Greetings, and welcome to the Kimbell Royalty Partners Second Quarter Earnings Conference 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]. It is now my pleasure to introduce your host for today's call, Mr. Rick Black, Investor Relations. 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 second quarter of 2020. 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, August 6, 2020, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay. 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 of future events or future financial performance, are all considered forward-looking statements made pursuant to the Safe Harbors provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements [Technical Difficulty] 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 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 for this call. I'm joined here on the call with several members of our senior management team, including Davis Ravnaas, our President and Chief Financial Officer; Matt Daly, our Chief Operating Officer; Blayne Rhynsburger, our Controller. I'd like to begin by providing an overview of our performance in the second quarter before handing the call over to Davis to walk you through the financials in more detail. We are encouraged by the gradual recovery in both commodity prices in the U.S. economy, and are cautiously optimistic that the worst is behind us with regard to production curtailments. Despite market challenges during the second quarter, we benefited from the full integration of the Springbok assets, and increased our Q2 2020 payout ratio from 50% to 75% of cash available for distribution. Our run rate and daily production during the quarter was 14,069 barrels of oil equivalent per day, down 7% from Q1 2020 record production of 15,188 Boe per day, including a full quarter of the production attributable to the Springbok assets. Substantially, all of the decrease in production between the first quarter and the second quarter was due to curtailments that occurred during the second quarter. Having said that, many risks remain in the economy, including, but not limited to, significant recent increases in COVID-19 cases across the country, additional potential shutdowns related to COVID-19, and the related effects on U.S. employment. In addition, significant uncertainties remain in the U.S. energy sector, primarily related to the pace of new drilling and completions for the remainder of 2020. However, we believe the Kimbell business model is highly differentiated from most companies in the U.S. energy sector, given our pure royalty model, diverse asset base, mix of commodities, substantial hedges,…

Thanks, Bob, and good morning, everyone. Although oil prices have somewhat recovered recently, primarily due to a rebound in gasoline demand, prices will likely be volatile for the remainder of the year. Even in the face of these challenges, we strongly believe that our business model and asset portfolio will continue to set itself apart from most other companies in the U.S. energy sector. As an example, one only has to look at Q2 production for Kimbell relative to Q1. Unlike many other companies in the U.S. energy sector that are experiencing double-digit production declines due to steep decline curves and a lack of drilling, our production only dropped by about 7% quarter-over-quarter, which is largely due to curtailments. While difficult to predict the exact timing, we do expect these curtailments will largely reverse themselves in the coming quarters. In addition, we continue to maintain a very strong inventory of permits and DUCs across our acreage, as a result of the strong drilling momentum on our acreage just prior to the pandemic. We expect these locations will provide immediate enhancements to our production profile, as eventual DUC conversions occur when frack crews resume operations. Overall, this strong focus on production stability in the face of a severe economic contraction is one of the main hallmarks of our business model. Furthermore, combining this competitive advantage with our robust hedge book and significant natural gas production, which has an increasingly positive macro outlook, provides even more enhanced cash flow stability into the coming quarters, as we emerge from this volatile period. The Company's second quarter average daily run rate production was an impressive 14,069 Boe per day, with a total average daily production of 14,254 Boe per day, which consisted of 185 Boe per day relating to prior period production recognized in…

[Operator Instructions]. Our first question comes from John Freeman with Raymond James. Please proceed with your question.

Hi, guys.

Hey, John.

Hey, John.

How you doing?

Doing well, thanks. First question I had, just trying to - a little bit more detail on the curtailments or shut-ins that you all saw during the second quarter. I'm just trying to get a sense of how much of it - and I realize it's difficult to nail down, but just ballpark, if you're thinking about from a curtailment versus outright shut-ins, if you could kind of just maybe ballpark round numbers about how much you think were just curtailments versus outright shut-ins.

Bob, do you want me to start?

Sure, yes.

Blayne, I want to hear what you think about this too. It's a good question, John. I think substantially, all - and I'm going to say 6% out of the 7% would be a good conservative. It's temporary curtailments. Is that correct?

Yes.

