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Kimbell Royalty Partners, LP (KRP) Q3 2019 Earnings Call Transcript

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Kimbell Royalty Partners, LP (NYSE: KRP)
Q3 2019 Earnings Call
Nov 7, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Kimbell Royalty Partners Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Rick Black Investor Relations. Thank you sir. You may begin.

Rick Black -- Investor Relations

Thank you, Operator and good morning everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the third quarter 2019. This call is also being webcast and can be accessed through the audio link on the Events & Presentations page of the IR section of kimbellrp.com. Information recorded on this call speaks only as of today November 7 2019. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay. 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 of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call which by their nature are uncertain and outside of the company's control. Actual results may differ materially.

Please refer to today's press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures including adjusted EBITDA and cash available for distribution. Reconciliations to the nearest GAAP measures can be found at the end of today's earnings press release. Kimbell assumes no obligation to publicly update or revise any forward-looking statements.

I would now like to turn the call over to Bob Ravnaas Kimbell Royalty Partners' Chairman and Chief Executive Officer. Bob?

Robert Ravnaas -- Chairman and Chief Executive Officer

Thank you, Rick and good morning everyone. I'm here with several other members of our senior management team including Davis Ravnaas our President and Chief Financial Officer; Matt Daly our Chief Operating Officer; and Blayne Rhynsburger our Controller. I would like to begin by discussing our record-breaking performance in the third quarter. Then I'll ask Davis to cover our financial performance and review our updated guidance. After that we'll take your questions. This was an excellent quarter generating record high revenue production and consolidated adjusted EBITDA and further proving the strength of our business model and strategy. The sequential production growth in the third quarter of 8% was entirely organic, which is a testament to the high degree of activity on our acreage coupled with our best-in-class PDP decline rate. We remain very pleased with the cash flow generation production stability and growth potential across our asset base. In addition revenue growth particularly year-over-year reflects strong performance from acquisitions made in the past 12 months despite lower realized commodity prices. In addition in the third quarter we had receipts of nearly $1 million in lease bonuses. Based on our strong third quarter results and expectations for the remainder of the year we are raising our Q4 2019 production guidance.

Our production in the third quarter was very strong. Average run rate daily production was 12785 Boe per day a new record. Total production for the quarter was 14838 Boe per day which includes 2053 Boe per day relating to prior period production recognized in Q3. Davis will comment further in his section about the realized pricing and prior period production. Taking a closer look at our business model it is important to point out that we maintain a broad stable and diverse portfolio of royalty assets across all the major basins in the Lower 48 featuring organic growth from our recently acquired assets coupled with the stability of the industry's lowest PDP decline rate of 12%. As we add production through organic development or acquisitions we also grow PDP reserves year-over-year. We are also able to grow with only modest amounts of additional G&A. This provides positive operating leverage as free cash flow drops to the bottom line. We are more akin to an asset management company rather than a traditional upstream working interest company. We also have some of the strongest and most efficient operators drilling on our acreage which includes premier names such as ExxonMobil Occidental Petroleum Pioneer and EOG to name just a few. We believe our model is working extremely well as evidenced by this great quarter. While current pressures persist for many exploration and production companies operating in the U.S. our broad-based high quality asset portfolio continues to outperform expectations.

At the end of the third quarter our rig count was 82 including 4 new rigs in the Permian and our market share of the entire Lower 48 U.S. drilling fleet increased to 9.8% from 9.5%. Lastly the acquisition market remains robust and we continue to evaluate opportunities across our many basins. Yesterday we closed an acquisition of 186 net royalty acres with 202 Boe per day of production in Oklahoma for $9.86 million. The effective date is August 1 2019 and is expected to be immediately accretive to distributable cash flow per common unit. We continue to see great value for acreage outside of the Permian Basin even considering dramatically reduced drilling activity in 2020 and beyond. This deal is a good example of that where we were able to acquire acreage outside of the Permian at highly attractive price metrics. We have great conviction on the long-term quality of the acreage. So while just about everyone else is focused on the Permian and although we continue to evaluate the Permian we are having more success in other basins with significantly less competition. We will continue to execute on our strategy of assembling a high-quality low PDP decline and diversified royalty portfolio that generates substantial free cash flow and additional growth potential with no capital outlays. We are bullish on our business and the opportunities to further enhance growth in the future.

Now I'll turn you over to Davis.

