Business Context and Reporting Period
Company: Kimbell Royalty Partners, LP (KRP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2024
Business Overview: KRP is a Delaware limited partnership owning mineral and royalty interests in oil and natural gas properties across the U.S. It is taxed as a corporation. As of September 30, 2024, the Partnership held interests in approximately 12.2 million gross acres and 4.7 million gross acres of overriding royalty interests, with 54% located in the Permian Basin and Mid-Continent.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2024 | Nine Months Ended Sept 30, 2024 |
|---|---|---|
| Total Revenues | $83.8 million | $242.6 million |
| Net Income | $25.8 million | $50.3 million |
| Net Income Attributable to Common Units | $17.4 million | $29.0 million |
| Diluted EPS (Common Units) | $0.22 | $0.38 |
| Operating Cash Flow | $62.4 million (Q3 only) | $194.3 million (YTD) |
| Long-Term Debt Outstanding | $252.2 million (as of Sept 30, 2024) | |
| Cash and Cash Equivalents | $34.7 million (as of Sept 30, 2024) | |
| Adjusted EBITDA (Attributable to KRP) | $53.5 million | $167.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 24.7% year-over-year for the three months ended September 30, 2024, and 24.5% for the nine-month period. This was driven primarily by increased production volumes from the LongPoint and MB Minerals acquisitions completed in 2023.
- Production Volumes: Combined production volumes (Boe) increased 20.6% in Q3 2024 compared to Q3 2023, and 36.3% for the nine-month period.
- Commodity Prices: Average realized oil prices decreased 4.2% in Q3 2024 compared to the prior year, while natural gas prices decreased 27.6%. Despite lower prices, volume growth offset the decline.
- Derivative Gains: The Partnership recorded a net gain of $9.6 million on commodity derivatives in Q3 2024, compared to a loss of $4.6 million in Q3 2023. This was due to the maturity of contracts with lower strike pricing.
- Impairment: An impairment charge of $6.0 million was recorded in the first nine months of 2024 due to a decline in 12-month average commodity prices as of March 31, 2024. No impairment was recorded in the prior year's comparable period.
- Debt Reduction: Long-term debt decreased from $294.2 million at year-end 2023 to $252.2 million at September 30, 2024, following repayments of approximately $47.0 million during the period.
Guidance, Outlook, and Risks
- Distributions: The Board declared a quarterly cash distribution of $0.41 per common unit for Q3 2024, payable November 25, 2024. A distribution of approximately $4.9 million is also due on Series A preferred units.
- Capital Allocation: The Board allocated 25% of cash available for distribution in Q3 2024 toward debt repayment. Management intends to continue allocating a portion of cash flow to reduce outstanding borrowings.
- Material Weakness in Internal Controls: The Partnership identified a material weakness in internal control over financial reporting related to the accounting for changes in ownership of its Operating Company (OpCo). While the error was corrected and deemed immaterial to prior financial statements, disclosure controls were deemed ineffective as of September 30, 2024. A remediation plan is underway.
- Market Risks: The company faces significant exposure to commodity price volatility. Global conflicts (Russia-Ukraine, Middle East) continue to create uncertainty in oil supply and demand. Rig counts on KRP acreage decreased slightly year-over-year.
- Derivative Exposure: As of September 30, 2024, the Partnership has open commodity derivative contracts covering oil and natural gas production through September 2026 to mitigate price risk.
Investor Verification Checklist
- Internal Control Remediation: Verify the progress of the remediation plan for the material weakness regarding OpCo ownership accounting and confirm when management expects controls to be deemed effective.
- Debt Covenants: Confirm continued compliance with the Debt to EBITDAX ratio (max 3.5:1) and current asset to current liability ratio (min 1.0:1) under the Amended and Restated Credit Agreement.
- Production Sustainability: Assess the longevity of production growth from the LongPoint and MB Minerals acquisitions versus natural decline rates in existing assets.
- Derivative Settlements: Monitor the impact of derivative settlements on future cash flows, particularly as contracts mature in 2025 and 2026.
- Preferred Unit Obligations: Review the cash flow impact of the Series A preferred unit distributions (6.0% per annum) and potential conversion triggers.