker 6

Got it. I appreciate the color on that, Davis. And then maybe on I was looking at obviously, it was addressed in the prior question on mid connectivity, the increase from 4Q to 1Q. And also, I want to ask on Haynesville, I noticed a slight production increase in 1Q given how activity has fallen off a cliff there given prices. Did that come as a surprise to you all?

Speaker 6

Or was that more of a factor of kind of second half twenty twenty three activity coming online?

Speaker 3

Yes. So for detail on Haynesville activity, Blaine, do you have anything to add to that or Matt?

Speaker 4

Yes, I do. So Haynesville, you're correct. Haynesville grew quarter over quarter 3% organically and the Permian grew 5% quarter over quarter organically. But back to the Haynesville, again, we were expecting a slowdown there and we are hearing about the CapEx drop offs in the Haynesville, but we had the growth quarter over quarter. It was mainly due to we had 3 high interest Chesapeake wells that came online at Red River Parish.

Speaker 4

These are huge wells and they're going to have an impact on it on us. But I would say and Blaine, unless you have other color, that's really the primary driver there. But yes, we were happy to see that. But yes, certainly what we're hearing in the market, wouldn't be surprised if over time the Haynesville starts to slow a bit.

Speaker 6

Yes. No, I completely agree, Matt. That was it was somewhat surprising to have those come on. But yes, we're happy for them. Perfect.

Speaker 6

Well, thank you guys for the color and congrats on a great quarter.

Speaker 3

Thank you very much for your time. Appreciate it.

Operator

Thank you. Next question comes from the line of Tim Rezvan with KeyBanc Capital Marketing. Please go ahead.

Speaker 7

Good morning folks. Thank you for taking my questions. Yes, good morning. I want to start on Slide 14. You've shown that the DUCs and permits.

Speaker 7

I know these tend to ebb and flow. It's down a bit from last year and you're hearing the rig count is biased, probably going to be moving down from here. So just kind of curious now that you're 4 months into the year, you left production guidance unchanged, but are trends and activity levels sort of in line with your expectations coming into the year?

Speaker 3

Yes, Jen, this is Davis. I'd say yes. This quarter, a little bit above the midpoint of our guidance, which was nice to see. I think that the outlook for activity remains the same as when we entered the year, just to answer that question succinctly and directly. We haven't seen evidence of a dramatic slowdown.

Speaker 3

We have enough near term catalysts in terms of DUCs and permits where we keep that we feel very confident in the 12 month forecast. Hopefully, we're conservative on it as well, which we have a long history of being. But nothing that alarms us yet. I mean, honestly, I guess in a more nuanced way, I'd say that we've been a little bit surprised just kind of building on Matt and Blaine's comments in the Haynesville. We've been a little bit surprised by how robust activity in the Haynesville has been and how resilient it's been.

Speaker 3

So that's just been a little bit counterintuitive just given what's happened to spot gas prices. So I'd say on the balance, feel good about next 12 months, wouldn't be surprised if we outperformed a little bit here and there, just given the conservative view that we tend to have with our guidance. But yes, I'd say nothing has really changed in terms of the data we've received over the last 4 months relative to when we started putting together guidance in the Q4.

Speaker 7

Okay. That's helpful. And then just as a follow-up, just some housekeeping. You kept the guide for 24,000 a year production.

Speaker 4

Just to

Speaker 7

be clear, that's run rate production, not the total that reflected the adjustment? Correct. Run rate production. Yes. Okay.

Speaker 7

Perfect. Thank you.

Speaker 3

Of course. Thank you, Tim.

Operator

Thank you. Next question comes from the line of Neil Dingmann with TruSecurities. Please go ahead.

Speaker 1

Hey, this is Julian Brochet on for Neil. Just have two questions for you guys. In terms of the cash distribution, is there anything that would cause you to vary from your like 75% payout level? And then kind of second one is on hedges. Are you comfortable writing out these recent moves?

Speaker 1

Are you looking to lock in more cash flows and maybe stabilize the payout? Thank you.

Speaker 3

Yes. Short answer to the question. We don't anticipate any changes to the 75% payout ratio and no material changes to our hedging program. Matt, any color that you'd like to add to that though?

Speaker 4

Yes. I mean, on the hedging program, I'm not sure people have noticed this, but we are hedged out for 2 years, roughly 20% of our oil and natural gas production. And if you look some of the prices we have, oil hedges, you're looking at for this year between $75,000,000 $83,000,000 and then for natural gas, we have $3.83,000,000 to $4.19,000,000 So we're able to have roughly a nice realized gain in Q1 in terms of hedging gains. And if you look at beyond in 2025, we have natural gas hedges between 368 and 432 at Mcf. So we're hedging into that contango curve right now in natural gas about 20%.

Speaker 4

And that's the percentage we do we've run enough stress test to see if that percentage of hedging, if you were to have a dramatic drop in commodity prices, we'd be well protected in terms of our covenants, but also provides 80% unhedged production in case so we can enjoy any run-in commodity prices. So I think there's no change in the hedging policy. It worked extremely well during COVID and I think we're well set up right now for the next couple of years as well.

Speaker 1

Got it. Thank you. And I can just maybe go back to the M and A on another question. Are you guys seeing any interesting opportunities outside the Permian?

Speaker 3

Outside of the Permian, yes, great question. Nothing material is coming to mind right now. The larger opportunities that we're seeing are Permian focused. We would obviously be very interested in, as you know, we have a history of buying in every basin. We'd be very interested in buying outside of the Permian as well, but nothing near term that's of scale outside of the Permian that we're focused on at this moment.

Speaker 1

Got it. Thank you. Very helpful.

Speaker 3

Thank you.

Operator

Thank you.

Speaker 2

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.

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