This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Greetings and welcome to the Kimbell Royalty Partners first quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the 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 with Investor Relations. Thank you, sir. You may begin.
spk01: Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the first quarter ended March 31, 2022. 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 today's call speaks only as of today, March 5, 2022, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay, listening, or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations for future events or future financial performance, are forward-looking statements made pursuant to the safe harbor's 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 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?
spk03: Thank you, Rick, and good morning, everyone. We appreciate you joining us on the call this morning. With me today are several members of our senior management team, including Davis Ravenous, our President and Chief Financial Officer, Matt Daly, our Chief Operating Officer, and Blaine Reinsberger, our Controller. I will begin today's discussion by providing comments about the quarter and the current operating environment before turning the call over to Davis to walk you through our financials in more detail. We are very pleased to have started 2022 with an extremely strong quarter that saw record oil, natural gas, and NGL revenues, adjusted EBITDA, and cash available for distribution, which led to a first quarter cash distribution to our unit holders of 47 cents per common unit, which is also a new record for Kimball. Strong commodity prices during the quarter translated into increased activity on our acreage as evidenced by the 20% increase in the rig count actively drilling on our acreage at no cost to us. In addition, line-of-sight inventory from our major properties increased 6% sequentially to 5.03 net ducts and permits. This is notable since we only need approximately 4.5 net wells completed each year to keep production flat. While the Permian led all of the basins in terms of growth and rig count, we believe strong natural gas prices will compel improved activity in the Haynesville, Marcellus, and MidCon as we continue through 2022. In fact, the Haynesville led all of our regions in terms of net ducks at quarter end. The U.S. exited the winter draw season with natural gas in storage of approximately 1.4 trillion cubic feet, well below 2021 levels and the five-year average. This relatively low level of natural gas and inventory coupled with less associated natural gas from oil directed drilling and recent record LNG exports should provide pricing support for natural gas throughout 2022. In fact, Kimball experienced some of the highest realized prices as compared to spot prices in the first quarter 2022 for natural gas that we have seen since our IPO in 2017. Pricing improvements were also strong in the natural gas liquids market with realizations approaching 50% of WTI oil prices. We are fortunate to have some of the highest quality natural gas royalty assets in the U.S., including a substantial portion in the core of the core in the Haynesville, and are poised to benefit from these improved fundamentals as we continue through 2022. As of March 31st, Kimball had 73 rigs actively drilling on its acreage. up 20% compared to the fourth quarter of last year. This presents approximately 11.1% market share of all rigs drilling in the continental United States, an increase from year-end 2021. Tailwinds continue in the global energy sector and fundamentals across the U.S. energy complex continue to improve, with low inventory levels and the overall rig count continuing to improve at a modest pace. We also saw a ramp up in public company drilling on our acreage with public operators making up 67% of our active rig count as compared to 57% at year end. We believe the outlook for our industry sector and for Kimball specifically is very positive and both should benefit from the current strong demand for energy. Kimball's broad and diverse asset portfolio throughout all the major basins in the lower 48 is well positioned for continued strong cash flow generations. The oil and natural gas royalty sector is particularly well positioned to benefit from the inflationary cycle that has accelerated in the U.S. since royalty companies participate in the upside from commodity price inflation and do not experience the significant service cost inflation currently impacting the upstream sectors. It is also important to point out that the asset class for mineral and royalties remains enormous at over $900 billion in market size with only a handful of public entities in the US and Canada that have the financial resources, infrastructure, and technical expertise to complete large-scale multi-basin acquisitions. In addition, this industry consolidation is still much closer to the beginning of the process than even to the midpoint. We believe Kimball is well-positioned to continue its role as a leading consolidator in the years to come. We are thrilled to be off to a great start in 2022 and we remain focused on delivering value for our unit holders. Lastly, we are also pleased to report the successful IPO of Kimball Tiger Acquisition Corporation, a SPAC sponsored by Kimball that will target an acquisition in the energy and natural resources industry in North America. Kimball Tiger is led by Zach Lund, who is a very talented energy executive, and we look forward to providing updates as events dictate. And with that, I'll now turn the call over to Davis.
