Q3 2023 Kimbell Royalty Partners LP Earnings Call
Speaker 1: Greetings and welcome to the Kimball Royalty Partners, 3rd quarter, 2023 earnings call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Greetings and welcome to the Kimball royalty partners third quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Speaker 1: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As your minder, this conference is being recorded. It's now my pleasure to introduce your host, Rick Black, investor relations.
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 its now my pleasure to introduce your host Rick Black Investor Relations.
Speaker 1: for Kimbo royalty partners. Thank you, you may begin.
For Kimball royalty partners.
You may begin.
Speaker 2: Thank you, Operator, and good morning, everyone. Welcome to the Kimbell Realty Partners Conference Call to review financial and operational results for the third quarter 2023, which ended on September 30, 2023.
Thank you operator, and good morning, everyone welcome to the Kimball royalty Partners Conference call to review financial and operational results for the third quarter 2023, which ended on September 30th 2023.
Speaker 2: 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.
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 Kimball Our P. Dot com information recorded on this call speaks only as of today November 2nd 20 twenty-three. So please be advised that any time sensitive information may no longer be accurate as of the date of any REIT.
Speaker 2: Information recorded on this call speaks only as of today, November 2, 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.
Play listening or transcript reading.
Speaker 2: I would also like to remind you that the statements made today's discussion that are not historical facts, including statements of expectations or 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.
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 considered forward looking statements made pursuant to the safe Harbor provisions.
Securities Litigation Reform Act of 1995.
Speaker 2: 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 and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission.
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 and other risks and uncertainties are described in detail in the country.
These filings with the Securities and Exchange Commission.
Speaker 2: 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 press release.
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 press 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 Ravenous Kimball Royal.
Speaker 2: Kimball assumes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Bob Ravenous, Kimball Realty Partners Chairman and Chief Executive Officer. Bob?
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 Ravenous, our President and Chief Financial Officer, Matt Daley, Our Chief operating officer, and Blaine Rheinberger. Our controller, we are very pleased to announce another record quarter that included the <unk>.
Speaker 3: 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 Ravenous, our President and Chief Financial Officer, Matt Daly, our Chief Operating Officer, and Blaine Rheinsberger, our Controller.
Speaker 3: We are very pleased to announce another record quarter that includes the Sancio growth in all key operating metrics. Our total production, including a full quarter from our recent $455 million acquisition from a private seller, exceeded 23,000 BoE per day for the first time in our history.
So growth in all key operating metrics, our total production, including a full quarter from our recent 455 million dollar acquisition from a private seller exceeded 23000 Boe per day for the first time in our history. We are excited to have achieved this significant milestone as we continue to execute.
Speaker 3: We are excited to have achieved this significant milestone as we continue to execute our strategic business model aimed at not only consolidating the U.S. oil and natural gas royalty sector, but also, and more importantly, generating long-term value for our unit holders.
Our strategic business model aimed at not only consolidating the U S oil and natural gas royalty sector, but also and more importantly, generating long term value for our unit holders. The third quarter marked a new all time highs sat in production rig count ducks and permits during the quarter our production mix.
Speaker 3: The third quarter marked new all-time highs set in production, rig count, ducts, and permits. During the quarter, our production mix continued to materially shift towards liquids, with oil and NGLs now representing 49% of our production compared to 46% last.
<unk> to materially shift towards liquids with oil and Ngls now representing 49% of our production compared to 46% last quarter.
Speaker 3: Activity in our acreage remains strong, and we now have a 17% market share of the overall US land rig count. The highest in our history.
Activity on our acreage remains strong and we now have a 17% market share of the overall U S land rig count the highest in our history.
Speaker 3: Even after giving effect to our most recent $455 million acquisition, we still have the best-in-class PDP decline rate of only 14%.
Even after giving effect to our most recent 455 million dollar acquisition, we still have the best in class PDP decline rate of only 14% at the end of the quarter. We had 9.3 net dukson permits reflecting the widest spread we've ever had of line of sight wells relative to the number of wells needed to.
Speaker 3: At the end of the quarter, we had 9.3 net ducks and permits. Reflecting the widest spread we've ever had of line of site wells, relative to the number of wells needed to maintain flat production of only 5.8 net wells per year.
To maintain flat production of only 5.8 net wells per year.
Speaker 3: This gives us confidence in the resilience in our production as we wrap up 2023 and look at 2024.
This gives us confidence in the resilience in our production as we wrap up 2023 and look at 2024 in short we're extremely pleased with this quarter as well as our third quarter distribution of 51 sense that we declared today, an increase of 31% from last quarter in.
Speaker 3: In short, we are extremely pleased with this quarter, as well as our third quarter distribution of 51 cents that we declared today, an increase of 31 percent from last quarter.
Speaker 3: In September , we closed our largest acquisition in the company's history. As we stated then and still believe today, this acquisition is expected to significantly enhance Kimball's positions in the best performing, highest growth oil and gas basins in the lower 48.
