|Shares Out. (in M):||27||P/E||0||0|
|Market Cap (in $M):||590||P/FCF||0||0|
|Net Debt (in $M):||129||EBIT||0||0|
KRP is a diversified mineral and royalty MLP (no IDRs) that went public in February 2017 at $18.00/unit. At its current price of ~$22.00/unit, KRP is cheap on a relative and absolute basis. Mineral and royalty interests are entitled to a portion of a well’s revenues but are not obligated to fund drilling and completion costs, lease operating expenses or plugging and abandonment costs at the end of a well’s productive life. Snarfy and jso1123 posted great write ups on VNOM and BSM, respectively, which are worth reading for additional background on the minerals space and KRP’s comps. Snarfy also posted an abbreviated write up of KRP on the VNOM message board. We approached KRP from a different angle than Snarfy and arrived at the same place. KRP is undervalued at its current market price.
KRP recently announced a large acquisition (“Haymaker”) that increases their TEV by more than 100%. The purchase price appears very reasonable, and the Sellers (KKR, Kayne Anderson, Haymaker mgmt) took 45% of the consideration in KRP units. The Sellers will own ~37% of the pro forma company. Legacy KRP directors and management will own ~15% of the pro forma entity (~$90mm).
Reason for Discount
We believe a large part of what is driving KRP’s discount is terrible disclosure of where exactly their acreage is. Mgmt discloses net royalty acres by loosely defined basins/areas and provide some rough guidance in the Permian by county. This is not even close to sufficient data to come up with a reasonably precise valuation. However, even if we drastically risk their total acreage figures, the valuation still appears quite attractive. We believe this lack of information creates the opportunity, but it is also definitely a source of risk. We have calculated a risked, probabilistic valuation range. We believe that we have been extremely conservative in our risking, but there remains the possibility that we have not been conservative enough.
Based on PDP PV10 at strip and our probabilistic acreage valuation, we estimate ~40% to 76% upside to KRP’s current unit price.
KRP’s strategy is to buy mineral and royalty interests from the GP (dropdowns) as well as from third parties. In addition, KRP expects organic production growth at >1.5x the overall L48 production growth rate. KRP has 2 years remaining on its ROFO on the Sponsor’s retained mineral and royalty assets in the Permian, Bakken, and Marcellus. We attribute no value to the ROFO on the dropdown inventory. Management built KRP’s asset base by acquisition over past twenty years, but they are not merely asset aggregators. Importantly, they have shown the willingness to sell assets when the price is right. In May 2018, KRP sold 41 net royalty acres in the Delaware Basin for $9mm (>$200k/NRA) and indicated on Q118 CC a willingness to “consider additional sales when we have the opportunity to deliver compelling value to our unitholders” as well as on the Haymaker acquisition CC “we’ll consider sales if we believe they are highly accretive on a per unit basis”. Also on the Haymaker call, KRP’s CFO stated “If we get third-party interest in picking out some assets and we can sell them for massively accretive valuations, we're absolutely going to consider doing that. We're committed to optimizing our portfolio of assets, and frankly, obsessed about driving per unit accretion. So that's, that's consistent with our strategy. We have more assets now that we can consider.” This is music to my ears and is indicative of a rational capital allocation philosophy and process. That said, I do not expect large scale asset sales in the future. In fact, maintaining and building scale is important for KRP. One of the benefits of the Haymaker transaction is that KRP’s G&A expense per boe (20:1 gas) decreases ~40% vs SQ.
KRP interests are well diversified across the lower 48. Existing production is very low decline (avg 10%/yr over next 5 years) and very well diversified, although at only 22% oil (6:1), it is gassier than would be ideal from an oil bull’s perspective. The Permian is the largest constituent of their current production and accounts for ~28% (20:1). On the Q118 cc mgmt highlighted production growth in the Permian, DJ Basin, and Eagle Ford. There are currently 73 rigs drilling on KRP’s acreage (25 on their legacy position and an incremental 51 on the Haymaker acreage). Pro Forma 2017 year/year production growth is 5% (1.6x L48 growth rate).
The map below is what they give you to figure out what they own along with a table that has the NRA’s by basin. This is not very helpful but provides enough to start pushing numbers around and see what sort of bet we are making at the current unit price.