Q4 2022 Kimbell Royalty Partners LP Earnings Call
Greetings and welcome to the Kimball royalty partners fourth quarter earnings conference call at.
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 to you Rick Black with Investor Relations. Thank you Rick.
You may begin.
Thank you operator, and good morning, everyone. Welcome to the Campbell royalty Partners Conference call to review financial and operational results for the fourth quarter and full year ended December 31, 2022. This call is also being webcast and can be accessed through the audio link on the events and presentations page of the IR section.
<unk> of Kimball RP Dot Com <unk>.
Information recorded on this call speaks only as of today February 23rd 2023. 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 forward looking statements made pursuant to the safe harbor's provision for the private Securities Litigation Reform Act of 1995, we.
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.
Results may differ materially.
Please refer to today's earnings 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 release Kimball assumes no obligation to publicly update or revise any forward looking statements.
With that I would now like to turn the call over to Bob Rasmus Kimball royalty 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, Rab necessary, President and Chief Financial Officer, Matt Daley, Our Chief operating officer, and Blaine Rheinberger. Our controller. We are pleased to report another very strong year for Kimball, which included new records for <unk>.
Revenues EBITDA distributable cash flow per unit and net income in 2022. In addition, we strengthened our financial flexibility by increasing our borrowing capacity and maintain a conservative balance sheet with net debt to trailing 12 month adjusted EBITDA of 0.9 times.
We also completed a highly attractive and accretive acquisition in one of the highest quality and most active parts of the Permian Basin in December the hatch acquisition reestablished the Permian as the leading basin for the company in terms of production active rig count ducks permits and on drilled inventory for.
The fourth quarter, including a full quarter of production from the hatch acquisition run rate daily production exceeded 17000 Boe per day for the first time in our history to put that in perspective, when Kimball IPO. In 2017 production was 30 116 Boe per day this massive growth in production.
<unk> represents a five and a half times increase largely a result of our continued consolidation in the mineral space.
Today, we also declared a cash distribution of 48 cents per common unit.
Again looking back to 2017 through today, the total cash distributed to common unit holders. Since we became a public company is $8 45 per common unit.
Turning to the operating environment in the fourth quarter, we had a record 92 rigs actively drilling on our acreage at the end of the year, representing 12, and a 12.1% market share of all rigs drilling in the continental United States. We also had a record number of net dukson permits which is unique given the massive drop in DUC inventory.
Nationwide, while the U S rig count increased during the year and is now approaching pre COVID-19 levels, we do not expect much in the way of significant oil production growth from U S operators.
A primary reason for this is that the number of deaths in the U S. One of the best indicators for near term production growth has dropped precipitously since 2020 in fact in the Permian Basin alone Docs have dropped from a peak of over 3500 in July 2022, just over 1000, a day levels not seen since 2015.
While many companies will focus on replenishing their DUC inventories in the short term, we believe that inflationary pressures in the drilling completion and labor side of their businesses will continue to temper oil production growth during 2023.
Production stability profitability and quality of inventory will continue to be the primary themes of energy investing rather than the hyper growth models of the past.
At Kimball, we updated our detailed portfolio review that we initially introduced in May of 2021, and we are very pleased to report that the results of the review confirmed an estimated 19 years of drilling inventory a superior five year annual average PDP decline rate of 12% and only.
<unk> 4.5, net wells needed per year to maintain flat production. We continue to believe that Kimball has a shallow decline rate of any public minerals company. This characteristic is no accident. We designed Kimball this waste that we can more easily generate organic growth and stable production through various market environments and cycles.
We will continue to drive growth through our disciplined acquisition strategy that is both a consistent and proven method. It has been in place for over 20 years, we employ a strict set of time-tested acquisition criteria focused on adding quality production with low PDP decline rates and upside drilling locations in a transaction that is accretive.
<unk> to our unit holders we are now realizing the benefits of this acquisition strategy as reflected in our record profitability record production high quality inventory and conservative balance sheet.
