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Operator
Greetings and welcome to the Kimbell Royalty Partners second quarter earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you. You may begin.
Rick Black
Thank you, operator, and good morning, everyone. Welcome to the Kimball Royalty Partners conference call to review financial and operational results for the second quarter, 2021. 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 kimballrp.com. Information recorded on this call speaks only as of the day, August 5th, 2021. 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 future events or future financial performance, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. While we may 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 and 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. Kimball assumes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Bob Ravenous, Kimball Realty Partners Chairman and Chief Executive Officer.
Bob Ravenous
Bob? 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 Ravenous, our President and Chief Financial Officer, Matt Daley, our Chief Operating Officer, Blaine Reinsberger, our Controller. I will begin today's discussion by providing comments about our second quarter before turning the call over to Davis to walk you through our financials in more detail. We were extremely pleased with our operational and financial performance during the quarter. Momentum across all areas of our business continued to improve from the first quarter to the second quarter in terms of both improved pricing and activity. Second quarter average daily production is 14,393 BOE per day on a six to one basis, which consisted of 382 BOE per day related to prior period production recognized in Q2. Excluding this amount, our Q2 run rate production was 14,011 BOE per day, which is up 2% sequentially compared to the first quarter. The combined momentum of improved pricing and production drove positive operating leverage and consolidated adjusted EBITDA to a new record of $28.1 million. Our cash available for distribution was robust during the quarter, resulting in a 15% increase in our quarterly distribution to 31 cents per common unit holder. Operators in the U.S. continue to practice discipline with their drilling activity, even in the face of significantly higher commodity prices. To put this into perspective, oil prices are now well above pre-COVID levels, but the U.S. land rate count is 39% below year-end 2019 levels. Furthermore, natural gas prices are trading at multi-year highs driven primarily by increased power demand in the U.S. and surging exports of LNG to Europe and Asia. Given that a significant portion of our daily production is natural gas, we expect this improved pricing to benefit our cash available for distribution in Q3 2021 and into the winter months based on the current strip pricing. A couple of months ago, we rolled out the results of our deep dive into our inventory by our technical team, which resulted in over 10,160 gross, 68.14 net, upside in major locations and 19 years of drilling inventory holding production flat at four and a half net wells per year. Davis will discuss this further in a moment. Today we are providing updated guidance regarding the expected favorable tax treatment of future earnings and distributions to common unit holders. We are pleased to report that we do not expect Kimball to pay a material amount of federal income taxes this year 2021 through 2027. And also important, we expect that substantially all cash distributions paid to common unit holders from 2021 to 2025 will be free of dividend income taxes and instead be considered a return of capital. We are unaware of any oil and gas company that has given this level of detail with their tax guidance and believe it provides a highly compelling competitive advantage in terms of generating superior after-tax returns to our unit holders. We are seeing signs of increased activity on our acreage this year as evidenced by a recent inflow of lease bonuses in Q2, as well as the moderate increase in the Baker Hughes US rig count in late July. We believe the energy sector is finally enjoying the early stages of some tailwinds after many years of challenges, and we are very excited about the future of Kimball and its prospects for delivering unit holder value for years to come. As we take a broader view of our company, With a backdrop of more positive industry trends and the potential for more industry consolidation benefiting Kimball specifically, we remain confident in our long-term strategic business model. Kimball has consistently demonstrated a strong track record of producing a stable growth profile organically in legacy assets, as well as acquiring strategic acquisitions in a disciplined fashion in the active basins within the lower 48s. We believe our low PDP decline rate and diversified royalty portfolio is a core competitive advantage for our company in the mineral and royalty space that provides long-term stability for Kimball. In addition, we plan to remain focused on our role as a major consolidator in the highly fragmented U.S. oil and gas royalty sector, assembling a high-quality, low PDP decline and diversified royalty portfolio generating recurring cash flow with significant growth potential and no capital requirements. Our vision for Kimball since inception has always been long-term focused on sustainability and growth. I'm also very pleased to announce the launch of Kimball Tiger Acquisition Corporation, which is a newly formed SPAC sponsored by Kimball that will search for a target in the energy and natural resources industry of North America. For more information on Tiger, please review the registration statement located at www.sec.gov. Due to the nature of the rules regarding SPACs, we will not be taking questions about it on this earnings conference call. And with that, I'll now turn the call over to Davis.
