Kimbell Royalty Partners, LP — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Kimbell owns U.S. mineral and royalty interests and generally does not fund drilling, operating, or plugging costs. It reported one operating segment and has been taxed as a corporation since September 24, 2018.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Oil, natural gas and NGL revenue | $29.5 million | $21.1 million | $80.3 million | $42.7 million |
| Total revenue, including derivative gains/losses | $33.0 million | $18.4 million | $82.9 million | $40.0 million |
| Operating income (loss) | $(27.3) million | $2.8 million | $(49.6) million | $(47.8) million |
| Net loss attributable to common units | $(16.3) million | $(3.7) million | $(31.7) million | $(55.2) million |
| Loss per common unit, basic and diluted | $(0.73) | $(0.15) | $(1.53) | $(2.91) |
| Operating cash flow | Not separately stated in the filing text | Not separately stated in the filing text | $64.0 million | $18.6 million |
| Adjusted EBITDA attributable to Kimbell | $11.4 million | $7.2 million | $28.7 million | $22.5 million |
| Cash available for distribution on common units | $9.8 million | $6.2 million | $24.1 million | $20.5 million |
Q3 operating margin was approximately negative 83%, versus positive 15% a year earlier, reflecting the large property impairment. The filing does not present a standard gross-margin measure. Q3 production was 1.37 million Boe, or 14,838 Boe/d; nine-month production was 3.34 million Boe. Average realized prices declined year over year: Q3 oil $54.87/Bbl versus $64.77, and natural gas $2.05/Mcf versus $2.56.
At September 30, cash was $20.3 million, current assets $40.1 million and current liabilities $6.8 million. Long-term debt was $91.3 million; the revolver had $208.7 million of stated available capacity. The Partnership reported compliance with credit-facility covenants. Nine-month investing cash outflow was $6.0 million and financing cash outflow was $53.5 million.
Material changes and key drivers
- Q3 total revenue increased about 79%, while oil, gas and NGL revenue rose about 40%. Nine-month oil, gas and NGL revenue rose about 88%.
- Production growth from the Phillips, Haymaker and Dropdown acquisitions drove higher volumes and revenue, more than offsetting lower realized commodity prices. Q3 production rose about 87% from the prior-year quarter.
- Q3 included a $34.9 million oil and gas property impairment, versus none in Q3 2018. Nine-month impairment was $65.8 million versus $54.8 million. Management attributed the impairment primarily to lower 12-month average oil and gas prices.
- Depletion expense rose to $15.1 million in Q3 from $7.6 million, reflecting acquired properties and properties moved into the depletable base. Nine-month depletion rose to $37.7 million from $15.5 million.
- The March 2019 Phillips Acquisition was funded with 9.4 million OpCo common units and an equal number of Class B units, valued at approximately $171.6 million. Unit conversions increased common units outstanding; 23.5 million common units and 23.4 million Class B units were outstanding at quarter-end.
- Nine-month cash from operations increased $45.4 million, principally due to acquired assets. Financing cash flow shifted from a $192.7 million inflow in 2018 to a $53.5 million outflow in 2019, largely reflecting distributions and the prior-year preferred-unit issuance and acquisition financing.
Outlook, distributions and risks
- The filing provides no formal earnings or production guidance. Management says results and distributions depend on commodity prices, production, operator drilling activity, acquisitions, taxes, contractual obligations and board-determined reserves; distributions may fluctuate significantly or be zero.
- The board declared a Q3 common-unit distribution of $0.42, down from $0.45 for Q3 2018. The filing says it was payable November 11, 2019. Series A preferred holders receive cumulative quarterly distributions at 7% annually; the preferred units also have conversion and redemption provisions that may involve higher return thresholds.
- The revolver matures February 8, 2022. May 2019 redetermination set commitments at $225 million and the borrowing base at $300 million; the November redetermination was still underway and expected to conclude by month-end. Interest rates are variable, and Kimbell had no interest-rate hedges.
- Commodity swaps covered approximately 19% of daily production based on debt and preferred equity relative to enterprise value. At September 30, derivative assets totaled $3.35 million; the contracts were not designated as accounting hedges, so fair-value changes affect reported earnings. One counterparty, also a lender, was disclosed.
- Commodity-price declines can trigger further full-cost impairments, which cannot be reversed in later periods. Other stated risks include operator drilling and financing activity, production and reserve uncertainty, acquisition execution, regulation, title defects, and transportation constraints.
- A $9.9 million Oklahoma mineral and royalty acquisition closed November 6, 2019, funded with revolver borrowings. A separate ownership disagreement involving non-producing acreage was not expected to have a material financial impact; no accrual was recorded.
- The Partnership disclosed immaterial prior-period classification and presentation errors and adjusted comparative equity balances and statement captions. Management concluded disclosure controls were effective at September 30, 2019; no material change in internal control was reported.
Most important facts for investors to verify
- Whether the November borrowing-base redetermination changed borrowing availability, covenants, or financing flexibility.
- How much of revenue and cash available for distributions is attributable to acquired assets versus legacy properties, and whether acquired production is sustained.
- The effect of commodity prices and reserve revisions on future full-cost ceiling tests and potential impairments.
- Distribution coverage after preferred and Class B obligations, taxes, debt service, and acquisition funding.
- The cost and dilution implications of preferred-unit conversion/redemption terms and continuing Class B/OpCo unit exchanges.
- How the disclosed immaterial error corrections affect comparisons across future filings; also reconcile the differing 2018 noncontrolling-interest figures shown in the Adjusted EBITDA reconciliations.