Kimbell Royalty Partners, LP — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed March 12, 2019. The filing is an annual report, not a standalone fourth-quarter report. FY 2017 comparisons are not fully like-for-like: the Partnership began operating as a public entity after its February 2017 IPO, and acquisitions materially expanded the portfolio.
Business context
Kimbell owns U.S. oil and gas mineral and royalty interests. It receives royalty revenue but generally does not fund drilling, completion, lease operating, or plugging costs. At year-end, it reported interests across approximately 7.8 million gross mineral-interest acres and 4.4 million gross overriding-royalty-interest acres, with 86,495 gross producing wells in 28 states. More than 98% of mineral-interest acreage was leased.
Financial and operating performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $70.3 million | $30.3 million |
| Oil, gas and NGL revenue | $65.7 million | $29.9 million |
| Operating income (loss) | $(48.2) million | $2.5 million |
| Net income (loss) attributable to common units | $(56.8) million; $(3.08) per unit | $1.7 million; $0.11 per unit |
| Adjusted EBITDA attributable to Kimbell | $35.9 million | $19.2 million |
| Cash available for distribution | $32.3 million | $18.7 million |
| Cash from operating activities | $33.2 million | $18.6 million |
| Capital used in investing activities | $(200.9) million | $(125.9) million |
| Cash from financing activities | $177.9 million | $113.0 million |
Revenue growth reflected acquisitions, a full year of Partnership operations, higher production and improved realized commodity prices. Oil, natural gas and NGL revenue increased about $35.4 million; the Haymaker Acquisition contributed $22.2 million of that increase. Total production was 2.21 million Boe on the filing’s 6:1 energy-equivalent basis, or 6,065 Boe/d, versus 1.07 million Boe in the reported 2017 comparison. Average realized prices were $60.17/Bbl for oil, $2.84/Mcf for gas and $25.14/Bbl for NGLs.
Reported loss was driven chiefly by a $67.3 million noncash oil and gas property impairment, alongside $25.2 million of depreciation, depletion and accretion. The impairment included $54.8 million from the first-quarter ceiling test after an SEC exemption expired and $12.6 million associated with the Dropdown acquisition. FY 2018 also included $4.1 million interest expense and $16.8 million general and administrative expense. The filing does not present a single consolidated operating-margin measure as a headline metric.
Balance sheet, liquidity and distributions
At December 31, 2018, cash was $15.8 million, current assets $37.6 million, total assets $753.3 million, total liabilities $91.1 million and long-term debt $87.3 million. The secured revolver had $200 million commitments and a $200 million borrowing base, leaving $112.7 million of availability at year-end. The next borrowing-base redetermination was scheduled for May 1, 2019; the facility matures February 8, 2022. The Partnership reported covenant compliance at year-end. Its covenants include a maximum Debt/EBITDAX ratio of 4.0:1 and a minimum current ratio of 1.0:1.
Common-unit distributions declared for 2018 were $0.42, $0.43, $0.45 and $0.40 per unit by quarter. The fourth-quarter $0.40 distribution was paid in February 2019. Distributions are not guaranteed: preferred and Class B distributions rank ahead of common units, and the Partnership has no minimum quarterly distribution. Series A preferred units carry a cumulative 7% annual distribution; Class B units receive 2% per quarter on the associated contribution.
Material changes, outlook and risks
- Acquisitions and financing: The July 2018 Haymaker Acquisition added approximately 5.4 million gross acres and 43,000 net royalty acres, for cash consideration of approximately $208.6 million plus 10 million common units. The December Dropdown added approximately 1.0 million gross acres and 16,700 net royalty acres for 6.5 million OpCo units and an equal number of Class B units. An October equity offering generated approximately $61.8 million net proceeds, used to repay revolver borrowings.
- Tax status: Effective September 24, 2018, Kimbell elected corporate taxation for U.S. federal income tax purposes; its Operating Company remains a partnership. The change may reduce cash available for distributions through entity-level taxes. The Partnership reported a $0.6 million federal tax-loss carryforward and a valuation allowance against most deferred tax assets.
- Reserves: Proved reserves rose to 37.651 million Boe from 20.954 million Boe, substantially reflecting acquired assets. 89.3% were proved developed producing and 10.7% proved undeveloped. Management chose not to book PUD reserves on assets acquired after 2017 and expects to eliminate existing PUD reserves ratably over four years, moving toward reporting only proved developed reserves; this may contribute to future impairments.
- Outlook: No quantified forward guidance is provided. Management’s stated strategy is to pursue acquisitions and benefit from operator drilling and organic production growth. It expects operators’ development, including infill and horizontal drilling, to support production, but has no operational control over them and does not plan to retain cash for replacement capital expenditures.
- Subsequent event: In February 2019, Kimbell agreed to the Phillips Acquisition, proposed consideration of 9.4 million OpCo units and an equal number of Class B units (approximately $151.3 million stated value). It had not closed when the report was filed and remained subject to closing conditions.
- Key risks and unusual items: Cash generation and distributions are exposed to volatile oil, gas and NGL prices, operator drilling decisions, production declines and acquisition execution. The five-year estimated PDP decline rate was 12%. Further full-cost ceiling impairments are possible, including if commodity prices or reserve estimates weaken. Related-party service arrangements and dropdowns, preferred distribution priorities, revolver restrictions and dilution from equity issuance are also relevant risks. Management reported no material pending legal proceedings or material contingencies.
Important facts for investors to verify
- How much of revenue, production and reserve growth came from acquired properties versus organic activity, and whether the acquisitions are accretive per common unit.
- The basis and sensitivity of the $67.3 million impairment, reserve estimates and planned PUD reserve phase-out; review the independent Ryder Scott reserve report.
- Revolver availability and covenant headroom after the May 2019 borrowing-base redetermination, and the funding and dilution implications of the Phillips Acquisition.
- Cash available for common distributions after preferred and Class B priorities, debt service, taxes and other obligations; distributions are discretionary and may vary.
- The ongoing effect of corporate tax status, including the valuation allowance and future cash tax burden, and the economics and governance of related-party service agreements and dropdowns.