Kimbell Royalty Partners LP (KRP) 2021 Q2 法說會逐字稿

Greetings, and welcome to the Kimbell Royalty Partners Second 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. 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 second quarter 2021. 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, August 5, 2021, so 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. While we are making -- while we may 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 for this call. I'm joined here on the call with several members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our Chief Operating Officer; Blayne Rhynsburger, our Controller.

I will begin today's discussion by providing comments about our second quarter before turning the call over to Davis to walk you through our financials in more detail. We are extremely pleased with our operational and financial performance during the quarter. Momentum across all areas of our business continued to improve from the first quarter to the second quarter in terms of both improved pricing and activity. Second quarter average daily production is 14,393 BOE per day on a 6:1 basis, which consisted of 382 BOE per day related to prior period production recognized in Q2. Excluding this amount, our Q2 run rate production was 14,011 BOE per day, which was up 2% sequentially compared to the first quarter. The combined momentum of improved pricing and production drove positive operating leverage and consolidated adjusted EBITDA to a new record of $28.1 million. Our cash available for distribution was robust during the quarter, resulting in a 15% increase in our quarterly distribution to $0.31 per common unitholder.

Operators in the U.S. continue to practice discipline with their drilling activity even in the face of significantly higher commodity prices. To put this into perspective, oil prices are now well above pre-COVID levels, but the U.S. land rig count is 39% below year-end 2019 levels. Furthermore, natural gas prices are trading at multiyear highs, driven primarily by increased power demand in the U.S. and surging exports of LNG to Europe and Asia. Given that a significant portion of our daily production is natural gas, we expect this improved pricing to benefit our cash available for distribution in Q3 2021 and into the winter months based on the current strip pricing.

A couple of months ago, we rolled out the results of our deep dive into our inventory by our technical team, which resulted in over 10,160 gross, 68.14 net upside in major locations and 19 years of drilling inventory, holding production flat at 4.5 net wells per year. Davis will discuss this further in a moment.

Today, we are providing updated guidance regarding the expected favorable tax treatment of future earnings and distributions to common unitholders. We are pleased to report that we do not expect Kimbell to pay a material amount of federal income taxes this year, 2021, through 2027. And also important, we expect that substantially all cash distributions paid to common unitholders from 2021 to 2025 will be free of dividend income taxes and instead be considered a return of capital. We are unaware of any oil and gas company that has given this level of detail with their tax guidance and believe it provides a highly compelling competitive advantage in terms of generating superior after-tax returns to our unitholders.

We are seeing signs of increased activity on our acreage this year, as evidenced by a recent inflow of lease bonuses in Q2 as well as a moderate increase in the Baker Hughes U.S. rig count in late July. We believe the energy sector is finally enjoying the early stages of some tailwinds after many years of challenges, and we are very excited about the future of Kimbell and its prospects for delivering unitholder value for years to come.

As we take a broader view of our company with a backdrop of more positive industry trends and the potential for more industry consolidation, benefiting Kimball specifically, we remain confident in our long-term strategic business model. Kimbell has consistently demonstrated a strong track record of producing a stable growth profile organically in legacy assets as well as acquiring strategic acquisitions in a disciplined fashion in the active basins within the Lower 48. We believe our low PDP decline rate and diversified royalty portfolio is a core competitive advantage for our company in the mineral and royalty space that provides long-term stability for Kimbell. In addition, we plan to remain focused on our role as a major consolidator in the highly fragmented U.S. oil and gas royalty sector, assembling a high-quality, low PDP decline and diversified royalty portfolio generating recurring cash flow with significant growth potential and no capital requirements. Our vision for Kimball since inception has always been long-term focused on sustainability and growth.

I'm also very pleased to announce the launch of Kimbell Tiger Acquisition Corporation, which is a newly formed SPAC sponsored by Kimbell that will search for a target in the energy and natural resources industry of North America. For more information on Tiger, please review the registration statement located at www.sec.gov. Due to the nature of the rules regarding SPACS, we will not be taking questions about it on this earnings conference call.

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

Thanks, Bob, and good morning, everyone.

As Bob mentioned, we are very excited about our second quarter results, and we remain very bullish on the future of our company. Second quarter total revenues were $25.7 million, net income was approximately $3.7 million, and net income attributable to common units was approximately $1.5 million, or $0.04 per common unit. Based on positive trends and improving cash flows in the quarter, we announced a substantially higher cash distribution of $0.31, up approximately 15% from the Q1 distribution in 2021.

As we have done in previous quarters, the company utilized 25% of its Q1 cash available for distribution to pay down a portion of the credit facility in Q2. Since May 2020, the company has paid down $30.6 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash flow to debt paydown. We expect to continue to allocate 25% of our cash available for distribution for debt paydown in the future.