Turning now to the commodity environment, we remain structurally bullish on oil over the long term due to years of extremely low investment, especially among energy companies outside of the United States and strong global demand trends that we expect to accelerate later in 2023 for.
For Kimball, we maintain a strong competitive advantage of being a pure royalty company, namely we have zero inflationary risk in terms of drilling and production costs, Yes, we received the upside from higher commodity prices.
We expect to continue overall as a major consolidator in the highly fragmented U S oil and gas.
Royalty sector that we estimate to be over 700 billion in size and as I've stated in the past there are only a handful of public entities in the U S and Canada that have the financial resources, the infrastructure network and technical expertise to complete large scale multi basin acquisitions. We believe that we are still in the early ages of this.
Validation and will actively seek out targets that fit within our acquisition profile. Finally, we are very grateful to our employees board of directors and advisors for their contributions to our company achieving record results. In 2022, we are excited about 2023 and the prospects for Kimball to generate long term unit holder value.
For years to come and I'll turn the call over to Davis to review our 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 both the year and the fourth quarter.
In addition, today, we are providing our full year 2023 guidance.
I'll start by reviewing our financial results from the fourth quarter.
Beginning with oil natural gas and NGL revenues.
Of $64 4 million a decrease of 13% from the third quarter, primarily due to a decline in realized commodity prices.
Kimball fourth quarter average realized price per barrel of oil was $82.04.
For Mcf of natural gas was $5 and she says.
A barrel of Ngls was $30 55.
For BOE combined was $43 65 sets.
Our record fourth quarter run rate daily production was 15394 barrels of oil equivalent per day on a six to one basis.
An increase of 3% from Q3 2022.
Daily production was comprised of approximately 61% natural gas again on a six to one basis at approximately 39% from liquids.
26% from oil and 13% from Ngls.
The fourth quarter run rate daily production includes only 17 days of production from the company's $277 million acquisition of mineral and royalty interests held formerly by Austin based hach loyalty.
Closed on December 15, 2022.
Including a full Q4 2022 impact of the acquired production the revenues from which will be received by the company.
Run rate production was 17176 Boe per day, a new record for Kimball.
As of December 31st Kimball's major properties that at 882, gross and 3.67 net drilled but uncompleted wells as.
As well as 675 gross and 3.27 net permits on its acreage.
Data does not include our minor properties, which we estimate could add an additional 20% to the deck and permit inventory.
The total amount of net backs and permits at year end was $6 94.
Which is higher than the 4.5 net wells, we need to maintain flat production.
Based on this metric we are optimistic about the production profile, we expect for Campbell as we progress through 2023.
On the expense side.
General and administrative expenses for example, or $7 2 million in the quarter.
$4 2 million of which was cash G&A expense or $2 97 per Boe.
Fourth quarter net income was approximately $35 2 million.
Total fourth quarter consolidated adjusted EBITDA was $46 2 million.
You will find a reconciliation of those consolidated adjusted EBITDA and cash available for distribution at the end of our news release.
Today, we announced a cash distribution of <unk> 48 per common unit for the fourth 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's secured revolving credit facility.
Since may 2020, excluding this upcoming Q4 payment.
Kimball has paid down approximately $86 1 million of outstanding borrowings under our secured revolving credit facility by allocating just a portion of its cash available for distribution for debt Paydown.
Commenting further on our balance sheet and liquidity.
As of December 31st Kimball had approximately $233 million of debt outstanding under our secured revolving credit facility.
And also had a net debt to fourth quarter 2022, trailing 12 month consolidated adjusted EBITDA of approximately zero point dynamics.
And remained in compliance with all financial covenants under our secured revolving credit facility.
Kimball had approximately 117 billion and undrawn capacity under our secured revolving credit facility.
We believe the company has been a stronger financial position today than it has been at any point in the last five years.
Today, we are providing full year 2023 guidance, which includes the production guidance that at its midpoint.
