Greetings, and welcome to the Kimbell Royalty Partners Fourth Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Rick Black, Investor Relations. Thank you, Sir. You may begin.

Thank you, operator, and good morning, everyone. Thanks for joining us for Kimbell Royalty Partners conference call to review financial and operational results for the fourth quarter 2018. This call is also being webcast and it can be accessed through the audio link on the Events and Presentation Page of the IR section of kimbellrp.com. Information recorded on this call speaks only as of today, March 7, 2019. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay. I would like also 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 make forward-looking statements as part of today’s call that, by their nature, are uncertain and outside of the Company’s control. Actual results may differ materially. Please refer to today’s 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 and good morning everyone. I’m here with several other 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. I would like to begin by giving an overview of our performance for the fourth quarter. I’ll then comment on the significant strategic acquisitions that we have executed over the past year. Finally, I will discuss our expectations going forward. Then I'll ask Davis to cover our financial performance in more detail. After that, we'll take your questions. We are very pleased with our fourth quarter results and full year. We generated record high production, revenue and consolidated adjusted EBITDA for the quarter. On average daily production after giving effect to the Drop Down transaction, which closed on December 20, 2018 was 10,066 barrels of oil equivalent Boe per day up to 187% from Q4 2017. Since our initial public offering in February, 2017 we have more than tripled our production. We have also achieved record oil, natural gas, and NGL revenues of $23 million up 143% from the same quarter last year. This strong performance led to consolidated adjusted EBITDA of $14.9 million in the quarter up 135% compared to last year. In the fourth quarter our cash distribution was $0.40 per common unit, which is expected to be substantially tax free. This cash distribution of $0.40 per common unit implies an approximate 9% yield. Furthermore, since our IPO in February, 2017 the Company has paid total cash distributions of $2.90 cents per common unit. The assets we acquired in 2018 from Haymaker and through the Drop Down are outperforming our expectations. Most notably, the Haymaker assets experienced significant growth from new wells coming online in the Permian Basin and Haynesville…

Thanks Bob. Good morning everyone. Total fourth quarter 2018 revenues increased 64% from the prior quarter to $30.3 million and we're up $20.6 million from the fourth quarter last year. Fourth quarter 2018, net loss attributable to common units was $1.6 million or $0.10 per common unit, primarily due to a non-cash impairment of $12.6 million compared to a net loss attributable to common units of $3.7 million in the prior quarter and net income of approximately $1.1 million in the fourth quarter last year. General and administrative expenses were $5.2 million in Q4 2018 of which $4.2 million was cash G&A and included $0.9 million in costs associated with the transition services agreement, which relates to the integration of the Haymaker Acquisition. This agreement expired at year-end 2018 and no further costs will be incurred relating to this agreement in 2019. Consolidated adjusted EBITDA, a new record was $14.9 million versus $14 million in the prior quarter and $6.3 million a year ago. Please keep in mind that on December 20, 2018, we closed the Drop Down transaction for approximately $90 million. Even though the effective date of this transaction was October 1, 2018, and Kimbell was entitled to cash flows from these assets as of this date, under generally accepted accounting principles, GAAP, Kimbell only begins recording production, revenues, net income and other financial measures as of the closing date, which was December 20, 2018. Thus, the above average fourth quarter 2018 highlights only reflect 11 days operational activity from the Drop Down assets. I'd like to reiterate something that Bob mentioned because it's a critical point to understand about our business model. Our organic PDP reserve growth, excluding acquisitions was up 5% year-over-year at no cost to us. This is a differentiator compared to other company business…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of TJ Schultz with RBC. Please proceed with your question.

Hey, guys. Good morning.

Good morning, TJ.

Hey, TJ.

I think first question is just on kind of acquisitions going forward. As you all get bigger, really following the Haymaker deal, are the types of deals like EnCap coming your way more often now or are those size of deals you're targeting. I'm just kind of curious on the market. When you went public, you talked about a big market and deals in the $10 million to $50 million range, but how are you kind of scoping out deal sizes now?

Yes, to answer that – this is Davis, TJ. Good morning. I would say that we went public, it was pretty amazing to us, the royalties space, the size of the transactions that are available to us, just continue to grow as the royalty market grows. Half of the companies that are private equity backed now that are buying minerals didn't even exist when we went public two years ago, I mean, it's really remarkable. So I think that the target size for us has grown over time. And I'd also say that, as you know, we're very conservative with the use of our balance sheet for acquisitions. So these larger deals – for example, EnCap, was willing to take 100% equity of the transaction which I think is probably unprecedented, at least in the minerals space. And so, these larger deals, we can finance with equity, which is naturally delivering our Company, and so it's not distracting us from blocking and tackling on the $10 million to $50 million deals. It's just that frankly we see, and Bob, Matt, I mean, I think, we see more competition for the smaller deals, just because there's more people they can buy them. I mean – if you're looking at a deal on West Texas that's run by some broker or investment bank, there's 50 different private equity companies that are bidding on a $10 million or $20 million deal, when you get up to over $100 million, there is just a very small number of guys like us that can actually pull the trigger on a deal of that size.

