U.S. Markets closed

Edited Transcript of KRP.N earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Kimbell Royalty Partners LP Earnings Call

FORT WORTH Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Kimbell Royalty Partners LP earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Matthew S. Daly

Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC

* R. Blayne Rhynsburger

Kimbell Royalty Partners, LP - Controller of Kimbell Royalty GP LLC

* Robert Davis Ravnaas

Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC

* Robert Dean Ravnaas

Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC

================================================================================

Conference Call Participants

================================================================================

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* John Christopher Freeman

Raymond James & Associates, Inc., Research Division - Research Analyst

* Timothy D. Howard

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Wei Jiang

Crédit Suisse AG, Research Division - Research Analyst

* Welles Westfeldt Fitzpatrick

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Rick Black

Dennard Lascar Associates, LLC - EVP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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. Mr. Black, you may begin.

--------------------------------------------------------------------------------

Rick Black, Dennard Lascar Associates, LLC - EVP [2]

--------------------------------------------------------------------------------

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 2019. 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 8, 2019. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay.

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 provisions of the Private Securities Litigation Reform Act of 1995. 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 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.

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 press 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 Royalty Partners' Chairman and Chief Executive Officer. Bob?

--------------------------------------------------------------------------------

Robert Dean Ravnaas, Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC [3]

--------------------------------------------------------------------------------

Thank you, Rick, and good morning, everyone. I'm here with several other members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our Chief Operating Officer; and Blayne Rhynsburger, our Controller.

I would like to begin by discussing our performance in the second quarter, followed by our expectations going forward. Then I'll ask Davis to cover our financial performance in more detail. After that, we'll take your questions.

We are very pleased with the cash flow generation, production stability and growth potential across our asset base, especially in a challenging time for many exploration and production companies operating in the U.S. Our rig count remained flat between Q1 and Q2 at 89 rigs and our market share of the entire Lower 48 drilling fleet increased to 9.5% from 9.1%, a testament to the quality of our acreage and operators.

For the quarter, we achieved record high consolidated adjusted EBITDA of $21.6 million, up from $16.1 million in the first quarter and up from $7.7 million in the second quarter last year. Oil, natural gas and NGL revenues were $27.9 million, up 22% sequentially, primarily due to a full quarter of Phillips revenue, improved differentials and the receipt of over $1 million in lease bonuses.

Second quarter average daily production of 11,807 Boe per day was approximately flat compared to the first quarter and was composed of approximately 37% from liquids, 25% from oil and 12% from NGLs and 63% from natural gas on a 6:1 basis. And most importantly, for our investors, our second quarter cash distribution of $0.39 per common unit was a 5.4% increase sequentially. This increase implies an annualized yield of approximately 11%.

Our total distributions paid since our IPO just 2 years ago is $3.66 per common unit, which is 20% of our IPO price. And we expect substantially all of the Q1 and Q2 2019 distributions to common unitholders will not be taxable dividend income and instead should generally constitute nontaxable reductions to the tax basis. This tax advantage structure to our unitholders is expected to remain in place for many years into the future. And I refer our investors to the tax guidance press release that we issued on May 13, 2019 for further details.

So from our view of the business and coming off an exceptional first quarter where we experienced 2.4% sequential production growth and 9.6% annualized production growth, second quarter results met our expectations. It is important to note that over the last 12 months, we have closed approximately $700 million in acquisitions, having completed the full integration of our most recent acquisition of the Phillips assets from EnCap in the second quarter.

The Phillips assets are performing very well, above our expectations, and we are projecting many years of additional development across this newly acquired mineral position. As of the end of the quarter, we now have royalty interest in over 92,000 wells with 89 rigs drilling on our acreage at no cost to us. In addition, we have some of the strongest and most efficient operators drilling on our acreage, which includes premier names, such as ExxonMobil, Oxidental Petroleum, Pioneer, Apache and EOG, to name a few.

To reiterate our business strategy and model, we are a pure mineral and royalty company with no working interest. We have no lease operating costs or capital expenditures. So key drivers of our distribution payouts come from production volume, fluctuations in commodity prices and the efficient integration of our acquisitions. We continue to execute on our proven growth strategy vis-à-vis organic growth and accretive acquisitions. And we maintain a broad, stable and diverse portfolio of royalty assets across all the major basins in the Lower 48, featuring organic growth from our recently acquired assets, coupled with the stability in the industry's lowest PDP decline rate of 12%. As we strategically add production through acquisitions, we also grow PDP reserves organically year-over-year.

