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spk05: Greetings and welcome to the Kimball Royalty Partners Third 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. Thank you, Rick. You may begin.
spk07: Thank you, Operator, and good morning, everyone. Welcome to Kimball Royalty Partners' conference call to review financial and operational results for the third quarter ended September 30th, 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, November 3rd, 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 provisions 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 earnings 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 release. Temple assumes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Bob Ravnis, Kimball Realty Partners Chairman and Chief Executive Officer. Bob?
spk01: 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 Ravnis, our President and Chief Financial Officer, Matt Daly, our Chief Operating Officer, and Blaine Reinsberger, our Controller. I'll start by commenting on the quarter and the current operating environment and before turning the call over to Davis to review our financials in more detail before we open the call to your questions. We maintain strong momentum in the third quarter coming off record results in the second quarter. In terms of production, we achieved another record as run rate daily production for Q3 2022 was 14,985 BOE per day. While last quarter's record production was driven by a surge in natural gas production in the Haynesville area, This quarter's record performance was driven by accelerated oil-weighted activity, primarily in the Permian and Eagleford, which drove an 8% sequential increase in oil production. This is a good example of the power of geographic diversity. As of September 30, 2022, we had 79 rigs actively drilling on our acreage, up 7% from last quarter, and representing over 10.6% market share of all rigs drilling in the continental United States. This is the highest level of rigs actively drilling on our acreage that we've experienced since 2019. Reflecting these strong quarterly results, we are pleased to announce today that our third quarter distribution is 49 cents per common unit. Moving into the final quarter of 2022, we see continued momentum supported by a record number of ducks and permits at the end of Q3 2022. We believe that this operational success is a result of seeds planted over the last five years with more than $900 million in acquisitions across the leading basins in the U.S. since 2018. Our consistent and proven strategy of having a strict set of time-tested acquisition criteria, which includes significant upside drilling inventory, continues to propel our business model and enhance growth. We are now realizing the benefits of this acquisition strategy as reflected in our inventory conversions, record production, and operational performance. I'm pleased to announce that we now believe Kimball only needs 4.0 net wells completed each year to keep production flat, an 11% reduction from the prior estimate of 4.5 net wells per year. This reduction further highlights Kimball's best-in-class production stability. Given that we currently have 5.44 net ducts and permits, which is another quarterly record, we are well-positioned to drive continued organic production growth. Today, the macro events dominating the financial headlines in many industry sectors, which were leaders over the last several years, are experiencing significant headwinds in this current environment. However, I believe the energy sector is in the best shape that I've seen in my career, which has spanned over 40 years, as is well prepared to weather any storm that may be coming in future quarters. In general, balance sheets are running at low levels of leverage. Free cash flow is strong. Management teams are disciplined, and valuations remain compelling, even in a higher interest rate environment. Many are expecting a slowdown in drilling in the medium term due to increased costs, especially labor. As I said before, this is one of the strongest competitive advantages of being a pure royalty company. Namely, we have zero inflationary risk in terms of drilling and production costs. Yet, we receive the upside from higher commodity prices. We remain structurally bullish on both oil and natural gas of the long term due to years of woefully low investment, especially among energy companies outside of the U.S. and strong global demand trends that we expect to accelerate in 2023. As we finish 2022, we are very grateful to our employees, board of directors, and advisors for helping us achieve a record year at Kimball. We remain extremely excited about our role as a leading consolidator in the oil and gas royalty sector. and the prospects for Kimball to generate long-term unit holder value for years to come. I'll now turn the call over to Davis to review our financials in more detail before we open the call to questions.
