Greetings, and welcome to the Kimbell Royalty Partners first quarter earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you. You may begin.
Thank you operator, and good morning, everyone. Welcome to Kimbell Royalty Partners conference call to review financial and operational results for the first quarter ended March 31, 2023. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the IR section of kimbellrp.com. Information on this call speaks only as of today, May 3, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance, are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
We will be making forward-looking statements as part of today's call, which by their nature are uncertain and outside of the company's control. Actual results may differ materially. Please refer to today's earnings press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA and cash available for distribution. Reconciliations to the nearest GAAP measures can be found at the end of today's earnings press release. Kimbell assumes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Bob Ravnaas, Kimbell Royalty Partners Chairman and Chief Executive Officer. Bob?
Thank you, Rick. Good morning, everyone. We appreciate you joining us on the call this morning. With me today are several members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer, Matt Daly, our Chief Operating Officer, and Blayne Rhynsburger, our Controller. We are pleased to report our first quarter results that included record run rate daily production, a new record high rig count on our acreage, and a declared cash distribution of $0.35 per common unit. We're also very excited about our Midland Basin mineral and royalty acquisition that we announced last month. We expect to close this acquisition later this month. With the addition of MB Minerals to our portfolio, we continue to build on last year's momentum and our production mix is now expected to materially shift towards oil.
After giving effect to our recent M&A activity, the Permian now leads all categories in terms of production, inventory, rig count, and line of sight wells. Looking at our natural gas royalty assets, even in the face of low natural gas prices in the first quarter, the rig count on our core Haynesville acreage increased quarter-over-quarter, led by private operators. This increase in the rig count is a testament to the quality of our acreage in this area. We realized natural gas prices that were substantially higher than Henry Hub across several basins during Q1, led by the DJ Basin and Bakken, which highlights the strength of our diversified royalty model. We realized natural gas prices during Q1 that were 19% above Henry Hub.
Before turning the call over to Davis to provide a more detailed review of our financials, I'd like to comment further on our Midland Basin acquisition. These assets include targeted oil and gas mineral and royalty interest on approximately 60,000 gross acres concentrated in the northern Midland Basin. Located primarily in northern Howard County, there is a high interest contiguous footprint and three active rigs on the acreage as of March 31st. The mineral and overriding royalty ownership is on over 100 horizontal DSUs and is 100% held by production with over 300 total producing wells. We expect to add approximately 1,900 BOE per day with a mix of 77% oil, 12% natural gas, and 11% NGL based on our estimated run rate average daily production over the next 12 months.
We believe this is an excellent and highly accretive transaction for our company and our unit holders at a very favorable multiple. This acquisition again reinforces our Permian Basin position as our leading basin in terms of production, active rig count, DUCs, permits, and undrilled inventory. We expect to increase our run rate average daily production to over 19,000 BOE per day, and the acquisition is expected to add 2.06 net DUCs and net permitted locations to Kimbell's inventory. Following the transaction, we expect our oil weighting daily production mix to increase from 29% to 34%. We also expect to maintain a peer-leading five-year PDP decline rate of approximately 13%. If we zoom out to take in a broad view of the industry, we continue to expect oil production growth from U.S. operators to remain relatively flat.
We arrive at this view not only from the commentary we are hearing from U.S. operators, but also due to the fact that the number of DUCs in the U.S., which is one of the best indicators for near-term production growth, has dropped precipitously since 2020 and has not recovered. Many operators will continue to focus on replenishing their DUC inventories in the short term, and we believe that inflationary pressures in the drilling completion and labor side of their businesses will continue to temper oil production growth during 2023. Production stability, profitability, and quality of inventory will continue to be the primary themes of energy investing rather than the hyper-growth models we've seen in prior cycles. Moving forward, we will continue to drive growth both through organic development and our disciplined acquisition strategy that is both a consistent and proven method at Kimbell.
