Business Context and Reporting Period
Company: Kimbell Royalty Partners, LP (KRP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2016
Business Model: KRP is a Delaware limited partnership formed to own and acquire mineral and royalty interests in oil and natural gas properties. As a royalty owner, KRP receives a portion of revenues from production without bearing the costs of drilling, completion, or lease operations.
Key Status: As of December 31, 2016, KRP had not yet acquired its initial assets. The historical financial data presented in this filing relates solely to its predecessor, Rivercrest Royalties, LLC. KRP completed its Initial Public Offering (IPO) and acquired its initial assets on February 8, 2017.
Key Financial Metrics (Predecessor: Rivercrest Royalties, LLC)
Note: The following metrics reflect the predecessor entity, which represents approximately 11% of KRP's total future undiscounted cash flows post-IPO.
| Metric | 2016 | 2015 | 2014 |
|---|---|---|---|
| Revenues (Oil, Gas, NGL) | $3.61 million | $4.68 million | $7.22 million |
| Net Loss | $(6.21) million | $(31.31) million | $(7.41) million |
| Adjusted EBITDA | $1.43 million | $2.33 million | $4.52 million |
| Operating Cash Flow | $1.09 million | $2.71 million | $4.04 million |
| Total Assets | $20.54 million | $27.91 million | $58.75 million |
| Long-Term Debt | $10.60 million | $11.45 million | $9.00 million |
| Cash and Equivalents | $0.51 million | $0.38 million | $0.27 million |
Reserves (Combined KRP & Predecessor as of Dec 31, 2016): 17,590 MBoe (52.3% liquids).
Predecessor Reserves (Dec 31, 2016): 2,311 MBoe.
Material Changes vs. Prior Period
- Revenue Decline: Predecessor revenues decreased by approximately 23% from 2015 to 2016, driven by steep declines in commodity prices (Oil: $38.69/Bbl in 2016 vs. $49.79/Bbl in 2015) and a 7% decrease in production volumes.
- Impairment Charges: The predecessor recorded a non-cash impairment charge of $5.0 million in 2016, a significant reduction from the $28.7 million charge in 2015. The 2015 charge was driven by the sharp price drop in late 2014/2015, while the 2016 charge reflected continued low prices.
- Production Costs: Production and ad valorem taxes decreased to $0.28 million in 2016 from $0.43 million in 2015, correlating with lower revenues.
- Debt Reduction: Predecessor long-term debt decreased by approximately $0.85 million in 2016 due to repayments.
Guidance, Outlook, and Risks
- Post-IPO Impairment Risk: Management estimates a potential non-cash impairment charge in excess of $100 million in the quarter ending March 31, 2017. This is due to the "step-up" in asset value from the IPO combined with SEC reserve pricing rules (12-month average prices) and a 10% discount rate, which differ from the forward pricing and lower discount rates used in the IPO valuation. This charge will not affect cash available for distribution.
- Distribution Policy: KRP intends to distribute all "available cash" quarterly. There is no minimum quarterly distribution guarantee. Distributions are highly sensitive to commodity prices and operator drilling activity.
- Liquidity: KRP entered into a new $50.0 million secured revolving credit facility (expandable to $100.0 million) in connection with the IPO. As of the IPO closing, $1.5 million was borrowed for transaction expenses.
- Key Risks:
- Commodity Price Volatility: No hedging arrangements are currently in place.
- Operator Dependence: KRP relies entirely on third-party operators for drilling and development; it has no control over their capital allocation or drilling schedules.
- Reserve Uncertainty: 31% of total proved reserves are classified as Proved Undeveloped (PUD), requiring future capital expenditure by operators to be realized.
Investor Verification Checklist
- Asset Acquisition Confirmation: Verify the closing of the asset contribution from Contributing Parties on February 8, 2017, and the final valuation of assets received.
- Q1 2017 Impairment: Monitor the Q1 2017 earnings release for the anticipated >$100 million non-cash impairment charge and any SEC staff exemption requests.
- First Distribution: Confirm the amount and timing of the first quarterly distribution (expected within 45 days of March 31, 2017).
- Operator Activity: Review rig counts and drilling activity on KRP acreage (specifically in the Permian Basin, which comprises ~44% of aggregate acres) to assess organic growth potential.
- Debt Covenants: Verify compliance with the new credit facility covenants, specifically the Debt to EBITDAX ratio (max 4.0x) and current asset to current liability ratio (min 1.0x).