Kimbell Royalty Partners LP (KRP) 2021 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. 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 third 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, November 4, 2021. 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 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 press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are detailed 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 these metrics can be found at the end of today's 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; and Blayne Rhynsburger, our Controller. I will begin today's discussion by providing comments about our third quarter before turning the call over to Davis to walk you through our financials in more detail.

For the third quarter, Kimbell had record oil, natural gas and natural gas liquids revenue, record consolidated adjusted EBITDA, record net income and record cash available for distribution per common unit. The company was positively impacted by surging commodity prices, especially natural gas, that contributed to our record quarter.

The operational momentum we identified in our last call continued, as evidenced by the 20% increase in our rig count at the end of the quarter compared to the end of the second quarter, led by natural gas-driven basins such as the Haynesville and Mid-Con. Our operational momentum today resulted from seeds planted in July 2018 with the completion of the Haymaker acquisition, which provided a world-class mineral position in the core areas of the natural gas-heavy Haynesville shale. That transformational acquisition more than 3 years ago is proving very fortuitous in this market environment.

For the third quarter, our run rate average daily production was 14,083 BOE per day on a 6:1 basis and was composed of approximately 62% from natural gas and 38% from liquids, of which 25% from oil and 13% from NGLs. The prior-period production recognized in the third quarter of 2021 was primarily due to new wells outperforming previous estimates, reflecting our continued conservative approach for new wells.

The combined momentum of improved pricing and production as well as controlling costs drove the positive operating leverage and expanded consolidated adjusted EBITDA to a record $33 million, an increase of 18% compared to the second quarter. We also had record cash available for distribution for the third quarter of $0.50 per common unit and declared a distribution of $0.37 per common unit or 75% of cash available for distribution, which was a 19% increase sequentially from Q2.

Tailwinds continue in the global energy sector and fundamentals across the U.S. energy complex continue to improve. Inventory levels are low, rig count growth is tepid and operators continue to focus on balance sheet strength and free cash flow generation. Having said that, we do see drilling activity from private operators outpacing that of public company operators as they move more quickly to capitalize on higher commodity pricing and build scale.

As of the end of the third quarter, private operators comprised 43% and public operators 57% of our active rig count. Overall, we believe this energy up cycle will last longer than previous cycles. Also, we believe that modest increase in investment that is expected in 2022 will only serve to largely replace the significant depletion in drilled but uncompleted wells in the U.S. rather than providing much in the way of oil and natural gas production growth in the Lower 48 next year.

The oil and natural gas royalty sector is particularly well positioned to benefit from this cycle since we participate in the upside from commodity price inflation, but do not experience the cost inflation that is currently being experienced by both the energy services and upstream sectors. We remain very bullish about the future of our space.

In particular, we are optimistic regarding our differentiated business strategy that has consistently demonstrated a strong track record of production stability in our legacy assets as well as acquiring strategic portfolios, such as our Haymaker acquisition in 2018, in a disciplined fashion across active basins. 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.

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 growth potential and no capital requirements. This year has been challenging for acquisitions in the minerals and royalty industry.

In fact, there has only been one significant publicly announced minerals transaction year-to-date in our space on the public side. We've been in this business a long time and have seen many different market cycles. This current situation is not necessarily uncommon. The minerals industry does go through cycles, where the bid-ask spread is so significant that people just aren't able to get deals done.

However, history has demonstrated that the pendulum will swing the other way and often very quickly. And when it does, we'll be ready. Our long-term vision for Kimbell since inception has been a focus on sustainability and disciplined growth, and we will continue to be highly opportunistic in this mission.

With modest growth forecasted for well production in the Lower 48, we believe that our production stability and flat PDP decline rates will be a winning theme for energy investing rather than the hyper-growth models of the past. As we disclosed previously, the results of our inventory evaluation of our portfolio, in coordination with Ryder Scott, a global engineering firm, illustrated that it will take a relatively low number of new net wells to maintain flat production due to our superior PDP decline curve.

The results from this evaluation demonstrated that only approximately 4.5 net wells per year are needed to keep our production flat. And at this level, we have approximately '19 years of drilling inventory. This strengthens our belief and confidence that Kimbell was built for these conditions. We look forward to finishing the year strong and continue to be very excited about the future of Kimbell and its prospects for delivering unitholder value for years to come.

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 quarterly results for the company in terms of both improving sequential operating metrics as well as record financial results.

Third quarter total revenues were $31.8 million. Net income was approximately $7.5 million, and net income attributable to common units was approximately $1.8 million or $0.04 per common unit. Based on positive trends and improving cash flows in the quarter, we announced a significantly higher cash distribution of $0.37, up approximately 19% sequentially from Q2.