To drive success and sustainability in this industry space, we believe that the optimal business model is a shallow PDP decline curve, coupled with the growth potential from unconventional drilling in the lowest cost basins from leading operators. We firmly believe that these elements of our strategy are extremely important differentiators for us compared to other companies. In addition, while production volumes can ebb and flow across the country, our broad footprint significantly benefits us. For example, we may see one basin drop off for a period of time but see increases in another basin as capital is reallocated to it, which provides us with a natural business model hedge.

As we move forward, we continue to actively evaluate a number of acquisition opportunities nationwide. We remain focused on assembling a high-quality, low PDP decline and diversified royalty portfolio that generates substantial cash flow and growth potential with no capital outlays. We will remain patient and highly selective as we seek diversified, high-quality acquisition opportunities that are not only immediately accretive to our unitholders but that also enhance the long-term value of the overall portfolio.

Lastly, we'd like to point out that we do not know of another company in the upstream or mineral and royalty market with a comparable PDP decline rate to ours. While the market seems to still be trying to understand our company and our sector, this is an extremely important and core understanding of our model. We started this company with this core belief: cash flow growth must, in our view, be higher than the PDP decline. I believe the market will grow to understand this and that we will be rewarded for this primary aspect of our business model.

I've been a petroleum engineer for over 40 years and have spent my entire carrier working with decline curves. The investor community needs to understand that an oil and gas business is not sustainable and lesser organic production growth within cash flow is greater than their PDP decline. Many of our peers have PDP declines of over 30% to 40%, which questions the sustainability of their business models, particularly in an environment where access to equity capital for drilling does not exist.

Again, we are very pleased with the results in the first half of 2019, and we are reaffirming our guidance for 2019.

Now I'll turn you over to Davis.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [4]

--------------------------------------------------------------------------------

Thanks, Bob, and good morning, everyone.

Total second quarter 2019 revenues increased 78% from the first quarter of 2019 to a new record of $31.9 million. Second quarter 2019 consolidated adjusted EBITDA was $21.6 million, also a new record and up 34% from Q1 2019.

Second quarter 2019 net loss attributable to common units was $11.8 million compared to a net income attributable to common units of $1.4 million in the second quarter last year due to a $28.1 million noncash impairment. This noncash accounting impairment expense is primarily attributable to the decline in the 12-month average price of oil and natural gas prices and does not impact our operations or our ability to pay distributions or fund acquisitions in the future or anything else.

General and administrative expenses were $6.2 million in Q2 2019, of which $4.1 million was cash G&A expense or $3.82 per Boe, down from $3.95 per Boe in Q1 2019. Noncash G&A in Q2 2019 was $2.1 million or $1.97 per Boe. Excluding the effect of onetime severance costs incurred in Q2 2019, cash G&A per Boe was $3.71 and noncash G&A per Boe was $1.67.

Cash available for distribution attributable to the common units was $9.1 million or $0.39 per common unit. You will find a reconciliation of both adjusted EBITDA and cash available for distribution at the end of our news release.

As Bob mentioned, our second quarter cash distribution was $0.39 per common unit, a 5.4% increase compared to the first quarter of 2019. This represents a highly compelling approximately 11% annualized yield. And because substantially all of this distribution will not be taxable dividend income and instead be a reduction in tax basis, the pretax equivalent yield is even higher. Assuming a 37% effective tax rate, the pretax equivalent yield is closer to 17%.

In addition, as announced on our May 13, 2019 press release, we expect that for the next 7 years, 2019 to 2025, the company will pay no material federal income taxes. For the next 4 years, 2019 to 2022, substantially all distributions paid to common unitholders will not be taxable dividend income. And for 2023 through 2025, less than 25% of distributions paid to common unitholders will be taxable dividend income. This favorable tax treatment significantly enhances the after-tax returns for the distributions paid to our common unitholders for years to come.

