Quarterly Report (10-q)

Date : 11/08/2019 @ 9:13PM
Source : Edgar (US Regulatory)
Stock : Kimbell Royalty Partners (KRP)
Quote : 16.25  0.14 (0.87%) @ 9:01PM
Kimbell Royalty Partners share price Chart

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                      to                    

Commission file number: 001‑38005


Kimbell Royalty Partners, LP

(Exact name of registrant as specified in its charter)


 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

1311
(Primary Standard Industrial
Classification Code Number)

47‑5505475
(I.R.S. Employer
Identification No.)

 

777 Taylor Street, Suite 810

Fort Worth, Texas 76102

(817) 945‑9700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class: 

Trading symbol(s)

Name of exchange on which registered:

Common Units Representing Limited Partner Interests

KRP

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

As of November 1, 2019, the registrant had outstanding 23,520,219 common units representing limited partner interests and 23,388,258 Class B units representing limited partner interests.

 

 

 

KIMBELL ROYALTY PARTNERS, LP

FORM 10‑Q

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements (Unaudited):

1

Condensed Consolidated Balance Sheets 

1

Condensed Consolidated Statements of Operations  

2

Condensed Consolidated Statements of Changes in Unitholders’ Equity  

3

Condensed Consolidated Statements of Cash Flows  

5

Notes to Condensed Consolidated Financial Statements 

6

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations 

22

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

38

Item 4.     Controls and Procedures 

39

 

 

 

 

PART II – OTHER INFORMATION 

 

Item 1.     Legal Proceedings 

41

Item 1A.  Risk Factors 

41

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds 

41

Item 6.     Exhibits  

42

Signatures 

43

 

 

 

i

PART I – FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements (Unaudited)

KIMBELL ROYALTY PARTNERS, LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2019

 

2018

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,297,982

 

$

15,773,987

Oil, natural gas and NGL receivables

 

 

16,934,026

 

 

18,809,170

Commodity derivative assets

 

 

2,380,629

 

 

2,981,117

Accounts receivable and other current assets

 

 

440,390

 

 

50,551

Total current assets

 

 

40,053,027

 

 

37,614,825

Property and equipment, net

 

 

1,202,434

 

 

429,602

Investment in affiliate (equity method)

 

 

2,885,037

 

 

 —

Oil and natural gas properties

 

 

 

 

 

 

Oil and natural gas properties, using full cost method of accounting ($299,613,448 and $280,304,353 excluded from depletion at September 30, 2019 and December 31, 2018, respectively)

 

 

987,942,123

 

 

818,594,943

Less: accumulated depreciation, depletion and impairment

 

 

(211,242,100)

 

 

(107,779,453)

Total oil and natural gas properties, net

 

 

776,700,023

 

 

710,815,490

Deposits on oil and natural gas properties

 

 

986,000

 

 

 —

Right-of-use assets, net

 

 

3,466,101

 

 

 —

Commodity derivative assets

 

 

969,062

 

 

1,246,829

Loan origination costs, net

 

 

2,483,443

 

 

3,178,627

Total assets

 

$

828,745,127

 

$

753,285,373

 

 

 

 

 

 

 

LIABILITIES, MEZZANINE EQUITY AND UNITHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

1,131,402

 

$

1,331,081

Other current liabilities

 

 

5,667,143

 

 

2,468,945

Total current liabilities

 

 

6,798,545

 

 

3,800,026

Operating lease liabilities

 

 

3,436,847

 

 

 —

Long-term debt

 

 

91,261,477

 

 

87,309,544

Total liabilities

 

 

101,496,869

 

 

91,109,570

Commitments and contingencies (Note 15)

 

 

 

 

 

 

Mezzanine equity:

 

 

 

 

 

 

Series A preferred units (110,000 units issued and outstanding as of September 30, 2019 and December 31, 2018)

 

 

73,365,147

 

 

69,449,006

Unitholders' equity:

 

 

 

 

 

 

Common units (23,520,219 units issued and outstanding as of September 30, 2019 and 18,056,487 units issued and outstanding as of December 31, 2018)

 

 

341,969,430

 

 

299,821,901

Class B units (23,388,258 units issued and outstanding as of September 30, 2019 and 19,453,258 units issued and outstanding as of December 31, 2018)

 

 

