Valuation Largely Reflects Kimbell Roylaty's Upside, Stifel Says In Downgrade

Kimbell Royalty Partners LP KRP reported March 8 fourth quarter revenue growth 20 percent quarter-over-quarter, while production and adjusted EBITDA were up 6 percent and 20 percent, respectively.

The Analyst

Stifel analyst Timothy Howard downgraded Kimbell Royalty from Buy to Hold with a $19 price target.

The Thesis

Kimbell Royalty's management continues to be upbeat around third-party M&A, Howard said in a note. The company's focus is on value with a preference for out-of-favor basins, while being agnostic to crude oil or natural gas production, the analyst said.

The company expects to complete a transaction on the dropdown front in 2018, the analyst added. That said, the analyst said he isn't modeling any third-party acquisitions or dropdowns, viewing potential deals as upside to his model.

Howard noted the company initiated a hedging program to insulate a modest portion of cash flows. Hedges will be a marginal detractor over the next two years, although some protection should do good, the analyst said.

The analyst also said management indicated the strategy could evolve, should prices change dramatically.

"We continue to favor KRP's liquids dominated production stream, modest leverage and optionality around dropdowns," Stifel said. However, the firm believes the current valuation largely reflects any potential upside.

Howard also noted the Kimbell Royalty units have limited liquidity, with its estimated 30-day average trading value at about $350,000 per day.

The Price Action

Kimbell Royalty shares are down about 3 percent over the past year.

The stock traded around $18.45 at time of publication.

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