Greetings, and welcome to the Kimbell Royalty Partners Fourth Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Rick Black, with Investor Relations. Thank you, Rick. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the Kimbell Royalty Partners' conference call to review financial and operational results for the fourth quarter and the full year ended December 31, 2022. 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 recorded on this call speaks only as of today, February 23, 2023, 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's provision 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 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 release. Kimbell assumes no obligation to publicly update or revise any forward-looking statements. With that, 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. 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 another very strong year for Kimbell, which included new records for revenue, EBITDA, distributable cash flow per unit and net income in 2022. In addition, we strengthened our financial flexibility by increasing our borrowing capacity and maintain a conservative balance sheet with net debt to trailing 12-month adjusted EBITDA of 0.9x. We also completed a highly attractive and accretive acquisition in one of the highest quality and most active parts of the Permian Basin in December. The Hatch acquisition reestablished the Permian as the leading basin for the company in terms of production, active rig count, DUCs, permits and undrilled inventory. For the fourth quarter, including a full quarter of production from the Hatch acquisition, run rate daily production exceeded 17,000 BOE per day for the first time in our history. To put that in perspective, when Kimbell IPO-ed in 2017, production was 3,116 BOE per day. This massive growth in production represents a 5.5x increase largely a result of our continued consolidation of the mineral space. Today, we also declared a cash distribution of $0.48 per common unit. Again, looking back to 2017 through today, the total cash distributed to common unit owners since we became a public company is $8.45 per common unit. Turning to the operating environment in the fourth quarter. We had a record 92 rigs actively drilling on our acreage at the end of the year, representing 12.1% market share of all rigs drilling in the Continental United States. We also had…

Thanks, Bob, and good morning, everyone. We are very pleased to report record performance during both the year and the fourth quarter. In addition, today we are providing our full year 2023 guidance. I'll start by reviewing our financial results from the fourth quarter, beginning with oil, natural gas and NGL revenues of $64.4 million a decrease of 13% from the third quarter primarily due to a decline in realized commodity prices. Kimbell's fourth quarter average realized price per barrel of oil was $82.04, per Mcf of natural gas was $5.02, per barrel of NGLs was $30.55, and for BOE combined was $43.65. Our record fourth quarter run rate daily production was 15,394 barrels of oil equivalent per day on a 6:1 basis, an increase of 3% from Q3 2022. This daily production was comprised of approximately 61% natural gas, again on a 6:1 basis, at approximately 39% from liquids, 26% from oil and 13% from NGLs. The fourth quarter run rate daily production includes only 17 days of production from the company's $270.7 million acquisition of mineral and royalty interest held formally by Austin-based Hatch Royalty that closed on December 15, 2022. Including a full Q4 2022 impact of the acquired production, the revenues from which will be received by the company, run rate production was 17,176 BOE per day, a new record for Kimbell. As of December 31, Kimbell's major properties had 882 gross and 3.67 net drilled but uncompleted wells as well as 675 gross and 3.27 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. The total amount of net DUCs and permits at year-end was 6.94, which is higher than the 4.5 net wells we need to…

Thank you. [Operator Instructions] Thank you. And our first question comes from the line of John Annis with Stifel. Please proceed with your question.

Hi, good morning, all. And congrats on a strong quarter.

Yes, thank you.

For my first question, I wanted to ask about your views on an optimal leverage ratio. As you continue to paydown debt, how should we think about the use of cash once that level is met? Do you put it on the balance sheet with near-term macro uncertainties or providing dry powder for M&A or would you consider increasing the payout?

