Kimbell Royalty Partners, LP — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The Partnership owns non-cost-bearing mineral and royalty interests in U.S. oil and gas properties. At quarter-end it reported interests across approximately 9.1 million gross mineral and royalty acres and 4.6 million gross overriding royalty acres. Its results depend on commodity prices, production and operator development activity.
Financial highlights
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Oil, natural gas and NGL revenues | $36.4 million | $25.6 million |
| Derivative gain (loss), net | $(14.1) million | $10.1 million |
| Total revenues | $22.4 million | $35.9 million |
| Operating income (loss) | $2.0 million | $(58.5) million |
| Net income (loss) | $0.5 million | $(59.8) million |
| Net loss attributable to common units | $(0.7) million; $(0.02) per unit | $(39.3) million; $(1.29) per unit |
| Net cash from operating activities | $15.5 million | $20.8 million |
| Adjusted EBITDA attributable to Kimbell | $17.1 million | $11.8 million |
| Cash available for distribution on common units | $14.7 million | $9.8 million |
Margins and production: Operating margin was approximately 8.9% of reported total revenues. Production increased 1.6% to 1.235 million Boe (13,721 Boe/d). Oil volumes declined to 319,649 barrels from 334,149; natural gas rose to 4.50 million Mcf from 4.26 million. The reported realized prices increased year over year: oil to $54.52/Bbl, gas to $3.31/Mcf and NGLs to $24.45/Bbl. Springbok acquisition production contributed 180,066 Boe; temporary weather-related shut-ins and weaker production on other properties partly offset the addition.
Cash, debt and liquidity: Cash was $8.1 million at March 31, down from $9.8 million at year-end. Current assets were $34.5 million and current liabilities $15.8 million, a current ratio of approximately 2.2. Long-term debt was $168.5 million, versus $171.6 million at December 31; the filing reports $96.5 million of remaining facility capacity. The Partnership complied with credit covenants at quarter-end. The revolving facility borrowing base was $265 million, subject to semiannual redetermination; the May 2021 review was still in progress. A $4 million additional draw occurred on April 27, after quarter-end.
Changes from the prior-year quarter
- Oil, gas and NGL sales rose $10.8 million, reflecting higher realized prices and modestly higher total production. However, a $14.1 million derivative loss, versus a $10.1 million gain in Q1 2020, drove total reported revenue lower.
- Consolidated net income improved to $0.5 million from a $59.8 million loss. The comparison is strongly affected by the prior-year $70.9 million property impairment; no impairment was recorded in Q1 2021.
- Operating cash flow decreased $5.3 million to $15.5 million. Financing cash outflow was $16.3 million, primarily distributions and debt repayment; investing cash outflow was $0.8 million.
- Interest expense increased to $2.1 million from $1.4 million, mainly due to borrowing associated with the Springbok acquisition, partly offset by a lower weighted-average borrowing rate (3.75% versus 4.70%).
- Quarterly common-unit distribution was declared at $0.27 per unit, up from $0.17 for Q1 2020; it was payable May 10, 2021. The Board allocated 25% of Q1 cash available for common-unit distribution to repayment of $5.6 million of facility borrowings in its available-cash determination.
Outlook, risks and notable items
- The filing provides no specific earnings or production guidance. Management describes acquisitions and organic development by operators as growth drivers, but states that future results depend on prices, volumes, operator activity and acquisition execution.
- Commodity price volatility remains a material risk. At quarter-end, commodity swaps covered approximately 34% of daily oil and gas production; derivative fair value was a net liability of $19.0 million. The contracts are not designated as accounting hedges, so fair-value changes affect current earnings.
- An interest-rate swap fixed the rate on $150 million of facility notional at approximately 3.9% through January 2024, covering about 89% of quarter-end borrowings. The filing estimates that a 1% rate increase on the quarter-end debt balance would add about $1.7 million to annual interest expense, assuming debt remained constant.
- COVID-19, global supply-demand changes and February 2021 winter storms affected industry activity and temporarily shut in certain properties. Management reported minimal operational impact from its work-location measures, but the longer-term effects remain uncertain.
- Management notes potential future property impairments if commodity prices fall or reserve estimates decline. No material legal, environmental or other contingencies were identified as of March 31, 2021. Related-party service providers received payments, including $75,329 to Nail Bay Royalties and $137,120 to Duncan Management during the quarter.
Important facts for investors to verify
- Reconcile the substantial difference between higher physical sales and lower reported total revenue by reviewing derivative mark-to-market losses, settlements and hedge volumes.
- Check the outcome of the May 2021 borrowing-base redetermination and the effect of the subsequent $4 million draw on available liquidity and covenant headroom.
- Assess whether cash available for distribution and the $0.27 distribution are sustainable after debt service, preferred-unit obligations, reserves and the Board’s debt-repayment allocation.
- Review production contribution and acquisition economics for Springbok and the March Nail Bay/Oil Nut Bay asset purchase, including related-party arrangements.
- Monitor reserve estimates, operator drilling activity and potential full-cost impairments, particularly given the Partnership’s policy not to book PUD reserves going forward.