Oil & Gas MLP Poised for Growth as It Transitions to C Corp

A Raymond James report highlighted the rationale for a positive view on this Texas-based entity.


In an Aug. 16 research note, John Freeman, a Raymond James analyst, offered reasons to remain bullish on Kimbell Royalty Partners LP (KRP:NYSE). The master limited partnership (MLP) owns and acquires royalty interests of oil and gas properties throughout the United States, primarily in the Permian Basin. "We remain highly confident in Kimbell's long-term outlook," Freeman added.

Based on its revised long-term oil deck, Raymond James increased its target price to $30 per share from $29 and reiterated its Strong Buy rating on Kimbell. The current stock price is about $22.36 per share.

Freeman offered several key points about Kimbell. One, its acquisition of Haymaker, which closed in mid-July for $445 million, "dramatically increased the scale of the company." For the combined entity, Raymond James expects annual organic growth of 3–5%, excluding future mergers and acquisitions (M&A).

Two, becoming a C Corp should give Kimbell access to a significantly wider investor base that should result in a "stronger environment to support future equity-financed acquisitions," Freeman noted. The tax status change should go into effect in Q3/18.

Three, Kimbell will most likely continue pursuing M&A, as such activity is a primary value creation strategy for the MLP and opportunities abound. "The minerals market remains fragmented," Freeman pointed out. "There are a number of private equity-backed minerals companies looking for exit opportunities, and a significant amount of assets remain at the sponsorship level available for dropdown."

Along with its acquisition strategy, Raymond James finds the following aspects of the MLP favorable: its mineral interest business model; its low (less than 11%) base decline rates of oil and gas reserves; its lack of true capex and opex requirements; and its significant, or 52%, Permian Basin and Mid-Continent focus.

Also in the research report, Freeman summarized Kimbell's Q2/18 performance, which he described as "relatively in line." Adjusted EBITDA was $7.7 million, which surpassed Raymond James and consensus' estimates of $7.4 million and $7.3 million, respectively. Cash distribution during the quarter was as expected, at $0.43 per share.

Average production in Q2/18 was 3,630 barrels of oil equivalent per day (3,630 Boe/d), which was slightly below Raymond James' projection of about 3,680 Boe/d and unchanged from Q1/18.

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