Q2 2023 Kimbell Royalty Partners LP Earnings Call

And answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

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

Thank you operator, and good morning, everyone welcome to the Kimball royalty Partners Conference call to review financial and operational results for the second quarter 2023 ended June 30th 2023.

Call is also being webcast and can be accessed through the audio link on the events and presentations page of the IR section of Kimball RP Dot com.

Information recorded on this call speaks only as of today August <unk> 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 statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance are considered forward looking statements papers.

Two the safe Harbor provisions.

Private Securities Litigation Reform Act of 995.

We'll 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.

Our disclosures on forward looking statements. These factors and other risks and uncertainties are described in detail in the Companys filings with the Securities and Exchange Commission.

Management will also refer to non-GAAP measures, including adjusted EBITDA 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 revenues, Kimball royalty partners, Chairman and Chief Executive.

Sure.

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 David <unk>, Our President and Chief Financial Officer, Matt Daley, Our Chief operating officer, and Blaine Rheinberger our controller.

We are very pleased with another record quarter and continue to build on momentum from Q1, and the recently closed <unk> minerals royalty acquisition, notably our Q2 production mix materially shifted towards oil, which represented 33% on a six to one basis up from 29% in the first quarter activity in our <unk>.

<unk> remains resilient, despite lower overall U S land rig count in fact, we now have the highest market share ever of the overall U S land rig count at 13, 8% after giving effect to our two most recent acquisitions. The Permian basin leads all categories in terms of production inventory right.

Count and line of sight wells production in the Permian grew by 48% quarter over quarter, reflecting a full quarter of the MB minerals acquisition with the Permian rig count increasing by 11% during the same period.

And we're very pleased to report that we maintained our superior five year annual PDP decline rate of 13% that only requires an estimated $4 nine net wells annually to maintain flat production overall.

Overall, we had a great quarter and are right on track to meet our targets for the year. Our Q2 2023 distribution of <unk> 39 reps.

<unk> represents an increase of 11% from Q1 and demonstrates our ongoing focus and commitment to enhancing unitholder value.

As we head into the second half of the years as well as looking out towards 2024, we will continue to execute on our strategy to drive growth both through organic development and our disciplined acquisition strategy that is both a consistent and proven method at Kimball. We also expect to continue benefiting from our diverse portfolio with.

Low PDP decline rates, coupled with upside drilling locations as a major consolidator in the highly fragmented U S oil and natural gas royalty sector. We remain bullish about the long term prospects in this space and our role in it we believe the future opportunities for Kimball are very bright and will extend for many years to come.

I'll now 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.

<unk> performed very well in the second quarter and generated record run rate daily production, surpassing a new milestone for the company of over 18000 Boe per day.

601 basis.

<unk>, a full quarter of <unk> minerals acquisition.

We are also pleased to report that we Havent had amended and extended our secured revolving credit facility through June 2027, and increased the borrowing base and elected commitments from $350 million to $400 million an increase of 14%.

We're also affirming our full year 2023 guidance that was previously disclosed in our May 18th press release.

I'll start by reviewing our financial results from the second quarter.

Beginning with oil natural gas and NGL revenues of $57 million, a decrease of 0.8% from the first quarter, primarily due to a decline in realized commodity prices.

Second quarter 2023 average daily production was 18145 BOE per day again on a six to one basis, which consisted of 572 Boe per day related to prior period production recognized during the quarter and 17500 <unk>.

73 Boe per day of run rate production the.

The prior period production recognized this quarter was attributable to past production that came into pay status during Q2 2023.

Our record setting a record second quarter run rate daily production of 17573 Boe per day.

An increase of three 3% from Q1 2023 was comprised of 45 days of <unk> minerals production and was approximately 54% from natural gas and approximately 46% from liquids.

And thats, 33% from oil and 13% from Ngls.

Including a full Q2 2023 impact of the <unk> minerals acquisition, the revenues from which will be received by the company run rate production was 18554 Boe per day.