Bob
Thanks, Bob, and good morning, everyone. As Bob mentioned, we are very excited about our second quarter results, and we remain very bullish on the future of our company. Second quarter total revenues were $25.7 million. Net income was approximately $3.7 million. And net income attributable to common units was approximately $1.5 million, or four cents per common unit. Based on positive trends and improving cash flows in the quarter, we announced a substantially higher cash distribution of 31 cents, up approximately 15% from the Q1 distribution in 2021. As we have done in previous quarters, the company utilized 25% of its Q1 cash available for distribution to pay down a portion of the credit facility in Q2. Since May 2020, the company has paid down $30.6 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash flow to debt pay down. We expect to continue to allocate 25% of our cash available for distribution for debt pay down in the future. We believe that our hedging strategy is a prudent methodology for managing the company's future price risks on oil and natural gas. Having substantial hedges in place on a rolling two-year basis, well ahead of the price shocks that occurred in 2020, proved to be a very effective risk mitigation strategy. For the second quarter of 2021, the company's oil, natural gas, and natural gas liquids revenues were $38.8 million, which reflected higher second quarter average realized prices of $63.62 per barrel of oil, $2.68 per mcf of natural gas, and 25% dollars and 79 cents per barrel of NGLs for a combined per BOE pricing of $29.50. Second quarter 2021 average daily production was 14,393 BOE per day on a six to one basis, which consisted of 382 BOE per day related to prior period production recognized during the quarter and 14,011 BOE per day of run rate production. The 14,011 BOE per day of run rate production was composed of approximately 61% from natural gas and approximately 39% from liquids, or 26% from oil and 13% from NGLs. The prior period production recognized this quarter was primarily due to new wells outperforming estimates. We had 50 active rigs at the end of the second quarter, led by Permian and the Hainesville basins, up from 49 rigs in Q1. Based on the level of activity we are seeing on our acreage and improved pricing, we are reaffirming our 2021 guidance that we outlined with our Q4 2020 earnings release. As of June 30th, Kimball had 799 gross and 1.95 net drilled but uncompleted wells, as well as 703 gross and 2.67 net permits on its acreage. This data does not include our minor properties, which we estimate could add an additional 20 percent to the duck and permit inventory. On the expense side, general and administrative expenses were 6.7 million in the quarter, 3.9 million of which was cash G&A expense, or $3.09 per BOE. Second quarter consolidated adjusted EBITDA was 28.1 million, an increase of 8% compared to the prior quarter, and a new record for the company. Net income for the second quarter was approximately 3.7 million, and the net income attributable to common units was approximately $1.5 million, or $0.04 per common unit. The $0.31 per common unit distribution this quarter reflects a 75% payout of cash available for distribution. We will use the retained amount, 25%, to pay down a portion of the outstanding borrowings under Kimball's credit facility. As in previous quarters, our focus is to manage our liquidity and balance sheet in a disciplined manner, especially given the broader market shocks experienced in 2020. 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, as of June 30th, 2021, we had approximately 162.9 million in debt outstanding under our secured revolving credit facility with net debt to second quarter trailing 12 month consolidated adjusted EBITDA of approximately 1.7 times. As of the end of the second quarter, we have approximately 102.1 million in undrawn capacity under our secured revolving credit facility. On July 7th, 2021, we successfully completed the redemption of 55% of the outstanding Series A cumulative convertible preferred units for an aggregate redemption price of $36.1 million. The redemption was funded through a borrowing on our secured revolving credit facility. We expect to redeem the remaining preferred units in early 2022 further simplifying our capital structure and significantly reducing our cost of capital. Finally, a couple of months ago, we shared with investors an extensive independent review of our portfolio of assets. To quickly provide some background here, our team, in coordination with Ryder Scott, a highly respected global engineering firm, We embarked on a deep dive of our inventory, property by property, throughout the lower 48. We discussed two key takeaways last quarter from that study. First, the report