Kimbell Royalty Partners (NYSE:KRP) is anticipated to have a quarterly distribution averaging in the mid-40s cents per unit in Q4 2023 and 2024 with a 75% payout ratio. The expected payout is slightly lower than the $0.51 per unit distribution for Q3 2023, attributable to weaker oil prices and increased preferred distributions, which had only a limited impact on Q3 2023.
Kimbell’s projected production growth in 2024 looks encouraging, with a high number of line-of-sight wells compared to its maintenance requirements. Consequently, the projected 2024 production has been increased to 24,500 BOEPD, signifying mid-single digits growth from 2H 2023 levels, proforma for its LongPoint acquisition.
This slight increase in production growth leads to an estimated value of around $19.25 per unit despite the lowered expectations for near-term distributable cash flow.
Borrowing Base Redetermination Boosts Credit Facility
The Redetermination of Kimbell’s credit facility borrowing base and aggregate elected commitments has seen an increase from $400 million to $550 million, reflecting the impact of Kimbell’s $455 million mineral and royalty interests acquisition from LongPoint Minerals II.
As of Q3 2023, Kimbell reported $310.4 million in outstanding borrowings under its revolving credit facility. Post redetermination, Kimbell would have $239.6 million in credit facility availability.
Potential Q4 2023 Production and Revenue
Kimbell expects approximately 23,400 BOEPD in production for Q4 2023 at the midpoint of its guidance. Commodity prices averaged around $78 to $79 for WTI oil and $2.75 for Henry Hub gas, with expectations of generating approximately $80 million in revenues, inclusive of hedges.
Based on these prices, Kimbell is anticipated to generate $54 million ($0.57 per unit) in Q4 2023 distributable cash flow, resulting in a Q4 2023 distribution of $0.43 per unit, lower than Q3 2023.
Updated 2024 Outlook
Kimbell has reported 9.34 net DUCs and permits at the end of Q3 2023, the highest multiple in its history to the estimated net wells per year. This is critical, although operational uncertainties persist regarding the timeline for well activation.
Despite this uncertainty, the presence of a large number of line-of-sight wells has led to an upward revision of Kimbell’s 2024 production to 24,500 BOEPD, reflecting a mid-single digit growth from its 2H 2023 production levels, post-LongPoint acquisition.
At the current 2024 strip, Kimbell is projected to generate around $330 million in revenues after hedges, with hedges covering around 20% of its oil and gas production at an average price of approximately $79 WTI oil and $4 Henry Hub gas.
Kimbell is now projected to generate $226 million (or $2.39 per unit) in distributable cash flow in 2024, resulting in a quarterly distribution of around $0.45 per unit based on a 75% payout ratio.
Conclusion: Projected Growth Amidst Industry Challenges
Projected quarterly distributions for Q4 2023 and 2024 are anticipated to average in the mid-40s cents per unit, slightly below Q3 2023. This is attributed to weaker oil prices and increased preferred distributions, yet the high visibility of line-of-sight wells bodes well for organic production growth. The projected valuation of $19+ per unit remains reasonable for Kimbell, representing a 2024 distribution yield of approximately 9.5% with a 75% payout ratio, and a distributable cash flow yield of around 12.5% at lower-than-average commodity prices.
