Greetings, and welcome to the Kimbell Royalty Partners Third Quarter 2023 Earnings 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's now my pleasure to introduce your host, Rick Black, Investor Relations for Kimbell Royalty Partners. Thank you. 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 third quarter of 2023, which ended on September 30, 2023. 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, November 2, 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 considered forward-looking statements made pursuant to the Safe Harbor provisions 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 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 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. 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 very pleased to announce another record quarter that included substantial growth in all key operating metrics. Our total production, including a full quarter from our recent $455 million acquisition from a private seller exceeded 23,000 BOE per day for the first time in our history. We are excited to have achieved this significant milestone as we continue to execute our strategic business model aimed at not only consolidating the U.S. oil and natural gas royalty sector, but also, and more importantly, generating long-term value for our unitholders. The third quarter marked new all-time highs set in production, rig count, DUCs and permits. During the quarter, our production mix continued to materially shift towards liquids with oil and NGLs now representing 49% of our production, compared to 46% last quarter. Activity in our acreage remains strong, and we now have a 17% market share of the overall U.S. land rig count, the highest in our history. Even after giving effect to our most recent $455 million acquisition, we still have the best-in-class PDP decline rate of only 14%. At the end of the quarter, we had 9.3 net DUCs and permits reflecting the widest spread we've ever had of line-of-sight wells relative to the number of wells needed to maintain flat production of only 5.8 net wells per year. This gives us confidence in the resilience in our production, as we wrap up 2023 and look at 2024. In short, we are extremely pleased with this quarter as well as our third quarter distribution of $0.51 that we declared today, an increase of 31% from last quarter. In September, we closed our largest acquisition in the company's history. As we stated then and still believe today, this acquisition is expected to significantly enhance Kimbell's positions in the best-performing, highest growth oil and gas basins in the Lower 48. The targeted portfolio of mineral and royalty interest complements our disciplined approach to M&A, combining excellent reservoir quality, near-term cash flow and long-term drilling upside. While this acquisition was immediately accretive to distributable cash flow per unit, we believe it will generate accelerated accretion in the future years. We look forward to continuing our role as a major consolidator in the oil and natural gas royalty sector. I'll now turn the call over to Davis to review our financials in more detail before we open the call to questions.

Thanks, Bob, and good morning, everyone. Kimbell performed extremely well in the third quarter and generated record daily production that marked a significant new milestone for Kimbell. Including a full quarter of the acquired production that Bob just discussed, the revenues of which will be received by Kimbell for the full quarter, run rate production was 23,531 BOE per day on a 6:1 basis. As a result of the significant incremental production and our expectations for the fourth quarter, today, we are boosting our production guidance range for Q4. In addition, we expect record low cash G&A per BOE at Q4, reflecting the positive operating leverage our business model generates. I'll start by reviewing our financial results from the third quarter, beginning with oil, natural gas and NGL revenues of $69.2 million, an increase of 21.5%, compared to the second quarter. Third quarter 2023 run rate average daily production was 19,777 BOE per day, including 18 days of production from our recent acquisition. This represents a 13% increase, compared to the second quarter run rate average daily production of 17,573 BOE per day. Our third quarter production mix was comprised of approximately 51% from natural gas and approximately 49% from liquids, or 34% from oil and 15% from NGLs. As of September 30, 2023, Kimbell's major properties had 909 gross or 5.4 net DUCs and 805 gross, or 3.94 net permitted locations on its acreage. This data does not include our minor properties, which we estimate can add an additional 20% to the DUC and permit inventory. In addition, we exited the quarter with 99 rigs actively drilling on our acreage, and our market share of all land rigs drilling in the continental United States, represents approximately 17%, a new record. On the expense side, general and administrative expenses for…

Thank you. [Operator Instructions] Our first question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Thanks and good morning all.

Hi good morning.

Good morning, Derrick

With my first question, I wanted to focus on your growth trajectory. Looking beyond Q4, with line of sight inventories far exceeding your maintenance requirement, it feels like there's quite a bit of upside to continue to forecast given that we're largely holding production flat in Q4. Is that a reasonable statement?

It's a great question. It's a great point. As you know, it's always challenging to say the least to predict growth and production volumes as a royalty company, just given the fact that we don't have, obviously, control over DUC completion dates, permit conversions, et cetera. That being said, your point is well founded. So, we now have more kind of line of sight wells relative to maintenance wells to keep production flat than I believe we've ever had in company history as a ratio. So that would suggest robust growth going forward, or at least certainly more than we've had in the past on an organic basis. What you'll probably see from us as we dig into the numbers and provide continued guidance for 2024, is a conservative view on production. That being said, your point is well stated and justified, and I don't disagree with the premise. Matt, anybody else want to jump in there on any thoughts?

Yes. Yes. I mean I would just say that looking at Q3, we had very good conversions to PDP in the Permian, Haynesville and Eagle Ford. Excluding the acquisition we made in Q3, our legacy production actually grew 2% quarter-over-quarter between Q2 and Q3. So that's 8% annualized growth organically for our legacy production. So that's a great growth quarter there. But looking forward, as Davis said, you're correct. I mean, we have a record number of line of sight wells right now, 9.34. We only need 5.8 net wells to stay flat. That's the highest spread in the company history. So, we feel very good about not only the resilience of Q4 production, but also the potential for organic growth as we wrap up '23 and going to '24.

