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spk00: Greetings, and welcome to the Kimball Royalty Partners Second 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, Investor Relations for Kimball Royalty Partners. Thank you, Mr. Black. You may begin.
spk08: 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 ended June 30, 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 kimballrp.com. Information recorded on this call speaks only as of today, August 4, 2022, so please be advised that any time-sensitive information may no longer be accurate as of the date of any listing 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 or future events or future financial performance, are forward-looking statements made pursuant to the safe harbor provisions for 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 disclosures 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 the 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. With that, I would now like to turn the call over to Bob Ravenous, Kimball Realty Partners Chairman and Chief Executive Officer. Bob?
spk02: 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'll start the call today by commenting on 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 sustain the momentum we had last quarter into this quarter. The strong commodity prices during the quarter coupled with organic production growth resulted in several new records for Kimball. In addition, net ducks and permits reached record levels at the end of Q2 2022 reflecting increased activity and line of sight on our acreage. I am particularly pleased with the 4% organic production growth in the quarter, which drove record run rate production in Q2 2022, driven mainly by significant new production from multiple high-interest wells in the Haynesville. Reflecting these strong quarterly results, we are pleased to announce today that our second quarter distribution is $0.55 per common unit, This marks yet another record for the company. Recessionary fears have now permeated across the economy, and U.S. gasoline demand has decreased, resulting in a steep drop in oil prices from the March 2022 highs. However, upstream operators across the United States have generally kept production growth constrained, which should provide a sturdy backstop for potential downside in oil prices from current levels. In fact, overall U.S. Oil production has grown only approximately 2% this year, even with multi-year highs in commodity prices. As of June 30, 2022, we had 74 rigs actively drilling on our acreage, up 1% from last quarter and representing over 10% market share of all rigs drilling in the continental U.S. After a significant correction in natural gas prices from June highs, These prices are again trending higher, reflecting record power demand and tepid production growth. This price increase is happening notwithstanding approximately two BCF per day of demand temporarily lost due to a major LNG export facility being offline. These higher oil and natural gas prices are supporting activity increases across all major basins, which we are seeing through increased lease bonus activity as well as record net ducts and permits. And we continue to see operators maintaining discipline even in the face of these higher prices and expect only modest production growth as we finish out 2022. As we have mentioned before, at Kimball, we only need approximately four and a half net wells completed each year to keep production flat. And our net ducts and permits currently exceed this level, providing the potential for continued organic production growth as we finish out 2022. As we look forward in 2022 and beyond, we remain very bullish about the industry overall. We remain extremely excited about our role as a leading consolidator in the oil and natural gas royalty sector, and we believe there are substantial opportunities for Kimball to generate long-term unit holder value for years to come. And with that, I'll now turn the call over to Davis.
spk06: Thanks, Bob, and good morning, everyone. we are very pleased to report record performance during the quarter and we are affirming our full year 2022 guidance that was previously disclosed at our fourth quarter 2021 press release i'll start by reviewing our financial results from the second quarter beginning with record oil natural gas and ngl revenues of 78.6 million an increase of 21 from q1 2022 reflecting improved realized commodity prices coupled with growth of organic production. Kimball's second quarter 2022 average realized price per BBL of oil was $107.96. Per MCF of natural gas was $6.93. Per barrel of NGLs was $46.10. and per BOE combined was $57.78. Our second quarter average daily production was 14,948 barrels of oil equivalent per day on a six-to-one basis, an increase of 4% from Q1 2022. This daily production was composed of approximately 63% from natural gas and approximately 37% from liquids or 24% from oil and 13% from NGLs. On the expense side, general and administrative expenses for Kimball were 7.9 million in the quarter, 4.9 million of which was cash G&A expense or $3.61 per BOE. Second quarter net income was approximately 43.3 million, a new record. Total second quarter consolidated adjusted EBITDA was $53.5 million, an increase of 22% compared to last quarter and also a new record. Today, we announced a record high cash distribution of $0.55 per common unit for the second 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 2020, excluding this upcoming Q2 payment, Kimball has paid down approximately 63 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 the balance sheet and liquidity, As of June 30th, Kimball had approximately 216.1 million in debt outstanding under its secured revolving credit facility. It also had net debt to second quarter 2022 trailing 12 month consolidated adjusted EBITDA of approximately 1.2 times and was in compliance with all financial covenants under its secured revolving credit facility. Kimball had approximately 83.9 million in undrawn capacity under its secured revolving credit facility. We are extremely proud of the strength of our business model that continues to perform very well in the highly cyclical energy industry. And we are also very pleased with our record performance, which is largely the result of seeds planted many years ago when we completed several acquisitions when commodity prices were much lower. We remain highly focused on our goal of generating long-term unit holder value for years to come. With that, operator, we are now ready for questions.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 comes from Trafford Lamar with Raymond James. Please proceed with your question.
