Kimbell Royalty Partners, LP — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The financial statements are unaudited. Kimbell owns non-cost-bearing mineral and royalty interests; Q2 2018 results reflect the Partnership before the July 12 Haymaker Acquisition closed.
Business context and financial performance
- At June 30, Kimbell held mineral and royalty interests across approximately 3.7 million gross acres and overriding royalty interests across approximately 2.0 million gross acres. More than 98% of acreage subject to its mineral and royalty interests was leased.
- Q2 oil, natural gas and NGL revenue was $11.25 million, up 45% from $7.75 million a year earlier. A $0.54 million derivative loss brought total revenue to $10.71 million, up 38% year over year.
- Q2 production was 330,621 Boe, up 18% year over year. Higher production and oil/NGL prices contributed to revenue growth; average realized oil price rose to $63.45/Bbl from $45.10/Bbl, while natural gas price declined to $2.59/Mcf from $2.89/Mcf.
- Q2 operating income was $1.86 million and net income was $1.38 million, compared with $0.43 million and $0.25 million, respectively, in Q2 2017. GAAP operating and net margins were approximately 17% and 13% of total revenue. Q2 general and administrative expense increased to $4.00 million from $2.18 million, including costs related to the proposed corporate tax conversion and higher unit-based compensation.
- For the six months, hydrocarbon revenue was $22.42 million and total revenue after derivative losses was $21.60 million. Net loss was $51.45 million, primarily reflecting a $54.75 million first-quarter full-cost ceiling impairment. Adjusted EBITDA, a non-GAAP measure, was $15.29 million; cash available for distribution was $14.31 million.
- Six-month comparisons with 2017 are not fully like-for-like: the 2017 period combines Partnership results after its February 2017 IPO with predecessor results before the IPO, and the predecessor represented only about 11% of the Partnership’s estimated future undiscounted cash flows.
Cash flow, debt and liquidity
- Six-month cash provided by operating activities was $14.19 million. Investing activities used $10.48 million, including the $21.0 million deposit for Haymaker, partly offset by $10.58 million in property-sale proceeds. Financing activities used $1.00 million after $13.13 million in distributions, $6.87 million in debt repayments and $19.0 million in borrowings.
- Cash was $8.33 million at June 30, versus $5.63 million at year-end 2017. Current assets were $15.16 million and current liabilities $6.87 million, a current ratio of approximately 2.2x.
- Long-term debt was $42.97 million at June 30. The company reported covenant compliance at that date; its borrowing base had been reaffirmed at $100 million. The July credit amendment raised lender commitments to $200 million, with an initial $200 million borrowing base and a potential increase in commitments to $500 million subject to conditions. Following the acquisition, the filing reported $148 million of outstanding borrowings as of August 3.
Material developments, outlook and risks
- In May, Kimbell agreed to sell a small portion of Delaware Basin acreage for $10.6 million; the properties represented less than 0.8% of production and approximately 0.08% of net royalty acres.
- The Haymaker Acquisition closed July 12 for a stated transaction value of approximately $451.7 million, comprising cash consideration and 10 million Kimbell common units. The acquired interests cover approximately 5.4 million gross acres and 43,000 net royalty acres. Including the acquisition, Kimbell reported approximately 11 million gross acres across 28 states.
- The cash consideration was funded with credit-facility borrowings and a $110 million private placement of Series A preferred units. Those units carry a 7% distribution rate and are convertible after two years at a 30% discount, subject to conditions; they rank senior to common units. The filing describes potential higher distribution rates in specified circumstances and restrictions requiring preferred-holder approval for certain actions.
- The board declared a Q2 distribution of $0.43 per common unit, payable August 13. The distribution included approximately $4.3 million of net revenues from Haymaker properties for production from the April 1 effective date. The board may change or suspend distributions; there is no minimum distribution or required coverage cushion.
- Kimbell was preparing to elect corporate federal tax treatment and implement an Up-C restructuring. The filing notes potential entity-level taxes, reduced cash available for distributions, tax consequences to unitholders, and execution and approval risks. The election and restructuring were not yet complete when the report was filed.
- Commodity prices and operator drilling activity are key business drivers. Kimbell’s fixed-price swaps were not designated as accounting hedges, so fair-value changes affect current earnings. Following Haymaker, the company said it hedged approximately 30% of post-acquisition daily production. It also disclosed counterparty credit exposure to one derivatives counterparty, which is a lender.
- Management recorded no Q2 impairment, but reported the $54.75 million Q1 impairment and said future impairment, including effects from Haymaker, remained possible. A dispute over ownership of certain non-producing acreage was not expected to have a material impact; no amount was accrued. Management reported effective disclosure controls and no material change in internal control during the quarter.
- No specific financial guidance was provided. Management’s stated distribution and growth plans depend on operating results, commodity prices, acquisitions, financing availability and board-determined reserves.
Important facts for investors to verify
- Final Haymaker purchase accounting, acquired-property contribution to production and cash flow, and whether expected acquisition benefits are realized.
- Post-acquisition debt, borrowing-base availability, covenant headroom and financing costs; distinguish June 30 debt from post-close borrowings.
- Preferred-unit distribution and conversion terms, seniority, and their effect on cash available to common unitholders.
- Timing and consequences of the proposed tax election and Up-C restructuring, including tax costs and any required unitholder approvals.
- Future full-cost ceiling tests, reserve assumptions and any additional impairment; also compare distributions with cash available for distribution.
- Commodity-price exposure, hedge volumes and fair-value impacts, as well as production and drilling trends on Kimbell’s acreage.