We also expect to continue benefiting from our diverse portfolio with quality production, low PDP decline rates, and upside drilling locations. As a major consolidator in the highly fragmented U.S. oil and gas royalty sector, we remain bullish about the long-term consolidation in this space and our role in it. We believe that future opportunities for Kimbell are very bright and extend for many years. I'll now turn the call over to Davis to review our financials in more detail before we open the call to questions.
Thanks, Bob. Good morning, everyone. We are pleased to report strong performance during the first quarter. We are also affirming our full year 2023 guidance that was previously disclosed in our fourth quarter of 2022 press release. We'll update our full year 2023 guidance after the closing of the MB Minerals acquisition. I'll start by reviewing our financial results from the first quarter, beginning with oil, natural gas, and NGL revenues of $57.4 million, a decrease of 10.9% from the fourth quarter, primarily due to a decline in realized commodity prices.
Kimbell's first quarter 2023 average realized price per barrel of oil was $74.99, per MCF of natural gas was $3.16, per barrel of NGLs was $25.82, and per BOE combined was $36.19. Despite coming in lower than Q4, our average realized natural gas prices for Q1 were 19% above Henry Hub due to premium prices received across several basins, led by the DJ Basin and the Bakken. First quarter 2023 average daily production was 17,215 BOE per day on a six-to-one basis, which consisted of 201 BOE per day related to prior period production recognized during the quarter and 17,014 BOE per day of run rate production.
The prior period production recognized this quarter was attributable to past production that came into pay status during Q1, 2023. Our record first quarter run rate daily production of 17,014 BOE per day, an increase of 10.5% from Q4, 2022, was composed of approximately 58% from natural gas and approximately 42% from liquids, or 29% from oil and 13% from NGLs. The first quarter run rate daily production does not include any production from the MB Minerals acquisition that we announced last month. As of March 31st, 2023, not including the MB Minerals acquisition, Kimbell's major properties had 749 gross and 3.55 net drilled but uncompleted wells, as well as 750 gross and 3.19 net permits on its acreage.
This data does not include our minor properties, which we estimate could add an additional 20% to the DUC and permit inventory. In addition, we exited the quarter with a record 94 rigs actively drilling on our acreage, up from 92 rigs at the end of 2022. Currently, our market share of all land rigs drilling in the continental United States represents approximately 12.8%. On the expense side, general and administrative expenses for Kimbell were $8.3 million in the quarter, $5.1 million of which was cash G&A expense, or $3.34 per BOE. Unit-based compensation in the first quarter, which is a non-cash G&A expense, was $3.2 million, or $2.07 per BOE.
We saw an uptick in cash G&A expenses compared to last quarter due to the payment timing of certain third-party professional fee expenses. Those costs are expected to come down through the remainder of the year. First quarter net income was approximately $28.9 million. Total first quarter consolidated adjusted EBITDA was $42.3 million. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release. Today, we announced a cash distribution of $0.35 per common unit for the first quarter. This represents a cash distribution payment to common unit holders of 75% of cash available for distribution, the remaining 25% will be used to pay down a portion of the outstanding borrowings under Kimbell's secured revolving credit facility.
Since May 2020, excluding this upcoming Q1 payment, Kimbell has paid down approximately $99.2 million of outstanding borrowings under its secured revolving credit facility by allocating a portion of its cash available for distribution for debt paydown. Since our IPO in 2017 through today, the total cash distributed to common unit holders since we became a public company is $8.80 per common unit, approximately 49% of Kimbell's $18 per unit IPO price. Commenting further on our balance sheet and liquidity, as of March 31st, we had approximately $223.9 million in debt outstanding under its secured revolving credit facility. We continue to maintain a conservative approach with net debt to trailing twelve-month consolidated adjusted EBITDA of 1 times.