Flex roughly flat daily production relative to our fourth quarter 2022 run rate daily production.
Including a full quarter of the acquired production from ACH.
We believe that most operators will focus their twenty's twenty-three budgets on replenishing their DUC inventories.
With the goal of flat to low single digit production growth in 2023.
We also anticipate and our guidance of slightly higher production contribution from oil and 2020 compared to last year.
This is due to the ACH acquisition, which is primarily liquids focused.
We expect that approximately 68% of the Q4 2022 distribution declared today.
Have you considered return of capital and not subject to federal income taxes.
With the remaining considered a qualified dividend for tax purposes.
We continue to believe our tax structure provides a highly compelling competitive advantage in terms of generating superior after tax returns to our unit holders.
We began the year, having grown our borrowing base and elected commitment on our revolving credit facility to $350 million.
With enhanced liquidity and a conservative capital structure.
In 2022.
Paid out 1.88, and the tax advantaged quarterly distributions during the year and paid down approximately $41 5 million on our credit facility.
We are confident that Campbell is well positioned for continued growth in 2023 with a resilient business model that continues to perform very well in the highly cyclical energy industry.
We will continue to benefit from a dynamic and diverse product portfolio, which is largely the result of strategic acquisitions, both recent and historic.
We are focused and energized and pursuit of continuing to generate 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. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary that you pick up your handset before pressing the star keys, we ask that you. Please limit yourself to one question and one follow up thank you.
And our first question comes from the line of John <unk> with Stifel. Please proceed with your question.
Hi, good morning, all and congrats on a strong quarter.
Yeah. Thank you.
For my first question I wanted to ask about your views on an optimal leverage ratio as you continue to pay down debt. How should we think about the use of cash once that level was met do you put on the balance sheet with near term macro uncertainties or providing dry powder for M&A or would you.
Increasing the payout.
Yeah, Great Great question, John that's probably.
The thought that we in the conversation that we at the management and board level have most often it's a high quality problem. Obviously, you know what what does the company do with its cash flow and I think the first priority will always be to send distributions on a quarterly basis to our unit holders.
That being said we started during COVID-19 allocating 25% of cash flow to debt Paydown, we're very happy and pleased that we did that historically.
For the for the time being we intend to continue that same policy, which would be to allocate 75% of cash flow to distributions and 25% to debt paydown.
You had originally targeted a leverage ratio of <unk>.
Frankly looking back over time, the leverage ratio that we've targeted just continues to get lower and lower it seems like the the.
Investor appetite for leverage in this business just continues to get lower and lower.
And you know credit facilities and debt in general has just become much more difficult to come by in the space due to a variety of factors.
What's your unfounded in our opinion.
But we're at a you know a nice milestone currently which is less.
Less than one times debt to EBITDA I think we will continue to drive that down lower over time, obviously with natural gas prices dropping we think it's even more important so precipitously I think 65% since mid December but I think it's even more important in that environment to pay down debt, particularly when the when.
When interest rates have risen so rapidly.
The return you get from paying down your revolver is better today than it obviously was really at any point since we've gone public so locking in kind of a guaranteed all of that 8% cost of capital by paying down our revolver is not a bad way to allocate capital and allocate that cash was so long way to answer the question, but I think we will continue to drive that.
Or there may be a point at which we consider buybacks or allocating capital to to third party acquisitions will obviously weigh the relative benefits of.
Buying a you know an external asset relative to buying our own assets, our stock, which we know better than anyone does of course said well, we'll make a judgment call on what we think will generate better returns at that point, but for now I can.
And then going to pay down debt I think is what we as management and the board believe is the best and highest use of our capital at this moment.
That makes sense and then for my follow up.
Understanding the ink is still wet on the hatch deal I wanted to ask for your thoughts on kimball's role in consolidation in the mineral space you highlighted being one of the few companies that can execute on large multi based on acquisitions.
In your view, which based on screen most attractive and are you starting to see seller expectations come in with the pullback in the commodity.
