Kimbell Royalty Partners - Q2 2024

Transcript

Operator (participant)

Greetings, and welcome to Kimbell Royalty Partners' Second 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, Rick Black. Thank you. You may begin.

Rick Black (EVP)

Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners Conference Call to review financial and operational results for the second quarter of 2024, which ended June 30th, 2024. This call is also being webcasted and can be accessed through the audio link on the Events and Presentations page of kimbellrp.com. Information recorded on this call speaks only as of today, which is August 1st, 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 harbors provision 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 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 of these 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 Dailey, our Chief Operating Officer, and Blayne Rhynsburger, our Controller. We are pleased to report solid results for the second quarter, with strong cash flow, continued debt paydown, and lower cash G&A costs. Our rig count remains robust at 91 rigs actively drilling across the U.S., which represents a 16% market share of all land rigs currently drilling in the continental United States. In addition, our line of sight wells continue to be meaningfully above the number of wells needed to maintain flat production, giving us confidence in the resilience of our production as we progress through 2024.

Finally, we announced a $0.42 distribution per common unit as we continue to focus on returning value to unit holders. Before turning the call over to Davis, I wanted to acknowledge the passing of Ben Fortson, who was one of Kimbell's original directors, my friend and colleague. Ben had decades of industry experience serving as President and CEO of Fortson Oil Company and serving as the Chief Investment Officer and Executive Vice President of the Kimbell Art Foundation since 1975. Ben was an essential part of our success and evolution here at Kimbell. He helped create Kimbell Royalty Partners, participated in our IPO in 2017, and continued to serve on our board of directors in 2024. I will miss Ben's wise counsel, vision, and excellent investing skills that contributed to the success of Kimbell over the years.

We will miss his advice, sense of humor, and friendship. I'll now turn the call over to Davis.

Davis Ravnaas (President and CFO)

Thanks, Bob, and good morning, everyone. In the second quarter, we once again generated strong results, exceeded our internal production expectations, maintained a substantial market share of the U.S. rig count, and achieved a record low cash G&A per BOE, which was below the low end of guidance. I'll start by reviewing our financial results from the quarter, beginning with oil, natural gas, and NGL revenues, which totaled $77 million. We had run rate production of 24,110 BOE per day, and we exited the quarter with 91 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, second quarter general and administrative expenses were $10.2 million, $5.1 million of which was cash G&A expense, or $2.34 per BOE.

This represents a new record low cash G&A per BOE for Kimbell and is below the low end of guidance, reflecting operational discipline and positive operating leverage. Net income in the second quarter was approximately $15.2 million, and net income attributable to common units was approximately $8.4 million, or $0.11 per common unit. Total second quarter consolidated Adjusted EBITDA was $65.8 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 $0.42 per common unit for the second 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 June 30, 2024, we had approximately $265.8 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing twelve-month consolidated Adjusted EBITDA of 0.9 times. We had approximately $284.2 million in undrawn capacity under the secured revolving credit facility as of June 30. 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 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 the overall demand for energy and our well-established and diversified asset portfolio will continue to enhance value for our unit holders. 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'd 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 question 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 poll for questions. The first question comes from Tim Rezvan with KeyBanc Capital Markets. Please go ahead.

Tim Rezvan (Managing Director)

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

Davis Ravnaas (President and CFO)

Of course. Morning, Tim.

Matt Daly (COO)

Yeah, good morning.

Tim Rezvan (Managing Director)

Want to start on the unchanged guidance that you put out for the year. I guess you reiterated it. Your production is sort of outpacing, you know, the midpoint of the annual guide year to date. We have decent line of sight on future wells, you know, across your footprint. You know, why not revisit guidance for that or, and, and maybe, you know, guidance as well on, you know, cash G&A and DD&A that seem to be trending outside the range? I know you all play conservative and sort of have wide goalposts, but just kind of curious, why not revisit some of those items?

Davis Ravnaas (President and CFO)

Yeah, that's a fair comment, and it's not lost on us. Let us collect internally here and reconsider that. I will say, you know, look, we don't have control, obviously, over the drill bit, so things are always variable. But your points are valid, and we don't want to be unduly conservative as well. And I'll add to that, we do have some even more immediate line of sight on some large 20% interest wells that we have, and I think it's Loving County, that we think are gonna come online later in this year. Matt, maybe you can provide a little bit of additional detail on that, but your point is valid. We're probably being a little bit unduly conservative.

We're not doing that from a sense of, you know, a deliberate attempt to do so, but more just trying to be conservative and want to indicate to the market that, you know, we're gonna deliver on what we're saying we're gonna deliver. But, Matt, anything on those additional wells that it might be helpful?

Matt Daly (COO)

Yeah, yeah, yeah. I mean, we do have some, as Davis mentioned, you know, two, you know, large interest wells, you know, over 20% royalty interest wells, likely coming on later this year, probably, you know, Q4 or Q1 2025. The operator is located in Loving County, currently rig on site. And just to put that in perspective, the average royalty interest for us is about 1% or 1.5%. So having two, you know, 20% wells coming online, you know, mainly oil production is gonna make, you know, a big difference in production, you know, later this year or early 2025. So your point about guidance is certainly noted, and we'll internally, you know, meet about that.

Bob Ravnaas (Chairman and CEO)

And this is Bob. I'd also like to add, we have a great position in the Mid-Continent that we're really proud of through a couple of acquisitions, one last year and one several years ago. Our production this last quarter is up 5% in Oklahoma, and our rig capture is approximately 50% of all rigs in Oklahoma. So we're very happy with the activity on our Mid-Continent acreage.

Tim Rezvan (Managing Director)

Okay, I appreciate the color. As my follow-up, I was curious, you know, you have the preferred sitting out there. I was wondering if you could give kind of your updated thoughts on when or how you might look to address those as we head, you know, towards 2025.

