TXO Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
TXO Partners, L.P. is an independent oil and natural gas company focused on acquiring, developing and operating conventional oil, natural gas and natural gas liquids properties, primarily in the Permian Basin and San Juan Basin. The filing covers the three months ended March 31, 2023, with comparison to March 31, 2022. The partnership completed its initial public offering in January 2023 and changed its name from TXO Energy Partners, L.P. to TXO Partners, L.P. effective May 8, 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $158.4 million | $(9.5) million |
| Operating income (loss) | $78.8 million | $(69.8) million |
| Net income (loss) | $83.8 million | $(65.6) million |
| Basic earnings (loss) per unit | $2.91 | $(2.62) |
| Cash flow from operations | $17.1 million | $28.7 million |
| Capital expenditures and acquisitions | $12.4 million | $5.8 million |
| Adjusted EBITDAX | $3.4 million | $38.8 million |
| Cash available for distribution | $(9.1) million | $36.5 million |
Production was 2,023 MBoe, or approximately 22 MBoe per day, compared with 2,077 MBoe, or approximately 23 MBoe per day, in the prior-year period. Average production mix consisted of 603 MBbls of oil and condensate, 269 MBbls of NGLs and 6,903 MMcf of natural gas.
Reported revenue was materially affected by derivatives. Q1 2023 included a $95.5 million unrealized derivative gain and an $80.4 million realized derivative loss. Q1 2022 included a $91.4 million unrealized derivative loss and a $15.2 million realized derivative loss.
Production expense increased to $35.3 million from $25.0 million, and expense per Boe increased to $17.46 from $12.05. Taxes, transportation and other expenses increased to $28.9 million from $23.5 million. General and administrative expense increased to $2.2 million from $0.4 million, partly because of IPO-related costs and $0.6 million of unit-award compensation expense.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $7.2 million at March 31, 2023, compared with $9.2 million at December 31, 2022.
- The $165 million senior secured credit facility had no outstanding borrowings at March 31, 2023, compared with $113.0 million outstanding at December 31, 2022. The full $165 million facility was available at quarter-end.
- The remaining long-term debt was $7.1 million under the September 2016 loan, compared with total long-term debt of $120.1 million at December 31, 2022.
- The January 2023 IPO and overallotment generated approximately $102 million of net proceeds, which, together with cash on hand, were used to repay the credit facility.
- Net cash used in financing activities was $6.7 million, including $106.3 million of IPO proceeds, $150.0 million of debt repayments and $37.0 million of debt borrowings.
- Management stated that the partnership was in compliance with debt covenants and believed it had adequate liquidity to continue as a going concern for at least the following twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue changed from a $(9.5) million reported loss in Q1 2022 to $158.4 million in Q1 2023, primarily because of substantially different derivative valuation and settlement results and higher natural gas realizations.
- Natural gas revenue increased to $99.7 million from $(10.1) million. The filing attributes the improvement largely to higher realized natural gas prices in West Coast markets and a $88.0 million unrealized derivative gain, partly offset by $79.2 million of realized derivative losses.
- Underlying commodity prices excluding derivatives declined for oil and NGLs, while natural gas prices increased. Oil production increased, but total production declined 3% because of natural declines in the San Juan Basin.
- Operating costs increased, reflecting additional Permian Basin interests, higher maintenance costs, inflation and changes in production mix.
- Cash flow from operations decreased by $11.5 million despite reported net income, reflecting the effect of derivative settlements and higher operating and development costs.
- The partnership converted all Series 5 preferred units into common equity in connection with the reorganization and IPO. Partners’ capital increased to $708.5 million from $521.5 million at December 31, 2022.
Guidance, Outlook, Risks and Unusual Items
- Management budgeted approximately $30 million to $35 million for 2023 drilling, completion, recompletion and facilities costs. Q1 spending for these activities was approximately $8.0 million.
- Management expected to fund distributions, debt obligations and the 2023 development program from operating cash flow and IPO proceeds, but stated that capital spending and distributions could be reduced if operating cash flow falls short.
- A quarterly cash distribution of $0.50 per common unit was declared for Q1 2023, payable May 30, 2023 to unitholders of record on May 22, 2023. The distribution was prorated from the IPO closing date through March 31, 2023.
- The partnership is required to distribute available cash, but distributions may vary significantly and could be zero.
- Commodity hedges covered significant future production, including fixed-price oil, NGL and natural gas contracts and natural gas collars. At March 31, 2023, derivative contracts had a net liability of approximately $8.7 million; a hypothetical 10% commodity-price change would have changed derivative fair value by approximately $13.9 million.
- Major risks include commodity-price volatility, reserve and production uncertainty, concentration in the Permian and San Juan Basins, inflation and supply-chain constraints, transportation limitations, environmental and regulatory exposure, cybersecurity threats and the ability to access capital.
- Asset retirement obligations totaled $128.4 million at March 31, 2023, including a $2.5 million current portion.
- Management reported no material changes to previously disclosed risk factors, no material litigation contingencies and effective disclosure controls as of March 31, 2023.
Important Facts for Investors to Verify
- Separate recurring operating performance from derivative gains and losses; reported Q1 profitability and revenue were heavily influenced by non-cash hedge valuation changes.
- Confirm the sustainability of the $0.50 per-unit distribution given that reported cash available for distribution was negative $9.1 million after development spending.
- Review the credit facility borrowing base, covenant calculations, hedge requirements and the effect of future commodity-price changes on liquidity.
- Assess whether production declines, higher per-unit operating costs and inflation could offset the benefits of higher natural gas realizations.
- Evaluate the funding requirements for the stated $30 million to $35 million 2023 development budget and the partnership’s ability to maintain production and reserves.
- Review the $128.4 million asset retirement obligation and related plugging, abandonment and environmental costs.
- Reconcile the filing’s historical references to the former TXO Energy Partners name with the subsequent legal name change to TXO Partners, L.P.; the common units continue to trade under ticker TXO.