Kimbell Royalty Partners LP (KRP) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Kimbell Royalty Partners third 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, Investor Relations. Thank you, sir, you may begin.

Thank you, Latonya, and good morning, everyone. Thanks for joining the Kimbell Royalty Partners conference call to review financial and operational results for the third quarter of 2017. 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 9, 2017. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay. 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 provisions of the Private Securities Litigation Reform Act of 1995.

We will be making forward-looking statements as part of today's call, that by their nature are uncertain and outside of the company's control. Actual results may differ materially. Please refer to our 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 during today's call, including adjusted EBITDA and cash available for distribution. Reconciliations to the nearest GAAP measures can be found at the end of our 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. Thanks for joining us. I'm here with several other members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our chief operating officer; Jeff McInnis, our Chief Accounting Officer; and Blayne Rhynsburger, our Controller. I would like to begin with a look at the additional accretive acquisitions that we just completed and that were described in this morning's earnings release, then look back at our operational performance during the third quarter, our latest distribution and our view of the opportunities ahead of us. Then I'll ask Davis to cover our financial performance in more detail.

After that, we'll take your questions. We continue to execute on our strategy to drive common unitholder value and distributions through accretive acquisitions with the purchase of 2 royalty packages that recently closed worth a combined $11 million. Collectively, these additional 2 properties, along with the $900,000 acquisition we made in Q2 in the Williston Basin will add 3,770 net royalty acres to our portfolio and almost 300 net Boe a day to production. Combining these 3 deals with the $16 million Maxus acquisition, that closed in April of this year, brings our total acquisition value to $28 million. Of these most recent deals, the largest is in the Fayetteville/Moorefield Shale in Arkansas representing about 60% of the total. This acquisition has highly attractive cash-on-cash yields with current production from the Fayetteville and additional upside potential from the Moorefield Shale. So this would be a valuable addition to our asset portfolio over time. We also purchased a very attractive royalty interest in the Uinta Basin in Utah operated by EOG. We are pleased with these acquisitions, which are exactly the type of strategic investments that we targeted to achieve our criteria for strong assets and a great value that are immediately accretive to our unitholders. Our existing portfolio of minerals performed very well in the third quarter, although slightly lower commodity prices impact our revenues. Production was up almost 9% versus Q2, and benefited from a full quarter's contribution from the Maxus acquisition, we completed on April 24 of this year. Average daily production for the third quarter was 3,297 Boe per day, and on a revenue basis, about 57% was oil, 11% was natural gas liquids, 30% was natural gas, and 2% was lease bonuses. As part of our evaluation model, we look for a long-lived assets with shallow decline. As a result, new drilling activity on our mineral acreage allows us to replace declining production on existing leases at no cost to us, and in some fields to actually increase production.

Our average decline rates across our portfolio is shallow by design and our best-in-class acreage has strong potential for growth in production. Including the 4 latest acquisitions we've completed since our IPO, we have mineral and royalty interest across 20 states in more than 300 counties and nearly every active basin in the Lower 48 with the greatest concentration in the Permian.

Turning now to our distribution. Last month, we declared a $0.31 per unit distribution for the third quarter, which was a 3% increase over our Q2 distribution of $0.30. The Q3 distribution is payable on November 13, to unitholders of record as of November 6. This represents 1x coverage. Our goal is to be in a position of increased revenues and distributable cash flow, so that we can steadily increase our distribution. As a variable distribution MLP, our partnership agreement requires us to distribute to unitholders a 100% of our available cash, and it will clearly vary depending on producer drilling activity, on our existing portfolio, commodity prices, and the pace and scale of third-party acquisitions and sponsor dropdowns.

We will continue to look for deals, which meet our criteria for investment. They are immediately accretive to unitholders and drive distribution growth. We don't overpay. They have long life stable production with a shallow decline curve that enables us to generate current income. They have significant upside potential for organic growth through additional field development or application of new technology. And we want reliable financially strong operators.

Dropdowns from our contributing parties over time will be a significant source of growth. However, we continue to see a record number of third-party acquisition opportunities, and we will continue to pursue the strategy in order to preserve our drop-down inventory. We do still expect the first one to be in 2018, which will provide additional time to put on production drilled, but not yet completed wells that can contribute immediately to our production volumes.

Now I'd like to turn it over to Davis for a look at our financials.