spk04: Hey, guys. Congrats on a great quarter, record quarter all around. I guess first question kind of centers around share buybacks. I see some of your peers have kind of shifted more from this is straight dividend distribution to incorporating buybacks as a percentage of that total distribution. I know you all mentioned it a little bit last quarter with regards to potentially rolling out buybacks or increasing the distribution later this year as a percentage of distributable cash flow, but I just want to get your thoughts on that.
spk06: Yeah, great question. Appreciate it. Um, this is Davis. I think from our perspective, as we have discussions with the board, we are increasingly encouraged to state the obvious by. The cashflow profile and outlook for the business, particularly in the context of our balance sheet, which continues to get stronger and stronger and stronger with every passing quarter. Um, as we've mentioned before, we, um, we will look at all possible options to maximize shareholder value. And so that can take the form of increasing our payout ratio at some point in the future when our leverage ratio gets to be so low that it's effectively de minimis. That could mean share buybacks, or we could continue to pay down even more debt. I think as it currently stands, we don't have a firm target on exactly what that bright line of leverage is. But for general purposes, I think it's fair to say around that we'd like to be Less than one times debt to EBITDA, which, as you can tell, is not too far away. So, you know, the stock is obviously trading at a very attractive level. You know, free cash flow yield is, well, let's see, the dividend yield annualized is 12.5% at the current price. Free cash flow yield is obviously significantly higher than that, so it's a compelling value proposition. It's something that we think about, and in the not-too-distant future, we'll be in a position vis-a-vis the balance sheet where we can really push down the gas pedal on hopefully buying back some stock or increasing dividends to our shareholders. Matt or Bob, anything you want to add?
spk03: No, I think that's right, Davis. I mean, this is Matt. I mean, you know, looking at the three options you mentioned there in terms of increasing the payout ratio, paying down debt or buyback stock as alluded to, the free cash flow yield, you're looking at a 17% free cash flow yield on the stock right now. It's an incredible value. And so to the extent you have a marginal dollar, that would be, you know, likely a place we would consider very strongly on buybacks. Great.
spk04: Thank you. Appreciate the color guys on that. And then second question, just kind of like a quarterly checkup on the ground floor game. I mean, y'all increased production pretty materially, organically from first quarter, second quarter. So not that y'all would need to make an acquisition, but just given the recent volatility, especially on the oil side, I guess what have y'all seen kind of in the bid-ask spread with sellers at the ground floor level?
spk06: Yeah, good question. It continues to be challenging. I think you see that not only with us, but also with our peers. Sellers want credit for $100 oil. And I think in some cases, don't want to admit that the curve is in such deep backwardation. So for us, volatility always hurts. And I think that's true for any industry. In this particular case, Kind of going back to your first question, we'd be better off buying back our own stock, to Matt's point, at a 17% free cash flow yield. We know our own assets, of course, better than we would know any third-party assets. So I think for now, as we think about the use of cash that the business generates, we'd like to continue to de-lever. And if we continue to trade like this, I think buybacks become the most appealing option.
spk04: Yeah. Perfect. Thanks, Dave, for the color, and congrats. Oh, sorry. Go ahead.
spk02: Oh, no. This is Bob. I'd like to just add to that is we did, obviously, we saw a number of publicly announced acquisitions this last quarter that were significant and pretty large. That was pretty aggressive pricing that I think companies did strategically, and we did look at all those, and we're not the high bidder, obviously. What I'm excited about through the years and going through the cycles, I don't like the volatility right now, But it's been my experience with us buying high-quality royalties that as prices keep on going up like they did earlier this year, that people tend to hold on to them saying that we think prices are going to go up even further. It's been my experience that when prices kind of come down a little bit and people are concerned on whether or not they're going to go back up again, that it sort of loosens the thought of sellers saying maybe $90 a barrel is not a bad price. And so I'm cautiously optimistic about that in the next couple of quarters. But to Davis's point, the volatility does hurt.
spk07: Great. Well, appreciate the color from both of you on that.
spk00: Thank you. Our next question comes from the line of Chris Baker with Credit Suisse. Please proceed with your question.
