Q4 2023 Kimbell Royalty Partners LP Earnings Call
Participants
Kim Black
Robert Ravnaas; Chairman of the Board, Chief Executive Officer of the General Partner; Kimbell Royalty Partners LP
R. Davis Ravnaas; President, Chief Financial Officer of the General Partner; Kimbell Royalty Partners LP
Neal Dingmann
Derrick Whitfield
Paul Dimebon
Grant Adkins
Aaron Bilkoski
Presentation
Operator
Welcome to the Kimbell Royalty Partners fourth-quarter earnings conference call. (Operator Instructions) This conference is being recorded today to introduce your host, Rick Black with Investor Relations.
Thank you. Sir, you may begin.
Kim Black
Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners conference call to review financial and operational results for the fourth quarter. On the 23 ended on December 31st, 2023. 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. Information recorded on this call speaks only as of today, February 21, 2024. 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 the statements made in today's discussion that are not historical facts, including statements of expectations for future events or future financial performance are considered forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making statements that are forward looking 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 release for our disclosure on forward-looking statements. Factors and other uncertainties and risks are detailed 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.
And with that, I would now like to turn the call over to Bob Ravnaas, Kimbell Royalty Partners, Chairman and Chief Executive Officer. Bob?
Robert 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 Rasmus, our President and Chief Financial Officer, Matt Daly, our Chief Operating Officer, and Blaine runs Berger, our Controller. We are very pleased to announce another record year for Kimbell in 2023, we completed our largest acquisition to date, which was immediately accretive to distributable cash flow per common unit and the acquisitions substantially bolstered the Permian as our leading basin in terms of production, active rig count, ducks permits and undrilled inventory. In addition, we increased the borrowing base and elected commitments on our revolving credit facility to 550 million, further enhancing our liquidity and conservative capital structure. We are also very pleased to report that we paid out $1.73 per common unit in tax-advantaged quarterly distributions during 2023 and to pay down approximately $49.9 million on our credit facility. We ended the year with a strong fourth quarter that reflected significant sequential organic growth over the third quarter due to a number of high interest wells coming online in the Permian and Haynesville. We expect to continue this operational momentum as we progress through 2024, given that our rig count remains near record highs with 98 rigs actively drilling in the US.
Turning now to production growth, it is remarkable reflect on our growth since our IPO as we have now grown production from 3,116 BOE per day to 24,332 BOE per day. An increase of 681%, as evidenced by our significant acquisition activity in 2023. We expect to continue our role as a major consolidator in the highly fragmented U.S. oil and natural gas royalty sector, and we estimate the total size of the market to be near nearly a trillion. As I've stated in the past, there are only a handful of public entities in the US and Canada that have the financial resources, infrastructure network and technical expertise to complete large-scale multi-basin acquisitions. We believe that we are still in the early stages of this consolidation and will actively seek out targets that fit within our acquisition profile. We are very excited about the opportunities to expand in the future and deliver unitholder value for years to come.
I'll now turn the call over to Davis Ravnaas.
R. Davis Ravnaas
Thanks, Bob, and good morning, everyone. I'd like to start by reiterating the sentiments Bob expressed. This was a great year for Kimbell as we finished 2023 with a very strong fourth quarter as well as setting new records in several of our financial and operating metrics.
I'll start by reviewing our financial results from the fourth quarter, beginning with oil natural gas and NGL revenues of $83.9 million, an increase of 21.2% compared to the third quarter at a record for the Company. In the fourth quarter, we generated record daily production that marked another significant milestone for Kimbell run rate production for Q4 2023 was a record at 24,332 BOEs per day on a 6-to-1 basis, which reflected 3.4% organic growth from Q. three 2023 run rate production. As of December 31st, 2023, Campbells major properties had 807 gross or 4.55 net docs and 727 gross or 3.83 net permitted locations on our acreage, not including minor properties, which we estimate could add an additional 15%. In addition, we exited the quarter with 98 rigs actively drilling on our acreage, which represents approximately 16.3% market share of all land rigs drilling in the continental United States.