1,169,413

 

 

972,663

Total unitholders' equity

 

 

343,138,843

 

 

300,794,564

Noncontrolling interest

 

 

310,744,268

 

 

291,932,233

Total equity

 

 

653,883,111

 

 

592,726,797

Total liabilities, mezzanine equity and unitholders' equity

 

$

828,745,127

 

$

753,285,373

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

KIMBELL ROYALTY PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2019

 

2018

 

2019

 

2018

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Oil, natural gas and NGL revenues

 

$

29,531,138

 

$

21,085,377

 

$

80,278,506

 

$

42,741,233

Lease bonus and other income

 

 

940,898

 

 

358,215

 

 

2,313,548

 

 

1,124,949

Gain (loss) on commodity derivative instruments, net

 

 

2,506,815

 

 

(3,035,636)

 

 

270,607

 

 

(3,858,990)

Total revenues

 

 

32,978,851

 

 

18,407,956

 

 

82,862,661

 

 

40,007,192

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Production and ad valorem taxes

 

 

2,236,405

 

 

1,410,335

 

 

5,757,742

 

 

3,031,732

Depreciation and depletion expense

 

 

15,098,107

 

 

7,607,137

 

 

37,690,558

 

 

15,494,439

Impairment of oil and natural gas properties

 

 

34,880,071

 

 

 —

 

 

65,828,980

 

 

54,753,444

Marketing and other deductions

 

 

2,332,010

 

 

1,689,780

 

 

5,938,093

 

 

2,868,655

General and administrative expense

 

 

5,694,534

 

 

4,879,497

 

 

17,248,399

 

 

11,650,291

Total costs and expenses

 

 

60,241,127

 

 

15,586,749

 

 

132,463,772

 

 

87,798,561

Operating (loss) income

 

 

(27,262,276)

 

 

2,821,207

 

 

(49,601,111)

 

 

(47,791,369)

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

Equity loss in affiliate

 

 

80,896

 

 

 —

 

 

80,896

 

 

 —

Interest expense

 

 

1,468,419

 

 

1,843,483

 

 

4,332,633

 

 

2,677,083

Net (loss) income before income taxes

 

 

(28,811,591)

 

 

977,724

 

 

(54,014,640)

 

 

(50,468,452)

Provision for income taxes

 

 

102,997

 

 

1,977,116

 

 

610,798

 

 

1,977,116

Net loss

 

 

(28,914,588)

 

 

(999,392)

 

 

(54,625,438)

 

 

(52,445,568)

Distribution and accretion on Series A preferred units

 

 

(3,469,584)

 

 

(2,840,456)

 

 

(10,408,752)

 

 

(2,840,456)

Net loss and distributions and accretion on Series A preferred units attributable to noncontrolling interests

 

 

16,146,535

 

 

141,003

 

 

33,398,555

 

 

141,003

Distribution on Class B units

 

 

(23,414)

 

 

(12,953)

 

 

(71,042)

 

 

(12,953)

Net loss attributable to common units

 

$

(16,261,051)

 

$

(3,711,798)

 

$

(31,706,677)

 

$

(55,157,974)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common units

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.73)

 

$

(0.15)

 

$

(1.53)

 

$

(2.91)

Diluted

 

$

(0.73)

 

$

(0.15)

 

$

(1.53)

 

$

(2.91)

Weighted average number of common units outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,399,748

 

 

24,079,289

 

 

20,715,633

 

 

18,962,446

Diluted

 

 

22,399,748

 

 

24,079,289

 

 

20,715,633

 

 

18,962,446

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

KIMBELL ROYALTY PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

   

Common Units

   

Amount

   

Class B Units

   

Amount

 

Interest

 

Total

Balance at January 1, 2019

 

 

18,056,487

 

$

299,821,901

 

 

19,453,258

 

$

972,663

 

$

291,932,233

 

$

592,726,797

Units issued for Phillips Acquisition

 

 

 —

 

 

 —

 

 

9,400,000

 

 

470,000

 

 

171,550,000

 

 

172,020,000

Conversion of Class B units to common units

 

 

1,438,916

 

 

23,507,402

 

 

(1,438,916)

 

 

(71,946)

 

 

(23,507,402)

 

 

(71,946)

Unit-based compensation

 

 

 —

 

 

1,770,410

 

