Business Context and Reporting Period
Company: Kimbell Royalty Partners, LP
Filing Type: Form 8-K (Current Report)
Report Date: July 18, 2018 (Earliest event reported: July 12, 2018)
Key Event: Completion of the acquisition of equity interests in subsidiaries owned by Haymaker Minerals & Royalties, LLC and Haymaker Resources, LP (collectively, the "Acquisition").
Key Financial Metrics and Capital Structure
Acquisition Consideration:
- Total Cash Consideration: Approximately $210 million ($87.3 million for Haymaker Minerals; $129.5 million for Haymaker Resources).
- Equity Consideration: Issuance of 10,000,000 Common Units (4,000,000 to Haymaker Minerals; 6,000,000 to Haymaker Resources).
- Credit Facility: Commitments increased from $50 million to $200 million under the Amended Credit Agreement.
- Borrowing Base: Initial borrowing base set at $200 million.
- Expansion Capacity: Facility may be increased to $500 million subject to conditions.
- Interest Margins: Reduced by 0.25% per level; ABR Loans range from 1.00% to 2.00%; LIBOR Loans range from 2.00% to 3.00%.
- Preferred Units: Issued 110,000 Series A Cumulative Convertible Preferred Units at $1,000 per unit, generating $110 million in gross proceeds.
- Transition Services: Approximately $2.3 million in compensation payable to Haymaker Services through December 31, 2018.
Note: This filing does not provide specific revenue, profit, or cash flow metrics for the reporting period. Pro forma financial information is scheduled to be filed within 71 days.
Material Changes Versus Prior Period
- Asset Base: Significant expansion through the acquisition of Haymaker Minerals and Haymaker Resources subsidiaries.
- Capital Structure: Substantial increase in debt capacity (4x increase in commitments) and issuance of senior preferred equity.
- Ownership: New issuance of 10 million Common Units to sellers and 110,000 Preferred Units to Apollo affiliates.
- Corporate Structure: Amendments to the Credit Agreement and Partnership Agreement to facilitate a potential future change in tax status from a pass-through partnership to a corporation ("up-C" structure).
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Strategic Intent:
The transaction is structured to support a potential future "check-the-box" election to change the Partnership's U.S. federal income tax status to a corporation. The Credit Agreement Amendment explicitly permits transactions to effect this change and an "up-C" structure.
Risks and Contingencies:
- Covenant Restrictions: The Amended Credit Agreement imposes limitations on incurring additional debt, issuing preferred equity (other than the Series A), making distributions, and disposing of assets.
- Registration Rights: The Partnership must file a shelf registration statement within 160 days to allow resale of Registrable Securities. Failure to do so by day 180 may trigger liquidated damages.
- Voting Agreements: Sellers have agreed to vote in favor of the tax status change and incentive plan amendments. These agreements prohibit the sale of Common Units until January 8, 2019.
- Board Rights: Preferred Unit holders gain board observer rights after three years and board appointment rights after four years (or upon events of default).
Investor Verification Checklist
- Verify the final purchase price adjustments and escrow amounts for the Haymaker acquisition.
- Confirm the timing and effectiveness of the required shelf registration statement (due within 160 days of July 12, 2018).
- Monitor the filing of pro forma financial information (due within 71 days of July 18, 2018) to assess the impact of the acquisition on leverage and liquidity.
- Review the specific terms of the "up-C" restructuring and the timeline for the potential tax status change.
- Assess the impact of the $2.3 million transition service cost on near-term operating expenses.