Kimbell Royalty Partners, LP — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. The partnership owns non-cost-bearing mineral and royalty interests across U.S. oil and gas basins; its revenue depends on production and prices set by third-party operators. The Springbok Acquisition closed in April 2020.
Financial performance and liquidity
- Revenue: Oil, natural gas and NGL revenue was $92.6 million, down 13.9% from $107.5 million in 2019. Total revenue, including lease income and derivative results, was $90.5 million versus $108.2 million. Production rose 12.3% to 5.07 million Boe (6:1), largely due to acquisitions, but average realized prices fell: oil to $36.98/Bbl from $54.66, natural gas to $1.79/Mcf from $2.21, and NGLs to $12.39/Bbl from $15.96.
- Profit and impairment: GAAP net loss was $256.1 million, compared with a $158.2 million loss in 2019; net loss attributable to common units was $167.4 million, or $4.85 per unit, versus $83.0 million, or $3.92 per unit. The principal unusual item was a $251.6 million noncash oil and gas property impairment, compared with $169.2 million in 2019. Operating loss was $250.7 million. The filing does not present a conventional operating margin that is meaningful apart from this impairment.
- Cash flow and non-GAAP measures: Cash from operations was $62.2 million, down from $80.7 million. Investing cash use was $90.8 million, mainly for Springbok; financing provided $24.2 million. Adjusted EBITDA attributable to the partnership was $42.0 million, and cash available for distribution on common units was $35.4 million. These are non-GAAP measures and are not substitutes for GAAP cash flow or earnings.
- Distributions: Common-unit distributions declared for 2020 totaled $0.68 per unit, versus $1.56 in 2019. The fourth-quarter distribution was $0.19 per common unit, paid in February 2021. The board allocated 25% of fourth-quarter cash available for common-unit distribution, or $3.9 million, to debt repayment. Distributions are not guaranteed; preferred and Class B claims rank ahead of common units.
- Debt and liquidity: Year-end cash was $9.8 million, current assets $28.3 million and current liabilities $8.8 million. Revolver borrowings were $171.6 million, up from $100.1 million a year earlier, against a $265 million borrowing base and facility commitment; reported available capacity was $93.4 million. The facility matures June 2024 and includes financial and distribution covenants. Year-end covenant compliance was reported. Interest expense was $6.4 million. In January 2021, a swap fixed the rate on $150 million of debt at approximately 3.9% through January 2024.
- Reserves: Proved reserves were 42.4 million Boe, down from 43.6 million; all were proved developed producing at year-end. The standardized measure of discounted future net cash flows fell to $285.0 million from $400.0 million, using SEC-required average prices of $39.57/Bbl oil and $1.99/Mcf gas. The company removed all PUD reserves after revising the prior-year 2.65 million Boe of PUDs to zero.
Material changes versus 2019
- Production increased, but lower commodity prices drove oil, gas and NGL revenue down; reported total revenue also declined.
- The 2020 impairment increased by $82.4 million, deepening the net loss. It reflected lower reserve pricing and uncertainty over development, including the removal of PUDs.
- Operating cash flow declined by $18.5 million. Common-unit distributions fell to $0.68 from $1.56 per unit.
- Springbok added production and acreage, funded with cash and equity, while the January equity offering raised $73.6 million net and was used largely to repay revolver debt. The company also redeemed half of its Series A preferred units for $61.1 million.
- Year-end active rigs on company acreage fell to 39 from 81, reflecting industry retrenchment amid COVID-19 and supply-demand disruption.
Outlook, commentary and risks
- Management provided no quantified earnings, production or distribution guidance. It said lower prices and continuing pandemic-related uncertainty could lead operators to reduce drilling, and identified potential adverse effects in early 2021. Management intended to use a portion of future cash for debt repayment, which could further reduce common distributions.
- Key exposures include volatile oil, gas and NGL prices; third-party operators’ drilling and production decisions; reserve and impairment uncertainty; borrowing-base redeterminations and covenant limits; and the ability to replace depleted reserves or make accretive acquisitions. The company has no control over operators and does not fund their drilling or operating costs.
- Commodity swaps covered approximately 32% of daily oil and gas production at year-end. They reduce some price exposure but are not designated as accounting hedges, so fair-value changes affect earnings; they can also limit upside and carry counterparty and volume risk.
- Other disclosed risks include climate and environmental regulation, hydraulic-fracturing restrictions, transportation constraints, cyber risk, and potential conflicts involving sponsors and related-party service providers. The partnership reported no legal proceeding expected to materially affect its financial condition or results.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. The auditor issued an unqualified opinion on the financial statements; no auditor attestation on internal controls was included under the company’s emerging-growth-company status.
Important facts for investors to verify
- Whether commodity prices, production and operator drilling activity support the reserve estimates and reduce the risk of further ceiling-test impairments.
- Borrowing-base redeterminations, revolver availability, covenant headroom and the effect of debt repayment on distributions.
- The sustainability of common distributions after preferred and Class B obligations, debt service and board-set reserves.
- The assumptions behind Springbok’s contribution to production and cash flow, and the effect of acquisition-related unit issuance and exchangeable Class B/OpCo units on dilution.
- The terms and performance of commodity and interest-rate derivatives, including counterparty exposure and hedge coverage.
- Related-party service costs, sponsor conflicts and the concentration of operational decisions among unaffiliated operators.