Kimbell Royalty Partners, LP — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The filing is unaudited. Kimbell owns non-cost-bearing mineral and royalty interests; it does not fund operators’ drilling, completion, or lease operating costs.
Financial and operating highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Oil, gas and NGL revenue | $69.2 million | $73.9 million | $183.6 million | $217.5 million |
| Total revenue, including derivatives and other income | $67.2 million | $72.9 million | $194.9 million | $179.4 million |
| Operating income | $25.3 million | $46.0 million | $83.3 million | $98.1 million |
| Net income | $18.5 million | $43.8 million | $65.2 million | $95.5 million |
| Net income attributable to common units | $13.6 million | $38.3 million | $50.4 million | $83.5 million |
| Basic earnings per common unit | $0.20 | $0.69 | $0.80 | $1.26 |
| Cash provided by operating activities | Not presented by quarter in the supplied filing text | Not presented by quarter in the supplied filing text | $115.0 million | $128.0 million |
| Cash available for distribution on common units (non-GAAP) | $38.1 million | $37.9 million | $98.4 million | $116.7 million |
- Production: Q3 volumes rose to 1.82 million Boe (19,777 Boe/d), up from 1.38 million Boe (14,985 Boe/d). Nine-month volumes increased to 5.05 million Boe from 4.14 million Boe. Acquisitions were the primary driver.
- Cash and liquidity: Cash was $39.5 million at September 30, 2023, versus $24.6 million at December 31, 2022. Nine-month investing cash use was $246.1 million and financing cash provided was $145.7 million.
- Debt: Revolver borrowings were $310.4 million; the Partnership reported $89.6 million of available capacity. The facility’s initial borrowing base and elected commitments were each $400 million, with maturity extended to June 7, 2027. Q3 and nine-month weighted-average borrowing rates were 8.64% and 8.56%, respectively. The Partnership reported compliance with covenants at quarter-end.
- Distributions: The board declared a $0.51 per common and OpCo common unit Q3 distribution after quarter-end, payable November 20, 2023. Prior 2023 quarterly distributions were $0.35 and $0.39 per unit.
Material changes and drivers
- Q3 oil, gas and NGL revenue declined 6% year over year, despite a 32% increase in production, as realized commodity prices fell. Reported average prices were $81.53/Bbl oil, $2.21/Mcf gas, and $23.10/Bbl NGL, versus $92.65, $6.92, and $35.50, respectively, in Q3 2022.
- Q3 total revenue fell 8%; operating income fell 45% and net income fell 58%. Higher depletion, G&A and interest expense contributed to lower earnings. Depletion expense more than doubled to $23.1 million; interest expense rose to $6.7 million from $3.7 million.
- For the nine months, total revenue rose 9%, mainly because derivative results were substantially better than in 2022. However, oil, gas and NGL revenue fell 16%, net income declined 32%, and cash from operations decreased 10%.
- Acquisitions expanded the asset base: MB Minerals closed in May for approximately $48.8 million cash plus units; the LongPoint/Cherry Creek acquisition closed September 13 in a transaction valued at approximately $455 million. LongPoint was funded with revolver borrowings and preferred-unit proceeds. The company cited Hatch, MB Minerals and LongPoint as increasing production, property costs and depletion.
- In August, Kimbell issued 8,337,500 common units for net proceeds of approximately $110.7 million; about $90 million was used to repay revolver debt. In September, it issued 325,000 Series A preferred units for $325 million gross proceeds.
Outlook, risks and unusual items
- The filing provides no specific earnings, production, or distribution guidance. Management describes acquisitions and organic development by operators as growth drivers and states that future distributions and debt repayment allocations remain subject to board decisions and available cash.
- The Series A preferred units carry cumulative distributions at 6% annually, rank senior to common units, and can increase to 20% annually under specified nonpayment or breach conditions. Preferred distributions take priority over distributions or repurchases on junior securities. Conversion and redemption provisions, including return thresholds, may affect future cash availability and common-unit dilution.
- Commodity prices and operator activity are key risks. U.S. active land rigs fell 19.5% year over year to 600 at September 30, 2023. Kimbell’s unhedged production remains exposed to price changes; fixed-price swaps extend through September 2025, and changes in their fair value flow through current earnings because the contracts are not designated as accounting hedges.
- Q3 included a $2.3 million increase in lease bonus and other income, primarily from a legal settlement. The company recorded a $4.6 million Q3 derivative loss, compared with a $1.1 million loss in Q3 2022.
- TGR, Kimbell’s SPAC subsidiary, failed to complete a business combination and was redeemed and dissolved in June 2023. The filing reports a $1.6 million net non-cash deconsolidation impact.
- The company reported no material legal, environmental, or other contingencies known at September 30, 2023, while noting that ownership disagreements over mineral interests can arise. It reported effective disclosure controls and no material changes in internal control over financial reporting.
- Management said the Russia-Ukraine and Middle East conflicts had not materially affected operations or financial statements to date, but may add commodity-price and market volatility. Other stated risks include reserve replacement, acquisition execution, title defects, regulation, and the possibility of impairment if prices or reserve estimates decline.
Key facts for investors to verify
- Whether LongPoint and MB Minerals deliver the production, cash flow, and acquisition returns anticipated, and how much of their contribution is offset by depletion, financing costs, and integration expenses.
- Current borrowing-base availability and the outcome of the November 2023 redetermination; also monitor the 3.5-to-1 debt-to-EBITDAX and 1.0-to-1 current-ratio covenant requirements.
- The all-in economic cost and potential dilution of the Series A preferred units, including cumulative distributions, redemption returns, conversion terms, and restrictions on common-unit distributions.
- How commodity-price movements, swap settlements and fair-value changes affect realized cash generation and reported earnings; distinguish cash available for distribution, a non-GAAP measure, from GAAP operating cash flow.
- Whether distributions remain supported after preferred distributions, debt service, and the board’s stated allocation of a portion of cash available toward debt repayment.