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Kimbell Royalty Partners, LP (NYSE:KRP)
Q3 2020 Earnings Call
Nov 6, 2020, 11:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Kimbell Royalty Partners Third Quarter Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

It is now my pleasure to introduce your host for today's call, Rick Black, Investor Relations. Thank you. You may begin.

Rick Black -- Executive Vice President

Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the third quarter 2020. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the IR section of kimbellrp.com.

Information recorded on this call speaks only as of today November 5, 2020. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or of future events or future financial performance are forward-looking statements made pursuant to the Safe Harbors provision of the Private Securities Litigation Reform Act of 1995.

We will be making forward-looking statements as part of today's call, which by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to today's press release for our disclosure on forward-looking statements. These factors as well as other risks and uncertainties are described in detail in the Company's filings with the Securities and Exchange Commission.

Management will also refer to non-GAAP measures, including adjusted EBITDA and cash available for distribution. Reconciliations to the nearest GAAP measures can be found at the end of today's earnings press release. Kimbell assumes no obligation to publicly update or revise any forward-looking statements.

And with that I would now like to turn the call over to Bob Ravnaas, Kimbell Royalty Partners' Chairman and CEO. Bob?

Robert Ravnaas -- Chairman and Chief Executive Officer

Thank you, Rick, and good morning, everyone. We appreciate you joining us for this call. I'm joined here on the call with several members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our Chief Operating Officer; Blayne Rhynsburger, our Controller. I'd like to begin by providing an overview of our performance in the third quarter before handing the call over to Davis to walk you through the financials in more detail.

We had a very good quarter with both a strong improvement in commodity pricing and increased production, once again proving the resilience of our business model. Production curtailments, which were put in place by many operators during the height of the pandemic earlier this year, were largely reversed in the Permian and Eagle Ford during the quarter. However, curtailments were still largely in place on our Bakken assets during the third quarter. We are hopeful that these will reverse in Q4 of 2020 due to improved differentials and commodity prices.

There was a slight uptick in the number of rigs drilling on our acreage from 29 to 30. The biggest increase occurred in the Haynesville, with a rig count increased from five rigs drilling at the end of the second quarter to eight rigs drilling at the end of Q3 2020.

We are very excited to see the expected improvement in natural gas prices both in Q4 2020 and the full-year 2021 based on the futures curve. With approximately 59% of our daily production from natural gas, this price improvement could have a very meaningful positive impact on our future cash flows and quarterly distribution payments. To put this in perspective, natural gas prices have averaged $2.02 per Mcf so far this year. The average expected natural gas price for the full year 2021 is $3.03 per Mcf, a 50% improvement over 2020 year-to-date prices.

In addition to our gas weighted daily production, we also have a significant amount of future drilling inventory located across the major natural gas basins in the U.S. with a concentration in the core areas of the Haynesville and Marcellus. We expect to benefit from this significant natural gas drilling inventory for years to come.

In the third quarter, we also achieved a record low cash G&A per Boe, demonstrating the continued efficiency of our business model and our focus on cost control during these uncertain times. In addition, our strong hedge book and solid balance sheet provides future flexibility -- further flexibility to make accretive acquisitions that fit our criteria for accretive growth. We are paying close attention to the hotly contested political discourse regarding fracking in the overall energy industry.

With less than 2% of our royalty acreage on federal lands, a potential frac ban on federal acreage would not have any material impact on our production or future drilling prospects. If anything, such a frac ban on federal acreage could have the unintended consequence of disrupting supplies of oil and natural gas in the U.S., potentially causing a spike in commodity prices. As we look toward the future, we remain confident that no matter which political party controls Washington, our nation will continue to be a global leader in the oil and natural gas industry for decades to come.

Focusing more closely on our specific business model, we have a highly differentiated strategy compared to most companies in the U.S. energy sector. Kimbell is a pure royalty model with a diverse asset base, a commodities mix that is heavily concentrated in natural gas and with substantial pricing hedges and very low PDP decline rate, which is among the best in the industry. All of these aspects of our strategy are by design. We created this Company with a long-term vision for sustainability and growth. We believe KRP will continue to be a consolidator of mineral and royalties across all of the major U.S. basins, and we are not tied to a particular operator in one particular basin, which we believe creates an unnecessary idiosyncratic risk.

These factors continue to contribute to our mission of maintaining a sustainable diverse portfolio of royalty assets that is broad and stable. Our mineral interests span over 13 million gross acres in 28 states and include more than 96,000 gross wells with over 40,000 wells in the Permian Basin. Since our IPO, Kimbell has demonstrated organic production growth and a five-year forecasted PDP decline of only 13%, which is one of the lowest among our minerals peers. Our leadership team has successfully managed through a number of economic cycles over the past several decades, and I believe Kimbell is very well positioned to not only weather this storm, but also be opportunistic as the right situations present themselves in the future.