demonstrated that we have more than 15 years of drilling runway in our current inventory at the 2019 drilling pace, and second, the detailed report Paul Cecala, Included metrics illustrating that it will it will take a relatively low number of active new wells to maintain flat production due to our superior PDP decline curve only approximately 4.5 net wells each year are needed. Paul Cecala, At 4.5 net wells per year we have approximately 19 years of drilling inventory. The results from this independent review of our assets should provide investors with further confidence regarding our long-term business model and the company's ability to generate future cash flow and distributions, which is of course important to us. In summary, we are very optimistic about the future of our industry, given rapidly improving fundamentals across the U.S. energy sector. We are also excited about the opportunities to further expand our acreage footprint and deliver compelling value to our unit holders for years to come. Kimball will continue with our goal and focus of generating long-term value and cash generation with transparency to investors for many years. With that, operator, we are now ready for questions.
Operator
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Chris Baker with Credit Suisse. Please proceed with your question.
Chris Baker
Hey, good morning. Hey, Chris. How are you doing? I'm good. I'm good. Appreciate the update this morning. Some solid results. My first question is for Davis. I was hoping you'd give us an update on what you're seeing on the mineral acquisition front currently. Just curious how that's evolved over the past few months and if you think we're likely to see KRP get another large scale opportunity over the line later this year.
Bob
Yeah, it's a great question. As you know, Chris, I think we've acquired more properties over the last five years than anyone else in the space. candidly, at least on the public side, we've averaged over, I want to say, $150 million a year of M&A since we went public per year. This year's been tough. There hasn't been a single significant publicly announced mineral transaction year-to-date by us or any of our peers on the public side. I think that's a combination of a few things. I think First and foremost, I think the public mineral companies, all of us, not even just us specifically, but perhaps us maybe the most, are dramatically undervalued. I mean, you're looking at, you know, what are we trading at now? 11.5% dividend yield, which is a 15% free cash flow yield. But even that 11.5% dividend yield is completely tax-free for us. So divide that by 0.63, it's an 18% taxable dividend on our stocks. I mean, we're getting to the Looney Tunes level of valuation. So we're at a point where we're looking at our assets and we're valued at a mid-teens yield. We'd be better off buying our own stock. So we want to pay off the prep we have with Apollo. We've indicated repeatedly that we're going to do that within the next six months, most likely subject to market conditions. At that point, what do we do with the residual 25% of cash flow that we have? Are we going to go buy minerals? It's something better than a PV 15 or 16 on assets that we already own and know intimately? Or do you take a risk and try to get better returns on the private side? I don't know. I mean, I think that's something that we in the board are looking at. I think private sellers, too, candidly have been very disappointed with the bids they're receiving from us and others. Obviously, if we're trading at a 15% yield, we can't buy somebody for more than, what, six times cash flow? No. So we've been looking at a few deals, and we're not even losing to our peers. It's that sellers are saying, why would I sell my asset at a 20% yield? So the public comps, ourselves included, set the tone for valuation for the rest of the space, particularly on assets that have existing production. And when our valuation is so out of whack, it's just harder to get sellers to accept that fact. That being said, I think on the equity side, I think that what we're trying to convince sellers of is if you take our stock, you're exchanging your interest in a concentrated position with something that's more liquid, more diversified, actively managed. Your yield that you're getting now, which is taxable, you now are arbitraging it into a non-taxable entity. So I'm not shutting the door on M&A this year. I'm just saying that it's been difficult, and it hasn't just been hard for us. It's been hard for all of our peers. That'll change. I'm looking at Bob for some perspective on this, but it's not uncommon for the mineral industry to go through periods of time where the bid-ask spread is so draconian that people just aren't able to get deals done.
