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, optimizing and exploiting conventional oil, natural gas and NGL reserves, primarily in the Permian and San Juan Basins. This report covers the three months ended March 31, 2024; comparative figures are for the three months ended March 31, 2023. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $67.4 million | $158.4 million |
| Operating income | $2.7 million | $78.8 million |
| Net income | $10.3 million | $83.8 million |
| Diluted earnings per unit | $0.33 | $2.86 |
| Net cash provided by operating activities | $25.2 million | $17.1 million |
| Adjusted EBITDAX | $26.4 million | $3.4 million |
| Cash available for distribution | $22.8 million | $(9.1) million |
| Total production | 2,046 MBoe | 2,023 MBoe |
Revenue declined 57% year over year. Natural gas revenue fell to $22.9 million from $99.7 million, primarily because the average realized gas price excluding derivatives fell 78% to $2.89 per Mcf. Oil and condensate revenue declined to $38.0 million from $49.6 million, while NGL revenue declined to $6.5 million from $9.1 million.
Operating margin was approximately 4.0% in Q1 2024 versus 49.8% in Q1 2023. Net margin was approximately 15.2% versus 52.9%. The margin comparison was heavily affected by derivative results, particularly the $95.5 million non-cash derivative gain recorded in Q1 2023 versus a $0.7 million non-cash derivative loss in Q1 2024.
Production expenses decreased 6% to $33.1 million, and taxes, transportation and other costs decreased 46% to $15.6 million. G&A increased 19% to $2.7 million, primarily due to higher personnel costs and unit-award amortization.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $4.6 million at March 31, 2024, compared with $4.5 million at December 31, 2023.
- Total long-term debt was $26.1 million, including $19.0 million drawn under the senior secured credit facility and $7.1 million under the September 2016 loan.
- The credit facility has a $165 million borrowing base and $146.0 million of remaining availability at March 31, 2024. It matures November 1, 2025.
- Management reported compliance with debt covenants and believes liquidity is adequate for at least the next 12 months.
- Capital expenditures and acquisitions totaled $3.0 million in Q1 2024, compared with $12.4 million in Q1 2023. Drilling, completion, recompletion and facilities spending was approximately $4.8 million.
- Management expects approximately $20 million to $28 million of 2024 drilling, completion, recompletion and facilities expenditures.
- Financing cash outflows were $22.1 million, including $19.5 million of distributions and $2.0 million of net debt repayment.
- A $0.65 per-unit distribution for Q1 2024 was declared on May 7, 2024, payable May 29, 2024.
Material changes versus the prior comparable period
- Revenue decreased $91.0 million, primarily because of sharply lower natural gas prices and materially different derivative impacts.
- Despite lower reported earnings, operating cash flow increased $8.0 million to $25.2 million, reflecting derivative settlement timing and lower costs.
- Total production was broadly stable at approximately 22 MBoe per day, with higher San Juan Basin gas and NGL production offsetting lower Permian Basin oil production.
- Average realized prices including derivatives were $70.30 per oil barrel, $22.94 per NGL barrel and $3.12 per Mcf of gas, compared with $82.22, $33.96 and $14.44, respectively, in Q1 2023.
- Net derivative fair value was a $1.3 million asset at March 31, 2024, compared with a $2.0 million asset at December 31, 2023. Q1 2024 net cash settlements paid to counterparties were $0.4 million, versus $80.4 million paid in Q1 2023.
- Asset retirement obligations increased to $156.6 million from $154.0 million at year-end 2023, primarily due to $2.8 million of accretion expense.
Guidance, outlook, risks and unusual items
Management expects continued volatility in oil, NGL and natural gas prices and expects inflationary and supply-chain pressures to persist. Based on current commodity prices and drilling results, management expects cash flow from operations and credit-facility borrowings to fund distributions, debt obligations and the 2024 development program. Management may defer capital expenditures or reduce distributions if cash flow underperforms.
Commodity hedges for April through June 2024 include approximately 2,000 barrels per day of crude oil at a weighted-average NYMEX price of $63.27 per barrel, 63,000 gallons per day of ethane at $0.23 per gallon, and 30,000 MMBtu per day of natural gas at $3.26 per MMBtu. Additional gas collars and basis swaps cover portions of 2024 production.
Key risks include commodity-price volatility, reserve uncertainty, concentration in the Permian and San Juan Basins, transportation and storage constraints, operating and environmental risks, inflation, access to capital, interest-rate exposure, cybersecurity, regulatory changes and the ability to service debt. A spring borrowing-base redetermination was expected in May 2024.
Unusual or notable items include a $1.6 million bonus payment on a term assignment, a $0.9 million increase in marketing income, $1.1 million of non-cash incentive compensation expense, and $45,000 of non-recurring expense included in Adjusted EBITDAX. Management stated that pending legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the May 2024 borrowing-base redetermination and resulting credit-facility availability.
- Assess sensitivity of cash flow and distributions to natural gas prices, given the steep year-over-year decline in gas realizations.
- Review hedge volumes, settlement obligations and counterparty exposure for the remainder of 2024.
- Compare actual 2024 capital spending with the $20 million to $28 million budget and evaluate its effect on production and reserves.
- Monitor the $156.6 million asset retirement obligation and future plugging, abandonment and remediation expenditures.
- Verify the sustainability of the $0.65 per-unit distribution, which may vary or be eliminated under the partnership agreement.