With approximately $126.1 million in undrawn capacity under our secured revolving credit facility, we are very comfortable with our strong financial position and the flexibility this provides for our continued consolidation. Before we open up the call to your questions, I would like to briefly reiterate Bob's comments about our acquisition of MB Minerals. We think this is a home-run acquisition for Kimbell at a great multiple that is highly accretive beginning in Q2 of this year. The purchase price is comprised of $48.8 million in cash, which is approximately 34% of the total consideration, approximately 5.4 million newly issued common units of Kimbell Royalty Operating, valued at $85.4 million, and approximately 0.6 million newly issued common units of Kimbell Royalty Partners valued at $8.9 million.
We appreciate the vote of confidence and support of Kimbell by the sellers that see the value of holding units in our company. Operator, we are now ready for questions. Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.
Good morning, everyone. Thanks for taking my questions. For my first one, looking at active rigs across your position, there was a six-rig increase in the Haynesville that you noted was largely driven by the privates. As you mentioned, the rig increase during the first quarter when operators were generally decreasing activity is certainly a testament to your acreage quality. My question is, how do you see that trend holding up against the backdrop of a lower commodity and commentary from industry regarding deferring completions and further activity reductions? Thanks.
Yeah. Thanks for the question, John. This is Davis. I think that was one of the more surprising data points that we observed from this quarter-over-quarter comparison. Frankly, we were expecting rig activity to be more muted in the Haynesville, just given the obvious drop in the commodity price. Impossible for us to predict what's gonna happen in terms of operator activity. We do think it's a, you know, an indication that our acreage is in an area that's better than average, obviously, and perhaps even extremely above average, just given the fact that the rig activity increased so meaningfully. At the same time, you know, we wouldn't be totally opposed to our operators keeping the gas in the ground and pulling it out when commodity prices are higher.
Don't wanna make any sort of estimate about what's gonna happen on our acreage going forward. It is a good sign that we appear to get more activity than the general, well, than the basin overall, notwithstanding the decline in the commodity price. Bob or Matt, anything you guys wanna add to that?
I mean, I would just add that, I mean, their ability right now, especially all these operators, their ability to hedge into a contango-shaped natural gas curve is likely driving a lot of this increase in drilling in the Haynesville. I mean, basically, you can hedge natural gas at $3.50 and $4.15 in 2024 and 2025. At those prices, you know, that's a very high return in the part of the Haynesville they're drilling. You know, I mean, hard to predict, like Davis said, but based on the contango right now, unless that flattens out, we really don't see much in the way of a major slowdown in the Haynesville. Right now, we have 21 rigs drilling in the Haynesville.
That's one-third of all Haynesville rigs that we have on our acreage currently. Certainly good to see. Yeah, this contango, I think is what's driving mainly the drilling in the Haynesville, so.
Terrific. I appreciate all the color. For my follow-up, I wanted to touch on how you see production trending over the next few quarters on a legacy company basis that is excluding the pending MB transaction. If we look at your line of sight inventory being well above your maintenance requirement, is it fair to say that there's potential upside to production growth above what the full year guide implies, which is relatively flat based on the midpoint?
Yep. John Freeman, we said this last quarter, and I think we'll reiterate it. Yes. I mean, the number of net DUCs and permits on our acreage relative to the number needed to keep production flat, is at its, you know, I believe it's best level in the company's history. We would expect, you know, potentially an increase in production above and beyond maintenance levels. That being said, commodity prices are obviously, you know, a headwind right now, where it wouldn't be unsurprising for us to see deferred completions on our acreage, which would obviously impact, you know, production going forward. We don't see evidence of that currently. It's just we don't have control, obviously, as a mineral company over the timing of those completions. We feel very good.
It's, you know, inevitable that those DUCs get completed and that the super majority, if not all of those permits, get developed at some point. We just can't control the timing. We feel good about it. We just there's just uncertainty around when the timing materializes. Bob or Matt, anything you guys would add to that too?
No, I agree with that.
Yep, I agree.
Makes sense. That's it for me. Thanks again for taking my questions.
Thanks, John.
