TXO Partners, L.P. — Q3 2023 Form 10-Q Summary
Business context and reporting period
TXO Partners, L.P. is an independent oil and gas partnership focused on acquiring, developing, optimizing and exploiting conventional oil, natural gas and NGL reserves, primarily in the Permian and San Juan Basins. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
TXO completed its initial public offering in January 2023, issuing 5.75 million common units in total and receiving approximately $102 million of net proceeds. The partnership now has a single class of common units; 30.75 million common units were outstanding as of November 7, 2023.
Key financial metrics
| Metric | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Nine months ended September 30, 2023 | Nine months ended September 30, 2022 |
|---|---|---|---|---|
| Total revenue | $69.9 million | $120.7 million | $288.7 million | $204.0 million |
| Operating income | $4.4 million | $50.6 million | $74.4 million | $1.4 million |
| Net income | $8.5 million | $55.7 million | $89.7 million | $14.6 million |
| Diluted earnings per unit | $0.27 | $2.23 | $2.93 | $0.58 |
| Net cash provided by operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $59.7 million | $103.7 million |
| Adjusted EBITDAX | $25.0 million | $41.4 million | $50.0 million | $118.6 million |
| Cash available for distribution | $14.7 million | $33.7 million | $17.0 million | $105.5 million |
Q3 operating margin was approximately 6.3%, compared with 42.0% in the prior-year quarter. For the first nine months, operating margin was approximately 25.8%, compared with 0.7% in 2022. The quarter’s results were adversely affected by lower commodity prices and derivative losses, while the nine-month comparison benefited significantly from derivative gains.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $5.9 million at September 30, 2023, compared with $9.2 million at December 31, 2022.
- Total debt was $25.1 million, consisting of $18.0 million outstanding under the senior secured credit facility and a $7.1 million FAM Loan. This compared with $120.1 million at year-end 2022.
- The $165 million credit facility matures November 1, 2025. At September 30, 2023, reported availability was $147.0 million; the borrowing base was reaffirmed at $165 million on October 25, 2023.
- Management stated that the partnership was in compliance with debt covenants and believed it had adequate liquidity to remain a going concern for at least twelve months from the filing date.
- Operating cash flow was $59.7 million, investing cash outflow was $40.5 million, and financing cash outflow was $22.5 million for the first nine months. Cash declined by $3.3 million during the period.
- Capital expenditures, including acquisitions, were $40.5 million. Development costs were $30.6 million, and management reported approximately $25.0 million spent on drilling, completion, recompletion and facilities activities.
- Distributions were $33.7 million during the first nine months. A third-quarter distribution of $0.52 per common unit was declared on November 7, 2023, payable November 27, 2023.
Material changes versus the prior comparable periods
- Q3 revenue declined 42% to $69.9 million, primarily from lower realized prices: oil and condensate revenue fell 55%, NGL revenue fell 59%, while gas revenue increased 3%.
- Q3 net income declined 85% to $8.5 million. Production expense increased 9% to $35.7 million, and general and administrative expense increased to $1.8 million from $0.1 million, partly due to public-company costs and unit-award amortization.
- For the first nine months, revenue increased 42% to $288.7 million and net income increased to $89.7 million from $14.6 million. The improvement was driven primarily by a $136.9 million net benefit from hedging activity, including $148.3 million of unrealized gains.
- First-nine-month operating cash flow fell 42% despite higher reported net income, reflecting lower underlying commodity realizations and higher operating costs, as well as the timing and impact of derivative settlements.
- Production was approximately 23 MBoe per day in both comparable periods. Nine-month production declined modestly to 6,257 MBoe from 6,351 MBoe, with higher oil volumes offset by lower NGL and gas volumes.
- TXO used IPO proceeds and cash on hand to repay $95 million of credit-facility borrowings during the first nine months, materially reducing interest expense.
Outlook, commentary, risks and unusual items
- Management expects commodity prices to remain volatile and states that revenue, profitability and growth are highly dependent on oil, NGL and natural gas prices.
- TXO budgeted approximately $30 million for 2023 drilling, completion, recompletion and facilities costs. Management expects to fund distributions, debt obligations and the 2023 development program through operating cash flow and IPO proceeds, but may reduce capital spending or distributions if cash flow underperforms.
- Electrical issues at the Vacuum-area CO2 plant caused unplanned downtime in September 2023, reducing NGL volumes and plant income. Management expected the plant to return to full operations in the fourth quarter of 2023.
- Derivative liabilities totaled $21.9 million at September 30, 2023, against derivative assets of $2.5 million, for a net liability of $19.4 million. A hypothetical 10% change in relevant commodity and basis prices was estimated to change the net derivative position by approximately $9.2 million.
- Hedging reduced Q3 revenue through $3.4 million of net cash settlements and $1.6 million of unrealized losses. For the first nine months, hedging reduced revenue by $81.6 million through net cash settlements but increased revenue by $84.9 million through unrealized fair-value gains.
- Asset retirement obligations totaled $133.9 million, including a $2.5 million current portion.
- Key risks include commodity-price volatility, reserve uncertainty, concentrated operations in the Permian and San Juan Basins, inflation and supply-chain constraints, transportation limitations, environmental and regulatory exposure, cybersecurity threats, hedging losses and the ability to service debt.
- Management reported no material changes to previously disclosed risk factors, no material adverse legal proceedings and effective disclosure controls as of September 30, 2023.
Important facts for investors to verify
- Reconcile reported revenue and earnings to realized and unrealized derivative gains and losses, particularly the significant nine-month 2023 hedge benefit.
- Verify the sustainability of cash available for distribution and whether future distributions can be funded by operating cash flow rather than additional borrowing or asset sales.
- Monitor the Vacuum plant’s return to full operations and its effect on NGL volumes and ancillary plant income.
- Review the credit facility’s borrowing base, covenant compliance, hedge requirements and November 2025 maturity.
- Assess whether higher production, maintenance, energy, personnel and public-company costs are pressuring per-unit margins.
- Evaluate the sensitivity of reserves, borrowing capacity, cash flow and distributions to oil, gas and NGL prices and to the partnership’s substantial asset retirement obligations.