Kimbell Royalty Partners LP

Greetings and welcome to 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 cable. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rick Black, Investor Relations, Thank you, Mr. Black. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to the Kimball Royalty Partners conference call to review financial and operational results for the first quarter 2024, ended March 31, 2024. This call is also being webcast, and it 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, which is May 2nd, 2024, 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 or future events or future financial performance, are considered forward-looking statements made pursuant to the Safe Harbor provisions by 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 press release for our disclosure on forward-looking statements. These factors, as well as other risks and uncertainties, are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA and cash available for distribution. Reconciliations to the nearest GAAP measures can be found at the end of today's earnings 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?

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 Daley, our chief operating officer, and Blaine Rheinsberger, our controller. We had another excellent quarter. Following on the operational momentum from 2023, we achieved several new quarterly records in terms of daily production, revenue, and EBITDA. Strong organic run rate production growth this quarter exceeded the midpoint of guidance, and we exited the quarter with a near record number of rigs drilling on our acreage. In addition, our line of site wells continue to be well above the number needed to maintain flat production, giving us confidence in the resilience of our production as we progress through 2024. Today, we were also very pleased to announce a 49 cent distribution per common unit, a 14% increase compared to last quarter. We are proud of the Kimball track record of delivering value to our unit holders in the form of quarterly cash distributions. Furthermore, we expect that approximately 79% of this distribution will be considered return of capital and not subject to dividend taxes, further enhancing the after tax return to our common unit holders. As we look forward in 2024 and beyond, we remain bullish on the U.S. oil and natural gas industry our role as a leading consolidator in the sector, and the prospects for Kimball to generate long-term unit holder value. I'll now turn the call over to Davis.

Thanks, Bob, and good morning, everyone. We had another great quarter here at Kimball as we built upon our 2023 success by delivering another strong quarter of new records for daily production, revenue, and EBITDA. I'll start by reviewing our financial results from the quarter, beginning with oil, natural gas, and NGL revenues, which totaled $87.5 million, an increase of 4.2% compared to the fourth quarter. This marks the highest quarterly revenue in our history. In the first quarter, we had run rate production of 24,678 BOE per day, which reflected 1.4% organic growth from Q4 2023, or 5.6% organic growth on an annualized basis. We exited the quarter with 98 rigs actively drilling on our acreage, which represents approximately 16.3% market share of all land rigs drilling in the continental United States. On the expense side, First quarter general and administrative expenses were $9.4 million, $5.8 million of which was cash G&A expense or $2.57 per BOE. Unit-based compensation in the first quarter, which is a non-cash G&A expense, was $3.7 million or $1.64 per BOE. Net income in the first quarter was approximately 9.3 million and net income attributable to common units was approximately 3.2 million or 4 cents per common unit. Total first quarter consolidated adjusted EBITDA was a record at 74.1 million and was up approximately 7.4% from last quarter. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release. As Bob mentioned, today we announced a cash distribution of 49 cents per common unit for the first quarter. This represents the cash distribution payment to common unit holders that equates to 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. Moving now to our balance sheet and liquidity, at March 31st, 2024, we had approximately 285.4 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing 12-month consolidated adjusted EBITDA of one times. We had approximately $264.6 million in undrawn capacity under the secured revolving credit facility as of March 31st, 2024. We remained very comfortable with our strong financial position, the support of our expanding bank syndicate, and our financial flexibility. Today, we are also affirming our 2024 guidance, which includes daily production at its midpoint of 24,000 BOE per day. As a reminder, our full guidance outlook was provided in the Q4 2023 earnings press release. We feel confident about the prospects for continued robust development given the number of rigs actively drilling on our acreage as well as the operator commentary we are hearing around their expected development activity in 2024, especially in the Permian. We continue to believe that industry trends, overall demand for energy, and positive operator sentiment represent a positive outlook for the royalties and mineral space, and Kimball specifically. We are pleased with our start to 2024 and we are focused on a long-term horizon for continued growth and opportunities to enhance unit holder value. We are proud of our hard work, dedicated and talented team here at Kimball, and we greatly appreciate their continued contributions to driving growth and enhancing the value of our organization for all stakeholders. In addition, we work with some of the best financial advisors and institutions in the business, and we greatly appreciate these partnerships that contribute to the company's success.

With that, operator, we are now ready for questions.

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 questions 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. The first question comes from the line of Nate Pendleton with . Please go ahead.

Good morning, and congrats on the strong quarter.

Thank you.

Good morning. My first question, I wanted to get your perspective on the M&A market, and specifically in what basins and at what potential deal size are you seeing the best opportunities?