Yeah, Great Great question, and I could go on and on and I'll try to keep it short.
Ashford has a fabulous deal for us it's the right asset at the right time, given the outperformance of oil relative to gas, it's even more accretive to us today than it was at the time of underwriting also sure that production volumes are slightly ahead of underwriting expectations. So it's always nice to see what the deal is off to a good.
Start.
Proving to be very conservative in how we were forecasting DUC completions.
So looking at the environment today this could be.
[noise] from the folks that we speak to the relationships we have on the banking side it.
This could be a little bit of a tougher year from an A&D perspective that tends to always happen when you see huge fluctuations in price one way or the other.
The gas side.
So I think we look at this this environment and say where we're at.
Never going to be the largest mineral company out there we don't want to be the largest mineral company out there we're not going to win every deal to be looked at in fact, we lose 95% of the ones that we've been on but every once in a while we'll find an acquisition at the right time that that's accretive to us and meets our underwriting criteria and will execute so we.
Continue to believe that that strategy of being patient and being conservative as it worked out for us for 25 years of doing this.
So I think we'll just kind of continue down that path going forward and what was the second part of your question John Forgive me.
It's really related to which basins are screening most attractive.
Yeah. So it can fluctuate I would say that we haven't done.
Our gassy deal in quite some time, you know the largest of which obviously was haymaker, which is in our opinion the best minerals, but part of the Haynesville continues to be the best federal slipping in the Haynesville.
So, but then again, we we got priced out of the Delaware for what was it three or four years, Bob and Matt and then finally, we're able to pull a lot of ACH in the fourth quarter, which I think speaks to the fact that that basin is is maturing in such a way that you can buy a nice balance.
Existing cash flow, which is immediately accretive to distributable cash, but then you also have enough inventory to make it NAV accretive as well so in this environment I'd say.
Permian still competitive really tough to buy gas assets I don't think people really want to sell what the strip is down so much especially spot being pushing that $2 barrier I think it's going to be tough. So we look at everything.
But if I had to guess I'd say the opportunities in <unk>.
Less favorable contrarian basins like the Eagle Ford and the mid Con, maybe even the Bakken a little bit tougher to buy their inventory concerns, but I would say that those baked in maybe the mid con first frankly, I think in terms of value opportunities there, but certainly also the Eagle Ford.
And then the Permian, It's obviously just going to continue to be the big deal source. There. It just happens to be more competitive bomberman anything you guys want to add there. Yeah. This is Bob the only thing I'd like to add too on that is.
Sometimes people get confused and I'm looking at mineral companies versus operating companies. We don't operate if we're able to get and screen our criteria.
In our base and we're able to buy something that is more accretive than in the Permian and of course, we love the Permian just like everybody else does but we aren't going to buy a dilutive acquisition in the Permian just to grow for growth's sake, we we only do accretive acquisitions and if we can get them more accretive acquisition and pass all of our screening criteria and other basins.
We will do that and by screening criteria is that you know obviously when you do an acquisition in another basin other than the Permian. It has to have a lot of runway for four first of all has to be accretive. But then has to have long life. We always buy properties that have at least 30 to 40 years of economic life, even on low pricing cases, and then it has to have a significant room for.
A development. So that's how we screen things and that that's why we've grown our company to not focus just on one basin frankly, because we're asset managers, we aren't an operator and if we can buy something that's extremely more accretive and like David said, a basin that isn't as popular as the Permian will do that we are now.
We're going to do a dilutive deal just to get bigger.
Yeah.
Great color, thanks for taking my questions.
Thanks, John .
And the next question comes from the line of Tim <unk> with Keybanc capital markets. Please proceed with your question.
Good morning, everybody and thank you for taking my questions.
I wanted to start on on the production guidance for the year is essentially in line with your current run rate.
And you've talked about how hach, it's outperforming your underwriting so I wonder if you could kind of step back a bit and talk about kind of what you're seeing across the rest of your portfolio are you starting to see ducks getting kind.