 

 —

 

 

 —

 

 

 —

 

 

1,770,410

Distributions to unitholders

 

 

 —

 

 

(7,798,161)

 

 

 —

 

 

 —

 

 

(7,205,737)

 

 

(15,003,898)

Distribution and accretion on Series A preferred units

 

 

 —

 

 

(1,441,938)

 

 

 —

 

 

 —

 

 

(2,027,646)

 

 

(3,469,584)

Distribution on Class B units

 

 

 —

 

 

(23,814)

 

 

 —

 

 

 —

 

 

 —

 

 

(23,814)

Net loss

 

 

 —

 

 

(2,221,500)

 

 

 —

 

 

 —

 

 

(3,123,863)

 

 

(5,345,363)

Balance at March 31, 2019

 

 

19,495,403

 

 

313,614,300

 

 

27,414,342

 

 

1,370,717

 

 

427,617,585

 

 

742,602,602

Conversion of Class B units to common units

 

 

3,600,000

 

 

63,540,000

 

 

(3,600,000)

 

 

(180,000)

 

 

(63,540,000)

 

 

(180,000)

Restricted units used for tax withholding

 

 

(1,268)

 

 

(21,036)

 

 

 —

 

 

 —

 

 

 —

 

 

(21,036)

Unit-based compensation

 

 

 —

 

 

2,112,764

 

 

 —

 

 

 —

 

 

 —

 

 

2,112,764

Distributions to unitholders

 

 

 —

 

 

(8,545,299)

 

 

 —

 

 

 —

 

 

(8,811,307)

 

 

(17,356,606)

Distribution and accretion on Series A preferred units

 

 

 —

 

 

(1,708,157)

 

 

 —

 

 

 —

 

 

(1,761,427)

 

 

(3,469,584)

Distribution on Class B units

 

 

 —

 

 

(23,814)

 

 

 —

 

 

 —

 

 

 —

 

 

(23,814)

Net loss

 

 

 —

 

 

(10,026,403)

 

 

 —

 

 

 —

 

 

(10,339,084)

 

 

(20,365,487)

Balance at June 30, 2019

 

 

23,094,135

 

 

358,942,355

 

 

23,814,342

 

 

1,190,717

 

 

343,165,767

 

 

703,298,839

Conversion of Class B units to common units

 

 

426,084

 

 

6,641,087

 

 

(426,084)

 

 

(21,304)

 

 

(6,641,087)

 

 

(21,304)

Unit-based compensation

 

 

 —

 

 

1,809,752

 

 

 —

 

 

 —

 

 

 —

 

 

1,809,752

Distributions to unitholders

 

 

 —

 

 

(9,162,713)

 

 

 —

 

 

 —

 

 

(9,633,877)

 

 

(18,796,590)

Distribution and accretion on Series A preferred units

 

 

 —

 

 

(1,739,672)

 

 

 —

 

 

 —

 

 

(1,729,912)

 

 

(3,469,584)

Distribution on Class B units

 

 

 —

 

 

(23,414)

 

 

 —

 

 

 —

 

 

 —

 

 

(23,414)

Net loss

 

 

 —

 

 

(14,497,965)

 

 

 —

 

 

 —

 

 

(14,416,623)

 

 

(28,914,588)

Balance at September 30, 2019

 

 

23,520,219

 

$

341,969,430

 

 

23,388,258

 

$

1,169,413

 

$

310,744,268

 

$

653,883,111

 

3

KIMBELL ROYALTY PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY – (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

   

Common Units

   

Amount

   

Class B Units

   

Amount

 

Interest

 

Total

Balance at January 1, 2018

 

 

16,509,799

 

$

262,065,434

 

 

 —

 

$

 —

 

$

 —

 

$

262,065,434

Distributions to unitholders

 

 

 —

 

 

(6,061,123)

 

 

 —

 

 

 —

 

 

 —

 

 

(6,061,123)

Restricted units granted, net of forfeitures

 

 

325,185

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Unit-based compensation

 

 

 —

 

 

668,934

 

 

 —

 

 

 —

 

 

 —

 

 

668,934

Net loss

 

 

 —

 

 

(52,824,471)

 

 

 —

 

 

 —

 

 

 —

 

 

(52,824,471)

Balance at March 31, 2018

 

 

16,834,984

 