Turning now to realized pricing in the second quarter. Average realized price per barrel for oil was $57.55, natural gas per Mcf was $2.44, NGLs per barrel was $19.55 and combined was $25.98 per Boe. We experienced a significant improvement in differentials for both oil and natural gas in the quarter, primarily as a result of infrastructure developments in the Permian Basin.

As of 06/30/2019, our hedges were approximately 20% of our daily oil and natural gas production for the next 2 years. We have provided a table at the end of our press release with additional detail on our hedges.

Looking now at the balance sheet. On May 28, 2019, our borrowing base has increased from $200 million to $300 million. At June 30, we had cash on hand of $16.9 million, we had $87.3 million outstanding, with $212.7 million under our revolving credit facility in terms of liquidity. As we've indicated before, our plan is to use the revolver to provide short-term financing for acquisitions, and our total debt to adjusted EBITDA ratio is a conservative 1.0x.

Before turning the call over for questions, I'd like to provide some overview comments about the mineral space. As you've seen, we've maintained a very active investor engagement schedule this year by attending several conferences as well as meeting with many investors. We have also welcomed additional sell-side coverage on our company. Q2 was a profoundly differentiating quarter between the mineral names and the working interest E&Ps. Kimbell and our peers in the mineral space continue to do relatively well, generating robust cash flow and returns for their shareholders. In contrast, many E&Ps this quarter experienced significant financial and operational distress and modest, if any, free cash flow. We believe that more capital will soon find its way out of marginally successful working interest E&Ps and into the mineral space as it continues to grow and increase its liquidity in the coming quarters and years. This, in turn, will increase the attention from generalist investors searching for yield, particularly at 11% yield that is tax free.

Just to provide a little more detail on regional production trends by basin, the Permian, Mid-Con, Appalachia and Bakken were roughly flat quarter-over-quarter. And the Eagle Ford experienced a decline from strong Q1 production that was offset by significant activity in the Haynesville. As always, basin-specific performance within our portfolio will vary from quarter-to-quarter, and our strength is in our diversification throughout basins, which helps to smooth our production trends over time rather than creating significant volatility from quarter-to-quarter. We believe we have a unique opportunity to continue to lead the way, along with our peers, in growing the public royalty sector. And with our proven business model and growth strategy, no required capital spending plan at a very robust distribution yield of 11%, we offer a compelling high-yield and tax-advantaged investment to our common unitholders.

In addition, Kimbell offers one of the largest diversified royalty portfolios in the mineral space, a best-in-class PDP decline rate and continued record-setting performance. This proven strategy enhances long-term value and reduces risk for our unitholders.

Despite a volatile time in the energy industry and in the financial markets at large, our sector and our company remain undervalued. Compared to our peer group of mineral and royalty companies, we have been only 1 of 2 companies with positive production growth year-to-date, and we have distributed the second largest combined dividend amount year-to-date. So while our company has had great performance so far this year, our stock has certainly not reflected it. In fact, as unbelievable as it is to us, our stock currently is being traded around its lowest point since we went public.

In addition, we continue to expect that investors will increasingly focus on PDP declines for oil and gas companies, which for most are typically in excess of 25% declines or more. We significantly stand out with an average PDP decline rate of only 12%, which is the best in our sector. As Bob mentioned, a core component to our business model is maintaining a low PDP decline rate while generating cash flow in excess of that rate. Frankly, we are surprised this model hasn't been embraced by the overall E&P sector and that the market does not seem to fully recognize our competitive advantage.

Make no mistake, it is a very tough time for the oil and gas market overall. The XOP Index of oil and gas producers is now at its lowest point since its inception in 2006, lower than even the 2008 financial crisis level. But we expect that our company, Kimbell, will operationally outperform in an environment like this. We have deliberately built the company so that it has the lowest PDP decline rate of 12%, not only of any mineral company, but of any upstream company we are aware of. We have 89 rigs operating on our properties, nearly all of which are drilling horizontal wells and growing production. We have a very strong balance sheet with debt-to-EBITDA of only 1x. We believe our dividend yield, which is over 11% and nontaxable, offers an outstanding risk-adjusted return and presents investors with the unique opportunity to invest in the U.S. oil and gas market at its lowest point in the last decade.

We are well equipped to weather this storm and believe the coming months will present the company with attractive acquisition opportunities and that we will come out of this cyclical downturn at an even stronger position than we are today.

