Q1 2024 Kimbell Royalty Partners LP Earnings Call

Participants

Rick Black; IR; Kimbell Royalty Partners

Robert Ravnaas; Chairman of the Board, Chief Executive Officer of the General Partner; Kimbell Royalty Partners LP

R. Davis Ravnaas; President, Chief Financial Officer of the General Partner; Kimbell Royalty Partners LP

Nick Anderson

Tim Rezvan; Analyst; KeyBanc Capital Markets

Neil Dingmann; Analyst; Truist Securities

Presentation

Operator

Greetings and welcome to Kimbell Royalty Partners first quarter earnings conference call. (Operator Instructions)
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rick Black, Investor Relations. Mr. Black, you may begin.

Rick Black

Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the first quarter 2024 ended March 31, 2024. For 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, which May 2, 2024. So please be advised that any time-sensitive information may no longer be accurate as of the date of any rate 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 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 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. 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

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 Rasmus, our President and Chief Financial Officer, Matt Daly, our Chief Operating Officer, and Blaine runs Berger, 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 actually exited the quarter with a near record number of rigs drilling on our acreage. In addition, our line-of-sight 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 $0.49 distribution per common unit, a 14% increase compared to last quarter. We are proud of that Kimbell track record of delivering value to our unitholders 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 US oil and natural gas industry, our role as a leading consolidator in the sector and the prospects for Kimbell to generate long-term unitholder value.
I'll now turn the call over to Davis.

R. Davis Ravnaas

Thanks, Bob, and good morning, everyone. We had another great quarter here at Kimbell 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 and 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 and $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 $0.04 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 $0.49 per common unit for the first quarter. This represents the cash distribution payment to common unitholders 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 our Kimball secured revolving credit facility.
Moving now to our balance sheet and liquidity. At March 31, 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 months consolidated adjusted EBITDA of one times. We had approximately 264.6 million in undrawn capacity under the secured revolving credit facility as of March 31, 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 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 it 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 Kimbell 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 unitholder value. We are proud of our hard work dedicated and talented team here at Kimbell, 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.

Question and Answer Session

Operator

(Operator Instructions) Nick Anderson.

Nick Anderson

Good morning, and congrats on the strong quarter for Zoran. And 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?

Robert Ravnaas

Thanks for the question. Relatively muted start to the year on the M&A front, just to directly answer your question, most of the opportunities that are out there that are of scale are in the Permian. So I wouldn't be surprised to see a couple of larger deals, you know, 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 things change quickly. Some time in some of the private equity portfolio, companies see an opportunity to exit in a window to exit, decide to rush quickly. So it could change, but so far, relatively muted the opportunities that we are seeing, they tend to be Permian focused.

Nick Anderson

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

Robert Ravnaas

Yes, good question. And we are, as you know, we love our Mid-Con position, the majority of which we acquired through Long Point. 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 some strange occurrences that happened in that base that at the corporate level, but great wells. And I think you'll see positive contributions from increased improved differentials. There's great takeaway capacity there there's operators there that continue to drive efficiencies in the play. And I'll pause there, if anything, and anything that you'd like to add to that, Matt or anyone else? Yes.

R. Davis Ravnaas

I mean, I just like the fact that we had no expected the Haynesville rigs went down between Q4 and Q1. We've heard all the other companies talking about cutting back on CapEx in that basin. So we are expecting that. But interesting, the Mid-Con actually grew pretty dramatically, like you said, from 17 rigs or 23 rigs between Q4 and Q1.
And so more than offset that nicely. So overall, rig count for the Company stayed flat at 90 rigs between Q4 and Q1, a very, very high level of activity near an all-time record for us. So just kind of shows the benefit of the benefits of having this diversified model where you have maybe one slowdown in, say, the Haynesville, but to the Mid-Con steps up as he takes over for that.

Operator

Trafford No. with Raymond James.

Hey, guys. Thanks for taking my questions here. First one.
Yes, thank you. And maybe the first one kind of a follow-up on M&A and then a topic you mentioned some potential opportunities in the Permian. And given kind of the opposite nature of the forward curves for Oil & Gas Act, you'll kind of talk about maybe what you're seeing on a bid-ask spread level for oily versus gassy assets?

Robert Ravnaas

Yes, that's a great question. And we haven't seen 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. While a lot of the larger Haynesville players have exited in recent years, we picked up our big Haynesville position back in 2018. There's been a few other folks that have sold in the last few years. Appalachia, from a minerals perspective has been challenging, a lot of very small interests that have to be aggregated over smaller and 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 out a backwardated curve that could be very attractive on accretion accretion basis or on our cash flow over the next couple of years. But then on
and on a net basis, if you really are running things at and on the 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 at lower multiples on initial cash flow from the ad bid perspective than perhaps the ask if that makes sense. And so I think that is a little bit of a challenge.
But I look, I think seller sellers are sophisticated. They're looking at the same numbers. We are I do think deals will continue to get done on that, make both sides happy. So nothing that we're terribly concerned about in terms of too wide of a bid-ask spread. And just on the M&A front, just so far this year, it hasn't there 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.

