TXO Partners, L.P. Form 10-K Summary
Business Context and Reporting Period
TXO Partners, L.P. is an independent North American oil, natural gas and NGL exploration and production partnership. Its assets are concentrated in the Permian Basin and San Juan Basin. The filing covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022. TXO began public trading on the NYSE in January 2023 and completed a 5.75 million-unit initial public offering that generated approximately $102.0 million of net proceeds.
- 2023 average production was approximately 23,006 Boe per day, consisting of approximately 28% oil, 57% natural gas and 15% NGLs.
- Proved reserves were approximately 100.2 MMBoe at year-end, with approximately 56% liquids and 90% proved developed reserves.
- Cross Timbers Energy, LLC, a 50%-owned and jointly controlled venture, represented approximately 27% of revenue excluding commodity derivatives and approximately 25% of proved reserves.
Financial and Operating Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $380.7 million | $246.4 million | Up 55% |
| Net income (loss) | $(104.0) million | $(7.7) million | Lower |
| Adjusted EBITDAX | $73.9 million | $161.4 million | Down 54% |
| Cash available for distribution | $34.7 million | $130.0 million | Down 73% |
| Cash flow from operations | $77.2 million | $136.4 million | Down 43% |
| Capital expenditures, including acquisitions | $46.2 million | $86.7 million | Down 47% |
| Development capital | $29.8 million | $29.8 million | Flat |
| Long-term debt | $28.1 million | $120.1 million | Down $92.0 million |
| Cash and cash equivalents | $4.5 million | $9.2 million | Down $4.7 million |
Revenue growth was driven primarily by a $226.4 million favorable year-over-year change in hedging results, including $219.5 million of unrealized derivative gains. Excluding unrealized derivative effects, 2023 revenue was pressured by lower realized oil, gas and NGL prices. Average realized prices excluding derivatives were $75.94 per barrel for oil, $5.20 per Mcf for natural gas and $22.53 per barrel for NGLs.
Production declined modestly to 8.397 MMBoe from 8.466 MMBoe. Production expense increased to $17.24 per Boe from $15.08 per Boe, while taxes, transportation and other expense declined to $8.98 per Boe from $11.22 per Boe. The filing does not provide a conventional net profit margin as a key management metric; based on GAAP revenue and net loss, the 2023 net margin was approximately negative 27%.
At December 31, 2023, the company had $21.0 million outstanding under its $165 million senior secured credit facility, $144.0 million of remaining availability and $14.1 million of positive net working capital excluding derivative effects. The borrowing base was $165 million as of October 25, 2023. The company reported compliance with its debt covenants and stated that it had adequate liquidity to continue as a going concern for at least the following twelve months.
Material Changes Versus the Prior Comparable Period
- GAAP net loss widened to $104.0 million from $7.7 million, despite higher reported revenue.
- The company recorded a $223.4 million impairment of long-lived assets related to Texas Permian Basin assets within Cross Timbers. The impairment reflected lower net commodity prices, higher costs and a change in development plans that reduced the PUD development horizon from five years to two years.
- Proved reserves declined 30% to 100.2 MMBoe from 143.4 MMBoe. The decline included 37.2 MMBoe of downward revisions, primarily from lower prices and higher costs and changes in the development plan.
- Standardized measure declined to $890.6 million from $1.970 billion, largely because of lower prices and reserve revisions.
- Operating cash flow, Adjusted EBITDAX and cash available for distribution decreased materially because of lower commodity prices, increased operating costs and lower production.
- Debt declined substantially following the initial public offering and debt repayments. Interest expense decreased to $4.4 million from $8.2 million, although the weighted-average credit facility rate increased to 8.4% from 5.4%.
- General and administrative expense increased to $7.9 million from $1.6 million due primarily to higher personnel costs, unit-based compensation and public-company expenses.
- 2023 distributions were $0.50 per unit for the first quarter, $0.48 for the second quarter and $0.52 for the third quarter. A fourth-quarter distribution of $0.58 per unit was declared on March 5, 2024 and scheduled for payment on March 28, 2024.
Guidance, Outlook, Risks and Unusual Items
Management expects 2024 development capital of approximately $20 million to $28 million, including approximately 14 gross Permian wells and seven gross San Juan wells based on current commodity prices. Management expects to fund the program, distributions and debt obligations from operating cash flow, but states that capital spending and distributions may be reduced if cash flow underperforms.
Management expects continued commodity-price volatility, inflation and supply-chain pressure in 2024. The company’s strategy remains focused on long-lived, low-decline conventional assets, disciplined development, opportunistic acquisitions, hedging and maintaining low leverage. Open hedges at December 31, 2023 included oil swaps for 2,000 barrels per day, natural gas swaps for 30,000 MMBtu per day, gas collars for 5,000 MMBtu per day and San Juan basis swaps for 20,000 MMBtu per day.
- Quarterly distributions are variable, are subject to reserves established by the general partner and may be zero. There is no minimum quarterly distribution.
- Commodity-price declines could reduce revenue, reserves, the borrowing base and cash available for distribution, and could trigger further impairments.
- The credit facility matures November 1, 2025, is secured by substantially all assets and contains leverage, liquidity, distribution, hedging and other restrictive covenants.
- The company is exposed to shared-control risks because Cross Timbers requires unanimous approval for certain material decisions.
- Asset retirement obligations were $154.0 million at year-end, including a $1.8 million current portion. Actual plugging, abandonment and remediation costs may differ materially from estimates.
- Environmental, methane, climate, hydraulic-fracturing, water-disposal, permitting, cybersecurity, weather and regulatory risks could increase costs or restrict operations.
- Two purchasers accounted for more than 42% of 2023 revenue excluding commodity derivatives, creating customer concentration risk.
- The company reported no known cybersecurity incident that had materially affected operations or financial condition and stated that pending litigation was not expected to have a material adverse impact.
Most Important Facts for Investors to Verify
- Whether the $223.4 million impairment and 37.2 MMBoe reserve revision indicate a lasting deterioration in Texas Permian economics or primarily reflect changes in assumptions and development timing.
- The sustainability of the $34.7 million 2023 cash available for distribution after separating realized operating cash flow from derivative gains and losses.
- Actual 2024 commodity prices, hedge settlements, production volumes and operating costs relative to management’s capital and distribution expectations.
- The results of semiannual borrowing-base redeterminations and continued compliance with credit facility covenants.
- Whether 2024 development spending converts the remaining 10.0 MMBoe of PUD reserves as planned and offsets production declines.
- The financial implications of the $154.0 million asset retirement obligation and the difference between that liability and abandonment costs reflected in the standardized measure.
- Potential dilution from the long-term incentive plan, which had 535,000 outstanding phantom units at year-end, and the governance and conflict-of-interest implications of affiliates owning approximately 37% of common units.