Executive Summary / Key Takeaways

• Mach Natural Resources LP operates as a distinctive upstream MLP in the Anadarko Basin, prioritizing variable cash distributions to unitholders through a strategy centered on acquiring distressed, cash-flowing assets at discounts to PDP PV-10.
• The company leverages operational execution and owned midstream infrastructure as key differentiators, consistently reducing acquired asset operating costs and enhancing realized prices and flow assurance.
• Despite a slight decrease in production and total revenue in Q1 2025 compared to Q1 2024, driven by natural declines and derivative losses, the company generated robust operating cash flow, supported by higher realized natural gas prices.
• MNR maintains a disciplined reinvestment rate below 50% of operating cash flow, directing capital towards high-return drilling locations on its extensive HBP acreage and opportunistic, accretive acquisitions, while preserving balance sheet strength (0.8x net debt/EBITDA pro forma).
• The 2025 outlook anticipates flat production supported by a three-rig drilling program ($260-$280M CapEx budget) and continued pursuit of accretive acquisitions, including potentially larger deals with equity partners, aiming to sustain peer-leading cash returns.

The Anadarko Crucible: Forging a Cash-Focused Strategy

Mach Natural Resources LP stands apart in the often growth-obsessed upstream energy sector. Operating primarily within the prolific Anadarko Basin across Western Oklahoma, Southern Kansas, and the Texas panhandle, MNR has carved out a unique identity as a master limited partnership singularly focused on maximizing variable cash distributions to its unitholders. This strategic foundation, established during the industry downturn starting in 2017, is built upon four core pillars: maintaining financial strength, disciplined execution in acquisitions, a rigorous reinvestment rate cap, and ultimately, maximizing cash distributions.

The company's history is one of opportunistic accumulation. Since its first acquisition in early 2018, MNR has completed over 20 deals, targeting distressed, cash-flowing properties. The key to this approach is acquiring proved developed producing (PDP) reserves at significant discounts to their PV-10 value, often securing associated undeveloped acreage and critical midstream infrastructure at little to no additional cost. This counter-cyclical strategy allowed MNR to build a substantial asset base, including over 1 million acres held by production (HBP) and owned gathering, processing, and water disposal systems, for a cumulative investment of approximately $1.9 billion by early 2024, supported by $520 million in equity and managed debt.

In a competitive landscape populated by larger, well-capitalized players like Devon Energy (DVN), Continental Resources (CLR), EOG Resources (EOG), and Chesapeake Energy (CHK), MNR doesn't compete head-to-head for large, premium-priced undeveloped acreage packages. Instead, it focuses on a niche in the $100 million deal size range, where its expertise in evaluating and integrating assets provides an edge. While competitors like DVN and EOG boast advanced proprietary technologies in drilling and seismic imaging that contribute to higher recovery rates and efficiency, MNR's differentiation lies in its operational execution and integrated asset base. The company's internal operating team consistently demonstrates the ability to reduce lease operating expenses (LOE) on acquired assets by 25% to 35% compared to previous owners. Furthermore, its owned midstream infrastructure, acquired for $65 million and contributing $78 million in EBITDA in 2024 ($17 million from third parties), provides tangible benefits through optimized pricing, enhanced flow assurance, and elimination of third-party costs, effectively acting as a cost-saving and revenue-enhancing operational advantage. This combination of disciplined acquisition, operational efficiency, and integrated assets forms MNR's practical, execution-based competitive moat.

Performance Reflecting Strategy and Market Realities

MNR's financial performance directly reflects its strategic pillars and the prevailing commodity price environment. For the three months ended March 31, 2025, the company reported total revenues of $226.8 million, a 5.2% decrease from $239.2 million in the same period of 2024. This was primarily influenced by a slight dip in oil, natural gas, and NGL sales ($252.7 million in Q1 2025 vs. $255.2 million in Q1 2024) and a larger loss on derivative instruments ($40.7 million in Q1 2025 vs. $29.3 million in Q1 2024). The decrease in sales revenue was largely attributable to a 10% decline in total production volumes (80.9 MBoed in Q1 2025 vs. 89.0 MBoed in Q1 2024), stemming from natural well declines, partially offset by new wells brought online. The increased derivative loss was mainly due to unrealized losses as natural gas prices rose.

Despite the top-line decrease and derivative losses, MNR's operational focus helped manage costs. While total operating expenses increased to $175.1 million in Q1 2025 from $171.9 million in Q1 2024, driven by higher LOE ($48.8 million vs. $40.8 million) and midstream operating expenses ($3.0 million vs. $2.6 million), gathering and processing costs decreased ($28.2 million vs. $31.9 million) in line with lower gas/NGL volumes. LOE per Boe increased to $6.69 from $5.03, reflecting the impact of lower production volumes on fixed and semi-variable field costs, alongside increases in specific expense categories like salt water disposal and labor. General and administrative costs saw a modest increase to $10.9 million from $10.3 million, primarily due to higher equity compensation.

Net income for Q1 2025 was $15.9 million, a significant decrease from $41.7 million in Q1 2024, impacted by the larger derivative loss and increased operating expenses. However, cash flow generation remained robust. Net cash provided by operating activities was $142.5 million in Q1 2025, comparable to $144.0 million in Q1 2024. This strong operating cash flow underscores the underlying profitability of the asset base and operational efficiency, even amidst production declines and volatile commodity markets.