On the expense side, fourth quarter general and administrative expenses were 9.1 million, 5.8 million of which was cash G&A expense. Excluding the impact of approximately 0.8 million and integration related expenses associated with the third quarter acquired production. Cash G&A per BOE was $2.25. Fourth quarter net income was approximately 17.8 million and net income attributable to common units was approximately $9.8 million as compared to 18.5 million and $13.6 million respectively from last quarter. Total fourth quarter consolidated adjusted EBITDA was a record at $69 million, which was up approximately 24% from last quarter. You will find a reconciliation of those consolidated adjusted EBITDA and cash available for distribution.
At the end of our news release today, we announced a cash distribution of $0.43 per common unit for the fourth quarter. This represents a cash distribution payment to common unit holders that equates to 75% of cash available for distribution, and the remaining 25% will be used to pay down a portion of the outstanding borrowings under Campbell's secured revolving credit facility.
Moving now to our balance sheet and liquidity. As a reminder, on December eighth, we increased the borrowing base and aggregate commitments under our secured revolving credit facility from $400 million to 550 million in connection with the fall redetermination at December 31st, 2023, we had approximately $294.2 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with net debt to trailing 12-month consolidated adjusted EBITDA of 1.0 times. Campbell had approximately 255.8 million in undrawn capacity under its secured revolving credit facility as of December 31st. We are very comfortable with our strong financial position, the support of our expanding bank syndicate and our financial flexibility. We are also releasing 2024 guidance, which includes daily production at its midpoint of 24,000 BOE per day. We feel very confident about the prospects for continued robust development given the number of rigs actively drilling on our acreage as well as the commentary we are hearing from several operators about their expected development activity in 2024, especially in the Permian. 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.
I'd like to thank the incredibly hard-working dedicated and talented team here at Campbell for continually driving growth and enhancing the value of our organization for all stakeholders. In addition, we work with the best advisers and financial institutions in the business, and we greatly appreciate these partnerships that contribute to the Company's success.
With that, operator, we are now ready for questions.
Question and Answer Session
Operator
(Operator Instructions) Neal Dingmann with Truist Securities. Please proceed with your question.
Neal Dingmann
(technical difficulty)
Kim Black
Operator, you can go to the next question while we wait for Neil and bring him back.
Operator
Tim Rezvan, KeyBanc.
Hi, this is John Marchioni on for Tim. You mentioned earlier in your press release you mentioned earlier that the industry is in early stages of consolidation and that you're excited about the opportunities to expand. Can you just talk about what you're seeing in the marketplace now, why or why you're so confident?
Robert Ravnaas
Sure. I'm happy to do that. I would say that every year since our IPO. And even before that, we've been surprised by M&A volume last year was was an enormous year across the entire sector for consolidation within Minerals continues to surprise us to the positive. We are seeing more 10s. And most recently, a trend we've seen is a lot of family offices that are getting increasingly involved in minerals that's driving consolidation, particularly amongst smaller deals that are being rolled up into larger portfolios. We are we are regularly in contact with those groups, and we're meeting new groups constantly nearly all of them have a plan to exit at some point in the future. And so that's why we continue to believe that larger institutional buyers like ourselves, specifically the public companies will continue to benefit from a robust seller pipeline. It's tough to getting deals done in this space, but we continue to see that trend as being a positive one. We think it will continue and we think it will grow. And as things continue, I mean, if you look at just the overall market that's been captured by the public companies, it's still de minimus know, low single digits of the overall market size. So we just think it's inevitable that consolidation continues.
It's great. Thanks for the details. And but the Permian is clearly your organic growth opportunity today. I talked about this a little bit, but can you just expand on what you're seeing from operators in terms of activity and cycle times? Are you seeing any and any stock builds or activity is still proceeding at the normal rate?