As of June 32023, Kimball's major properties at 763, 767, gross and 389 net drilled but uncompleted wells as well as 734 gross and $2 97 net permits on its acreage.

This data does not include our minor properties, which we estimate could add an additional 20% to the DUC permit inventory.

In addition, we exited the quarter with 90 rigs actively drilling on our acreage and our market share of all land rigs drilling in the continental United States represents approximately 13, 8% a new record.

The expense side general and administrative expenses for Campbell were $7 9 million in the quarter.

$4 6 million of which was cash G&A expense or $2 90 per Boe.

Unit based compensation compensation in the second quarter, which is a noncash G&A expense was $3 3 million.

<unk> <unk> six per BOE $2 <unk> per Boe.

Second quarter net income was approximately $17 8 million.

Total second quarter consolidated adjusted EBITDA was $45 million.

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 39 per common unit for the second 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 Q2 payment Kimball.

Kimball has paid down approximately $108 6 million about standing borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution for debt Paydown.

Moving now to our balance sheet and liquidity.

On June 13.

We amended our existing credit agreement to among other things increase the borrowing base and elected commitment amount from $350 million to $400 million on the secured revolver and extend the maturity to June 2027.

As of June 30, we had approximately $269 6 million in debt outstanding under our secured revolving credit facility.

We continue to maintain a conservative approach with net debt to trailing 12 month consolidated adjusted EBITDA of one one times.

Approximately $130 4 million and Undrawn capacity under our secured revolving credit facility. We are very comfortable with our strong financial position the support of our expanding bank syndicate and.

Our financial flexibility.

We are very bullish about our industry and our company as we see a long horizon for continued growth and opportunities to enhance shareholder value.

With that operator, we are now ready for questions.

Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.

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<unk> pressing the star key.

Our first question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Thanks, and good morning all.

Good morning Derik.

This is my first question I wanted to focus on your growth trajectory.

Based on your improving net DUC and permit inventory in your strong Q2 oil production performance.

How do you see the trajectory of volumes over the next six to 12 months.

Always hard to answer that question Derrick can we try to be conservative with our guidance Youre correct that.

The ratio of net DUC to permit.

That we have on our acreage relative to what's required to keep it flat continues to trend in a positive direction, you're further right that the.

Oil weighting amongst that mix continues to.

The increase in improve we don't like to take three to six months.

Views on what that development cadence might be we as mineral owners one of the weaknesses of our business model there aren't very many of them, but one of the weaknesses is lack of developmental control.

So we've reiterated guidance.

But youre certainly correct that we may be too conservative in how we're thinking about this matt or Andrew Bob.

Thanks.

Yes, I would just say that's correct I mean, the 686 net DUC permit is well above the $4 nine to stay flat.

Oil prices are good. So you may start to see some accelerated completions of ducks as of year end and gas as we get into Q4 with the.

Gas curve in contango prices are higher in Q4 as well. So you may see some of that as well, so but I would agree with Davis.

We stand by our guidance for Q3, Q4, which has a midpoint.

Production of 19000 Boe per day.

Great and then looking at the gas side of the Ledger. Your Haynesville rig activity has been particularly resilient despite lower gas prices.

Are you guys attribute to that resiliency.

Acreage quality public company exposure some combination of the two.

Any thoughts you could share yes.

Yes, great Great question, we were free.

We were positively surprised I wouldn't use the word surprise, but we were pleased to see.

You see that just given the fact that everybody else that seems to be reporting is seeing a lot of disappointing production declines in the basin I would attribute it to frankly, I think you've kind of hit on it with your first.

Your first point that legacy position that we picked up from haymaker back in 2018 is just incredible core haynesville asset and we would probably argue that our production should and will continue to be more resilient than other folks.

We have a lower PDP decline rate on our haynesville position relative to a lot of other people too. So it doesn't require quite as much well, we will outperform I should say on balance the more hyper drilling folks that have newer flush production with higher decline rates. So we're kind of in a nice balanced spot.

A lower PDP decline rate, but still a healthy amount of activity.

We got asked that question yesterday on a call and.

