Kimbell Royalty Partners LP

Greetings and welcome to Kimball Royalty Partners' fourth 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, 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 fourth quarter 2024 that ended on December 31, 2024. 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, February 27th, 2025, 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 considered forward-looking statements made pursuant to the Safe Harbor's provisions of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's discussion, 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 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 also will be referring 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 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. We are pleased to report another outstanding year at Kimball, marked by substantial growth in production, revenue, and EBITDA. This year yielded success from the significant acquisition we made in the prior year, which you might recall was a record $455 million increase acquisition that closed in Q3 2023. This portfolio has and continues to perform extremely well. As a result of this very productive year, Kimball paid out $1.75 per common unit in tax advantage quarterly distributions during 2024, in addition to paying down on our credit facility. During the fourth quarter, drilling activity remained strong, with 91 rigs actively drilling on our acreage. including the rigs added from the Midland Basin acquisition, which closed last month. This rig count represents 16 percent market share of all rigs drilling in the lower 48. Line of side wells continue to be well above the number of wells needed to maintain flat production, giving us confidence in the resilience of our production for 2025. Our superior five-year annual average PDP decline rate of 14 percent, including the acquired production, requires only an estimated 6.5 net wells annually to maintain flat production. 2025 is off to a strong start as we closed a $230 million acquisition last month, completed a highly successful primary equity offering, and today we introduced 2025 guidance that has expected production at its midpoint, a new record guidance level for Kimball. Finally, we believe Kimball is well positioned for continued growth as we continue to enhance unit holder value into the future. I'll now turn the call over to Davis.

Thanks, Bob, and good morning, everyone. As Bob mentioned, this is another excellent quarter for Kimball. I'll now start by reviewing our financial results for the fourth quarter. Oil, natural gas, and NGL revenues totaled $69.1 million during the quarter, which excludes the acquired production. including the acquired production, we had record run rate production of 25,946 BOE per day. And we exited the quarter with 91 rigs actively drilling on our acreage, which represents approximately 16% market share of all land rigs drilling in the continental United States. On the expense side, fourth quarter general and administrative expenses were 9.4 million, 5.6 million of which was cash G&A expense, or $2.53 per BOE. Total fourth quarter consolidated adjusted EBITDA was 59.8 million, which excludes the acquired production. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release. Today we announced a cash distribution of 40 cents per common unit for the fourth quarter. We estimate that approximately 100% of this distribution is expected to be considered return of capital and therefore not subject to dividend taxes, further enhancing the after-tax return to our common unit holders. This represents a 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 December 31st, 2024, we had approximately 239.2 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing 12 months consolidated adjusted EBITDA of approximately 0.8 times. We had approximately 310.8 million in undrawn capacity under the secured revolving credit facility as of December 31st, 2024. We remain very comfortable with our strong financial position, the support of our expanding bank syndicate, and our financial flexibility. Today, we are also releasing our 2025 guidance, which includes the incremental production associated with our latest acquisition and reflects a record high daily production guidance of 25,500 BOE per day at the midpoint. As a reminder, our full guidance outlook was provided in the Q4 2024 earnings press release. We remain confident about the prospects for continued robust development as we progress through 2025, given the number of rigs actively drilling on our acreage, especially in the Permian Basin, as well as our line-of-sight wells materially exceeding our maintenance well count. Lastly, before turning the call over to questions, I'd like to take a moment to recognize the achievements at Kimball and thank our team, our board of directors, and our advisors that have all contributed to the company's success. Eight years ago this month, KRP successfully completed our IPO. Since then, we have now grown production from 3,116 BOE per day to 25,946 BOE per day, an increase of 733%. As evidenced by our track record of ongoing acquisition activity, we expect to continue our role as a major consolidator in the highly fragmented U.S. oil and gas royalty sector, which we estimate to be over $700 billion in size. And as we have stated in the past, there are only a handful of public entities in the United States and Canada that have the financial resources, infrastructure, network, and technical expertise to complete large-scale, multi-basin acquisitions. We are very excited about the opportunities to expand in the future and to deliver unit holder value for years to come. 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 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 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 Neil Dingman with Tourist Securities. Please go ahead.

Yeah, hey, good morning. Thank you for taking my question. This is Jack Wilson on for Neil. Maybe just to start, are there any particular basins where you're seeing an abundance of opportunity to add acreage?

morning Jack this is Davis continue to look across the United States I wouldn't target one specific base and for where we're seeing the most deal flow other than to point out the obvious which is that the Permian continues to be the place where the most consolidation is occurring that being said we're seeing opportunities across the United States there are a few big packages out in the market right now some are more interesting than others but we're certainly taking a look at each of them But no specific basin that I would single out at the moment.

Okay, that sounds good. And then I guess maybe just from a regulatory perspective, I know there's been a lot of news flow. Have you been seeing that in kind of the opportunities present, or is that more just still headlines?

