Kimbell Royalty Partners, LP — Q3 2021 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2021. Kimbell owns non-cost-bearing mineral and royalty interests across U.S. oil and gas properties; it does not fund operators’ drilling or lease operating costs. At quarter-end, it reported interests covering approximately 9.1 million gross mineral and royalty acres and 4.6 million gross overriding royalty acres. The interim financial statements are unaudited.
Financial and operating performance
- Q3 revenue: $31.8 million, versus $18.4 million a year earlier. Oil, natural gas and NGL revenue was $47.6 million, offset by a $17.6 million net commodity-derivative loss.
- Q3 earnings: Operating income was $10.1 million versus an operating loss of $25.0 million; net income was $7.5 million versus a net loss of $25.7 million. Net income attributable to common units was $1.8 million, or $0.04 per diluted unit, versus a loss of $17.8 million, or $0.50 per unit.
- Nine-month results: Total revenue was $79.9 million versus $67.2 million; net income was $11.7 million versus a net loss of $162.3 million. Common-unit-attributable income was $2.6 million, or $0.06 diluted per unit, versus a loss of $105.1 million, or $3.13 per unit.
- Production and prices: Q3 production was 1.36 million Boe, up from 1.30 million; nine-month production was 3.91 million Boe, up from 3.78 million. Management attributed higher oil, gas and NGL revenue primarily to stronger realized prices. Q3 average operator prices were $67.47/Bbl oil, $3.82/Mcf gas and $28.42/Bbl NGL.
- Cash flow: Nine-month operating cash flow was $69.1 million, compared with $47.9 million. Investing used $0.8 million versus $88.8 million; financing used $65.4 million versus providing $39.1 million. Cash increased by $2.9 million to $12.7 million.
- Liquidity and debt: Debt was $192.7 million at September 30, with $72.3 million of stated available capacity under the revolving facility. The $265 million borrowing base was reaffirmed in May; the November redetermination was pending. The partnership reported covenant compliance. Current assets were $44.9 million and current liabilities $41.1 million; current liabilities included $33.7 million of derivative liabilities.
- Derivatives and interest: Net derivative liabilities were $41.3 million, compared with $6.3 million at year-end 2020. Commodity hedges covered approximately 33% of daily production. A $150 million interest-rate swap fixed a portion of borrowings at approximately 3.9% through January 2024. Q3 interest expense was $2.5 million, up from $1.6 million.
- Distribution: The board declared a Q3 common-unit distribution of $0.37, payable November 8, 2021. The board allocated 25% of Q3 cash available for common-unit distribution toward repayment of revolver borrowings.
Material changes versus the prior comparable period
- Higher commodity prices and modestly higher production lifted oil, gas and NGL revenue; Q3 production increased about 4.6% year over year.
- Q3 results improved from a loss to a profit, in part because there was no property impairment in 2021. The comparable 2020 quarter included a $22.2 million impairment; the 2020 nine-month period included $158.7 million.
- Commodity-derivative losses increased: $17.6 million in Q3 2021 versus $5.9 million in Q3 2020; the nine-month loss was $45.9 million versus a $0.2 million gain.
- In July, Kimbell redeemed 30,000 Series A preferred units for $36.1 million, funded with revolver borrowings. Twenty-five thousand preferred units remained outstanding at quarter-end. Debt rose from $171.6 million at December 31, 2020 to $192.7 million.
Outlook, commentary, risks and unusual items
- No specific financial or production guidance is provided. Management says commodity-price, demand, production, operator drilling activity and acquisition outcomes remain uncertain. The 2020 pandemic and supply disruptions affected the comparison period; management noted that oil prices had recovered above pre-pandemic levels in the first half of 2021.
- Key risks include volatile commodity prices, production and drilling levels controlled by operators, reserve estimates and potential impairments, operator financing and title matters, regulation and climate-related policy, and COVID-19-related market or operational disruption.
- Management warned that the proposed TGR SPAC offering and subsequent business-combination process may not succeed and could divert management resources. TGR had filed an S-1 but had not completed its offering; the proposed base offering was $200 million, potentially $230 million with full over-allotment.
- The filing reported no known legal, environmental or other contingencies expected to materially affect financial condition, results or liquidity. No off-balance-sheet arrangements were reported. An additional $8 million revolver draw occurred October 28, after quarter-end.
- The company expects no material federal income taxes through 2027 and expects most common-unit distributions through 2025 not to be taxable dividend income; these are estimates based on assumptions and current tax law, not assurances.
Important facts for investors to verify
- How much of the revenue and earnings improvement reflects durable production and pricing versus noncash derivative valuation movements and prior-year impairment charges.
- The November 2021 borrowing-base redetermination outcome, remaining revolver capacity after the subsequent $8 million draw, and covenant headroom.
- Future allocation between common-unit distributions and debt repayment, including whether the $0.37 distribution is sustainable under changing prices and hedge settlements.
- Commodity hedge volumes, prices and resulting cash settlements relative to production and market prices through 2023.
- Progress, costs and potential management demands of the TGR SPAC offering and any proposed business combination.