Q3 2022 Kimbell Royalty Partners LP Earnings Call
<unk> nine 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 the result of seeds planted over the last five years with more than $900 million in acquisitions across our 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're now realizing the benefits of this acquisition strategy as reflected in our inventory conversions record production and.
<unk> performance I am pleased to announce that we now believe Kimball only needs four point out net wells completed each year to keep production flat at 11% reduction from the prior estimate of $4 five net wells per year. This reduction further highlights kimball's best in class production stability given that we currently have.
Have 544, net decks and permits which is another quarterly record we are well positioned to drive continued organic production growth today.
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 spans over 40 years.
<unk> 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 cost, 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.
Yet we received the upside from higher commodity prices, we remain structurally bullish on both oil and natural gas over 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 finished 2022.
We are very grateful to our employees board of directors and advisers for helping us achieve a record year at Campbell, 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 unitholder value for years to come I'll now turn the call over to Davis to review.
Financials in more detail before we open the call to questions.
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 in 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.
<unk> 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.
Per BOE combined was $53 58.
Our record third quarter average daily production was 14985 barrels of oil equivalent per day.
On a six to one basis and.
An increase of 0.2% from Q2 2022.
This daily production was composed of approximately 62% from natural gas.
601 basis at approximately 38% from liquids or 25% from oil and 13% from Ngls.
On the expense side general and administrative expenses for Campbell 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.
66 cents per common unit.
Today, we announced a cash distribution of <unk> 49 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 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 our secured revolving credit facility by allocating just a portion of its cash available for distributions for debt Paydown.
Commenting further on our balance sheet and liquidity.
As of September 30th Kimball had approximately $203 9 million debt outstanding under our secured revolving credit facility.
It also had net debt to third quarter 2022, trailing 12 month consolidated adjusted EBITDA of approximately one point O times and.
And remained in compliance with all financial covenants under our secured revolving credit facility.
Kimball had approximately $96 1 million and undrawn capacity under its secured revolving credit facility.
We are extremely proud of the strength of our business model continues to perform very well in the highly cyclical energy industry.
We're 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.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question is from John <unk> with.
Stifel. Please proceed with your question.
Good morning, all and congrats on a strong quarter.
Thank you.
Yes.
My first question you mentioned in the past with wanting to get the leverage ratio below one times before considering buying back some stock or increasing dividends.
Now that you are around that one times level could you share your updated thoughts on increasing the payout ratio or stock buybacks.
Yes. Thanks for that question, that's one of the topics that we discussed most frequently as a management team at the board level.
As we look at the environment I think investors continue to want us to Delever the business.
Looking at it.
I think it would be nice if we could get maybe a half a turn of leverage long term.
The mid cycle levels, so that when prices inevitably do go back down.
Let's say they fall, 50% from mid cycle to trough, we're back at one times. So I think I think thinking about deleveraging is an important thing at the same time, though we want to look at the overall context of the overall environment, we feel very good about the fundamentals of the business, but our stock continues to.
Trade at levels that we think are dramatically undervalued.
Clearly 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 a.
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.
Possible share repurchases debt Paydown or third party M&A kind of depending on or increasing the payout ratio. So I think all of all of those options are on the table and will depend on the environment in the context.
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 can you help me better understand what the drivers were or the assessment you perform that led you to revise this estimate down to four net wells per year.
Sure sure Great Great question and this is a really important part of our business, but I think a lot of people don't understand so we look at that on an annual if not twice annual basis.
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 Ninety's. When we got started as one of the very first mineral buyers.
No.
When we look at that what that's really what's important is to see what.
Let's call it a replacement production levels are.
So why did that dropped from let's call. It four four 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 unconventional focus on unconventional properties right, which by nature have by their nature have a higher PDP decline rate.
<unk> wells and 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 dukson 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 her relative to the number of wells that need to come online in order to maintain production.
We're at 544, net ducks and permits which is a new record, which is fantastic we were very happy to see that.
We have we only need four wells to keep production flat. So we have roughly one divided by the other 35% more than that.
Let's call it immediate development catalyst category.
<unk> 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 that ducks and permits relative to.
Whats necessary to keep production flat.
Good point to be in our business.
That makes sense, great update and thanks for the time.
Thank you.
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Thank you. Our next question is from TJ Schultz with RBC capital. Please proceed with your question.
Okay.
Hey, guys good morning.
Thank you.
You highlighted the $900 million of acquisitions.
2018, and I think it's clear you've had success.
Executing on M&A.
Do you see the setup for transactions.
Into next year, 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 it doesn't it does it change how you view size and scale to remain competitive.
Yeah. Thanks T. J 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 are we underwrite deals you've been doing it for comment 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 dollars sector.
20 million American the math is 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.
Most of those on average or a hunter box demand. So it's a rapidly consolidating space.
Public mineral companies represent a very small fraction of that like low single digit percentage of the overall market. So consolidation is happening it needs to happen Mauro.
Moreover, I think opt in the mineral space gets overlooked because United States is the only place where private mineral ownership exist. 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 and the.
A very early innings of growth and there will not in our opinion be a single company or even a even a half a dozen companies that are able to to acquire everything that exists out there so for us we.
We focus on what we do we don't worry about what our competition does and we've seen years, 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. So looking forward to next year. We we plan on doing more of the same I think youll CSB.
Yes.
As always.
More focused on deploying capital on behalf of our unitholders at 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.
So we focused on the hottest basin.
And every time, so we can look where it is most efficient for us to deploy and I think we'll just continue to do that anything you'd add Bob.
No I agree with all of those.
Okay, No that's very helpful I guess how.
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 youre more focused on today versus some others.
Great question any answer to that is now we always look at what's available on the market, we are agnostic to gas oil.
We've always been that way and we're agnostic to base and we're unique in the sense that TJ. You know this is going all the way back to our IPO. We're one of the only buyers debt that has been successful acquiring in every basin throughout the United States. So we just have we have an ability to deploy capital in our opinion much more efficiently because we aren't.
Included 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 fitting our underwriting wheelhouse, but when we find something we will move on it so.
Okay makes sense I appreciate it.
Thank you.
Thank you there are no further questions at this time I'd like to turn the floor back over to management for any closing comments.
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.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.