 

203,848,774

 

 

 —

 

 

 —

 

 

 —

 

 

203,848,774

Distributions to unitholders

 

 

 —

 

 

(7,070,693)

 

 

 —

 

 

 —

 

 

 —

 

 

(7,070,693)

Restricted units granted, net of forfeitures

 

 

4,478

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Unit-based compensation

 

 

 —

 

 

723,039

 

 

 —

 

 

 —

 

 

 —

 

 

723,039

Net income

 

 

 —

 

 

1,378,295

 

 

 —

 

 

 —

 

 

 —

 

 

1,378,295

Balance at June 30, 2018

 

 

16,839,462

 

 

198,879,415

 

 

 —

 

 

 —

 

 

 —

 

 

198,879,415

Common units issued for acquisition

 

 

10,000,000

 

 

235,400,000

 

 

 —

 

 

 —

 

 

 —

 

 

235,400,000

Recapitalization related to tax conversion

 

 

(12,953,258)

 

 

(209,591,880)

 

 

12,953,258

 

 

647,663

 

 

209,591,880

 

 

647,663

Distributions to unitholders

 

 

 —

 

 

(11,540,969)

 

 

 —

 

 

 —

 

 

 —

 

 

(11,540,969)

Unit-based compensation

 

 

 —

 

 

751,074

 

 

 —

 

 

 —

 

 

 —

 

 

751,074

Issuance of Series A preferred units

 

 

 —

 

 

36,607,966

 

 

 —

 

 

 —

 

 

 —

 

 

36,607,966

Distribution and accretion on Series A preferred units

 

 

 

 

 

(2,840,456)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,840,456)

Distribution on Class B units

 

 

 

 

 

(12,953)

 

 

 —

 

 

 —

 

 

 —

 

 

(12,953)

Net income

 

 

 —

 

 

(858,389)

 

 

 —

 

 

 —

 

 

(141,003)

 

 

(999,392)

Balance at September 30, 2018

 

 

13,886,204

 

$

246,793,808

 

 

12,953,258

 

$

647,663

 

$

209,450,877

 

$

456,892,348

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4

KIMBELL ROYALTY PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

2019

   

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(54,625,438)

 

$

(52,445,568)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Provision for deferred income taxes

 

 

 —

 

 

1,475,648

Depreciation and depletion expense

 

 

37,690,558

 

 

15,494,439

Impairment of oil and natural gas properties

 

 

65,828,980

 

 

54,753,444

Amortization of right-of-use assets

 

 

88,058

 

 

 —

Amortization of loan origination costs

 

 

783,961

 

 

208,276

Equity loss in affiliate

 

 

80,896

 

 

 —

Unit-based compensation

 

 

5,692,926

 

 

2,143,047

Loss on commodity derivative instruments, net of settlements

 

 

878,255

 

 

3,495,463

Changes in operating assets and liabilities:

 

 

 

 

 

 

Oil, natural gas and NGL receivables

 

 

5,270,397

 

 

(8,781,555)

Accounts receivable and other current assets

 

 

(389,839)

 

 

(190,093)

Accounts payable

 

 

(399,679)

 

 

1,172,615

Other current liabilities

 

 

3,198,198

 

 

1,266,354

Operating lease liabilities

 

 

(117,312)

 

 

 —

Net cash provided by operating activities

 

 

63,979,961

 

 

18,592,070

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchases of property and equipment

 

 

(829,724)

 

 

(396,480)

Proceeds from sale of oil and natural gas properties

 

 

 —

 

 

10,576,595

Purchase of oil and natural gas properties

 

 

(1,192,432)

 

 

(210,574,890)

Deposits on oil and natural gas properties

 

 

(986,000)

 

 

 —

Investment in affiliate

 

 

(2,965,933)

 

 

 —

Net cash used in investing activities

 

 

(5,974,089)

 

 

(200,394,775)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from the issuance of Series A preferred units, net of issuance costs

 

 

 —

 

 

103,359,603

Contributions from Class B unitholders

 

 

470,000

 

 

647,663

Redemption of Class B contributions on converted units

 

 

(73,250)

 

 

 —

Issuance costs paid on Series A preferred units

 

 

(717,612)

 

 

 —

Distributions to unitholders

 

 

(51,157,094)

 

 

(24,672,785)

