Kimbell Royalty Partners, LP — Q2 2017 Form 10-Q
Reporting period: Quarter ended June 30, 2017; filed August 11, 2017. The Partnership completed its IPO on February 8, 2017. Accordingly, Q2 2017 reflects the Partnership’s broader post-IPO asset base, while Q2 2016 reflects only its accounting predecessor, Rivercrest. Period comparisons are not directly like-for-like.
Business context
Kimbell owns non-cost-bearing mineral, royalty and overriding royalty interests and receives a share of production revenue; it does not fund drilling, completion or lease operating costs as a working-interest owner. At June 30, 2017, it reported interests across approximately 3.7 million gross mineral and royalty acres and 2.0 million gross overriding royalty acres, in 20 states. Approximately 35% of aggregate acreage was in the Permian Basin, and the interests covered more than 50,000 gross producing wells.
Financial and operating highlights
- Q2 revenue: $7.75 million, versus $0.85 million for predecessor Q2 2016. Q2 2017 revenue mix was 58% oil, 31% natural gas and 11% NGLs. Management attributed the increase principally to assets contributed at the IPO, not simply comparable-asset growth.
- Q2 earnings: Operating income was $434,626 and net income was $251,651, compared with predecessor operating and net losses of $1.09 million and $1.20 million, respectively, in Q2 2016. Q2 2017 net margin was approximately 3.2%.
- Post-IPO results: From February 8 through June 30, revenue was $12.31 million, net income was $534,869, and Adjusted EBITDA, a non-GAAP measure, was $7.58 million. The combined first-half 2017 figures include both predecessor and Partnership periods and are not directly comparable to the predecessor’s first-half 2016 results.
- Production: Q2 2017 production was 279,090 BOE (3,067 BOE/day), versus 38,343 BOE (421 BOE/day) for predecessor Q2 2016. June 2017 average production was 3,116 BOE/day, compared with 3,025 BOE/day in March. Acquired overriding royalty interests helped offset natural declines.
- Cash flow: Operating cash flow from February 8 through June 30 was $8.58 million. Investing cash outflow was $113.20 million and financing cash inflow was $110.45 million; these figures include IPO and acquisition activity. The filing does not provide a clear standalone Q2 cash-flow figure.
- Liquidity and debt: Cash was $5.83 million; current assets were $10.98 million and current liabilities $1.37 million. Long-term debt was $18.27 million. The secured revolver had $50 million in aggregate commitments and $50 million of maximum availability after its borrowing base was reaffirmed at $100 million on August 1. The weighted-average borrowing rate through June 30 was 3.38%; the Partnership reported covenant compliance.
- Distributions: The Board declared $0.30 per common unit for Q2, payable August 14. Management calculated cash available for distribution at $0.28 per unit and added $0.02, citing excess working capital, primarily from prior-period production receipts. The Q1 distribution was $0.23 per unit.
Material changes, outlook and risks
- During February 8–June 30, the Partnership acquired interests underlying 1,116,874 gross acres (6,881 net royalty acres) for approximately $16.8 million, funded with revolver borrowings. IPO-contributed assets were valued at approximately $247.8 million.
- The Partnership has no commodity hedges. Revenue and distributions are exposed to oil, natural gas and NGL prices, production volumes and operator drilling activity. Management cited volatility in commodity prices and dependence on third-party operators among the principal risks.
- The SEC granted an exemption through December 31, 2017 allowing most IPO-acquired properties to be excluded from the full-cost ceiling test. Management affirmed the exemption remained appropriate at June 30. The filing states that, absent that affirmation, an $82.3 million impairment would have been recorded for the period; management also said an impairment in 2018 was likely after the exemption expires, absent significant changes in prices or reserves.
- Management’s business objective is to grow distributions through acquisitions and development by operators, but the Partnership has no minimum distribution and may change or suspend distributions. It does not generally intend to retain cash for replacement capital expenditures, which could leave distributions more exposed to production decline over time.
- Management services are provided under agreements involving the general partner and sponsor-affiliated entities; related-party payments reduce cash available for distribution. The filing reported no known material legal, environmental or other contingencies. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
- No numerical forward guidance was provided. The filing emphasizes that interim results may not indicate full-year results.
Key facts for investors to verify
- Whether production, commodity prices and operator activity support recurring cash generation as the post-IPO portfolio seasons; distinguish acquired growth from comparable-asset performance.
- The assumptions behind the ceiling-test exemption and the potential for impairment after December 31, 2017, including reserve and price sensitivity.
- Distribution coverage: reported Q2 cash available of $0.28 per unit versus the $0.30 distribution, and the role of working-capital receipts in the supplemental amount.
- Revolver availability, borrowing-base redeterminations and covenant headroom as acquisition spending and debt change.
- Costs and governance of sponsor-affiliated management and acquisition services, and the effect of those payments on distributable cash.