spk04: Thanks, Bob, and good morning, everyone. We are very pleased to report record performance during the quarter, and we are again reaffirming 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 third quarter, beginning with oil, natural gas, and NGL revenues of $73.9 million, a decrease of 6% from Q2 2022, primarily due to a decline in realized commodity prices. Kimball's third quarter 2022 average realized price per barrel of oil was $92.65, Per MCF of natural gas was $6.92. Per barrel of NGLs was $35.50. And per BOE combined was $53.58. Our record third quarter average daily production was 14,985 barrels of oil equivalent per day on a six to one basis. an increase of 0.2% from Q2 2022. This daily production was composed of approximately 62% from natural gas on a six to one basis and approximately 38% from liquids or 25% from oil and 13% from NGLs. On the expense side, general and administrative expenses for Kimball were 7.5 million in the quarter, $4.5 million of which was cash G&A expense, or $3.26 per BOE. Third quarter net income was approximately $43.8 million. Total third quarter consolidated adjusted EBITDA was $47.5 million, and cash available for distribution was $0.66 per common unit. Today, we announced a cash distribution of 49 cents per common unit for the third 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 Q3 payment, Kimball has paid down approximately $75.2 million of its outstanding borrowings under its secure revolving credit facility by allocating just a portion of its cash available for distributions for debt pay down. Commenting further on our balance sheet and liquidity, as of September 30th, Kimball had approximately $203.9 million in debt outstanding under its secure revolving credit facility. It also had net debt to third quarter 2022 trailing 12-month consolidated adjusted EBITDA of approximately 1.0 times and remained in compliance with all financial covenants under its secured revolving credit facility. Kimball had approximately 96.1 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. We are also very pleased with our strong 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.
spk05: Thank you. We will now 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 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. One moment, please, while we poll for questions.
spk06: Thank you. Our first question is from John Anus with Stifel. Please proceed with your question.
spk00: Good morning, all, and congrats on a strong quarter. Thank you. For my first question, you mentioned in the past of wanting to get the leverage ratio below one times before considering buying back some stock or increasing dividends. Now that you're around that one times level, could you share your updated thoughts on increasing the payout ratio or stock buybacks?
spk04: Yeah, thanks for that question. That's one of the topics that we discuss most frequently as a management team and at the board level. As we look at the environment, I think investors continue to want us to delever the business, you know, looking at it. I think it would be nice if we could get to maybe half a turn of leverage long-term at kind of the mid-cycle level so that when prices inevitably do go back down, or let's say they fall 50% from mid-cycle to trough, we're back at one times. So I think thinking about deleveraging is an important thing. At the same time, though, we want to look at the overall context and the overall environment. If we feel very good about the fundamentals of the business... but our stock continues to trade at levels that we think are dramatically undervalued, particularly undervalued relative to third party M&A that we could do, then we would, of course, consider buying back stock, notwithstanding our focus on continuing to reduce leverage. So I think what you'll see for us going forward is hopefully a very thoughtful, active approach to to optimizing the way in which our investors are rewarded with their cash flow. And that'll be a combination of, you know, possibly share repurchases, debt pay down, or third-party M&A kind of depending on, or increasing the payout ratio. So I think all of those options are on the table and will depend on the environment and the context.
spk00: That makes sense. I appreciate the color. And then for my follow-up, I wanted to focus on the commentary regarding the reduction in wells required to keep production flat. Could you help me better understand what the drivers were or the assessment you performed that led you to revise this estimate down to four net wells per year? Thanks.
spk04: Sure. Great question. And this is a really important part of our business that I think a lot of people don't understand. So we look at that on an annual, if not twice annual basis. We try to look at how many wells – so we believe in the sustainability of an upstream model. We've always been that way. We're probably the only guys – one of the only groups that really focuses on underlying PDP decline rate. We've always felt that that's critically important, really going back to the late 90s when we got started as one of the very first mineral buyers. So when we look at that, what that's really – it's always important for us to see what – what's called our replacement production levels are. So why did that drop from, let's call it 4.4 net wells to keep production flat to four wells? Well, a lot of the production growth that you've seen on our assets over the last few years have been focused on unconventional properties, right? Which by their nature have a higher PDP decline rate. As those wells have started to mature and as we've had new wells that have come online, that underlying PDP decline rate has kind of shifted a little bit lower and therefore fewer wells are required to maintain production and keep it flat. I would say that since we started tracking that, and since we started quantifying our net ducks and permits, this is probably the best we've ever felt. Well, maybe I can just say certainly the best we've ever felt in terms of the ratio of net ducks and permits on our acreage relative to the number of wells that need to come online in order to maintain production. So we're at 5.44 net ducts and permits, which is a new record, which is fantastic. We were very happy to see that. And we have, you know, we only need four wells to keep production flat. So, you know, we have roughly, you know, see one divided by the other, you know, 35% more in the, let's call it immediate development catalyst category for development to offset drilling. So we're always conservative with guidance. We typically like to see our production grow low single digits, perhaps high single digits in a better environment, I think this would suggest that the fundamentals would support kind of the latter case. So from our perspective, just very simplistically, I've never felt better about what we have in terms of immediate development, net ducks and permits relative to what's necessary to keep production flat. It's a good point to be in our business.
