Kimbell Royalty Partners, LP — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results. Kimbell owns non-cost-bearing oil and gas mineral and royalty interests; it generally does not fund drilling or well operating costs. Results are substantially affected by commodity prices, production and acquisitions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $31.9 million | $10.7 million | $49.9 million | $21.6 million |
| Oil, gas and NGL revenue | $27.9 million | $10.8 million | $50.7 million | $21.7 million |
| Operating income (loss) | $(18.4) million | $1.9 million | $(22.3) million | $(50.6) million |
| Net income (loss) | $(20.4) million | $1.4 million | $(25.7) million | $(51.4) million |
| Net income (loss) attributable to common units | $(11.8) million; $(0.54) per unit | $1.4 million; $0.08 per unit | $(15.4) million; $(0.78) per unit | $(51.4) million; $(3.14) per unit |
| Adjusted EBITDA attributable to Kimbell (non-GAAP) | $10.6 million | $7.7 million | $17.3 million | $15.3 million |
| Cash available for distribution (non-GAAP) | $9.1 million | $7.2 million | $14.3 million | $14.3 million |
Q2 operating loss was about 58% of revenue. Oil and gas production volumes were 1.07 million Boe in Q2, versus 0.33 million Boe a year earlier; first-half volumes were 1.98 million Boe versus 0.66 million. Management attributed the increases principally to the Haymaker, Phillips and Dropdown acquisitions. Lower realized oil and NGL prices partly offset acquisition-driven revenue growth.
Q2 impairment expense was $28.1 million, compared with none in Q2 2018; first-half impairment was $30.9 million versus $54.8 million. The impairment was primarily attributed to lower 12-month average oil and gas prices and the full-cost ceiling test. Depletion expense was $12.3 million in Q2 and $22.6 million for the first half.
Cash, debt and distributions
- Cash and cash equivalents were $16.9 million at June 30, 2019, compared with $15.8 million at year-end 2018. Current assets were $38.1 million and current liabilities $5.4 million.
- First-half operating cash flow was $39.1 million, compared with $14.2 million in the prior-year period. Investing used $1.4 million and financing used $36.6 million; cash increased by $1.1 million.
- Long-term debt was $87.3 million, unchanged from year-end. The revolver had $225 million of commitments, a $300 million borrowing base and $212.7 million of reported available capacity at June 30. It matures February 8, 2022. The company reported covenant compliance.
- The weighted-average borrowing rate for the first half was 4.74%. A 1 percentage-point rate increase on then-outstanding debt would add approximately $0.9 million of annual interest expense, assuming debt remained constant.
- The board declared a Q2 common-unit distribution of $0.39 per unit, down from $0.43 in Q2 2018. The filing says distributions may fluctuate materially or cease; the partnership does not intend to borrow to fund them or maintain a material distribution reserve.
Material changes, outlook and risks
- Phillips Acquisition: Completed March 25 for approximately $171.6 million of equity consideration, consisting of 9.4 million OpCo common units and 9.4 million Class B units. The acquired interests included approximately 866,528 gross acres and 12,210 net royalty acres. Acquisitions materially affect year-over-year comparability.
- Capital structure: At June 30, 23.1 million common units and 23.8 million Class B units were outstanding. Series A preferred units carry cumulative distributions of 7% annually; redemption terms can require higher returns. Preferred and Class B distributions rank ahead of common-unit distributions.
- Joint venture: Kimbell committed up to $15 million for a 49.3% interest; no investment had been made by June 30. It contributed $2.2 million in July 2019.
- Hedging: Fixed-price swaps covered approximately 20% of daily production. Derivatives are not designated as accounting hedges, so fair-value changes flow through current earnings. First-half derivative results included a $2.2 million loss; Q2 included a $2.7 million gain.
- Commodity and operating risks: Oil and gas prices are volatile, and production depends on third-party operators’ development activity. Further price declines, reserve revisions or ceiling-test calculations could produce additional impairments; prior impairments cannot be reversed under the described accounting treatment.
- Tax and unusual items: The partnership elected corporate federal tax treatment effective September 24, 2018. It recorded a $0.5 million tax provision in the first half, associated with income allocated to Series A preferred units, and reported a full valuation allowance on deferred tax assets. It is not reimbursed by the Operating Company for federal taxes paid by the partnership.
- Other items: Q2 G&A included one-time severance costs, including $0.3 million of unit-based compensation expense and $0.1 million of cash expense. A dispute concerning title to certain non-producing acreage was not expected to have a material financial impact; no amount was accrued.
- No formal earnings or production guidance is provided in the supplied filing text. Management’s stated objective is to grow cash distributions through acquisitions and organic development, but it cautions that distributions depend on operating results, commodity prices, obligations and reserves.
Important facts for investors to verify
- How much of production and revenue growth is attributable to acquired assets versus organic production, and whether acquisitions are delivering expected returns.
- The sensitivity of future earnings and asset values to commodity prices, reserve estimates and additional full-cost ceiling impairments.
- Revolver borrowing-base availability, covenant headroom and refinancing needs before the February 2022 maturity.
- The full cash burden and priority of Series A preferred and Class B distributions relative to common-unit distributions.
- Whether cash available for distribution and the declared $0.39 common-unit distribution are supported by recurring cash generation, given the partnership’s variable-distribution policy.
- Potential effects of the corporate tax election, including taxes allocated to preferred-unit income and the deferred-tax valuation allowance.