Kimbell Royalty Partners - Q1 2024

Transcript

Operator (participant)

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. 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 (Head of 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 first quarter, 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 kimbellrp.com. Information recorded on this call speaks only as of today, which is May 2nd, 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 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, 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. 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 Partners Chairman and Chief Executive Officer. Bob?

Bob Ravnaas (Chairman and CEO)

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 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. 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. 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 Kimbell to generate long-term unitholder value. I'll now turn the call over to Davis.

Davis Ravnaas (President and CFO)

Thanks, Bob, and good morning, everyone. We had another great quarter here at Kimbell 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 $87.5 million, an increase of 4.2% compared to the fourth quarter. This marks the highest quarterly revenue in our history. In the first quarter, 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.

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, first quarter general and administrative expenses were $9.4 million, $5.8 million of which was cash G&A expense, or $2.57 per BOE. Unit-based compensation in the first quarter, which is a non-cash G&A expense, was $3.7 million, or $1.64 per BOE. Net income in the first quarter was approximately $9.3 million, and net income attributable to common units was approximately $3.2 million, or $0.04 per common unit. Total first quarter consolidated Adjusted EBITDA was a record at $74.1 million and was up approximately 7.4% 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. As Bob mentioned, today, we announced a cash distribution of $0.49 per common unit for the first quarter. This represents a cash distribution payment to common unit holders 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. At March 31st, 2024, we had approximately $285.4 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing twelve months consolidated Adjusted EBITDA of 1x.

We had approximately $264.6 million in undrawn capacity under the secured revolving credit facility as of March 31st, 2024. We remain very comfortable with our strong financial position, the support of our expanding bank syndicate, and our financial flexibility. 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 2024, and we are focused on a long-term horizon for continued growth and opportunities to enhance unitholder value. 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 (participant)

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. One moment, please, while we pull for questions. The first question comes from the line of Nate Pendleton with Stifel. Please go ahead.

Nate Pendleton (Associate VP)

Good morning, and congrats on the strong quarter.

Davis Ravnaas (President and CFO)

Hey, thanks. Good morning.

Nate Pendleton (Associate VP)

Thank you.

My first question, I wanted to get your perspective on the M&A market, and specifically in what basins and at what potential deal size are you seeing the best opportunities?

Davis Ravnaas (President and CFO)

Yeah, thanks for the question. Relatively muted start to the year on the M&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, you know, let's call it $100 million plus deals consummated in the, you know, over the balance of the remaining year in the Permian. But so far, it's been a relatively slow start. Not entirely sure why that's the case. You know, 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. 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.

Nate Pendleton (Associate VP)

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

Davis Ravnaas (President and CFO)

Yeah, good question. We, as you know, we love our MidCon position, the majority of which we acquired through Longpoint. And I think that's a basin that you'll continue to see kind of surprising activity levels, but more robust than I think people expect going forward. The basin really got beat down over the last several years, you know, tremendously out of favor. There was a lot of negative PR over, you know, just some strange occurrences that happened in that basin at the corporate level. But great wells, and I think you'll see, you know, positive contributions from 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?

Matt Daly (COO)

Yeah, I mean, I just like the fact, you know, we had, you know, expected, you know, the Haynesville rigs went down between Q4 and Q1. We know, we've heard all the, all the companies talking about cutting back on CapEx in that basin, so we were expecting that. But interesting, the MidCon actually grew, you know, pretty dramatically, like you said, from 17 rigs to 23 rigs between Q4 and Q1. And so, more, you know, 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 kinda shows the benefits of having this diversified model where you have maybe one slowdown and say, the Haynesville, but then the MidCon steps up and sort of takes over for that, so.

Davis Ravnaas (President and CFO)

Totally agree.

Nate Pendleton (Associate VP)

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

Davis Ravnaas (President and CFO)

Thank you.

Operator (participant)

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

Trafford Lamar (Equity Research Associate)

Hey, guys. Thanks for taking my questions.

Davis Ravnaas (President and CFO)

Oh, sure.

Trafford Lamar (Equity Research Associate)

First one. Yeah, thanks. Yeah, maybe the first one, kind of a follow-up on the M&A topic. You mentioned, you know, some potential opportunities in the Permian. Given kind of the opposite nature of the forward curves for oil and gas, can you all kind of talk about maybe the what you're seeing on a bid-ask spread level for oily versus gassy assets?

Davis Ravnaas (President and CFO)

Yeah, that's a great question. We haven't seen—you know, 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. One, a lot of the larger Haynesville players have exited in recent years. You know, we picked up our big Haynesville position back in 2018. 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, accretion basis for cash flow over the next couple of years. But then on a NAV basis, if you really are running things at a, on a, 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, you know, 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 you know, look, I think sellers, sellers are sophisticated.

