Oil & Gas Royalty MLP Benefits from 'Record Production in Q3/19'

In a Nov. 7 research note, Raymond James analyst John Freeman wrote that Kimbell Royalty Partners, LP (KRP:NYSE) "reported record production in Q3/19, making way for about an 8% sequential distribution growth."

This quarterly result exceeded consensus' estimate by about 11% and Raymond James' forecast by about 2%. Freeman highlighted that Kimbell achieved this despite the number of rigs on its acreage dropping in Q3/19 by 8%, driven by an industry slowdown. "We believe [this] is a testament to the low Proven Developed Producing (PDP) decline strategy that Kimbell employs," he added.

Consequently, the master limited partnership (MLP) increased its Q4/19 guidance at the midpoint by about 5% to 11,600,000–12,800,000 barrels of oil equivalent per day, in line with the Street's guidance.

One of the highlights in Q3/19 was the quick result from Kimbell adding a team member to "proactively search for and recover production in suspense across its asset base," noted Freeman. Within only two months, the move benefitted the MLP to the tune of about $600,000 in cash flow that otherwise would have been delayed indefinitely. "This should be an incremental benefit as Kimbell continues to improve this process going forward, so we could see more positive surprises in future quarters on this front," the analyst added.

Also in Q3/19, Kimbell's microstrategy joint venture closed on $3 million worth of microscale deals. Since Q3/19 ended, the MLP closed another acquisition, $10 million for 186 net royal acres and 202 barrels of oil equivalent per day of current production from the STACK play, which will be accretive to discounted cash flow per unit in Q4/19. Additionally, management mentioned another significant potential purchase, in the Eagle Ford and late in the negotiations stage.

Freeman concluded, "We continue to favor Kimbell's: 1) mineral interest business model (an asymmetric risk-reward play on development activity), 2) low PDP base decline rates (about 12%) and 3) aptitude for acquiring assets that are accretive to discounted cash flow per unit."

Accordingly, Raymond James has a Strong Buy rating and a $19 per share target price on Kimbell Royalty.

The MLP's stock was trading at the time of the report's publication at around $14.28 per share, or a roughly 12% annualized yield, which Freeman described as surprising and significantly below where it should be, given Kimbell's "steady, resilient production, distribution growth profile and favorable tax treatment through 2025." The current stock price is $13.89.

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Disclosures from Raymond James, Kimbell Royalty Partners LP, November 7, 2019

ANALYST INFORMATION

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

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