Business Context and Reporting Period
This Form 8-K, filed on August 2, 2023, reports material definitive agreements entered into by Kimbell Royalty Partners, LP ("Kimbell"). The filing details a major acquisition and a concurrent private placement financing transaction intended to fund the purchase.
Key Financial Metrics and Transaction Terms
- Acquisition Price: Approximately $455 million in cash (unadjusted) to acquire all membership interests of Cherry Creek Minerals LLC from LongPoint Minerals II, LLC.
- Financing Proceeds: Up to $400 million in gross proceeds from the issuance of Series A Cumulative Convertible Preferred Units. This includes a firm commitment of $325 million and an option for an additional $75 million.
- Preferred Unit Terms: Issued at $1,000 per unit with a 6.0% annual cumulative distribution rate. The rate increases to 20.0% per annum upon failure to pay distributions or material breach.
- Acquired Production (as of June 1, 2023): Estimated 4,840 Boe/d (1,619 Bbl/d oil, 1,227 Bbl/d NGLs, 11,964 Mcf/d natural gas).
- Projected Cash Flow: Estimated $64.3 million for the twelve months ending June 30, 2024, based on strip pricing as of July 26, 2023.
- Asset Scale: The acquired company holds approximately 49,658 net royalty acres and 1,613 gross producing wells in the Delaware and Midland basins, plus 2,434 gross producing wells in SCOOP/STACK.
Material Changes and Strategic Impact
- Production Growth: The acquisition is expected to increase Kimbell's average daily net production by approximately 28% as of June 1, 2023.
- Commodity Mix: The deal is projected to balance Kimbell's commodity mix to approximately 50% liquids (33% oil, 17% NGLs) and 50% natural gas for the next twelve months.
- Inventory Expansion: The transaction will increase Kimbell's total net drilled but uncompleted wells and permitted location inventory by 37% to 9.41 net wells and increase major drilling inventory by 25%.
- Cost Efficiency: Estimated reduction in general and administrative expenses by approximately 22% per Boe.
- Capital Structure: Introduction of a new senior class of Preferred Units with distribution rights senior to Common Units, including specific voting rights and conversion features.
Outlook, Risks, and Contingencies
- Closing Conditions: The acquisition and private placement are subject to customary closing conditions and are expected to close in the third quarter of 2023, with an effective date of June 1, 2023.
- Preferred Unit Conversion: Holders may convert units to Common Units after the second anniversary if the Common Unit price is at least 130% of the $15.07 conversion price. Kimbell may force conversion if the price exceeds 160% of the conversion price.
- Redemption Rights: Units may be redeemed after seven years or upon a change of control at a price calculated to achieve a Minimum IRR (ranging from 12.0% to 14.0% depending on the anniversary) or 1.2x return on investment.
- Risks: Risks include failure to close the transaction, inability to realize anticipated benefits, integration challenges, and standard oil and gas operational risks (e.g., price volatility, reserve estimation accuracy).
- Reserve Estimates: Proved reserve estimates for the acquired assets will be prepared by Ryder Scott Company, L.P., as of December 31, 2023, and may differ from current management estimates.
Investor Verification Checklist
- Verify the final closing date and confirmation that all conditions precedent have been satisfied.
- Review the audited historical financial statements of LongPoint Minerals II, LLC (Exhibits 99.2 and 99.3) for historical performance validation.
- Examine the unaudited pro forma financial information (Exhibit 99.4) to understand the combined entity's financial position.
- Confirm the final number of Preferred Units issued and the exact cash proceeds received.
- Monitor the accuracy of the 4,840 Boe/d production estimate and the $64.3 million cash flow projection against actual post-closing performance.
- Assess the impact of the Preferred Unit covenants on Kimbell's future ability to incur debt or issue senior securities.