Davis Ravnaas (President and CFO)

Man, you're asking all the, all the great questions. We are excited to say that we'll probably plan to redeem about half of that pref in the next three to six months. That, that's our current game plan. We want to keep leverage low, so looking at a, you know, a debt to EBITDA ratio, less than 1.5 times, that would allow us to redeem just over half of the pref, we believe, probably by the end of the calendar year. So that's, you know, in our opinion, a way that we're continuing to improve the balance sheet and just move ourselves into a stronger position. So, you know, all good news on that front as well. Thank you for asking that.

Tim Rezvan (Managing Director)

Okay, thank you. If I could sneak a quick one in, just, you know, on the modeling side. You know, the common units outstanding increased quite a bit to 81 million. Was that simply due to the accelerated vesting of restricted units that you cited in the release, or was there anything else?

Davis Ravnaas (President and CFO)

There was a conversion of one of our shareholders recently. Matt, do you want to add any detail to that? I believe it was related to the Hatch acquisition a couple years ago.

Matt Daly (COO)

Correct. Yeah. One of the private equity funds converted from OpCo into common here recently, and that's one of the reasons why the common unit count went up and the OpCo unit count went down, if that's what you're asking about.

Tim Rezvan (Managing Director)

Yeah. Yeah, I was asking that. That's an important part.

Matt Daly (COO)

You'll see their holdings are reported on Bloomberg as of 6:30 P.M.

Tim Rezvan (Managing Director)

Okay. Okay, I appreciate all the color. Thank you.

Davis Ravnaas (President and CFO)

Of course.

Operator (participant)

Thank you. The next question is from Neal Dingmann with Truist Securities. Please go ahead.

Julian Broche (Associate in Equity Research)

Hey, this is, Julian Broche on for Neal. Thanks for taking our questions.

Davis Ravnaas (President and CFO)

Yeah. Good morning, Julian.

Julian Broche (Associate in Equity Research)

Good morning. Just kinda given the weak, you know, gas environment that we're seeing now, are you guys seeing any actionable dislocations in pricing, kind of, versus, you know, gas assets versus oily ones?

Davis Ravnaas (President and CFO)

You know, it's been, it's been a little bit. You know, I'll just give you my perspective. I'd be curious what Bob and Matt think, too. It's been a little bit disappointing on the gas front. You know, we, we, we. You know, our big gas acquisition was obviously Haymaker, which we made back in 2018, which I, which I continue to believe was probably the best gas buy we've done in 20 years. Gas was $2. It's core, you know, Western Louisiana acreage and this outstanding, outstanding asset. We haven't seen a whole lot, at, on the gas front in the last. I mean, candidly, I'll, I'll even say we haven't seen much since 2018.

It just seems like nobody wants to sell gas assets, mostly because I think everybody's just looking at this incredible, you know, futures pricing scenario with, with, you know, the new export terminals coming online and all of that. It's been rough finding nice gas assets. Now, what I will say to that, the Mid-Continent acquisition, which Bob was just talking about, that we picked up through Longpoint, does have a heavy gas component associated with it, and that's been wonderful to buy, too. So, you know, tough to find gas assets. It's not lost to anybody that gas is depressed. We would, we would be happy to buy gas assets. It's just been hard to get them out of people's hands. But Bob or Matt, anything you guys would like to add to that?

Matt Daly (COO)

Yeah, I mean, it's just interesting to me. You know, the Haynesville production for us was actually up, you know, slightly Q1 and Q2, even with these low prices, and the rig count in the Haynesville is totally flat. So things have totally stabilized there from an operational standpoint. But yeah, you're right, Davis, it's been difficult to find, you know, acquisitions in that area. I think people see what we're seeing there in terms of the future prospects about, you know, the LNG exports and so forth. So but operationally, it's just sort of, like, running, you know, perfectly. And the Haymaker asset we bought, that asset has grown dramatically since we bought it back in 2018 organically, so it's done very well for us.

Julian Broche (Associate in Equity Research)

Got it. Thank you. And if I can sneak one more in. The kind of Permian where you know, I guess, Permian deal flow is kind of potentially gonna slow down into year-end, given all the deals. But what other basins are you all looking at, and what's kind of the potential ticket size that you're seeing the best opportunities right now?

Davis Ravnaas (President and CFO)

It's been a disappointing year for M&A, generally speaking, across the board. So I'd say that we've seen very few transactions and even fewer transactions that are actually interesting to us from an asset quality standpoint. We're looking at every basin, so we always do. We look at everything we can. You know, our job is not to pick a specific county and say that we're only gonna buy there, and we'll pay whatever it takes to get a deal done in that county. We. You know, our dollars compete across the board, across all basins and all counties. So if we can make more money for our investors buying something in Utah, we'd rather do that than buy something in Midland County. So we're looking everywhere, but I would say so far this year has been a little bit depressed on royalty volumes.

I think everybody's seen that from an M&A standpoint. That being said, things change all the time. I mean, last year, last year was relatively quiet, and then LongPoint came along for us, and that was a huge deal. We've seen that the last couple of years, too, where people just want to sell things by the end of the year, so I wouldn't be surprised if things picked up here imminently. But so far it's been, it's been relatively quiet. But no, we're open-minded to, to acquisitions everywhere.

Julian Broche (Associate in Equity Research)

Got it. Very helpful. Thank you very much.

Davis Ravnaas (President and CFO)

Thank you.

Operator (participant)

Thank you. Thank you. There are no further questions at this time. I would like to turn the floor back over to the management for closing comments.

Bob Ravnaas (Chairman and CEO)

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 now disconnect your lines. Thank you for your participation.