Kimbell Royalty Partners, LP — Q1 2017 Form 10-Q
Reporting period: Quarter ended March 31, 2017. The Partnership completed its IPO on February 8, 2017, so the filing reports Partnership results only from February 8 through March 31 and separate predecessor results for January 1 through February 7. Comparisons with Q1 2016 and December 31, 2016 are therefore not directly comparable, particularly because the Partnership acquired its initial assets at the IPO.
Business context and operating results
- The Partnership owns non-cost-bearing mineral and royalty interests and receives production revenues without funding drilling, completion, or lease operating costs as a working-interest owner.
- At March 31, it reported interests across approximately 3.7 million gross mineral and royalty acres and 0.9 million gross overriding royalty acres; approximately 44% of aggregate acreage was in the Permian Basin. More than 95% of acreage was leased, and the interests included ownership in more than 48,000 gross producing wells.
- For the post-IPO period, revenue was $4.55 million and net income was $283,218, or $0.02 per common unit. The predecessor reported a $496,856 net loss for January 1–February 7. Together, the reported periods show approximately $4.87 million in revenue and a net loss of approximately $214,000, but this is not a consolidated full-quarter result.
- Management’s combined production data for Q1 2017 was 172,463 BOE, or 1,916 BOE/day, versus 43,608 BOE, or 479 BOE/day, for the predecessor in Q1 2016. The increase primarily reflects the substantially larger asset base acquired at the IPO.
- Combined Q1 2017 revenue mix was 61% oil, 28% natural gas, and 11% NGLs. Average realized prices were $47.33/bbl for oil, $2.60/Mcf for natural gas, and $23.42/bbl for NGLs.
Financial position, cash flow, and liquidity
| Metric | Reported amount or context |
|---|---|
| Assets at March 31, 2017 | $279.4 million, including $265.7 million of net oil and natural gas properties |
| Cash and current assets | $3.9 million of cash; $10.8 million of total current assets, including $6.6 million of oil, gas, and NGL receivables |
| Liabilities | $5.8 million total liabilities, including $3.9 million of long-term debt and $1.9 million of current liabilities |
| Liquidity | Current assets/current liabilities were approximately 5.7x. The Partnership had a $50 million secured revolving facility, subject to borrowing-base availability; it may be increased to $100 million subject to conditions. |
| Debt | $3.9 million outstanding at March 31, bearing interest at 3.238%; the Partnership reported compliance with facility covenants. Management reported $17.4 million borrowed as of May 8, 2017. |
| Cash flow, February 8–March 31 | $2.7 million provided by operating activities; $98.6 million used in investing; $99.8 million provided by financing; ending cash of $3.9 million. |
| Adjusted EBITDA and cash available | Post-IPO Adjusted EBITDA was $2.88 million; management-calculated cash available for distribution was $2.88 million after cash interest and capital expenditures. These are non-GAAP measures. |
The $96.3 million of IPO proceeds funded the cash portion of the initial asset acquisition; the Partnership also issued units valued at approximately $169.0 million to contributors for properties. The predecessor’s $10.6 million debt was repaid in connection with the IPO and was not assumed by the Partnership.
Changes, outlook, risks, and unusual items
- IPO and growth: The February 8 IPO issued 5.75 million public common units at $18 per unit and established the Partnership’s initial asset base. The increase in revenues, production, and operating cash flow versus Q1 2016 chiefly reflects those acquired assets; public-company costs also raised general and administrative expense.
- Distribution: The board declared a $0.23-per-unit distribution for Q1, payable May 15 to holders of record May 8. Management calculated cash available at $0.18 per unit and said the additional $0.05 reflected cash received from contributors for production before the IPO. There is no minimum distribution or commitment to retain excess coverage; distributions may fluctuate or be suspended.
- Acquisition: On April 24, the Partnership closed a $15.9 million acquisition of overriding royalty interests in the Anadarko Basin, covering 1.1 million gross acres and 6,700 net royalty acres. A $2.4 million deposit was recorded at March 31.
- Impairment exposure: The SEC did not object to an exemption from the full-cost ceiling test for qualifying IPO-acquired properties through the December 31, 2017 reporting period. Their unamortized cost was $247.8 million; management estimated that applying the test at March 31 would have resulted in a $91.3 million noncash impairment. Future changes in value or assumptions could require impairment.
- Commodity exposure: The Partnership had no commodity hedges. Revenue and distributions are exposed to oil, gas, and NGL prices, production volumes, operator drilling activity, and third-party operators’ ability to develop properties. Management noted volatile prices and no assurance of reserve replacement.
- Related parties: Sponsor-affiliated entities provide management, administrative, operational, and acquisition services. Payments for these services reduce cash available for distributions.
- Controls and contingencies: Management concluded disclosure controls were effective at March 31 and reported no material changes in internal control. Management reported no material legal, environmental, or other contingencies.
Important facts for investors to verify
- Assess the $91.3 million potential impairment and the assumptions supporting the SEC ceiling-test exemption through year-end.
- Reconcile the $0.23-per-unit distribution with the $0.18-per-unit calculated cash available, including the one-time pre-IPO production receipts.
- Confirm borrowing-base availability and the use of proceeds from the increase in borrowings to $17.4 million reported as of May 8, 2017.
- Review the economics, closing costs, and expected contribution of the $15.9 million Anadarko Basin acquisition.
- Evaluate commodity-price, production, reserve-estimation, operator, and related-party service risks; the filing provides no formal financial guidance or guaranteed distribution level.