Kimbell Royalty Partners LP (KRP) 2022 Q1 法說會逐字稿

Greetings, and welcome to the Kimbell Royalty Partners First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rick Black with Investor Relations. Thank you, sir. You may begin.

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 ended March 31, 2022. 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 today's call speaks only as of today, March 5, 2022, 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 forward-looking statements made pursuant to the safe harbor's 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 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 press 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?

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. I will begin today's discussion by providing comments about the quarter and the current operating environment before turning the call over to Davis to walk you through our financials in more detail.

We are very pleased to have started 2022 with an extremely strong quarter that saw record oil, natural gas and NGL revenues, adjusted EBITDA and cash available for distribution, which led to a first quarter cash distribution to our unitholders of $0.47 per common unit, which is also a new record for Kimbell. Strong commodity prices during the quarter translated into increased activity on our acreage as evidenced by the 20% increase in the rig count actively drilling on our acreage at no cost to us.

In addition, line of sight inventory from our major properties increased 6% sequentially to 5.03 net DUCs and permits. This is notable since we only need approximately 4.5 net wells completed each year to keep production flat. While the Permian led all of the basins in terms of growth in rig count, we believe strong natural gas prices will compel improved activity in the Haynesville, Marcellus and Mid-Con as we continue through 2022. In fact, the Haynesville led all of our regions in terms of net DUCs at quarter end.

The U.S. exited the winter draw season with natural gas in storage of approximately 1.4 trillion cubic feet, well below 2021 levels and the 5-year average. This relatively low level of natural gas and inventory, coupled with less associated natural gas from oil-directed drilling and recent record LNG exports, should provide pricing support for natural gas throughout 2022. In fact, Kimbell experienced some of the highest realized prices as compared to spot prices in the first quarter of 2022 for natural gas that we have seen since our IPO in 2017.

Pricing improvements were also strong in the natural gas liquids market with realizations approaching 50% of WTI oil prices. We are fortunate to have some of the highest quality natural gas royalty assets in the U.S., including a substantial portion in the core of the core in the Haynesville and are poised to benefit from these improved fundamentals as we continue through 2022.

As of March 31, Kimbell had 73 rigs actively drilling on its acreage, up 20% compared to the fourth quarter of last year. This presents approximately 11.1% market share of all rigs drilling in the continental United States, an increase from year-end 2021. Tailwinds continue in the global energy sector and fundamentals across the U.S. energy complex continue to improve with low inventory levels and the overall rig count continuing to improve at a modest pace.

We also saw a ramp-up in public company drilling on our acreage with public operators making up 67% of our active rig count as compared to 57% at year-end. We believe the outlook for our industry sector and for Kimbell specifically is very positive, and both should benefit from the current strong demand for energy. Kimbell's broad and diverse asset portfolio throughout all the major basins in the Lower 48 is well positioned for continued strong cash flow generation.

The oil and natural gas royalty sector is particularly well positioned to benefit from the inflationary cycle that has accelerated in the U.S. since royalty companies participate in the upside from commodity price inflation and do not experience a significant service cost inflation currently impacting the upstream sectors.

It is also important to point out that the asset class for mineral and royalties remains enormous at over $900 billion in market size with only a handful of public entities in the U.S. and Canada that have the financial resources, infrastructure and technical expertise to complete large-scale multi-basin acquisitions. In addition, this industry consolidation is still much closer to the beginning of the process than even to the midpoint. We believe Kimbell is well positioned to continue its role as a leading consolidator in the years to come. We are thrilled to be off to a great start in 2022, and we remain focused on delivering value for our unitholders.

Lastly, we are also pleased to report the successful IPO of Kimbell Tiger Acquisition Corporation, a SPAC sponsored by Kimbell that will target an acquisition in the energy and natural resources industry in North America. Kimbell Tiger is led by Zach Lunn, who is a very talented energy executive, and we look forward to providing updates as events dictate.

And with that, I'll now turn the call over to Davis.

Thanks, Bob, and Good morning, everyone. We are very pleased to report record performance during the first quarter, and we are affirming our full year 2022 guidance that was previously disclosed in our fourth quarter 2021 press release.