Yeah, thanks for the question. Relatively muted start to the year on the M&A front. And just to directly answer your question, most of the opportunities that are out there that are of scale are in the Permian. So wouldn't be surprised to see a couple of larger deals, let's call it $100 million plus deals, consummated over the balance of the remaining year in the Permian. But so far it's been a relatively slow start. Not entirely sure why that's the case. Some years are more robust than others. Last year was a large one for us. This one so far for ourselves and our peers appears to be relatively muted. But things change quickly. Sometimes some of the private equity portfolio companies see an opportunity to exit and a window to exit, decide to rush quickly. So it could change, but so far relatively muted. And of the opportunities that we are seeing, they tend to be permeate-focused.

Got it. Thanks for the color. And for my follow-up, looking into your activity metrics, it appears rig activity on your MIDCON assets remains quite strong. Can you provide any color as to what you're seeing on the ground in the basin?

Yeah, good question. As you know, we love our mid-con position, the majority of which we acquired through Longpoint. And I think that's a basin that you'll continue to see kind of surprising activity levels, but more robust than I think people expect going forward. The basin really got beat down over the last several years, tremendously out of favor. There was a lot of negative PR over just some strange occurrences that happened in that basin at the corporate level. But great wealth, and I think you'll see, you know, positive contributions from improved differentials. There's great takeaway capacity there. There's operators there that continue to drive efficiencies into play. I'll pause there. Anything that you'd like to add to that, Matt, or anyone else?

Yeah, I mean, I just like the fact, you know, we had, you know, expected, you know, the Haynesville rigs went down between Q4 and Q1, you know, we've heard all the companies talking about cutting back on CapEx in that basin. So we were expecting that, but interesting that MidCon actually grew, you know, pretty dramatically, like you said, from 17 rigs to 23 rigs between Q4 and Q1. And so more, you know, offset that nicely. So overall rig count for the company stayed flat at 98 rigs between Q4 and Q1, a very, very high level of activity near an all-time record for us. So This kind of shows the benefits of having this diversified model where you have maybe one slowdown in, say, the Hainesville, but then the MidCon steps up. That's where it takes over for that.

I totally agree.

Absolutely. Well, I'll pass it back. Thanks for taking my questions. Thank you. Thank you.

Next question comes from the line of Trafford Lamar with Raymond James. Please go ahead.

Hey, guys. Thanks for taking my questions. Oh, sure. Yeah, thanks. Yeah, maybe the first one, kind of a follow-up on the M&A topic. You mentioned some potential opportunities in the Permian. Given kind of the opposite nature of the forward curves for oil and gas, can you all kind of talk about maybe what you're seeing on a bid-ask spread level for oily versus gassy assets?

Yeah, that's a great question. We haven't seen, you know, candidly, not a lot of gas assets of scale have come to market recently. I think that that's driven by a few different factors. One, a lot of the larger Hainesville players have exited in recent years. You know, we picked up our big Hainesville position back in 2018. There's been a few other folks that have sold in the last few years. Appalachia, from a minerals standpoint, perspective has been challenging. A lot of very small interests that have to be aggregated over smaller acreage footprints. So we just haven't seen as many high quality, large mineral packages in the Appalachian Basin. I would say that on the oil front, what you're asking is actually a really good nuanced question. Because you'll see deals on a backward-rated curve that can be very attractive on an accretion basis for cash flow over the next couple of years. But then on a NAV basis, if you really are running things on strip, which is what we do, it can be more challenging to do NAV accretive deals. So that's creating some disparity, I think, between lower multiples on initial cash flow from the bid perspective than perhaps the ask, if that makes sense. And so I think that is a little bit of a challenge. But look, I think sellers are sophisticated. They're looking at the same numbers we are. I do think deals will continue to get done that make both sides happy. So nothing that we're terribly concerned about in terms of too wide of a bid-ask spread. Just on the M&A front, just so far this year, there just hasn't been a whole lot that's come to market yet. But, again, the M&A environment ebbs and flows, so nothing that we're terribly concerned about.

Got it. I appreciate the color on that, Davis. And then maybe on – I was looking at – obviously, it was addressed in the prior question on mid-con activity, the increase from 4Q to 1Q – And also, you know, I want to ask on Haynesville, I noticed, you know, slight production increase in 1Q given how, you know, activity has fallen off a cliff there given prices. Did that come as a surprise to you all or was that more of a factor of kind of second half 23 activity coming online?

Yeah, so for detail on Haynesville activity, Blaine, do you have anything to add to that or Matt? Yeah, I do.

So Hainesville, you're correct. Hainesville grew quarter-over-quarter, 3% organically, and the Permian grew 5% quarter-over-quarter organically. But back to the Hainesville, again, we were expecting a slowdown there, and we are hearing about the CapEx drop-offs in the Hainesville, but we had the growth quarter-over-quarter. It was mainly due to we had three high-interest Chesapeake wells that came online at Red River Parish. These are huge wells, and they're going to have an impact on us. But I would say, and Blaine, unless you have other color, that's really the primary driver there. But yes, we were happy to see that. But certainly what we're hearing in the market, wouldn't be surprised if over time the Hanesville starts to slow a bit.