We believe that our hedging strategy is a prudent methodology for managing the company's future price risks on oil and natural gas. Having substantial hedges in place on a rolling 2-year basis, well ahead of the price shocks that occurred in 2020, proved to be a very effective risk mitigation strategy. For the second quarter of 2021, the company's oil, natural gas and natural gas liquids revenues were $38.8 million, which reflected higher second quarter average realized prices of $63.62 per barrel of oil, $2.68 per Mcf of natural gas and $25.79 per barrel of NGLs for a combined per-BOE pricing of $29.50.

Second quarter 2021 average daily production was 14,393 BOE per day on a 6:1 basis, which consisted of 382 BOE per day related to prior period production recognized during the quarter and 14,011 BOE per day of run rate production. The 14,011 BOE per day of run rate production was composed of approximately 61% from natural gas and approximately 39% from liquids, or 26% from oil and 13% from NGLS. The prior period production recognized this quarter was primarily due to new wells outperforming estimates. We had 50 active rigs at the end of the second quarter, led by Permian and the Haynesville basins, up from 49 rigs in Q1. Based on the level of activity we are seeing on our acreage and improved pricing, we are reaffirming our 2021 guidance that we outlined with our Q4 2020 earnings release. As of June 30, Kimball had 799 gross and 1.95 net drilled but uncompleted wells, as well as 703 gross and 2.67 net permits on its acreage. This data does not include our minor properties, which we estimate could add an additional 20% to the DUC and permit inventory.

On the expense side, general and administrative expenses were $6.7 million in the quarter, $3.9 million of which was cash G&A expense, or $3.09 per BOE. Second quarter consolidated adjusted EBITDA was $28.1 million, an increase of 8% compared to the prior quarter and a new record for the company. Net income for the second quarter was approximately $3.7 million, and the net income attributable to common units was approximately $1.5 million, or $0.04 per common unit. The $0.31 per common unit distribution this quarter reflects a 75% payout of cash available for distribution. We will use the retained amount, 25%, to pay down a portion of the outstanding borrowings under Kimbell's credit facility.

As in previous quarters, our focus is to manage our liquidity and balance sheet in a disciplined manner, especially given the broader market shocks experienced in 2020. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release.

Looking now at the balance sheet and liquidity, as of June 30, 2021, we had approximately $162.9 million in debt outstanding under our secured revolving credit facility, with net debt to second quarter trailing-12-month consolidated adjusted EBITDA of approximately 1.7x. As of the end of the second quarter, we have approximately $102.1 million and undrawn capacity under our secured revolving credit facility.

On July 7, 2021, we successfully completed the redemption of 55% of the outstanding Series A cumulative convertible preferred units for an aggregate redemption price of $36.1 million. The redemption was funded through a borrowing on our secured revolving credit facility. We expect to redeem the remaining preferred units in early 2022, further simplifying our capital structure and significantly reducing our cost of capital.

Finally, a couple of months ago, we shared with investors an extensive independent review of our portfolio of assets. To quickly provide some background here, our team, in coordination with Ryder Scott, a highly respected global engineering firm -- we embarked on a deep dive of our inventory property by property throughout the Lower 48. We discussed 2 key takeaways last quarter from that study. First, the report demonstrated that we have more than 15 years of drilling runway and our current inventory at the 2019 drilling pace and, second, the detailed report included metrics illustrating that it will take a relatively low number of active new wells to maintain flat production due to our superior PDP decline curve. Only approximately 4.5 net wells each year are needed. At 4.5 net wells per year, we have approximately 19 years of drilling inventory.

The results from this independent review of our assets should provide investors with further confidence regarding our long-term business model and the company's ability to generate future cash flow and distributions, which is, of course, important to us.

In summary, we are very optimistic about the future of our industry, given rapidly improving fundamentals across the U.S. energy sector. We are also excited about the opportunities to further expand our acreage footprint and deliver compelling value to our unitholders for years to come. Kimbell will continue with our goal and focus of generating long-term value and cash generation with transparency to investors for many years.

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

(Operator Instructions) Our first question comes from the line of Chris Baker with Credit Suisse.

Appreciate the update this morning, some solid results. My first question is for Davis. I was hoping you could give us an update on what you're seeing on the mineral acquisition front currently. Just curious how that's evolved over the past few months and if you think we're likely to see KRP get another large-scale opportunity over the line later this year.

Yes, it's a great question. As you know, Chris, I think we've acquired more properties over the last 5 years than anyone else in the space, candidly, at least on the public side. We've averaged over, I want to say, $150 million a year of M&A since we went public per year.

This year has been tough. There hasn't been a single significant publicly announced mineral transaction year-to-date by us or any of our peers on the public side. I think that's a combination of a few things. I think first and foremost, I think the public mineral companies, all of us, not even just us specifically, but perhaps us maybe the most, are dramatically undervalued. I mean you're looking at -- what are we trading at now? An 11.5% dividend yield, which is a 15% free cash flow yield. But even that 11.5% dividend yield is completely tax-free for us. So divide that by 0.63, it's an 18% taxable dividend on our stock. I mean, this is -- we're getting into a Looney Tunes level valuation. So we're at a point where we're looking at our assets and we're valued at a mid-teens yield. We'd be better off buying our own stock.