In September we closed our largest acquisition in the company's history. As we stated then and still believe today. This acquisition is expected to significantly enhance kimball's positions in the best performing highest gross oil and gas basins in the lower 48, the targeted portfolio of mineral and royalty interests complements our disciplined approach to M&A.
Speaker 3: The targeted portfolio of mineral and rural interests complements our disciplined approach to M&A combining excellent reservoir quality, near-term cash flow, and long-term drilling upside, while this acquisition was immediately accretive to distributable cash flow per unit.
Combining excellent reservoir quality near term cash flow and long term drilling upside. While this acquisition was immediately accretive to distributable cash flow per unit. We believe it will generate accelerated accretion in the future years, we look forward to continuing our role as a major consolidator in the oil and Nat.
Speaker 3: we believe it will generate accelerated accretion in the future years.
Speaker 3: We look forward to continuing our role as a major consolidator in the oil and natural gas world.
Gas royalty sector.
Speaker 3: I'll now turn the call over to Davis to review our financials in more detail before we open the call to questions.
Now 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.
Speaker 4: Kemble performed extremely well in the third quarter and generated record daily production that marked the significant new milestone for Kemble.
Kimball performed extremely well in the third quarter and generated record daily production that marks a significant new milestone for example.
Speaker 4: including a full quarter of the acquired production that Bob just discussed, the revenues of which will be received by Campbell for the full quarter. Run rate production was 23,531 B.O.E. per day on a 6-to-1 base.
Including a full quarter of the acquired production that Bob just discussed the revenues of which will be received by Campbell from the full quarter.
One rate production was 23531 Boe per day on a system wide basis.
Speaker 4: As a result of the significant incremental production and our expectations for the fourth quarter, today we are boosting our production guidance range for Q4.
As a result of a significant incremental production at our expectations for the fourth quarter.
Hey, we are boosting our production guidance range for Q4.
In addition, we expect to record low cash G&A for Q4.
Speaker 4: In addition, we expect record load, cash, G&A, per VOE and Q4, reflecting the positive operating leverage our business model general.
Reflecting the positive operating leverage our business model generates.
I'll start by reviewing our financial results from the third quarter, beginning with oil natural gas and NGL revenues.
Speaker 4: I'll start by reviewing our financial results from the third quarter, beginning with oil, natural gas, and NGL revenues.
$69 2 million and.
Speaker 4: 69.2 million an increase of 21.5% compared to the second court.
An increase of 21, 5% compared to the second quarter.
Speaker 4: Third quarter 2023 run rate average daily production was 19,777 BUE per day.
Third quarter 2023 run rate average daily production was 19777 Boe per day.
Including 18 days of production from our recent acquisition.
Speaker 4: including 18 days of production from our recent acquisition.
Speaker 4: This represents a 13% increase compared to the second quarter run rate average daily production of 17,573 BoE production.
This represents a 13% increase compared to the second quarter run rate average daily production of 17573 Boe per day.
Speaker 4: Our third quarter production mix was comprised of approximately 51% for natural gas.
Our third quarter production mix was comprised of approximately 51% for natural gas.
Speaker 4: And approximately forty nine percent from liquids or thirty four percent from oil and fifteen percent from NGOs. As a.
At approximately 49% from liquids or 34% from oil and 15% from Ngls.
As of September 30th 2023 Kimball.
Speaker 4: Kimmel's major properties had 909 gross or 5.4 net ducks and 805 gross or 3.94 net permitted locations on a
Kimball's major properties at 909, gross or $5 for debt Ducks, and 805 gross or $3 94 net permitted locations on its acreage.
Speaker 4: This data does not include our minor properties, which we estimate can add an additional 20% to the duck and permit inventory.
This data does not include our minor properties, which we estimate could add an additional 20% to the duck and permit inventory.
Speaker 4: In addition, we exited the quarter with 99 rigs actively drilling on our acreage and our market share of all land rigs drilling in the continental United States represents approximately 17% a new record.
In addition, we exited the quarter with 99 rigs actively drilling on our acreage.
And our market share of all land rigs drilling in the continental United States represents approximately 17% a new record.
On the expense side general and administrative expenses for Campbell with $10 4 million.
Speaker 4: On the expense side, general and administrative expenses for Campbell were 10.4Million. 7Million of which.
7 million of which was cash G&A expense.
Excluding the impact of approximately 1.5 billion in transaction related expenses associated with the acquired production and including a full quarter impact of the acquired production cash G&A per BOE was $2 55, a new record low for the company.
Speaker 4: Excluding the impact of approximately $1.5 million in transaction-related expenses associated with the acquired production and including a full quarter impact of the acquired production, cash G&A per BOE was $2.55, a new record low for the
Speaker 4: Third quarter net income was approximately 18.5 million and net income attributable to common units was approximately 13.6 million.
Third quarter net income was approximately $18 5 million and net income attributable to common units was approximately $13 6 million as compared to $17 8 million and $13 5 million respectively from last quarter.