Chris
Hey, Chris. It's Matt Daly. One more comment about the bid-ask spread David said is that we price acquisitions using the strip, and the strip right now is in a pretty severe backwardation, oil in the 50s and the out years. A lot of these sellers are assuming, you know, $70 oil is flat forever, and that's just not realistic based on the strips. That's one cause of the so-called bid-ask spread right now.
Chris Baker
Okay, great. No, it's helpful. And then just as a follow-up, you know, maybe for Bob or Davis, whoever wants to grab it, any color you can share on, you know, maybe how the first half of next year is shaping up given where the activity backlog is today and what you've seen historically in terms of conversion rates?
Bob
Good to excellent. I mean, what everybody's forgetting about, we're at, what, 65% gas production right now, and gas is at $4.20. I mean, people are going to start going bonanza on gas plays. I don't think that's very well reflected in the outlook for our production. I mean, is there anything that we see, guys, anybody around the table that's negative on our production? I mean, we just went up sequentially quarter to quarter better than the growth stocks that we trade against I mean, we feel very good about the future.
Chris Baker
I appreciate the color, guys.
Operator
As a reminder, it's Star 1 to ask a question. Our next question comes from the line of Derek Whitfield with Stifel. Please proceed with your question.
Derek Whitfield
Thanks, and good morning, all.
Operator
Hey, Derek. How are you?
Derek Whitfield
Doing great. For my first question, I wanted to focus on your rig count market share as your gains in the past trajectory have been quite strong. Is there anything that you're seeing in the data as a trend that would explain the slight dip in Q2, or is it likely just temporary in nature?
Chris
This is Matt Daly. We think it's just a slight dip to temporary. We generally range between 11% and 12% market share on the U.S. rig count, so there's nothing. We believe that's just a temporary dip. The RIT count between 6-30 and July 30th is up about 4%. So assuming we keep that consistent sort of 11-12% market share of the lower 48, and based on the increase in the RIT count between June 30 and July 30, we would expect our RIT count to go from 50 to something slightly higher, but we'll see how that changes out.
Bob
Hey, Derek, I'll add. I agree with everything Matt just said. This is Davis. We also... So tracking the rig count is a useful metric for us. It is. And I'm glad that you're asking about it, that you focus on it. But keep in mind, we literally do that analysis, one of our geologists does, on one day. So it's the day that the quarter ends. So the day before, the day after, the rig count could be different. We just don't know. You see what I'm saying? So it's a helpful metric. It's imperfect in nature. And I would say the exact same thing if our rate count market share was up. I would hedge that by saying that on that particular day, it appeared to be up relative to that particular day of the quarter before. So it's helpful. I just wouldn't read too much into it unless we start seeing some sort of massive trend, which would, of course, be obvious one way or the other.
Derek Whitfield
It makes complete sense. As my follow-up, perhaps shifting over to the lease bonuses in Q2, could you offer any color on the new activity and the potential for sustained bonuses based on the activity in those areas?
Chris
Who wants to take that? Yeah, I'll take that. So the lease bonuses, the color there, the major area that we got a lease bonus was in Martin County, Texas, about half a million dollar bonus. We had some other two big bonuses come in in Wyoming and Campbell County. in Converse County, Wyoming. And obviously, a fair amount of, call it 11 total lease bonuses came in during the quarter. So that was a big increase in activity relative to Q1. That's a good sign for activity that's going to sort of come later this year. So in terms of the sustainability of that, I mean, with prices at 70 and gas at 420, we think that hopefully that'll continue for the latter part of the year. Maybe not quite that high, but certainly good.
Derek Whitfield
Very helpful. Thanks for your time.
Operator
Thank you, Derek. There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Bob Ravenous
This is Bob Ravenous. We thank you for joining us this morning and look forward to speaking with you again when we report third quarter results. This completes today's call.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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