Kimbell Royalty Partners, LP — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. Kimbell completed its IPO on February 8, 2017 and acquired its initial royalty assets at that time. Accordingly, the Partnership’s reported 2017 results cover February 8–December 31; results through February 7 are those of its accounting predecessor, Rivercrest Royalties, LLC. Comparisons with 2016 are therefore not like-for-like.
Business context
Kimbell owns U.S. mineral and royalty interests and receives production revenue without funding drilling, completion, or lease operating costs. At year-end it held mineral and royalty interests across approximately 3.7 million gross acres and overriding royalty interests across approximately 2.0 million gross acres, in 20 states and more than 50,000 gross producing wells. Approximately 35% of aggregate acres were in the Permian Basin; more than 98% of mineral-interest acreage was leased.
Financial and operating highlights
| Metric | 2017 reported period / year-end | Context |
|---|---|---|
| Oil, natural gas and NGL revenue | $30.7 million | Partnership period, February 8–December 31. Predecessor revenue for January 1–February 7 was $0.3 million. |
| Total revenue, net of derivative loss | $30.3 million | Partnership period; includes a $0.3 million commodity-derivative loss. |
| Net income | $1.7 million | Partnership period; predecessor’s pre-IPO stub-period net loss was $0.5 million. |
| Operating cash flow | $18.6 million | Partnership period; predecessor stub-period operating cash flow was $0.2 million. |
| Adjusted EBITDA | $19.2 million | Non-GAAP measure for the Partnership period; not equivalent to net income or cash available for distribution. |
| Investing / financing cash flow | $(125.9) million / $113.0 million | Investing outflows principally reflect asset acquisitions; financing includes IPO proceeds and borrowings. |
| Cash and debt | $5.6 million cash; $30.8 million long-term debt | December 31, 2017 balance sheet. |
| Proved reserves | 20.954 million Boe | At year-end; 73.1% PDP, 0.4% PDNP and 26.5% PUD. PDP five-year average estimated annual decline rate: 8.8%. |
| Standardized measure | $215.6 million | Discounted at 10%; based on SEC pricing and reserve assumptions, and not a fair-value estimate. |
Combined 2017 oil, gas and NGL revenue for the Partnership and predecessor periods was approximately $31.0 million, versus $3.6 million for the predecessor in 2016; the increase primarily reflects the IPO asset contribution and subsequent acquisitions. Combined 2017 production was approximately 1.08 million Boe (6:1 energy conversion), or 2,952 Boe per day. The broader asset base and partial-year reporting make these comparisons unsuitable as a standalone measure of organic growth.
Average realized prices for the Partnership period were $47.08 per barrel of oil, $2.74 per Mcf of natural gas, and $21.50 per barrel of NGLs. Revenue mix was approximately 59% oil, 28% natural gas, 11% NGLs and 2% other. These figures are sensitive to commodity prices and operator production.
Changes, distributions and financing
- The Partnership completed multiple 2017 acquisitions for approximately $29.3 million, financed with revolving-credit borrowings. It also acquired its initial assets in the IPO.
- Quarterly distributions were $0.23, $0.30, $0.31 and $0.36 per unit for the first through fourth quarters, respectively. The fourth-quarter distribution was declared in January 2018 and paid in February. There is no minimum distribution; the Board may change or suspend distributions.
- The secured revolver has $50 million of commitments, a $100 million borrowing base reaffirmed in February 2018, and a February 2022 maturity. At year-end, $30.8 million was outstanding and the Partnership reported covenant compliance. Availability is limited by the $50 million commitment, notwithstanding the higher borrowing base.
- The filing presents no full-year guidance. Management’s stated strategy is to grow distributions through acquisitions and operator-led development, while generally distributing available cash rather than retaining funds for replacement capital expenditures.
Outlook, risks and unusual items
- Impairment: No Partnership impairment was recorded in 2017 while an SEC exemption excluded the IPO-acquired properties from the full-cost ceiling test. Those assets had an unamortized cost of $237.2 million. Management stated that, absent its fair-value conclusion, a $64.3 million impairment would have been recorded at year-end and that an impairment would be recognized in the first quarter of 2018 after the exemption expired. The actual charge is not reported in this filing.
- Commodity exposure: Oil, gas and NGL prices drive revenue and distributions. The Partnership entered into fixed-price swaps for 2018 and 2019 covering 43,070 barrels of oil and 352,590 MMBtu of gas in each year. Derivatives are not designated as accounting hedges, so fair-value changes affect reported earnings.
- Operator dependence: Third-party operators control all development and production. The ten largest operators accounted for approximately 45% of 2017 combined net income. Reduced drilling, operator financing constraints, production interruptions or title-payment suspensions could reduce cash generation.
- Reserves and growth: PUDs require operator investment and are not assured of development. All year-end PUD locations were scheduled to be drilled by December 31, 2022, but schedules and costs are outside Kimbell’s control. Production declines may pressure distributions if drilling or acquisitions do not offset depletion.
- Liquidity and governance: Debt covenants restrict distributions and certain financing, investment and acquisition activity. The Partnership distributes available cash and may need external capital for growth. Sponsor and affiliate relationships create conflicts; the Partnership pays related-party service providers, and affiliate agreements were not negotiated at arm’s length.
- Other risks and contingencies: Environmental, hydraulic-fracturing, water, induced-seismicity, transportation and regulatory changes may affect operators and production. Management reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because of emerging-growth-company relief.
Most important facts for investors to verify
- Whether and how much impairment was recorded in the first quarter of 2018 after the ceiling-test exemption expired.
- Actual revolver availability, borrowing-base terms, covenant headroom and compliance, including the distinction between the $100 million borrowing base and $50 million lender commitments.
- Whether operating cash flow supports distributions after interest, affiliate service fees, reserves and other obligations; distributions are not guaranteed.
- Whether operator drilling and acquisitions replace production decline and convert PUD reserves on schedule.
- The realized effect of commodity prices and the 2018–2019 swaps, including derivative fair-value volatility and counterparty exposure.
- Related-party service costs, acquisition terms and potential conflicts, and the extent to which acquisitions are accretive per unit.