R. Davis Ravnaas -- President and Chief Financial Officer

Thanks, Bob and good morning everyone. I will start by reviewing our record-breaking production in the quarter followed by a recap of our financial results before discussing our 2019 guidance update. As Bob mentioned Q3 average run rate daily production was 12785 Boe per day a robust 8% quarter-over-quarter growth rate. The revenue mix of this production was approximately 64% liquids 57% from oil and 7% from NGLs and 36% from natural gas. On top of this record production we received an additional 2053 Boe per day of production reflecting prior period adjustments related to the company receiving additional production data on wells that came online very late in Q2 as well as production that we proactively discovered was in suspense specifically related to some Oxy-operated wells in the Permian. We have hired a new resource in our land department to spend virtually all of his time searching for production and cash that is in suspense across our massive acreage footprint and we expect this to continue to unlock value for the company. So far this year we have found over $600000 in suspense and we believe this will be an ongoing lucrative effort for us over time. Please remember that as we find production in suspense we not only get a nice catch up payment but we also get ongoing and future production payments as these wells continue to produce. So it's not just a one-off effect. This is one of the ways in which we're unlocking value from our massive and diverse asset base for our shareholders. We also view this as a testament to our conservative accrual estimates. Interestingly we see other companies report prior period true-ups that are negative more often than not not positive as ours was for the quarter. Total third quarter revenues increased 79% compared to the third quarter last year to a record $33 million. This significant increase reflects strong performance from acquisitions made in the past 12 months despite the decrease in realized commodity prices. Consolidated adjusted EBITDA was $22.8 million the highest we have ever recorded. This was up 6% sequentially and up 63% compared to Q3 of last year. On the expense side more good news general and administrative expenses were $5.7 million in Q3 of which $3.9 million was cash G&A expense or $3.30 per Boe down approximately 14% quarter-over-quarter. Noncash G&A in Q3 was $1.8 million or $1.54 per Boe. Cash G&A per Boe is down 42% from the same period last year and below the low end of our Q3 guidance. Cash available for distribution attributable to the common units was $9.8 million or $0.42 per common unit. You will find a reconciliation of both adjusted EBITDA and cash available for distribution at the end of our news release. As a reminder our third quarter cash distribution per unit a 7.7% increase sequentially represents a highly compelling approximate 12% annualized yield. And because substantially all of this distribution will not be taxable dividend income and instead be a reduction in tax basis the pre-tax equivalent yield is even higher closer to an astonishing 19% assuming the highest effective tax rate. And to reiterate the commentary we have provided about tax implications for our cash dividend several times in the past we continue to expect that for the next seven years 2019 to 2025 the company will pay no material federal income taxes. For the next four years 2019 to 2022 substantially all distributions paid to common unitholders will not be taxable dividend income. And for 2023 through 2025 less than 25% of distributions paid to common unitholders will be taxable dividend income. This favorable tax treatment significantly enhances the after-tax returns from the distributions paid to our common unitholders for years to come. Turning now to realized pricing in the third quarter. Average realized price per barrel of oil was $54.47 per Mcf of natural gas was $2.06 and per barrel of NGLs was $13.01 and per Boe combined was $22.22. As of 9/30/19 our hedges represented approximately 19% of our daily oil and natural gas production for the next two years. We have provided a table at the end of our press release with additional detail on our hedges. Looking now at the balance sheet, at September 30 2019, we had $91.3 million of debt outstanding at $133.7 million in undrawn capacity under the revolving credit facility or $208.7 million if the accordion feature was exercised. Before turning the call over for questions I'd like to discuss our updated guidance for 2019. We are boosting our Q4 2019 production range to a low end of 11600 Boe per day and a high-end of 12800 Boe per day. This compares favorably to our original Q4 '19 guidance of a low end of 11000 Boe per day and a high end of 12200 Boe per day. You can see the updated guidance table in our earnings press release. We anticipate releasing full year 2020 guidance with our Q4 2019 earnings release in February 2020. We believe an investment in Kimbell is truly unique and we have some data to back that up. There are approximately 5000 companies traded on the New York Stock Exchange and the NASDAQ combined. Of those fewer than 200 pay a dividend yield of 10% or greater. Of those only 9 are of reasonable size with a market capitalization greater than $500 million and have strong balance sheets which we define as having leverage of less than 2x EBITDA. Nine companies. That's how few there are. Finally only one of those companies has a nontaxable dividend and that's us. We are unique. In summary this was an outstanding quarter and reflects the truly unique combination of stability and growth that our asset base provides. We believe this strategy is already proving to be very appealing on a risk-adjusted basis relative to a hyperbolic growth and decline strategy and will allow our company to grow substantially through cycles. We believe the company's valuation today presents a wonderful investment opportunity for existing and prospective shareholders for whom a stable nontaxable dividend yield of approximately 12% should be appealing. With that operator we're ready for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of John Freeman with Raymond James.

John Freeman -- Raymond James -- Analyst

Good morning, guys. Davis if you could just give a little bit more color and detail on this topic of sort of the prior period production revisions? And I guess more importantly kind of this suspense payment I guess retrieval type process. I guess just sort of like examples of kind of how it happens steps that you can take to kind of be able to recoup it if there's like things internally that can be done to kind of accelerate the process? Just some additional color because we're definitely -- I mean it's a positive surprise we definitely have not seen this or expected it?