Thanks, Bob, and good morning, everyone. Third quarter net income was approximately $119,000, which is down sequentially by 53%, due almost entirely to non-cash G&A items. Revenues increased by 8% to $8.4 million compared with the prior quarter. Operating income was $344,000, down 21% from Q2. Net income and operating income in the third quarter were impacted both by slightly lower commodity prices versus Q2. G&A was down from the second quarter on a per unit of production basis as a result of nonrecurring consulting expense items that didn't occur in Q3. We will continue to work toward reducing G&A to a run rate below the Q2 level as we realize the benefits from operating leverage for the company. Adjusted EBITDA was $5.3 million, which is up 12% from last quarter. Our adjusted EBITDA calculation is net income plus DD&A and interest expense added back.

Cash available for distribution was $5.1 million. We define cash available for distribution as adjusted EBITDA less cash needed for debt service and other contractual obligations and fixed charges and reserves for future operating expenses or capital needs. You will find a reconciliation of both adjusted EBITDA and distributable cash flow at the end of our news release. Our average realized price per Boe was $26.95 per barrel, down 3% from Q2 that includes $43.95 per barrel for crude oil, a decrease of 3% from Q2, $2.79 for natural gas, down 4% from Q2 and $19.75 per barrel of NGLs, a decrease of 5% from Q2. We did not incur a full cost ceiling test impairment in Q3 under the exemption we received from the SEC following our IPO. Although, we expect to have to take impairment at some point in the future. Let me stress that it would be a noncash charge and would not in any way impact cash available for distribution or the liquidity, asset borrowing base or our ability to grow through acquisitions or dropdowns. We will continue to evaluate this on an ongoing basis. As of September 30, we had cash on hand of $6.2 million and $22.2 million outstanding on our revolving credit facility, primarily related to the Maxus acquisition.

As of today, including amounts used to finance acquisitions, we have a total of $29.6 million outstanding on our revolver. That gives us current liquidity of $70.4 million, if we exercise the accordion feature that doubles our revolver to $100 million. We plan to use the revolver to provide short-term financing for acquisitions, and our goal is to maintain, as always, a conservative capital structure.

Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from Jason Wangler with Imperial Capital.

I was just curious with the acquisitions, could you maybe the 300 Boe a day. Could you maybe breakdown kind of where that came from? And then also maybe you had good growth in the quarter. But maybe what the organic number kind of looked like versus what the acquisitions given the timing of them added throughout the period?

Yes. Jason, I didn't hear the second part of your question. But for the first part, 70% of the production came from the Fayetteville acquisition that we made, 27% from Uinta County, Utah, which was the second largest acquisition we made and then about 2% on a Boe basis came from the Bakken acquisition we made.

Yes. And what I was just curious about is, the third quarter growth sequentially up about 8%, 9%. Could you maybe break that out as far as what you kind of did organically versus what these acquisitions, at least some of them, may have helped them (inaudible) closing the fourth quarter?

Yes, let me look for those numbers, one second Jason. None of the acquisitions for this quarter added any production growth to the production numbers you're seeing. So growth -- the production growth was attributable to organic growth, and also the Maxus acquisition. And if we added gas, we'd say about 2/3 of that growth came from Maxus and the remaining 1/3 from organic growth.

Okay. And maybe if I could sneak one last one in. You've talked, I think, in the last call and we've spoken about just what you're seeing in the Permian, and how hot that activity is? And you guys are obviously acquiring some assets in other areas that you think have some better value so to speak. Could you maybe just talk about, as you look at the Permian still, would you be better sellers, if it made sense, even though it's not really your strategy? Your -- just kind of your thoughts around what's going on with valuation there?

Yes. We've never seen anything like what we're seeing in the Permian basin right now in terms of valuation. To say this for the 500th time, we're very lucky that we've been buying Permian acreage for 20 years now. So we -- as you know, our biggest area is the Permian basin. We're fortunate enough to develop and acquire our acreage when prices were pennies compared to what acquisitions are going for today. So what we're focused on today is finding -- the Permian basin is not the only high-quality reservoir in the United States. And to us, it feels like the -- like some people in the market don't see that and that's to our benefit, because we have geographic expertise in every major basin. We are comfortable making acquisitions everywhere. So we are trying to do deals at reasonable valuations outside of the Permian today. We're still seeing and evaluating a lot of Permian opportunities. It's just been too competitive frankly, for what -- we can get a better return for our unitholders deploying our dollars elsewhere today.

Our next question comes from T.J. Schultz with RBC Capital Markets.

Just first question, any thoughts on need to hedge here or any desire to hedge at these prices?

