Kimbell Royalty Partners, LP — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Kimbell owns non-cost-bearing mineral and royalty interests in U.S. oil and gas properties. Results were shaped by acquisitions, lower commodity prices, derivative gains and a substantial property impairment.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Oil, natural gas and NGL revenue | $25.6 million | $22.8 million |
| Total revenue, including derivatives | $35.9 million | $17.9 million |
| Operating loss | $(58.5) million | $(3.9) million |
| Net loss | $(59.8) million | $(5.3) million |
| Net loss attributable to common units; loss per unit | $(39.3) million; $(1.29) | $(3.7) million; $(0.21) |
| Operating cash flow | $20.8 million | $15.8 million |
| Consolidated Adjusted EBITDA | $18.8 million | $16.1 million |
| Adjusted EBITDA attributable to Kimbell; cash available for common-unit distribution | $11.8 million; $9.8 million | $6.7 million; $5.2 million |
| Cash and cash equivalents at period-end | $14.5 million | $14.2 million at Dec. 31, 2019 |
| Long-term debt at period-end | $101.2 million | $100.1 million at Dec. 31, 2019 |
Oil, gas and NGL production revenue rose about 12% year over year, while production volumes increased 35% to 1.22 million Boe. Reported total revenue also benefited from a $10.1 million derivative gain, compared with a $5.0 million derivative loss in Q1 2019. The $70.9 million impairment was the principal driver of the net loss; excluding that non-cash charge, reported earnings would have been materially different. The filing does not provide a conventional operating margin that isolates recurring operating performance.
Cash used in investing activities was $11.2 million, including a $9.7 million deposit on oil and gas properties and $1.3 million invested in an affiliate. Cash used in financing activities was $9.3 million; ending cash increased by $0.3 million. The credit facility had $225 million of commitments, with $123.8 million of stated capacity available at March 31, subject to facility terms. Kimbell reported compliance with its covenants at quarter-end. Current assets were $36.7 million and current liabilities $4.2 million.
Material changes versus Q1 2019
- Oil, gas and NGL revenue increased by $2.8 million, primarily from acquired production; lower realized oil and gas prices partly offset volume growth.
- Average realized prices were $45.25 per barrel of oil and $1.93 per Mcf of natural gas, down from $50.89 and $2.68, respectively.
- Production increased from 902,877 to 1,215,562 Boe, with Phillips and other acquired interests contributing to growth.
- Property impairment increased from $2.8 million to $70.9 million. The charge included impairment of PUD reserves and unevaluated properties amid price declines and drilling uncertainty.
- Cash from operations rose by $5.0 million, while common-unit cash available for distribution increased to $9.8 million from $5.2 million.
- In January, Kimbell issued 5.0 million common units for net proceeds of about $73.6 million, used through the Operating Company largely to repay borrowings. In February, it redeemed half of its Series A preferred units for $61.1 million.
Outlook, risks and unusual items
- COVID-19 and commodity markets: Management described sharp demand and oil-price declines, heightened volatility and risks of operator spending cuts, shut-ins and lower royalty revenue. Two operators had notified Kimbell of shut-ins or curtailments affecting properties representing about 1% of Q1 production.
- Expected impairment: Management expected a further oil and gas property impairment in Q2 2020 due to the full-cost ceiling test and lower trailing average commodity prices; further charges were possible if prices remained low or fell further.
- Distributions and debt reduction: The board declared a Q1 common-unit distribution of $0.17 per unit, versus $0.37 for Q1 2019. It allocated 50% of Q1 cash available for distribution, together with certain acquisition proceeds and reserves, toward repaying $15 million of facility borrowings. Future distributions and cash allocations could change.
- Springbok acquisition after quarter-end: Closed April 17, 2020, for $95 million cash, 2.2 million common units and 2.5 million OpCo common units paired with Class B units. The cash portion was funded with revolver borrowings. Kimbell also reported additional hedging after closing; hedged production rose to approximately 31% from 19%.
- Borrowing-base and refinancing risk: The May 2020 borrowing-base redetermination was pending at filing. The facility matures February 2022; management intended to seek an extension before March 2021. Sustained lower prices could reduce future borrowing capacity. As of May 1, borrowings were $186.7 million.
- Controls: Disclosure controls were deemed ineffective as of March 31 because a previously identified material weakness in oversight of the full-cost ceiling calculation remained under remediation and testing.
- Other: Management reported no known legal, environmental or other contingencies expected to materially affect financial condition, results or liquidity. The filing provides no specific full-year earnings or production guidance.
Important facts for investors to verify
- Whether Q2 impairment charges, operator shut-ins and lower prices materially affect production revenue, cash flow and asset values.
- The outcome of the borrowing-base redetermination, post-Springbok revolver balance, covenant headroom and plans to extend the facility.
- Whether the reduced distribution is sustainable and how much cash is directed to debt repayment versus distributions.
- The completed Springbok transaction’s contribution to production and cash generation relative to its cash, debt and equity consideration.
- Whether management’s remediation of the full-cost ceiling control weakness is tested and deemed effective.