As we have done in previous quarters, the company will utilize 25% of its Q3 cash available for distribution to pay down a portion of the credit facility. Since May 2020, the company has paid down $36.9 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution to debt paydown, and we expect this capital allocation strategy to continue.

For the third quarter of 2021, the company's oil, natural gas and natural gas liquids revenues were $47.6 million, up 23% sequentially from Q2. This primarily reflected higher third quarter average realized prices of $68.31 per barrel of oil, $3.86 per Mcf of natural gas and $28.77 per barrel of NGLs for a combined per BOE pricing of $35.16.

Third quarter 2021 average daily production was 14,810 BOE per day, which consisted of 727 BOE per day related to prior-period production recognized during the quarter and 14,083 BOE per day of run rate production. The prior-period production recognized this quarter was primarily due to new wells outperforming estimates.

We had 60 active rigs at the end of the third quarter, led by the Permian and Haynesville basins, which was up 20% from Kimbell's 50 rigs at the end of Q2. Our continental U.S. rig count represents 11.7% of total market share for rigs drilling in the Lower 48, up from 10.9% at the end of Q2.

Based on the level of activity we are seeing on our acreage and improved pricing, we are reaffirming our 2021 guidance that we outlined earlier in the year. As of September 30, Kimbell had 770 gross and 1.69 net drilled but uncompleted wells as well as 674 gross and 3.02 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 $6.8 million in the quarter, $4 million of which was cash G&A, or $3.09 per BOE, which was flat from Q2. Third quarter consolidated adjusted EBITDA was $33 million, an increase of 18% compared to the prior quarter, and a new record for the company.

Record net income for the third quarter was approximately $7.5 million, and the net income attributable to common units was approximately $1.8 million or $0.04 per common unit. The $0.37 per common unit distribution this quarter reflects a 75% payout of cash available for distribution. We will use the retained amount to pay down a portion of the outstanding borrowings under Kimbell's credit facility.

Our capital allocation strategy continues to be focused on prudent management of the company's liquidity and balance sheet as a risk mitigation against future uncertainties. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release.

Commenting further on our balance sheet and liquidity. As of September 30, 2021, we had approximately $180 million of net debt and 1.7x debt-to-Q3 trailing 12-month consolidated adjusted EBITDA. At the end of the third quarter, we have approximately $72.3 million in undrawn capacity under our secured revolving credit facility.

Further to our balance sheet and capital structure work earlier this year, we successfully completed the redemption of 55% of the outstanding Series A cumulative convertible preferred units during Q3, and the redemption was funded through a borrowing from our secured revolving credit facility. We expect to redeem all remaining Series A cumulative preferred units outstanding in Q1 2022, further streamlining our capital structure and reducing our overall cost of capital.

Before we open the call to questions, I would like to reiterate our guidance regarding the expected favorable tax treatment of future earnings and distributions to common unitholders that we provided last quarter. 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.

Kimbell's current asset base as well as global energy sector tailwinds across the broader U.S. energy sector continues to give us confidence in our ability to generate strong operational results and cash distributions for unitholders for many years to come. As Bob said, we believe this energy up cycle will last longer than previous cycles, and forecasted modest increases in investments by U.S. operators expected in 2022 will only serve to replace the significant depletion in DUCs rather than lead to much in the way of new production in the continental United States next year.

Kimbell, unlike many others in this sector, was built for this environment and will significantly benefit from commodity price inflation without the significant downside risk of further input cost inflation, which is truly unique to our model. Kimbell will continue with our goal and focus of generating long-term value and cash generation with transparency to investors for many years to come.

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

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

I just wanted to circle back on some of the acquisition comments Bob made earlier, just mostly curious if you've seen the bid-ask spread narrow at all over the past few months. And any additional color around what you're seeing on the M&A front would be great.

We have -- I'd say, it's heating up pretty substantially very recently, frankly. I don't know if that's driven by year-end tax. This is Davis, by the way. I don't know this is driven by year-end tax purposes, people wanting to close deals out or what. I think it's also that sellers are getting a little bit more accustomed to where the public comps are trading right now, right?

So for us, we're trading at, what, 7.5x distributable cash flow. In the past, 5, 6 years ago, for good quality royalty packages, people wanted 10x. And unfortunately, that's just not where the universe is right now.

So we're seeing things getting better. I think we're encouraged by that. We're very active in the marketplace at any given time. We're talking and negotiating with various sellers at any time. But the reality is, we just have to be very, very, very conservative and, frankly, low on bid prices to make sure that any deals if we do them are very obviously accretive.

