Kimbell Royalty Partners, LP — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Kimbell owns non-cost-bearing mineral and royalty interests across U.S. oil and gas basins; it does not fund operators’ drilling or lease operating costs. Results are unaudited.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Oil, natural gas and NGL revenue | $38.8 million | $16.8 million | $75.2 million | $42.4 million |
| Total revenue, including derivative gains/losses | $25.7 million | $12.8 million | $48.1 million | $48.8 million |
| Net income (loss) | $3.7 million | ($76.8 million) | $4.2 million | ($136.6 million) |
| Net income (loss) attributable to common units | $1.5 million | ($48.0 million) | $0.8 million | ($87.3 million) |
| Net cash provided by operating activities | Not separately stated in the cash flow statement | Not separately stated in the cash flow statement | $44.0 million | $35.5 million |
| Cash available for distribution on common units (non-GAAP) | $17.8 million | $5.9 million | $32.5 million | $15.8 million |
Q2 operating income was $5.6 million, versus an operating loss of $75.1 million in the prior-year quarter. No property impairment was recorded in 2021; 2020 included impairments of $65.5 million for Q2 and $136.5 million for the first half. The Q2 2021 total-revenue figure includes a $14.2 million net commodity-derivative loss; first-half derivative losses were $28.4 million, compared with a $6.1 million gain in the first half of 2020.
- Production: Q2 volumes were 1.31 million Boe, up about 4% year over year; first-half volumes were 2.54 million Boe, up about 3%. Management attributed growth largely to the 2020 Springbok acquisition, partly offset by other production declines and February 2021 winter storms.
- Cash and liquidity: Cash was $13.0 million at June 30, versus $9.8 million at year-end 2020. Current assets were $38.2 million and current liabilities $28.8 million. Six-month investing cash outflow was $1.0 million and financing cash outflow was $39.8 million.
- Debt: Revolver borrowings were $162.9 million at June 30, against a $265 million borrowing base, with $102.1 million of availability. The facility matures June 7, 2024; Kimbell reported covenant compliance. The weighted average borrowing rate was 3.75%. A $150 million interest-rate swap fixed a substantial portion of the borrowing balance at approximately 3.9% through January 2024.
- Distributions: The board declared a Q2 common-unit distribution of $0.31 per unit, compared with $0.13 for Q2 2020. The board allocated 25% of Q2 cash available for distribution on common units to debt repayment. A portion of the distribution was paid after quarter-end.
Material changes and management commentary
- Oil, gas and NGL revenue rose sharply as realized commodity prices recovered; Q2 operator prices averaged $63.47 per barrel of oil and $2.69 per Mcf of gas, versus $25.40 and $1.43, respectively, a year earlier. First-half total revenue nevertheless declined slightly because derivative results swung from a gain to a loss.
- Management said oil prices and activity improved in the first half of 2021, with oil prices above pre-pandemic levels. It cautioned that COVID-19, commodity-price volatility and supply-demand imbalances could still adversely affect production, cash flow and results.
- On July 7, 2021, Kimbell redeemed 30,000 of its 55,000 Series A preferred units for $36.1 million, funded by a July 1 revolver draw. The redemption left 25,000 preferred units outstanding. As a result, revolver borrowings were $199.0 million and availability $66.0 million as of July 30.
- Kimbell’s subsidiary SPAC, Kimbell Tiger Acquisition Corporation, filed an S-1 on July 29 for a proposed $200 million offering, potentially $230 million with the underwriter option. Kimbell expected to own about 20% after the offering; management and directors have interests in the SPAC sponsor. The filing highlights execution, regulatory, distraction and potential financial-statement restatement risks.
Risks, contingencies and unusual items
- Commodity prices, production volumes, operator drilling activity and the ability of operators to obtain financing are key sensitivities. Kimbell had commodity swaps covering about 33% of daily oil and gas production; the contracts are not designated as accounting hedges, so fair-value changes flow through current earnings.
- Derivative liabilities totaled $30.0 million at June 30, versus $6.3 million at year-end 2020. Price increases drove mark-to-market losses, which can make reported revenue and earnings volatile.
- The credit facility limits distributions and other activities and requires a maximum debt-to-EBITDAX ratio of 3.5:1 and a current-assets-to-current-liabilities ratio of at least 1.0:1. The filing reports compliance at June 30.
- Management reported no known material legal, environmental or other contingencies. The partnership noted that disputes over mineral-interest ownership can arise in the ordinary course.
- Kimbell is taxed as a corporation for federal income-tax purposes. Management’s estimates that federal taxes will remain immaterial through 2027 and that more than 95% of common-unit distributions will not be taxable dividend income through 2025 are subject to assumptions and uncertainty.
Investor verification priorities
- Track realized commodity prices, production trends and operator activity, and distinguish underlying production revenue from derivative mark-to-market effects.
- Reconcile the $36.1 million post-quarter preferred redemption and additional revolver borrowing with the resulting debt, liquidity and future interest expense.
- Review distribution coverage and the board’s continuing debt-repayment allocation policy; cash available for distribution is a non-GAAP measure.
- Monitor borrowing-base redeterminations, covenant headroom and derivative positions, particularly given the large derivative liability and commodity exposure.
- Assess the SPAC offering and related-party interests, including whether it closes, its eventual business combination and any effect on Kimbell’s management focus or financial reporting.