Kimbell Royalty Partners, LP — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with the same period in 2018. Kimbell owns U.S. oil and gas mineral and royalty interests and generally does not bear drilling, operating, or abandonment costs. As of quarter-end, it reported interests across approximately 13.0 million gross acres, 144,117 net acres, and 92,911 gross producing wells.
On March 25, Kimbell completed the Phillips Acquisition, issuing 9.4 million OpCo common units and an equal number of Class B units, valued at approximately $171.6 million. The acquired interests comprised approximately 866,528 gross acres and 12,210 net royalty acres. The acquisition was equity-financed; its contribution to reported Q1 operations was limited to the period after closing.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Oil, gas and NGL revenue | $22.8 million | $10.8 million | Up 111%; acquisitions drove most of the increase |
| Total revenue, including derivative results | $17.9 million | $10.9 million | Up 65%; includes a $5.0 million derivative loss in 2019 |
| Operating loss | $3.9 million | $52.5 million | Improved primarily because impairment expense fell |
| Net loss | $5.3 million | $52.8 million | 2019 includes preferred-unit distributions and accretion in allocation to common units |
| Net loss attributable to common units / diluted loss per unit | $3.7 million / $0.21 | $52.8 million / $3.23 | Loss per unit narrowed substantially |
| Operating cash flow | $15.8 million | $7.3 million | Up $8.5 million, mainly from acquisitions |
| Cash available for distribution, non-GAAP | $5.2 million | $7.1 million | Down approximately 27% |
| Production | 902,877 Boe | 328,530 Boe | Up 175%; acquisitions were the principal driver |
Reported operating margin was approximately negative 22% of total revenue in Q1 2019; the comparable 2018 figure was heavily affected by impairment. The filing does not provide a company-defined operating margin measure. Average realized prices were $50.89 per barrel of oil, $2.68 per Mcf of natural gas, and $19.70 per barrel of NGLs, versus $60.97, $2.69, and $26.69, respectively, in Q1 2018.
Impairment expense was $2.8 million, compared with $54.8 million a year earlier. Depreciation, depletion and accretion rose to $10.3 million from $4.5 million, while G&A increased to $5.3 million from $2.8 million. Interest expense was $1.4 million versus $0.4 million. Management attributed these expense increases primarily to acquisitions and, for G&A, higher unit-based compensation.
Liquidity, debt and distributions
Cash was $13.5 million at March 31, down from $15.8 million at year-end. Current assets were $35.6 million and current liabilities $4.4 million. The secured revolving facility had $87.3 million outstanding and $112.7 million of stated available capacity against a $200 million borrowing base/commitment; borrowing-base redetermination was underway and expected to conclude by the end of May. The facility matures February 2022. The weighted-average borrowing rate was 4.76%, and Kimbell reported compliance with covenants, including maximum debt-to-EBITDAX of 4.0x and minimum current ratio of 1.0x.
Operating cash flow was more than offset by $17.2 million of financing outflows, mainly distributions; investing outflows were $0.8 million. Cash declined by $2.2 million during the quarter. The Board declared a Q1 common-unit distribution of $0.37 per unit, payable May 13, compared with $0.42 for Q1 2018. Series A preferred units carry cumulative distributions at 7% annually; Class B units receive distributions based on a 2% quarterly rate on their contribution, ahead of common-unit distributions.
Material changes, outlook and risks
- Revenue and production increased substantially due to the Haymaker Acquisition, the 2018 Dropdown, and the Phillips Acquisition; lower oil and NGL prices partly offset the volume gains. Q1 average oil and natural-gas benchmark prices were lower year over year.
- Q1 derivative loss was $5.0 million, including $5.2 million of mark-to-market losses, partly offset by settlement gains. Derivatives are not designated as accounting hedges, so fair-value changes affect current earnings. The portfolio hedged approximately 20% of post-Phillips production.
- Management’s stated objective is to grow cash distributions through acquisitions and operator development, but the filing gives no quantified earnings, production, or distribution guidance. Distributions can fluctuate, and the partnership does not intend to borrow to fund them or maintain a distribution reserve under its current policy.
- Key risks include volatile commodity prices, production and drilling activity controlled by operators, acquisition execution and integration, reserve and impairment estimates, access to operator financing and transportation, and regulatory or environmental changes. A 1 percentage-point increase in interest rates would add approximately $0.9 million in annual interest expense if debt were unchanged. Kimbell had one derivative counterparty, also a credit-facility lender.
- The filing reports a non-producing-acreage ownership disagreement, with no accrual and no expected material financial impact. Management also disclosed $300,000 of transitional administrative and accounting services costs from April 1 through June 1, 2019. No material change to previously reported risk factors was identified; management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the borrowing-base redetermination increased or constrained capacity, and how much of the stated $112.7 million availability remained usable.
- Whether acquired acreage and production translate into sustainable cash available for distribution, given lower realized commodity prices and the reduced common distribution.
- The effect of derivative settlements and mark-to-market changes, including hedge coverage, counterparty exposure, and future fixed-price terms.
- The acquisition’s contribution to subsequent-quarter results and any further unit issuance or exchange activity that could dilute common unitholders.
- Potential future full-cost impairments, particularly if commodity prices fall or reserve estimates are revised.