Kimbell Royalty Partners, LP — Q1 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter ended March 31, 2018. Kimbell owns non-cost-bearing mineral and royalty interests across U.S. oil and gas basins. At quarter-end, it reported interests in approximately 3.7 million gross mineral and royalty acres and 2.0 million gross overriding royalty acres; approximately 35% of aggregate acres were in the Permian Basin. More than 98% of acreage was leased, and substantially all leases were held by production.
Financial performance and position
- Revenue: Oil, natural gas and NGL revenue was $11.18 million; a $0.28 million loss on commodity derivatives brought total revenue to $10.89 million. Revenue mix was 60% oil, 24% natural gas, 13% NGLs and 3% other.
- Profit and impairment: Net loss was $52.82 million, or $3.23 per common unit, principally reflecting a $54.75 million oil and gas property impairment. Operating loss was $52.47 million. The impairment followed expiration of the SEC ceiling-test exemption for acquired properties. No impairment was recorded in the comparable 2017 periods.
- Cash flow and non-GAAP measure: Operating cash flow was $7.29 million; investing cash outflow was $0.02 million, financing cash outflow was $6.06 million, and cash increased by $1.21 million to $6.84 million. Adjusted EBITDA was $7.62 million and cash available for distribution was $7.14 million; both are non-GAAP measures defined by the Partnership.
- Production and pricing: Production totaled 328,530 Boe, or 3,650 Boe/d. Reported average realized prices were $60.97/Bbl for oil, $2.69/Mcf for natural gas and $26.69/Bbl for NGLs.
- Liquidity and debt: Current assets were $13.77 million and current liabilities $2.27 million; cash was $6.84 million. Long-term debt was $30.84 million, unchanged from year-end. The revolving facility has $50 million of commitments, with $30.8 million drawn and $19.2 million of commitment capacity remaining. Its borrowing base was reaffirmed at $100 million; the Partnership reported covenant compliance. The quarter’s weighted-average borrowing rate was 4.09%.
- Distributions and capital: The Partnership paid $0.36 per unit for Q4 2017, totaling $6.06 million. After quarter-end, it declared $0.42 per unit for Q1 2018, payable May 14, 2018. Partners’ capital declined to $203.85 million from $262.07 million, reflecting the net loss and distributions, partly offset by unit-based compensation.
Changes versus the prior comparable period
Oil, gas and NGL revenue increased from approximately $4.87 million for Q1 2017 to $11.18 million, and production rose to 328,530 Boe from 172,463 Boe. The filing attributes the increases primarily to a full quarter of Partnership-wide results in 2018, compared with 2017, when results before the February 8 IPO reflected only the Predecessor, plus production from interests acquired during 2017. Consequently, the periods are not directly comparable. Average realized oil and natural gas prices also increased year over year. Operating cash flow rose to $7.29 million from approximately $2.9 million. General and administrative expense increased, which management attributed in part to costs of operating as a public company. Interest expense also increased, reflecting debt incurred to fund 2017 acquisitions.
Outlook, risks and notable items
- The filing provides no formal earnings or production guidance. Management expects quarterly distributions to vary with operator performance, commodity prices, production, working capital and Board-determined reserves; there is no minimum quarterly distribution or commitment to maintain distributions.
- Management’s stated objective is to grow cash distributions through acquisitions and continued development by working-interest owners. The Partnership generally does not expect to retain cash for replacement capital expenditures; management warns that production declines could reduce future cash generation and distributions if development does not offset depletion.
- Commodity prices are volatile. The Partnership uses fixed-price oil and gas swaps through March 2020 to reduce price exposure, but contracts are not designated as accounting hedges, so fair-value changes affect reported earnings. At March 31, the derivative liability was $0.53 million. The sole derivative counterparty was Frost Bank, also the credit-facility lender; counterparty contracts are not collateralized.
- A 1% increase in interest rates on the reported debt would add approximately $0.3 million in annual interest expense, assuming debt remained constant; the Partnership had no interest-rate hedges.
- On May 4, 2018, the Partnership agreed to sell a small portion of Delaware Basin acreage for $9.0 million. The sale represented approximately 24 Boe/d and 41 net royalty acres and was expected to close in Q2 2018.
- Management reported no material change in previously disclosed risk factors, no material adverse expectation from ordinary-course legal matters, and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Review the $54.75 million impairment, its full-cost ceiling-test assumptions and the effect on carrying value and future depletion.
- Assess the comparability limits of 2017 results, including the IPO-period distinction and the impact of 2017 acquisitions.
- Evaluate whether operating cash flow and cash available for distribution support the declared $0.42 per-unit distribution and future payout variability.
- Confirm debt availability, covenant headroom and exposure to floating interest rates and the shared Frost Bank lending/derivative-counterparty relationship.
- Track closing and proceeds from the $9.0 million acreage sale and the impact, if any, on production and future revenue.