Can you please expand on the question, please?

So just, you know, the new administration has been discussing a lot of potential regulatory changes. Have you been seeing that affecting you at all, or is that more just still in the headlines?

No, not at all, other than to say obviously the new administration has been very supportive of increased energy output here domestically, and that would obviously benefit us as a mineral owner across our very diverse footprint.

Thank you very much.

Thank you.

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

Hi, good morning. This is John on for Tim. Thanks for taking our questions.

Morning, John.

Morning. Can you just talk about what you're seeing across your footprint that led to a 2025 guide below your call it pro forma fourth quarter run rate? And how would you frame the of the acquired assets compared to the rest of your portfolio? We saw line-of-sight wells increase following the acquisition, so we just thought we might see a little bit of growth this year.

Yeah, so our guidance does imply that growth is likely, if not probable, to occur. If you look at our exit run rate, including the acquired production, we're almost dead on the midpoint of our 2025 guidance. So we've put guidance at a midpoint, which reflects flat growth for the year. I think that's in line with what most of our peers both in the mineral and in the working interest space they're looking at. We like to be conservative with our guidance. Our guidance for 2024 was just slightly less than actual realized volumes from last year. So having done this for quite some time, we just continue to improve and refine the way in which we put out that guidance. So feel great about our guidance for 2025. We have a better line of sight inventory than we ever have. Our inventory and in the future on a long-term basis is as strong as it ever has been as well. We have 91 rigs operating on our acreage, about 50 of those in the Permian Basin. After that, the MidCon is the most meaningful contributor in terms of activity. So I feel very good about both near and long-term catalysts for growth on our acreage. And the acquired assets, the second part of your question, outstanding acquisition. Couldn't be happier with the born assets that we bought. Anyone who knows that property loves it. It's a wonderful asset. There's a continuous drilling clause on it that ensures development by its largest operator, Conoco, in the near future, in medium-term future, frankly. So feel very good about that. We think it'll be a really nice keystone asset in our portfolio that will bear fruit for years to come.

Okay, great. Appreciate the details. Can you just give an update as to whether you still plan to redeem a portion of your preferreds in the second quarter? And if an acquisition opportunity, say, in the next couple of months were to present itself, would you consider redeeming those?

Yeah, so the plan is to take out about half of the Apollo pref in May. We are on track for that right now. I think we've alluded to that the last couple of quarters in a row. So that's still on track. That'll be about half of the overall balance. As acquisitions present themselves, we, of course, look and consider all possible financing options for those. So I don't think that the acquisition framework and our timeline is in any way affected by the redemption of the PREF. And we look forward to simplifying the balance sheet and reloading for more acquisitions in the future.

Okay, great. Appreciate it. I'll head it back. Thank you.

Thank you. Next question comes from the line of Noah Hungeness with Bank of America. Please go ahead.

Hi, everyone. For my first question, I kind of wanted to expand on the PREF a little bit. Once you guys do pay down about half of the PREF in May, how should we think about your plans to kind of pay down the rest of it?

Yeah, great question. Thank you, Noah. We will continue to use 25% of our cash flow going forward to pay down debt on our revolver, and then we'll continue to draw down on a revolver to incrementally take out portions of the prep going into the future. So it's a pretty easy process. And as you know, we've gone through this before and have a long history of paying down debt and shoring up the balance sheet and then looking at acquisitions and financing those at the right mix of equity and debt that keeps our leverage at a level that doesn't threaten the dividend under any sort of draconian scenario. So yeah, that's the game plan.

Just kind of one clarification question is, as you guys do pay down debt and you have extra capacity on your revolver, should we think of you paying down the press in large chunks like you would be doing in May, or would it be a more rateable pay down?

I would say more rateable absent a meaningful equity-driven a creative acquisition that would be de-levering in nature. So if you look back to our history, we've done a good job, I think, of using our units to make a creative acquisition without increasing leverage on the balance sheet and, in fact, have de-levered through that process. And if that were to occur, then obviously that would accelerate the rate at which we would imagine redeeming the remaining preferred balance.

Makes sense. And then for my second question, Just kind of comparing your 24 guidance for the marketing and other expenses versus your 25, it does seem like it's moved down about 20 cents. Could you kind of talk about the moving parts there, what drove that lower?

Sure, I'll turn that over to Blaine Reinsberger, our controller, who can give you a more detailed response.

Yeah, it typically moves a little bit depending on commodity prices, and so Marketing and other, the way that different operators put that on the checks that we actually receive varies, and so it moves a little bit. So I would say that, you know, we were being overly conservative probably in prior guidance, and I would say that the current guidance that we have out there now is reflective of what we think is going to be going forward.

Makes sense.

Thanks. Thank you.