spk05: Hey, guys. Congrats on some solid organic growth this quarter.
spk06: Thanks, Chris. Nice to see the pipeline.
spk05: I was hoping you could maybe just talk a bit about, you know, how you're thinking about the second half. I think guide was reiterated, but obviously the top end of the range gives you a little bit of wiggle room there. And, you know, just longer term, I know a while back we talked about, you know, maybe a low single digit organic growth target over time. Any updated thoughts just based on where you're seeing the macro shakeout today in terms of that organic growth story in the second half and beyond?
spk06: Yeah, great question. So reaffirmed guidance, your point's well taken that perhaps, well, implicit in that comment might be that we're being a little bit conservative, which we always try to be. Looking at the second half of the year, We feel very good about that. We had a long discussion on that topic yesterday in terms of line of sight that we're seeing on development activity in the second half of the year. That's supported and evidenced by just the amount of duck and permit inventory that we have right now as it currently stands. Frankly, it took a little bit longer, at least than I expected personally. to start to see some of these high interest duck conversion that we had in the Hainesville. We knew that a lot of these wells were out there and, uh, you know, it just took a little bit longer than we expected to, to, um, for that to materialize. So that could accelerate in the second half of the year. We don't want to count on it. That's why we're not, you know, that's why we're not enhancing guidance at this time. But, uh, Chris, your, your points will take and feel very confident. about the back half of the year, certainly given what's going on with natural gas prices. Matt, Bob, anything you want to add?
spk03: Yeah. Yeah, that's exactly right. I mean, you know, 14,948 BWE per day, you know, that's 4% above the midpoint of guidance. And, you know, any time you have, you know, sort of this low single-digit organic growth in this market, Especially when you have oil production growing at 2% and lower 48% and gas production growing 1%. Anytime you have sort of low to mid single digit organic growth, it's certainly very positive. And as David says, we have a fair amount of activity that we see coming up here. The timing is always a little bit difficult to pinpoint, but certainly a lot of these ducks and the rigs you guys have been seeing over the last several quarters is starting to materialize now, especially as David said, in the Haynesville and other areas. You obviously saw the lease bonus activity as well that was relatively sizable, and that was very broad-based among multiple basins, and so we're certainly benefiting right now and see good momentum.
spk06: Yeah, it's a fun... Go ahead, Bob. Sorry.
spk02: Yeah, I'd like to add, too. I'm really proud of our property base. Yeah, I don't know of any company that only requires four and a half net wells to maintain production clout, and if you recall, our last significant acquisition last year had a very, very low PDP decline, which would even... tend to even lower that. Plus, as wells get more mature, they tend to flatten out. We haven't updated our work on that yet this year, but I'm optimistic that the amount of wells right now with our current property set to maintain production flat would be less than 4.5. I don't know how much less, but if anything, directionally, I would anticipate it to be lower. And so that just really makes it so much easier to grow organically. Very proud of that. We don't have to do an acquisition... financed by debt to make it accretive to maintain production or to increase production that our property said just continues to show growth every year organically. So I'm very happy about that. Appreciate the comments, Bob.
spk05: And then just longer term, fair to think as we kind of look out to 23 and beyond that in a moderate growth sort of scenario, lower 48 onshore, that Gimbel's portfolio would keep pace. just directionally speaking?
spk06: Yeah, Chris, this is Davis again. Yes, I would have to agree with that statement. Just looking at kind of our historical track record and what we're seeing more recently, particularly on the natural gas development front. I mean, Matt, yeah, I think we'd have to conclude that we would at least match lower 48, if not exceed it. I think what's been surprising, I think, is just And perhaps not surprising. I don't think anybody really predicted that natural gas prices were going to increase so rapidly here in the not-too-distant past. And that's just really highlighting the position we have in the Hainesville, right? And that was an acquisition that we made. We were fortunate to pull off that acquisition when natural gas prices were much lower. And there just wasn't a whole lot of development on that asset yet. over the last few years. But now with prices increasing dramatically, yeah, Chris, I'd have to logically conclude that we would expect development activity to at least match, if not exceed, lower 48 average.
spk05: That's great. And if I could just squeeze one more in, I'd be remiss if I didn't kind of touch on it. The headlines yesterday, I guess the question for you guys, To the extent that you continue to see valuation sort of disconnected, certainly agree the stock looks like it's trading well above peers on a cash flow yield basis. Any consideration for a strategic review or some sort of strategic alternative process if you kind of continue to see shares trading at what looks like unreasonable levels?
