Greetings and welcome to the Kimbell Royalty Partners Third 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today's call, 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 third quarter 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, November 5th, 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 future events or future financial performance are forward-looking statements made pursuant to the Safe Harbor's provision 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 press release for our disclosure on forward-looking statements. These factors as well as 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 earnings press 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 CEO. 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 third quarter before handing the call over to Davis to walk you through the financials in more detail. We had a very good quarter with both a strong improvement in commodity pricing and increased production, once again proving the resilience of our business model. Production curtailments, which were put in place by many operators during the height of the pandemic earlier this year, were largely reversed in the Permian and Eagle Ford during the quarter. However, curtailments were still largely in place on our Bakken assets during the third quarter. We are hopeful that these will reverse in Q4 of 2020 due to improved differentials in commodity prices. There was a slight uptick in the number of rigs drilling on our acreage from 29 to 30. The biggest increase occurred in the Haynesville, with a rig count increase from five rigs drilling at the end of the second quarter to eight rigs drilling at the end of Q3 2020. We are very excited to see the expected improvement in natural gas prices, both in Q4 2020 and the full year 2021, based on the futures curve. With approximately 59% of our daily production from natural gas, this price improvement could have a very meaningful positive impact on our future cash flows and quarterly distribution payments. To put this in perspective, natural gas prices have averaged $2.02 per Mcf so far this year. The average expected natural gas price for…

Thanks Bob and good morning everyone. As we discussed on our call last quarter, curtailments largely reversed themselves in the third quarter, specifically on our Permian and Eagle Ford properties. However, curtailments were still largely in place on our Bakken assets in the third quarter. We are hopeful that these will also reverse in the fourth quarter given improved commodity prices. We are pleased with the continued strong performance of our large and diverse asset portfolio as well as the fact that production mix is weighted more heavily to natural gas production. As Bob laid out a few moments ago, natural gas price futures are projected to be up approximately 50% in the next 12 months as compared to the average prices over the last 12 months, which could generate a significant improvement in cash flow for the company. We are encouraged by the way production and pricing are currently positioned for the rest of 2020 and continuing into 2021. We continue to maintain a robust hedge book with a significant amount of future production hedged through Q3 2022 using swaps. In addition, we continue to maintain a very strong inventory of permits and drilled and uncompleted wells across our acreage as a result of strong drilling momentum on our acreage just prior to the pandemic. We expect these locations will provide even more stability to our production profile as eventual conversions to producing wells occur when frac crews resume operations. The company's third quarter average daily run rate production was 14,160 Boe per day, comprised of approximately 59% from natural gas on a 6:1 basis and 41% from liquids, 28% from oil and 13% from NGLs. As of September 30th, Kimbell had 794 gross and 2.62 net drilled but uncompleted wells as well as 573 gross and 1.84 net…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Chris Baker with Credit Suisse. Please proceed with your question.

Hey good morning. I hope you guys could talk a little bit more about what you're seeing in the Haynesville. It certainly looks like some robust volume growth sequentially and with the rig count back up to eight. Any sense of where that points you in terms of potential growth next year? And anything that you guys are hearing from your major operators over there?

Yes, thanks for the question, Chris. I think it's a part of our story that -- and a lot of investors, frankly, haven't been paying attention to. It's our largest area by production. We had -- and I can confirm this, but I think we had seven new Haynesville wells that were material, six were Aethon operated. In the -- in Bossier and Bienville County -- Parish, we had one Wine well in Red River. We're not ready to release guidance yet for next year. We still anticipate doing that in conjunction with the K, just given all the uncertainty in the market. But the fact that the rig count is going up so rapidly, coupled with the fact that natural gas prices are improving so dramatically, obviously we feel very good about that asset in our portfolio. And again, I'll just stress, we're not aware of any company, public or private, that has a better position in the Haynesville shale than we do. It was largely a result of the Haymaker acquisition that we made a couple of years ago, as you know, Chris. And those were legacy Chesapeake assets, which was one of the pioneers of putting the play together originally 15 years ago. Bob or Matt, anything else you guys want to add to that?

Yes, I would just say -- this is Matt. I would just say that the wells that are currently being drilled on 9/30, you can see that the rig count we have in our investor presentation in the Haynesville, the good news is that a lot of those wells are higher interest wells closer to 1% interest versus the average well that we drill. Typically, that's more like 50 basis points net revenue interest. So when those wells come online hopefully in, say, Q3, Q4 of next year, we'll hopefully get the benefit of that higher net revenue interest.

That's great. And then just as a follow-up on the cash cost side, certainly continue to see some good progress there. Can you talk about the sustainability of the recent improvement in G&A? And maybe what we can look at in terms of a clean run rate fourth quarter and beyond?