Yes, great question, John. That's probably the thought that we - and the conversation that we at the management and Board level, have most often. It's a high-quality problem, obviously. What -- what does the company do with its cash flow? And I think the first priority will always be to send distributions on a quarterly basis to our unitholders. That being said, we started during COVID allocating 25% of cash flow to debt paydown. We're very happy and pleased that we did that historically. For the time being, we intend to continue that same policy, which would be to allocate 75% of cash flow to distributions and 25% to debt paydown. We had originally targeted a leverage ratio of - frankly, looking back over time, the leverage ratio that we've targeted just continues to get lower and lower. It seems like the investor appetite for leverage in this business just continues to get lower and lower. And credit facilities and debt in general, has just become much more difficult to come by in the space due to a variety of factors, many of which are unfounded, in our opinion. But we're at a nice milestone, currently which is less than one times to EBITDA. I think we will continue to drive that down lower over time. Obviously, with natural gas prices dropping, we think it's even more important, so precipitously, I think, 65% since mid-December. We think it's even more important in that environment to pay down debt, particularly when the -- when interest rates have risen so rapidly that - the return you get from paying out our revolver is better today than it obviously was really at any point since we've gone public. So locking in kind of a guaranteed all-in 8% cost of capital by paying down our revolver is not a bad way to allocate capital and allocate that cash flow. So long winded answer to the question, but I think we'll continue to drive debt lower. There may be a point at which we consider buybacks or allocating capital to third-party acquisitions will obviously weigh the relative benefits of buying an external asset and relative to buying our own assets or stock, which we know better than anyone does, of course. Then we'll make a judgment call into - what we think would generate better returns at that point. But for now, continuing to paydown debt, I think, is what we as management and the Board believe is the best and highest use of our capital at this moment.

That makes sense. And then for my follow-up, understanding the ink is still wet on the Hatch deal. I wanted to ask for your thoughts on Kimbell's role in consolidation in the mineral space. You highlighted being one of the few companies that can execute on large multi-basin acquisitions. In your view, which basins screen most attractive? And are you starting to see seller expectations come in with the pullback in the commodity?

Yes, great question. I could go on and on. I'll try to keep it short. Hatch was a fabulous deal for us. It was the right asset at the right time. Given the outperformance of oil relative to gas, it's even more accretive to us today than it was at the time of underwriting. I'll also share that production volumes are slightly ahead and underwriting expectations. So it's always nice to see when the deal is off to a good start. We're proving to be very conservative in how we're forecasting DUC completions. So looking at the environment today, this could be from a - from the folks that we speak to and the relationships we have on the banking side. This could be a little bit of a tougher year from an A&D perspective that tends to always happen when you see huge fluctuations in price one way or the other on either the oil or the gas side. So I think we look at this environment and say, we're never going to be the largest mineral company out there. We don't want to be the largest mineral company out there. We're not going to win every deal that we look at. In fact, we lose 95% of the ones that we bid on. But every once in a while, we'll find an acquisition at the right time that's accretive to us and meets our underwriting criteria, and we'll execute. So we continue to believe that, that strategy of being patient and being conservative has worked out for us for 25 years of doing this. So I think we'll just kind of continue down that path going forward. What was the second part of your question, John, forgive me?

Related to which basins are screening most attractive?

Yes. So it fluctuates. I would say that we haven't done a gassy deal in quite some time, the largest of which obviously was Haymaker, which was, in our opinion, the best mineral footprint in the Haynesville and continues to be the best mineral simply in the Haynesville. So -- but then again, we got priced out of the Delaware for, what was it, three or four years, Bob and Matt? And then finally, we're able to pull off Hatch in the fourth quarter, which I think speaks to the fact that, that basin is maturing in such a way that you can buy a nice balance of existing cash flow, which is immediately accretive to distributable cash. But then you also have enough inventory to make it NAV accretive as well. So in this environment, I'd say Permian is still competitive, really tough to buy gas assets. I don't think people really want to sell when the strength is down so much and especially spot being -- pushing that $2 barrier, I think, is going to be tough. So we look at everything. But if I had to guess, I'd say that opportunities in less favorable contrarian basins, like the Eagle Ford or the Mid-Con, maybe even the Bakken a little bit tougher to buy there with inventory concerns. But I'd say those basins, maybe the Mid-Con first frankly, I think, in terms of value opportunities there, but certainly also the Eagle Ford. And then the Permian is obviously just going to continue to be the big deal source there. It just happens to be more competitive. Bob or Matt, anything you guys want to add there?

