Welcome to the Kimbell Royalty Partners Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, with Investor Relations. Thank you, sir. 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 2023 ended on December 31, 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, February 21, 2024. 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's provision of the Private Securities Litigation Reform Act of 1995. We will be making statements that are forward-looking 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 uncertainties and risks are detailed 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. And 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 very pleased to announce another record year for Kimbell. In 2023, we completed our largest acquisition to date, which was immediately accretive to distributable cash flow per common unit, and the acquisition substantially bolstered the Permian as our leading basin in terms of production, active rig count, DUCs, permits, and undrilled inventory. In addition, we increased the borrowing base and elected commitments on our revolving credit facility to $550 million, further enhancing our liquidity and conservative capital structure. We are also very pleased to report that we paid out $1.73 per common unit in tax-advantage quarterly distributions during 2023 and paid down approximately $49.9 million on our credit facility. We ended the year with a strong fourth quarter that reflected significant sequential organic growth over the third quarter due to a number of high-interest wells coming online in the Permian and Haynesville. We expect to continue this operational momentum as we progress through 2024, given that our rig count remains near record highs with 98 rigs actively drilling in the U.S. Turning now to production growth. It is remarkable to reflect on our growth since our IPO, as we have now grown production from 3,116 BOE per day to 24,332 BOE per day, an increase of 681%. As evidenced by our significant acquisition activity in 2023, we expect to continue our role as a major consolidator in the highly fragmented U.S. oil and natural gas royalty sector. And we estimate the total size of the market to be nearly $1 trillion. As I've stated in the past, there are only a handful of public entities in the U.S. and Canada that have the financial resources, infrastructure, network, and technical expertise to complete large-scale multi-basin acquisitions. We believe that we are still in the early stages of this consolidation and will actively seek out targets that fit within our acquisition profile. We are very excited about the opportunities to expand in the future and deliver unitholder value for years to come. I'll now turn the call over to Davis and Matt.

Thanks, Bob, and good morning, everyone. I'd like to start by reiterating the sentiment that Bob expressed. This was a great year for Kimbell as we finished 2023 with a very strong fourth quarter as well as setting new records in several of our financial and operating metrics. I'll start by reviewing our financial results from the fourth quarter, beginning with oil, natural gas, and NGL revenues of $83.9 million, an increase of 21.2% compared to the third quarter and a record for the company. In the fourth quarter, we generated record daily production that marked another significant milestone for Kimbell. Run rate production for Q4 2023 was a record at 24,332 BOE per day on a 6 to 1 basis which reflected 3.4% organic growth from Q3 2023 run rate production. As of December 31, 2023, Kimbell's major properties had 807 gross or 4.55 net DUCs and 727 gross or 3.83 net permitted locations on our acreage, not including minor properties, which we estimate could add an additional 15%. In addition, we exited the quarter with 98 rigs actively drilling on our acreage, which represents approximately 16.3% market share of all land rigs drilling in the continental United States. On the expense side, fourth quarter general and administrative expenses were $9.1 million, $5.8 million of which was cash G&A expense. Excluding the impact of approximately $0.8 million and integration-related expenses associated with the third quarter acquired production, cash G&A per BOE was $2.25. Fourth quarter net income was approximately $17.8 million of net income attributable to common units was approximately $9.8 million as compared to $18.5 million and $13.6 million, respectively, from last quarter. Total fourth quarter consolidated adjusted EBITDA was a record at $69 million, which was up approximately 24% from last quarter. You will find a reconciliation of both consolidated adjusted EBITDA and cash available for distribution at the end of our news release. Today, we announced a cash distribution of $0.43 per common unit for the fourth quarter. This represents a cash distribution payment to common unitholders that equates to 75% of cash available for distribution, and the remaining 25% will be used to pay down a portion of the outstanding borrowings under Kimbell's secured revolving credit facility. Moving now to our balance sheet and liquidity. As a reminder, on December 8, we increased the borrowing base and aggregate commitments under our secured revolving credit facility from $400 million to $550 million in connection with the fall redetermination. At December 31, 2023, we had approximately $294.2 million in debt outstanding under our secured revolving credit facility. We continue to maintain a conservative balance sheet with a net debt to trailing 12-month consolidated adjusted EBITDA of 1 time. Kimbell had approximately $255.8 million and undrawn capacity under its secured revolving credit facility as of December 31. We are very comfortable with our strong financial position, the support of our expanding bank syndicate, and our financial flexibility. We are also releasing 2024 guidance, which includes daily production at its midpoint of 24,000 BOE per day. We feel very confident about the prospects for continued robust development given the number of rigs actively drilling on our acreage as well as the commentary we are hearing from several operators about their expected development activity in 2024, especially in the Permian. We remain very bullish about our industry and our company as we see a long horizon for continued growth and opportunities to enhance shareholder value. I'd like to thank the incredibly hard-working, dedicated, and talented team here at Kimbell for continually driving growth and enhancing the value of our organization for all stakeholders. In addition, we work with the best advisers and financial institutions in the business. And we greatly appreciate these partnerships that contribute to the company's success. With that, operator, we are now ready for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Neal Dingmann with Truist Securities. Please proceed with your question.