So I'd just say the bar is high for getting deals done. That's why I think now, we've seen 2 deals this year by public companies. But only 2, which, I think, is surprising to a lot of folks. I think it's heading in the right direction, and we're hopeful that things continue to move that way.

Great. And just as a follow-up, I realize it's still early days, but it looks like a nice uptick in the activity backlog. Any color around how you guys are thinking about '22 -- 2022 growth, just given what looks like a backlog well in excess of what you need to hold production flat?

Yes, feeling good about that. Thank you for observing that. Shocked, by the way. We have a record number of records this quarter, and we woke up and our stock is down. So that's a lot of fun for us. So I feel bad for our shareholders, but I think this creates a nice buying opportunity for a lot of folks.

As we look at activity in '22, given where gas prices are and just given -- I mean, again, we're unaware of anyone that has a better position in the Haynesville. We have a lot of high-interest units there. I think we're going to expect to see some pretty robust drilling and completions.

We've got a lot of acreage, particularly in the Red River Parish under GEP, which was obviously recently acquired by Southwestern. I just -- I would be dumbfounded if we didn't see some big positive results, particularly on the gas side in that basin. Anybody else want to add anything to that?

No, I'll just say that, I mean, that's also tempered with the fact that most operators are trying to be relatively flattish next year. But yes, Davis is totally right. The gassy areas in the Haynesville and Mid-Con are definitely seeing the most rig count growth for us right now.

Yes. So Chris, long answer. We try to be -- we're not the team -- you've known us for a while now. We don't promise hyperbolic growth. I think that's silly. We try to be conservative with the forecast we put together. I don't think -- the higher prices would have us be a little bit more aggressive, I think, on what we're expecting for activity, but anything we put out there for 2022 guidance is going to be conservative. We've never -- I don't think we've ever failed to meet guidance. So.

Great. No, I appreciate it. And if I could just sneak one more in. Any comments around how you're thinking about the payout ratio once the remaining preferred is redeemed? Just any color around the puts and takes and potential to see maybe a buyback if you see continued weakness in the share price here would be great. And I'll leave it there.

Yes. No, good question, and you can keep asking if you want. There's only 15 people on the conference call right now. So you can keep asking questions, just no one's paying attention to this. I would say that we intend to take out the pref probably in the -- we said first quarter, but realistically, it's going to be the first week of January.

So we'll be -- we've been very grateful for Apollo's partnership, but we plan to redeem the rest of that pref in the first quarter of January, so we're 60 days away. It's almost done. And then I think we'll continue to pay down debt for a little while. But to your point, we may opportunistically shift cash flow to a buyback instead of debt paydown, if we're trading at ridiculously low valuations.

And we still want to be active on M&A. So we are still placing bids on packages. They're just low bids. And the only way that we're going to get them done is if a seller accepts a discount, obviously, to where we trade here today. So I wouldn't be surprised to see us do some M&A using our stock. I wouldn't be surprised to see us buy back stock, too, at some point next year.

I think we want to get our leverage to kind of a bulletproof level. I think people have been concerned about the -- which doesn't make sense to me, but concerned about the overhang associated with the pref. So I just want to reiterate, unless something crazy happens, we intend to get that out of the way in the next 60 or so days. And then I think it's kind of onward and upward from there. I mean, Matt or Bob, anything to add?

No, totally nailed it.

So I mean, I'm just going to add to this. I never felt better about the state of our business ever. I mean, it's wonderful to see activity on our acreage. It's been wonderful to see gas price uptick. We've been criticized in the past for being 61% natural gas.

When we bought Haymaker back in, when was it, 2018, it was very out of favor. The minerals that we acquired there were mostly Chesapeake related. They were underneath Abry's position that he put together back in kind of the heyday of the Haynesville. He didn't sold -- they didn't those minerals to the Haymaker team, and then we bought them from the Haymaker team.

So just -- I just think we haven't a world -- I mean, again, I don't know anyone who has a better Haynesville position than we do. And we feel good about the price realizations there. I mean, you've seen that in the data. It's been wonderful. So I think kind of across the board and -- I haven't felt better about the business ever. The tax shield remains in place. We're trading at a 10% dividend yield right now, that's tax-free. I just don't know where else you can find that.

The company's leverage is in a very reasonable position and continues every quarter to improve. The free cash flow yield is even higher. So -- and again, all nontaxable return to capital, so we think it's a wonderful investment. We're managing this in as conservative a way as possible. And if you see us buy anything, it's going to be at a price that I think any rational human being would say is incredibly attractive. So anything else? Bob, do you want to add thing?

No.

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

Thank you very much. Look forward to a very good fourth quarter call in 3 months.

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.