Yes, this is Bob. The only thing I'd like to add too, on that is, I think sometimes people get confused on looking at mineral companies versus operating companies. We don't operate -- if we're able to get and screen our criteria of -- in a basin, we're able to buy something that is more accretive than in the Permian. And of course, we love the Permian, just like everybody else does. But we aren't going to buy a dilutive acquisition in the Permian just to grow for growth's sake. We only do accretive acquisitions. And if we can get a more accretive acquisition and pass all of our screening criteria in other basins, we'll do that. And by screening criteria is that obviously, we do an acquisition in another basin other than the Permian. It has to have a lot of runway for -- first of all, it has to be accretive, but then has to have long life. We always buy properties that have at least 30 to 40 years of economic life even on low pricing cases. And then it has to have a significant room for development. So that's how we screen things, and that's why we've grown our company to not focus just on one basin, frankly, because we're asset managers, we aren't an operator. And if we can buy something that's extremely more accretive, and like Davis said, a basin that isn't as popular as the Permian, we'll do that. We are not going to do a dilutive deal just to get bigger.

Great, color. Thanks for taking my questions.

Thanks John.

And the next question comes from the line of Tim Rezvan with KeyBanc Capital Markets. Please proceed with your question.

Good morning, everybody. And thank you for taking the questions. I wanted to start on the production guidance for the year. It's essentially in line with your current run rate. And you've talked about how Hatch is outperforming your underwriting. So I wonder if you could kind of step back a bit and talk about kind of what you're seeing across the rest of your portfolio? Are you starting to see DUCs getting, kind of, rebuilt a little bit? Are you seeing activity slow down? I'm just trying to understand kind of how you landed on that guidance for the year.

Yes. No, it's a good question. First and foremost, I'll say that we're -- we've historically established a pattern of being very conservative with guidance. We think that is prudent and frankly, just the right way to run your business. So if you look back over time, we've generally been in line, if not above, kind of the midpoint of our guidance range on just about every factor going back since we started providing guidance a few years ago. Your point raises -- your question raises a good point, which is that we've made the observation in this press release that our net DUCs and permits are relative to the amount of permits or the amount of completed wells necessary to keep production flat, which is 4.5 net. Our net DUCs and permits, which is over six currently, is that ratio has never been higher. So that would suggest, assuming historical patterns of DUC completions remain constant, that would suggest that we have some amount of organic growth this year. We feel very good about that number. Let me just put it that way more directly. That being said, in an uncertain environment, our company is still majority gas by revenue and production on a 6:1 basis. And so when you see gas spot at $2, it's just a harder environment for us to provide, to really get aggressive about what production growth will be. So our hope is that three months, six months from now, you're on this call and you're looking at our production numbers and we're hitting what we're putting out there. And if we happen to be above those numbers because the operators have been more aggressive on either accelerating completions or drilling new wells that we don't even have in the queue right now, so be it. So conservative numbers. We don't think it's overly conservative, but we think it's a conservative number. And we feel good about the ability to maintain or grow production volumes on our asset even without making any acquisitions. Matt, Bob, anything?

No, I mean, I think that's right. I think it's interesting that this is the highest spread we've ever had between line-of-sight wells and our maintenance wells of 4.5 net wells per year. So everything you say was correct, Davis. I mean it's a -- we do, do conservative guidance. In 2022, the midpoint was 14,400 BOE per day, and we exited at 17,176. So that's beating my point a bit. But yes, it's very conservative, we think.

That makes sense. Gas at $2 should drive one to be conservative, so I appreciate that. And then just one, that 12 -- I guess, 12.4% is the PDP decline you've highlighted, which I do believe is -- stands out among the public minerals companies. Obviously Hatch, with the activity this year, will be much higher. I mean, should we just -- we can do weighted average production. I mean should we think about that decline rate kind of going to like a mid-teens as you look out a year?