I'll start by reviewing our financial results from the first quarter, beginning with record oil, natural gas and NGL revenues of $65.1 million, which is an increase of 25% compared to the fourth quarter of 2021. This is largely attributable to improved realized commodity prices and $5.9 million of prior period adjustments. This quarter also marks the first full quarter contribution from the Cornerstone portfolio of assets we acquired late last year, which is performing in line with our expectations.

Kimbell's first quarter 2022 average realized price per BBL of oil was $92.01, per Mcf of natural gas was $4.48, and per BBL of NGLs was $43.24 and, finally, per BOE combined was $45.69. First quarter 2022 average daily production was 14,482 BOE per day on a 6:1 basis, which consisted of 94 BOE per day related to prior period production recognized during the quarter and 14,388 BOE per day of run rate production. The prior period production recognized this quarter was attributable to past production that was released from suspense. The first quarter run rate daily production of 14,388 BOE per day was composed of approximately 61% from natural gas and approximately 39% from liquids, or 25% from oil and 14% from NGLs.

On the expense side, general and administrative expenses for Kimbell were $6.6 million in the quarter, $4.4 million of which was cash G&A or $3.39 per BOE. Unit-based compensation in the first quarter, which is a non-cash G&A expense, was $2.2 million or $1.69 per BOE. Total first quarter consolidated adjusted EBITDA was $43.9 million, an increase of 34% compared to last quarter.

We announced a record high cash distribution of $0.47 per common unit for the first 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 outstanding borrowings under Kimbell's secured revolving credit facility. Since May of 2020, excluding this upcoming Q1 payment, Kimbell has paid down approximately $52.5 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution for debt paydown.

Commenting further on our balance sheet and liquidity. As of March 31, Kimbell had approximately $226.5 million and debt outstanding under its secured revolving credit facility. It also had net debt to first quarter 2022 trailing 12-month consolidated adjusted EBITDA of approximately 1.5x and was in compliance with all financial covenants under its secured revolving credit facility. Kimbell had approximately $48.5 million in undrawn capacity under its secured revolving credit facility to quarter end.

Before we turn the call over for questions, I'd like to reiterate the strength of our strategic business model that continues to perform very well in the highly cyclical energy industry. Since our IPO in February 2017, just over 5 years ago, we have distributed $6.93 per common unit and have grown daily production by over 360%. All of this occurred under a much lower average commodity price that we are experiencing today for both oil and natural gas. So as we look at the remainder of 2022 and beyond, we are extremely excited about our role as a leading consolidator in the oil and natural gas royalty sector and the prospects for Kimbell to generate long-term unitholder value for years to come.

With that, operator, we are now ready for questions.

(Operator Instructions) Our first question is from Chris Baker with Credit Suisse.

I just want to ask on M&A. Could you guys maybe expand on the comments made in the release just around the excitement you see for KRP and its role as a consolidator in the mineral space?

Sure. This is Davis. We're looking at record deal flow right now. I think that's motivated in part by obviously the front-month spiking so precipitously over the course of the year-to-date. That being said, we've done everything on the strip. It's been tough to get some sellers to accept the fact that we're bidding on oil prices that are in the next couple of years meaningfully below where they are today obviously, being in such steep [aggradation]. That being said, for portfolios of assets that are larger than, let's call it, $50 million to $100 million, the buyer universe really dries up. So, we're in a good spot on that front. If we do buy someone, it's going to be leverage neutral, if not delevering in nature. So we plan to use our stock to do that. Very careful in underwriting acquisitions in this environment, I think you have to be. But overall, I think we're encouraged by the level of interest and folks that want to sell their multi-basin packages, which are kind of our wheelhouse, have been coming up at frankly a record rate since we went public.

Bob, Matt, anything you guys would like to add to that?

No. Good summary.

Yes.

Great. And just as a follow-up, you touched on the balance sheet. Could you just maybe share your latest thoughts around leverage? And I think my favorite question, the potential for a share buyback later this year. [Against] my model, it still looks like you guys are trading at an elevated valuation versus peers just on a for cash flow basis.

Yes. No, thanks for the question, Chris. That's one of the topics that we discussed most frequently with the Board. Right now, leverage at 1.5x, we feel very good about that, particularly as a royalty company. Unfortunately we still get painted with the same brush as some of the E&P businesses that have CapEx obviously. And so 1.5x for royalty business is obviously much better than for an E&P company. I think we'd like to get and we continue to look at 1x or lower is a nice level. We're not too far away from that. Your models haven't looked at it recently, but you're probably very close, if not directly on where we would be in terms of delevering over the next several quarters.