spk04: Thanks, Bob, and good morning, everyone. We are very pleased to report record performance during the first quarter, and we are affirming our full year 2022 guidance that was previously disclosed in our fourth quarter 2021 press release. I'll start by reviewing our financial results from the first quarter, beginning with record oil, natural gas, and NGL revenues of $65.1 million. which is an increase of 25% compared to the fourth quarter of 2021. This is largely attributable to improved realized commodity prices and 5.9 million of prior period adjustments. This quarter also marks the first full quarter contribution from the cornerstone portfolio of assets we acquired late last year, which is performing in line with our expectations. Kimball's first quarter 2022 average realized price per BBL of oil was $92.01. Per MCF of natural gas was $4.48. And per BBL of NGLs was $43.24. And finally, per BOE combined was $45.69. First quarter 2022 average daily production was 14,482 BOE per day on a six to one basis, which consisted of 94 BOE per day related to prior period production recognized during the quarter and 14,388 BOE per day of run rate production. The prior period production recognized this quarter was attributable to past production that was released from suspense. The first quarter run rate daily production of 14,388 BOE per day was composed of approximately 61% from natural gas and approximately 39% from liquids or 25% from oil and 14% from NGLs. On the expense side, General and administrative expenses for Kimball were $6.6 million in the quarter, $4.4 million of which was cash G&A or $3.39 per BOE. Unit-based compensation in the first quarter, which is a non-cash G&A expense, was $2.2 million or $1.69 per BOE. Total first quarter consolidated adjusted EBITDA was 43.9 million, an increase of 34% compared to last quarter. We announced a record high cash distribution of 47 cents per common unit for the first quarter. This represents a cash distribution payment to common unit holders of 75% of cash available for distribution, and the remaining 25% will be used to pay down a portion of the outstanding borrowings under Kimball's secured revolving credit facility. Since May of 2020, excluding this upcoming Q1 payment, Kimball has paid down approximately $52.5 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution for debt pay down. Commenting further on our balance sheet and liquidity, as of March 31st, Kimball had approximately 226.5 million in debt outstanding under its secured revolving credit facility. It also had net debt to first quarter 2022 trailing 12 month consolidated adjusted EBITDA of approximately 1.5 times and was in compliance with all financial covenants under its secure revolving credit facility. Kimball had approximately $48.5 million in undrawn capacity under its secured revolving credit facility to quarter end. Before we turn the call over for questions, I'd like to reiterate the strength of our strategic business model that continues to perform very well in the highly cyclical energy industry. Since our IPO in February 2017, just over five years ago, we have distributed $6.93 per common unit and have grown daily production by over 360%. All of this occurred under a much lower average commodity price than we are experiencing today for both oil and natural gas. So as we look at the remainder of 2022 and beyond, we are extremely excited about our role as a leading consolidator and the oil and natural gas royalty sector and the prospects for Kimball to generate long-term unit holder value for years to come. With that, operator, we are now ready for questions.
spk00: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that 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 keys. One moment, please, while we poll for questions. Our first question is from Chris Baker with Credit Suisse. Please proceed with your question. Hey, good morning.
spk05: I just wanted to ask on M&A. Could you guys maybe expand on the comments made in the release just around the excitement you see for KRP and its role as a consolidator in the mineral space?
spk04: Sure. Thanks, Chris. This is Davis. We're looking at record deal flow right now. I think that's motivated in part by, obviously, the front month spiking so precipitously over the course of the year to date. That being said, we've been everything on the strip. It's been tough to get some sellers to accept the fact that we're bidding on oil prices that are in the next couple of years meaningfully below where they are today, obviously, being in such deep backwardation. That being said, for portfolios of assets that are larger than, let's call it 50 to 100 million, the buyer universe really dries up. So we're in a good spot on that front. Um, if we do buy someone it's going to be, uh, leverage neutral, if not de-levering in nature. So we plan to use our stock to do that. Um, very careful and underwriting acquisitions in this environment. I think you have to be, but, um, but overall, I think we're encouraged by the, the, the level of interest and folks that want to sell their multi-basin packages, which are kind of our wheelhouse have been coming up at a, frankly, a record rate since we went public. Bob, Matt, anything you guys would like to add to that?
spk03: Nope. Good summary. Yep.
spk05: Great. And just as a follow-up, you touched on the balance sheet. Could you just maybe share your latest thoughts around leverage? And I think my favorite question, the potential for a share buyback later this year. At least on my model, it still looks like you guys are trading, you know, at an elevated valuation versus peers just on a poor cash flow basis? Thanks.