With that, operator, we are now ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from John Freeman, Raymond James.

--------------------------------------------------------------------------------

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Congrats again on getting this creative joint venture structure done to pursue opportunities on the micro market side. Can you provide any additional details on kind of how sort of the structure and this kind of partnership works in terms of -- obviously, you've committed the $15 million, but this partner, do they get some sort of a -- just from a high-level perspective, they get some sort of a fee when they bring you a deal? Like just sort of how it works.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [3]

--------------------------------------------------------------------------------

Yes. Absolutely, John. Thank you for asking. It's -- frankly, it's one of the things we're most excited about from our company's perspective. I think just one kind of macro comment on it, to the extent that we can finance royalty purchasers or aggregators directly rather than watching private equity folks back these guys and then paying a premium to acquire the assets, that would be our preference. We think that strategic combinations like this or partnerships make a whole lot of sense and just kind of cut the middleman out, so to speak. So in terms of the arrangement, we do pay them a small upfront fee, which is capitalized, and then they have to return that cost back to us, plus a healthy return that's consistent with kind of private equity returns. And then if they achieve certain return thresholds on the asset, they get a back end that's consistent with how PE works. So rather than getting more specific, I'll just say it's basically a traditional private equity arrangement with an upfront fee with a back end, like a PE model. But again, kind of cutting out the middleman, instead of having 2 layers of promote, there's just one now. So...

--------------------------------------------------------------------------------

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

That makes sense. And then the partnership you have, does -- again, just from a high-level perspective, does this partner tend to focus on a certain area or region? Or do they kind of pursue kind of a broad-based approach like you all do?

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [5]

--------------------------------------------------------------------------------

Yes. Thanks for asking that, too. So that was the toughest part about doing this. We've been trying to establish a ground game and find a partner like this for a long time. And as you probably know, John, there -- I mean, look, in the Fort Worth Club building that we're in today, there's probably 50 guys right now downstairs working out that buy minerals. And the challenge is that they typically focus on one county or just one little area within a county and don't have kind of a Rolodex of relationships nationwide. So what's unique about this partner that we found, and we've known them forever, it's just -- we're just kind of finding the right opportunity to partner with them, is that they've bought successfully in every major basin in the U.S. And so we've sat down with them and really vetted their track record over the last decade or so and came away unbelievably impressed and have set up certain parameters under which they're allowed to transact.

So it's not -- just -- I just want to be clear, it's not like we're just giving these guys $15 million and they're just going out and doing whatever they want to do, they have very strict parameters where we have weighting on upside locations, we have assumptions within every basin about spacing, we have operator limitations in terms of who they're focusing on, concentration limitations. So we put this together really over the course of about the last 6 months. And we're starting out conservatively with $15 million, but we might expand that as we kind of look back at the success of the results. But the PV values that they're able to transact at would really make -- frankly, just make you blush and it's something that's very attractive to us in an increasingly competitive royalty acquisition market.

--------------------------------------------------------------------------------

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Those details are really helpful. And if I was allowed to just sneak one extra question in on the lease bonus, you had a very nice contribution from lease bonuses this quarter. And just quite frankly, we're seeing kind of the opposite trend with others just given the general macro environment. Just any additional color on that.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [7]

--------------------------------------------------------------------------------

Yes. It's funny, I would actually say, if anything, it's kind of -- I mean, this was a big quarter for lease bonus at $1.5 million. But I mean, so far, this quarter, we have a good amount...

--------------------------------------------------------------------------------

Robert Dean Ravnaas, Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC [8]

--------------------------------------------------------------------------------

At least, $500,000.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [9]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [10]

--------------------------------------------------------------------------------

Yes. Hey, John, this is Matt Daly. Just some more detail on the lease bonuses, I mean, call it $200,000 in the Eagle Ford from some of the Haymaker properties, we had about $140,000 in the Marcellus from the Haymaker properties. The biggest allocation was the Mid-Con from Haymaker again, $700,000 in Stephens County in the SCOOP area, a private operator. We had some legacy properties in the Permian lease bonus area. So pretty much diversified across our basins.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [11]

--------------------------------------------------------------------------------

Yes. And it's something we haven't talked about a lot historically, John. Because, as you know, when we went public, we had more of the mature asset base that was all HBP-ed. And now that we've acquired Haymaker and Phillips, we do have kind of a component to our revenue story going forward that will be lease bonus-based. And it's something that, for obvious reason, doesn't really be -- we're not really getting credit for it, so to speak. So there you are.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question is from Jason Wangler, Imperial Capital.