You all just mentioned activity and your thoughts for this year and focus areas. Thank you. I think I was muted. Joe, great quarter. My question is about...

Hey, Neal. You might be on mute. Operator?

Okay. We can go to the next question while we wait for Neal and bring them back in. Our next question is from Tim Rezvan with KeyBanc. Please proceed with your question.

Hi. This is Jon Mardini on for Tim. You mentioned earlier in your press release –

Hi.

Hey, you mentioned earlier that the industry is in early stages of consolidation that you're excited about the opportunities to expand. Can you just talk about what you're seeing in the marketplace now and why you're so confident?

Sure. Happy to do that. I would say that every year since our IPO and even before that, we've been surprised by M&A volume. Last year was an enormous year across the entire sector for consolidation within minerals. It continues to surprise us positively. We're seeing more teams. Most recently, a trend we've seen is a lot of family offices that are getting increasingly involved in minerals. That's driving consolidation, particularly amongst smaller deals that are being rolled up into larger portfolios. We are regularly in contact with those groups. We're meeting new groups constantly. Nearly all of them have a plan to exit at some point in the future. And so that's why we continue to believe that larger institutional buyers like ourselves, specifically the public companies, will continue to benefit from a robust seller pipeline. It's tough getting deals done in this space, but we continue to see that trend as being a positive one. We think it will continue, and we think it will grow as time goes on. I mean if you look at just the overall market that's been captured by the public companies, it's still de minimis, low single digits of the overall market size. So we just think it's inevitable that consolidation continues.

No, that's great. Thanks for the details. And so the Permian is clearly your organic growth opportunity today. You talked about this a little bit, but can you just expand on what you're seeing from operators and in terms of activity and cycle times? Are you seeing any stock builds or is activity still proceeding at the normal rate?

Yeah. Good question. So we feel better today than we ever have about the near-term catalyst for development on our acreage. So we have net DUCs and permits of 8.4 compared to 5.8 needed to maintain flat production on our asset profile. So that would suggest that we have ample opportunity here to not only keep production volumes flat, but particularly for them to grow. That being said, everybody is aware of what's been happening in the natural gas space recently. You're correct that we have pivoted, not necessarily deliberately, but we have pivoted and just benefited from some really nice acquisitions in the Permian Basin over the last two years. So our company has become increasingly oil-weighted, we're less dependent on line and specifically the Haynesville for our growth versus where we were a few years ago. I think that's a good place to be right now, just given the dynamics in the natural gas space. I kind of wish that some of these operators would bring back drilling to a certain extent and maybe keep the gas in the ground on our acreage and theirs until natural gas accommodates a more positive price here. But we think that the Permian producers are going to keep production flat as a general theme; some will be growing production. I think our acreage will grow better than the average producers will, just by evidence of the number of DUCs we have relative to our PDP decline maintenance level. So feel good about the Permian; the Haynesville is a smaller position that we have today, but still feel good about the Haynesville. We have a lot of DUCs there. So overall, feel good about the direction of the company. I think what you see in our guidance like always, is a conservative view on development. It's just always challenging as a mineral owner with no developmental control over the assets to pinpoint exactly what growth is going to be, particularly in such a volatile environment like we're in today on the natural gas side and even oil, but more recently. So a conservative guide, feel good about it though. We don't think it's unduly conservative and feel very confident in our assets and the near-term horizon for them.

No, that’s great. Thanks for having that up. I’ll hand it back.

Our next question comes from Derek Whitfield with Stifel. Please proceed with your question.

Thanks and good morning, all.

Good morning, Derrick.

Hey, good morning. Given the considerable M&A we've witnessed across the Permian and Haynesville over the last six months, I wanted to ask your thoughts on the impacts it could have on your business?