Yes, great question. We talked about that yesterday on our board call. We're certainly evaluating a number of hedging options right now. And so -- that's all, I'll say from now is that, yes, we are actively considering hedging strategies, particularly given what everyone's seen obviously with oil ramping up so much recently. So that's not lost on us. We're very focused on that. And don't be surprised if you see something from us on the hedging activity in the next month or 2. So...

Okay. Cool. And then, I guess my follow-up would just be any more color on the recent acquisitions that you did make, just the processes involved, if it was competitive, negotiated that sort of thing. And just any color on the competitive landscape for those type of deals and those types of basins?

Yes, we can go on forever on that. So good question. Without giving too much away, I would say, 1 out of these 3 packages was competitive somewhat, I'd say the other 2 weren't at all. And I think what we really benefit from again, we're kind of in an enviable position where we already have a Permian position, we don't have to add more Permian acreage. So for us, it seems like everybody in the country is in this frenzy to try to get a Permian position if they don't have one. And so they're not looking at assets elsewhere and that's created a huge vacuum for us. And I'd say that over the last 3 to 6 months, we've probably seen more high quality, non-Permian deals than we have seen in the last couple of years. And moreover we've seen bid-ask spreads narrow meaningfully. I think that sellers are getting more comfortable or uncomfortable, however you look at it, with prices potentially being lower for longer. And that oil might not go to 80 bucks tomorrow, like they maybe thought 2 years ago. So we're encouraged by what we're seeing in terms of a narrowing in the bid-ask spread. And we're also, frankly, benefiting from [Permianpalooza] and our ability to kind of buy things elsewhere. So...

Our next question comes from Garrison Allen with Raymond James.

So first question. Turning to the credit facility, is there a certain limit or threshold on utilization that you'll targeting kind of in the long term?

That's a good question. I'd say that we always want to have a conservative balance sheet. I think that -- I'd hate to put a number on that. I'd say that to give an upper limit, we certainly would not want to exceed 2x to 2.5x debt-to-EBITDA. I think we're pretty comfortable with where we are currently. That being said, if we found a super attractive acquisition opportunity and we weren't able to offer units for that deal, I think we'd consider increasing indebtedness, but it'd have to be competitive. It would have to be highly compelling rather. So in a general sense, I think we're comfortable with where we are. I hope that answers your question

Definitely. Appreciate it. Next question real quick, is rig count for your acreage still sitting at roughly 24 rigs overall and 17 Permian?

I think we're at 21 now.

Yes, we're -- hey, this is Matt Daly. Yes, currently we are at 21 rigs and 14 in the Permian.

Yes.

Our next question comes from Matt Schmid with Stephens.

Just looking back at the production trends over the quarter, even with the Maxus acquisition obviously driving up or contributing to overall production, but just looking at the oil production was up, looks like about 9% sequentially as well. Are you starting to really see the benefit of that first half rig ramp? And overall just kind of what's your broad thought on organic growth opportunity over the next couple of quarters?

Matt, excellent point, very happy you brought that up. You're right, Maxus is a gas deal and oil volumes ripped for us this quarter-over-quarter. We have seen -- so to answer your question directly, yes, the rig count increase that we saw from end of '16 to kind of where we are today is starting to materialize in terms of when we're seeing production volumes. And that's really been kind of as we expected. I mean, I think you will remember we said it would take anywhere from 3 to 9 months for us to start to see that impact. And so now we're kind of at that point. We had a couple really big wells come on in Pecos County that are Diamondback operated. So again, that kind of speaks to a lot of the upside acreage that we have and the strong legacy position that we have in West Texas. So yes, that's a long answer to your question, which is we are very encouraged with how things are going in terms of oil production volumes on an organic basis.

Okay. That's helpful. And just back on the competitive environment. Just in terms of deal size, you'll have an easier time finding sort of attractive smaller deals given your structure and sort of relationships and experience versus competition for larger packages out there?

Absolutely. I mean, if a deal gets to be $50 million-plus, it gets incredibly competitive. Likewise, really small deals for royalties kind of under $1 million bucks could be really competitive, sometimes, but there's also a lot of them. So I'd say that's a big market size. But anywhere from 1 to 50, there's a lot of deals, there's is not a lot of natural buyers for those assets, particularly outside of the Permian basin. So -- and to your point, yes, a lot of these are relationship-driven opportunities. So yes, it's -- there's a lot of opportunity out there right now and we're very excited about it.

At this time, I'll like to turn the call back over Mr. Bob Ravnaas for closing comments.

Thank you, everyone, and thank you all for joining us this morning. That completes today's call.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.