--------------------------------------------------------------------------------

Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [13]

--------------------------------------------------------------------------------

I actually wanted to follow up on that lease bonus question because I was kind of curious on your thoughts with the commentary that you guys mentioned earlier in seeing a lot of rigs being dropped and things, it doesn't seem like it's really impacting you guys as much. But do you think that's going to be a bigger part of that -- of the business as folks try to keep leases? Or how do you kind of see that going as you've got some uncertainty headed in the second half of the year?

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [14]

--------------------------------------------------------------------------------

Jason, I'd hate to extrapolate too much based on a couple of quarters of lease bonus success. I think it's going to be more material for us going forward than it has been in the past. But I would hate to make any sort of forecast on lease activity just because it's so sporadic.

--------------------------------------------------------------------------------

Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [15]

--------------------------------------------------------------------------------

Sure. That's helpful. And then, I mean, you guys talked about the ground game piece in this $15 million commitment. I mean how far into that are you? How much has been, I guess, spent? And how do you kind of see that playing out? And then maybe just some commentary on some larger M&A kind of what you're seeing because of what we're seeing in the market would be helpful.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [16]

--------------------------------------------------------------------------------

Sure. Sure. Good question. So of the $15 million, I think, they've drawn down $2 million to $3 million of it so far. We've funded $2 million to $3 million, so good progress already. We're only like a month into this now. And we've got to look under the hood on what they bought and have been very impressed.

And then on larger M&A opportunities, we're looking at really kind of a record amount of deal flow. I know we say that every quarter, but it's just amazing. This space is just exploding. A lot of it's PE guys looking to exit, and we've touched on that multiple times in the past. But also just kind of some interesting M&A discussions we're having with other companies that, frankly, working interest companies or companies in other sectors that just have minerals within their portfolio and aren't getting credit for it, so trying to structure something creative with them where we can do an accretive deal that highlights the value of the minerals they have in their portfolio. So we're trying to be creative. And again, I've said this the last couple of quarters that I'd be disappointed if we didn't announce another large M&A deal by the end of the year that's financed with units. So...

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question is from Welles Fitzpatrick, SunTrust.

--------------------------------------------------------------------------------

Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [18]

--------------------------------------------------------------------------------

Can you give a breakout on the lease bonuses this quarter? Is essentially all of that new leases? Or is some of that renewals? And if it is, could you break that out?

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [19]

--------------------------------------------------------------------------------

Yes. Yes. They're going to be almost entirely on new leases, new activity, not renewals.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [20]

--------------------------------------------------------------------------------

The biggest one was actually a working interest conversion, right?

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [21]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [22]

--------------------------------------------------------------------------------

So we have a bunch of -- well, I'm not sure if you're familiar with this. But in many cases, if you go -- if you're given the opportunity to drill, you can deny it and then you back into a royalty payment after, I think, a payout typically of what 3x or something to the operator. So we have a number of -- and that's a legacy -- that's a Haymaker thing that's been going on frankly forever with those guys. So that's one component too within lease bonuses or these working interest conversions, but they're mostly new leases otherwise.

--------------------------------------------------------------------------------

Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [23]

--------------------------------------------------------------------------------

Okay. Okay. Perfect. That makes sense. And then can you talk to what you're seeing in the markets for mineral prices? I mean it's still holding up pretty well. Or are people anticipating maybe more of a drop in the rig count as these E&Ps move to -- attempt to be free cash flow positive as you noted in your comments?

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [24]

--------------------------------------------------------------------------------

Yes. Well, first of all, thank you for picking up coverage on us, excited that you did, and we appreciate that. And as you kind of get to know us a little bit better, I think one thing we'd say is that the commentary you're going to hear from some of our peers about royalty acquisitions really doesn't apply to us because we don't buy in the same way that any of them do. We really don't look at dollar per acre figures. And so while I agree with you, it's almost ridiculous. In the Delaware Basin, if you're paying $20,000 in that royalty acre a year ago when oil was over $60, that figure doesn't change when oil drops down to the $40s. And so we've never liked that approach. It seems to be kind of a simplistic land-focused aggregation strategy that doesn't look at engineering and geology and just math, which is what we do. And so when we transact, it's typically on -- or it's always on next 12 months forecasted cash flow assuming very reasonable development pace and DUC completion schedules and the like.

