2023-12-26 09:16:34 ET
Summary
- Kimbell Royalty Partners has a well-diversified list of operators and a per-unit yield that is attractive for income investors.
- The company owns and acquires royalty interests in the United States, with interests in every onshore energy basin in the nation.
- Kimbell Royalty is positioned more like a proper corporation, focusing on sustainability and returning generous portions to unitholders.
- With a high current ratio, KRP is working hard to pay down their revolving debt, giving more flexibility if acquisition opportunity presents itself.
I’ve made it no secret that I love responsibly-run companies, and high yield income securities. In that regard, Kimbell Royalty Partners (KRP) has come to my attention recently, as it has oodles of prime oil and gas reserves to generate royalty from, a well-diversified list of operators, and has a per-unit yield that would make a lot of income stocks blush.
About Kimbell
Founded in 2015, Kimbell makes it their business to own and acquire an ever-growing amount of royalty interests in the United States. They spent the last five years constantly finding new areas to spread into. How successful was this?
Kimbell Royalty now has 11.5 million gross acres of royalty rights, spread across 28 states. They brag, seemingly accurately, that they have interests in every single onshore energy basin in the nation.
They command 124,000 gross wells, with 48,000 concentrated in the lucrative Permian Basin , their biggest location of holdings centered in West Texas. This has been a priority for years, to the extent that Kimbell Royalty continues to acquire interests in Permian to this day.
Kimbell reports having 1,500 separate operators handling the wells, the list of whom is a laundry list of major oil and gas players like Chevron (CVX) and Chesapeake (CHK). The top producer is at 11.3% percent of operation, and Kimbell Royalty insists the loss of any one producer won’t have any material adverse effect on the company. Since everybody seems to want a piece of their operations, it’s not hard to imagine it can be replaced with others on the off chance it does happen.
Royalty Companies, the Risk
I’d be remiss if I didn’t talk about the things that can go wrong, sometimes very wrong, in these companies that make their business out of sending royalties to unitholders.
Commodity prices are good, the units surge to near their 52-week high, and the yield remains healthily in the teens. You buy it then, because at these commodity levels all payouts seem sustainable, then watch as the bottom falls out from under you.
The problem is even if you’re temporarily bullish on prices right now, and have every reason to be, commodity prices are notoriously unstable, and dropping from $90 a barrel to $60 a barrel could really cut into both money available for the payouts and earnings. If that suddenly happens, the market says 52-week high is just not sustainable, and it drops like a rock.
Furthermore, more traditional royalty trusts tend to price at what it costs for setup and envision yield paying more or less the price paid back to unitholders. As the remaining reserves go down, so do the payouts, and again, so does the price.
But still…
Kimbell Royalty doesn’t worry about depletion of reserves so much, as they’ve spent a lot of money adding to the price of the already generous arsenal of reserves around the nation. The company has a $350 million revolving credit facility, and uses excess case from production to pay it down, so they can be more flexible in buying out more royalty properties when the opportunity presents itself.
Also, buying at an unsustainable 52-week high is less a problem, as Kimbell Royalty is trading in a 52-week range of $13.85 - $17.14, just under $2 below the high and $1.35 over the low. That’s smartly in the middle with a lot of wiggle room to cover a lot of sins, like surprise moves in oil and gas prices.
All in all, Kimbell Royalty seems positioned less like the traditional royalty trust and more like a proper corporation, sort of how Canadian companies did when CanRoys got regulated virtually out of existence. This allows the corporation to focus more on sustainability, and continue to return generous portions to unitholders.
By the Numbers
So we’ve taken a look at the potential goods and bads at Kimbell Royalty in a general sense. Now it's time to take apart the balance sheet and judge the financial state as it stands in the most recent 10-Q.
Cash and Equivalents | $39.5 million |
Total Current Assets | $105.2 million |
Total Current Liabilities | $15.1 million |
Current Ratio | 6.96 |
Properties | $2.048 billion |
Total Assets | $1.389 billion |
Long-Term Debt | $310.4 million |
Total Liabilities | $329.2 million |
Unitholders Equity | $746.5 million |
Debt/Equity Ratio | 0.44 |
Source: 10-Q from SEC
As you can see, Kimbell Royalty is very responsibly financed with a high current ratio and a low debt/equity. Liabilities seem pretty manageable, despite the borrowing to try to keep buying more properties to generate more royalties.
Free cash flow is also in a nice state. In the 9 months of 2023 currently reported, Kimbell Royalty has generated $114.9 million cash from operating activities. Financing isn’t quite so rosy, which with the borrowing, but even net free cash flow is positive, an increase of $14.5 million which ended up directly in the $39.5 million cash and cash equivalents line in the table above. That’s an improvement over 2022 free cash flow, which was also respectably positive.
The unitholder equity, as it stands, gives us a price/book of around 1.51. That’s not too bad, though naturally the lower we get the better it is for all of us. Positive cash flow and paying down the debt should help going forward.
Growth Prospects
As Kimbell Royalty will happily tell us in SEC filings, their growth plan is to keep acquiring more and more assets and further developing the huge number of acres they already have. We can look here to see how that’s going.
2020 | 2021 | 2022 | 2023 (1st 9 months) | |
Total Revenue | $90.4 million | $135.6 million | $248 million | $194.8 million |
Operating Income | ($250.7 million) | $49.3 million | $136.9 million | $83.2 million |
Net Income | ($256 million) | $42.4 million | $130.8 million | $65.2 million |
Source: SEC 10-K and 10-Q
As you can see, 2020 was a tough year for Kimbell Royalty, with low commodity prices costing them heavily. The yearly acquisitions kept driving production up, so by 2021 they were becoming profitable and 2022 they were exceedingly so. 2023 isn’t over quite yet, but the first 9 months is showing very positive revenue and income and Q4 is historically very good for them.
In April of 2020, Kimbell bought out Springbok Energy II for $95 million, giving them 90 operators with 2,160 net royalty acres. In December of 2021, they bought Cantas Royalty LLC for $54.6 million, adding an impressive 26,000 gross producing wells from leading US basins. Finally in December of 2022, they acquired part of Hatch Royalty LLC for $150.4 million, a further 889 net royalty acres and 230,000 gross acres.
As you can see, revenue came nicely split between oil and natural gas. I like to see that, because the price trends of the two don’t always track, and if Kimbell Royalty is making money on one, they should still do well even if the bloom is off the bull market on the other.
Conclusion
Kimbell Royalty makes for a juicy, appealing income generator, and the company seems determined to keep growing its assets to keep growing its payout. It really makes for a nice look as part of the portfolio.
At the same time, I’m tempted to wait a bit before jumping in with both feet and see if I can’t get in on a slightly lower entry level, maybe closer to $15 even. I like having a nice cushion just in case something does start to go wrong, as it should allow me to exit without having to worry about losing too much of my principle. That sort of security is always nice.
My catalyst for increase in prices is the fact that despite all the good things, listed above, Kimbell Royalty is still below its 52-week high. If they continue to execute as they have, I expect them to start chasing down that high once again, and that could be a nice capital gain, all the while collecting those nice royalties that they offer.
That’s not to say I blame anyone for jumping in early and not looking for a cheaper price. If your portfolio needs exposure to an oil and gas play, and are looking for a nice source of income, you could do a lot worse than Kimbell Royalty.
For further details see:
Kimbell Royalty Partners Is Worth Looking For The Right Entry Position