And we're also – this is Matt Daly. We also can buy diversified deals and that really especially that we have and also can offer OpCo Units to these private equity sponsors. So that's a competitive advantage we have.

Yes. So I guess I'd say that the market has changed in the last couple of years and we've changed with it to a certain extent.

Yes. Makes sense. And then as you look at deals, should we assume you continue to look at kind of producing assets and cash flow accretion primarily? Or is the opportunity as you get bigger to mix in more NAV accretion or undeveloped acres?

Yes. Let's talk about that for a second because I think people get really confused.

Yes, good question.

We don't just buy assets that have cash flow and slap an accretive multiple on it and buy it. We rigorously engineer everything that we buy. So, I just want to make that perfectly clear. We've done 200 deals over the last 20 years, we've built NAV both on PDP, PDNP and PUDs on every single one of those. So we do buy on NAV. What we don't do, which is different from most of our peers is we don't buy raw land, we don't take the bet, that somebody is going to – we don't buy raw land where we can't control the development and then get on our knees and hope and pray that somebody develops it in the near-term. First of all, because it's immediately dilutive to our existing cash distributions but secondly, we think there's tremendous risk with those assets. I mean, look at what we're seeing right now in terms of well spacing and decline rates in West Texas, I think a lot of the acreage that people bought in minerals over the last two years in the Delaware Basin probably isn't worth as much as they thought it was when you start layering in some of these more conservative spacing assumptions. So we're buying things that are accretive not only on immediate, production and cash flow metrics, but also on NAV. We build out NAV on everything we do. That's what my dad spent his entire career doing.

Okay. Thank you very much. Appreciate it.

Yes, thanks, TJ.

Thank you.

Our next question comes from the line of John Freeman with Raymond James. Please proceed with your question.

Hi guys.

Hey, John. How are you doing?

Doing well. Thank you. Just kind of a follow-up on the last line of questions, I mean, it's definitely interesting sort of the evolution where originally – it's kind of the focus was on the smaller deals and now it's interesting to hear that there is actually increasingly less competition on the bigger deals given the limited number of buyers for it. I'm curious if kind of how the return parameters that you all have used historically, do they adjust at all, when you're looking at bigger size deals, are you willing to maybe have lower return thresholds given the bigger footprint accretion and things like that or has it stayed relatively the same?

I would say – Bob speaking, I'd say relatively the same, maybe a little bit more competitive than it used to be when we…

You are saying large versus small? On the large, let's be clear about that too, John. On the large deals, I've been very, very surprised at the price at which we've been able to buy them. As you can tell from our track record with Haymaker with our Drop Down and with Phillips, it's been very accretive to us and then also accretive on NAV. What we found because of so many private equity competitors, a deal at the $10 million to $20 million range, if we were to bid the same type of parameters and have it as accretive, we get beat by three to five companies.

Yes, John. I will give you an example, we looked at a property right in our wheelhouse. It was a central – it was a diverse set of assets throughout the Central Basin platform that it basically been flat for 20 years and you've been covering us since we went public. We love that kind of thing. We're trading at what, a 9% yield. And so we looked at that, we thought, man, we could pay nine or 10 times cash flow and that's accretive to us and it was like a $12 million deal or a $15 million deal.

Great properties there.

And we just got totally smoked on it. And I think some family office or a smaller guy bought it for like $20 million, because they were willing to accept 7% yield in their personal account and these kind of stable assets with a call option on oil prices. And so what we've seen here is just a complete – and I'm sure you guys seeing this on the working interest side too and it's little bit frustrating for us. But the micro deals, private buyers are paying more for than sophisticated large public companies can. And so for us, that's been frustrating and so instead really just out of how – we applied the same methodology to larger deals as we do the smaller ones. It's just we have less competition for these larger deals and so we've been able to be more successful in doing them. And then I'd also just say in terms of managing our team to a certain extent, as you know, we are very thinly staffed, it takes us just as much time to work a $150 million deal as it does a $15 million deal. And so to a certain extent, our time is better spent focusing on the larger ones rather than trying to do $10 million to $15 million deals over the same period of time.

Just to clarify, and also this relates like you said to TJ's question, we do look at everything though. We aren't just all of a sudden saying, now we're only going to look at $100 million deals. We look at everything, and we still have 30, 40, 50 deals on our…

And we're also, John, looking to – and this is kind of new news, but just that you brought it up, we're actively looking to build a strategic relationship with kind of a micro accumulator of royalty assets. So we might form some kind of strategic JV or build a subsidiary that buys really tiny deals and kind of accumulates them over time, maybe $50 million a year or something like that.