Distributions on Series A preferred units

 

 

(5,775,000)

 

 

(705,834)

Distributions to Class B unitholders

 

 

(71,042)

 

 

 —

Borrowings on long-term debt

 

 

3,951,933

 

 

124,336,547

Repayments on long-term debt

 

 

 —

 

 

(6,870,596)

Payment of loan origination costs

 

 

(88,776)

 

 

(3,389,421)

Restricted units used for tax withholding

 

 

(21,036)

 

 

 —

Net cash (used in) provided by financing activities

 

 

(53,481,877)

 

 

192,705,177

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

4,523,995

 

 

10,902,472

CASH AND CASH EQUIVALENTS, beginning of period

 

 

15,773,987

 

 

5,625,495

CASH AND CASH EQUIVALENTS, end of period

 

$

20,297,982

 

$

16,527,967

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

3,572,952

 

$

2,220,885

Non-cash investing and financing activities:

 

 

 

 

 

 

Right-of-use assets obtained in exchange for operating lease liabilities

 

$

3,554,159

 

$

 —

Units issued in exchange for oil and natural gas properties

 

$

171,550,000

 

$

235,400,000

Distribution to Series A preferred unitholders in accounts payable

 

$

 —

 

$

981,837

Non-cash deemed distribution to Series A preferred units

 

$

4,633,752

 

$

1,152,785

Distribution to Class B unitholders in accounts payable

 

$

 —

 

$

12,953

Redemption of Class B contributions on converted units in accounts payable

 

$

200,000

 

$

 —

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5

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KIMBELL ROYALTY PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Unless the context otherwise requires, references to “Kimbell Royalty Partners, LP,” “the Partnership,” or like terms refer to Kimbell Royalty Partners, LP and its subsidiaries. References to the “Operating Company” refer to Kimbell Royalty Operating, LLC. References to “the General Partner” refer to Kimbell Royalty GP, LLC. References to “the Sponsors” refer to affiliates of the Partnership’s founders, Ben J. Fortson, Robert D. Ravnaas, Brett G. Taylor and Mitch S. Wynne, respectively. References to the “Contributing Parties” refer to all entities and individuals, including certain affiliates of the Sponsors, that contributed, directly or indirectly, certain mineral and royalty interests to the Partnership. References to “Kimbell Operating” refer to Kimbell Operating Company, LLC, a wholly owned subsidiary of the General Partner.

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

Kimbell Royalty Partners, LP is a Delaware limited partnership formed in 2015 to own and acquire mineral and royalty interests in oil and natural gas properties throughout the United States. Effective as of September 24, 2018, the Partnership has elected to be taxed as a corporation for United States federal income tax purposes. As an owner of mineral and royalty interests, the Partnership is entitled to a portion of the revenues received from the production of oil, natural gas and associated natural gas liquids (“NGL”) from the acreage underlying its interests, net of post-production expenses and taxes. The Partnership is not obligated to fund drilling and completion costs, lease operating expenses or plugging and abandonment costs at the end of a well’s productive life. The Partnership’s primary business objective is to provide increasing cash distributions to unitholders resulting from acquisitions from third parties, its Sponsors and the Contributing Parties and from organic growth through the continued development by working interest owners of the properties in which it owns an interest.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10‑Q and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. As a result, the accompanying unaudited interim condensed consolidated financial statements do not include all disclosures required for complete annual financial statements prepared in conformity with GAAP. Accordingly, the accompanying unaudited interim condensed consolidated financial statements and related notes should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018, which contains a summary of the Partnership’s significant accounting policies and other disclosures. In the opinion of the Partnership’s management, the unaudited interim condensed consolidated financial statements contain all adjustments necessary to fairly present the financial position and results of operations for the interim periods in accordance with GAAP and all adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

Preparation of the Partnership’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and notes. Actual results could differ from those estimates.

Segment Reporting

The Partnership operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Partnership’s chief operating decision maker allocates resources and assesses performance based upon financial information of the Partnership as a whole.