And the largest one was EP Energy, is that correct?

Yes.

So, John, it's not - so, the good news is we expect what - we have reduced rig activity on our existing acreage position, and so does everybody. But 6% of the 7% of production drop, we believe, is attributable to temporary curtailments that should reverse themselves. And maybe I'll be ever more aggressive and say we believe most of those have already reversed themselves. Isn't that a fair statement, Blayne?

Yes.

In June, yes.

In June, yes.

So, that's a good news, John.

No, that's great. And then I want to spend a little bit time talking more about the payout ratio. You increased it from a 50% to the 75%. I know, in the past, you sort of talked about if you got leverage back down below 1.5 times, you'd probably start moving back to the 100% payout, and I'm just curious if just when you think about long term, if - and again, I completely acknowledge that you all have the lowest base decline rate of anybody, so you already have kind of a built-in additional safety net, relative to your peers. But if there might be some inclination to maybe not quite go back to the 100% payout, just as a sort of additional kind of dry powder, and also along those same lines, if potentially that 1.5 times leverage target might, over time, maybe move closer to 1 times.

Great, question, John. Thank you for asking it. There is not a perfect answer on the payout ratio, and we have agonized over it pretty much every single day over the - ever since this whole COVID fiasco started. I think that when we made the decision to go to 50%, we had a long conversation with the Board. It was the same week then oil negative $40. So at that time - I'm giving you kind of a long explanation, but at that time, we just didn't know when we didn't know. We didn't know how bad this is going to get, and I think it was just prudent and the right thing to do to reduce the payout ratio to 50% at that time. Our Board abundantly agreed with that. When we made the decision to go up to 75%, the world, it improved dramatically. We went from - we had an $80 swing in crude prices from negative $40 to positive $40. We had more transparency on the Company. You asked about curtailments. We felt confident that most of that is going to reverse itself. We were encouraged by the fact that our market share of rigs in the U.S. is actually - continues to increase, which suggests, all other things being equal, that we have more attractive assets than the average asset in the United States. But on top of that, we're not happy with where our leverage is. So, I don't see us going above 75%. Bob, weigh in here if you disagree with that. I don't think the Board is going to want us to go above 75% until we get leverage closer to that 1 times to 1.5 times. Another factor why we went from 50% to 75%, so we spent a lot…

That's great. I appreciate all of the comments, guys. Thanks a lot.

Thanks, John.

Thank, John. I hope you and your family are doing well.

Our next question comes from TJ Schultz with RBC Capital Markets. Please proceed with your question.

Hey, guys. Good morning. On the micro investment deal in July, is that just normal course? And I know it's small dollars, but is there anything more to read into that on how sellers may be more willing recently? And then just more broadly on M&A, what's your view on the potential to do more deals this year? And how would potentially financing some of those larger deals look, just given where the stock is right now? Thanks.

Great question. So, nothing is - so, we have very strict underwriting standards on the micro strategy. We're targeting kind of risked PV, let's call it 20 plus. So, it's really hard to get those deals done. But it's a really big market. So, in July, we had a small amount of activity, but really good deals. I mean, it's just hard to transact. So, we're talking about PV 20s risked at $40 oil environment. So, we feel pretty good about those. I think what we've seen is a little bit - I think this is fair. Everybody else jump in here, if you have anything to add. I think it's fair to say that it's always more difficult to get deals done when the bid ask spread is just so severe. I mean, the volatility in oil prices kills deals. I mean, it just makes it really hard to get things done. That being said, the opportunities where we've been able to transact, there has been an element of distress associated with those. So sometimes, these are mineral owners that - it's a working interest company that has a small mineral position. They want to sell to pay down debt or they want to fund a drilling program, or whatever. And minerals tend to be the easiest assets to sell. It's just an easier cash flow stream to monetize than an operated position. So, all things being equal, more difficult to get deals done in an environment like this. Although with stabilization of $40, I would expect things to pick up a little bit on that front. But there is an element of distress. I mean, this is a really tough environment for a lot of people, and a lot of people need money right now, I mean, for…

No, no. I agree with everything you said.