All accretive.

So long as we get comfortable and we've been trying to – it's hard to find the right partner and the right group to do that. It's kind of a ground game, but we're not going away from that market, we're just saying. We haven't been as competitive. And I think it's going to take the institutional investors that are new to the royalty. Really I think, frankly the older family offices in Texas understand royalties better than a lot of the institutional investors do in the public space. And that's why they're willing to accept these lower yields and until that changes and until we get more float and liquidity and kind of what I was saying on the transcript earlier, until we get more liquidity and we get a rerate in this space, I think it's going to be difficult for our peers to buy a whole lot of small deals that are immediately accretive on cash flow. You can buy small deals if you're buying raw land, but buying small deals where it's immediately accretive to cash flow, I think is going to be more challenging.

Those are great insights. And then I guess just kind of a follow-up along that same question. Obviously since you’ve all reported third quarter results. We've been able to witness the hyper volatility of the oil market for the last three months. And I'm just curious during that time frame, what you've seen in terms of a change in sort of the seller attitude or expectations in terms of either more willing sellers? And then how much is sort of their expectations for value changed over that time period?

It's been more difficult to get deals done in the last three months as a result of that volatility, unfortunately. And I think that – I think volatility always kills A&D markets particularly with royalties, because you can just hold on to them and they're cost free and so there's really no – you're not worried about CapEx obligations or OpEx. You're going to sit there and hold. I would argue that, I think that if things continue to remain as volatile as they are then this year could be a low year for A&D possibly with the exception of private equity backed companies, who are looking for an exit for their mineral portfolio. Because they have – they have LTA agreements, and they have timelines on their funds that they have to meet. And so what we've tried to do is just develop relationships with dozens of these private equity backed companies and we're trying to be choosy about where we want to spend our time and with whom we want to partner. I mean, we're very fortunate that the Haymaker management team, the EnCap guys, Kayne and KKR, these are all phenomenal people and have been incredibly supportive, thoughtful partners for us. And so we're trying to bring the right people into the stock. And so that's kind of how we're spending our time this year. I would be very disappointed if we didn't announce another large deal this year. It's great that we've already got off to such a strong start. But we're going to keep the foot on the pedal, because I'm not sure there's going to be and again this is just my opinion not necessarily anybody else's, the fact that there is such a small number of strategic buyers for these larger assets, I'm not sure that's going to persist forever. I don't know if the same window is going to be around five years from now. So, I think we'd be remiss if we didn't really take advantage of this moment that we have and work really hard to capture this market opportunity.

Hi, John, this is Matt. Also when people were taking back stock in these transactions at a low price environment, they're actually going to experience the price improve and oil prices have done the rest, they are not locking in the gain in a cash deal they experienced the upside in the stock over the long term.

Yes, I think private equity guys, they like taking units in our stock more than a small or mid-cap E&P, C-corps just because we pay a 9% dividend. I mean that's – most private equity firms have an 8% hurdle rate with their limited partners. They are already in the money at the general partner level holding our stock, which I think is a very different thing than holding a stock in a liquid C-corp that doesn't pay a dividend.

Appreciate the detailed answers guys. That was great. Keep up the great work.

Thanks, John.

Yes, thank you, John.

Our next question comes from the line of Betty Jiang with Credit Suisse. Please proceed with your question.

Hi. Good morning.

Good morning, Betty.

Good morning, Betty.

Hi. You mentioned earlier that about a third of your active rigs on your acreage is in the Permian. Can you give us a sense on how your rig exposure in the basin had changed in the last couple of quarters. And then sort of based on the activity that you're seeing today, what does that mean for your production outlook?

Matt, do we have a list of rigs by operator and county?

Yes. So, hey, Betty. How are you doing? So basically right now, we have 77 rigs outstanding. Roughly...

Up from what, 71 extended Q3?

Exactly. Those additional rigs came from the Drop Down. The mix right now it's 36% Permian, 29% Mid-Con, 18% Rockies and that mix is compared to Q3. So, Q4 is 36% Permian. It looks like roughly flat from Q3 in the Permian. So it's not much of a change in terms of the allocation. Now we are adding 17 new rigs from the Phillips acquisition in Q1. So that's going to take us up to 94 rigs, which is essentially 9% of the entire U.S. rig fleet that we're actually drilling our wells at no cost to us. So, I would say that we have Davis as a list of all the operators we have in the Permian.