6

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KIMBELL ROYALTY PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Restructuring, Tax Election and Related Transactions

On July 24, 2018, the Partnership entered into a Recapitalization Agreement (the "Recapitalization Agreement") with Haymaker Minerals & Royalties, LLC, EIGF Aggregator III LLC, TE Drilling Aggregator LLC, Haymaker Management, LLC (collectively, the “Haymaker Holders”), the Kimbell Art Foundation, Haymaker Resources, LP, the General Partner and the Operating Company pursuant to which (a) the Partnership's equity interest in the Operating Company was recapitalized into 13,886,204 newly issued common units of the Operating Company ("OpCo Common Units") and 110,000 newly issued Series A Cumulative Convertible Preferred Units in the Operating Company and (b) the 10,000,000 and 2,953,258 common units held by the Haymaker Holders and the Kimbell Art Foundation, respectively, were exchanged for (i) 10,000,000 and 2,953,258 newly issued Class B common units representing limited partner interests of the Partnership ("Class B Units"), respectively, and (ii) 10,000,000 and 2,953,258 newly issued OpCo Common Units, respectively. The Class B Units and OpCo Common Units are exchangeable together into an equal number of common units of the Partnership.

In May 2018, the General Partner’s Board of Directors (the “Board of Directors”) unanimously approved a change of the Partnership’s federal income tax status from that of a pass-through partnership to that of a taxable entity via a “check the box” election (the “Tax Election”). The Tax Election became effective on September 24, 2018.

For each Class B Unit issued, five cents has been paid to the Partnership as additional consideration (the “Class B Contribution”). Holders of the Class B Units are entitled to receive cash distributions equal to 2.0% per quarter on their respective Class B Contribution, subsequent to distributions on the Series A Preferred Units (as defined in Note 7—Long-Term Debt) but prior to distributions on the common units.

Following the effectiveness of the Tax Election and the completion of the related transactions, the Partnership’s royalty and minerals business continues to be conducted through the Operating Company, which is taxed as a partnership for federal and state income tax purposes. The Operating Company passes income to the noncontrolling interest and the Partnership, which is treated as a corporation for federal and state income tax purposes. As of November 1, 2019,  50.1% of the OpCo Common Units were held by the Partnership and 49.9% were held by third parties.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

For a description of the Partnership’s significant accounting policies, see Note 2 of the consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as the items noted below. There have been no substantial changes in such policies or the application of such policies during the nine months ended September 30, 2019, other than those discussed below in Recently Adopted Accounting Pronouncements.

Reclassification of Prior Period Presentation

Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on previously reported net income (loss), total cash flows from operations or working capital.

New Accounting Pronouncements

Recently Adopted Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑02, “Leases.” ASU 2016‑02 requires the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases currently classified as operating leases and makes certain changes to the way lease expenses are accounted for. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted. The Partnership adopted this update using the modified retrospective

7

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KIMBELL ROYALTY PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

approach, effective January 1, 2019. The adoption of this update did not have a material impact on the Partnership’s financial statements or results of operations for the three and nine months ended September 30, 2019.

The Partnership evaluated whether its contractual arrangements contain leases at the inception of such arrangements. Specifically, the Partnership considered whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Substantially all of the Partnerships leases are long-term operating leases with fixed payment terms and will terminate in October 2028. The Partnership’s ROU operating lease assets represent its right to use an underlying asset for the lease term, and its operating lease liabilities represent its obligation to make lease payments. ROU operating lease assets and operating lease liabilities are included in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2019. Short term operating lease liabilities are included in other current liabilities. The weighted average remaining lease term as of September 30, 2019 was 9.59 years.

Both the ROU operating lease assets and liabilities are recognized at the present value of the remaining lease payments over the lease term and do not include lease incentives. The Partnership’s leases do not provide an implicit rate that can readily be determined; therefore, the Partnership used a discount rate based on its incremental borrowing rate, which is determined by the information available in the Amended Credit Agreement, as defined in Note 7—Long-Term Debt, as of January 1, 2019. The incremental borrowing rate reflects the estimated rate of interest that the Partnership would pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. The weighted average discount rate used for the operating lease was 6.75% for the nine months ended September 30, 2019.

Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expense in the accompanying unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2019. The total operating lease expense recorded for the three and nine months ended September 30,  2019 was de minimis. 

Currently, the most substantial contractual arrangement that the Partnership has classified as an operating lease is the main office space used for operations. In July 2019, the Partnership became the lessee in several other related lease agreements for additional office space.  In addition, the Partnership was involved in the construction and design of the underlying assets. The underlying assets were capitalized in July 2019 upon commencement of the lease.

