Kimbell Royalty Partners, LP — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Kimbell owns non-cost-bearing mineral and royalty interests across U.S. oil and gas basins; it does not fund drilling, operating, or plugging costs on those interests. Results are unaudited.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Oil, gas and NGL revenue | $57.0 million | $78.6 million | $114.4 million | $143.7 million |
| Total revenue, including lease income and derivatives | $60.8 million | $72.7 million | $127.7 million | $106.5 million |
| Operating income | $24.6 million | $43.9 million | $58.0 million | $52.1 million |
| Net income | $17.8 million | $43.3 million | $46.7 million | $51.7 million |
| Net income attributable to common units | $13.5 million | $37.9 million | $36.8 million | $45.2 million |
| Diluted net income per common unit | $0.23 | $0.55 | $0.59 | $0.42 |
| Adjusted EBITDA attributable to Kimbell | $34.2 million | $46.8 million | $68.3 million | $85.3 million |
| Cash available for distribution on common units | $29.7 million | $42.3 million | $60.3 million | $78.8 million |
- Q2 operating margin was approximately 40.6%, compared with 60.4% a year earlier; net margin was approximately 29.3%, compared with 59.5%. These ratios use reported total revenue, including derivative results.
- Production increased to 18,145 Boe/d in Q2 from 14,948 Boe/d; first-half production rose to 17,783 Boe/d from 14,763 Boe/d.
- Operating cash flow for the first half was $78.6 million, versus $76.5 million. Cash and cash equivalents were $20.8 million at June 30.
- Long-term debt was $269.6 million at June 30, up from $233.0 million at year-end 2022. The facility had $130.4 million available at June 30. The reported current assets/current liabilities ratio was approximately 7.0x.
- The board declared a Q2 distribution of $0.39 per common unit, payable August 21, 2023. It allocated 25% of Q2 cash available for distribution to repay $11.2 million of revolver borrowings.
Material changes and notable items
- Q2 oil, gas and NGL revenue declined 27% year over year despite higher production. Management attributed the decline chiefly to lower realized prices: oil averaged $71.91/Bbl versus $107.96, and natural gas $2.22/Mcf versus $6.93.
- Acquisitions, primarily Hatch and MB Minerals, supported production growth. Kimbell completed the MB Minerals acquisition on May 17, paying approximately $48.8 million cash and issuing units. Acquisitions also increased depletion expense, which rose to $19.7 million in Q2 from $11.3 million.
- Q2 total revenue included a $1.7 million net commodity-derivative gain, compared with a $7.1 million loss in Q2 2022. For the first half, derivative results swung to a $10.8 million gain from a $39.1 million loss.
- Interest expense rose to $6.3 million in Q2 from $3.3 million, reflecting higher borrowing rates and debt associated with acquisitions. The Q2 weighted-average borrowing rate was 8.76%.
- Cash-flow comparisons were materially affected by Kimbell Tiger Acquisition Corporation (TGR): TGR failed to complete a business combination, redeemed public shares in May, and was dissolved and deconsolidated in June. First-half 2023 investing cash flow included $243.2 million released from TGR’s trust, while financing cash flow included the corresponding $243.2 million redemption distribution.
Outlook, risks and contingencies
- No formal earnings, production, or distribution guidance is provided. Management describes acquisitions and organic development by third-party operators as growth drivers, while noting that results depend on commodity prices and operator activity.
- On June 13, Kimbell amended and extended its secured revolving facility to June 7, 2027, with a $400 million initial borrowing base and elected commitments, within a $750 million maximum principal amount. The facility requires a debt-to-EBITDAX ratio no greater than 3.5x and a current ratio of at least 1.0x. Kimbell reported compliance at June 30.
- A July 24 amendment raised the excess-cash threshold from $30 million to $50 million and permitted certain preferred equity. At July 28, after a $47 million draw to fund a deposit, revolver borrowings were $316.6 million and available capacity was $83.4 million.
- On August 2, Kimbell announced an agreement to acquire LongPoint Minerals II interests for approximately $455 million, subject to adjustments. Intended funding includes a private placement of 6.00% Series A cumulative convertible preferred units and revolver borrowings; final funding mix was not yet determined.
- Commodity prices, production levels, operator drilling and financing, acquisitions, reserve estimates, and interest rates are key risks. Fixed-price swaps covered approximately 15% of daily oil and gas production at June 30 and extend through June 2025; derivatives are not designated as accounting hedges, so fair-value changes affect current earnings.
- Management reported no material legal, environmental, or other contingencies known at June 30 and no oil and gas property impairment for the periods presented. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether the LongPoint acquisition closes, its final purchase price, funding mix, and impact on debt, preferred distributions, and common-unit distributions.
- Post-quarter borrowing levels, revolving-credit capacity, covenant headroom, and interest costs after the July draw.
- Whether production growth from Hatch and MB Minerals offsets lower realized prices and higher depletion and interest expense.
- Derivative contract settlements, fair-value swings, and actual hedge coverage as commodity prices change.
- The sustainability of the $0.39 quarterly distribution relative to cash available for distribution and the board’s debt-repayment allocation.
- Tax treatment of distributions: Kimbell is taxed as a corporation for federal purposes, and the filing says its estimates of taxable and non-taxable distribution components may change.