Yes. Really good question. It's hard to answer because a lot of the cost that we cut were related to marketing and investor relations and traveling for conferences, which we didn't do any of, just given the virus, just about everything got canceled. But there is some amount of that that I would classify as permanent or sustainable reduction in G&A. We worked with a couple of our vendors to reduce costs. We terminated a couple of smaller relationships. Matt, any detail you want to give that might be more specific than that or anything you want to add?

Yes, I mean, yes, that's -- I mean, basically, as you know, Q2 cash G&A was $4.3 million. $300,000 of that was the TSA associated with the Springbok acquisition. So it was $4 million run rate in -- back in Q2. Q3, as you said, was $3.7 million, so it was down about $300,000. And again, a lot of the drop is, as Davis said, it's lower professional fees really just due to lower activity overall. So I mean, I wouldn't say the 3.7% is a -- it's a record low cash unit per Boe of $2.81. I would say as things ramp up again hopefully next year as you get more activity, we're looking at more transactions and so forth. That's probably going to tick up to some extent just with additional professional fees. So, I wouldn't say that's the -- that's a -- I would say a little bit higher than that would be sort of sustainable, but we'll give better guidance on that when we release Q4 earnings in February.

Great. Thanks guys.

Thanks Chris.

Our next question is from Harry Halbach with Raymond James. Please proceed with your question.

Good morning guys. I was wondering if you could give me somewhat an estimate of shut-ins in the quarter, like as a percent. You obviously said it came down from the 6% or 7% last quarter, but I'm just trying to get a sense of what's like a fair just normal production decline you all saw?

Good question. Matt or Bob, just wonder if you want to tackle that first? What do you think?

Yes. So the quarter -- so we mentioned last quarter, the 6% out of the 7% of the drop was related to curtailments. All of those reversed in Q3 and are back online in the Eagle Ford and the Permian. The only basin that's not -- that hasn't reversed is the Bakken and we're estimating that production is currently curtailed to be between 90 and 100 Boe per day. That's currently offline and we are hopeful that that will come back online in Q4. So, if you take 90 or 100 Boe per day divided by our daily production of 14,160 currently, that's the current percentage of our production that's currently curtailed. So, it's very small, but it can make a difference. And so again, we're hopeful that it will come back online in Q4.

Great. Thank you. And then in regards to M&A, are you all seeing any meaningful split in interest for gas versus oil properties given the right vergence in the two commodities?

Yes, we are very recently. We've been active on the M&A front. We'll still look at acquisitions. We're not interested in using cash in this environment just given the fact that we're really focused on cleaning up the balance sheet as much as we can and we don't want to do an equity raise at an unpalatable discount right now to raise the cash. But we are looking at issuing units directly to sellers and we've had a lot of success in doing that in the past. So, we're still making bids. I think the challenge for us is that the stock is just still undervalued. I mean, we're trading at 12% dividend yield, 16%, 17% free cash flow yield all into equity. And so the bar is just very high to make accretive M&A work. So, we're still working around the clock on acquisitions or submitting bids. It's just more challenging. I mean I think that sellers in this environment need to adjust expectations when the public companies, they're supposed to be the lowest cost of capital trade down so dramatically, us and our peers, that should trickle down to the sellers. And it takes a little bit of time, I think, for them to realize that. But the opportunity to acquire these private equity-backed portfolios is still there. It's not going away. There's a catalyst, which is just the function of the limited partner agreements that these firms have. They eventually have to monetize those assets. And we think we're arguably in the best or amongst the best positioned to consolidate that opportunity. Now, as it pertains to your question about oil versus gas mix, we have seen people get a little bit more aggressive on gas. Funny enough, we were aggressive on gas and everybody hated it. And that was largely the Haymaker acquisition we made two years ago. We like to be contrarian. So, we're not going to overpay for gas assets in this environment. We're going to look at them, but we're not going to overpay and I think some oil assets are becoming increasingly more interesting. So, long question short, we have seen a pickup in competition on the gas side that didn't exist even six to 12 months ago. But that doesn't concern us or impede our ability to successfully execute our M&A strategy. Bob or Matt, anything -- and I guess I'll add -- I mean, Bob, have we seen any asset that we -- that got out of our hands and went to somebody else that we really wanted? I don't think we've missed out on any deal that we like the asset quality of. So--

No, no. There is no deal that we've lost that we really, really wanted just because of quality and where we a little bit lost it because of price. That hasn't happened. There's been a number of deals that we put bids on, but we made sure that it was a fair bid and a bid that was accretive to our shareholders. So, no, there's nothing that we've lost out on. However, there has been quite a few that we've bid on.

Great. Appreciate you guys taking my question.

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

Yes. Thank you for joining this morning and look forward to speaking with you again when we report year-end and fourth quarter results. This completes today's call. Thanks everyone.

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