Kimbell Royalty Partners (<a href="https://seekingalpha.com/symbol/KRP" alt="Kimbell Royalty Partners, LP Common Units">KRP</a>) just wrapped up a stellar first quarter of 2024, boasting record production, revenue, and EBITDA. The market cheered, sending distributions soaring 14%. But beneath this gleaming surface, a subtle dissonance emerges from the transcript of their earnings call <a href="https://seekingalpha.com/article/6314111-kimbell-royalty-partners-krp-ceo-bob-ravnaas-on-q1-2024-results-earnings-call-transcript" alt="Q1 2024 Earnings Call Transcript"> (Q1 2024 Earnings Call Transcript) </a>, a dissonance that could signal a looming challenge for the royalty giant.

The crux of the issue lies in the Haynesville Shale. While the Permian Basin, fueled by oil's robust forward curve, basks in the limelight, the Haynesville faces a starkly different reality. Natural gas prices have plummeted, leading many operators to slash capital expenditures and rein in production. The Haynesville, once a darling of the energy sector, has fallen from grace, its future clouded by uncertainty.

One would expect this market chill to be reflected in Kimbell's Haynesville performance, yet the company reported a <em>surprising 3% organic production growth</em> quarter-over-quarter in the basin. This seemingly defies logic. How can production rise in the face of plunging gas prices and dwindling operator activity?

The transcript offers a clue, attributing the growth to "three high-interest Chesapeake wells" that came online in Red River Parish, Louisiana. These wells, described as "huge", appear to have single-handedly buoyed Kimbell's Haynesville production, masking the underlying trend of slowing activity.

This raises a critical question: is this Haynesville growth sustainable? The answer, in all likelihood, is no. These Chesapeake wells represent a short-term boost, a final burst of activity initiated before the gas market downturn. Looking ahead, the company's management acknowledges the "CapEx drop off" in the Haynesville, signaling an inevitable slowdown.

The transcript reveals further evidence of this brewing Haynesville headwind. Rig count in the basin dropped between Q4 2023 and Q1 2024, a trend management expects to continue. Furthermore, while the overall number of DUCs (Drilled but Uncompleted wells) and permits on Kimbell's acreage comfortably exceeds the level needed for production maintenance, this aggregate figure might be obscuring a basin-specific weakness in the Haynesville.

The implications of a Haynesville slowdown for Kimbell are significant. While the Permian currently dominates their portfolio, a protracted decline in gas prices and associated activity could dent their overall production growth and potentially impact distributions in the long run.

Kimbell's Exposure to Haynesville and Natural Gas Price Volatility

Kimbell has skillfully navigated industry cycles in the past, leveraging their diversified portfolio and disciplined M&A strategy. But the Haynesville presents a unique challenge. Unlike previous downturns, this one is fueled by structural shifts in the gas market, a shift towards an oversupplied, structurally lower-priced environment.

Kimbell's management has a history of conservatism in their guidance, often exceeding their own projections. This gives some hope that their 2024 targets are achievable, even with a softening Haynesville.

Rig Count Trends: Permian vs Haynesville

However, the Haynesville Headscratcher remains. Will Kimbell's diversification and hedging strategy be enough to offset this emerging gas headwind? Or will the royalty giant be forced to revise its growth expectations in the face of a changing energy landscape? The answer to this question will have significant implications for Kimbell's investors and the broader royalty sector in the months to come.

"Fun Fact: The Haynesville Shale, named after a small town in Louisiana, stretches across parts of Louisiana, Texas, and Arkansas. It's one of the largest natural gas fields in the United States, capable of producing trillions of cubic feet of natural gas. Source: U.S. Energy Information Administration [https://www.eia.gov/energyexplained/natural-gas/haynesville-shale.php]"