Speaker 4: as compared to $17.8 million and $13.5 million, respectively, from last quarter.
Speaker 4: Total third quarter consolidated adjusted EBITDA was 55.8 million.
Total third quarter consolidated adjusted EBITDA was $55 8 million.
Speaker 4: up from 45 point at 45 million last.
Up from 45 point at 45 million last quarter.
Speaker 4: including the acquired production from the effective date of June 1st, 2023 through September 30th, 2023, Q3 2023 consolidated adjusted EBITDA was 71.6%.
Including the acquired production from the effective date of June one 2023 through September 30 of 2023, Q3, 2023 consolidated adjusted EBITDA was $71 6 million.
Speaker 4: You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release.
You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release.
Speaker 4: Today we announced a cash distribution of 51 cents per common unit for the third quarter.
Today, we announced a cash distribution of 51 cents per common unit for the third quarter.
Speaker 4: This represents a cash distribution payment to common unit holders that equates to 75% of cash available for distribution.
This represents a cash distribution payment to common unit holders that equates to 75% of cash available for distribution.
Speaker 4: And the remaining 25% will be used to pay down a portion of the outstanding borrowing under Kimbell's secured revolving credit facility.
And the remaining 25% will be used to pay down a portion of the outstanding borrowings under Kimball secured revolving credit facility.
Speaker 4: We expect that approximately 55 percent of our third quarter 2023 distribution should not constitute dividends for U.S. federal income tax purposes.
We expect that approximately 55% of our third quarter 2023 distribution should not constitute dividends for U S. Federal income tax purposes, but instead are estimated to constitute nontaxable reduction to the basis of each distribution recipients owner.
Speaker 4: but instead are estimated to constitute non-taxable reductions to the basis of each distribution recipient's ownership interest in Kimball Common U.S.
Ship interesting Kimball common units.
Please refer to today's earnings release for additional commentary related to taxes.
Speaker 4: Please refer to today's earnings release for additional commentary related to taxes.
Moving now to our balance sheet and liquidity.
Speaker 4: As a reminder, on June 13th, 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 September ,
As a reminder, on June 13th we amended our existing credit agreement to among other things increased the borrowing base and elected commitment amount from 350 million to 400 million on the secured revolver and extend the maturity to June 2020.
As of September 30th 2023.
Speaker 4: We had approximately $310.4 million in debt outstanding under our Secured Revolving Credit Facility.
We had approximately $310 4 million in debt outstanding under our secured revolving credit facility.
Speaker 4: We continue to maintain a conservative balance sheet with net debt to trailing 12 months consolidated adjusted EBITDA of 0.9 times.
We continue to maintain a conservative balance sheet with net debt to trailing 12 month consolidated adjusted EBITDA of 0.9 times.
Speaker 4: Kimble had approximately 89.6 million and under on capacity under its secured revolving credit facility as of September 30th, 2023.
Kimball had approximately $89 6 million and undrawn capacity under our secured revolving credit facility as of September 30th 2023.
Speaker 4: We are very comfortable with our strong financial position, the support of our expanding bank syndicates, and our financial flexibility.
We are very comfortable with our strong financial position the support of our expanding bank syndicate and our financial flexibility.
We remain very bullish about our industry and our company as we see a long horizon for continued growth and opportunities to enhance shareholder value.
Speaker 4: We remain 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.
Speaker 1: We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star 2.
Thank you.
We will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question. Kim you May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker 1: Our first question comes from the line of Derek Whitfield with Steeple. Please proceed with your question.
Our first question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.
Yeah.
Thanks, and good morning, all Hey, good morning Darren.
Speaker 5: Thanks and good morning all. Hey, good morning here.
Speaker 5: With my first question, I wanted to focus on your growth trajectory, looking beyond Q4 with line of sight inventories far exceeding your maintenance requirement, it feels like there's quite a bit of upside to consume this forecast given that we're largely holding production slots in Q4. Is that a reasonable statement?
With my first question I wanted to focus on your growth trajectory.
Looking beyond Q4.
With line of sight inventory far exceeding your maintenance requirement. It feels like there's quite a bit of upside to consensus forecast given that were largely holding production flat from Q4 that.
Is that a reasonable statement.
Speaker 4: It's a great question. It's a great point. As you know, it's always challenging, to say the least, to predict growth and production volumes as a royalty company, just given the fact that we don't have, you know, obviously control over duck completion dates, permit conversions, etc.
It's a great question and it's a great point as you know, it's always challenging to say the least to predict growth and production volumes as a royalty company just given the fact that we don't have Oh.
Obviously control over DUC completion dates permit conversions et cetera.
Speaker 4: That being said, your point is well-founded. So we now have more kind of line-of-sight wells relative to maintenance wells to keep production flat than I believe we've ever had in company history as a ratio. So that would suggest robust growth going forward, or at least certainly more than we've had in the past on an organic basis.
That being said your point is well founded so we now have more of a kind of line of sight wells relative to maintenance wells to keep production flat there and I believe we've ever had in company history as a ratio.