Kind of rebuilt a little bit are you seeing activity slow down or I'm, just trying to understand kind of how you landed on that on that guidance for the year.
Yeah, no it isn't a question.
First and foremost I will say that where were you.
Historically.
Stablish a pattern of being very conservative with guidance, we think that is prudent and frankly, just the right way to run your business South you. If you look back over time, we've generally been in line, if not above kind of the midpoint of our guidance range.
Not every factor going back since we started providing guidance a few years ago.
Your point raises that your question raises a good point, which is that who you know we've made the observation in this press release that.
Our net dock and permits are relative to the amount of permits or thereabout of completed wells necessary to keep production flat with just four and a half that our net ducks and permits which is never six currently and that ratio has never been higher so that would suggest you know.
Assuming historical patterns DUC completions remain constant that would suggest that we add some amount of organic growth. This year, we feel very good about that number but let me just put it that way more directly that being said right in an uncertain environment. Our company is still majority gas by revenue.
And production on our 61 basis and say what do you see gas spot at two blocks, it's just a harder environment for us to provide it to really get.
That's at about what production growth will be so.
Is that you know three months six months from now.
Are you on this call on your Youre looking at our production down and where we're.
We're hitting what we're putting out there and if we happen to be above those numbers because the operators have been more aggressive on either accelerating completions or drilling new wells and we don't even have in the in the queue right now so be it. So conservative numbers, we don't think it's overly conservative, but we think it's a conservative number and we feel good about the ability to maintain.
Or grow production volumes are at that even without making any acquisitions.
Matt Bob anything.
No I mean, I think that's where I think it's interesting that this is the highest spread we've ever had between line of site wells and our maintenance wells are four five net wells per year. So.
Everything you say it was correct Davis I mean, it's a.
We do do conservative guidance in 2022, the midpoint was 14400 Boe per day.
We exited a 17176, so you know.
That's been quite a bit but yeah. So it is very conservative we think.
Okay.
Makes sense guess that $2.
Should dry wanted to be conservative so I appreciate that.
And then just one.
That 12, I guess 12, 4% at the PDP decline, you've highlighted which I do believe as you know.
Fans out among the public minerals companies.
Hatch with the activity this year will be much higher I mean should we just we can do weighted average production I mean should we think about that decline rate kind of go into like a mid teens as you look out a year.
So I'll I'll take a stab at this and I think you'll love this color and I'll turn it over to obviously, Bob as the resident reservoir engineering arguably the best in the country in the field.
<unk> more color, it's interesting so it really doesn't affect us much.
But I would expect and I was a little bit curious if looking at the number of self initially.
And she has a lot of it has an existing PDP base, which has been accretive to our distributable cash flow, but because its not an overwhelming component of our overall production mix. It really doesn't drag down that it's not such flush production that had with such a high decline rate that it drags down the overall comes.
Any decline in a really meaningful way.
So theres that so it doesn't really affect the initial PDP decline rate in a material way if we were at 12.
12, 5% before and now it's <unk>.
Now, it's like 11, 9% before and now it's 12.4, it still hasn't moved up more than 50 60 basis points, so not enough to create a rounding difference on that additional decline rate.
And then the next question is well what happens when all these wonderful development catalysts materialize on hatching. All these docs and so that you know you would assume because its flush production coming on line at a higher decline rate you assumed that would have an impact on increasing our decline rate, but you have to keep in mind that the rest of our portfolio a lot of which is more of a.
Sure.
Nature that the decline rate there has flattened out and so its kind of offset that that increased decline in ash assets with a lower decline on the more mature.
Existing legacy K R P asset and so the net effect in our view, it's actually not material enough to really make much of a difference then I'll turn it over to Bob for any additional color I articulate that in a way that makes sense.
Go ahead.
No really nothing is nothing I can add to that I agree with everything David just said.
Okay that makes that makes a lot of sense.
Anytime everybody yeah. Thank you yeah. Thank you.