So for us, the transaction multiples are always -- the price that we're willing to pay is going to change up and down with commodity price movements, whereas for most of our peers it will not. So that's why I think that -- again, that's why I think we've been successful in the past. And we're just not interested in playing that game of guaranteeing our investors 80% year-over-year production growth forever because it's just not realistic. So we're just different in that respect. So...

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question is from Betty Jiang, Crédit Suisse.

--------------------------------------------------------------------------------

Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Can you give an update on the unconventional assets in the portfolio? How have they performed relative to expectations? The rig count, that seems to be holding pretty flat. So just wondering the momentum there is showing up in production and cash flow.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [27]

--------------------------------------------------------------------------------

Sure. Sure. So we actually just did a look back on how performance has trended on our Phillips and Haymaker assets from when we underwrote them to present, and they're outperforming together by about 11% since we underwrote the acquisition. So I think that's a -- we always like to see that, that we've been conservative in our underwriting forecast that they tend to outperform. General trends, I'd say that activity seems to be kind of bouncing around from basin to basin. Last quarter was very strong for us in the Eagle Ford. This quarter, it was not as strong. It was down from last quarter, but the Haynesville was up. So over time, we do expect that unconventional volumes are going to continue to increase. They've more than offset the PDP decline on our assets year-to-date, Bob or Matt, any other...

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [28]

--------------------------------------------------------------------------------

Betty, this is Matt. One comment on the Eagle Ford. We had about 165 Boe per day temporarily shut in as they fracked wells nearby. So pro forma for that, we're taking the production up to 11,972, which would have been an all-time new record. So a temporary shutdown -- shut and hopefully this will come back online in Q3.

We also have 3 new large net revenue interest wells coming online in the Haynesville right now, and they peaked out -- probably going to peak out sometime in Q3 as well. So they're 10.5% net revenue interest wells, which is very big for us.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [29]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Dean Ravnaas, Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC [30]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Great. No, that's helpful. And then just that $165 million is a net number, net to you guys?

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [32]

--------------------------------------------------------------------------------

Net to us, yes.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [33]

--------------------------------------------------------------------------------

Yes. That was Carnes and what was the other kind of...

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [34]

--------------------------------------------------------------------------------

South.

--------------------------------------------------------------------------------

Robert Dean Ravnaas, Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC [35]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

Got it. And then on M&A, we do -- we are hearing more and more E&P operators highlighting in-house royalty assets. Do you see more competition from operators who can arguably pay more for royalty assets under their own land?

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [37]

--------------------------------------------------------------------------------

Yes. Again, it gets back to kind of what I said before, if we were a private equity-backed group that bought nonproducing acreage ahead of the drill bit, that would be a huge concern to us because you're going to be competing against the operators that know where the drill bit is going. It's not -- I mean I don't think we ever had an operator compete with us ever in -- maybe once in the last 5 years. We've had an operator...

--------------------------------------------------------------------------------

Robert Dean Ravnaas, Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC [38]

--------------------------------------------------------------------------------

And then that would be a conventional asset where they would just want to increase the net revenues. So yes, on an unconventional...

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [39]

--------------------------------------------------------------------------------

Jumping off the platform. Yes, exactly. So no, Betty, that hasn't been a concern of ours. I would say that, I think, you're right though. I think that for some of our peers, that's going to be kind of a headwind they're going to face on acquisitions.

--------------------------------------------------------------------------------

Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Got it. No, that's helpful. And then one last thing. Just on the second quarter, pricing realization is fairly strong across the board. You saw narrower oil differential and then NGL realization was flattish despite the Mont Belvieu pricing was weak during the second quarter. So just -- maybe help us understand what's driving that strong pricing? And would these pricing dynamics continue?

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [41]

--------------------------------------------------------------------------------

Sure. I'll start, and then Blayne and Matt, you guys jump in. So on the oil front, I think, that's largely just a result of infrastructure improving in the Permian. So everything we've got there has dramatically improved in terms of differential improvement. Any other comments you guys have on that.