spk04: Yeah, no, thanks for the question, Chris. That's one of the topics that we discuss most frequently with the board. Right now, leverage at 1.5x, we feel very good about that, particularly as a royalty company. Unfortunately, we still get painted with the same brush as some of the E&P businesses that have CapEx, obviously. And so, you know, one and a half times for a royalty business is obviously much better than for an E&P company. I think we'd like to get and we continue to look at one times or lower as a nice level. We're not too far away from that. You know, your models, I haven't looked at it recently, but you're probably very close, if not directly on where we would be in terms of de-levering over the next several quarters. Buybacks, always an option. I think we're going to weigh that with external M&A opportunities. But to your point, if I look at it, I think we're at a 15% pretty cash flow yield right now and 11% dividend yield if you just use this quarter and annualize it. And things are looking better going forward, obviously, with what's happened to pricing. So that makes M&A more challenging, kind of tying back into your first question. So I think all options are on the table. I think once we get to kind of that one turn, we talk to our investors all the time. We welcome feedback from all of our investors. I think that once we get to a point where leverage is effectively bulletproof, and I think one times or less, if you just look at it on a liquidity basis, is relatively bulletproof, that opens up some interesting options for us. Do we do external M&A? We can buy stuff at you know, high teens yields, 20% yield plus kind of deals, you know, maybe. Would we be better off buying our stock with assets that we understand better? Maybe, you know, probably in that particular example. Should we return to a higher payout ratio? That's certainly on the table as well. So it's a good problem to have, which is what do you do with your cashflow? And, you know, we're just not quite there yet, but to your point, it's just around the corner, so.
spk02: Yeah, all I'd add to that, this is Matt, is that the leveraging process is happening much more rapidly than we originally projected, given obviously $8 gas prices and some of the realizations we're seeing on the gas side. So as David says, once we get to that one times level, we have all kinds of options at that point to deploy that other 25%, as you said, into buybacks, raising the payout ratio, or just paying the debt off entirely. So anyway.
spk05: Great. I appreciate the answers, guys. Thanks, Chris.
spk00: Thank you. Our next question is from Trafford Lamar with Raymond James. Please proceed with your question.
spk06: Hey, guys. Congrats on a great quarter. Thanks for taking my question. Thank you. Y'all kind of answered my first question. Yeah, y'all kind of answered my first question I was going to ask about, you know, looking at increasing the distribution ratio once y'all got to 1x. I guess second question is, It revolves around hedges. I know you all have a formulaic approach tied in with your leverage ratio. But given where front month is over $8 right now, have you all looked into potentially doing any additional hedges in the second half of the year, like costless callers specifically?
spk04: We talk about hedging all the time. I think what's most important to us is just maintaining a consistent approach. So we made a bunch of money on our hedges, obviously, in the downturn, and people were happy about that. Now that we're in an environment where prices went up much faster than I think just about anybody expected, the hedges are a little bit of a drag. Again, though, I don't think we internally have any desire to change the approach that we have to hedging. People get in trouble when they think they can predict what's happening to oil and gas prices. So we're going to stay consistent with our formula. But what that means is, you know, as we continue to pay down debt and as our EBITDA is growing and therefore enterprise value, the debt to enterprise value ratio that we use to dictate our forward two-year hedging policy continues to get lower and lower as a percentage. So hedges are rolling off and they're rolling off quickly. But I don't – look, we've looked at costless collars. We entertain, you know, consulting firms that come in and pitch us on strategies. We like swaps because they're simple. I don't really see that changing going forward. One thing I will add, since you brought it up, we've made a good amount of money on our interest rate swaps. So that's another kind of arrow in our quiver, so to speak, that helps mitigate against the losses we have on the commodity edges. So we could potentially balance those against each other, if that makes sense. So I feel good about where we are. I like that we're de-levering rapidly. I like that our hedging percentage is going to go down over time. And I don't really see any near-term change in that strategy. Matt, you want to add anything to that?
spk02: No, I totally agree with that. And that's right, it is rapidly dropping. I mean, we're looking at 29% of our production hedge for the rest of this year. It drops to 19% in 23 and around 17% in 24. So obviously, you know, it's sort of a catalyst for the stock. having distribution growth simply by having these hedges roll off over time in the near term.
spk06: Great. Well, thank you, guys. And again, congrats on a great quarter. Thank you. Thank you.
spk00: Thank you. Our next question is from Nate Pendleton with Steeple. Please proceed with your question.
spk07: Good morning. Congrats on a strong quarter. Thank you. My first question, in light of the higher commodity environment and in front of the higher rig count environment as well. Can you share your thoughts on the potential for lease bonuses in 2022?
spk04: That is a good question. So we never really bake in any lease bonus to any of our forecasts. Man, Matt, how do we want to answer that? I mean, I would say, I'll make a general comment and I'll turn it over. You know, obviously, it's a good question. I think obviously anytime you see oil and gas prices go up like this, one would naturally expect an increase in lease bonus activity. So I'd say that we do expect that. That being said, it comes in waves. We'll get some really big, chunky lease bonuses one quarter, and then for whatever reason, the next quarter we get nothing. So it's difficult, if not impossible, to predict. But I would argue that your premise is correct and that we would expect the trend to – to be elevated, at least here in the near term. Matt?
