Q2 2023 Kimbell Royalty Partners LP Earnings Call
Participants
Matthew S. Daly; COO & Secretary of Kimbell Royalty GP LLC; Kimbell Royalty Partners, LP
Robert Davis Ravnaas; President & CFO of Kimbell Royalty GP LLC; Kimbell Royalty Partners, LP
Robert Dean Ravnaas; Chairman of the Board & CEO of Kimbell Royalty GP LLC; Kimbell Royalty Partners, LP
Derrick Lee Whitfield; MD of E&P & Senior Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division
Trafford Lamar
Rick Black; EVP; Dennard Lascar Associates, LLC
Presentation
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?
Robert Dean 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 Blayne Rhynsburger, 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 6:1 basis, up from 29% in the first quarter. Activity in our acreage remains resilient despite a lower overall U.S. land rig count. In fact, we now have the highest market share ever of the overall U.S. land rig count at 13.8%. After giving effect to our 2 most recent acquisitions, the Permian Basin leads all categories in terms of production, inventory, rig count and line of sight wells. Production in the Permian grew by 48% quarter-over-quarter reflecting a full quarter of the MB Minerals acquisition with the Permian rig count increasing by 11% during the same period.
And we are very pleased to report that we maintain a superior 5-year annual PDP decline rate of 13% that only requires an estimated 4.9 net wells annually to maintain flat production. Overall, we had a great quarter and are right on track to meet our targets for the year. Our Q2 2023 distribution of $0.39 represents an increase of 11% from Q1 and demonstrates our ongoing focus and commitment to enhancing unitholder value.
As we head into the second half of the year as well as looking out towards 2024, we will continue to execute on our strategy to drive growth, both through organic development and our disciplined acquisition strategy that is both a consistent and proven method at Kimbell. We also expect to continue benefiting from our diverse portfolio with low PDP decline rates coupled with upside drilling locations. As a major consolidator in the highly fragmented U.S. oil and natural gas royalty sector, we remain bullish about the long-term prospects in this space and our role in it. We believe the future opportunities for Kimbell are very bright and will extend for many years to come.
I'll now turn the call over to Davis to review our financials in more detail before we open the call to questions.
Robert 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 6:1 basis, including a full quarter of the MB Minerals acquisition. We are also pleased to report that we have an amended and extended our secured revolving credit facility through June 2027 and increased the borrowing base and elected commitments from $350 million to $400 million, an increase of 14%. We are also affirming our full year 2023 guidance that was previously disclosed in our May 18th press release.
I'll start by reviewing our financial results from the second quarter, beginning with oil, natural gas and NGL revenues of $57 million, a decrease of 0.8% from the first quarter primarily due to a decline in realized commodity prices. Second quarter 2023 average daily production was 18,145 BOE per day, again, on a 6:1 basis, which consisted of 572 BOE per day related to prior period production recognized during the quarter, and 17,573 BOE per day of run rate production.
The prior period production recognized this quarter was attributable to past production that came into pay status during Q2 2023. Our record setting -- our record second quarter run rate daily production of 17,573 BOE per day, an increase of 3.3% from Q1 2023 was comprised of 45 days of MB Minerals production and was approximately 54% for natural gas at approximately 46% from liquids. And that's 33% from oil and 13% from NGLs, including a full Q2 2023 impact of the MB Minerals acquisition, the revenues from which will be received by the company, run rate production was 18,554 BOE per day. As of June 30, 2023, Kimbell's major properties had 763 -- 767 gross and 3.89 net drilled but uncompleted wells as well as 734 gross and 2.97 net permits on its acreage.
This data does not include our minor properties, which we estimate could add an additional 20% to the DUC and permit inventory. In addition, we exited the quarter with 90 rigs actively drilling on our acreage, and our market share of all land rigs drilling in the Continental United States represents approximately 13.8%, a new record.
On the expense side, general and administrative expenses for Kimbell were $7.9 million in the quarter, $4.6 million of which was cash G&A expense or $2.90 per BOE. Unit-based compensation in the second quarter, which is a noncash G&A expense was $3.3 million or $2.06 per BOE, $2.06 per BOE.
Second quarter net income was approximately $17.8 million. Total second quarter consolidated adjusted EBITDA was $45 million. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release. Today, we announced a cash distribution of $0.39 per common unit for the second quarter.
This represents a cash distribution payment to common unitholders of 75% of cash available for distribution, and the remaining 25% will be used to pay down a portion of the outstanding borrowings under Kimbell's secured revolving credit facility. Since May 2020, excluding this upcoming Q2 payment, Kimbell has paid down approximately $108.6 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution for debt paydown.
Moving now to our balance sheet and liquidity. On June 13, we amended our existing credit agreement to, among other things, increase the borrowing base and elected commitment amount from $350 million to $400 million on the secured revolver and extend the maturity to June 2027. As of June 30, we had approximately $269.6 million and debt outstanding under our secured revolving credit facility. We continue to maintain a conservative approach with net debt to trailing 12-months consolidated adjusted EBITDA of 1.1x.
With approximately $130.4 million in undrawn capacity under our secured revolving credit facility, we are very comfortable with our strong financial position, the support of our expanding bank syndicate and our financial flexibility. We are very bullish about our industry and our company as we see a long horizon for continued growth and opportunities to enhance shareholder value.
With that, operator, we are now ready for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Derrick Whitfield with Stifel.
Derrick Lee 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?
Robert 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 S. 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 Lee 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?
Robert 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 S. 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 Lee 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?
Robert 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 S. 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.
Robert 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.
Robert Davis 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.