Derrick, it's a balance. We don't want to be unduly conservative, but we also don't want to be overly aggressive. So, we do our best when issuing guidance just given the obvious kind of lack of operational control. I hope that's fair in your view.

It is. And with my follow-up, clearly, understanding that the interest is driving [ph] on the largest transaction you guys have done in the history of the company. I wanted to ask if you could characterize the competitive landscape for M&A at present and your interest in participating in it? And has the recent, I guess, surge or firming in commodity prices change the bid as dynamics out in the market?

Great question. So I would say just first and foremost, in my opinion, this was a historic year for M&A in the royalty sector, not just ourselves, but also our peers. I think, have done a fabulous job of consolidating and getting private minerals into the public sector. So it's been a big year overall. I think that the competitive dynamic for larger packages, like the ones that we would be targeting is probably the most favorable to buyers that I've seen in quite some time. I would actually argue in many ways and we see this that some of the smaller deals that come across, our desk are priced competitively than larger deals. And so I think that a lot of aggregators are going to have some difficulty putting together packages where they pay, let's call it, 10 times cash flow and then try to sell to someone else, like a meaningful multiple greater than that, like 12 times. But in reality, the large M&A deals that you're seeing, whether it's from ourselves or our peers are in the six to eight times cash flow range. So, we think there is benefit right now, to being a larger buyer of assets. We will always look at everything. I think what you'll see is that we'll continue to be very [Technical Difficulty] on the acquisitions that we make. We've had years where we've done no deals. We've had years where we've done one deal. This year, we did three meaningful ones, but frankly, they were all unexpected in nature. We didn't - it's hard to predict the M&A wave and we just happen to be in a good place at the right time. And they are assets that we really like, and we're able to get them. So, I'd say that we're going to participate. We'll be pursuing deals on a leverage-neutral basis. We don't anticipate levering up, obviously, any more than we already are and we like our chances. And I think that, we've done very well historically in using our currency, either through primary offerings or direct issuances to sellers as a currency to acquire assets. I think we're differentiated in that regard. And so, I think you'll continue to see us in the M&A landscape. So, we're going to be very rifle shot in our approach. Bob or Matt, anything else you guys want to add?

Yes. The only thing I'd like to add is, we really love the last three acquisitions that we've done, and we're delighted to have been able to get them at accretive pricing. So starting with [indiscernible] last year, MB and then this most recent largest third quarter acquisition, the quality of the production on all three are excellent and just a lot of drilling activity. So, we're very excited about the way these three acquisitions are performing.

Very insightful. Thanks for your time.

Thanks, Derrick.

Thank you. Our next question comes from the line of John Abbott with Bank of America. Please proceed with your question.

Hi. Good morning and Thanks for taking our questions.

Good morning.

Yes. So both our questions are really on tax. So per your presentation, you've indicated that 55% of the distribution paid in November will be nontax from federal - for federal purposes. I guess the real question is just how does that trajectory sort of look over a sort of a multiyear basis based off your forecast? What do you think about that?

In terms of future, how does that 55% number change going forward?

Correct.

Yes. Blayne, are you on the call right now? I might defer it to you to answer that question.

Yes, I am. And we used to - in previous year, provide guidance going out further than just the quarter. But then when commodity prices increased, we kind of made the change to do it quarter-by-quarter. So, I would say really that number, that 55% number is really just going to ride with commodity prices. So if you see a run in oil and that's where the capital number is going to go down. But there's really no other factors other than that that's going to change that. So I would just - the answer would be that it's going to change with commodity prices and move with that, so.

I understand. I understand that you don't necessarily provide multiyear tax guidance anymore, and I understand the volatility of commodity prices. But you are taxed like a C corp. You've done your acquisitions, so that probably helps your taxes probably next year and maybe a little bit after that. But at what point, if just sort of assuming if you did not do another acquisition, would you guys think that you would be a full taxpayer? Are we looking four to five years out? How do you kind of - if we just sort of look at the strip today?

Yes, John, it's a fair question. Given the dramatic growth we've had this year, candidly, that analysis that you're asking for, it's challenging. We have to work with accounting firms and it takes time to come up with that. In fact, I think we're one of the only firms that's ever provided multiyear tax guidance, at least in our sector, let us reflect on that. Given the M&A growth that we've had this year, obviously, the dynamics of the company have changed pretty meaningfully. But that might be something that's worth our time to revisit and point taken that, additional disclosure is always great. So that's on us, let us circle up internally and figure out next steps on providing additional guidance, if that's fair.

That's fair. Thanks you very much for our taking our questions.

Yes, my pleasure. Thanks John.

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

Hi guys. Thanks for taking my questions.

Hi good morning.

Yes. Good morning. And I guess the first one I have is leverage is now below 1x and continues to move directionally lower. Should we anticipate a 75% payout ratio moving higher over time? Or how should we think about that? How are you guys thinking of that?