Yes. So I'll take a stab at this, and I think you'll love this color, and I'll turn it over to, obviously, Bob is the was the fore engineer, arguably the best in the country in this field, to provide more color, it's interesting. So it really doesn't affect the [technical difficulty] much as one might expect. And I was a little bit curious looking at the numbers yourself initially. So Hatch has a lot of -- it has an existing PDP base, which has been accretive to our distributable cash flow. But because it's not an overwhelming component of our overall production mix, it really doesn't drag down that -- it's not such flush production that it drags -- with such a high decline rate, then it drags down the overall company decline in a really meaningful way. So there's that. So it doesn't really affect the initial PDP decline rate in a material way. If we were at 12.5% before and now it's -- we were like 11.9% before, now it's 12.4%, it still hasn't moved at more than 50, 60 basis points. So not enough to create a rounding difference on that initial decline rate. So then the next question is, well, what happens with all these wonderful development catalysts materialize on Hatch and all these DUCs? And so that, you would assume, because it's flush production coming online at a higher decline rate, you'd assume that would have an impact on increasing our decline rate. But you have to keep in mind that the rest of our portfolio, a lot of which is more mature in nature, the decline rate there has flattened out. And so it's kind of offset that increased decline in Hatch assets with a lower decline on the more mature existing legacy KRP assets. And so the net effect, in our view, is actually not material enough to really make much of a difference. Then I'll turn it over to Bob for any additional color. I articulated that in a way that makes sense. Go ahead, Bob.

No, really nothing I can add to that. I agree with everything Davis just said.

Okay. That makes a lot of sense. Thanks for your time everybody.

Yes, thank you.

Yes, thank you.

And the next question comes from the line of Trafford Lamar with Raymond James. Please proceed with your question.

Hi, guys. Thanks for taking my question. To kind of follow up on that last comment about the base decline rate. Obviously, the flush production from Hatch has offset the legacy decline of Kimbell's majority assets. I noticed that the net DUC and permit in total kind of reverted back to the number prior to 3Q at 4.5. Is that simply due to the influx of DUCs via Hatch and just the higher decline rate of those initial wells?

Bob, how would you answer that question?

Yes, I think that's a good analysis. I think -- yes. In looking at it, we thought that possibly it would go down because of Davis' comment about our production maturing and taking less net wells to maintain production being flat. But that didn't go down, I would say, as a primary driver of what you alluded to is the new wells that are coming out all the DUCs that are coming on in Hatch.

Yes. And I would say that without Hatch, it would probably be closer to 4.1, 4.2 net wells, I'd say flat. So Hatch probably added 0.3 to that.

Okay. And then last question, kind of circling back to kind of M&A, M&A landscape. Obviously, Hatch was higher unconventional versus your -- the rest of your asset base. Does that kind of affect your mindset going forward with regards to potential acquisitions? Or is it still -- I know you all mentioned it's accretive. That's priority number one. So I guess -- are you all looking more to lower decline assets moving forward or in the near term? Or is it simply agnostic accretive?

Agnostic-accretive. It's been our experience that when you try to get too selective on hey, we're going to go out and buy a low-decline, Central Basin Platform asset, that has to be our next deal. If you get that mindset, it just becomes very difficult to transact on anything and you end up missing out on nice opportunities that aren't necessarily in your -- in what you're immediately targeting. I would extend that to hydrocarbon streams. So we have folks that come into our office all the time and say, oh, you just got a liquids-focused asset with Hatch. Should you guys go out and buy a gassier asset now and to balance it out? And the answer is no. I mean, we're going to look at everything. And I think that's a big advantage that we have. We're not pigeonholed into one basin. We're not pigeonholed to gas versus oil. We are -- we look at the entire landscape. We try to look at as many opportunities as we possibly can. And we're not in the business of predicting which commodity is going to outperform. So we take the view of we're going to look at as much as we can, and we're going to underwrite deals in such a way that they're accretive to us and we have a conservative price put into it. And we'll buy whatever opportunities give us the highest and best return on capital amongst that larger landscape. This business is hard enough and competitive enough as it is. I can't even imagine having to only buy oil-based assets in the Permian Basin only, or only being able to buy oil and gas assets in the Haynesville only. I just think that's a much harder business to run. It would -- you'd lose out…

Right, awesome. Well, appreciate the color guys. Thanks again.

Thank you.

Thank you. At this time, there are no further questions. Now I would like to turn the floor back over to the Kimbell Royalty management team for closing remarks.

We thank you all for joining us this morning and look forward to speaking with you again when we report first quarter results. This completes today's call. Thank you.

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