These strong characteristics of our business coupled with a proven consolidation strategy that acquires high quality and accretive assets have demonstrated significant growth, scale, and cash flow for our Company. Our goal is to continue advancement of our long-term strategy as a pre-eminent consolidator of diversified and low PDP decline minerals that generate substantial free cash flow for distribution to our unitholders. And since roughly 59% of our daily production is from natural gas and a substantial portion of our production is contractually hedged for the next couple of years, we believe that our business model is well positioned for any tough challenges ahead and to participate in the eventual economic recovery.

We also believe that Kimbell offers a compelling investment opportunity with growth opportunities and a robust distribution yield, which we expect our distributions to be substantially tax-free through 2023 and instead to be considered a return of capital to the extent of a unitholders basis in its common units. While significant uncertainties remain in the U.S. energy sector, primarily related to the pace of new drilling and completions for the remainder of 2020 and into [Phonetic] 2021, we remain very optimistic about the future of the U.S. energy industry and our business specifically.

And with that, I'll now turn the call over to Davis.

R. Davis Ravnaas -- President and Chief Financial Officer

Thanks, Bob, and good morning, everyone. As we discussed on our call last quarter, curtailments largely reverse themselves in the third quarter, specifically on our Permian and Eagle Ford properties. However, curtailments were still largely in place on our Bakken assets in the third quarter. We are hopeful that these will also reverse in the fourth quarter, given improved commodity prices.

We are pleased with the continued strong performance of our large and diverse asset portfolio as well as the fact that production mix is weighted more heavily to natural gas production. As Bob laid out a few moments ago, natural gas price futures are projected to be up approximately 50% in the next 12 months as compared to the average prices over the last 12 month, which could generate a significant improvement in cash flow for the Company. We are encouraged by the way production and pricing are currently position for the rest of 2020 and continuing into 2021.

We continue to maintain a robust hedge book with a significant amount of future production hedged through Q3 2022 using swaps. In addition, we continue to maintain a very strong inventory of permits and drilled but uncompleted wells across our acreage as a result of strong drilling momentum on our acreage just prior to the pandemic. We expect these locations will provide even more stability to our production profile, as eventual conversions to producing wells occur when frac crews resume operations.

The Company's third quarter average daily run rate production was 14,160 Boe per day, comprised of approximately 59% from natural gas on a six to one basis and 41% from liquids, 28% from oil and 13% from NGLs. As of September 30, Kimbell had 794 gross and 2.62 net drilled but uncompleted wells as well as 573 gross and 1.84 net permits on its acreage. Also as of the end of September, the Company had 30 rigs actively drilling on our acreage, which represented 12% market share of all drilling rig activity in the Lower 48 at that time.

For the third quarter of 2020, the Company's oil, natural gas, and natural gas liquids revenue were $24.3 million, which reflected Q3 average realized prices of $38.30 [Phonetic] per barrel of oil, $1.76 per Mcf of natural gas and $13.42 per barrel of NGLs for a total combined Boe realization of $18.67.

In Q3, we realized hedging gains of approximately $675,000. On the expense side, general and administrative expenses were $6.1 million in Q3, $3.7 million of which was cash G&A expense or $2.81 per Boe. This marks the a new record low cash G&A per Boe for Kimbell, reflecting our intense focus on controlling costs during these uncertain times.

Q3 consolidated adjusted EBITDA was $17.1 million, an increase of approximately 41% as compared to Q2, 2020. Net loss for the third quarter was $25.7 million and the net loss attributable to common units was $17.8 million, or $0.50 per common unit. The net loss for Q3 reflected a $22.2 million non-cash ceiling test impairment expense recorded during the quarter related to the substantial weakness in commodity prices. This non-cash ceiling test impairment is not expected to impact the cash available for distribution generated by Kimbell or its liquidity or its ability to make acquisitions in the future.

The Q3 2020 distribution of $0.19 per common unit, which was declared on October 23, 2020, reflects a 75% payout of the Q3 cash available for distribution. We will use the retained amount to strengthen the balance sheet and pay down a portion of the outstanding borrowings under Kimbell's credit facility. We continue to manage the Company in a conservative and prudent manner, especially given this year's unprecedented events and uncertainties in the energy sector and the broader economy. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release.

