Kimbell Royalty Partners, LP — 2020 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The unaudited filing was signed November 5, 2020.
Business context
Kimbell owns non-cost-bearing mineral and royalty interests in U.S. oil and natural gas properties; it receives royalties but generally does not fund drilling, operating or end-of-life well costs. At quarter-end, it reported interests across about 9.0 million gross mineral and royalty acres and 4.6 million gross overriding royalty acres, spanning 28 states. Springbok, acquired in April 2020, added interests across several basins.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil, natural gas and NGL revenue | $24.3 million | $29.5 million | $66.7 million | $80.3 million |
| Total revenue, including derivatives | $18.4 million | $33.0 million | $67.2 million | $82.9 million |
| Operating loss | $(25.0) million | $(27.3) million | $(158.6) million | $(49.6) million |
| Net loss | $(25.7) million | $(28.9) million | $(162.3) million | $(54.6) million |
| Net loss attributable to common units | $(17.8) million | $(16.3) million | $(105.1) million | $(31.7) million |
| Loss per common unit, basic and diluted | $(0.50) | $(0.73) | $(3.13) | $(1.53) |
| Adjusted EBITDA attributable to Kimbell | $11.2 million | $11.4 million | $30.3 million | $28.7 million |
| Cash available for distribution on common units | $9.6 million | $9.8 million | $25.4 million | $24.1 million |
Q3 production was 1.30 million Boe, down 4.6% year over year; nine-month production was 3.78 million Boe, up 13.1%. Management attributed the Q3 revenue decline mainly to lower realized prices, partly offset by Springbok production. Q3 realized oil and natural gas prices were $38.36/Bbl and $1.76/Mcf, versus $54.87/Bbl and $2.05/Mcf a year earlier. Nine-month realized prices were $36.08/Bbl and $1.70/Mcf, versus $54.65/Bbl and $2.33/Mcf.
Q3 derivative activity reduced reported revenue by $5.9 million, including mark-to-market losses; nine-month derivative gain was $0.2 million. These contracts are not designated as accounting hedges, so fair-value changes affect current earnings. The filing does not provide a single operating-margin measure; reported losses were materially affected by property impairments.
For the nine months, operating cash flow was $47.9 million, down from $64.0 million. Investing cash outflow was $88.8 million, primarily reflecting the Springbok acquisition and joint-venture investment. Financing cash inflow was $39.1 million, including equity proceeds and net borrowings. Cash declined $1.9 million to $12.3 million from year-end 2019.
At September 30, total assets were $665.5 million and total liabilities were $183.2 million. Revolver debt was $169.7 million, compared with $100.1 million at year-end 2019. The $225 million commitment and $300 million borrowing base left $55.3 million of stated availability. Current assets of $29.3 million exceeded current liabilities of $7.8 million. The facility bore interest at LIBOR plus 2.50% or Prime plus 1.50%; the nine-month weighted-average borrowing rate was 3.38%. The Partnership reported covenant compliance.
Material changes and unusual items
- Property impairment was $22.2 million in Q3 and $158.7 million for the nine months, compared with $34.9 million and $65.8 million, respectively, in 2019. The 2020 charge reflected lower commodity-price assumptions and, in the first quarter, uncertainty about PUD development and unevaluated properties.
- The Springbok acquisition consideration included about $95 million cash funded with revolver borrowings, 2.2 million common units and 2.5 million OpCo units paired with Class B units. Acquisition activity helped increase production but also increased debt and unit count.
- Kimbell redeemed 55,000 of 110,000 Series A preferred units in February for $61.1 million. It also issued 5 million common units in a January offering for net proceeds of $73.6 million, primarily used to purchase OpCo units and repay about $70 million of revolver borrowings.
- Series A preferred units outstanding fell to 55,000. Common units outstanding rose to 38.9 million from 23.5 million at year-end 2019; Class B units declined to 20.8 million from 25.6 million.
- The Board declared a Q3 common-unit distribution of $0.19 per unit, payable November 9, 2020. For Q3, it allocated 25% of cash available for distribution—$3.7 million—to revolver repayment. The filing says distribution or cash-allocation policy may change.
- A previously identified material weakness in controls over the full-cost ceiling calculation was reported remediated as of June 30, 2020. Management judged disclosure controls effective at September 30.
Outlook, risks and contingencies
Management expected low oil prices and volatility to persist through Q4 2020 and potentially longer, citing COVID-19 demand disruption, OPEC-related supply changes and storage concerns. It expected a further Q4 property impairment from the full-cost ceiling test; further impairments were possible if prices remained low or declined. A November borrowing-base redetermination was underway, and management intended to request an extension of the revolver, which matures February 8, 2022, before March 31, 2021.
Operators’ drilling, production and shut-in decisions are outside Kimbell’s control. Rig activity on its acreage declined to 30 rigs from 82 a year earlier. Management reported no Q3 shut-in or curtailment notifications, but warned that further reductions in operator activity could affect royalties. About 33% of daily production was economically hedged at quarter-end. Kimbell also disclosed counterparty exposure to one derivative counterparty, which is a revolver lender, and floating-rate debt exposure: a 1% rate increase on quarter-end borrowings would add about $1.7 million of annual interest expense, assuming constant debt.
Management was not aware of legal, environmental or other contingencies expected to materially affect financial condition, results or liquidity. No material legal proceedings were described in the supplied filing text.
Important facts for investors to verify
- Whether the expected Q4 impairment occurred, its size, and any subsequent effects on asset carrying values and reserve estimates.
- The outcome of the November 2020 borrowing-base redetermination, remaining revolver availability, covenant headroom and progress on extending the facility.
- Whether lower commodity prices, operator drilling cuts or well shut-ins further reduced production, royalties or distribution coverage.
- How the Board’s debt-repayment allocation and future distribution decisions affect common-unit cash returns.
- The contribution and financing impact of Springbok and the joint venture, including whether acquisition-related production and cash generation offset added debt and dilution.