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Kimbell Royalty Partners (NYSE:KRP) added significantly to its oil production with its recent Hatch acquisition. The acquisition may boost its oil production by close to 40% and gives it additional exposure to the Permian (mostly Delaware Basin). The Hatch acquisition should also boost Kimbell’s 2023 distributable cash flow per unit (at current strip) due to lowered G&A per BOE and more unhedged production.
Overall, I’d now estimate that Kimbell is worth approximately $20 per unit in a long-term (after 2023) $70 WTI oil and $4 NYMEX gas scenario. Near-term commodity prices have weakened a bit from a few months ago, but Kimbell should still be able to average close to a $0.50 per unit quarterly distribution during 2023.
Q3 2022 Results
Kimbell reported strong production results in Q3 2022, with run-rate daily production of 14,985 BOEPD. While this was only a 0.2% increase in overall average daily production compared to Q2 2022, Kimbell’s daily oil production increased by 8% over that period. This production growth was entirely organic.
This allowed Kimbell to pay out a $0.49 per unit distribution for Q3 2022 with a 75% payout ratio. At the end of Q3 2022, Kimbell had 79 active drilling rigs on its acreage, up from 74 active drilling rigs at the end of Q2 2022. This sets Kimbell up well for some continued production growth.
Hatch Acquisition
Kimbell paid approximately $290 million to acquire mineral and royalty interests from Hatch Royalty LLC. The purchase price consisted of $150 million in cash and approximately 7.3 million Kimbell common units. Kimbell subsequently did a public offering of 6 million common units at $17.75 per unit, resulting in gross proceeds of $106.5 million. Thus the Hatch acquisition is effectively being paid for with 13.3 million common units and approximately $46 million in cash (after deducting commissions and other costs associated with the offering).
The Hatch assets are located in the Permian Basin, mostly (82%) in the Texas Delaware Basin, with 8% in the New Mexico Delaware Basin and 10% in the Midland Basin. There are 889 Net Royalty Acres on 230,000 gross acres.
Kimbell expects the Hatch assets to average 2,522 BOEPD (57% oil, 25% natural gas, 18% NGLs) in production during 2023. At November 1, 2022 strip prices, this would result in around $48.6 million in cash flow during 2023. Current strip prices are only slightly changed from the beginning of November, and the Hatch assets would deliver an estimated $47.5 million in cash flow.
There appears to be a fair bit of near-term development on the Hatch acreage (with 11 active rigs), as Kimbell projects 2023 average production to be 22% higher than current (as of the beginning of October 2022) production. Kimbell is basing the expected production growth on Hatch’s 1.18 net DUCs and 1.06 net permitted locations.
Kimbell will have approximately 78.9 million total units after the Hatch acquisition closes, assuming that the underwriters did not exercise their option for another 0.9 million units.
2023 Outlook
I previously modeled Kimbell’s production at around 15,500 BOEPD for 2023. The Hatch acquisition could thus push its 2023 production to a bit over 18,000 BOEPD.
At current 2023 strip (including roughly $80 WTI oil and $5.30 Henry Hub gas), Kimbell is now projected to generate $271 million in revenues after hedges. Kimbell’s 2023 hedges have around negative $15 million in estimated value at current strip.
|
Type |
Barrels/Mcf |
Realized $ Per Barrel/Mcf |
Revenue ($ Million) |
|
Oil (Barrels) |
1,883,035 |
$78.00 |
$147 |
|
NGLs (Barrels) |
903,740 |
$31.00 |
$28 |
|
Natural Gas [MCF] |
22,746,800 |
$4.70 |
$107 |
|
Lease Bonus and Other Income |
$4 |
||
|
Hedge Value |
-$15 |
||
|
Total |
$271 |
Kimbell is now projected to generate around $202 million in distributable cash flow in 2023. This is approximately $2.56 per unit based on 78.9 million outstanding units.
At a 75% payout ratio, this would translate into a $0.48 per unit quarterly distribution. At an 80% payout ratio, this would increase to around $0.512 per unit per quarter.
The Hatch acquisition should increase Kimbell’s near-term distributable cash flow per unit. Without the acquisition (and unit offering), I estimate that Kimbell would have generated around $2.40 per unit in distributable cash flow in 2023 at current strip prices. The Hatch acquisition gives Kimbell more unhedged production as well as reduces its cash G&A per BOE.
|
$ Million |
|
|
Marketing And Other Deductions |
$18 |
|
Production Costs And Ad Valorem Taxes |
$21 |
|
Cash G&A |
$17 |
|
Cash Interest |
$13 |
|
Total Expenses |
$69 |
Notes On Valuation
I now estimate that Kimbell is worth approximately $20 per unit in a scenario where commodity prices follow current strip until the end of 2023, and average long-term prices of $70 WTI oil and $4.00 NYMEX gas after that. This assumes that production from the Hatch assets can be at least maintained at expected 2023 levels of 2,522 BOEPD. This is a slight increase from my previous estimate of Kimbell’s value due to the positive effect of the Hatch acquisition (assuming that production growth from the Hatch acreage does actually meet expectations).
Conclusion
Kimbell’s Hatch acquisition appears to be a positive for the company as it boosts its projected oil production in 2023 by close to 40% and gives it more unhedged barrels. Thus Kimbell may still be able to offer a quarterly distribution of near $0.50 per unit in 2023 despite expectations for weaker natural gas prices compared to several months ago. The 2023 strip for natural gas has decreased $1.30 compared to the beginning of September.
Kimbell appears to be a decent value at its current unit price as I estimate that it is worth around $20 per unit at long-term (after 2023) $70 oil and $4 gas, while at current strip it could pay out $2 in distributions related to 2023 results.
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