10-Q: Kimbell Royalty Partners Reports Q3 2024 Results, Revenue Up Amidst Market Volatility

Kimbell Royalty Partners saw a revenue increase in Q3 2024, driven by higher production volumes, despite fluctuating commodity prices and a reported material weakness in internal controls.

Summary

• Kimbell Royalty Partners reported a revenue increase for the third quarter of 2024, reaching $83.8 million, compared to $67.2 million in the same period of 2023.
• The increase in revenue was primarily due to higher production volumes, which rose to 2.19 million barrels of oil equivalent (Boe) in Q3 2024 from 1.82 million Boe in Q3 2023.
• The company experienced a net income of $25.8 million for the quarter, compared to $18.5 million in the same period last year.
• Depreciation and depletion expenses increased to $32.2 million in Q3 2024, up from $23.1 million in Q3 2023, due to recent acquisitions.
• The company reported a material weakness in internal control over financial reporting related to accounting for changes in ownership of a subsidiary, but stated that this did not result in a material misstatement of previously filed financial statements.
• Kimbell Royalty Partners declared a cash distribution of $0.41 per common unit for the third quarter of 2024.
• The company's outstanding debt under its secured revolving credit facility was $252.2 million as of September 30, 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While revenue and production are up, the material weakness in internal controls and increased expenses temper the positive aspects. The company's debt level and exposure to commodity price volatility also add to the uncertainty.

Positives

• The company experienced a significant increase in revenue and production volumes compared to the same period last year.
• Net income increased year-over-year, indicating improved profitability.
• The company continues to distribute cash to unitholders, with a declared distribution of $0.41 per common unit for Q3 2024.

Negatives

• Depreciation and depletion expenses increased significantly, impacting overall profitability.
• The company identified a material weakness in internal control over financial reporting, which could pose future risks.
• The company's debt remains substantial at $252.2 million.

Risks

• The company is exposed to commodity price volatility, which can significantly impact revenue and profitability.
• The identified material weakness in internal control over financial reporting could lead to future misstatements in financial statements.
• The company's debt level could pose a risk if interest rates increase or if cash flows decline.
• Global conflicts and economic uncertainty could impact the company's operations and financial results.

Future Outlook

The company expects to continue pursuing acquisitions of mineral and royalty interests and intends to allocate a portion of cash available for distribution to repay outstanding borrowings under its secured revolving credit facility. The company also intends to pay a quarterly cash distribution on the Series A preferred units of approximately $4.9 million for the quarter ended September 30, 2024.

Management Comments

• Management is in the process of remediating the internal control weakness related to our accounting for changes in ownership of OpCo.
• Management has corrected the error and will implement a new control to ensure that changes in ownership of a consolidated subsidiary that is less than wholly owned are accounted for by adjusting the carrying value of non-controlling interests to reflect the change in ownership interest in the subsidiary.

Industry Context

The report reflects the ongoing volatility in the oil and gas industry, with fluctuating commodity prices impacting revenue and profitability. The company's focus on acquisitions and production growth aligns with industry trends, but the identified material weakness in internal controls highlights the importance of robust financial management in the sector.

Comparison to Industry Standards

• Kimbell's production growth is in line with other royalty and mineral interest companies that have been actively acquiring assets.
• The company's debt levels are comparable to other companies in the sector that have used debt to finance acquisitions.
• The reported material weakness in internal controls is a concern, as it indicates a potential deficiency in financial reporting processes, which is not typical for well-established companies.
• The company's distribution policy of distributing all available cash is similar to other yield-focused partnerships in the energy sector.
• The company's exposure to commodity price volatility is a common risk for companies in the oil and gas industry, and its use of derivatives is a standard practice for managing this risk.

Related Party Transactions

• The Partnership has a management services agreement with Kimbell Operating, which has a separate services agreement with K3 Royalties, LLC. Amounts paid to Kimbell Operating and K3 Royalties under their respective services agreements will reduce the amount of cash available for distribution on common units to the Partnerships unitholders.
• The Partnership previously had a services agreement with BJF Royalties, LLC, which was terminated upon the death of Ben Fortson on May 19, 2024.
• The Partnership received $44,596 and $104,075 in reimbursements from Rivercrest Capital Management, LLC for shared operating expenses for the three and nine months ended September 30, 2024.

Stakeholder Impact

• Shareholders will receive a cash distribution of $0.41 per common unit for Q3 2024.
• Shareholders may be concerned about the identified material weakness in internal control over financial reporting.
• Employees may be affected by the company's financial performance and any potential changes in operations.
• Creditors will be monitoring the company's debt levels and ability to repay its obligations.
• Customers (operators) will be interested in the company's ability to continue acquiring and developing mineral and royalty interests.

Next Steps

• The company will continue to monitor and remediate the material weakness in internal control over financial reporting.
• The company will continue to pursue acquisitions of mineral and royalty interests.
• The company will continue to allocate a portion of cash available for distribution to repay outstanding borrowings under its secured revolving credit facility.
• The company will pay a quarterly cash distribution on the Series A preferred units of approximately $4.9 million for the quarter ended September 30, 2024.

Key Dates

Keywords

Kimbell Royalty Partners, oil and gas, mineral rights, royalty interests, production volumes, financial results, Q3 2024, commodity prices, internal controls, debt, distributions