So that would suggest that would suggest robust growth going forward or at least certainly more than we've had in the past on an organic basis.
Speaker 4: What you'll probably see from us as we dig into the numbers and provide continued guidance for 2024 is a conservative view on production. That being said, you know, your point is well stated and justified and I don't disagree with the premise. Matt, anybody else want to jump in there on any thoughts?
What youll, probably see from us as we dig into the numbers and and provide continued guidance for 'twenty 'twenty four is that conservative deal on production.
That being said your point is well stated and justified and I I don't disagree with the premise that anybody else would have.
And there on any thoughts.
Speaker 6: Yeah, yeah. I mean, I would just say that, you know, you know, looking at Q3, we had, you know, very good conversions to PDP and the Permian, Hainesville and Eagleford.
Yeah, Yeah, I mean, I I would just say that you know you know looking at Q3, we had very good conversions to PDP in the Permian Haynesville and Eagle Ford.
Speaker 6: excluding the acquisition we made in Q3, our legacy production actually grew 2% quarter of our quarter between Q2 and Q3, so that's 8% annualized growth organically for our legacy production, so that's a great growth quarter there. But looking forward, as David said, you're correct. I mean, we have a record number of line of side wells right now at 9.34.
Excluding the acquisition we made in Q3.
Our legacy production actually grew 2% quarter over quarter between Q2 and Q3, so that's 8% annualized growth organically for our legacy production. So that's a great growth quarter, there, but looking forward as David said, you're correct. I mean, we have a record number of line of sight wells right now at 9.34.
Speaker 6: We only need 5.8 net wells to stay flat. That's the highest spread in the company history, so we feel very good about not only the resilience of Q4 production, but also the potential for organic growth as we wrap up 23 and go into 24.
We only need 5.8 net wells to stay flat.
That's the highest spread in the company history. So we feel very good about not only the resilience of Q4 production, but also the potential for organic growth as we wrap up 23 and go into 'twenty four.
Speaker 4: Derek, it's a balance. We don't want to be unduly conservative, but we also don't want to be overly aggressive.
Derek it's a balance we don't want to be unduly conservative, but we also don't want to be overly aggressive.
Speaker 4: So we do our best when issuing guidance just given the grain of lack of operational control. I hope that's fair enough.
So we do our best when issuing guidance just given the fact you're trying.
Kind of a lack of operational control I hope that's that's fair in your view.
Speaker 5: If it is and with my follow up, clearly understanding that the Inc. suits your eye on the largest transaction you guys has done in the history of the company, wanted to ask if you could characterize the competitive landscape for M&A at present and you're interested in participating in it and has the recent, I guess, third or affirming in commodity prices changed the bid aspenomics out in the market.
It is and with my follow up really understanding that the institute your iron on the largest transaction you guys have done in the history of the company.
Wanted to ask if you could characterize the competitive landscape for M&A, if president and your interest in participating in it.
And has the recent I guess third you're affirming in commodity prices change that the bid ask dynamics out in the market.
Speaker 4: Great question. So I would say just first and foremost, in my opinion, this was a historic year for M&A and the royalty sector, not just ourselves, but also our peers, I think, have done a fabulous job of consolidating and getting private minerals into the public sector. So it's been a big year overall.
Great question. So I would say just first and foremost in my opinion. This was a historic year for M&A and the royalty sector.
Not just ourselves, but also our peers I think have done a fabulous job of consolidating and getting private minerals into the public sector. So it's been a big year overall.
Speaker 4: I think that the competitive dynamics for larger packages like the ones that we would be targeting is probably the most favorable to buyers that I've seen in quite some time. I would actually argue in many ways that we see this, that some of the smaller deals that come across their desk are priced more competitively than larger deals.
I think that the competitive dynamic for larger packages like the ones that we would be targeting is probably the most favorable to buyers that I've seen in quite some time I would actually argue in many ways and we see that that some of the smaller deals that come across our desk.
I didn't believe in larger deals.
So I think that a lot of aggregators are going to have some difficulty putting together packages, where they pay let's call. It 10 times cash flow and then try to sell to someone else like <unk> or.
Meaningful multiple greater than that like 12 times when in reality, the large M&A deals that you're seeing whether it's from ourselves and our peers are in the six to eight times cash flow range. So we think there is benefit right now to to being a larger buyer of assets.
Speaker 4: We will we will always look at everything. I think what you'll see is that will continue to be very On the acquisitions that we make we've had years where we've done no deals. We've had years where we've done one deal This year we did three meaningful ones, but frankly that they were all unexpected in nature We didn't it's hard to predict the m&a wave and we just happened to be in a good place at the right time and Saw assets that we really liked and we're able to get them
We will we will always look at everything I think what you'll see is that we'll continue to be very.
On the acquisitions that we make we've had years, where we've done no deals we've had years, where we've done one deal. This year, we did three meaningful ones, but frankly that they were all unexpected in nature, we didn't it's hard to predict the M&A wave and we just happen to be in a good place at the right time and so.