Our next question comes from the line of John Freeman with Raymond James. Please proceed with your question.
Hi, guys.
Hey, John.
Hey, John. How's it going?
Good, thanks. You know, I was looking, you know, the last, you know, six months y'all have done, you know, over $400 million in acquisitions with these two, you know, very attractive Permian deals. When I looked at kind of the prior kind of 4-year run rate, like prior to Hatch, you know, y'all were sorta averaging just over $100 million in acquisitions annually. I'm trying to get a sense of just what's kinda changed that's created this much more favorable backdrop for y'all to get, you know, not just the quality of the deals, but also the size of these deals that y'all have done recently relative to you know, what was kind of occurring the prior three, four years.
John, I think that's an excellent question, and thank you for making that observation. The largest acquisition we made, which was perhaps our most impactful in terms of transforming the company, was the Haymaker acquisition we made in 2018. That was a, you know, $400 million plus acquisition back then. If you had asked us back then what we would have expected in terms of A&D and M&A, I think we would have expected and hoped that we would have been able to continue that sort of cadence of acquisitions, you know, being able to do several hundred million dollars every year. What I think changed was there was a major influx of private equity capital cash, mostly that came in kinda that 2017, 2018 timeframe, more specifically focused on the Permian.
I think that made a lot of sellers. Well, sellers always prefer cash to equity. I think in that particular timeframe, there was more cash available for sellers to exit to and to accept as consideration. I think it was more challenging for us to issue our equity to sellers and be competitive with, you know, large war chests of cash that were, you know, pursuing similar opportunities. At the same time, you know, 5 years ago, 6 years ago, most of the mineral positions that exist in the Permian Basin, more specifically the positions of scale that existed in the Delaware Basin, were very, very mature. We're talking about very little. I know you know all this, I'm just providing context for my answer. The production on those assets was very small.
A lot of these deals, you know, it could have been a $200 million deal, but had very little existing production. Folks, buyers were expecting, you know, a ramp in that production development activity. We've never liked that strategy. We've just never done that. As a public company, we think it's tough to be buying non-producing assets that are, you know, immediately dilutive to distributable cash flow, making a bet on development that you can't control as a mineral company. We had to kinda wait it out, so to speak, as a combination of an immature, you know, a basin that was in the process of maturing and was previously very immature, and then a lot of cash buyers on the sideline. Fast-forward to Hatch.
Hatch is an asset that was kinda perfect for us from A, and also in B, from the standpoint that it's immediately accretive to distributable cash flow. It was mature enough such that it was a, you know, meaningfully accretive asset to us on a, on a cash flow basis, it also still had enough running room for us to get really excited about the growth opportunities on the asset as well. That coupled with the financing alternatives, we just don't necessarily see, you know, new portfolio companies of major private equity firms coming out with $500 million, $1 billion commitments to go out and buy minerals. Even if they did have those, I don't think they're gonna be competing for more mature assets like the ones that we're targeting.
I think it's kind of a combination of all those factors which has driven the success that we've had on the M&A front over the last six months. We haven't changed anything internally about our, you know, our underwriting process, which has frankly been virtually untouched for 25 years. I mean, we've made improvements and modifications to it, but you know, similar approach and the thought process behind it. I think it's more of a, you know, a confluence of different events, and it's been very welcome, and we hope that it continues going forward. We certainly didn't necessarily expect that timing. We didn't think that, you know, we were gonna do $400 million of deals in the last six months.
It just happened that we were in the right place at the right time, and we're in a good position to execute. Bob or Matt, anything you guys would add?
Yeah, I'd just like to add that both acquisitions, John, we were very fortunate. As Davis Ravnaas said, we're very selective, and so it wasn't any change in underwriting criteria. I'll never forget looking at Hatch, you know, and I know you know Jimmy Murchison too. He and his team just put together an excellent set of assets that we almost couldn't have asked for anything better. It just checked all the boxes with regard to, you know, our offer was immediately accretive both to cash flow and also on NAV, and it had a long inventory in the Delaware. When I first saw that and I saw the engineering runs, I said, "I think we're gonna be competitive on this." I know a lot of.