Yeah. Betty give me a second. This is 3Q. So we had one rig at the end of 3Q in Eddy County. At the end of 4Q, we had three. We had one rig in Lea county at the end of 3Q. At the end of 4Q, we had two. Nothing in Fisher County as of 3Q, but we have one rig there now. Glasscock, our rig count has actually gone down, went down from five as of the end of 3Q to one. As of 4Q, Hockley is the same, one rig in 3Q one rig in 4Q. Howard one, two, three. Howard is flat, three rigs as of end of 3Q, three rigs as of end of 4Q. Martin County has gone down by one rig, three rigs as of 3Q, two rigs as of 4Q almost done. Midland three rigs as of the end of 3Q, eight rigs as of the end of 4Q, wow, there are a lot of mills, I'm going to fetch from the drop. Scurry County, we had three rigs as of the end of 3Q, two rigs as of the end of 4Q, Reagan two rigs as of the end of 3Q, none at 4Q, Scurry three rigs as of 3Q, two rigs as of 4Q, Ward has gone up from one rig as of 1Q or 3Q, two rigs as a 4Q. And then finally Yoakum went down two rigs as of the end of 3Q to one rig as of 4Q. So it kind of jumps around. There's nothing in that that really surprises me except for maybe that so many rigs were added in Midland County. It looks like those were mostly CrownQuest rigs.

Got it. Thanks for the color. But in general, the composition between the various basins are fairly similar or just a percentage exposure in the Permian is fairly similar to what you were seeing before?

Yes, I would agree with that.

Yeah, that's correct.

Okay. Great. And then you also mentioned that, if I heard correctly that the organic production growth would have been 5% in 2018, if you had Haymaker for the full year.

That's exactly right.

So my question is like would this be a reasonable baseline assumption for the business going forward and how would the Phillips deal sort of skew that number up or down over the long run?

Yeah, great question Betty and I'm glad you asked that. So, we've always kind of said historically that we've typically grown on average between 3% and 6% organically every year. So this year, so once it's break it down by bucket so there is the Drop Down assets, there is the Haymaker assets and then there's the KRP legacy assets. The Drop Down assets had 9% organic growth in 2018, the Haymaker assets had 6% organic growth in 2018 and KRP legacy was 1% which then all that makes sense to maybe is the KRP legacy assets are more that's like the 7% PDP decline assets, that are more flat in nature. So on a blended basis or (0:40:25) it is 5% total. It's difficult to answer that question. I mean I might say that given what we've seen happen to oil prices and given CapEx budgets coming in this year, I wouldn't be surprised if growth in 2019, I'm just being fully transparent, is less than 5%, but we added the Phillips assets that are high growth assets too, so I wouldn't be surprised if it was more than 5%. So we are working on guidance, we'll get that out once we have the Phillips assets closed. What I will say is our two peers that have released guidance have both guided to kind of flat production in 2019 off of 4Q 2018 levels. And I think, I just want to make that clear too that those are – the two companies that have released guidance, both – at least from what we've seen, they are guiding toward flat production for 2019 off of 4Q production. So I think they're probably just being conservative and then there are some great management teams. We might take a similar approach, just to kind of give you a preview. But, yeah, I don't think you're far off with the 5% organic growth assumption. So, Bob or Matt, would you guys add anything?

I would agree.

Great. Thank you. That's really helpful.

Thank you, Betty.

[Operator Instructions] Our next question comes from the line of Tim Howard with Stifel. Please proceed with your question.

Hi, thanks for taking our question.

Hi, Tim.

Hi, Tim.

Hi, just a few quick ones on the Phillips acquisition. Is there anything related to the closing conditions? I saw that was highlighted in the press release. I assume it's just standard – just standard disclosure. But I wanted to make sure there is no closing condition hurdles to get over. And then also are there any integration costs that we should be aware of in 1Q or 2Q? And then lastly, kind of a run rate SG&A, it's going to have that number already, if not, we can wait for guidance.

Hi, Tim. It's Matt. On the SG&A, the last question, we will give you that with the guidance in K that's arriving in late March. The Phillips deal is going to have two-month TSA. Remember the Haymaker was six months. This is going to have two months, so much shorter. It would be $175,000 a month for a two months. And then the ongoing recurring G&A be probably $200,000 to $300,000 for the most, so it would be very modest. But my point is we are able to essentially had the $150 million acquisition and have very modest G&A increase in overall basis. So our cash G&A per Boe is going to go down further from what we are disclosing here in this press release and script. So that's showing the positive operating leverage in the model.

Excellent. And then on the closing conditions, I assume that's just standard language?

I don't think there's anything in the closing conditions. Yes, standard language. But the lawyers just make us put that in there...

Nice, great. And then just as we think about 1Q production, the 10,066 kind of pro forma for the Drop Down, I assume that's kind of a good run rate to think about, but just wanted to confirm that as well.

Sure. Yes, I agree with that. Yes.

Okay, perfect. All right. That's all I got. Thank you so much.

Thank you.

Thank you, Tim.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

This is Bob. Thanks everyone, look forward to next earnings call.

Thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.