Kimbell Royalty Partners, LP — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Kimbell owns non-cost-bearing mineral and royalty interests in U.S. oil and gas properties; it reported one operating segment. Its portfolio covered approximately 11.4 million gross mineral and royalty acres and 4.7 million gross overriding-royalty acres, with interests in about 122,900 gross wells.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Oil, natural gas and NGL sales | $65.1 million | $36.4 million |
| Net commodity-derivative loss | $32.0 million | $14.1 million |
| Total revenue, including derivative losses | $33.8 million | $22.4 million |
| Operating income | $8.1 million | $2.0 million |
| Net income | $8.4 million | $0.5 million |
| Operating cash flow | $36.0 million | $15.5 million |
| Cash and cash equivalents at quarter-end | $13.5 million, including $3.0 million held by consolidated entities | $8.1 million |
- Production was 1.403 million Boe, or 14,482 Boe/d, up 13.6% from 1.235 million Boe. Average realized prices reported by Kimbell rose to $86.08/Bbl for oil, $4.76/Mcf for natural gas and $40.57/Bbl for NGLs.
- Operating margin was approximately 24% of reported total revenue. That denominator reflects the substantial derivative loss; oil, gas and NGL sales before derivatives were $65.1 million.
- Common-unit earnings require care: the statement reports $7.3 million attributable to common units before a $16.3 million accretion of TGR redeemable noncontrolling interest. The EPS note therefore calculates a post-accretion loss of $9.0 million and loss per unit of $0.20. The filing’s presentation is easy to misread.
- Quarter-end long-term debt was $226.5 million under the secured revolver; reported unused capacity was $48.5 million. The Partnership was covenant-compliant. It drew another $17.1 million on April 29, after quarter-end. Current assets were $56.6 million and current liabilities $49.0 million, including significant derivative liabilities.
- Quarter-end derivative fair value was a net liability of $45.3 million. Operating cash flow benefited from higher commodity prices; investing cash flow was heavily affected by $236.9 million of TGR trust investments. Consolidated cash should not be equated with cash freely available to Kimbell: TGR trust funds are for TGR purposes.
Material changes and unusual items
- Oil, gas and NGL sales rose 79% year over year, reflecting higher prices and a 13.6% increase in production. Management attributed production growth partly to the Haynesville, Mid-Continent, Bakken and Rockies, and noted lower Permian production.
- Commodity-derivative losses increased to $32.0 million, including $22.5 million of mark-to-market losses and $9.5 million of settlement losses. Kimbell said rising forward prices drove the mark-to-market losses. Derivatives are not designated as accounting hedges, so fair-value changes affect current earnings.
- The December 2021 Cornerstone Acquisition contributed to higher depletion expense and production-related costs. Kimbell reported no oil and gas property impairment for either comparative quarter.
- TGR completed a $230 million SPAC IPO in February 2022. Its consolidation added approximately $237.0 million of trust investments and $236.9 million of redeemable noncontrolling interest to the balance sheet. TGR has 15 months after the IPO to complete a business combination, with possible extensions under specified circumstances.
- Common units outstanding increased during the quarter, including conversion of 9.36 million Class B units. The Board declared a $0.47-per-common-unit Q1 distribution, paid May 9, 2022; the comparable Q1 2021 distribution was $0.27.
- The Springbok joint venture sold its royalty interests on April 29, 2022, for $14.8 million; Kimbell reported net proceeds of $6.4 million.
Outlook, risks and contingencies
- No specific earnings, production or commodity-price guidance is provided. Management said the Board intended to allocate some future cash available for distribution to revolver repayment; for Q1, 25% of cash available for distribution was allocated to debt repayment. Distribution policy remains subject to Board discretion, debt restrictions and operating needs.
- Kimbell reported a $0.47 Q1 distribution per common unit. Cash available for distribution, a non-GAAP measure, was $36.4 million versus $14.7 million in Q1 2021; it is not equivalent to GAAP cash flow or a guaranteed future distribution.
- Commodity prices, operator drilling and production decisions, reserve estimates, acquisitions, and the COVID-19 pandemic remain risks. The Russia-Ukraine conflict and related sanctions added uncertainty and volatility to energy markets. Kimbell said it could not reasonably estimate the pandemic’s potential effects.
- Commodity swaps covered approximately 29% of daily oil and gas production at March 31. A $150 million interest-rate swap fixed that portion of revolver exposure at approximately 3.9% through January 2024. Kimbell estimated a 1% rate increase on quarter-end debt would raise annual interest expense by about $2.3 million, assuming debt stayed constant.
- The May 2022 borrowing-base redetermination was still underway and expected by the end of May. A further $17.1 million revolver draw occurred April 29. Management said it did not expect the LIBOR transition to materially affect the Partnership.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. It was not aware of legal, environmental or other contingencies expected to materially affect its financial condition, results or liquidity.
Important facts for investors to verify
- Reconcile the reported $7.3 million common-unit income with the $0.20 per-unit loss, including the $16.3 million TGR redemption-value accretion.
- Assess how the fixed-price swaps and their $45.3 million net fair-value liability affect realized cash flows and exposure to higher commodity prices.
- Confirm revolver capacity and borrowing-base terms after the May redetermination and the April $17.1 million draw.
- Distinguish Kimbell’s operating liquidity from TGR trust assets and consider TGR’s business-combination deadline, redemption terms and consolidation effects.
- Evaluate the sustainability of the $0.47 distribution against debt repayment, cash available for distribution, Board discretion and commodity-price volatility.