TXO Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
TXO Partners, L.P. is an independent oil and 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 unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. The partnership completed its initial public offering in January 2023 and its common units trade on the NYSE under “TXO.”
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 |
|---|---|---|
| Total revenue | $60.5 million | $218.9 million |
| Operating income (loss) | $(8.8) million | $70.1 million |
| Net income (loss) | $(2.5) million | $81.3 million |
| Net income (loss) per diluted unit | $(0.08) | $2.68 |
| Adjusted EBITDAX | $21.7 million | $25.1 million |
| Cash available for distribution | $11.4 million | $2.3 million |
| Net cash provided by operating activities | Not separately provided for the quarter | $35.6 million |
- Production was approximately 23 MBoe per day in both the quarter and first six months, with six-month volumes of 1,223 MBbl of oil and condensate, 620 MBbl of NGLs and 13,855 MMcf of natural gas.
- Second-quarter revenue declined 35% year over year, primarily from lower realized oil, NGL and natural gas prices. Six-month revenue increased 163%, largely because of significant derivative gains, including a $178.6 million unrealized gain, partly offset by $78.2 million of cash payments to derivative counterparties.
- Second-quarter operating margin was approximately negative 14.5% and net margin approximately negative 4.2%. Six-month operating margin was approximately 32.0% and net margin approximately 37.1%.
- Production expense increased to $39.4 million in the second quarter and $74.7 million for the six months, reflecting higher maintenance, energy and acquired-property costs. Six-month production expense increased to $17.99 per Boe from $14.52 per Boe.
- Cash and cash equivalents were $4.4 million at June 30, 2023, compared with $9.2 million at December 31, 2022. Current assets were $50.0 million and current liabilities were $53.0 million; management reported positive net working capital of $5.6 million excluding derivative effects.
- Capital expenditures and acquisitions used $28.6 million of investing cash during the first six months, including $21.2 million of development costs.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue decreased from $92.9 million to $60.5 million, and net income declined from $24.5 million to a $2.5 million loss. Lower commodity prices outweighed improved hedge results and relatively stable production.
- Six-month revenue improved from $83.3 million to $218.9 million and net income improved from a $41.1 million loss to $81.3 million of income. The comparison was heavily affected by derivative valuation changes: 2023 included an $86.4 million derivative fair-value gain, while 2022 included a $92.2 million loss.
- Operating cash flow declined from $68.5 million to $35.6 million, while investing cash usage increased from $7.9 million to $28.6 million as development spending increased.
- General and administrative expense increased from $0.5 million to $3.3 million for the six months, primarily due to higher personnel costs, phantom-unit compensation and IPO-related expenses.
- Debt declined from $120.1 million at December 31, 2022 to $21.1 million at June 30, 2023. Credit facility borrowings fell from $113.0 million to $14.0 million, while reported availability increased to $151.0 million.
- The Series 5 preferred units were converted into common equity, and the IPO generated approximately $102 million of net proceeds. The partnership had 30.75 million common units outstanding as of August 8, 2023.
Guidance, Outlook, Risks and Unusual Items
- Management budgeted approximately $30.0 million for 2023 drilling, completion, recompletion and facilities costs, compared with approximately $18.8 million incurred during the first six months. Capital spending may be deferred depending on commodity prices, equipment availability, infrastructure and financing conditions.
- Management expects to fund distributions, debt obligations and the 2023 capital program through operating cash flow and IPO proceeds under current commodity-price assumptions, but stated that distributions may vary materially or be zero.
- A cash distribution of $0.48 per common unit for the second quarter was declared on August 8, 2023 and is payable August 25, 2023. The first-quarter distribution was $0.50 per unit.
- Commodity prices remain volatile. The partnership hedged portions of future production, including oil, NGLs and natural gas through 2024. At June 30, 2023, derivatives represented a net liability of $17.8 million; a hypothetical 10% price change would change the net derivative liability by approximately $11.9 million.
- The credit facility matures November 1, 2025, is secured by substantially all partnership assets and requires a current ratio above 1.0 and total net debt-to-EBITDAX of no more than 3.0. The partnership reported compliance with all covenants at June 30, 2023.
- Asset retirement obligations totaled $131.6 million, including $2.5 million classified as current. Key risks include commodity-price volatility, reserve uncertainty, basin concentration, inflation and supply-chain constraints, transportation capacity, environmental and regulatory requirements, cybersecurity, and the ability to service debt and fund development.
- Management reported no material changes to previously disclosed risk factors, no material litigation matters, effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Separate recurring operating performance from material derivative gains and losses, particularly the six-month 2023 results.
- Assess whether operating cash flow and cash available for distribution can support the stated distribution policy and planned capital spending without renewed borrowing.
- Review the credit facility’s borrowing base, covenant calculations, hedge requirements and November 2025 maturity.
- Evaluate exposure to lower oil, NGL and natural gas prices, including the effect of hedges that may limit upside and create future settlement obligations.
- Review reserve estimates, asset retirement obligations and the assumptions used for impairment and fair-value measurements.