Compared to larger peers, MNR's scale results in different financial profiles. While companies like Devon Energy and EOG Resources exhibit higher revenue growth rates (e.g., DVN's 15% in 2024) and typically higher operating and net margins (e.g., DVN's ~35% operating margin), MNR's profitability metrics, such as its TTM EBITDA margin of 55.95% and TTM Net Profit Margin of 35.82%, demonstrate solid performance within its niche. Its strength lies not in rapid production growth, but in generating substantial cash flow relative to its asset base and returning a large portion to unitholders.

Capital Allocation and Future Outlook

MNR's capital allocation is strictly governed by its disciplined reinvestment pillar. The 2025 capital expenditures budget is set between $260 million and $280 million, primarily focused on drilling and completion activities ($225-$240 million) and workovers. This budget is designed to remain below 50% of anticipated operating cash flow, ensuring ample cash is available for distribution. In Q1 2025, development costs were approximately $52 million, including $42.8 million for drilling and completion activities that spud 6.7 net wells and brought 9.3 net wells online.

The 2025 drilling program plans for three rigs, an increase from two in 2024, enabled by management's expectation of higher natural gas prices increasing operating cash flow. The program will target high-return locations across the Oswego, Woodford, Mississippian, and Deep Mississippian formations in Kingfisher, Canadian, Stevens (Ardmore Basin), and Custer counties. Management highlights operational efficiencies achieved, such as Oswego D&C costs averaging $2.6 million or $202 per lateral foot in 2024, and deeper Woodford/Mississippian wells coming in under initial estimates ($7.7 million average completed D&C cost compared to predecessors' $9.7 million). These efficiencies contribute to attractive median payout periods of 15 months (assuming $70 WTI, $3.50 Henry Hub), competitive with or better than costs in basins like the Delaware and Midland where location costs are significantly higher. With this planned CapEx, MNR anticipates holding production basically flat in 2025.

Acquisitions remain the primary lever for production and distribution growth. MNR continues to actively seek accretive deals, noting an improving pipeline of opportunities both within the Mid-Continent and potentially in other basins if competition for undeveloped land in the Anadarko remains high. The company closed the Flycatcher acquisition in Q1 2025 for $29.8 million and the XTO acquisition for $60 million in April 2025, funded by the new revolving credit facility and cash. For larger acquisitions (>$500 million), MNR is open to partnering with firms willing to take equity, believing this could materialize in 2025 and provide increased scale and float for institutional investors.

Financially, MNR strengthened its balance sheet in Q1 2025 by refinancing its debt. The previous Term Loan and Revolving Credit Agreement were repaid and terminated using proceeds from a $221.1 million equity offering and borrowings from a new $750 million Revolving Credit Facility, which matures in February 2029. As of March 31, 2025, the company had $460 million drawn on the new RCF, with $285 million available. This resulted in a pro forma net debt-to-EBITDA ratio of 0.8x as of March 13, 2025, well within its target of 1x or less and providing significant financial flexibility. The company maintains strong asset coverage (3.9x proved coverage, 3.3x PDP PV/total debt).

The core of MNR's outlook is its commitment to variable cash distributions. The partnership agreement mandates distributing all available cash quarterly, less reserves. This resulted in a Q1 2025 distribution of $0.79 per common unit, paid in June 2025. While distributions fluctuate with commodity prices and operating performance, the disciplined reinvestment rate and efficient operations aim to maximize the cash available. MNR highlights its strong track record, having distributed over $1 billion to owners since inception and ranking first among public upstream peers in distribution yield in 2024, alongside a top-ten ranking in total shareholder returns.

Risks and Considerations

Investing in MNR involves exposure to inherent risks in the upstream sector. Commodity price volatility is the most significant factor influencing revenue, cash flow, and distributions. While hedging 50% of the next 12 months' and 25% of the subsequent 12 months' production provides some mitigation, it also limits upside potential and introduces counterparty risk. Inflationary pressures on operating and capital costs could impact profitability if not offset by commodity prices or efficiency gains.

Operational risks, including natural production declines, drilling success rates, and infrastructure constraints, can affect volumes and costs. The concentration of operations in the Anadarko Basin exposes the company to region-specific regulatory changes (e.g., potential shut-ins) and environmental liabilities. The variable nature of distributions means unitholders face uncertainty regarding quarterly payouts, which can be significantly impacted by market conditions and operational results.

Furthermore, the success of MNR's acquisition strategy depends on the availability of suitable assets at attractive prices and the ability to integrate them efficiently. Increased competition in the Mid-Continent could make finding accretive deals more challenging, potentially requiring the company to explore less familiar basins.

Conclusion

Mach Natural Resources presents a clear investment thesis centered on generating and distributing substantial cash flow through a disciplined, acquisition-led strategy in the Anadarko Basin. By focusing on acquiring distressed, cash-flowing assets at discounts, leveraging operational efficiencies and owned midstream infrastructure, and strictly limiting reinvestment to below 50% of operating cash flow, MNR aims to deliver peer-leading variable distributions.

While Q1 2025 results showed the impact of natural production declines and derivative volatility on reported net income, operating cash flow remained strong, supporting the declared distribution. The company's fortified balance sheet, discretionary CapEx budget, and planned increase to a three-rig program in 2025 position it to maintain flat production and pursue accretive growth opportunities. Despite competitive pressures in its core operating area and inherent industry risks, MNR's consistent execution of its unique strategy, particularly its focus on cash returns and disciplined capital allocation, provides a compelling narrative for investors seeking yield and exposure to potential commodity price upside within a financially prudent framework.