Kimbell Royalty Partners, LP — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Kimbell owns non-cost-bearing oil and gas mineral and royalty interests across U.S. basins; it generally does not fund drilling or well operating costs. Results were heavily affected by COVID-19, falling commodity prices and related property impairments.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Oil, natural gas and NGL revenue | $16.8 million | $27.9 million | $42.4 million | $50.7 million |
| Total revenue, including derivatives | $12.8 million | $31.9 million | $48.8 million | $49.9 million |
| Net loss | $(76.8) million | $(20.4) million | $(136.6) million | $(25.7) million |
| Net loss attributable to common units | $(48.0) million; $(1.39) per unit | $(11.8) million; $(0.54) per unit | $(87.3) million; $(2.68) per unit | $(15.4) million; $(0.78) per unit |
| Operating cash flow | $14.8 million | $23.3 million | $35.5 million | $39.1 million |
| Adjusted EBITDA attributable to Kimbell (non-GAAP) | $7.4 million | $10.6 million | $19.2 million | $17.3 million |
| Cash available for distribution on common units (non-GAAP) | $5.9 million | $9.1 million | $15.8 million | $14.3 million |
Q2 production increased 17% year over year to 1.26 million Boe, mainly reflecting acquisitions, but lower realized commodity prices outweighed higher volumes. Average operator prices received fell to $25.40 per barrel of oil, $1.43 per Mcf of gas and $7.54 per barrel of NGL, versus $57.55, $2.44 and $19.55, respectively, in Q2 2019. The filing does not provide a single headline operating-margin measure.
Balance sheet, liquidity and capital
- At June 30, cash was $11.3 million, current assets $26.6 million and current liabilities $5.9 million.
- Long-term debt was $171.7 million, up from $100.1 million at December 31, 2019. The revolver had $225 million in commitments, a $300 million borrowing base and $53.3 million of stated available capacity at quarter-end. Kimbell was covenant-compliant.
- Six-month investing cash outflow was $88.5 million, primarily related to the Springbok acquisition and joint-venture investment. Financing cash inflow was $50.0 million; cash declined $2.9 million to $11.3 million.
- In January, Kimbell raised $73.6 million net from a 5.0 million-unit offering. It redeemed 55,000 of 110,000 Series A preferred units in February for $61.1 million. The remaining preferred units carry cumulative quarterly distributions at 7% annually.
Material changes and unusual items
- Q2 property impairment was $65.5 million; first-half impairment totaled $136.5 million, compared with $28.1 million and $30.9 million, respectively, in 2019. The charges reflected lower commodity-price expectations and uncertainty about development of proved undeveloped and unevaluated properties. Kimbell said it does not intend to book PUD reserves going forward.
- The April 17 Springbok acquisition added interests across several major basins. Consideration included approximately $95 million cash funded with revolver borrowings, 2.2 million common units and 2.5 million OpCo units paired with Class B units.
- Quarterly common-unit distributions were reduced to $0.13 for Q2 2020, from $0.39 for Q2 2019; the Q1 2020 distribution was $0.17. The board also allocated 25% of Q2 cash available for distribution, or $2.5 million, to debt repayment.
- Operating expenses included a substantial noncash impairment. Q2 derivative results included a $4.0 million net loss, while first-half derivative results were a $6.1 million net gain.
- Management reported that disclosure controls were effective and that the previously identified material weakness in controls over the full-cost ceiling calculation had been remediated during Q2.
Outlook, risks and contingencies
Management expected low oil prices and commodity volatility to persist through Q3 2020 and potentially longer, and expected a further property impairment in Q3 from the full-cost ceiling limitation. Lower prices, reduced drilling, additional shut-ins or curtailments, and a possible borrowing-base reduction could adversely affect revenue, liquidity and distributions. Some operator shut-ins occurred; production resumed on the Eagle Ford properties previously curtailed, and other Q2 notices affected less than 1% of Q2 production. COVID-19 and OPEC-related supply and demand developments were described as highly uncertain. No formal earnings or production guidance was provided.
The revolver matures February 8, 2022; management intended to request an extension before March 31, 2021. The May 2020 borrowing-base redetermination maintained the $300 million base and $225 million commitments. Management reported no material legal, environmental or other contingencies at June 30, 2020.
Investor verification points
- Track realized prices, production volumes, operator drilling activity and any additional shut-ins or curtailments.
- Verify the size and timing of the expected Q3 impairment and subsequent full-cost ceiling test effects.
- Monitor the next borrowing-base redetermination, revolver availability, covenant headroom and progress toward extending the February 2022 maturity.
- Assess whether operating cash flow and cash available for distribution support the reduced $0.13 quarterly common-unit distribution and future debt repayment.
- Review Springbok acquisition performance and the remaining preferred-unit redemption, distribution and conversion terms.