Robert Ravnaas
Yes, good question. So we are we feel better today than we ever have about the near term catalysts for development on our acreage. So we have that docks and permits of 8.4 compared to 5.8 needed to maintain flat production on our on our asset profile so that would suggest that we have ample opportunity here to not only keep production volumes flat, but particularly for them to grow. But that being said, that being said, everybody is aware of what's been happening in the natural gas space recently, you're correct that we have pivoted not necessarily deliberately, but we have pivoted that just benefited for some really nice acquisitions in the Permian Basin over the last two years. So our company has become increasingly oil-weighted. We're less dependent on it, specifically the Haynesville for our growth versus where we were a few years ago. I think that's a good place to be right now. Just given the dynamics in the natural gas space, that kind of wished it, some of these operators would would would rein back drilling to a certain extent and maybe keep the gas in the ground on our acreage and theirs until natural gas accommodates a more positive price here. But we think that the Permian producers are going to keep production flat is a general theme. Some will be growing production. I think our acreage would grow better than the average producer as well, just by evidence of the number of docs we have relative to our PDP decline maintenance level. So feel good about the Permian. The Haynesville is a smaller position than we have today, but still feel good about the Haynesville. We have a lot of ducks there. So overall, feel good about the direction of the Company. I think what you I think what you see in our guidance, like always is a conservative view on development is always challenging as a mineral owner with no developmental control over the assets to pinpoint exactly what growth is going to be, particularly in such a volatile environment like we're in today on the natural gas side and even oil, but more recently. So a conservative guide feel good about it, though. We don't think it's unduly conservative and feel very confident and our assets in the near term, the horizon for them.
No, that's great. Thanks for framing that I'll hand it back.
Operator
Our next question comes from Derrick Whitfield with Stifel. Please proceed with your question.
Derrick Whitfield
Thanks, and good morning, all. Given the considerable M&A we've witnessed across the Permian and Haynesville over the last six months. Wanted to ask your thoughts on the impacts that could have on your business.
Robert Ravnaas
That's a great question. And my immediate reaction to that is that we'll see a more disciplined approach to growth. So I think I think if I had to guess I'd say that growth will be we will feel more confident about those combined companies on a consolidated basis for their ability to maintain production levels. I think that what you'll see less of is the hyperbolic shale growth of prior years, unless, of course, we see some sort of material macro event that increases oil and gas prices. We tend to see that happen pretty quickly on our acreage but overall, we're absolutely fans of consolidation. We get that question all the time, and we view it as we'd rather have our assets developed by folks with stronger balance sheets with more liquidity in their stock, access to capital markets, investment grade ratings, all those wonderful things that support a healthy operator. We continue to believe that that ongoing consolidation story on the operator side will ultimately benefit mineral owners like ourselves and everyone else.
Derrick Whitfield
It makes sense. And then for my follow-up, I wanted to focus more specifically on Long Point and now that you've on-boarded with assets, are you seeing more ground game or collection opportunities and by collection opportunities? And I'm speaking to operator, independent, et cetera?
Robert Ravnaas
Sorry, just to clarify, are you asking are we seeing more small-scale acquisition opportunities on the mineral front? Or am I misunderstanding the question?
Derrick Whitfield
No, you've got it. That's correct.
Robert Ravnaas
So more mineral opportunity based on the new assets you've onboarded two Long Point.
Derrick Whitfield
And then secondarily, just our collection revenue collection opportunities, are you seeing any situations where there were operator underpayment just now that you've got the assets in-house
Robert Ravnaas
Yes, great question. Very happy with the ease at which we were able to integrate the Long Point asset. They have a phenomenal team and have been incredibly well organized and very supportive of, frankly, just getting us fully integrated and getting all the cash where it needs to go and not seeing necessarily a pickup in the smaller M&A game. We continue to be disappointed by the price, the clearing prices for smaller acquisitions, you know, just kind of speaking earlier to the fact that there just continues to be more and more attention to this space, more money coming into it, new teams constantly coming in. And what I think that's done is made it ground game acquisitions, smaller deals, more expensive, candidly, some of the larger opportunities that we've seen over the last couple of years have been counterintuitively more efficient from a from a pricing perspective, larger packages having better pricing than smaller ones, which just seems totally counterproductive counterintuitive to anybody from a corporate finance standpoint. So I wouldn't I wouldn't think the deals that's pulling led to an increase in smaller deal volumes. And but overall just continue to be happy with how that asset has been developed. And we continue to believe that it's going to increase in production value.