Future minimum lease commitments as of September 30, 2019 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Remainder of

    

 

 

    

 

 

 

 

 

 

 

 

    

 

 

 

Total

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

Operating leases

 

$

4,736,830

 

$

116,761

 

$

472,737

 

$

478,428

 

$

478,837

 

$

479,796

 

$

2,710,271

Less: Imputed Interest

 

 

(1,299,983)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,436,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This update provides clarification and corrects unintended application of the guidance in various sections. This update is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of this update did not have a material impact on the Partnership’s financial statements or results of operations for the three and nine months ended September 30, 2019.

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” This update provides clarification and corrects unintended application of certain sections in the new lease guidance. This update is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of this update did not have a material impact on the Partnership’s financial statements or results of operations for the three and nine months ended September 30, 2019.

8

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KIMBELL ROYALTY PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This update modifies the fair value measurement disclosure requirements specifically related to Level 3 fair value measurements and transfers between levels. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied prospectively. The Partnership is currently evaluating the impact of the adoption of this update, but does not believe it will have a material impact on its financial position, results of operations or liquidity.

NOTE 3—ACQUISITIONS, JOINT VENUTURES AND DIVESTITURES

Acquisitions

On March 25, 2019, the Partnership acquired all of the equity interests in subsidiaries of PEP I Holdings, LLC, PEP II Holdings, LLC and PEP III Holdings, LLC that own oil and natural gas mineral and royalty interests (the “Phillips Acquisition”). The aggregate consideration for the Phillips Acquisition consisted of 9,400,000 OpCo Common Units and an equal number of Class B Units, valued at approximately $171.6 million based on the closing price of the Partnership’s common units of $18.25 on March 25, 2019. The assets acquired in the Phillips Acquisition consisted of approximately 866,528 gross acres and 12,210 net royalty acres.

On July 12, 2018, the Partnership completed the acquisition of the equity interests in certain subsidiaries owned by Haymaker Minerals & Royalties, LLC and Haymaker Properties, LP (the “Haymaker Acquisition”) in a transaction valued at approximately $444.0 million. The purchase price for the Haymaker Acquisition was comprised of (i) net cash consideration of approximately $208.6 million and (ii) 10,000,000 common units of the Partnership, valued at approximately $235.4 million based on the closing price of the Partnership’s common units of $23.54 on July 12, 2018. The Partnership funded the cash consideration with borrowings under the Amended Credit Agreement and net proceeds from the Preferred Unit Transaction (as defined in Note 8 – Preferred Units). The assets acquired in the Haymaker Acquisition consisted of approximately 5.4 million gross acres and 43,000 net royalty acres.

The following unaudited pro forma results of operations reflect the Partnership’s results as if the Haymaker Acquisition,  the acquisition of certain overriding royalty, royalty and other mineral interests from Rivercrest Capital Partners LP, the Kimbell Art Foundation and Cupola Royalty Direct, LLC, as well as all of the equity interests of a subsidiary of Rivercrest Royalties Holdings II, LLC (the “Dropdown”), and the Phillips Acquisition had occurred on January 1, 2018. In the Partnership’s opinion, all significant adjustments necessary to reflect the effects of the Haymaker Acquisition, Dropdown and Phillips Acquisition have been made. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2019

 

2018

 

2019

 

2018

Total revenues

 

$

32,978,851

 

$

30,506,261

 

$

87,871,247

 

$

91,943,767

Net loss attributable to common units

 

$

(16,261,051)

 

$

(1,694,292)

 

$

(27,233,939)

 

$

(17,260,464)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common units

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.73)

 

$

(0.08)

 

$

(1.31)

 

$

(0.83)

Diluted

 

$

(0.73)

 

$

(0.08)

 

$

(1.31)

 

$

(0.83)

On September 20, 2019, the Partnership agreed to acquire various mineral and royalty interests in Oklahoma for an aggregate purchase price of approximately $9.9 million. The acquisition closed on November 6, 2019. The Partnership funded the payment of the purchase price with borrowings under its secured revolving credit facility. In connection with the execution of the purchase agreement, the Partnership paid a deposit of approximately $1.0 million on the purchase price. This deposit is included in deposits on oil and natural gas properties on the accompanying condensed consolidated balance sheet. See Note 16 – Subsequent Events for details on the closing of this acquisition.