Appreciate the color on that Davis. And then maybe I had a I was looking at obviously that was addressed in the prior question on Mid-Con activity, the increase from 4Q to 1Q and also want to ask on Haynesville, I noticed slight production increase in 1Q given how activity has fallen off a cliff there, given prices did not come as a surprise to you all, or was that more of a factor of kind of second half 23 activity coming online Yes.

Robert Ravnaas

So for detail on Haynesville activity, Blaine, do you have anything to add to that or Matt, just yes, I do so because of the Haynesville, you're correct. Haynesville grew quarter over quarter 3% organically in the Permian grew 5% quarter over quarter organically. But back to the Haynesville, again, we were expecting a slowdown there and we are hearing about the CapEx drop off in the Haynesville, but we had the growth quarter over quarter.
It was mainly due to we had three high interest Chesapeake wells that came online in Red River Parish. You know, these are these are huge wells and they're going to have an impact on it on us. But I'm I would say, I believe unless you have other color. That's really the primary driver there. But yes, we were we were happy to see that. And but certainly what we're hearing in the market, you wouldn't be surprised if over time they will start to slow a bit.
Yes.

R. Davis Ravnaas

No, I completely agree, Matt, that that was it was it was somewhat surprising to have those come on. But yes, we're we're happy for so.
Okay, cool.

Thank you, guys for the color, and congrats on a great quarter.

Operator

Tim Rezvan with KeyBanc Capital Markets. Please go ahead.

Tim Rezvan

Good morning, folks. Thank you for taking my questions.
Good morning, Tom and I will start on Slide 14. You show net deductions and permits come in. I know these tend to ebb and flow and 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 and you left production guidance unchanged, but are trends and activity levels sort of in line with your expectations coming into the year?

R. Davis Ravnaas

Yes, Tim, this is Davis. Yes, I'd say yes, this quarter a little bit above the midpoint of our guidance, which was nice to see it. I think that the outlook for activity remains 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. And we have enough near term catalysts in terms of docks and permits where we 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.
And yet, honestly, I guess even in a more nuanced way, I'd say that we've been a little bit surprised just kind of building on Matt and Glenn's comments in the Haynesville. We've been a little bit surprised by how robust activity in the Haynesville has been and how resilient it's been. So that that's just been a little bit counterintuitive, just given what's happened to spot gas prices. So I'd say on balance, we feel good about next 12 months. I 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 yes, I'd say nothing has really changed in terms of the data we've received over the last four bonds relative to where we started putting together guidance in the fourth quarter yes, that's helpful.

Tim Rezvan

And then just as a follow-up, just some housekeeping. You kept the guide for 24,000 a year of production. Just to be clear, that's run rate production not the total that reflected the adjustments?

R. Davis Ravnaas

Correct.

Tim Rezvan

Relative production expense?

R. Davis Ravnaas

Yes.

Tim Rezvan

Thank you.

Operator

Neal Dingmann with Truist Securities. Please go ahead.

Neil Dingmann

Hey, this is Julian per se. On for Neil. Does have a two questions for you guys on on terms of the cash distribution, is there anything that would cause you to the very from your that 75% payout level? And then kind of second one is on hedges on comfortable writing out these recent moves? Are you looking to lock in more cash flows, maybe stabilize the pale?

Robert Ravnaas

Yes, short answer to the question. We don't 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?
Yes.

R. Davis Ravnaas

I mean on the hedging program, I'm not sure people have noticed this, but we are where our hedge out for two years, roughly 20% of our oil and natural gas production. And if you look at some of the prices. We have no oil hedges you're looking at for this year between 75 and 83. And then for natural gas, we have three 83 to 4 19 so we're able to have roughly a nice realized gain in Q1 in terms of hedging gains. And if you look into beyond in 2025, we have our natural gas hedges between three, 68 and four 32 an Mcf.
So we're hedging into that contango curve right now and natural gas about 20%. And that's and that's the percentage we do. We've ran stress tests to see at 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 of so we can enjoy any running commodity prices. So I think there's no change in the hedging policy and work extremely well during COVID, and I think we're well set up right now for the next couple of years as well.

Neil Dingmann

Got it.
Thank you.
And I guess just maybe go back to the M&A. On another question, are you guys seeing any interesting opportunities outside the Permian outside of immune priming in?

R. Davis Ravnaas

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

Neil Dingmann

Got it.
Thank you very much.

Operator

(Operator Instructions) There are no further questions at this time. I would like to turn the floor over to the management for closing comments.

Robert Ravnaas

Thank you, Al. 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.

Operator

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