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

Trafford Lamar (Equity Research Associate)

Got it. Well, appreciate the color on that, Davis. And then maybe on, you know, I was looking at, obviously, it was addressed in the prior question on MidCon activity, the increase from 4Q to 1Q. And also, you know, I want to ask on Haynesville, I noticed, you know, a slight production increase in 1Q, given how, you know, activity has fallen off a cliff there, given prices. Did that come as a surprise to you all, or was that more of a factor of kind of second half 2023 activity coming online?

Davis Ravnaas (President and CFO)

Yeah, so for detail on Haynesville activity, Blayne, do you have anything to add to that, or Matt?

Matt Daly (COO)

Yeah, I do. I do. So, Haynesville, you're correct. Haynesville grew quarter-over-quarter, 3% organically, and, you know, 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, you know, we had the growth quarter-over-quarter. It was mainly due to we had three high-interest Chesapeake wells that came online in Red River Parish. You know, these are huge wells, and they're going to have an impact on it, on us. But I would say, and Blayne, unless you have other color, that's really the primary driver there. But yes, we were happy to see that.

You know, certainly what we're hearing in the market, you know, wouldn't be surprised if over time, the Haynesville starts to slow a bit.

Bob Ravnaas (Chairman and CEO)

Yeah, no, I completely agree, Matt. That's, you know, that was somewhat surprising to have those come on. But, yeah, we're happy for them, so.

Trafford Lamar (Equity Research Associate)

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

Davis Ravnaas (President and CFO)

Thank you very much for your time. Appreciate it.

Operator (participant)

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

Tim Rezvan (Managing Director)

Good morning, folks. Thank you for taking my questions.

Bob Ravnaas (Chairman and CEO)

Yeah, good morning.

Davis Ravnaas (President and CFO)

Yes.

Tim Rezvan (Managing Director)

I want to start on slide 14. You know, you've shown the DUCs and permits. You know, I know these tend to ebb and flow. It's down a bit from last year, and you're hearing, you know, the rig count is, you know, biased, probably gonna be moving down from here. So just kind of curious, now that you're four 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?

Davis Ravnaas (President and CFO)

Tim, this is Davis. I'd say yes. This quarter, you know, 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. We have enough near-term catalysts in terms of DUCs and permits where we keep that we feel very confident in the twelve-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 Blayne'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. So that, 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 twelve months. Wouldn't be surprised if we, you know, outperformed a, a little bit here and there, just given the conservative view that we tend to have... with our guidance. But yeah, I'd say nothing has really changed in terms of the data we've received over the last four months, relative to when we started putting together guidance in the, in the fourth quarter.

Tim Rezvan (Managing Director)

Okay.

Davis Ravnaas (President and CFO)

Matt?

Tim Rezvan (Managing Director)

That's, that's helpful. Sorry, and then just as, as a follow-up, just some housekeeping. You know, you, you kept the guide for 24,000 a year. Now, production, just to be clear, that's run rate production, not the total that reflected the adjustment?

Matt Daly (COO)

Correct. Run Rate Production.

Davis Ravnaas (President and CFO)

Yeah.

Tim Rezvan (Managing Director)

Okay. Okay, perfect. Thank you.

Davis Ravnaas (President and CFO)

Of course. Thank you, Tim.

Operator (participant)

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

Julian Boucher (Managing Director)

Hey, this is Julian Boucher on for Neil. Just have two questions for you guys. On terms of the cash distribution, is there anything that would cause you to vary from your, like, 75% payout level? And then kind of the second one is on hedges. You know, are you comfortable writing out these recent moves, or are you looking to lock in more cash flows to maybe stabilize the payout? Thank you.

Davis Ravnaas (President and CFO)

Yeah, short answer to the question, we don't, 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?

Matt Daly (COO)

Yeah, I mean, you know, on the hedging program, I'm not sure if people have noticed this, but we are, you know, we are hedged out for two years, roughly 20% of our oil and natural gas production. And if you look at some of the prices we have, you know, oil hedges, you're looking at for this year between $75-$83, and then for natural gas, we have $3.83-$4.19. So we're able to have, you know, roughly, you know, a nice realized gain in Q1 in terms of hedging gains. And if you look into beyond in 2025, we have, you know, natural gas hedges between $3.68-$4.32 at Mcf. So we're hedging into that Contango curve right now in natural gas, about 20%.

You know, that's the percentage we do. You know, we've run enough stress tests to see at 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, you know, 80% unhedged production in case of... 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.

Julian Boucher (Managing Director)

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

Davis Ravnaas (President and CFO)

Outside of the Permian... Yeah, great, 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, you know, as you know, we have a history of buying in every basin. We'd be, you know, 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.

Julian Boucher (Managing Director)

Got it. Thank you. Very helpful.

Davis Ravnaas (President and CFO)

Thank you.

Operator (participant)

Thank you. A reminder to all the participants that you may press star and one to ask a question. There are no further questions at this time. I would like to turn the floor over to the management for closing comments.

Bob Ravnaas (Chairman and CEO)

Yes, thank you. 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 (participant)

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