Thank you. Next question comes from the line of Derek Whitfield with Texas Capital. Please go ahead.

Thanks, and good morning, all.

Good morning, Derek.

With my first question, I wanted to lean in on the competitive landscape for M&A. Given the more constructive natural gas backdrop we have, does that change your relative focus or amount of attention you're providing to the gas basins?

That's a great question. The short answer is no. We try not to take a position on commodity price movements one way or the other. We're more focused on finding high-quality properties that can be acquired at reasonable prices. Obviously, the natural gas tailwinds are not lost on us, but I wouldn't say that we're refocusing efforts on more gas-heavy properties right now just because natural gas prices are higher in nature. In fact, I would argue that we should perhaps be doing the opposite and focusing on oil properties when prices are lower. So we'll look at everything, and it really just depends on asset quality and valuation, and we try to remain impartial and agnostic to commodity price. We look at the strip.

Thanks, Dan. Given the considerable M&A that we've witnessed across the Permian, and I'm thinking about this more from a working interest operator perspective, I wanted to ask for your thoughts on the impact it could have on your business, both from a consolidated operator perspective and also from a competitive perspective, given that many of these operators are also competing for minerals.

Yeah, we do see operators compete from time to time. I would say that it's generally rare. I mean, there are a few examples out there. And when they are competing, it's traditionally for very large packages. So it's a good question. But we haven't seen a whole lot of competition in the, let's call it, $50 to $300 million range, $100 to $300 million range from operators just because it's so small for them, it's not very meaningful. And I'd add to that that consolidation for us If we look back across our, what, almost 30 years of doing this, there's always some friction when M&A occurs between operators and what does that mean for development on our assets. But I'd say overall, it tends to be a net positive. You have larger companies with better balance sheets. They now have a larger acreage footprint where they can organize their drilling schedules in such a way to be even more efficient. So overall consolidation, when we look back over time, can create some short-term noise, but longer term, it almost always results in a positive outcome for mineral owners, including ourselves.

Very helpful. Thanks for your time.

Thank you.

Thank you. Next question comes from the line of Paul Diamond with Citi. Please go ahead.

Thanks, Alan. Appreciate you taking my call. Staying on the M&A dialogue, how should we think about the appetite? As you guys have grown bigger, obviously the deals have gotten bigger, but then there's been some kind of sizable swings taken, I guess. How should we think about your opportunity set going forward? Should we think more in those $50 to $100 million deals, or with your increasing scale, equipping 25,000 BV a day, does that Should that grow linearly or will you take some bigger swings?

Now, thanks for asking that question. It's very thoughtful and it's something that obviously isn't lost on us. We really are focused on larger acquisitions. I think the concern we have with doing a handful of smaller deals is that you can't structure a meaningful equity deal around something like that. And so you end up kind of casually leaning into Revolver quarter over quarter with smaller deals and they start to add up. It just increases leverage over time. So I would say that our focus is on $100 million-plus deals. I think we could swing higher if we found the right opportunity with the right ownership group, used a mix of equity and leveraged neutral on our revolver to finance it. That's been a recipe that's worked quite well for us over time. But you're right. I mean, we have gotten larger, and so I would say – In tandem with that, the opportunity set available to us has grown in terms of acquisition size. And then I guess I'd further add to that, that as the mineral space just continues to consolidate, the size of the deals just keeps getting bigger and bigger. I mean, gosh, when we were just newly public back in 2017, you rarely saw a mineral and royalty deal over $50 million in size, but now there are seemingly dozens of deals that are $100 million plus in the market at any given time. So as the consolidators have grown, they've attracted more institutional capital into their private space, and that's simply resulted in more and larger opportunities going up into public hands. So it's a really nice theme to see, and I think we're still very early on in how this plays out. I mean, when you look at the Overall mineral market size of $700 billion, just a very small percentage of that is captured by the public market. So this is a trend that we expect to continue to snowball.

Understood. I appreciate the clarity. And then just one more bit of a wonky question. So if I look at the table on your release between gross ducks and gross permits, the ratio seems pretty stable outside of a notable kind of weakening in Haynesville. Is that a decent read-through to think about as far as production growth or sustainability in Haynesville, not just on your operations, but on the larger basin? Or is that the wrong way to read through that?

No, I wouldn't read through too much on that. If we start to notice a significant trend on that particular basin, that would be something that would be more meaningful to us. But, no, that ratio of ducts to permits, it tends to go up and down over time. Still very bullish about the Hainesville, obviously, and, of course, in this new natural gas price environment, it's a very bullish place to be. But I wouldn't overly – I wouldn't read too much into the ratio of ducts and permits. That could easily change quarter over quarter.

Got it. Appreciate the clarity.

I'll leave it there.

Thank you.

Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to the management for closing comments.

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 teleconference. You may disconnect at this time. Thank you for your participation.