And the next question comes from the line of Troy, Florida Lamar with Raymond James. Please proceed with your question.
Hey, guys. Thanks for taking my thank you for taking my question kind of follow up on that last comment about the base decline rate obviously, the flush production from matches offset some decline, but kimball's majority assets.
I noticed that the you know.
Net DUC and permit total reverted back to the.
So the number of priority <unk> in four and a half is that simply due to the.
The influx of docs via ACH and just the higher decline rate of those initial wells.
Bob How would you answer that question I think I think I mean I think.
That's a good yeah I think that's a good analysis.
Yes, and looking at it we thought that possibly it would go down.
Because of Davis has comment about our production maturing in and taking less net wells to maintain production being flat, but that didn't go down I would say is the primary driver of what you alluded to as the new wells that are coming out and all the ducks are that are coming on and hatch.
Yeah, and I would say that without hatch without hatch would probably be closer to 4142 net wells that stay flat. So it has really at a 0.3 to that.
You know I don't okay perfect.
Yeah.
Okay, and then last question kind of circling back to kind of M&A.
In a landscape, obviously hatch was higher.
Conventional versus your the rest of your asset base does that kind of affect your mindset going forward with regards to potential acquisitions or is it still I know you. All mentioned you know if its accretive.
You know that that's priority number one.
So I guess, how are you all looking more to lower decline assets moving forward or in the near term or is it simply agnostic accredo.
Hey, agnostic accretive it's been our experience that when you try to get to selective on hey, we're going to go out and buy a low decline.
Central Basin platform asset that has to be our next deal if you get that mindset and it just becomes very difficult to transact on anything and you end up missing out on nice opportunities that aren't necessarily in your what your immediately targeting I would extend that to hydrocarbon stream. So we have folks that come into the office.
At the time and say Oh, you just bought a liquids focused asset with hatch did you guys go out and buy a gas your asset now to balance it out and the answer is no. I mean, we were going to look at everything and I think that's a big advantage that we have we're not.
We're not pigeonholed into one basin, we're not pigeonholed to gas versus oil.
We are we look at the entire landscape, we tried to look at as many opportunities as we possibly can and we're not in the business of predicting which commodity is going to outperform so we take the view, we're going to look at as much as we can ever going to we're going to underwrite deals in such a way that they are accretive to us and we have a conservative price put.
And do it well by whatever opportunities give us the highest and best return on capital amongst that larger landscape.
This business is hard enough and competitors out there as it is I can't even imagine having done only by you know.
Oil based assets in the Permian basin, only are only being able to buy oil gas assets in the Haynesville only I just think that's a much harder business to run it with you'd lose out on opportunities. If you didn't have a more geographically diverse footprint that being said I will say that we would absolutely love wallboard.
To be able to go out and buy a <unk>.
Digit decline.
To pick on that one place, but you know like Central basin platform asset that that just had a long life reserve base I mean, that's how that's how Kimball got started that's how we made our money historically is buying these very.
Very predictable very conservative oil.
Oil based asset that it all sorts of nice things that's happening in terms of enhanced oil recovery and Workovers and re completions and all of that on these assets that people think are melting ice cubes, but ultimately yard so we'd love to do that it's just hard to find those opportunities I mean, the people that own [laughter].
Don't want to carve off an override the people that own those metals, if typically at least the larger positions and own them for generations and so they're not there they're just as the students. We are in terms of how predictable and wonderful that cashless sell they're harder deals to get but no nothing would make us happier than to underwrite at 100 of it.
300 million dollar conventional oil asset.
Platform and World Class unit, that's that's how we got started.
Right Awesome, well I appreciate the color guys. Thanks again.
Thank you.
Thank you at this time there are no further questions I would like to turn the floor back over to the Kimball royalty management team for closing remarks.
We thank you all for joining us this morning, and look forward to speaking with you again, when we report first quarter results. This completes today's call. Thank you.
Yes.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect disconnect. Your lines at this time and have a wonderful day.
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