R. Davis Ravnaas -- President and Chief Financial Officer

Yes. Very glad you asked about it John. So anybody who's been in the royalty business for a long time and has diversified portfolios kind of knows that when you buy a big portfolio of assets with a big footprint there's always positive surprises and there's very seldomly negative surprises because everything we buy is already in pay status. So the operators have already done title opinions. So very often you don't get negative news. The positive news is you own things that you don't know that you own. So operators are required by law to make -- if we send them a letter asking them if there's anything that they haven't suspense on us they're required by law to get back with us and tell us that yes we couldn't really square title here. But if you can help us cure that issue we can put you in pay status on certain opportunities. So we've tried to keep G&A for the company incredibly low since we've gone public and we have a very lean staff.

But with the addition of -- just the way we've grown over the last couple of years getting to a critical mass now where we could hire additional resource we hired a landman who's really doing a much better job than we even expected him to. And he's just pounding these operators with letters saying "Look is there anything in the Haymaker Acquisition anything for Kimbell legacy anything for Phillips these huge diverse millions of acres portfolios" and we're already getting just a bunch of responses from them saying yes we've had these wells in suspense for two years and if you can help us cure title we'll send you some payment. So it's hard to say -- it's hard to quantify that going forward. But I'd say that of the $600000 we've already found -- I mean is that like the last two months.

Robert Ravnaas -- Chairman and Chief Executive Officer

Yes.

R. Davis Ravnaas -- President and Chief Financial Officer

Yes. That's just two months of work and there's another like 70 operators who have not even responded to us that we're going to have to kind of hammer on to. But I think we're going to kind of continue to uncover additional revenue streams going forward. It's tough for me to quantify what that might be. But I think it could be as much as $0.5 million a quarter or something like that going forward. Again difficult to predict because it's early stages. And the other thing I'd say is I'll throw a bone to one of our peers. Blackstone Minerals does a terrific job of this. They've got a much larger company and therefore a larger staff. They make a big effort to be proactive with managing their minerals. And really this is something that we're only now kind of getting into. So it's -- we're hopeful that it's going to continue to create kind of some nice positive news for us in the future.

John Freeman -- Raymond James -- Analyst

That's great. And then on the quarter the lease bonus again was really strong which continues to be surprising given just kind of the overall commodity environment we're in and you had the $1.5 million last quarter another $1 million this quarter. And I guess a couple of thoughts on that. Is that still predominantly driven by the Haymaker Properties? And then just sort of what if anything you're seeing on the lease bonus side as we kind of finish the year here?

R. Davis Ravnaas -- President and Chief Financial Officer

Matt -- I'll let Matt answer that.

Matthew S. Daly -- Chief Operating Officer

John It's Matt Daly. So this quarter the bulk of the lease bonus about $0.5 million was from the KRP legacy assets. This is in Howard County operator called Cordero Energy Resources. That's about $0.5 million. And then we had about $200000 in McKenzie County in the Bakken about $100000 in Ward County for Marathon and the rest of them are sort of relatively small lease bonuses. But I'd say across the board both Haymaker as well as KRP legacy.

R. Davis Ravnaas -- President and Chief Financial Officer

Yes. So John good question too. I mean how do we model out? I'm trying to kind of put myself in your shoes. How do we model out the future lease bonuses? I mean gosh -- I mean what do you guys think? I mean there's going to be some quarters where it's basically nothing. And then some quarters it's $1.5 million to make you guys kind of looking around the room. Do you guys like $0.5 million to $1 million a quarter something like $0.5 million a quarter I didn't want to say that. It's tough to guess. But I mean I'd be conservative maybe halfway between $250000 and $500000 a quarter. Let's call it $375000 a quarter on average is kind of what we would expect. Bob does that sound reasonable to you too?

Robert Ravnaas -- Chairman and Chief Executive Officer

Yes yes.

John Freeman -- Raymond James -- Analyst

That's great. That helps a lot. Congrats on a great quarter.

R. Davis Ravnaas -- President and Chief Financial Officer

Yes. One more thing I'll mention just because we think it's pretty imminent. We're getting pretty close to signing a PSA for an acquisition and this will be announced obviously publicly but a PSA for an all-stock deal in the Eagle Ford. So it's about 84% oil production. So anyway that should be positive. It's kind of in the $30 million range. So hoping to announce that shortly. We had a call this morning from someone who was complaining that because of these new Haynesville wells that came online we're now getting gassier. And so my response was it's not our fault that people are drilling gas wells on our properties and do they want us -- do they want us to send the money back so that we're not getting gassier. I mean it's a good problem to have. And -- but my counterpoint the reason I'm bringing up this other deal is that that oil cut there should help with the oil mix and alleviate concerns I think on that front.

Operator

[Operator Instructions] As there are no further questions left in the queue. I would like to turn the floor back over to Mr. Bob Ravnaas for any closing remarks.

Robert Ravnaas -- Chairman and Chief Executive Officer

We thank you all for joining us this morning. I look forward to speaking with you again when we report fourth quarter results. This completes today's call. Thank you everyone.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Rick Black -- Investor Relations

Robert Ravnaas -- Chairman and Chief Executive Officer

R. Davis Ravnaas -- President and Chief Financial Officer

Matthew S. Daly -- Chief Operating Officer

John Freeman -- Raymond James -- Analyst

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