spk06: I think that we have the ability to enhance value through buybacks. I think that, you know, we've touched on that a number of times on this phone call. I think that would be kind of the first volley to maximize value, to kind of take control of our own destiny by buying back our own stock at what we feel is a very attractive valuation. But yeah, always thinking about ways to maximize value, Chris. But don't have any comments specifically on... on some of the reports from yesterday.
spk05: Fair enough. Thank you, guys.
spk00: Thank you. Our next question comes from the line of Derek Whitfield with Stiefel. Please proceed with your question.
spk07: Thanks, and good morning, all. Good morning. Good morning. With my first question, I wanted to focus on your hedging strategy. In light of the higher commodity price environment and your improving balance sheet, could you speak to your views on hedging at present and if those views are evolving as the landscape is evolving?
spk06: We have always felt that the most important thing about hedging is to have a consistent hedging policy. We are not in the business of predicting oil and gas price movements. So we continue at the board level to invoke a strategy where we effectively protect the debt or the leverage in our business relative to the overall enterprise. And so we will continue to hedge on a go forward basis. Our debt divided the percentage of our production that's reflected in debt divided by total enterprise value. We're not an operating company, so we don't have a CapEx program to protect. We don't have operating expenses, et cetera. But what we do have is a modest amount of financial leverage. And so in our view, hedging some modest amount through these cycles just allows us to better protect all of the stakeholders in our business. Matt, anything you'd like to add? I wouldn't say that we're, because of the elevated prices, I wouldn't say that we're considering some sort of change in our hedging strategy. I think trying to time those movements can be really tough. And when you start making inconsistent hedging decisions and start changing your strategy from quarter to quarter, it can obviously be less than ideal. So, Matt, any thoughts at all?
spk03: Yeah, yeah, yeah. And based on that formula Davis said earlier, you know, the debt by enterprise value, the amount we're hedging, you know, we're putting on, we just put on the Q2 24 hedges. It's on our press release. You know, we hedged about 17% of our midpoint of 2022 production. So 17%, we got oil swaps at $82 a barrel per, you know, we're not hedging too much, but hedging some, and we think good prices. So I think it's a strategy that's worked very well. especially proved itself during the pandemic. But, you know, we've never really gone much more than a third of our production hedge, and right now we're laying around hedges around 17% two years out.
spk07: Great. That makes sense. And as my follow-up, shifting over to Tiger Acquisition Corp., could you help kind of size up the opportunities you're seeing in the market at present to affect a direct drive operating strategy?
spk06: Continue to evaluate a number of opportunities. We feel very confident in Tiger and in our ability to be successful there, but no comment beyond that that we can report.
spk07: All right, terrific. Thanks for your time, guys. That's very helpful. Thank you. Thanks.
spk00: Thank you. Our next question comes from the line of Cameron Lockridge with Stevens. Please proceed with your question.
spk01: Hey, good morning, guys. Thanks for taking my questions.
spk00: Hey, Cameron.
spk01: Hey, good morning. I wanted to start going back to the topic of M&A. You know, you mentioned, obviously, the bid-ask spread is not conducive to doing deals at this time. But just generally, if you can kind of maybe give us a sense for, I mean, you have a great footprint across the lower 48. Any particular basins you're particularly keen on at this point? Anything you'd share there would be helpful.
spk06: Bob, I'll turn this over to you. Maybe I'll make one or two comments. So, Cameron, we've always been opportunistic on M&A. And what we really pride ourselves on doing is deploying capital in as efficient of a way as possible on behalf of our investors. So, you know, for example, over the last five, six years, we didn't really make a whole lot of acquisitions in the Delaware Basin, the phenomenal basin. But it's been very pricey, and I think development expectations or the reality of development pace just hasn't matched, I think, what a lot of folks underwrote over the last, you know, let's call it half a dozen years. So for us, we really are agnostic to Basin. If we can make more money and deploy capital more efficiently buying something in, you know, the Haynesville or the Eagleford or the Bakken – We're more than happy to do that, and we will do that over spending money in the Permian just because the Permian is the sexiest basin. So that's a consistent theme that we've had going on over the last 25 years of our business model. We're also agnostic between oil and natural gas. Again, we don't try to take a position on relative outperformance of one commodity relative to another. And we're just very selective. I mean, so last year we had one acquisition that we made that frankly has already turned out to be a home run with Cornerstone. I'd say on average per year, we've done about one or two M&A events. So we just try to look at everything. We try to be very patient and conservative with what we bid. And we're very rarely successful, but when we are, it tends to be a good outcome for everyone involved. So Still very interested in M&A. I think that what's particularly exciting for us, though, just to kind of repeat this again, is, you know, we're at a pretty exciting inflection point for the business in terms of, you know, there being a catalyst here with debt pay down, whereby we're going to have debt at a pretty de minimis level very, very soon. And at that point, you know, frankly, we'd be on a risk adjusted basis, much better off buying back our own stock assets that we've underwritten historically assets that we currently manage, that we understand, that we like. So that's going to be kind of the competition for external M&A is going to be, are we going to be better off just buying back our own stock? So that's where we are. That's where we continue to kind of evaluate. But Matt or Bob, anything you guys want to add in?