Looking now at the balance sheet and liquidity. At September 30, 2020, Kimbell had approximately $169.7 million in debt outstanding under its revolving credit facility and $55 million in undrawn capacity or approximately $130 million if aggregate commitments were equal to Kimbell's current borrowing base, which is $300 million. Increases in commitments pursuant to the accordion feature of the revolving credit facility are subject to the satisfaction of certain conditions, including obtaining additional commitments from new or existing lenders. Total debt to Q3 trailing 12-month consolidated EBITDA was approximately 2.2 times.

Earlier this year, we announced that we would begin disclosing our DUCs and permits by basin on our major properties, and we have continued this additional disclosure in our third quarter earnings release. As of September 30, 2020, we reported 2.62 net DUCs, 794 gross DUCs and 1.84 net permits, 573 gross permits on Kimbell's acreage at the end of the period. This data does not include our minor properties, which we estimate could add an additional 20% to the DUC and permit inventory based on our experience.

We appreciate your interest in our business. I want to thank the Kimbell investors for believing in our strategy, and we will strive to continue to generate long-term value in the years to come.

With that, operator, we're ready for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Chris Baker with Credit Suisse. Please proceed with your question.

Chris Baker -- Credit Suisse -- Analyst

Hey, good morning. I hope you guys could talk a little bit more about what you're seeing in the Haynesville. It certainly looks like some robust volume growth sequentially and with the rig count back up to eight. Any sense of where that points you in terms of potential growth next year? And anything that you guys are hearing from your major operators over there?

R. Davis Ravnaas -- President and Chief Financial Officer

Yeah. Thanks for the question, Chris. I think it's a part of our story that -- and a lot of investors, frankly, haven't been paying attention to. It's our largest area by production. We had -- and I can confirm this, but I think we had seven new Haynesville wells that were material, six were Aethon operated in Bossier and Bienville County -- parish, we had one Wine well in Red River. We're not ready to release guidance yet for next year. We still anticipate doing that in conjunction with the K, just given all the uncertainty in the market.

But the fact that the rig count is going up so rapidly, coupled with the fact that natural gas prices are improving so dramatically, obviously we feel very good about that asset in our portfolio. And again, I'll just stress, we're not aware of any company, public or private, that has a better position in the Haynesville shale than we do. It was largely a result of the Haymaker acquisition that we made a couple of years ago, as you know, Chris. And those were legacy Chesapeake assets, which was one of the pioneers of putting the play together originally 15 years ago. Bob or Matt, anything else you guys want to add to that?

Matthew S. Daly -- Chief Operating Officer

Yeah. I would just say -- this is Matt. I would just say that the wells that are currently being drilled on 9/30, you can see that the rig count we have in our investor presentation in the Haynesville. The good news is that a lot of those wells are higher interest wells closer to 1% interest versus the average well that we drill. Typically, that's more like 50 basis points net revenue interest. So when those wells come online hopefully in, say, Q3, Q4 of next year, we'll hopefully get the benefit of that higher net revenue interest.

Chris Baker -- Credit Suisse -- Analyst

That's great. And then just as a follow-up on the cash cost side, certainly continue to see some good progress there. Can you talk about the sustainability of the recent improvement in G&A? And maybe what we can look at in terms of a clean run rate fourth quarter and beyond?

R. Davis Ravnaas -- President and Chief Financial Officer

Yeah. Really good question. It's hard to answer because a lot of the costs that we cut were related to marketing and investor relations and traveling for conferences, which we didn't do any of, just given the virus, just about everything got canceled. But there is some amount of that I would classify as permanent or sustainable reduction in G&A. We worked with a couple of our vendors to reduce costs. We terminated a couple of smaller relationships.

Matt, any detail you want to give that might be more specific than that or anything you want to add?

Matthew S. Daly -- Chief Operating Officer

Yeah. I mean, yeah, that's -- I mean, basically, as you know, Q2 cash G&A was $4.3 million. $300,000 of that was the TSA associated with the Springbok acquisition. So it was $4 million run rate in -- back in Q2. Q3, as you said, was $3.7 million, so it was down about $300,000. And again, a lot of the drop is, as Davis said, it's lower professional fees really just due to lower activity overall. So I mean, I wouldn't say the $3.7 million is a -- it's a record low cash unit per Boe of $2.81. I would say as things ramp up again hopefully next year as you get more activity, we're looking at more transactions and so forth. That's probably going to tick up to some extent just with additional professional fees. So I wouldn't say that's the -- that's a -- I would say a little bit higher than that would be sort of sustainable, but we'll give better guidance on that when we release Q4 earnings in February.

Chris Baker -- Credit Suisse -- Analyst

Great. Thanks guys.

Robert Ravnaas -- Chairman and Chief Executive Officer

Thanks, Chris.

Operator

Our next question is from Harry Halbach with Raymond James. Please proceed with your question.

Harry Halbach -- Raymond James -- Analyst

Good morning, guys. I was wondering if you could give me somewhat an estimate of shut-ins in the quarter like [Indecipherable]. You obviously said it came down from the 6% last quarter, but I'm just trying to get a sense of what's like a fair just normal production decline you all saw?

R. Davis Ravnaas -- President and Chief Financial Officer

Good question. Matt or Bob, just wonder if you want to tackle that first? What do you think?

Matthew S. Daly -- Chief Operating Officer

Yeah. So the quarter -- so we mentioned last quarter, the 6% out of the 7% of the drop was related to curtailments. All of those reversed in Q3 and are back online in the Eagle Ford and the Permian. The only basin that's not -- that hasn't reversed is the Bakken, and we're estimating that production is currently curtailed to be between 90 Boe per day and 100 Boe per day. That's currently offline and we are hopeful that will come back online in Q4. So if you take 90 Boe per day or 100 Boe per day divided by our daily production of 14,160 currently, that's the current percentage of our production that's currently curtailed. So it's very small, but it can make a difference. And so, again, we're hopeful that it will come back online in Q4.

Harry Halbach -- Raymond James -- Analyst

Great. Thank you. And then in regards to M&A, are you all seeing any meaningful split in interest for gas versus oil properties, given the right vergence in the two commodities?

R. Davis Ravnaas -- President and Chief Financial Officer

Yes, we are very recently. We've been active on the M&A front. We'll still look at acquisitions. We're not interested in using cash in this environment, just given the fact that we're really focused on cleaning up the balance sheet as much as we can and we don't want to do an equity raise at an unpalatable discount right now to raise the cash. But we are looking at issuing units directly to sellers and we've had a lot of success in doing that in the past. So we're still making bids.

I think the challenge for us is that the stock is just still undervalued. I mean, we're trading at 12% dividend yield, 16%, 17% free cash flow yield all into equity. And so, the bar is just very high to make accretive M&A work. So we're still working around the clock on acquisitions or submitting bids. It's just more challenging. I mean I think that sellers in this environment need to adjust expectations when the public companies, they're supposed to be the lowest cost of capital trade down so dramatically, us and our peers, that should trickle down to the sellers. And it takes a little bit of time, I think, for them to realize that. But the opportunity to acquire these private equity-backed portfolios is still there. It's not going away.

There's a catalyst, which is just the function of the limited partner agreements that these firms have. They eventually have to monetize those assets. And we think we're arguably in the best or among the best positioned to consolidate that opportunity. Now as it pertains to your question about oil versus gas mix, we have seen people get a little bit more aggressive on gas. Funny enough, we were aggressive on gas and everybody hated it. And that was largely the Haymaker acquisition we made two years ago. We like to be contrarian. So, we're not going to overpay for gas assets in this environment. We're going to look at them, but we're not going to overpay. And I think some oil assets are becoming increasingly more interesting.

So long question short, we have seen a pickup in competition on the gas side that didn't exist even six to 12 months ago, but that doesn't concern us or impede our ability to successfully execute our M&A strategy.

Bob or Matt, anything -- and I guess I'll add -- Bob, have we seen any asset that we -- that got out of our hands and went to somebody else that we really wanted? I don't think we've missed out on any deal that we like the asset quality of. So...

Robert Ravnaas -- Chairman and Chief Executive Officer

No, no. There is no deal that we've lost that we really, really wanted just because of quality and where we a little bit lost it because of price. That hasn't happened. There's been a number of deals that we put bids on, but we made sure that it was a fair bid and a bid that was accretive to our shareholders. So no, there's nothing that we've lost out on. However, there has been quite a few that we've bid on.

Harry Halbach -- Raymond James -- Analyst

Great. Appreciate you guys taking my question.

Operator

There are no further questions. At this time, I'd like to turn the floor back over to management for closing comments.

Robert Ravnaas -- Chairman and Chief Executive Officer

Yeah. Thank you for joining this morning and look forward to speaking with you again when we report year-end and fourth quarter results. This completes today's call. Thanks everyone.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Rick Black -- Executive Vice President

Robert Ravnaas -- Chairman and Chief Executive Officer

R. Davis Ravnaas -- President and Chief Financial Officer

Matthew S. Daly -- Chief Operating Officer

Chris Baker -- Credit Suisse -- Analyst

Harry Halbach -- Raymond James -- Analyst

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