So I think it'll be really liked them, we're able to get them.
So I'd say that we're going to participate.
Speaker 4: We'll be pursuing deals on a leverage neutral basis. We don't anticipate levering up, obviously, any more than we already are.
We'll be pursuing deals on a leverage neutral basis, we don't anticipate levering up obviously anymore than we already are.
Speaker 4: and we like our chances. I think that we've done very well historically in using our currency, either through primary offerings or direct issuances to sellers as a currency to acquire assets. I think we're differentiated in that regard. And so I think you'll continue to see us in the M&A landscape. So we're going to be very rifle shot in our approach.
We like our chances and I think that we've done very well historically and using our currency either through primary offerings or direct issuances to sellers as a currency to acquire assets I think were differentiated in that regard and so I think youll continue to see us in the M&A landscape, but we're going to we're gonna be Barry.
Rifle shot in our approach.
Speaker 3: Bob or Matt, anything else you guys wanna add? Yeah, the only thing I like to add is we really love the last three acquisitions that we've done and we're delighted to have been able to get them and at a creative pricing. So starting with hatch last year, MV, and then this most recent largest third quarter acquisition, the quality, the production, and all three are excellent, and just a lot of drilling activities. So we're very excited about the way these three acquisitions are performing.
Matt anything else you guys want to add.
Yeah, the only thing I'd like to add is we we really loved the last three acquisitions that we've done and we're delighted to have been able to get them and added an accretive pricing. So starting with hatch last year M. B and then this most recent largest third quarter acquisition the quality of the production on all three are excellent and just a lot of drilling.
So we're very excited about the way these three acquisitions are performing.
Very insightful thanks for your time.
Thanks, Eric.
Thank you. Our next question comes from the line of John Abbott with Bank of America. Please proceed with your question.
Speaker 1: Thank you. Our next question comes from the line of John Abbott with Bank of America. Please proceed with your question. Okay, good morning and thanks.
Hey, good morning, and thank you for taking our question.
Speaker 2: Sure, yeah, so both our questions are really on task.
Yeah. So poker questions are really on tax.
Speaker 2: So, you know, per your presentation, you you've indicated that 55% of the distribution paid in November will be non tax from federal for federal purposes.
So you know part of your presentation, you you've indicated that 55% of the distribution paid in November will.
It would be non tax from federal for federal purposes.
Speaker 2: I guess the real question is just is how does that trajectory sort of look over sort of a multi-year basis based off your forecast?
I guess the real question is is how does that trajectory sort of look over sort of a multi year basis based off your forecasts.
Speaker 4: They think about that in terms of future future. How does that 55% number change going forward? Correct.
Do you think about that.
In terms of future future, how does that 55% number change going forward.
Correct Yeah.
Speaker 7: Yeah, Blaine, are you on the call right now? I might defer it to you to answer that question. Yeah, I am and we used to, you know, we used to in previous years provide guidance going out further than just the quarter. But then when.
Yeah Blayne are you on the call right now I might defer to you to answer that question, Yeah I am.
We used to we used to in previous years provide guidance going out further than just the quarter, but then when commodity prices are.
Speaker 7: Commodity prices increased, we kind of made the change to do it quarter by quarter. So I would say really, you know, that number, that 55% number is really just going to ride with commodity prices. So if you see a run in oil and natural gas prices, that the return of capital number is going to go down. But there's really no other factors other than that, that's going to change that. So I would just.
<unk>, we kind of made the change to do it quarter by quarter. So I would say really that number that 55% number is really just going to ride with commodity prices. So if you see a road in oil and natural gas prices that the return of capital number is going to go down.
But theres really no other factors other than that that's going to change that so I would just add.
Speaker 7: The answer would be that it's going to change with commodity prices and move with that.
The answer would be that it's going to change with commodity prices and move with that so.
Speaker 2: I understand. I understand that you don't necessarily provide multi-year tax guidance anymore and I understand the volatility of commodity prices.
I understand I understand that you don't necessarily provide multiyear.
Tax guidance anymore, and I understand the volatility of commodity prices.
Speaker 2: but you are attacked like a C-Corp. Don't be, you've done your acquisition, so that might help sure.
But you you are tax like the C Corp done until you've done your acquisition. So that probably helps your taxes, probably next year and maybe a little bit after that.
Speaker 2: Taxes probably next year and maybe a little bit after that, but at what point it's just a sort of assuming if you did not do another acquisition, would you guys think that you would be a full.
At what point its just a sort of assuming if you did not do another acquisition, where do you guys think that you would be a full <unk>.
Speaker 4: taxpayer? Are we looking four to five years out? How do you kind of, if we just sort of look at the strip today? Yeah, John , it's a fair question. Given the dramatic growth we've had this year, candidly, that analysis that you're asking for is, it's challenging. We have to work with accounting firms and it takes time to come up with that. In fact, I think we're one of the only firms that's
Tax payer are we looking at four to five years out how do you kind of if we just sort of look at the strip today.