spk00: That makes sense. Great update and thanks for the time.
spk05: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
spk06: Thank you.
spk05: Our next question is from TJ Schultz with RBC Capital. Please proceed with your question.
spk03: Hey, guys. Good morning. Thank you. You highlighted the $900 million of acquisitions since 2018, and I think it's clear you've had success executing on M&A. How do you see this set up for transactions into next year or maybe Also, in the context of having two of your peers considering a merger, how that may change the competitive landscape for you all, if at all, or just generally, does it change how you view size and scale to remain competitive? Thanks.
spk04: Yeah, thanks, DJ. Good question. Nothing's changed on how we view the M&A landscape. As you know, we're just very selective. We often disappoint sell-side brokers, investment bankers, and frankly, just other mineral companies that are looking for an exit because we just have a set of criteria under which we underwrite deals. We've been doing it for coming on 30 years now and really have never deviated. The space is so large since you brought up competitive dynamics. I mean, we're talking about pushing a trillion-dollar sector With, you know, 20 million American, the math's pretty simple. We have in our investor presentation and a bunch of groups, including Bloomberg, I think have adopted our methodology for trying to quantify the size of the minerals and royalty sector. But over 20 million Americans get royalty checks. You know, most of those on average are 100 bucks a month. So it's a rapidly consolidating space. The public mineral companies represent, you know, a very small fraction of that, like low single digit percentage of the overall market. So consolidation is happening. It needs to happen. Moreover, I think often the mineral space gets overlooked because the United States is the only place where private mineral ownership exists. So if you look at 7 billion people on the planet, 6.6 billion of them outside the United States don't even realize that this asset class exists and that you can invest in it. So underappreciated in the very early innings of growth. And there will not, in our opinion, be a single company or even a half a dozen companies that are able to acquire everything that exists out there. So for us, we focus on what we do. We don't worry about what our competition does. And we've seen years where we've done zero deals. We've seen years where we've done three or four. I think on average, we've executed on one per year or so. Looking forward to next year. We plan on doing more of the same. I think you'll see us be, as always, more focused on deploying capital on behalf of our unit holders in the most effective way. We want to generate the highest return on invested capital, regardless of basin. That gives us a huge advantage to not be solely focused on the hottest basin at every time. So we can look where... it's most efficient for us to deploy, and I think we'll just continue to do that. Anything you'd add, Bob?
spk06: Nope. I agree with all those. Okay.
spk03: No, that's very helpful. I guess, how do you consider, I mean, you are very geographically diverse, a lot of opportunities out there. As you kind of think about the different basins, is there anything where you're more focused on today versus some others?
spk04: Great question, and the answer to that is no. We always look at what's available on the market. We're agnostic to gas, oil. We've always been that way, and we're agnostic to basin, and we're unique in the sense that, TJ, you know this going all the way back to our IPO. We're one of the only buyers that has been successful acquiring in every basin throughout the United States. So we have an ability to deploy capital, in our opinion, much more efficiently because we aren't precluded from investing in certain places. So we look at everything. I say everything. We'd like to believe that we hear about most major transactions and we evaluate all of them. And there's only a very small percentage of those that kind of fit in our underwriting wheelhouse. But when we find something, we move on it.
spk06: Okay. Makes sense. I appreciate it. Thank you. Thank you.
spk05: There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.
spk02: We thank you all for joining us this morning and look forward to speaking with you again when we report fourth quarter results. This completes today's call.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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