So we want to pay off the pref we have with Apollo. We've indicated repeatedly that we're going to do that within the next 6 months, most likely, subject to market conditions. At that point, what do we do with the residual 25% of cash flow that we have? Are we going to go buy minerals at something better than a PV 15 or 16 on assets that we already own and know intimately, or do you take a risk and try to get better returns on the private side? I don't know. I mean, I think that's something that we and the board are looking at.

I think private sellers, too, candidly, have been very disappointed with the bids they're receiving from us and others. Obviously, if we're trading at a 15% yield, we can't buy somebody for more than, what, 6x cash flow. So we've been looking at a few deals, and we're not even losing to our peers. It's that sellers are saying -- why would I sell my asset at a 20% yield?

So the public comps, ourselves included, set the tone for valuation for the rest of the space, particularly on assets that have existing production. And when our valuation is so out of whack, it's just harder to get sellers to accept that fact. That being said, I think on the equity side, I think that what we're trying to convince sellers of is if you take our stock, you're exchanging your interest in a concentrated position with something that's more liquid, more diversified, actively managed, your yield that you're getting now, which is taxable, you now are arbitraging into a nontaxable entity.

So I'm not shutting the door on M&A this year. I'm just saying that it's been difficult, and it hasn't just been hard for us. It's been hard for all of our peers. That will change. I'm looking at Bob for some perspective on this. But it's not uncommon for the mineral industry to go through periods of time where the bid-ask spread is so draconian that people just aren't able to get deals done. So . . .

Chris, it's Matt Daly. One more comment about the (inaudible) spread Davis said is that we price acquisitions using the strip. And the strip right now is in a pretty severe backwardation, oil in the $50s in the out years. A lot of these sellers are assuming a $70 oil flat forever, and that's just not realistic based on the strips. That's one cause of this so-called bid-ask spread right now.

Okay. Great. No, that's helpful. And then just as a follow-up, maybe for Bob or Davis, whoever wants to grab it. Any color you can share on maybe how the first half of next year is shaping up, given where the activity backlog is today and what you've seen historically in terms of conversion rates?

Good to excellent.

Yes.

I mean, what everybody is forgetting about, we're, what, 65% gas production right now and gas is at $4.20. I mean, people are going to start going bonanza on gas plays. I think that's -- and I think that's very well reflected in the outlook for our production. I mean, is there anything that we see, guys, anybody around the table, that's negative on our production? I mean, we just went up sequentially quarter-over-quarter better than the, quote, growth stocks that we trade against. No, I mean we feel very good about the future.

(Operator Instructions) Our next question comes from the line of Derrick Whitfield with Stifel.

So for my first question, I wanted to focus on your rig count market share as your gains and the past trajectory have been quite strong. Is there anything that you're seeing in the data, a trend, that would explain the slight dip in Q2? Or is it likely just temporary in nature?

This is Matt Daly. We think it's just a slight dip to temporary. We generally range between 11% and 12% market share on the U.S. (inaudible) rig count. So there's nothing -- we believe this is a temporary dip. The rig count between 6/30 and July 30 is up about 4%. So assuming we keep that consistent sort of 11%, 12% market share of the Lower 48 and based on the increase in the rig count between June 30 and July 30, we would expect our rig count to go from 50 to something slightly higher, but we'll see how it shakes out.

Derrick, I'll add -- I agree with everything Matt just said. This is Davis. We also -- so tracking the rig count is a useful metric for us. It is. And I'm glad that you're asking about it, that you focus on it. But keep in mind, we literally do that analysis, one of our geologists does, on one day. So it's the day that the quarter ends. So the day before or the day after, the rig count could be different. We just don't know. You see what I'm saying. So it's imperfect. It's a helpful metric. It's imperfect in nature. So I just -- I wouldn't -- and I would say the exact same thing if our rig count market share was up. I would hedge that by saying that on that particular day it appeared to be up relative to that particular day the quarter before. So it's helpful. I just wouldn't read too much into it unless we start seeing some sort of massive trend, which will start being -- which would, of course, be obvious one way or the other. So.

Makes complete sense. As my follow-up, perhaps shifting over to the lease bonuses in Q2. Could you offer any color on the new activity and the potential for sustained bonuses based on the activity in those areas?

Who wants to take that?

Yes, I'll take that. So the lease bonuses, the color there, the major area that we got a lease bonus was in Martin County, Texas, about, call it $0.5 million bonus. We had some other -- 2 big bonuses come in in Wyoming and Campbell County and Converse County, Wyoming. And obviously, so a fair amount of -- call it 11 total lease bonuses came in during the quarter. So that was a big increase in activity relative to Q1. That's a good sign for activity that's going to sort of come later this year.

So in terms of the sustainability of that, I mean, with prices at $0.70 and gas at $4.20, we think that -- hopefully, that will continue for the latter part of the year, maybe not quite that high, but certainly good.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

This is Bob Ravnaas. We thank you for joining us this morning and look forward to speaking with you again when we report third quarter results. This completes today's call.

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