Buyback is always an option. I think we're going to weigh that with external M&A opportunities. But to your point, I think, if I look at -- I think we're at, what, 15% free cash flow yield right now and 11% dividend yield, if you just use this quarter and annualize it, and things are looking better going forward obviously with what's happened to pricing. So, that makes M&A more challenging, kind of tying back into your first question. So I think all options are on the table. I think once we get to kind of that 1 turn, we talk to our investors all the time. We welcome feedback from all of our investors.

I think that once we get to a point where leverage is effectively bulletproof and I think, 1x or less, if you just look at it on a liquidity basis is relatively bulletproof. And that opens up some interesting options for us. Do we do external M&A? If we can buy stuff at high-teens yields, 20% yield plus kind of deals? Maybe. Will we be better off buying our stock with assets that we understand better? Maybe, probably in that particular example. Should we return to a higher payout ratio? That's certainly on the table as well. So, it's a good problem to have, which is what you do with your cash flow. And we're just not quite there yet. But to your point, it's just around the corner.

Yes. All I'd add to that, this is Matt, is that the deleveraging process is happening much more rapidly than we originally projected, given obviously $8 gas prices and some of the realizations we're seeing on the gas side. So, as Davis says, once we get to that 1x level, we have all kinds of options at that point to deploy that, other 25%, as you said, into buybacks, raising the payout ratio or just paying the debt off entirely. So, anyway.

Our next question is from Trafford Lamar with Raymond James.

Congrats on a great quarter. I kind of answered my first question -- you've kind of answered my first question. I was going to ask about looking at increasing the distribution ratio once you got to 1x. I guess, second question revolves around hedges. I know you'll have a formulaic approach tied in with your leverage ratio. But given where front-month is over $8 right now, have you all looked into potentially doing any additional hedges in the second half of the year, like costless collars specifically?

We talk about hedging all the time. I think what's most important to us is just maintaining a consistent approach. So we made a bunch of money on our hedges, obviously, in the downturn and people were happy about that. Now that we're in an environment where prices went up much faster than, I think, just about anybody expected, the hedges are a little bit of a drag. Again, though, I don't see any -- I don't think we internally have any desire to change the approach that we have to hedging. People get into trouble when they think they can predict what's happening to oil and gas prices. So we're going to stay consistent with our formula.

But what that means is, as we continue to pay down debt and as our EBITDA is growing, and therefore, enterprise value, the debt to enterprise value ratio that we use to dictate our forward 2-year hedging policy continues to get lower and lower as a percentage. So, hedges are rolling off and they're rolling off quickly. But I don't -- look, we've looked at costless collars. We entertain consulting firms to come in and pitch us on strategies. We like swaps because they're simple. I don't really see that changing going forward.

One thing I will add, since you brought it up, we've made a good amount of money on our interest rate swaps. So that's another kind of arrow in our quiver, so to speak, that helps mitigate against the losses we have on the commodity hedges. So we could potentially balance those against each other if that makes sense. So, I feel good about where we are. I like that we're delevering rapidly. I like that our hedging percentage is going to go down over time. And I don't really see any near-term change in that strategy.

Matt, do you want to add anything to that?

No, I totally agree with that. And that's right, it's rapidly dropping. I mean, we're looking at 29% of our production hedge for the rest of this year. It drops to 19% in '23 and around 17% in '24. So, obviously it's sort of a catalyst with the stock having distribution growth simply by having these hedges roll off over time in the near-term.

Our next question is from Nate Pendleton with Stifel.

Congrats on strong quarter. My first question, in light of the higher commodity environment and the higher rig count environment as well, can you share your thoughts on the potential for lease bonuses in 2022?

That is a good question. So we never really bake in any lease bonus to any of our forecasts. Matt, how do we want to answer that? I mean, I would say -- I'll make a general comment and I'll turn it over. It's a good question. I think, obviously, any time you see oil and gas prices go up like this, one would naturally expect an increase in lease bonus activity. So, I'd say that we do expect that. That being said, it comes in waves. We'll get some really big chunky lease bonuses one quarter and then for whatever reason in the next quarter we get nothing. So, it's difficult if not impossible to predict, but I would argue that your premise is correct and that we would expect the trend to be elevated, at least here in the near-term. Matt?

