Master limited partnerships, or MLPs, are companies that integrate the tax benefits associated with private partnerships with the liquidity advantages of publicly traded stocks. Because of their unique corporate structure, MLPs return a greater percentage of income earned to investors through cash distributions or dividends. Due to these factors, MLPs generally offer investors a higher-than-average dividend yield, making them ideal for income-seeking investors.
Kimbell Royalty Partners (KRP) is one such MLP. Valued at a market cap of $1.41 billion, KRP provides shareholders with a dividend yield of 10.4%. Over the past three months, the shares have gained nearly 11%, but still trade below their recent highs near $20.
With oil futures (CLZ23) retreating today on cooling Middle East tensions and a massive merger deal for Chevron (CVX), let's see whether it makes sense to scoop up this income stock at current levels.
Inside Kimbell's Permian Portfolio
Kimbell Royalty Partners owns mineral and royalty interests in more than 17 million gross acres in 28 states and in every major U.S. onshore basin. Notably, it owns more than 50,000 wells in the Permian Basin.
The company owns 90 active rigs drilling on its acreage and royalty interests in more than 125,000 gross wells in the U.S., which accounts for 13.8% of the entire U.S. lower 48 active drilling fleet. It has 151,000 net royalty acres in the U.S., with significant positions in the country’s highest growth basins. Around 97% of its onshore rigs in the contiguous 48 states are in counties where the company holds mineral interest positions.
Management notes that 18% of its overall production is from conventional assets, including certain enhanced oil recovery (EOR) projects. Its exposure to conventional production provides production stability, which helps facilitate organic production growth as new wells come online.
Significantly, Kimbell owns a portfolio of diversified, high-margin, and shallow decline assets with zero capital requirements needed to support free cash flow. With 17 years of drilling inventory remaining and a PDP (proved developed producing) decline rate of 13%, Kimbell targets high-quality positions in highly fragmented regions.
How did Kimbell Royalty Partners Perform in Q2 2023?
In the June quarter, Kimbell Royalty Partners generated $57 million in oil, natural gas (NGX23), and natural gas liquids revenue on the back of record run-rate average daily production of 17,573 barrels of oil equivalent each day. It reported EBITDA (earnings before interest, tax, depreciation, and amortization) of $45 million and a cash distribution of $0.39 per share.
Since its initial public offering (IPO) in early 2017, Kimbell Royalty Partners has invested $1.3 billion toward mergers and acquisitions (M&A). It has closed nine major M&A transactions in the last six and half years, allowing it to increase run-rate average daily production by 5x in this period. In fact, Kimbell just closed on its own $455 million acquisition of Permian-focused assets.
Kimbell's asset-light business model allows for a conservative leverage ratio, which helps to insulate the company from recent interest rate hikes.
Looking ahead, KRP will announce its Q3 results in early November.
What's the Target Price for KRP?
The consensus on Wall Street is calling for KRP's earnings to narrow in 2023 to $1.34 per share, down from $1.72 per share in 2022. Off 18% from annual highs, the oil and gas stock currently trades at 12.2x forward earnings, which is quite cheap given its high dividend yield.
Each of the four analysts covering KRP has a “strong buy” recommendation. The average target price for KRP is $21.25, which implies expected upside of 31.8% from current prices.