Just just by virtue of the number of docs and comments on the properties over the next couple of years.
Derrick Whitfield
Very helpful. Thanks for your time.
Operator
Neal Dingmann, Truist Securities.
Neal Dingmann
Morning, guys. Nice quarter. I apologize for the fire back on your way out of the office. My first question is also on your M&A. It sounds like you all continue to believe there's ample opportunities. It certainly seems to me as well. And I'm just wondering, will you strategically target mostly Permian assets on the heels of your recent successful deal or yield, you all just look at you the most accretive. I know you'll continue to see tons of deals out there. So I'm just wondering how you think about approaching things this year.
Robert Ravnaas
Yes, excellent question again, one of the more common questions that we get was a strength of ours that's played out over the last 27 years of us doing this. It's not having a geographic restriction to what we buy or even a commodity restriction and what we buy. It's hard enough to make money in this business. It's a competitive business minerals, it's even harder when you want to restrict ourselves to one county or two counties or even just one basin. I think it can be very challenging, but with some exceptions, but I think it makes your life more difficult when you're precluding ourselves from looking at the totality of what's possible to buy as opposed to focusing on one individual basins.
So on consistent with our strategy in the past, we believe that first and foremost, our job when looking at acquisitions is to find assets that generate the best risk-adjusted returns for our investors, and we're agnostic as to where those those opportunities present themselves. So it's just so happened in the last couple of years, the Permian has been really hot there's been a lot of exits in that space. We have obviously benefited from that. But then you go back four or five years ago with our 80 acre acquisition and others the infill look at excellent basin for us, cities. These basins tend to be cyclical in nature, and we like to be there opportunistically and trying to keep our minds open as possible on what makes the most sense for us to acquire. So slow start to this year, but I will say that we're not necessarily seeing huge packages right now that are particularly interesting to us, but that's not that's not something that surprises us. We've seen that same trend over the last couple of years. We frankly at this time last year, we thought that 2023 was going to be a quiet year and ended up being the most active year in our company's history. So things can change quickly. I think what you'll see is that a lot of folks holding natural gas minerals are going to sit on their hands until prices improve to state the obvious. So if I had to if I had to guess at this point, I'd say that the balance of the year looks more as it looks more addressable from an oil weighted perspective than perhaps gas. So I'll just add that context?
Neal Dingmann
No, understood. I really like the way you all look at that. And the second question is on activities specifically. Obviously, I can see the rig count seems to be holding up quite well. But just wondering how you all would describe sort of overall expectations for your operators remainder of the year besides the attractive, what has it done nearly nine ducks and net permitted locations you've talked about.
Robert Ravnaas
Yes, excellent. And not to kind of repeat a little bit of what I said earlier. I think on balance, what we're hearing from operators is that they want to maintain production volumes, at least on the oil side on the Permian, the Permian specifically, I think on the natural gas side, we're seeing a little bit of a mixed bag, some operators, and we've all seen the headlines in the last couple of days about some operators cutting CapEx, cutting production guidance, which we think makes incredibly good sense in this natural gas price environment. But we may see a little bit of a less production growth or less of an ability to replace production on the maintenance front on the natural gas side. But again, feel very confident about the oil-weighted asset base roughly, let's say, just over 50% of our rigs running right now in our acreage in the Permian. And then we're pretty well diversified after that, with 17% in the Mid-Con, 13% in the Haynesville, 8% in the Eagleford. Obviously, oil weighted 6% in the Williston oil weighted and so on and so forth. So I think what you'll see is that operators overall are going to what we're hearing that they're going to maintain production volumes, maybe slight amounts of growth, just depending on what's going on with their drilling programs. But I think that because we've happened to have acquired large assets in the last two years with a disproportionate number of docks relative to that maintenance production level, we would expect that our portfolio will look quite good on a relative basis to perhaps in the Lower 48 growth overall. And again, we can't guarantee that, but we feel we feel very confident about near term development on our asset and the ability to replace declining production barrels.
Neal Dingmann
So I really love to hear that activity. Thank you all.
Operator
Our next question comes from Paul Dimebon with Citi.
Paul Dimebon
Thank you. Good morning and thanks for taking my call. I'm wanting to touch a quick morning. I just want to touch quickly on the kind of the opportunities that you guys are seeing for further growth there as the market sits right now, kind of ideal, yes, scale of the deals you're looking at are those to this family offices and to get to a certain kind of a level before they make sense for you guys to really talk to or is it more just kind of like maintaining that conversation and seeing where things go in the future?
Yes.
Robert Ravnaas
Great. Great question. And I haven't gotten that question addressed in that specific way. I wouldn't say it's necessarily the scale of the portfolio size. That's the most important characteristic of making making assets appealing to ourselves and other larger institutional buyers. I see it's more of kind of waiting until the assets are at a big, a balance of cash flow accretion today, right? We're not going to buy something for 10 times cash flow. That's immediately dilutive to our cash flow per unit. But then there has to be enough upside on the asset to where it's not just the declining one. And the reason for that is that obviously it could be cash flow accretive today. If you buy something at three times cash flow and then obviously dilutive in a year or two as the asset run down without the ability to replace the inventory. So what we what we continue to focus folks on that are out there working hard every day putting together mineral portfolios, as I tried to think about the exit as you're putting the assets together, trying to think about putting that right balance together of cash flow and drilling inventory so that somebody like us can pay the price that they need to justify the returns that they want. And we believe in win-win outcomes. We want the folks that we buy deals from to make money, they want us to make money. And that's the reason we say that is because a lot of what we do is buy from repeat sellers and have a rapport with them or they know that we're going to do what we say we're going to do and we know that the quality of title, an asset that they're delivering to us is going to be solid because we've gone through the diligence process with them before. So yes, so size is relevant. I wouldn't say it's as relevant as what I was just alluding to. But on the sides aspect, it's been really tough to find deals that make sense for us. And candidly, just from a pricing perspective, under 25 or 50 million bucks, it just seems like that size range, anything under that just attracts an incredible amount of attention from buyers. And we've just been priced out of those deals. And I think you'll see that not just for ourselves, but also some of the other public companies. We're just a little bit surprised that it looks like some people are just trying to put money to work. And if the expectation is that they can outbid us today for a $25 million asset and maybe put together four of them and then trying to bring that to us is a $100 million deal that's not going to make mathematical sense to us. So we continue to be surprised by how competitive the smaller opportunities have been and continue to be pleased by how attractively priced some of the larger deals are.
Paul Dimebon
So that makes perfect sense. Just a quick follow-up if I were, if I do some back-of-the-envelope math on the existing permits index versus production guidance growth, should I think about that as more of a expectation that you have a similar level of ducks turned in line and the payments kind of progressing as normal seeing about, you know, 40, 38, 40% of the existing going through or is it more just an expectation that, you know, there might be some increased volatility in the markets this year?
Robert Ravnaas
I mean, I think it really sounds like I think it's a little bit of both. I like the way that you framed that. So historically speaking, that we expect close to 100% of our net debt to be to be completed over the next, call it, 12 to 18 months, but it's probably closer to 12 months.
On the permit side, I don't disagree with the percentage that you just you just framed there. I don't have exactly in front of me what the historical averages have been on permits, but that sounds reasonable to me. I think that what you're seeing from us and maybe maybe this is what you're driving at is perhaps it looks a little bit conservative on our guidance, given that ratio of net ducks and permits on our acreage to that maintenance level needed to maintain flat production and are being unduly conservative. I just think that in this in this market environment, we'd rather look at that volatility and say we want to put something out there that makes sense on guidance.
We don't want to be unduly conservative, but we can't guarantee that a natural gas price environment like this, where if oil starts to turn it over this year, we don't want to be over-promising production to our to our shareholders. And so I think that what you see is just us trying to be trying to hold that line of getting of giving realistic guidance for the next 12 months, not being unduly conservative, but also keeping in mind you know, obviously, the natural gas was $1.50 a couple of days ago. So it's a it's a tough environment specifically right now to be providing guidance. But I think that's something that's going to be tough for any mineral owner. Obviously, that doesn't have developmental control over their assets.
Paul Dimebon
Got it. Understood. I appreciate your time, and I'll leave it there. Thank you.
Operator
Grant Adkins, Raymond James.
Grant Adkins
Hey, guys, thanks for taking the call, Monogram. So this is going to be time on the macro side, but given the kind of activity reductions we've seen from some operators in both Appalachia and the Haynesville, do you all see that as kind of I guess you kind of mentioned that you don't really want necessarily those as a smidge over by now, but how do you think that affects your kind of gas production? Or does it moving forward into 24.
Robert Ravnaas
I'm not too worried about gas production in our asset in 2024 just because of the amount of data that we have in gas basins currently. So I think what you'll see is that those alone with some permits will be able to keep our production more or less flat, absent even increased drilling on the acreage. That's really more focused on the Haynesville, which is now only, but the 13% of our on our rigs that are running today. So a little bit less relevant than it was for a business you've had just a couple of years ago. What's your choice? Just kind of I mean, there's been a look at look at element of the portfolio has changed Appalachia, less significant portion of our production, obviously, so less less focused on that. But what we are hearing overall from operators there is that maintenance production levels are are going to be what we're going to see here over the next 12 to 18 months. So I don't feel your point is well taken. I think that's baked into our guidance and kind of echoes some of the comments that I've made on previous questions, which is that we feel very good about our ducks and comments relative to maintenance activity that needs to happen to keep production flat. But our guidance does reflect a realistic and conservative view of the fact that it a recognition that natural gas prices are very low and very volatile and therefore, difficult to predict in terms of activity levels.
Grant Adkins
So I'll say thank you. And then my follow-up is going to shift gears a little bit. So you all have a pretty distinct advantage with the buy tax structure on your distribution. Now that was last announced 93% was non-taxable. Um, can you give any color on like what where do you expect that to be for the coming year, just like an average kind of what your tax shield is going to be there?
Robert Ravnaas
Blaine, do we have anything that we can share on that now? Or any thoughts on that blood forget roller step?
R. Davis Ravnaas
Yes. So we we used to give tax guidance going forward and then we stopped doing that. Just given the volatility of pricing, I would just say if you want a big market, I would take what pricing is today and then you can kind of it's going to ride whatever natural gas and oil prices do for the rest of the year. So I would take whatever we have for Q4 and maybe use that as a benchmark and then whatever you think whatever the strip price of oil and natural gas is kind of the movement of that is going to be what's going to dictate what our tax shield is going to be.
Grant Adkins
Okay. Also. Thank you, guys. Thank you.
Operator
Aaron Lasky with TD Cowen.
Aaron Bilkoski
Hi, morning, guys. I know there's been a lot of focus on this call around M&A. But I would say the one thing that I like about your businesses that can they can replenish itself organically. And my question sort of on that front. I noticed that your Eagle Ford activity picked up quite a lot in Q4 and it was up five or six rigs quarter-over-quarter. Do you have any color on what's what's driving that?
Robert Ravnaas
That is an excellent question, Aaron. Good morning by the way. Yes, Aaron, this is bad daily. I noticed that two of the operators in the Eagle Ford. It's interesting. There's only one public operators, EOG.
The rest of the folks in the Eagle Ford are all private operators. And so we had quarter over quarter, we had six rigs drop off the Permian with six rigs added to the Eagleford. So that was nice to see that sort of pop in the Eagle Ford drilling activity, but it's mainly private operators there.
Aaron Bilkoski
Perfect. I guess that's the benefit of the diversified royalty business, please. Thank you.
Operator
This concludes our question and answer session. I would now like to slip turn the floor back over to management.
Kim Black
Thank you all for joining us this morning, and we look forward to speaking with you again next quarter.
Operator
This completes today's call, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