Yes. Yes, totally agree with that. I mean, you saw $650,000 in Q1, almost all of that was in the Permian, Reeves County, Loving County, Martin County, Midland County. What we're seeing right now in Q2, we are seeing a lot of activity with lease inbound calls on leasing, mainly in the Haynesville and Mid-Con, which is not surprising, given the higher natural gas prices we're seeing right now as well as the higher NGL prices that obviously the Mid-Con is fairly NGL heavy. So that's sort of a theme you might see for the rest of the year for Permian, Haynesville and Mid-Con.

And for my follow-up, regarding Q1 oil volumes, were there any notable drivers behind that outperformance?

Good question. Blayne, do you want to speak to any of the bigger drivers on oil volumes?

Yes, absolutely. I would say, just given a broad -- include oil specifically with your question, but with the majority of our development, we had solid development in the Haynesville. But on the oil side, the majority of it came from the Eagle Ford on a legacy asset that we've owned there. We had 7 new wells come on in Dimmit County. Mixing with that was also a good development in the Permian. So, I would say, those are the 2 main factors, the development in the Eagle Ford and the Permian.

Our next question is from TJ Schultz with RBC Capital.

Hey. Just first on Tiger, any update on the [gold] de-SPAC? And then, really as you're thinking about just how that would potentially work with KRP longer term and the type of producing asset you want through Tiger, does that put you all in a different sandbox at all for deals that are out in the market today? Just trying to get a feeling for how competitive it's going to be to find a deal at your level of optimism to get something done in the next year to 15 months.

Yes. TJ, I'd say, we feel better sitting here today about our ability to find a de-SPAC candidate than we did at the end of last quarter. Very encouraged by ongoing dialogue that we have with multiple parties. It's a really exciting advantage for KRP to potentially have an operated working interest partner that could help unlock an entirely new universe of acquisition opportunities, frankly, for KRP with the unique advantage of having line of sight and transparency on development. Frankly I think every mineral company should have a partner that operates acreage alongside or in front of their minerals. So that's the premise. We feel good about it. I mean, I think that in this environment, it's really difficult to finance acquisitions with a huge amount of cash. I think it's hard to get public unless you're a really big, big company. So there's only a few of those out there on the working interest side that could really pull that off even in this environment, in my opinion.

So, I think a SPAC is a great opportunity for -- and folks are, in my opinion, company that realization, a great opportunity to get some liquidity and to do so in a way that -- where you have a strategic partner like us, we can bid on the mineral side or carve-out and override it with a lower cost of capital than the working interest folks can. And so, on a combined basis, it makes acquisitions pretty interesting. We could be a financing partner to that working interest group. So, feel good about it. Being optimistic, I do think we'll get something done. And it's going to be exciting for KRP unitholders, not only the initial upfront amount of cash and units that TRP unitholders will get in the de-SPAC candidate, but also just the ongoing strategic relationship and what that means for M&A and growth for KRP going forward.

Matt or Bob, anything?

No, that sounds perfect.

Okay. I appreciate that. If I could just shift gears on cash taxes, I think you guys have said before, you would not be a material cash taxpayer through 2027 and definitely a differentiator for you all. Does that time frame accelerate at all as these prices -- these commodity prices hold over the next year or 2?

So I'll turn that over to Blayne. The first thing I'll say is, we typically release our tax guidance once a year. It's a very complicated process, as you can imagine. Let me provide more detail on tax guidance than just about anybody I know. Obviously, with revenues and profitability going up, we'd expect that -- which is a good thing, it's a good problem to have. The shield could go away faster. We haven't released specifics on that, but I'll turn it over to Blayne to add additional color.

Yes. No, Davis, I think directionally, you're right there. I mean, we have said, as you mentioned, TJ, that through 2027, we expect to not pay material, not federal income taxes. I think, if you just look at, the last time we gave our guidance was -- we released in Q2 of last year. You've got gas in the 3s and oil in the 60s going down obviously. And now, we've got gas to-date and oil at 108. So you can just kind of do the math. But as Davis alluded to, the shields will be eaten through with higher revenues a lot quicker. So, you can look forward to updated tax guidance coming out with our Q2 release.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to management for closing remarks.

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

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