Yes. Excellent question. Always the best question for us is how do you manage the cash flows and how do we think about rewarding shareholders in the most efficient way. I would say that at the Board level, we want to keep the ratio - the payout ratio consistent at 75%. We like paying down debt, particularly when we're paying 8% interest on it with 25% of our cash flow. So, I think you'll see us continue to do that for quite some time. There will be a point at which we want to start to redeem the profit that we have. So bringing up additional capacity on the revolver, just gives us more flexibility to do that. So I think that's where we are at this point, but it's something that we constantly evaluate. And your point is very well taken, which is that the balance sheet is in great shape. There may be a point in the future where we decide to increase that payout ratio because it's just unduly conservative. We just don't feel - at least at this point that we're at that point yet. Matt or Bob, anything you guys want to add?

No, I'd say that our borrowing base continues to increase. We're going to have a solid [ph] determination meeting later this month, and we - right now, we're at $400 million on our credit facility. We expect that to go up in Q4, which is adding additional liquidity. But as Davis says, right now, the plan is to, over the next quarters to continue to paydown the credit facility to be in a good position, call it, this time next year to redeem a big chunk of that Apollo [ph] preferred so...

Awesome. And kind of on a similar note, regarding hedges, that's where you've all kind of proportionally added oil and gas hedges in '24 and '25 and got some higher swap price in the second half of '24. Similarly with leverage kind of below the 1x number, kind of how do you all think about hedging moving forward?

We systematically do it. We - it's always a question of how do you think about hedging as a royalty company. For us, we look at - we don't have to protect the CapEx budget like a driller does, obviously. But for us, we do have the built-in financial leverage vis-a-vis debt. And so what we do is we take our debt. We divide it by enterprise value, and we hedge that ratio on a rolling two-year forward basis. So if I'm not mistaken, I believe that's at 17% right now, Matt, I think, for the next two years on average.

That's correct, yes.

Yes. So, I think we'll just continue to do that, just keep a consistent strategy. We're not trying to predict movements in oil and gas prices, people historically get a lot of trouble doing that so.

Perfect. Thanks guys.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Tim Rezvan with KeyBanc Capital Markets. Please proceed with your question.

Yes. Good morning, everybody. And congratulations on the Texas Rangers last night.

Yes, thanks.

That was a great game.

Good series. Derrick actually took both my questions, so I was hoping to push a little more, because I think they're important topics. On the M&A market, you've seen some pretty attractive debt financing set up by peers of yours. And I'd imagine that sellers noticed that as well. So we saw - it looks like a logjam broke on M&A this year and now that there's more financing available maybe than people thought in the year - at the start of the year. I'm just trying to understand sort of what's the latest kind of - how do you think about kind of the near-term outlook overall for the sector?

Man, it's a really great question. That's one of the most fun things about our business is looking at the M&A environment, and it's been really fun to watch and evolve since we started doing this well, 25 years ago, but in the public context and gearing up for public the last 10 years, we continue to be surprised by just the sheer volume of private sellers that are out there. There are groups out there that have $100 million packages that we just get introduced to on a weekly, if not monthly basis, they didn't know previously. I mean there's just an incredible consolidation effort going out there - going on out there, and it's really just a reflection of just how big the industry is. We're going to see that over $0.5 trillion in size, and it's just massively fragmented. So, we expect that trend. If you look historically, and if we had like a bar chart of it, it just continues to always go up. And frankly, it always surprises us. We always end up being a little bit conservative on how much M&A volume there is out there. Our view, so I would say that we continue to expect robust M&A activity. Our view is always to be just highly selective in what we buy. We try to sit around and look at the landscape and say, what's the best possible asset out there that we can get at a price that maximizes returns to our shareholders. And we try to focus in on those opportunities, and there's not a lot of them every year, if you run up the Rangers, we're just waiting for the right pitch and we want to swing at the right opportunity. So I agree with you on the debt financing…

No, that's a great answer.

Okay. That's great. I appreciate that context. And then back to the sort of the maintenance activity levels. I think 5.4 net DUCs, 3.9 net permitted locations. You have now a much bigger exposure to sort of the Mid-Con. I'm just curious kind of any insight on visibility on converting those permits to PDPs. And you mentioned strong execution in the third quarter. Just how that's been trending? And how you think about that now that you have a lot more exposure to the Mid-Con than you had earlier in the year?

Yes, that's a great question. I'm not sure we have enough data yet to really give you a full answer on the most recently acquired Mid-Con asset in terms of how those permits have converted to real development. I would say on average, permits convert across the portfolio, Bob, what would you say, 12 to 18 months?

Yes, usually within that, but yes, yes.

Yes. And we love our Mid-Con position. In fact, we think that was one of the best buys we've ever made, frankly, in terms of bang for your buck and in terms of what we've been able to buy in terms of hydrocarbon in place relative to purchase price. A good question. Let us give you a more full answer over the next quarter or two in terms of how we're seeing activity there. But I think just a little bit too early to probably give you a read on what's going on there in terms of permit conversions so.

Got you. That's fair. Thanks.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

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

Thank you. You may now disconnect your lines. Thank you for your participation and interest.