The mix between private and Publix continues to kind of shift up and down I'm not sure I would directly attribute our resilience to our specific mix between public and private acceptance. So far to say as we have a healthy mix there all for the most part very good operators and it's just.

It's just a great asset I mean, it's just a.

That asset Thats core to our business that just continues to perform and we've got you.

Years and years of inventory, there, which is which is obviously, a nice and very exciting thing anybody else want to chip out on that.

Yeah.

In Q1 as you pointed out we had a pretty large increase in the rig count in the Haynesville and the increase from bi.

Six rigs in Q1, even with relatively low gas prices and then Q2, the rig count went down slightly and in the Haynesville, but as David said I mean, the operating activity remains robust there.

Mainly because the economics are so strong in a lot of these folks are able to hedge into again, the contango curve, which is gas in the mid threes going into the fours in future. So.

And if I could maybe squeeze one more in with regard to your decision to dissolve the Tiger acquisition Corp. In Q2 should we consider that chapter fully close on that pursuit or do you think theres still an opportunity longer term to pursue a symbiotic E&P and mineral relationship.

Yeah, Great. Great question. Thank you for asking that no. The idea is not dead the idea and its and its form which was the stacked warm under Tiger that has concluded.

We still are very interested in building our own operating company to work alongside Kimball or partnering with another operating company just to realize what really to address your first question, which is a lack of developmental inside it would just be wonderful to have a relationship.

With an operator, where we could have more transparency on development cadence, but then also joint bid acquisition that either have high net revenue interest, where an override could be carved out appropriately.

<unk> situation, where.

Working interest partner actually owns the mineral ownership and also the working interest so.

We still think the idea has a lot of merit and it's something that.

That we we would love to do so I wouldn't I wouldn't put the the final nail in the coffin on that but by any means.

Very helpful. Thanks for your time.

Thank you for your questions.

Our next question comes from the line of Trafford Lamar with Raymond James. Please proceed with your question.

Hey, guys. Thanks for taking my question I kind of wanted to piggyback off of Derricks rig question.

Obviously.

You all saw very smaller decrease relatively to the quarter over quarter relatively.

U S total.

And.

I wanted to ask on the Permian specifically.

About kind of how.

How rents fell quarter over quarter, and if you all saw.

Similar levels from from <unk>.

Yes, I'll take that this is Matt I mean, the Permian rig count.

Went up by five rigs quarter over quarter, we had 50 rigs out of the 90, where in the Permian basin as Youre correct.

The market share went up from 12, 8% to 13, 8% the highest market share ever for the company.

The Eagle Ford rig count went up.

Every quarter, we did see a drop of four in the Haynesville.

Not surprisingly due to low gas prices.

But in the Permian specifically you know the major operators Exxonmobil has nine rigs oxy has five rigs Diamondback has four rigs overall on our rig count for all base and 63% of those are public companies during the pandemic it was actually 63%.

5% private companies in the public companies have come back and sort of running the show here, but again very happy to see that the rig count.

Modestly dropped market share went up Permian is very very strong in terms of activity with some leading operators.

So this shows the resilience and the quality of our acreage.

Yes.

Great I appreciate the color on that guys slightly off topic.

One talking point as of late has been partnership the C Corp conversion and I'd love to get your thoughts and specifically from potential index exposure standpoint.

Yes, so we converted to a C Corp. As you know for tax purposes, a couple of years ago.

I think thats been a positive development.

We would always consider anything that makes sense for our for our.

And our unit holders, but we are very happy with our structure and we believe that the structure. We have in place allows us to make decisions very.

Quickly and very easily and I think that helps explain it.

Frankly are just really good success over the last several years on the M&A front, we've made a number of acquisitions that.

But it really helped the company and grown exponentially so happy with our structure, but certainly aware of.

That phenomenon.

Yeah totally makes sense. Thank you guys.

Thank you.

There are no further questions in the queue I'd like to hand, the call back over to Bob revenues for closing remarks.

We thank you all for joining us this morning, and we look forward to speaking with you again, when we report third quarter results. This completes today's call.

Yes.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.