--------------------------------------------------------------------------------

R. Blayne Rhynsburger, Kimbell Royalty Partners, LP - Controller of Kimbell Royalty GP LLC [42]

--------------------------------------------------------------------------------

The main driver of the oil was the Permian improvements.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [43]

--------------------------------------------------------------------------------

Okay. And then gas, I guess, just because the Haynesville got better depths than anywhere else.

--------------------------------------------------------------------------------

R. Blayne Rhynsburger, Kimbell Royalty Partners, LP - Controller of Kimbell Royalty GP LLC [44]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [45]

--------------------------------------------------------------------------------

Yes. So...

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [46]

--------------------------------------------------------------------------------

Yes. So gas differentials were, I believe, 5% versus 8% in Q1. If you go back and -- if I were you guys, in terms of modeling this, I wouldn't take -- and I guess, oil was 4%. If you take a look at the last 2 or 3 quarters, maybe use an average of those as sort of your modeling forecast.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [47]

--------------------------------------------------------------------------------

Gas. For gas.

--------------------------------------------------------------------------------

Matthew S. Daly, Kimbell Royalty Partners, LP - COO & Secretary of Kimbell Royalty GP LLC [48]

--------------------------------------------------------------------------------

Yes. The last 3 quarters for gas and maybe for oil 4% sort of right at the bottom tick levels. My point is if you're going to do this to be conservative, I'd look at maybe take that number and average out a couple of quarters and use that for forecasting. Differentials are very hard to predict quarter-to-quarter. So in NGL, I mean, really no comment there. That's -- we're so diversified. It's sort of we can't really pinpoint one particular area driving that differential.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Our next question is from Tim Howard, Stifel.

--------------------------------------------------------------------------------

Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [50]

--------------------------------------------------------------------------------

I was just wondering if you can provide an update on any thoughts of the private equity ownership. We received a lot of questions on potential sales given the lockups and fully understand this is tough question to answer. But given kind of how KRP has traded recently, the volatility, it's surprising to us as well. So I don't know if there's anything that you could provide, feedback that you're hearing from them, just maybe a piece of the market a little bit.

--------------------------------------------------------------------------------

Robert Davis Ravnaas, Kimbell Royalty Partners, LP - President & CFO of Kimbell Royalty GP LLC [51]

--------------------------------------------------------------------------------

Yes, sure. Thanks for the question, Tim. Yes. It's funny, we get questions about our private equity ownership, but it's only about, what, 25% of our total company whereas any of our peers that were private equity-backed or 80% or 90% owned by private equity sponsors. So we actually have a lot less of an overhang than some of our peers do. But on that front, we look at it as a positive longer-term for the company in terms of improving float and liquidity. So -- and this last -- Kayne Anderson, I think it's been publicly announced, sold out 3.2 million of their 3.6 million shares, I think, last quarter. And they were able to do it at a 6% discount, which on a smaller, more liquid stock like ours is amazing. So I think that, that -- and some of that stock went to some very prominent investors that we're very pleased and flatter to now have as long-term holders. So I think that speaks to the fact that there is a market for our stock. People want our stock, and we don't have a whole lot of float. But when they have opportunities to get their hands on some of the stock, they tend to take it at tight discounts. So we're not super concerned about overhang. We certainly haven't heard anything that makes us think that there's some huge share dump that's imminent. I think it will be kind of an orderly process over the next couple of years. So -- and again, it's not a huge amount of our stock relative to some of our peers. So...

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Mr. Ravnaas, there are no further questions at this time. And I would like to turn the floor back over to you for closing comments.

--------------------------------------------------------------------------------

Robert Dean Ravnaas, Kimbell Royalty Partners, LP - CEO & Chairman of Kimbell Royalty GP LLC [53]

--------------------------------------------------------------------------------

Thank you. I'd like to reiterate that we are very bullish on our company and the royalty sector overall. We'll be on the road quite a bit more this year at a number of investor conferences, telling the Kimbell story and broadening the outreach, along with our peers in the mineral sector. We look forward to the second half of 2019 and the opportunities that lie ahead. We thank you all for joining us this morning, and look forward to speaking with you again when we report third quarter results. This completes today's call.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.