Kimbell Royalty Partners, LP — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Kimbell owns non-cost-bearing mineral and royalty interests across U.S. oil and gas basins; it reported one operating segment. Its interests cover approximately 11.5 million gross mineral and royalty acres and 4.7 million gross overriding royalty acres. More than 99% of acreage was leased to operators.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Oil, natural gas and NGL revenue | $57.4 million | $65.1 million |
| Total revenue, including derivative gains/losses | $66.9 million | $33.8 million |
| Operating income | $33.3 million | $8.1 million |
| Net income | $28.9 million | $8.4 million |
| Net income attributable to common units | $23.3 million | $7.3 million |
| Basic / diluted earnings per common unit | $0.37 / $0.36 | $(0.20) / $(0.20) |
| Net cash from operating activities | $47.1 million | $36.0 million |
| Adjusted EBITDA attributable to Kimbell | $34.1 million | $38.4 million |
| Cash available for distribution on common units | $30.6 million | $36.4 million |
- Production was 1.58 million Boe, or 17,215 Boe/d, up 12.7% year over year. The company attributed the increase primarily to the December 2022 Hatch acquisition.
- Commodity revenue declined 11.8%, chiefly because realized prices fell, partly offset by higher production. Average prices received were $73.99/Bbl of oil, $3.51/Mcf of gas and $23.52/Bbl of NGLs, compared with $86.08, $4.76 and $40.57, respectively, in Q1 2022.
- Total revenue, operating income and net income increased year over year primarily because derivative results swung to a $9.1 million gain from a $32.0 million loss. Q1 2023 derivative results included $12.5 million of mark-to-market gains and $3.4 million of settlement losses.
- Operating margin, calculated as operating income divided by reported total revenue, was approximately 49.8%, versus 24.1% in Q1 2022; derivative volatility materially affects this comparison.
- Depletion expense increased to $17.6 million from $10.8 million, reflecting the Hatch acquisition and a higher depletion rate. G&A rose to $9.0 million, including consolidated VIE expenses, from $7.3 million; interest expense rose to $5.5 million from $2.9 million.
Liquidity, debt and distributions
- At March 31, cash and cash equivalents were $19.1 million on the balance sheet; cash including consolidated VIE cash was $19.2 million. Current assets were $58.1 million and current liabilities were $8.1 million.
- Operating cash flow of $47.1 million was more than offset by $52.6 million of financing outflows, including $38.6 million of distributions, $13.1 million of debt repayments and $4.9 million of unit withholding repurchases. Cash declined by $5.8 million during the quarter.
- Revolver borrowings were $223.9 million, with $126.1 million of available capacity under the $350 million facility. The weighted-average borrowing rate was 8.26%; the facility matures June 7, 2024. The company reported compliance with covenants, including a maximum debt-to-EBITDAX ratio of 3.5x and minimum current-assets-to-current-liabilities ratio of 1.0x.
- The board declared a Q1 distribution of $0.35 per common unit, payable May 22, 2023. This compares with $0.47 per unit for Q1 2022. The board allocated 25% of Q1 cash available for distribution to debt repayment; management said it intends to continue allocating some cash to debt reduction, subject to board decisions.
Outlook, material events and risks
- No specific earnings or production guidance was provided. Management cited commodity-price volatility, operator drilling and production levels, acquisition execution, reserve estimates, financing costs and regulatory and geopolitical developments as factors that could affect results.
- On April 11, 2023, the partnership agreed to acquire mineral and royalty assets in Howard and Borden Counties, Texas, for approximately $48.8 million in cash plus OpCo and partnership units. The acquisition was expected to close in Q2 2023, subject to customary conditions. On April 6, it drew $15 million under the revolver to fund the deposit.
- On May 3, 2023, TGR announced it would redeem its public shares after failing to complete a business combination by May 8. The expected redemption price was approximately $10.56 per share based on March 31 trust assets; TGR warrants, including sponsor-held private warrants, were to expire worthless. Kimbell said the resulting deconsolidation impact would be non-cash and was not expected to affect cash available for distribution or liquidity.
- The company reported no material legal, environmental or other contingencies known to management and no oil and gas property impairment in Q1. Its commodity swaps covered approximately 15% of daily oil and gas production. A 1 percentage-point increase in interest rates on then-outstanding debt was estimated to raise annual interest expense by approximately $2.2 million, assuming debt remained constant.
- Management said disclosure controls were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter.
Key investor verification points
- Track realized oil, gas and NGL prices, production volumes and operator activity; commodity revenue fell even as volumes increased.
- Separate recurring operating performance from mark-to-market derivative gains and losses when assessing the sharp year-over-year earnings change.
- Monitor debt reduction, the May 2023 borrowing-base redetermination, covenant headroom and the June 2024 facility maturity.
- Confirm closing terms and funding of the MB Minerals acquisition, including the cash and unit consideration and resulting dilution.
- Review the completed TGR redemption and deconsolidation effects in subsequent filings, including any effect on reported results and unit-level measures.
- Assess distribution sustainability against cash available for distribution, debt repayment needs and the board’s discretion over future distributions.