That's a great question. My immediate reaction is that we will adopt a more disciplined approach to growth. If I had to speculate, I would say that we will feel more confident about the combined companies on a consolidated basis regarding their ability to maintain production levels. You will likely see less of the rapid shale growth from prior years, unless we encounter a significant macro event that drives up oil and gas prices. This tends to happen fairly quickly on our properties. Overall, we fully support the consolidation trend. It's a question we get frequently, and we prefer our assets to be developed by companies with stronger balance sheets, greater liquidity, access to capital markets, and investment-grade ratings, all of which contribute to healthier operators. We continue to believe that the ongoing consolidation among operators will ultimately be beneficial for mineral owners like us and others.

Makes sense. And then for my follow-up, I wanted to focus more specifically on Long Point. Now that you've onboarded these assets, are you seeing more ground game or collection opportunities and by collection opportunities I'm speaking to operate payment, et cetera?

Sorry, just to clarify, are you asking, are we seeing more small-scale acquisition opportunities on the mineral front? Or I'm not misunderstanding the question?

No, you've got it. That's correct. So more mineral opportunities based on the new assets you've onboarded through Long Point? And then secondarily, just collection, revenue collection opportunities? Are you seeing any situations where they were operated under payment just now that you've got the assets in-house?

Yeah. Great question. I'm very happy with the ease at which we were able to integrate the Long Point asset. They have a phenomenal team and have been incredibly well organized and very supportive of, frankly, just getting us fully integrated and getting all the cash to where it needs to go. Not seeing necessarily a pickup in the smaller M&A game. We continue to be disappointed by the clearing prices for smaller acquisitions. I was kind of speaking earlier to the fact that there just continues to be more and more attention to the space, more money coming into it, new teams constantly coming in. And what I think that's done is made ground game acquisitions, smaller deals, more expensive. Candidly, some of the larger opportunities that we've seen over the last couple of years have been counterintuitively more efficient from a pricing perspective, larger packages having better pricing than smaller ones, which just seems totally counterproductive or counterintuitive to anybody from a corporate finance standpoint. So I wouldn't say that the deal definitely went to an increase in smaller deal volumes. But overall, just continue to be happy with how that asset has been developed. And we continue to believe that it's going to increase in production value just by virtue of the number of DUCs and permits on the properties over the next couple of years.

Very helpful. Thanks for your time.

Thank you.

Our next question comes from Neal Dingmann with Truist Securities. Please proceed with your question.

Good morning, guys. Nice quarter. I apologize for the prior background noise in the office. My first question is also on your M&A. It sounds like you all continue to believe there's ample opportunity. It certainly seems to me as well. And I'm just wondering will you strategically target mostly Permian assets on the heels of your recent successful deal or you all just look at the most accretive? I know you'll continue to see tons of deals out there. So I'm just wondering how you think about approaching things this year?

That's a great question and a common one we receive. One of our strengths over the past 27 years has been our lack of geographic or commodity restrictions when it comes to acquisitions. The minerals business is challenging enough without limiting ourselves to one or two counties or a specific basin. Doing so can complicate matters, though there are some exceptions. Our strategy has always been to seek out assets that provide the best risk-adjusted returns for our investors, regardless of where they are located. Recently, the Permian has been very active, and we've benefited from that, but we also had a significant acquisition in the Haynesville a few years ago. These areas can be cyclical, and we aim to be opportunistic and open-minded about our acquisition targets. This year has started off slowly, and we haven't seen many appealing packages, which isn't surprising given recent trends. Last year, we anticipated 2023 would be quiet, but it turned out to be our busiest year ever. Market conditions can change rapidly. I think many natural gas mineral holders will hold off until prices improve. If I had to predict, I'd say the rest of the year may be more favorable for oil-weighted opportunities than for gas.

No. I understood. I really like the way you all look at that. And the second question is on activity specifically. Obviously, you can see the rig count seems to be holding up quite well, but just wondering how you all would describe sort of overall expectations for your operators’ remainder of the year besides the attractive, what is it, nearly 9 DUCs and net permitted locations you all talked about?

We're hearing from operators that they want to maintain production volumes, particularly in the oil sector within the Permian. On the natural gas side, the situation is a bit mixed, with some operators reducing capital expenditures and production guidance, which seems reasonable given the current natural gas price environment. As a result, we may see a slowdown in production growth or a decreased ability to replace production in the natural gas sector. However, I am confident about the oil-weighted asset base. Currently, just over 50% of our rigs are operating in the Permian, with the remainder well diversified—17% in the Mid-Con, 13% in the Haynesville, 8% in the Eagle Ford, and 6% in the Williston. Overall, it appears that operators plan to maintain their production volumes, with only slight growth depending on their drilling programs. We've acquired significant assets in the last two years, particularly with a higher number of drilled but uncompleted wells compared to maintenance production levels, so we expect our portfolio to position well relative to overall production growth in the lower 48. While we can't guarantee this outcome, we're optimistic about our near-term development and our ability to replace declining production.