Do that all make sense, TJ?

That's great. I really appreciate all the insight. I'll just leave it there. Thank you.

Thanks.

Our next question comes from Chris Baker with Credit Suisse. Please proceed with your question.

Hey, guys. Just on the micro strategy, I was wondering, could you give us a sense of how much you've seen pricing improve since before the oil price crash?

Pricing improved since before the - I think you're talking about in terms of the PV, the NAVs that we're able to transact at on the micro strategy. Is that you're asking about?

Yes, just maybe on a dollar per acre basis or something like that.

So, we never look at dollar per acre because we don't buy - that's when - when you have no other metrics, you have to use dollar per acre where there is no existing cash flows. Everything we buy has at least some component of existing cash flow or a DUC that's in the process of getting completed. But before - it's the same parameters. So, we like to do risked net PV 20s on the micro strategies, and that's because the deals are so small that you're able to find some good opportunities. So, what I'm saying is we're still underwriting to that harder to deploy capital, that level at $40 oil, but if we were pre - if you asked about it compared to pre-COVID, I'd say pre-COVID, if you're assuming a price deck of $50 or wherever oil was before this whole nightmare started, it may be a PV 30 or 40 in today's terms, if that makes sense, of what we're able to transact at.

We've done about 24 micro deals, and they're relatively small. And one thing that slowed it down obviously a lot was the fact that people can't go notarize and close deals right now with the pandemic. So, we expect that to pick up hopefully in Q3 and Q4.

Great. And then just a follow-up on -

Did I answer your question, Chris? Go ahead.

Yes. Yes, no, that's helpful. And just as a follow-up, any color on the second half outlook? I know you guys talked about a majority, if not all of the curtailments coming back online. Do you think it's likely that second quarter is the trough for the year?

Let's give him as much detail as we can, where we sit. I think - and Bob, I'd turn it over to you. I think I'd be happy if our volumes stabilized around where they are right now. I mean all things being equal, I expect Q3 to be higher than Q2 because of the reversal of the curtailments. But, Chris, offsetting that, we do have some element of natural decline and fewer rigs running on our properties. So, I'd be happy if our production stayed at it its current level for Q2 for the rest of the year. But I do think that it could go up in Q3. And we still have a fair amount of - I mean it depends on what happens in our high-interest wells, but we still have a fair amount of activity that's meaningful. What would you add to that, Bob?

I'm very proud. We've always said how we've always gone into best areas to buy our properties all through the country, and I'm extremely, extremely proud of only a 7% decline in the second quarter, and I think it's a self-fulfilling strategy. If you buy properties in the better areas, that's going to be the last properties that operators shut in. And that's what we're seeing. I would have problems sleeping at night of our PDP decline was 35% to 40%, and it isn't. It's a five-year average of 13%. So, I think we're in a very strong position, and I think the second half of the year shouldn't be any lower than the second quarter, and I'm cautiously optimistic that it should be higher.

Well, in particular, what we are seeing is gas prices. Gas over $2 now. So, that can pick up a lot more attractive for drilling Haynesville wells. Chris, it's a hard question to answer because there's so much uncertainty. Matt and I were talking before this. We might be in a position to issue guidance sometime in Q3, Q4 for next year. As soon as we feel comfortable enough issuing guidance, Chris, we're going to do it. So, we can give you a better answer. But I would expect our production to be somewhere between where it is today and Q1 for the second half of the year. Is that a fair enough statement, everybody? Do you guys all agree with that?

And Chris, back to the natural gas point, we are 59% natural gas on a six to one basis, and natural gas is up over 20% so far in Q3. So, that's certainly going to help going forward here.

Great. Thanks, guys.

Our next question comes from Aaron Bilkoski with TD Securities. Please proceed with your question.

Thanks. Morning, guys. Maybe just as a follow-up to Chris's questions, you talked about 29 active rigs as of June 30. Would you have any idea where that rig count on your acreage would stand today?

Great question. I don't know the answer to that.

I mean the Baker Hughes rig count has stayed relatively flat, maybe pretty much flat since June 30. So, I'd say probably about the same.

