Kimbell Royalty Partners, LP — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. The partnership owns U.S. mineral and royalty interests and generally does not fund drilling, operating or abandonment costs. Filing dated February 25, 2022.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Oil, natural gas and NGL revenue | $175.1 million | $92.6 million |
| Total revenue, including derivative losses | $135.6 million | $90.5 million |
| Operating income (loss) | $49.3 million | $(250.7) million |
| Net income (loss) | $42.4 million | $(256.1) million |
| Net income (loss) attributable to common units | $22.6 million | $(167.4) million |
| Net cash provided by operating activities | $91.4 million | $62.2 million |
| Adjusted EBITDA attributable to KRP | $84.3 million | $42.0 million |
| Cash available for distribution on common units | $75.5 million | $35.4 million |
- Production was 5.24 million Boe, or 14,354 Boe/d, up 3.3% from 2020. Average realized prices rose to $64.86/Bbl for oil, $3.51/Mcf for gas and $29.33/Bbl for NGLs.
- Production and ad valorem taxes were $10.5 million; marketing and other deductions were $12.0 million; depreciation and depletion was $36.8 million; G&A was $27.0 million; and interest expense was $9.2 million.
- Derivative losses were $42.8 million, including $22.1 million of mark-to-market losses and $20.7 million of settlement losses. This substantially reduced reported total revenue relative to oil, gas and NGL revenue.
- Year-end cash was $7.1 million. Current assets were $45.4 million and current liabilities $28.3 million. Long-term revolver borrowings were $217.1 million, versus $171.6 million a year earlier; reported remaining capacity was $57.9 million against a $275 million borrowing base.
- The credit facility matures June 7, 2024. The partnership reported compliance with its covenants at year-end. The facility requires debt/EBITDAX of no more than 3.5x and current assets/current liabilities of at least 1.0x; distributions are restricted if debt/EBITDAX exceeds 3.0x.
Material changes and significant events
- Oil, gas and NGL revenue increased $82.5 million, primarily due to higher commodity prices; production also increased modestly, partly because 2021 included a full year of Springbok production.
- The partnership recorded no oil and gas property impairment in 2021, compared with $251.6 million in 2020. The 2020 charge reflected lower commodity-price assumptions and reserve/property impairments.
- Proved reserves rose 7.2% to 45.5 million Boe from 42.4 million Boe. All year-end 2021 reserves were proved developed producing (PDP); the estimated first-five-year annual decline rate was 11.8%.
- The Cornerstone acquisition closed December 7, 2021, for approximately $54.6 million in cash, funded with revolver borrowings. It added interests associated with approximately 26,000 gross producing wells.
- A November 2021 equity offering raised approximately $57.7 million net. Proceeds were used to purchase Operating Company units, which repaid approximately $56.0 million of revolver borrowings.
- The partnership redeemed all remaining Series A preferred units in 2021 for approximately $67.1 million in total, funded in part with revolver borrowings. None remained outstanding at year-end.
- Common-unit distributions were $0.27, $0.31, $0.37 and $0.37 for the first through fourth quarters of 2021, respectively. The $0.37 fourth-quarter distribution was paid February 7, 2022.
Outlook, risks and unusual items
- No specific production, revenue or earnings guidance is provided. Management’s strategy is to pursue acquisitions and benefit from operator-led development while maintaining financial flexibility. The partnership expects to allocate some available cash to debt repayment; distributions may therefore vary and can be reduced or suspended.
- Commodity prices, operator drilling decisions and production levels are key drivers. KRP depends on unaffiliated operators for development and production and has no operational control. Approximately 36.8% of revenue came from its ten largest operators; its largest purchaser represented about 6.0%.
- Commodity swaps covered approximately 32% of daily oil and gas production at year-end. Fixed-price swaps may limit gains when market prices rise, and because derivatives are not designated as accounting hedges, fair-value movements affect current-period earnings. A $150 million interest-rate swap fixed the rate on that notional amount at approximately 3.9% through January 2024.
- Environmental, hydraulic-fracturing and climate-related regulation, transportation constraints, reserve-estimation uncertainty, acquisition integration, title and royalty-payment suspense, and refinancing or borrowing-base reductions are among the disclosed risks.
- KRP is a taxable corporation for federal income-tax purposes. Management estimates no material federal income taxes through 2027 and expects most distributions to be non-dividend income through 2025, but these estimates depend on assumptions and may change.
- After year-end, affiliated SPAC Kimbell Tiger Acquisition Corporation completed its February 2022 IPO. KRP funded $14.1 million for private-placement warrants; the SPAC had not yet completed a business combination. KRP disclosed the risk of losing this investment if the SPAC fails to complete one within its permitted period.
Important facts for investors to verify
- Review the reconciliation and assumptions behind adjusted EBITDA and cash available for distribution, including derivative settlements, debt service and the board’s debt-repayment allocations.
- Assess hedge prices and volumes against expected production and current market prices, and review the resulting exposure to commodity-price changes.
- Confirm revolver availability, borrowing-base redeterminations, covenant headroom and debt levels after the Cornerstone acquisition, preferred-unit redemptions and subsequent 2022 borrowings.
- Evaluate reserve replacement and production trends given that all reported reserves are PDP and estimated annual decline is 11.8% over the first five years.
- Review acquisition economics, the SPAC warrant investment and related-party service arrangements and governance conflicts disclosed in the filing.
- Note the auditor’s unmodified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.