Yeah, John It's a it's a fair question given the dramatic growth. We've had this year candidly that analysis that you're asking for is.
It's it's it's challenging we have to work with accounting firms and it takes time to come up with that in fact, I think we're one of the only firms. That's it's ever provided multiyear tax guidance at least in our sector well, let us reflect on that.
Speaker 2: that's ever provided multi-year tax guidance, at least in our sector, let us reflect on that. Given the M&A growth that we've had this year, obviously the dynamics of the company have changed pretty meaningfully, but that might be something that's worth our time to revisit and point taken that additional disclosure is always great. So that's on us. Let us circle up internally and figure out next steps on providing additional guidance, if that's fair. That's fair. Thank you very much for taking our questions.
Given the M&A growth that we've had this year, obviously the dynamics of the company have changed pretty meaningfully.
That might be something it's worth our time to revisit and point point taken that additional disclosure is always great. So that's our that's what I want to circle up internally and figure out next steps on providing additional guidance if that's fair.
That's fair. Thank you very much for taking our questions Yeah my pleasure. Thanks.
Thank you. Our next question comes from the line of Trafford Lamar with Raymond James. Please proceed with your question.
Speaker 1: Thank you. Our next question comes from the line of Trafford Lamar with Raymond James.
Speaker 7: Hey guys, thanks for taking my questions. Hey, good morning. Yeah, good morning. And I guess the first one I have is leverage is now below 1x and continues to move directionally lower. Should we anticipate a set of 5% payout ratio moving higher over time or how should we think about that? How are you guys thinking about that?
Hey, guys. Thanks for taking my questions Hey, good morning.
Yeah. Good morning, I guess, the first one I have leverage is now below one actually continues to move Directionally, where should we anticipate 75% payout ratio moving higher over time or how should we think about that how are you guys thinking about that yeah. Excellent question always the best question for Hum for US is how do you.
Speaker 4: Yeah, excellent question. Always the best question for us is how do you manage the cash flows and how do we think about rewarding shareholders in the most efficient way?
Manage the cash flows and how do we think about rewarding shareholders in the most efficient way I would say that at the board level, we want to keep the the ratio the payout ratio consistent at 75%, we like paying down debt, particularly when we're paying 8% interest on it with 25% of our cash flow.
Speaker 4: I would say that at the board level, we want to keep the, the ratio, the payout ratio consistent at 75%.
Speaker 4: We like paying down debt, particularly when we're, you know, paying 8% interest on it with 25% of our cash flow. So I think you'll see us continue to do that.
I think you'll see us continue to do that.
Speaker 4: for quite some time. There'll be a point at which we want to start the routine, the press that we have. So it's bringing up additional capacity on the revolver, it just gives us more flexibility to do that.
For quite some time there'll be a point at which we want to start to redeem the.
The prefs that we have.
I would bring up additional capacity on the revolver just gives us more flexibility to do that.
Speaker 4: Um, I think that's where we are at this point, but it's something that we constantly evaluate and your point is very well taken, which is that, you know, the balance sheet is in great shape. There may be a point in the future where we decide to increase that payout ratio because it's just unduly conservative. We just don't feel at least at this point that we're at that that point yet matter Bob. Anything you guys want to add.
So I think that's where we are at this point, but it's something that we constantly evaluate and your point is very well taken which is that you know the balance sheet is in great shape. There may be a point in the future, where we decided to increase that payout ratio because it's just unduly conservative we just don't feel at least at this point that we're at that point, yet matter, Bob anything you guys want to add.
No no I'd say that you know are our borrowing base continues to increase you know we're going to have a fall Redetermination meeting later this month and we you know Ryan our $400 million on our credit facility, we expect that to go up.
Speaker 6: No, I'd say that our borrowing base continues to increase. We're going to have a fall redetermination meeting later this month, and right now we're at $400 million on our credit facility. We expect that to go up in Q4, which is adding additional liquidity. But as David says, right now the plan is to, over the next quarters, to continue to pay down the credit facility to be in a good position. Call it this time next year to redeem a big chunk of that Apollo Preferred.
Q4, which is adding additional liquidity, but as David says you know right now the plan is to over the next two quarters to continue to pay down the credit facility to be in a good position call. At this time. This time next year to redeem a big chunk of that Apollo preferred so.
Yeah.
Awesome, Thanks for that and kind of on a similar note regarding hedges, but somehow it kind of proportionately added.
Speaker 8: Awesome. Thanks for that. And kind of on a similar note regarding hedges, but some of y'all kind of proportionally added oil and gas hedges in 24 and 25 and got, you know, some higher swap price in the second half of 24. Similarly, with leverage, you know, kind of below that 1x number. How do y'all think about hedging moving forward?
Oil and gas hedges in 2025, and got them higher swap price.
Second half of 'twenty four.
Similarly, with leverage you know kind of below that one X number of kind of how do you all think about hedging going forward.
