2023-03-29 22:03:30 ET
Summary
- Kimbell is projected to generate $1.68 per unit in distributable cash flow in 2023 at the current strip.
- Around 58% of its production is natural gas and less than 20% of that is hedged, so it is affected by the weak near-term gas prices.
- I still expect Kimbell to be able to deliver over $2 per unit in distributable cash flow per year in the longer term.
- Estimated value has been trimmed to $18.50 per unit as 2023 production outlook was a bit lower than I expected.
Kimbell Royalty Partners ( KRP ) is now projected to generate approximately $1.68 per unit in distributable cash flow in 2023 at current strip, with 75% of that going towards distributions and 25% towards debt reduction. Kimbell's production is approximately 58% natural gas, so it has been affected by weak near-term gas prices with less than 20% of that production hedged for 2023.
I still remain more positive on natural gas price in the long-term, but I've trimmed Kimbell's estimated value to $18.50 per unit as its projected 2023 production was a bit lower than what I had previously modeled . At the midpoint of its guidance it appears that Kimbell expects a slight (-1%) production decline compared to 2022 for its legacy assets.
Updated 2023 Outlook
Kimbell expects to average approximately 17,200 BOEPD in production during 2023 at its guidance midpoint. This includes a production split of approximately 28% oil, 14% NGLs and 58% natural gas.
Kimbell is projected to generate $197 million in revenues before hedges at current 2023 strip of around $73 WTI oil and $2.70 Henry Hub natural gas.
Kimbell's hedges are estimated to have negative $3 million in value for 2023. It has approximately 17% of its oil production hedged at an average price of $59.35 per barrel and approximately 19% of its natural gas production hedged at an average price of $2.90. The oil hedges have around negative $4 million in estimated value, while the natural gas hedges have approximately positive $1 million in estimated value.
Type | Barrels/Mcf | Realized $ Per Barrel/Mcf | Revenue ($ Million) |
Oil (Barrels) | 1,757,840 | $71.00 | $125 |
NGLs (Barrels) | 878,920 | $31.00 | $27 |
Natural Gas [MCF] | 21,847,440 | $1.90 | $42 |
Lease Bonus and Other Income | $3 | ||
Hedge Value | -$3 | ||
Total | $194 |
At current strip, Kimbell is now projected to generate $134 million in distributable cash flow during 2023. This is approximately $1.68 per unit in distributable cash flow.
$ Million | |
Marketing And Other Deductions | $16 |
Production Costs And Ad Valorem Taxes | $14 |
Cash G&A | $19 |
Cash Interest | $11 |
Total Expenses | $60 |
Kimbell is maintaining a 75% payout ratio, so this means it could pay $1.26 per unit in distributions related to 2022 results. The remaining 25% should allow Kimbell to reduce its net debt to $175 million by the end of 2023.
Notes On Production
Kimbell's production split was in-line with my expectations after its oil-heavy (roughly 57% oil) Hatch acquisition. However, Kimbell's projected 2023 production was a bit lower than I expected.
Kimbell's 2022 production (excluding the 17 days of Hatch production) was around 14,925 BOEPD. Kimbell previously expected Hatch to average around 2,522 BOEPD in production during 2023. Added together, this would be around 1% higher than its guidance midpoint for 2023.
Thus Kimbell's expected 2023 production from Hatch is a bit lower than what it previously anticipated and/or at guidance midpoint for 2023 it generally expects a slight decline in legacy production compared to 2022.
Notes On Hedges
Kimbell's 2023 hedges have slightly negative value at current strip, but its 2024 hedges should have a bit of positive value. It doesn't have a huge amount of 2024 hedges, with around 13% of its oil production hedged and 15% of its natural gas production hedged, assuming flat production growth compared to 2023.
The 2024 hedges are at relatively good prices through, at an average of $74.44 for its oil hedges and $4.35 for its natural gas hedges. These hedges have around $3 million in positive value at current 2024 strip of $70 oil and $3.60 gas.
Estimated Valuation
I've trimmed my estimated value for Kimbell to $18.50 per unit. My long-term commodity pricing scenario remains at $70 WTI oil and $4.00 Henry Hub natural gas. However, Kimbell's production expectations for 2023 were a bit lower than I had previously expected, while natural gas prices remain relatively weak in the near-term. Reduced development from natural gas producers would boost Kimbell's realized price for natural gas but would also lower Kimbell's production. The Haynesville Shale is Kimbell's second-largest source of production post-Hatch acquisition and the economics of that play aren't as strong as Appalachia due to high development costs. Southwestern Energy's Haynesville D&C costs per lateral foot are over double its Appalachian D&C costs per lateral foot.
Conclusion
Kimbell is projected to generate $1.68 per unit in distributable cash flow in 2023 at current strip, of which 75% is earmarked for distributions. In the longer-term it should be able to deliver a bit over $2 per unit in distributable cash flow at long-term prices of $70 oil and $4 natural gas and 2023 production levels.
I estimate Kimbell's value at $18.50 per unit at those commodity prices (for 2024 and beyond), down from $19.50 before due to trimmed production expectations and weak near-term natural gas prices.
For further details see:
Kimbell Royalty Partners: Reviewing Its Outlook For 2023