Kimbell Royalty Partners, LP — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; filed November 9, 2017. The Partnership completed its IPO on February 8, 2017. Accordingly, Q3 2017 results are for the Partnership, while Q3 2016 comparison figures are for its accounting predecessor and are not directly comparable. The same distinction applies to the nine-month figures.
Business context
The Partnership owns non-cost-bearing mineral and royalty interests in U.S. oil and gas properties. At September 30, it reported interests across approximately 3.7 million gross mineral and royalty acres and 2.0 million gross overriding royalty acres; about 35% of aggregate acreage was in the Permian Basin. It had interests in more than 50,000 gross producing wells. The Partnership generally does not fund drilling, completion, lease operating, or plugging costs.
Financial and operating metrics
| Metric | Q3 2017 | Relevant comparison or other period |
|---|---|---|
| Oil, gas and NGL revenue | $8.35 million | $0.97 million, predecessor Q3 2016; comparison is not like-for-like |
| Operating income (loss) | $0.34 million | $(0.66) million, predecessor Q3 2016 |
| Net income (loss) | $0.12 million | $(0.77) million, predecessor Q3 2016 |
| Adjusted EBITDA | $5.27 million | Non-GAAP; cash available for distribution was $5.10 million |
| Production | 303,301 Boe; 3,297 Boe/day | 34,234 Boe; 372 Boe/day, predecessor Q3 2016 |
| Average realized prices received by operators | Oil $43.95/Bbl; gas $2.79/Mcf; NGL $19.75/Bbl | Predecessor Q3 2016: $42.08/Bbl, $3.11/Mcf and $20.37/Bbl, respectively |
| Post-IPO period revenue and Adjusted EBITDA | — | February 8–September 30: $20.66 million revenue and $12.85 million Adjusted EBITDA |
| Cash flow from operations | Q3 standalone amount is not clearly stated | $13.97 million, February 8–September 30; predecessor pre-IPO period generated $0.19 million |
Q3 costs included $4.49 million of depreciation, depletion and accretion and $2.31 million of general and administrative expense. The reported Q3 operating and net margins were approximately 4.1% and 1.4%, respectively.
At September 30, cash was $6.23 million, receivables were $5.50 million, current assets were $11.99 million and current liabilities were $2.30 million. Long-term debt was $22.21 million. The Partnership reported a $50 million revolving-credit commitment, with $50 million maximum availability after the August borrowing-base redetermination, and a 3.51% weighted-average borrowing rate for the post-IPO period. It was in compliance with its covenants at quarter-end. Borrowings were $29.6 million as of November 8.
For February 8–September 30, investing cash outflow was $117.19 million and financing cash inflow was $109.45 million; ending cash was $6.23 million. Investing included property acquisitions, while financing included $96.26 million of IPO proceeds, $22.21 million of borrowings and $8.71 million of distributions.
Material changes and capital allocation
- Revenue and production rose substantially versus predecessor periods, primarily because of the assets contributed at the IPO and subsequent acquisitions. Management said interests acquired from Maxus Energy in April helped offset natural production declines and contributed to slightly higher production exiting Q3.
- Q3 production and ad valorem taxes were $0.78 million, depletion and accretion expense was $4.49 million, and marketing and other deductions were $0.42 million. Management attributed increases in these costs largely to the larger post-IPO asset base and related production.
- Q3 general and administrative expense increased to $2.31 million from the predecessor’s $0.46 million, reflecting costs of operating as a public company. Related-party service providers received payments under management and service agreements.
- The Partnership acquired interests underlying 1.1 million gross acres and 6,881 net royalty acres for approximately $16.8 million in Q2. After quarter-end, it acquired Utah interests for approximately $3.9 million and Arkansas interests for approximately $7.3 million, funded with credit-facility borrowings.
- Quarterly distributions were $0.23 per unit for Q1 and $0.30 for Q2; the Board declared $0.31 per unit for Q3, payable November 13, 2017. Management reported calculated cash available for distribution of $0.28 per unit for Q2, with the declared distribution increased using excess working capital.
Outlook, risks and unusual items
- No specific production, revenue, earnings or distribution guidance was provided. Management’s objective is to increase cash distributions through acquisitions and continued development by third-party operators, but distributions are discretionary, may fluctuate, and there is no minimum quarterly distribution.
- The Partnership had no commodity hedges. Revenue and distributable cash are exposed to volatile oil, natural gas and NGL prices, production levels, operator drilling activity, and other factors outside the Partnership’s control.
- A significant accounting uncertainty is the SEC exemption allowing IPO-acquired properties to be excluded from the full-cost ceiling test through December 31, 2017. Those properties had an unamortized cost of $240.8 million at September 30. Management said an impairment charge would have been $78.4 million absent its fair-value conclusion and indicated an impairment in 2018 was likely after the exemption expires, absent significant changes in prices or reserves.
- The credit facility is secured by substantially all Partnership assets and includes financial covenants, including a maximum debt-to-EBITDAX ratio of 4.0 to 1.0 and minimum current ratio of 1.0 to 1.0. A 1 percentage-point interest-rate increase on quarter-end debt would add approximately $0.2 million of annual interest expense if borrowings remained constant.
- Management reported no material legal, environmental or other contingencies and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether commodity prices, operator activity and production sustain cash generation and the declared distribution; the Partnership does not hedge and has no minimum distribution.
- How the 2018 full-cost ceiling test affects the reported carrying value and whether the anticipated impairment occurs.
- Acquisition economics, funding and resulting leverage, including post-quarter acquisitions and the November 8 debt balance.
- Related-party management and service fees, which reduce cash available for unitholder distributions.
- Comparability of reported growth: predecessor results cover only a limited portion of the Partnership’s current asset base and are not directly comparable with post-IPO results.