spk02: Yeah, I totally agree with that. I mean, you saw $650,000 in Q1. Almost all of that was in the Permian, Reeves County, Loving County, Martin County, Midland County. What we're seeing right now in Q2, we are seeing a lot of activity with inbound calls and leasing, mainly in the Haynesville and MidCon, which is not surprising given the higher natural gas prices we're seeing right now. as well as the higher NGL prices that obviously the MidCon is fairly NGL heavy. So that's sort of a theme you might see for the rest of the year for Permian, Haynesville, and MidCon.
spk07: Great.
spk02: Thanks for the color.
spk07: And for my follow-up, regarding C1 oil volume, were there any notable drivers behind that outperformance?
spk04: Good question. Blaine, do you want to speak to any of the bigger drivers on the oil volumes? Yeah, absolutely.
spk06: I would say just, you know, given a broad, you know, include oil specifically with your question, but with the majority of our development, we had solid development in the Hainesville, but on the oil side, the majority of it came from the Eagleford on a legacy asset that we've owned there. We had seven new wells come on in DeMint County. Mixed in with that was also good development in the Permian. So I would say those are the two main factors, the development in the Eagleford and the Permian.
spk07: Great. Thanks for taking my question. Thank you.
spk00: Our next question is from TJ Schultz with RBC Capital. Please proceed with your question.
spk08: Hey, good morning. Just first on Tiger, any update on the goal to de-SPAC? And then really as you're thinking about just how that would potentially work with KRP longer term and the type of producing asset you want through Tiger, does that put you all in a different sandbox at all for deals that are out in the market today? Just trying to get a feeling for how competitive it's going to be to find a deal, your level of optimism. to get something done in the next year to 15 months. Thanks.
spk04: Yeah. Morning, TJ. I'd say we feel better sitting here today about our ability to find a D-SPAC candidate than we did at the end of last quarter. Very encouraged by ongoing dialogue that we have with multiple parties. It's a really exciting advantage for KRP to potentially have an operated working interest partner that could help unlock an entirely new universe of acquisition opportunities, frankly, for KRP with the unique advantage of having a line of sight and transparency on development. Frankly, I think every mineral company should have a partner that operates acreage alongside or in front of their minerals. So that's the premise. We feel good about it. I mean, I think that in this environment, I think in this environment, it's really difficult to finance acquisitions with a huge amount of cash. I think it's hard to get public unless you're a really big, big company. So there's only a few of those out there working at your side that could really pull that off, even in this environment, in my opinion. So I think a SPAC is a great opportunity for, and folks are, in my opinion, coming to that realization, a great opportunity to get some liquidity and And to do so in a way where you have a strategic partner like us, we can bid on the mineral side or carve out an override with a lower cost of capital than the working interest folks can. And so on a combined basis, it makes acquisitions pretty interesting. We could be a financing partner to that working interest group. So feel good about it. Being optimistic, I do think we'll get something done. And it's going to be exciting for KRP unit holders, not only the initial upfront amount of cash and units that KRP unit holders will get in the D-SPAC candidate, but also just the ongoing strategic relationship and what that means for M&A and growth for KRP going forward. Matt or Bob, anything?
spk02: No, that sounds perfect.
spk08: Okay, I appreciate that. If I could just shift gears on that. Cash taxes, I think you guys have said before you would not be a material cash taxpayer through 2027 and definitely a differentiator for you all. Does that timeframe accelerate at all if these prices, these commodity prices hold over the next year or two? Thanks.
spk04: So I'll turn that over to Blaine. The first thing I'll say is we typically release our tax guidance once a year. It's a very complicated process, as you can imagine. and we provide more detail on tax guidance than just about anybody I know. Obviously, with revenues and profitability going up, we'd expect that, which is a good thing. It's a good problem to have. The shield could go away faster. We haven't released specifics on that, but I'll turn it over to Blaine to add additional color.
spk06: Yeah, no, David, I think directionally, you're right there. I mean, we had said, as you mentioned, TJ, that through 2027, we expect to not pay a material amount of federal income taxes. I think if you just look at The last time we gave out guidance was, you know, we released it in Q2 of last year. You've got gas in the threes and oil in the 60s going down, obviously. And now we've got, you know, gas at eight and oil at 108. So you can just kind of do the math that, as Davis alluded to, those shields will be eating through with higher revenues a lot quicker. So you can look forward to updated tax guidance coming out with our Q2 release.
spk08: Perfect.
spk06: Thanks, guys.
spk08: Thank you.
spk00: Ladies and gentlemen, we have reached the end of the question and answer session and I would now like to turn the call back over to management for closing remarks.
spk03: We thank you all for joining us this morning and look forward to speaking with you again when we report our second quarter results. This completes today's call.
spk00: This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer