2023-10-12 09:07:07 ET
Summary
- Kimbell recently closed its acquisition of mineral and royalty interests from LongPoint Minerals II.
- It ended up issuing $325 million in Series A Preferred Units to help pay for the acquisition.
- These preferred units may eventually convert into 21.6 million common units.
- Kimbell had the option to issue up to $400 million in preferred units, which would have increased the potential dilution by 5 million units.
- Kimbell is now projected to generate $2.58 per unit in distributable cash flow at current 2024 strip.
Kimbell Royalty Partners (KRP) recently closed on its acquisition of mineral and royalty interests from LongPoint Minerals II. Kimbell chose to issue $325 million in Series A Preferred Units, which is $75 million less than it could have issued.
This reduces the potential future dilution from conversion of the preferred units by approximately 5 million common units at the conversion price of $15.07. As a result, I now estimate Kimbell's value at approximately $19.25 per common unit at long-term $75 WTI oil and $3.75 Henry Hub gas. This is up slightly from before due to the reduced future dilution, as I had previously modeled Kimbell issuing $400 million in Series A Preferred Units.
Closing Of LongPoint Acquisition
Kimbell closed on its acquisition of mineral and royalty interests from LongPoint Minerals II in mid-September 2023. Kimbell appears to have paid a total of $445.6 million after purchase price adjustments and transaction costs. The original $455 million price was modified downwards by $4.7 million by acquired cash and closing adjustments, while there were also $10.9 million in purchase price adjustments related to asset cash flow since the June 1, 2023 transaction effective date. Transaction costs ended up at $6.2 million.
Kimbell paid for the acquisition by issuing $325 million in 6.0% Series A Preferred Units to Apollo. It had the option to issue up to $400 million in Preferred Units, but didn't opt for the additional $75 million.
Kimbell also ended up with approximately $130 million in additional borrowings under its credit facility to pay for the remainder of the adjusted purchase price and the $10.5 million in equity issuance costs related to the Series A Preferred Units.
Kimbell previously issued 8.3375 million common units (including underwriters' option) at $14 per unit, resulting in approximately $111 million in net proceeds after the underwriters' discount.
These proceeds cover most of Kimbell's additional credit facility borrowings, so its credit facility borrowings will have increased by approximately $20 million as a result of the acquisition.
Debt And Common Units
Kimbell now has approximately 94.7 million outstanding common units. Full conversion of the Series A Preferred Units would add another 21.6 million common units, bringing Kimbell's outstanding common units up to around 116.3 million.
Kimbell also had approximately $249 million in net debt at the end of Q2 2023. It added around $20 million in net credit facility debt for its recent acquisition. I now project Kimbell's year-end 2023 net debt to be around $240 million with a 75% payout ratio.
Updated 2024 Outlook
The current 2024 strip is approximately $78 WTI oil and $3.65 Henry Hub gas now. At those commodity prices I project Kimbell to generate $352 million in revenues after hedges.
Type | Barrels/Mcf | Realized $ Per Barrel/Mcf | Revenue ($ Million) |
Oil (Barrels) | 2,971,830 | $75.50 | $224 |
NGLs (Barrels) | 1,449,870 | $26.00 | $38 |
Natural Gas [MCF] | 26,136,555 | $3.25 | $85 |
Lease Bonus and Other Income | $4 | ||
Hedge Value | $1 | ||
Total | $352 |
This results in an estimate of $244 million in 2024 distributable cash flow, which is around $2.58 per unit with Kimbell's current common unit count. This would lead to a quarterly distribution of around $0.48 per unit with a 75% payout ratio in 2024.
I've increased my modeling of Kimbell's cash G&A by $3 million to reflect its transition services agreement with FourPoint Energy.
Full conversion of the Series A Preferred Units would reduce Kimbell's distributable cash flow by approximately 12% per unit in this scenario (to around $2.27 per unit). Conversion is unlikely until at least late 2025 though and would also require Kimbell's common unit price to be generally above $19.59 per unit for conversion at the holders' option.
$ Million | |
Marketing And Other Deductions | $17 |
Production And Ad Valorem Taxes | $28 |
Cash G&A | $23 |
Cash Interest | $20 |
Preferred Distributions | $20 |
Total Expenses | $108 |
Notes On Valuation
I have slightly increased my estimate of Kimbell's value to $19.25 per unit. This is based on long-term commodity prices of $75 WTI oil and $3.75 Henry Hub gas. My long-term commodity price estimates have not changed. However, I had previously modeled Kimbell issuing $400 million in Series A Preferred Units. It issued $325 million in Series A Preferred Units instead, resulting in around 5 million fewer common units upon conversion of those preferred units.
Conclusion
Kimbell is now projected to generate $2.58 per unit in distributable cash flow in 2024 at current strip prices. This includes the impact of its recently closed acquisition of mineral and royalty interests from LongPoint Minerals II.
Kimbell issued $325 million in 6.0% Series A Preferred Units to help fund that acquisition. These units have a conversion price of $15.07 per unit, so conversion (potentially in two years) would increase Kimbell's common unit count by approximately 23%.
Kimbell had the option to issue up to $400 million in preferred units, and the reduced potential dilution from the lower $325 million amount helps slightly increase my estimated value for Kimbell to $19.25 per common unit.
For further details see:
Kimbell Royalty Partners: Closes LongPoint Acquisition And Issues $325 Million In Preferred Units