Yeah, no, I completely agree, Matt. It was somewhat surprising to have those come on. But yeah, we're happy for them. Perfect. Well, thank you guys for the color and congrats on a great quarter.

Thank you very much for your time. Appreciate it.

Thank you. Next question comes from the line of Tim Reswan with KeyBank Capital Marketing. Please go ahead.

Good morning, folks. Thank you for taking my questions. Yeah, good morning. I want to start on slide 14. You know, you've shown the ducks and permits. You know, I know these tend to ebb and flow. It's down a bit. from last year, and you're hearing the rig count is biased, probably going to be moving down from here. So just kind of curious, now that you're four months into the year, you left production guidance unchanged, but are trends and activity levels sort of in line with your expectations coming into the year?

Tim, this is Davis. I'd say yes. This quarter, a little bit above the midpoint of our guidance, which was nice to see. I think that the outlook for activity remains the same as when we entered the year, just to answer that question succinctly and directly. We haven't seen evidence of a dramatic slowdown. We have enough near-term catalysts in terms of ducks and permits where we keep that. We feel very confident in the 12-month forecast. Hopefully we're conservative on it as well, which we have a long history of being. But nothing that alarms us yet. Honestly, I guess in a more nuanced way, I'd say that we've been a little bit surprised, just kind of building on Matt and Blaine's comments in the Hainesville. We've been a little bit surprised by how robust activity in the Hainesville has been and how resilient it's been. So that's just been a little bit counterintuitive, just given what's happened to spot gas prices. So I'd say on the balance, feel good about next 12 months. Wouldn't be surprised if we outperformed a little bit here and there. just given the conservative view that we tend to have with our guidance. But, yeah, I'd say nothing has really changed in terms of the data we've received over the last four months relative to when we started putting together guidance in the fourth quarter.

Okay. That's helpful. Sorry, and then just as a follow-up to some housekeeping, you know, you kept the guide for $24,000 a year. production. Just to be clear, that's run rate production, not the total that reflected the adjustment?

Correct. Run rate production.

Okay. Perfect.

Thank you. Of course. Thank you, Tim.

Thank you. Next question comes from the line of Neil Tingman with True Securities. Please go ahead.

Hey, this is Julian Brachet on for Neil. Let's have a Two questions for you guys. In terms of the cash distribution, is there anything that would cause you to vary from your 75% payout level? And then kind of the second one is on hedges, are you comfortable writing out these recent moves? Are you looking to lock in more cash flows and maybe stabilize the payout? Thank you.

Yeah, short answer to the question, we don't anticipate any changes to the 75% payout ratio and no material changes to our hedging program. Matt, any color that you'd like to add to that, though?

Yeah, I mean, on the hedging program, I'm not sure people have noticed this, but we are hedged out for two years, roughly 20% of our oil and natural gas production. And if you look at some of the prices we have you know, oil hedges, you're looking at for this year between 75 and 83. And then for natural gas, we have 383 to 419. So we're able to have roughly, you know, a nice realized gain in Q1 in terms of hedging gains. And if you look at the beyond in a 2025, we have, you know, natural gas hedges between 368 and 432 at MCF. So we're hedging into that Contego curve right now in natural gas, about 20%. And, you know, that's the percentage we do, you know, we've run enough stress tests to see if that percentage of hedging, if you were to have a dramatic drop in commodity prices, we would be well protected in terms of our covenants, but also provides 80% unhedged production in case, so we can enjoy any run in commodity prices. So I think there's no change in the hedging policy. It worked extremely well during COVID, and I think we're well set up right now for the next couple of years as well.

Got it. Thank you. And I can just maybe go back to M&A on another question. Are you guys seeing any interesting opportunities outside the Permian?

Outside of the Permian, yeah, great question. Nothing material is coming to mind right now. The larger opportunities that we're seeing are Permian-focused. We would obviously be very interested in, as you know, we have a history of buying in every basin. We'd be very interested in buying outside of the Permian as well, but nothing near-term of scale outside of the Permian that we're focused on at this moment.

Got it. Thank you very much. Thank you. Thank you. A reminder to all the participants that you may press star and one to ask a question. There are no further questions at this time.

I would like to turn the floor over to the management for closing comments.

Yes, thank you. We thank you all for joining us this morning. and we look forward to speaking with you again next quarter. This completes today's call.

Thank you. This concludes today's study conference. You may disconnect your lines at this time. Thank you for your participation.