Kimbell Royalty Partners, LP — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Kimbell owns non-cost-bearing mineral and royalty interests in U.S. oil and gas properties; it generally does not fund drilling or well operating costs. Management’s objective is to support growing cash distributions through acquisitions and operator development.
Financial performance
- Q2 revenue: Total revenue was $72.7 million, up from $25.7 million in Q2 2021. Oil, natural gas and NGL revenue rose to $78.6 million from $38.8 million, partly offset by a $7.1 million commodity-derivative loss (versus a $14.2 million loss a year earlier).
- Q2 earnings: Operating income was $43.9 million versus $5.6 million; net income was $43.3 million versus $3.7 million. Net income attributable to common units was $37.9 million versus $1.5 million. Basic and diluted earnings per unit were $0.66 and $0.55, respectively, compared with $0.04 for both measures in Q2 2021.
- First-half performance: Total revenue was $106.5 million versus $48.1 million; net income was $51.7 million versus $4.2 million; and income attributable to common units was $45.2 million versus $0.8 million. Basic/diluted earnings per unit were $0.54/$0.42, compared with $0.02/$0.02.
- Drivers and costs: Q2 production increased about 3.9% to 1.36 million Boe, or 14,948 Boe/d. The company attributed revenue growth primarily to higher realized commodity prices, with additional production chiefly from the 2021 Cornerstone Acquisition. Q2 average realized prices were $107.96/Bbl oil, $6.93/Mcf natural gas and $46.10/Bbl NGL. Higher prices also contributed to increased production taxes and marketing deductions. Depletion rose partly because of Cornerstone.
- Cash flow: First-half operating cash flow was $76.5 million, up from $44.0 million. Investing cash outflow was $234.0 million, largely reflecting $236.9 million invested in TGR trust securities; financing cash inflow was $164.6 million, primarily including TGR IPO proceeds. First-half cash available for distribution on common units, a non-GAAP measure, was $78.8 million versus $32.5 million.
- Balance sheet and liquidity: At June 30, cash was $13.3 million at the Partnership and $0.8 million at consolidated variable-interest entities. Current assets were $71.1 million and current liabilities $42.9 million. Revolver debt was $216.1 million, with $83.9 million of stated available capacity under the $300 million facility. The company reported covenant compliance.
- Distributions: The board declared $0.55 per common unit for Q2, payable August 22, 2022. The board allocated 25% of Q2 cash available for distribution—$12.2 million—to revolver repayment. First-half distributions paid to common and OpCo unitholders totaled $54.8 million.
Material changes and unusual items
- The June credit amendment increased the revolving facility and borrowing base from $275 million to $300 million and transitioned its benchmark from LIBOR to SOFR. The facility includes a maximum debt-to-EBITDAX ratio of 3.5:1 and a minimum current-assets-to-current-liabilities ratio of 1.0:1.
- Kimbell consolidated its sponsored SPAC, Kimbell Tiger Acquisition Corporation (TGR), following its February 2022 $230 million IPO. At June 30, TGR contributed $237.2 million of trust investments and $236.9 million of redeemable noncontrolling interest. These balances are not equivalent to unrestricted Partnership liquidity; TGR assets are restricted to TGR purposes, and the filing states there is no recourse to Kimbell for TGR liabilities.
- Kimbell partially terminated an interest-rate swap in May, recognizing a $3.0 million gain. The remaining $75 million notional is fixed at approximately 3.9% through January 29, 2024. Commodity derivatives covered approximately 32% of daily production; net derivative liabilities were $38.7 million at quarter-end.
- Income tax expense was $1.8 million in Q2 and $2.1 million for the first half, which management attributed primarily to higher commodity prices and forecast taxable income. No oil and gas property impairment was recorded in the reported periods.
Outlook, commentary and risks
- The filing provides no specific earnings or production guidance. Management said future results depend substantially on commodity prices, production and operator drilling activity; it cautioned that COVID-19 effects and oil and gas market volatility remain uncertain.
- TGR must complete a business combination by May 8, 2023, with sponsor options to extend the deadline by up to two three-month periods. Failure to complete a transaction could result in liquidation and redemption of public shares from the trust, while warrants could expire worthless.
- Key risks include commodity-price and derivative volatility, changes in operator activity and production, acquisition and reserve-estimation risks, interest-rate exposure, counterparty credit risk, and uncertainty related to COVID-19, the Russia-Ukraine conflict, regulation and inflation. Management reported no known legal, environmental or other contingencies expected to materially affect the Partnership.
- Disclosure controls and procedures were reported effective as of June 30, 2022; the filing reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the sustainability of revenue and distributions if commodity prices or operator production activity decline; distinguish realized production revenue from derivative gains and losses.
- Review the $216.1 million debt balance, $83.9 million facility availability, covenant calculations and sensitivity to floating rates.
- Assess the distribution against cash available for distribution, including the board’s debt-repayment allocation and the non-GAAP nature of that measure.
- Separate restricted TGR trust assets and redeemable public-shareholder interests from Kimbell’s own available liquidity; monitor TGR’s business-combination deadline and outcome.
- Review derivative positions, settlements and counterparty exposure, and confirm how hedges may affect future realized cash flows.