Speaker 4: We systematically do it. It's always a question of how do you think about hedging as a royalty company for us?
Where we we systematically do it yes it is.
As always the question of how how do you think about hedging as a royalty company for US. We look at you know we don't have to protect the capex budget like a driller does obviously, but for US we do have.
Speaker 4: We look at, you know, we don't have to protect a capex budget like a driller does, obviously, but for us, we do have, you know, the built in financial leverage. These are the debt. And so what we do is we take our debt. We divide it by enterprise value and we hedge that ratio on a rolling to your forward basis.
The Delta in financial leverage visa the debt and so what we do is we take our debt divided by enterprise value and we hedged that ratio on a rolling two year forward basis. So if I'm not mistaken I believe that's a 17% right now Matt I think for the next two years on average.
Speaker 4: So if I'm not mistaken, I believe that's at 17% right now, Matt. I think for the next two years on average.
That's correct Yep, Yeah. So I think we'll just continue to do that.
Speaker 4: Yeah, so I think we'll just continue to do that. Just keep a consistent strategy. We're not trying to predict movements in oil and gas prices. People historically get in a lot of trouble doing that. Perfect. Thanks, guys.
Just keep it keep a consistent strategy, we're not trying to predict movements in oil and gas prices people historically getting a lot of trouble doing that so.
Perfect. Thanks, guys.
You.
Speaker 1: Thank you. Ladies and gentlemen, as your mind, or if you'd like to join the question to, please press star one on your telephone keypad. Our next question comes from a line of Tim Resvin with Keybank Capital Markets. Please proceed with your question.
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Our next question comes from the line of Tim <unk> with Keybanc capital markets. Please proceed with your question.
Speaker 2: Good morning everybody and congratulations on the Texas Rangers last night. Yeah thanks, that was a great game.
Hey, good morning, everybody and congratulations on the Texas Rangers lifestyle, Yeah. So that was a great game.
It was good to hear.
Derek actually took both my questions. So I was hoping to push a little more because I think they're important topics.
Speaker 2: Derek actually took both my questions, so I was open to push a little more, because I think they're important topics. I'm the M&A market.
On the M&A market.
Speaker 2: You see some pretty attractive debt financing set up by peers of yours.
You've seen some pretty attractive debt financing set up by by peers of yours.
Speaker 9: And I'd imagine that sellers notice that as well. So.
Imagine that sellers noticed that as well so.
Speaker 9: You know, we saw, it looked like a log jam broke on M&A this year. And now that there's more financing available, maybe than people thought in the year, you know, at the start of the year.
We saw it looks like a logjam broke on M&A. This year and now that there is more financing available maybe than people thought in the year.
It started the year.
Speaker 9: You know, I was trying to understand sort of what's the latest, you know, kind of.
No.
I guess, just trying understand sort of what what's the latest you know kind of.
Speaker 9: How do you think about kind of the near term outlook overall for the sector?
How do you think about kind of the near term outlook overall for the sector.
Speaker 4: Man, it's a really great question. That's one of the most fun things about our business is looking at the M&A environment. And it's been really fun to watch it evolve since we started doing this, you know, well, 25 years ago, but in the public context and gearing up for public the last 10 years, we continue to be surprised by just the sheer volume of private sellers that are out there. There are groups out there that have $100 million packages.
Man, it's a really great question and that's one of the most fun things about our business just looking at the M&A environment and it's been really fun to watch it evolve since we started doing this you know well 25 years ago, but in a public context and gearing up for public. The last 10 years, we continue to be surprised by just the sheer volume of.
Private sellers that are out there there are groups out there that have $100 million packages.
Speaker 4: that we just get introduced to on a weekly, if not monthly basis, they didn't know previously. I mean, there's just an incredible consolidation effort going out there, going on out there. And it's really just a reflection of just how big the industry is. I mean, it's over half a trillion dollars in size and it's just massively fragmented. So we expect that trend, if you looked historically, and if we had like a bar chart of it, it just continues to always go up. And frankly, it always surprises us. We always end up being a little bit conservative on how much M&A volume there is out there.
Do we just get introduced to you on a weekly if not monthly basis. They didn't know previously I mean, there's there's just an incredible consolidation effort going out there going on out there and it's really just a reflection of just how big the industry is I can see how over half a trillion dollars in size and it's just massively fragmented. So we expect that trend if you looked historically.
And if we have like a bar chart of it. It just continues to always go up and frankly, it always surprises, we always end up being a little bit conservative on how much M&A volume there is out there our view so.
Speaker 4: Our view, so I would say that we continue to expect robust M&A activity. Our view is always to be just highly selective on what we buy. We try to sit around, look at the landscape, and say, what's the best possible asset out there that we can get at a price that maximizes returns to our shareholder?
So I would say that we continue to expect robust M&A activity. Our view is always to be highly selective in what we buy we try to sit around and look at the landscape and say, what's the best possible asset out there that we can get at a price that.