So, about flat. Yes, I agree with that. About flat, Aaron, would be our guess.

Okay. And maybe a follow-up question on the 2019 rigs at the end of June, relative to - I think you had 75-ish at the end of Q1. Which plays were the most resilient which plays saw the largest drop off in rig counts?

That's another question. Do we have the breakdown by rigs?

We do. I can do it. So, Aaron, it's Matt. So we had - this is - going let's compare April to June. So, April 17, we had 70 rigs, and June 30, we had 29 rigs. In April, we had 33 in the Permian and that dropped - so, 22 rigs down to 11 at June 30. So, that was the biggest in terms of drops. And the [indiscernible] operators like Concho, Diamondback, Apache, Parsley, dropping rigs between that period. We still have rigs from Pioneer, Devon in the Permian, but that will be the biggest area in terms of the drop.

Perfect. Thanks, guys.

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

Hey, Derrick.

Hey, guys. Good morning. How are you doing?

Good. Good morning.

Staying on the rig count market share topic, you guys have seen some remarkable gains, as noted on Page 12 in the bottom chart. My question is really twofold. First, how sustainable is that trend? And second, what, in your view, is the primary driver for your success?

That's a great question. Bob, why is our rig count doing so much better in terms of market share gain than kind of the average company?

I mean, I'd just say it's because we've selectively, through the years, bought in the areas where the operators would leave that as the last area to stop drilling. So, we've just bet in better areas in the various basins.

Yes. I mean, it's just really good operators. We've got Pioneer right now drilling a bunch on our acreage. We've got - Laredo and Devon are still very active in the Permian, which is surprising to me. And I think I think some of our gas positions have been remarkably resilient. We still have - we have five rigs running in the [indiscernible] right now. I mean, that was back in June 30 when gas was what? $1.60? We still had five rigs running. I mean, it's just - we've underwritten, individually, every single one of the acquisitions that's in our portfolio, and so just to sum of the parts, I think.

Exactly.

I think we just have a better than average portfolio. We've kind of proven that. I'm glad that you're noticing that because nobody else is.

Yes, thank you.

But I mean that's exactly right.

Just some more color between March and April 17, the U.S. rig count dropped 28%, and our rig count only dropped 7%. They hung out a little longer to finish those wells.

Yeah, I mean what's said differently, Derrick, was - when we were back in April, I mean that's kind of giving you more context than perhaps you want we were having freaks out that these curtailments were going to drop our production 20% or 30% this quarter versus last quarter. I would kind of have trouble sleeping at night, just worried about curtailments. The fact that we're only down 7% and we believe 6% of that 7% is temporarily curtailed and probably has already come back one, I mean if you told - I wish I could go back in time and calm myself down in April there. I mean we're really only down 1% quarter-over-quarter, which is exactly what we've tried to do. That's exactly the purpose of how we built this asset base, was to have that type of performance in adverse environments like this. I mean, this is - we're purpose built exactly for this, and it's just so nice to see it play out the way that we thought it would, if that makes sense. It's very rewarding.

That's certainly a remarkable statement on the quality of your assets.

Well, thank you.

Well, appreciate that.

And shifting over to M&A with my follow-up, perhaps for Rob or Davis, with the backdrop on gas improving, would it be fair to assume your stand increasing deal flow in the gas basins?

Yes, yes, nailed it. And we are happy, right? We're seeing increased deal flow in gas. A lot of Marcellus stuff is coming to market. We're a little bit less rosy on that than we are the Haynesville. We tend to prefer the Haynesville for a number of reasons, and we have more experience there too. But yes, we're seeing more activity on the gas assets. And the other nice thing about that, Derrick, if you kind of backed our diversified strategy, there aren't a whole lot of public buyers for gas assets. I mean it's one or two groups, us and one of our peers maybe that are even interested in buying gas assets. So, I think that puts us in a pretty unique position to consolidate that segment of the market, which is obviously enormous.

Very helpful. Thanks for your time.

Thanks, Derrick.

Yes, thank you.

There are no further questions at this time. At this point, I'd like to turn the call back over to management for closing comments.

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

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