Which I think is unfortunate, I think a lot of royalty companies still really do a backstop of looking at dollars per acre. I think that, you know, on us, as long as everything checks the boxes, if it's in a high-quality area with a lot of development, we care less about the dollars per acre or, you know, we look at it as, but we don't use it as a backstop. The other thing about Hatch is they had a tremendous amount of near-term DUCs and permits. The other aspect of it is it de-risked, for us, it de-risked cash flows, you know, over the first year and a half, two years. We love that. This most current acquisition, we love that, too. We were just very fortunate in both that they came out and they checked our boxes.
John, I'll add on to that just one more thought. You know, we're very lucky to have different owners of mineral baskets, private equity sponsors in particular, and then also just management teams. Bob mentioned the Hatch team, and then also obviously, EnCap is the sponsor with MB. These are groups that we've done business with in the past and groups that we trust and that we've had good experiences with. I think that just kinda speaks to, you know, the importance of relationships in this, you know, sector, which is still in the early stages of consolidating, so.
All that color is great. I actually, I was gonna go a different direction, but I'm actually gonna stick with the M&A topic 'cause y'all touched on a few things, Bob and Davis, that I think is interesting is sort of the contrast where on the E&P side, we've seen a number of portfolio companies get sold by private equity this year, and they generally had good inventory, acreage, et cetera, but really high base decline rates relative to who's acquiring them. Yet, you know, y'all have done two sizable deals and your base decline rate barely budged, right? 12% prior to these two and 13% post.
I guess it's sort of, that's pretty. I mean, it's great that y'all are able to do that, but it does beg a question, just thinking about other deals that may be coming over the next year or two. If theoretically, like a deal, obviously it's gotta be accretive. I get that that's the number one priority. If it's, you know, accretive on all the metrics that y'all are focused on, it's high inventory, it's in a good area, got good operators, all of that stuff, and it comes with a materially higher base decline rate such that it would materially affect y'all's base decline rate, is that a deal that y'all would still look at under the right circumstances or no, you just move on?
You know, John, great question. We've been fortunate that we haven't really pursued deals that fit that higher decline rate that you're alluding to, at least at meaningful scale up to this point. I think what we would do is we would be open-minded on those opportunities. I think that we benefit from, you know, as time goes by, obviously our base decline rate continues to flatten. That's kind of one of the reasons why Hatch and MB didn't have such an outsized impact on our, on our base decline rate. As our base decline rate continues to decline and matures, it allows us, I think, to pursue opportunities like what you're describing without changing the underlying DNA of our, our PDP production profile, which is something that's critically important to us as you know well.
I think open-minded. I think that it probably on balance just makes the acquisition more challenging for us to get excited about. I think if the base decline rate was, you know, meaningfully higher and meaningfully increased Kimbell's base decline rate, we need to see more impact. We need to be able to make more money for our shareholders on the accretion front to make it more direct. We need to see more of a meaningful impact on cash flow per unit immediately, and then we need to be able to see a, you know, the ability to drive those cash flows greater over time. I think it just.
It would be less desirable in a package, but I don't think it would disqualify it from consideration by us. Frankly, we're just encouraged that as, you know, more specifically, the Delaware continues to mature, I think that the production profile of some of those packages, and a lot of them are still in private hands, as you know. I think they're gonna become increasingly more competitive in acquiring those deals that we missed in the past for all the reasons that I previously mentioned. Hopefully some of that makes sense.
That makes sense. No, I appreciate it. Thanks again, guys, for the detailed answers.
Thanks, John.
Yeah. Thanks, John.
Our next question comes from the line of Tim Rezvan with KeyBanc. Please proceed with your question.
