Kimbell Royalty Partners, LP
Q2 2023 Earnings Call Transcript

Published: 2 Aug 2023

[Operator:]

Greetings, and welcome to the Kimbell Royalty Partners Second Quarter Earnings Conference Call. [Operator Instructions] 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.

[Rick Black:]

Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the second quarter 2023 ended June 30, 2023. This call is also being webcast and can be accessed through the audio link on the Events & Presentations page of the IR section of kimbellrp.com. Information recorded on this call speaks only as of today, August 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. 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 made pursuant to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as reported in today's call, which by their nature, are uncertain and outside of the company's control. The actual results may differ materially. Please refer to today's earnings press release for our disclosures 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. Kimbell assumes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Bob Ravnaas, Kimbell Realty Partners' Chairman and Chief Executive Officer. Bob?

[Bob Ravnaas:]

Thank you, Rick, and good morning, everyone. We appreciate you joining us on the call this morning. With me today are several members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our Chief Operating Officer; and BlayneRhynsburger, our Controller. We are very pleased with another record quarter and continue to build our momentum from Q1 and the recently closed MB Minerals Royalty acquisition. Notably, our Q2 production mix materially shifted towards oil, which represented 33% on a 6

[Davis Ravnaas:]

Thanks, Bob, and good morning, everyone. Kimbell performed very well in the second quarter and generated record run rate daily production surpassing a new milestone for the company of over 18,000 BOE per day on a 6

[Operator:]

[Operator Instructions] Our first question comes from the line of Derrick Whitfield with Stifel.

[Derrick Whitfield:]

With my first question, I wanted to focus on your growth trajectory. Based on your improving net DUC and permit inventory and your strong Q2 oil production performance, how do you see the trajectory of volumes over the next 6 to 12 months?

[Davis Ravnaas:]

Always hard to answer that question, Derrick, and we try to be conservative with our guidance. You're correct that the ratio of net DUCs to permits 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 increase and improve. We don't like to take 3 to 6 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 you're certainly correct that we may be too conservative in how we're thinking about this. Matt or Andrew, Bob anybody would like to take.

[Matthew Daly:]

Yes. I would just say that, that's correct. I mean, the 6.86 net DUCs and permits is well above the 4.9 to stay flat. I mean oil prices are good, so you may start to see some accelerated completions at DUCs in the year-end and gas as we get into Q4 with gas curve and contango prices were 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 and Q4, which has a midpoint of production of 19,000 BOE per day.

[Derrick Whitfield:]

Great. And then looking at the gas side of the ledger, your Haynesville rig activity has been particularly resilient despite lower gas prices. What do you guys attribute to that resiliency acreage quality, public company exposure, some combination of the 2? Any thoughts you could share?

[Davis Ravnaas:]

Yes. Great question. We're -- I mean, frankly, we were positively surprised -- I wouldn't use the word surprise. But we're pleased to 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 kind of hit on it with your first point. That legacy position that we picked up from Haymaker back in 2018 is just an incredible core Haynesville asset. And we would probably argue that our production should and will continue to be more resilient than other folks. I think 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 balance spot with a lower PDP decline, right, but still a healthy amount of activity. We got asked that question yesterday on a call, and the mix between privates and publics 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 privates, except in so far to say as we have a healthy mix. They're all, for the most part, very good operators, and it's just a great asset. I mean it's just an asset that's kind of corridors business that just continues to perform. And we've got years and years of inventory there, which is obviously a nice and very exciting thing. Anybody else want to chip on that?

[Matthew Daly:]

I mean, in Q1, as you pointed out, we had a pretty large increase in the rig count in the Haynesville increase from -- by 6 rigs in Q1, even with relatively low gas prices. And then Q2, the rig count went down slightly in the Haynesville. But as Davis said, I mean, the operating activity remains robust there, mainly because the economics are so strong. And a lot of these folks are able to hedge into, again, the contango curve, which has gas in the mid-3s going into 4s in the future, so.

[Derrick Whitfield:]

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 the chapter fully closed on that pursuit? Or do you think there's still an opportunity longer term to pursue a symbiotic E&P and mineral relationship?

[Davis Ravnaas:]

Yes, great question. Thank you for asking that. No, the idea is not yet. The idea in its form, which was the stack form under Tiger that has concluded, but we still are very interested in building our own operating company to work alongside Kimbell or partnering with another operating company just to realize, well, really to address your first question, which is lack of developmental insight. It would just be wonderful to have a relationship with an operator where we can have more transparency on development cadence but then also joint bid acquisitions that either have high net revenue interest where an override could be carved out appropriately and/or a situation where a working interest partner actually owns the mineral ownership and also owns the working interest. So we still think the idea has a lot of merit and it's something that we would love to do. So I wouldn't put the final nail on the coffin on that by any means.

[Operator:]

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

[Trafford Lamar:]

I kind of wanted to piggyback off at Derrick's rig question. Obviously, you all saw a very smaller decrease relatively to the quarter-over-quarter relatively to the U.S. total. And I want to ask on Permian specifically about kind of how rigs fell quarter-over-quarter and if you all saw similar levels from 1Q to 2Q there?

[Matthew Daly:]

Yes. I'll take that. This is Matt. I mean, the Permian rig count went up by 5 rigs quarter-over-quarter. We had 50 rigs out of the 90 were in the Permian Basin. As you're 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 quarter-over-quarter. We did see a drop of 4 in the Haynesville not surprisingly due to low gas prices. But in the Permian specifically, the major operators, ExxonMobil has 9 rigs, Oxy has 5 rigs, Diamondback has 4 rigs. Overall, on our rig count, we're all basins, 63% of those are public companies. During the pandemic, it was actually 63% -- 65% private companies. And now as 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 it just shows the resilience and the quality of our acreage.

[Trafford Lamar:]

Great. I appreciate the color on that. And guys, slightly off topic. The one talking point as of late has been partnership to C-corp conversion, and I'd love to get shells pops in this specifically from potential index exposure standpoint.

[Davis Ravnaas:]

Yes. So we converted to a C-corp, as you know, for tax purposes a couple of years ago. I think that's been a positive development. I would always consider anything that makes sense for our company and our unitholders, 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 frankly, are just really good success over the last several years on the M&A front. We've made a number of acquisitions that have really helped the company and grown us exponentially. So happy with our structure, but certainly aware of that phenomenon.

[Operator:]

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

[Bob Ravnaas:]

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.

[Operator:]

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.