9

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KIMBELL ROYALTY PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Joint Ventures

On June 19, 2019, the Partnership entered into a joint venture (the “Joint Venture”) with Springbok SKR Capital Company, LLC and Rivercrest Capital Partners, LP. The Partnership’s ownership in the Joint Venture is 49.3% and its total capital commitment will not exceed $15.0 million. The Joint Venture will be managed by Springbok Operating Company, LLC. The purpose of the Joint Venture will be to make direct or indirect investments in royalty,  mineral and overriding royalty interests and similar non-cost bearing interests in oil and gas properties, excluding leasehold or working interests. The Partnership will utilize the equity method of accounting for its investment in the Joint Venture. As of September 30, 2019, the Partnership has paid approximately $3.0 million under its capital commitment.

Divestitures

In May 2018, the Partnership executed two purchase and sale agreements to sell a small portion of its Delaware Basin acreage for $10.6 million, which was recorded as a reduction in the full-cost pool, with no gain or loss recorded on the sale. At the time of the divestiture, the sales represented approximately 29 barrels of equivalent (“Boe”) per day of production, less than 0.8% of total production and 59 net royalty acres, approximately 0.08% of total net royalty acres.

 

NOTE 4—DERIVATIVES

The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses oil and natural gas commodity derivative financial instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts, and other contractual arrangements. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty.

As of September 30, 2019, the Partnership’s commodity derivative contracts consisted of fixed price swaps, under which the Partnership receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume. The Partnership hedges its daily production based on the amount of debt and/or preferred equity as a percent of its enterprise value. This amount constitutes approximately 19% of daily oil and natural gas production.

The Partnership’s oil fixed price swap transactions are settled based upon the average daily prices for the calendar month of the contract period, and its natural gas fixed price swap transactions are settled based upon the last day settlement of the first nearby month futures contract of the contract period. Settlement for oil derivative contracts occurs in the succeeding month and natural gas derivative contracts are settled in the production month.

10

Table of Contents

KIMBELL ROYALTY PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The Partnership has not designated any of its derivative contracts as hedges for accounting purposes. The Partnership records all derivative contracts at fair value. Changes in the fair values of the Partnership’s derivative instruments are recognized as gains or losses in the current period and are presented on a net basis in the accompanying unaudited condensed consolidated statements of operations. Changes in fair value consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2019

 

2018

 

2019

 

2018

Beginning fair value of commodity derivative instruments

 

$

1,665,887

 

 

(1,000,359)

 

$

4,227,946

 

$

(318,829)

Gain (loss) on commodity derivative instruments

 

 

2,506,815

 

 

(3,035,636)

 

 

270,607

 

 

(3,858,990)

Net cash (received) paid on settlements of derivative instruments

 

 

(823,011)

 

 

221,703

 

 

(1,148,862)

 

 

363,527

Ending fair value of commodity derivative instruments

 

$

3,349,691

 

$

(3,814,292)

 

$

3,349,691

 

$

(3,814,292)

The following table presents the fair value of the Partnership’s derivative contracts as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

Classification

 

Balance Sheet Location

 

2019

 

2018

Assets:

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

2,380,629

 

$

2,981,117

Long-term asset

 

Commodity derivative assets

 

 

969,062

 

 

1,246,829

Liabilities:

 

 

 

 

 

 

 

 

Current liability

 

Commodity derivative liabilities

 

 

 —

 

 

 —

Long-term liability

 

Commodity derivative liabilities

 

 

 —

 

 

 —

 

 

 

 

$

3,349,691

 

$

4,227,946

 

As of September 30, 2019, the Partnership’s open commodity derivative contracts consisted of the following:

Oil Price Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

Weighted Average

 

Range (per Bbl)

 

 

Volumes (Bbl)

 

Fixed Price (per Bbl)

 

Low

 

High

September 2019 - December 2019

 

74,908

 

$

61.47

 

$

53.07

 

$

63.47

January 2020 - December 2020

 

224,356

 

$

55.48

 

$

50.45

 

$

61.43

January 2021 - June 2021

 

178,231

 

$

53.58

 

$

50.79

 

$

56.10

 

Natural Gas Price Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

Weighted Average

 

Range (per MMBtu)