TXO Partners, L.P. (NYSE:TXO) is an independent oil and gas company focused on the acquisition, development, optimization, and exploitation of conventional oil, natural gas, and natural gas liquid reserves in North America. The company's properties are predominantly located in the Permian Basin of New Mexico and Texas, as well as the San Juan Basin of New Mexico and Colorado.

TXO Partners was formed as a Delaware limited partnership in January 2012, with an effective inception of operations in January 2018. The company's operations are governed by the partnership agreement, as amended, executed by the general partner, TXO Partners GP, LLC, and the limited partners. TXO Partners' assets include its investment in an unincorporated joint venture, Cross Timbers Energy, LLC, in which it owns a 50% stake and serves as the manager. Cross Timbers Energy's properties are located primarily in the San Juan Basin and the Permian Basin.

In addition to its joint venture interest, TXO Partners also has a wholly-owned subsidiary, MorningStar Operating LLC, which owns oil and gas assets primarily in the San Juan Basin and the Permian Basin.

Financials

For the fiscal year ended December 31, 2023, TXO Partners reported annual revenue of $357,539,000, a decrease from the previous year's revenue of $401,456,000. The company's annual net income for the same period was a loss of $103,987,000, compared to a loss of $92,145,000 in the prior year. Despite the decline in revenue and net income, the company's annual operating cash flow was $77,150,000, and its annual free cash flow was $66,729,000.

In the first quarter of 2024, TXO Partners generated total revenues of $67,439,000, a significant decrease from the $158,399,000 reported in the same period of 2023. This decline was primarily attributable to a 78% decrease in the average selling price of natural gas, excluding the effects of derivatives, resulting in a $70.9 million decrease in revenue. Additionally, the company experienced a $16.1 million net loss on its hedging activity, which included $96.2 million in unrealized losses partially offset by $80.0 million in realized gains.

Despite the decrease in revenue, TXO Partners' production volumes increased by 23 MBoe in the first quarter of 2024 compared to the same period in 2023. This increase was driven by higher natural gas and NGL production in the San Juan Basin, which partially offset declines in Permian Basin oil production.

Liquidity

As of March 31, 2024, TXO Partners had $4,570,000 in cash and cash equivalents and $146,000,000 in available borrowing capacity under its $165 million senior secured credit facility. The company's total long-term debt stood at $26,100,000 as of the same date.

The company's management has indicated that it will use a variety of tools, including debt amortization, capital budget adjustments, and cash distribution modifications, to support its underlying "production and distribution" strategy.

Risks and Challenges

TXO Partners, like other oil and gas companies, faces a number of risks and challenges, including:

1. Commodity price volatility: The company's revenue, profitability, and future growth are highly dependent on the prices it receives for its oil, natural gas, and NGL production, which can be volatile and unpredictable.

2. Concentration of operations: A significant portion of TXO Partners' assets and production are located in the Permian Basin and the San Juan Basin, making the company vulnerable to regional economic and operational factors.

3. Regulatory changes: The company's operations are subject to various federal, state, and local laws and regulations, which can change and potentially result in production curtailments or other operational disruptions.

4. Competition: TXO Partners operates in a highly competitive industry, which may impact its ability to acquire new assets or retain skilled personnel.

5. Depletion of reserves: As a mature oil and gas producer, TXO Partners faces the ongoing challenge of replacing its reserves and maintaining production levels.

Outlook

TXO Partners has not provided any specific financial guidance or outlook for the remainder of 2024. However, the company has stated that it will continue to focus on prudent capital allocation, with a dynamic approach to funding its development program, acquisitions, and cash distributions to unitholders.

Conclusion

TXO Partners is a diversified oil and gas producer with a significant presence in the Permian Basin and the San Juan Basin. While the company has faced challenges in recent quarters, including declining revenue and net losses, it has maintained positive operating and free cash flow. TXO Partners' focus on prudent capital allocation and its flexible approach to managing its business in response to market conditions suggest that the company is well-positioned to navigate the current industry environment. However, investors should carefully consider the risks and challenges facing the company, including commodity price volatility and the concentration of its operations, when evaluating an investment in TXO Partners.