Kimbell Royalty Stock: Quarterly Distributions Over $0.50 (NYSE:KRP)

Kimbell Royalty Partners (NYSE:KRP) delivered strong Q2 2022 results with noticeable (+4%) sequential production growth and a $0.55 per unit distribution. Assuming that a more modest amount (+1%) of sequential production growth continues, Kimbell should be able to continue offering a similar distribution over the next year and a half at current strip prices.

I previously thought that Kimbell was fairly priced based on my expectations for long-term oil and gas prices. I have since bumped up my expectations around Kimbell’s production levels and long-term natural gas prices. Thus Kimbell now appears to be a decent value at under $17 per unit.

Strong Production Growth

Kimbell reported strong production growth in Q2 2022. It had 4% organic production growth from Q1 2022 to Q2 2022, with average run-rate production going from 14,388 BOEPD in Q1 2022 to 14,948 BOEPD in Q2 2022.

Despite the production growth, Kimbell just reaffirmed its full-year guidance for 2022 rather than increasing it. This is likely due to its original guidance range being quite wide at 13,700 BOEPD to 15,100 BOEPD. Kimbell averaged approximately 14,670 BOEPD in run-rate production during the first half of 2022, so it would need to average over 15,523 BOEPD during the second half of 2022 to exceed the 15,100 BOEPD high-end of its full-year guidance range.

Thus Kimbell could have some continued production growth in the second half of 2022 without revising its guidance. Around +2.5% sequential production growth per quarter would result in it averaging a bit over 15,500 BOEPD in production during the second half of the year.

Hedges

Kimbell’s hedges are still having a major negative impact in 2022. It paid $22 million to settle derivatives in the first half of 2022, and may realize another $32 million in hedging losses over the second half of 2022.

Kimbell’s hedges become less of a negative factor as time goes on since it has lower hedged volumes plus improved swap prices. Kimbell’s hedges have an estimated value of negative $23 million for 2023 and negative $2 million for 2024 at current strip prices.

Updated 2H 2022 Outlook

If we assume that Kimbell’s sequential production growth is a more moderate 1% per quarter in the second half of 2022, then it could average around 15,175 BOEPD during that period.

At Q2 2022 production splits of 24% oil, 13% NGLs and 63% natural gas, Kimbell is projected to generate $130 million in revenues after hedges. This is based on current 2H 2022 strip of $90s WTI oil and nearly $9 Henry Hub natural gas.

Click to enlarge

This would result in Kimbell generating $98 million (approximately $1.50 per unit) in distributable cash flow in the second half of 2022. At a 75% payout ratio, there would be a $0.56 per unit quarterly distribution related to 2H 2022 results.

Click to enlarge

2023 Outlook

If Kimbell then averages 15,500 BOEPD in production in 2023, it could generate $239 million in revenues after hedges. This is based on current 2023 strip of approximately $80 WTI oil and $6.60 Henry Hub gas.

Click to enlarge

In this scenario, Kimbell could generate $180 million in distributable cash flow (approximately $2.75 per unit) in 2023. At a 75% payout ratio, the quarterly distribution would be approximately $0.515 per unit. This rises to $0.55 per unit at an 80% payout ratio.

Click to enlarge

Notes On Valuation

I’ve increased my long-term outlook for natural gas prices to $4.00. In a scenario where commodity prices follow current strip until the end of 2023 and then average $70 WTI oil and $4.00 Henry Hub gas after 2023, I’d estimate Kimbell’s value at approximately $19.50 per unit.

At slightly more optimistic long-term oil and gas prices of $75 and $4.50, respectively, Kimbell’s estimated value increases to approximately $21.25 per unit.

Conclusion

Kimbell delivered strong production growth in Q2 2022 and announced a $0.55 per unit distribution. Based on current strip prices, it may be able to deliver a similar quarterly distribution for the next year and a half.

I estimate Kimbell’s value at around $19.50 per unit to $21.25 per unit based on my expectations around long-term (after 2023) oil and gas prices. Thus at under $17 per unit, Kimbell appears to be a decent value now.