Good morning, everybody. Thanks for taking my question. I had a couple quickies just based on prepared comments to help us from a modeling standpoint. Did you say that you expect oil to be 34% of production after the close? Should we assume that as kind of a run rate going forward, maybe starting in third quarter?
Give me a second.
This is Matt. That's correct. 34% oil weighting in Q2. Of course, we're gonna issue guidance here shortly that'll have this deal integrated that'll have the revised production numbers mix of various commodities, cash G&A, so forth. 34% would be something you'd use, and that would be something going forward, you know, plus or minus a couple percent. Then, Tim, this is Bob. We struck the deal so that it would be a full second quarter after we close. It won't be just after the closing date, that the effective date. We'll get full production beginning in the beginning of the second quarter. That 34% would apply for the whole second quarter on.
Okay. Okay. Yeah, that's Okay. All right. I appreciate that. One thing I was a little surprised on is, you know, that this impending acquisition, you know, the pricing seems so attractive that it looks like a little more of a, kind of, you know, a PDP acquisition. I know there's some near-term growth. If I heard you correctly, you said three active rigs at the end of the first quarter. Do you expect or did you underwrite, you know, kind of longer term growth? You know, beyond you talked about, in the number of producing wells, how do you think about that asset, you know, over the next two, three years? What was embedded in your expectations?
Yeah. Bob, do you want me to start out, then you can jump in here and then Matt?
Sure. Sure.
Tim, great question. Great question. Not as much running room on the drilling front as something like Hatch, right, which has a much longer runway from an inventory standpoint. Love that because, you know, Hatch was immediately accretive, we also have a lot of inventory and growth to kinda drive future accretion. Contrast that with the MB acquisition, which has at a much lower cash flow multiple to your point, which is correct, a lot more near term accretion, less growth going forward. That being said, this isn't a PDP asset that's declining. We do see a multiyear inventory on this package, it's just not as much running room as Hatch has. Candidly, we kinda look at it and say they're a really nice complement to one another.
We didn't proactively seek out to buy MB because it was a good complement to Hatch. It just kinda turned out that way. It was a nice circumstance, but it kinda drives more near-term accretion to cash flow, which everybody's gonna see in the second quarter. That'll be well balanced by, you know, the longer term inventory nature of which Hatch has. No, I don't wanna leave you with the conclusion that we bought an asset that's, you know, peaked out on production rates and is declining over time. I think you pointed that out too. I mean, that's why there's a meaningful amount of DUC and permanent inventory in the rigs that are running on the acreage.
I mean, there is running room there, and you can go look at, you know, Vital's, you know, investor presentation and kind of, you know, make your own informed opinion as well. No, there is growth there, just not quite as much as Hatch. That's also why, you know, we bought it at the multiple of cash flow that we did and didn't pay as much for it on a cash flow basis as Hatch, if that makes sense.
Yeah, totally. Okay. I just wanted to kinda confirm that was as expected. Then if I could sneak in a quick final one.
Sure.
You talked about the $126 million undrawn capacity, $224 million drawn. My understanding that is kinda before the factoring in this acquisition. Could you talk about kinda when the timing was, when we might see a redetermination or how that, you know, liquidity could change?
Matt, you wanna tackle that one?
Yeah. Yeah. This is a, you know, as Davis said, this is a relatively heavy PDP asset, which the banks give a lot of credit on the borrowing base increase. We're looking at the bank meeting. It will be mid-May. Just throwing out some potential numbers here. You're probably looking at, you know, at least a $50 million increase in borrowing base on this transaction. Could be more than that. Of course, with that increase, you're looking at about $130 million of liquidity. A lot of liquidity post this acquisition. A pro forma leverage ratio around 1 times.
Okay. Okay. That's great. Thank you, everybody.
You bet.
Oh, thank you.
Yeah. Thanks, Tim.
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Thanks, everyone. We appreciate your time today and look forward to talking to you again when we report our second quarter earnings. This completes today's call.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.