Maximizes returns to our shareholders and we try to focus in on those opportunities and there's not a lot of them every year you brought up the Rangers. We're just waiting for the right pitch and we want to swing at the right opportunities now.
Speaker 4: And we try to focus in on those opportunities and there's not a lot of them every year. You know, you brought up the Rangers. We're just waiting for the right pitch and we want to swing at the right opportunity. So...
Speaker 4: I agree with you on the deaf and dancing angle. I don't think that you're looking at an environment where there's a very small number of public buyers and there are hundreds of thousands of private buyers. And so I think that sets up a very favorable...
Agree with you on the debt financing angle I don't think that.
No you're looking at an environment, where there's a very small number of public buyers and there are hundreds if not thousands of private buyers and so I think that sets up a very favorable.
Dynamics for us as a buyer as a public buyer I think that in case. There is the private folks have gotten a little bit disappointed by the ability to pay of the publics and I think I've kind of forgotten in some cases that.
Speaker 4: dynamics for us as a buyer, as a public buyer. I think that in some cases the private folks have gotten a little bit disappointed by the ability to pay of the publics, and I think have kind of forgotten in some cases that, you know, the public valuations where we trade should trickle down to what the private valuations are. And so for us, I think, and you've seen this consistently, there is a strange dynamic going on where you're seeing some private folks
The public valuations, where we trade should trickle down to what the private valuations are and and so for US I think and you've seen US consistently there is a strange dynamic going on where you're seeing some private bulks raise money and outbid public competitors and that's just kind of the opposite a once you would expect so maybe at some.
Speaker 4: raise money and out bid public competitors, and that's just kind of the opposite of what you would expect. So maybe at some point that changes, but focusing on some of these larger packages where there is a limited exit opportunity seems to be working for our self and our peers, not just us, this seems to be working for everybody. So I think we'll just continue to do more of the same in this environment. Bob or Matt, anything you guys wanna add?
That changes, but focusing on some of these larger packages, where there is a limited exit opportunity seems to be working for ourselves and our peers not just us who seem to be working for everybody. So I think we'll just continue to do more of the same in this environment Barbara Matt anything you guys want to add.
No that's a great answer.
Okay. Okay.
Speaker 9: Okay, good. That's great. I appreciate that context. And then back to the, you know, sort of the maintenance activity level.
That's great I appreciate that context, and then yeah.
Back to the.
Sort of the the maintenance activity levels.
Speaker 9: I think you know, it's 5.4 net ducks, 3.9 net permitted locations. You have now a much bigger exposure to sort of the midcon. I'm just curious how any insight on, you know, visibility on...
I think you know at five four net DOCSIS 3.9, net permitted locations you have now a much bigger exposure to sort of the mid con, but I'm, just curious kind of any any insight on.
You know visibility on converting.
Speaker 9: those permits to PDPs and you mentioned strong execution in the third quarter. Just had that's been trending and how you think about that now that you have a lot more exposure to the mid-com than you had earlier in the year.
Those permits to P. D piece and you mentioned strong execution in the third quarter, just how that's been trending and it.
How are you thinking about that now that you have a lot more exposure to the mid continent had earlier in the year. Yeah. That's it that's a great question I'm not sure we have enough data yet to really to really give you a full answer on it the.
Speaker 4: Yeah, that's a great question. I'm not sure we have enough data yet to really give you a full answer on the most recently acquired VidCon asset in terms of how those permits have converted to
The most recently acquired mid Con asset in terms of how those permits have converted to it.
Speaker 4: to real development. I would say on average permits convert across the portfolio, Bob, what would you say, 12 days?
So real development I would say on average permits convert across the portfolio, Bob What would you say 12 to 18 months.
Speaker 4: Yeah, usually within that, but yes. Yep. Yeah, and we love our mid-con position. In fact, we think that was one of the best vies we've ever made, frankly, in terms of bang for your buck and in terms of what we've been able to buy in terms of hydrocarbon and place, well, of the purchase price.
Yeah, usually within that but yes, yep, yeah, and and we love our mid contract position. In fact, we think that was one of the best buys we've ever made frankly in terms of Bang for your Bakken and yeah in terms of what we've been able to buy in terms of hydrocarbon in place relative to purchase price.
Speaker 8: Good question. Let us give you a more full answer of the next quarter or two in terms of how we're seeing activity there. But I think just a little bit too early to probably give you a read on what's going on there in terms of permit conversions. So. Okay.
Good question, let us let us give you a more fulsome answer over the next quarter or two in terms of how we're seeing activity there.
Just a little bit too early to probably give you a read on what's going on there in terms of the permanent conversions. So.
Okay. That's fair thanks.
Thank you.
Speaker 1: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to management for any final
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to management for any final comments.
Yeah, 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.
Speaker 3: Yeah, 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.
Yeah.
Speaker 1: Thank you. You may now disconnect your lines. Thank you for your participation and interest.
Thank you you may now disconnect your lines. Thank you for your participation and interest.
Yeah.