spk02: Yeah, we're really proud of our position. As you said, all over the lower 48, we've always looked at total returns when we look at an acquisition. And our first acquisition was in the Permian Basin over 20 years ago. And so I obviously and our team are obviously very familiar with the Permian. When we aren't able to get an acquisition because it being so pricey in the Permian, and we get it. You know, I think sometimes people spend all their time looking at operating working interest companies. And they say, you know, the Delaware and the Midland Basin are superior companies. just because of the amount of oil in place per acre, and we get that, and I agree with that. But I think a lot of times people forget about being a mineral company where you don't have the capex to drill. All you're doing is buying basically a sophisticated financial instrument that if you can buy in another basin at a 20% return compared to a 10% return in the Permian, a lot of times it makes sense. Now, we do shy away, obviously, from, and I've heard people wonder about us, We do shy away from areas where there's no activity. You know, we don't want to be just a PDP deplete, look at a PDP depletion acquisition. There has to be activity in that basin. But if we can buy it at a very attractive return to our shareholders, we're going to do it in a good basin that has a very long life. Unfortunately, earlier in my career, we bought very attractive acquisitions somewhat in California. And there are some world-class oil reservoirs in California. And unfortunately, just because of the political climate there, we probably, in effect, we probably won't entertain an acquisition there. The other area that we've kind of shied away from is the DJ Basin. And we get why some people get excited about a DJ Basin acquisition that has a lot of ducks on the property, because you might have a tremendous short-term pop over the three to six months after the acquisition. But in the DJ Basin, if you don't have control over operations, which outpass ducks and permits as a royalty owner, you don't, you know, as you're aware, it's very significant declines. So we're also very cautious on doing any acquisitions there. But anyway, I think it's summary. Matt, any other comments? No, I think you nailed it, guys.
spk03: Thanks.
spk06: I'll add one more thing there, Karen, not to beat this to death. I think one thing that's a little bit different about us that might be surprising to folks that don't follow our story as much, we'd love to do a big acquisition in the Central Basin platform. A more mature basin that still has a really significant reserve life remaining that's on an effectively flat trajectory, we'll take that all day long. I think we're a little bit unique in the sense that we're not only looking at unconventional assets. I think a lot of folks forget that there's a very significant percentage of lower 48 production that is not horizontal in nature. And that market, in our opinion, attracts less competition and can be a really wonderful foundation and stable production base for a business like ours.
spk01: That's very helpful. Thank you all for the color. I appreciate it. Maybe switching gears here to the financials, you guys have a great chart in your slide deck showing the decline in cash G&A per BOE really going back to 2017. It does look like as of late that has started to tick up just modestly over the past few quarters. And I just wondered if you could comment on maybe some of the drivers there and where you think that ultimately settles down or settles out, you know, over the long run.
spk06: Great question. Matt, you want to take that one?
spk03: Yeah. Hey, so, yeah, the increase, you know, Q1, cash in A for B, we was $339. Q2 was $361. The increase was almost entirely due to professional fees related to the proxy preparation and solicitation related to our extraordinary general meeting that we held back in June. It was our first annual meeting since our IPO. It involved a lot of new document drafting, so we don't expect those costs the rest of the year. G&A, cash G&A should fall back down within the range that we gave for guidances, which is between 320 and 340.
spk01: Got it. Thanks, Matt. I appreciate that. And thank you all. I'll turn it back.
spk06: Thank you very much.
spk00: Thank you. This does conclude our Q&A session for today. I'd like to turn the floor back over to management for closing comments.
spk02: We thank you all for joining us this morning and look forward to speaking with you again when we report third quarter results. This completes today's call. Thank you, everyone.
spk00: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
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