Kimbell Royalty Partners, LP — Q3 2018 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2018. Kimbell owns non-cost-bearing oil, natural gas and NGL mineral and royalty interests. On July 12, it completed the approximately $444 million Haymaker acquisition, adding about 5.4 million gross acres and 43,000 net royalty acres. On September 24, the Partnership’s federal tax status changed from pass-through to taxable corporation; the operating business remains in a partnership-taxed subsidiary. Comparisons are affected by the acquisition and, for nine-month 2017, by predecessor-only results before the 2017 IPO.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Oil, gas and NGL revenue | $21.1 million | $8.2 million | $42.7 million | $20.5 million |
| Total revenue, including derivative losses | $18.4 million | $8.4 million | $40.0 million | $20.7 million |
| Operating income (loss) | $2.8 million | $0.3 million | $(47.8) million | $1.1 million |
| Net income (loss) attributable to common units | $(3.7) million | $0.1 million | $(55.2) million | $0.7 million |
| Basic and diluted loss per common unit | $(0.15) | $0.01 | $(2.91) | $0.04 |
| Adjusted EBITDA (non-GAAP) | $14.0 million | $5.3 million | $29.3 million | $12.8 million |
| Cash available for distribution (non-GAAP) | $12.0 million | $5.1 million | $26.3 million | $12.6 million |
Q3 operating margin was approximately 15%; common-unit net margin was approximately negative 20%. The filing’s nine-month net loss primarily reflects a $54.8 million oil and gas property impairment recorded in Q1. No impairment was recorded in Q3.
- Production: Q3 volumes were 731,253 Boe, or 8,546 Boe/d, up from 303,301 Boe, or 3,297 Boe/d, in Q3 2017. Haymaker contributed approximately 5,002 Boe/d of the increase.
- Cash flow: Nine-month operating cash flow was $18.6 million; investing cash flow was $(200.4) million, including the acquisition; financing cash flow was $192.7 million. The MD&A reconciliation reports Q3 operating cash flow of approximately $0.7 million.
- Balance sheet and liquidity: September 30 cash was $16.5 million; current assets were $34.5 million and current liabilities $6.3 million (about 5.5x current coverage). Long-term debt was $148.3 million; cash-adjusted net debt was about $131.8 million. The amended revolving facility had $200 million commitments and a $200 million borrowing base, subject to covenants and redetermination.
- Margins and costs: Q3 oil and gas revenue rose mainly on acquisition-driven production and higher oil prices; average realized oil price rose 47.4% year over year, while natural gas price fell 8.2%. Q3 G&A rose to $4.9 million from $2.3 million, including $1.4 million of Haymaker transition-service costs.
- Distributions: Common-unit distributions were $0.42 per unit for Q1 and $0.43 for Q2. A $0.45 per-unit Q3 distribution was declared October 26, payable November 12. Preferred-unit cash distributions were $0.7 million for the quarter.
Material changes versus prior periods
- Haymaker materially expanded acreage and production, funded with cash, 10 million common units valued at $235.4 million, preferred-unit proceeds and borrowings. The reported Q3 includes only part of the post-acquisition period; pro forma results are not a forecast.
- The credit facility was expanded from $50 million to $200 million, and debt rose to $148.3 million at quarter-end. A subsequent October equity offering of 3.45 million units generated approximately $61.8 million net proceeds, used to repay debt; the filing reports $87.3 million outstanding on November 2.
- The Partnership issued $110 million of Series A preferred units carrying a 7% distribution rate, convertible after two years at a 30% discount subject to conditions. Redemption is permitted at the greater of 1.2 times invested capital. Class B holders receive quarterly distributions equal to 2% of their contribution, senior to common distributions but after preferred distributions.
- Q3 derivative losses were $3.0 million; nine-month losses were $3.9 million. The Q3 2017 comparison had no derivatives. The Q3 unit loss also reflects preferred distributions and accretion and the new income-tax provision.
Outlook, risks and unusual items
The filing provides no specific earnings or production guidance. Management’s stated objective is to grow cash distributions through acquisitions and development by third-party operators. The Partnership generally intends to distribute available cash, but has no minimum distribution, may retain reserves, and the board can change or suspend distributions at its discretion. Management cautions that distributions may fluctuate with commodity prices, production, working capital, debt service and reserves.
- Commodity prices and operator drilling, completion and production levels are material uncertainties. Hedges covered about 30% of post-acquisition daily production at September 30; after the October debt repayment, management said coverage was about 25%. Contracts are not designated as accounting hedges, so fair-value changes affect reported earnings.
- The derivative portfolio had one counterparty, also a credit-facility lender; collateral is not required. A 1% increase in interest rates on quarter-end debt would increase annual interest expense by approximately $1.5 million, assuming debt stayed constant.
- The $54.8 million impairment followed the full-cost ceiling test. Future impairment risk depends on commodity prices, reserve estimates and future net revenues; recognized impairment may not be reversed.
- The tax-status change produced a $2.0 million tax provision, including $1.5 million related to the status change and $0.5 million associated with the preferred transaction. The change may affect future taxes and comparability.
- Credit-facility covenants include a maximum debt-to-EBITDAX ratio of 4.0x and a minimum current ratio of 1.0x. Kimbell reported covenant compliance at September 30; borrowing-base redetermination was scheduled for February 1, 2019.
- A mineral-title disagreement concerning non-producing acreage was under assessment; management expected no material impact and recorded no accrual. The filing also identifies risks involving acquisition execution, reserve estimates, title, regulation, transportation and operator access to capital.
Investor verification priorities
- Verify Haymaker’s actual contribution to production, cash available for distribution and future results against pro forma disclosures, and assess integration and acquisition economics.
- Track post-offering debt, facility availability, covenant headroom and the February 2019 borrowing-base redetermination.
- Review preferred-unit distribution, redemption and conversion terms, potential dilution, and Class B distribution priority.
- Assess how the tax election affects entity-level taxes, common-unit economics and reported earnings.
- Check hedge coverage, mark-to-market volatility, counterparty exposure and sensitivity to oil, gas and interest-rate changes.
- Evaluate reserve estimates and impairment exposure, and confirm the status of the acreage-title matter.