Very love to hear that activity. Thank you all.

Thank you.

Our next question comes from Paul Diamond with Citi. Please proceed with your question.

Thanks. Good morning, all. Thanks for taking my call.

Good morning.

Good morning. I would like to quickly discuss the growth opportunities you see. In the current market, is there a specific scale of deals you are considering? Do family offices need to reach a certain level before engaging in discussions with you, or is it more about keeping the conversation open and seeing how things develop in the future?

That's a great question. I haven’t addressed it in that specific way before. I wouldn’t necessarily say that the size of the portfolio is the most important factor in making assets attractive to us and other larger institutional buyers. It's more about ensuring that the assets have a balance of cash flow today. We won't invest in something with a 10 times cash flow that would immediately dilute our cash flow per unit. We also need to see sufficient upside in the asset so that it isn’t just a declining one. The asset may generate cash flow today if purchased at three times cash flow, but could become dilutive in a year if it runs out without replacing the inventory. We focus on working with people who are diligently assembling mineral portfolios, encouraging them to think about the exit while they’re organizing the assets. It's essential to find the right balance of cash flow and drilling inventory so that we can justify the returns we need. We aim for mutually beneficial outcomes, where both the sellers and we make money, which is crucial since we often buy from repeat sellers who understand that we honor our commitments. We trust the quality of the titles and assets they provide because of our previous diligence process together. Size is relevant, but not as relevant as I previously mentioned. However, it has been challenging to find deals that make sense for us from a pricing perspective in the under $25 million or $50 million range, as those tend to attract a lot of attention from buyers, making it difficult for us to compete. We’ve been amazed by how competitive the smaller opportunities are and are pleased to see that some of the larger deals remain attractively priced.

Good. That makes perfect sense. I have a quick follow-up. When I look at the current permits and DUCs compared to production guidance growth, should I expect a similar level of DUCs being turned inline, with the Permian progressing normally and approximately 40% of the existing being utilized? Or should I be anticipating increased market volatility this year?

I believe it's a combination of factors, and I appreciate how you framed the question. Historically, we anticipate completing nearly all of our net DUCs within the next 12 to 18 months, though it's likely closer to 12 months. Regarding permits, I agree with the percentage you mentioned. I don't have the exact historical averages for permits on hand, but that figure seems reasonable to me. What you might be noticing is that our guidance could appear somewhat conservative, especially in light of the ratio of net DUCs and permits to the maintenance level required to keep production steady. Are we being excessively cautious? I think in the current market climate, we're choosing to acknowledge the volatility and offer guidance that makes sense. We aim to avoid being overly conservative, but we can’t promise production levels to our shareholders if natural gas prices remain low or if oil prices start to decline this year. What's reflected in our guidance is our attempt to strike a balance—providing realistic expectations for the next 12 months while not being overly cautious, especially given the recent low prices for natural gas. It's indeed a challenging situation for anyone who owns minerals and does not control their development.

Got it. Understood. I appreciate the time. I’ll leave it there.

Thank you.

Our next question comes from Grant Adkins with Raymond James. Please proceed with your question.

Hey, guys. Thanks for taking the call.

Good morning, Grant.

So this is going to be kind of on the macro side. But given the kind of activity reductions we've seen from some operators in both Appalachia and the Haynesville. Do you all see that as kind of I guess you kind of mentioned that you don't really want necessarily those assets to be drilled up right now, but how do you think that affects your kind of gas production or does it moving forward into '24?

I’m not too concerned about gas production or our assets in 2024 due to the number of drilled but uncompleted wells we have in gas basins currently. I believe that these, along with some permits, should allow us to maintain our production levels, even without increased drilling on our acreage. The focus is primarily on the Haynesville, which now represents only about 13% of our current rigs. This area has become less significant to our business compared to a couple of years ago, which is intriguing to observe as our portfolio evolves. Appalachia contributes less to our production, so we are focusing less on that. Operators in that region are indicating that maintenance production levels will be what we see over the next 12 to 18 months. I appreciate your point, and I think it is incorporated into our guidance. I would like to reiterate what I have said in earlier discussions: we feel confident about our uncompleted wells and permits in relation to the maintenance activities necessary to keep production stable. However, our guidance does present a realistic and conservative outlook, acknowledging that natural gas prices are currently low and highly volatile, which complicates predicting activity levels.

Awesome. Thank you.

Thank you.

This concludes our question-and-answer session. I would now like to turn the floor back over to management for closing remarks.

Thank you all for joining us this morning, and we look forward to speaking with you again next quarter. This completes today's call.

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