Kimbell Royalty Partners, LP — Q3 2022 Form 10-Q
Business context and reporting period. The Partnership owns non-cost-bearing mineral and royalty interests in U.S. oil and gas properties. This unaudited filing covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. At quarter-end, it reported interests spanning approximately 16.0 million gross acres and 122,899 gross wells. Results are sensitive to commodity prices and production on properties operated by others.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Oil, natural gas and NGL revenue | $73.9 million | $47.6 million | $217.5 million | $122.8 million |
| Total revenue, including derivative results | $72.9 million | $31.8 million | $179.4 million | $79.9 million |
| Operating income | $46.0 million | $10.1 million | $98.1 million | $17.7 million |
| Net income attributable to common units | $38.3 million | $1.8 million | $83.5 million | $2.6 million |
| Basic / diluted earnings per common unit | $0.69 / $0.59 | $0.04 / $0.03 | $1.26 / $1.00 | $0.07 / $0.04 |
| Adjusted EBITDA attributable to the Partnership | $41.6 million | $23.4 million | $126.8 million | $60.4 million |
| Cash available for distribution on common units | $37.9 million | $21.7 million | $116.7 million | $54.2 million |
| Cash provided by operating activities | $51.6 million | $25.1 million | $128.0 million | $69.1 million |
- Margins and costs: Q3 operating income was about 63% of total revenue, compared with about 32% in Q3 2021. Q3 production and ad valorem taxes were $4.5 million, depletion was $11.3 million, marketing and other deductions were $3.1 million, and general and administrative expense was $7.5 million.
- Cash flow and distributions: Nine-month investing cash outflow was $234.0 million, largely reflecting $236.9 million invested in TGR’s trust account; financing cash inflow was $116.0 million. The Board declared a Q3 distribution of $0.49 per common unit on November 3, payable November 21, 2022.
- Debt and liquidity at September 30: Long-term debt was $203.9 million, with $96.1 million of revolver capacity available under the $300 million facility. Cash was $16.6 million at the Partnership and $0.6 million at consolidated variable-interest entities. Current assets were $65.5 million and current liabilities $30.8 million. The Partnership reported compliance with credit-facility covenants.
- Other balance-sheet items: Commodity derivative liabilities totaled $25.4 million. TGR trust investments were $238.4 million, alongside $236.9 million of redeemable noncontrolling interest; trust funds are for TGR purposes and should not be viewed as ordinary Partnership liquidity.
Material changes versus the prior comparable period
- Q3 oil, gas and NGL revenue increased $26.2 million year over year; nine-month revenue rose $94.7 million. Management attributed the increase mainly to higher realized commodity prices and, to a lesser extent, higher production.
- Q3 production increased slightly to 1.379 million Boe from 1.363 million; nine-month production rose to 4.142 million Boe from 3.907 million. Management attributed much of the volume growth to the December 2021 Cornerstone Acquisition.
- Q3 average realized prices reported for operator sales were $92.65/Bbl oil, $6.92/Mcf gas and $35.50/Bbl NGL, versus $67.47, $3.82 and $28.42, respectively, a year earlier.
- Q3 net commodity-derivative loss narrowed to $1.1 million from $17.6 million, but the nine-month loss remained $40.2 million. Q3 included a mark-to-market gain offset by settlement losses.
- Interest expense increased to $3.7 million in Q3 and $9.9 million for the nine months, reflecting higher average borrowing rates and debt associated with the Cornerstone Acquisition and prior preferred-unit redemptions. All Series A preferred units had been redeemed by December 2021.
- Common units outstanding rose to 57.3 million from 47.2 million at year-end 2021, principally reflecting conversion of 9.4 million Class B units, plus awards. This increases the importance of per-unit and distribution coverage analysis.
Outlook, commentary and risks
- The filing provides no formal earnings or production guidance. Management’s stated objective is to provide increasing cash distributions, supported by acquisitions and development by third-party operators.
- The Partnership hedged approximately 25% of daily oil and gas production at September 30. It had fixed-price swaps extending through September 2024. The interest-rate swap covering $150 million of revolver notional was fully terminated in 2022, generating gains of $3.4 million in Q3 and $6.4 million for the nine months; borrowings are consequently exposed to floating rates.
- The June 2022 credit amendment increased the facility and borrowing base from $275 million to $300 million and transitioned the benchmark from LIBOR to SOFR. The facility requires Debt to EBITDAX of no more than 3.5:1 and a current-assets-to-current-liabilities ratio of at least 1.0:1; covenant terms also restrict certain debt, distributions, acquisitions and other actions.
- The Board allocated 25% of Q3 cash available for distribution to repayment of $10.9 million of revolver borrowings and said it intends to continue allocating a portion of cash to debt reduction. Distribution levels remain subject to Board decisions and cash needs; the Partnership says it does not maintain a material reserve to stabilize distributions.
- TGR, the consolidated SPAC, raised approximately $230 million in its February 2022 IPO. It must complete a business combination by May 8, 2023, subject to up to two three-month extensions. If it does not, public shares are subject to redemption from the trust and warrants may expire worthless. TGR’s assets and liabilities are consolidated, although its trust assets are restricted and its obligations generally have no recourse to the Partnership.
- Key risks include oil and gas price volatility, operator drilling and production decisions, acquisition execution, reserve estimates and potential future full-cost impairments, interest-rate exposure, and uncertainty relating to COVID-19 and the Russia-Ukraine conflict. No property impairment was recorded in the periods presented. Management said disclosure controls were effective and reported no material changes in internal control over financial reporting.
- The Partnership reported no known legal, environmental or other contingencies expected to have a material effect on its financial condition, results or liquidity. It noted that ownership disagreements over mineral interests may arise in the ordinary course.
Important facts for investors to verify
- How much of reported earnings and cash available for distribution is attributable to the Partnership versus noncontrolling interests, including TGR, and how unit conversions affect per-unit measures.
- Whether the $0.49 Q3 distribution is supported by recurring cash generation after debt service, taxes, and the Board’s planned debt repayments.
- The current and forward economics of commodity swaps, including settlement cash costs, hedge volumes and realized prices relative to market prices.
- Revolver utilization, SOFR-linked borrowing costs, covenant headroom and the impact of floating rates after termination of the interest-rate swap.
- TGR’s progress toward a business combination, deadline and extension conditions, redemption exposure, and separation of restricted trust assets from Partnership liquidity.
- Any changes in operator activity, production, commodity prices, reserves or impairment assumptions that could alter future revenue and depletion.