Company Overview
TXO Partners, L.P. (NYSE:TXO) is an independent oil and gas company that has been making significant strides in the energy sector. With a focus on the acquisition, development, optimization, and exploitation of conventional oil, natural gas, and natural gas liquid reserves in North America, TXO Partners has established itself as a key player in the industry.
History and Formation
The company’s history can be traced back to January 2012, when it was formed as a Delaware limited partnership. TXO Partners’ operations are governed by its partnership agreement, as amended, executed by the general partner, TXO Partners GP, LLC, and the limited partners. The company’s assets include its investment in an unincorporated joint venture, Cross Timbers Energy, LLC, of which TXO Partners owns 50%. In 2016, TXO Partners expanded its geographic footprint and production profile by acquiring oil and gas assets primarily in the San Juan Basin of New Mexico and Colorado, the Permian Basin of West Texas and New Mexico, and the Williston Basin of Montana and North Dakota through its wholly-owned subsidiary, MorningStar Operating LLC. A significant milestone was reached in 2021 when TXO Partners completed an initial public offering, raising over $100 million in proceeds, which were used to fund acquisitions and development activities. This event transformed TXO Partners from a private partnership to a publicly traded entity.
Recent Acquisitions
In 2024, TXO Partners made a significant move by completing the acquisition of producing properties from Eagle Mountain Energy Partners and VR 4-ELM, LP, located in the Elm Coulee field in Montana and the Russian Creek field in North Dakota, which are part of the Greater Williston Basin. The company also acquired producing properties from Kaiser-Francis Oil Company in the Russian Creek field in North Dakota. These acquisitions, known as the “Williston Acquisitions,” were funded by a combination of cash on hand from a public offering and borrowings under the company’s credit facility.
Impact of Acquisitions
The Williston Acquisitions have had a significant impact on TXO Partners’ operations. As of September 30, 2024, the company’s total leasehold and mineral acreage increased from approximately 846,000 gross (372,000 net) to approximately 1.12 million gross (550,000 net). This expansion has provided TXO Partners with additional opportunities to optimize and exploit its oil and gas reserves, with the company expecting the average daily production on the Williston assets to consist of approximately 78% oil, 12% NGLs, and 10% gas.
Market Challenges and Resilience
Despite the challenges posed by the COVID-19 pandemic and its impact on the energy industry, TXO Partners has demonstrated its resilience. In the nine months ended September 30, 2024, the company generated total revenues of $193.48 million, a decrease of 33% compared to the same period in the prior year. This decline was primarily attributable to a 67% decrease in the average selling price of natural gas, a less than 1% decrease in the average selling price of oil, and a 1% decrease in the average selling price of NGLs, all excluding the effects of derivatives.
Risk Management
While the company’s revenues were impacted by the lower commodity prices, TXO Partners has taken steps to mitigate the effects. The company has entered into various commodity derivative contracts to hedge its exposure to price fluctuations on crude oil, natural gas liquids, and natural gas sales. These hedging activities are intended to limit the company’s exposure to product price volatility and to maintain stable cash flows.
Financials
In terms of financial performance, TXO Partners reported a net loss of $103.99 million for the year ended December 31, 2023, compared to a net loss of $7.67 million in the prior year. This decline was primarily due to a $223.38 million write-off during the year, which had a significant impact on the company’s bottom line.
Despite these challenges, TXO Partners has maintained a strong focus on its operational efficiency. In the nine months ended September 30, 2024, the company’s production expenses decreased by 1% compared to the same period in the prior year, while its taxes, transportation, and other expenses decreased by 27% over the same period. These cost reductions have helped to partially offset the impact of the lower commodity prices on the company’s profitability.
For the most recent fiscal year ending December 31, 2023, TXO reported revenue of $380.72 million, operating cash flow of $77.15 million, and free cash flow of $66.73 million. In the most recent quarter ending September 30, 2024, the company reported revenue of $68.73 million, representing a year-over-year revenue decrease of 1.6%. This decrease was primarily driven by lower natural gas prices, which were partially offset by increased oil and NGL production from the Williston Basin acquisitions. The company’s net income for the quarter was $203,000, with operating cash flow of $20.71 million and negative free cash flow of -$211.15 million.
Liquidity and Future Outlook
Looking ahead, TXO Partners has provided guidance for the 2024 fiscal year. The company expects to incur costs of approximately $20.00 million for drilling, completion, and recompletion activities and facilities in 2024. Additionally, TXO Partners has hedged a portion of its underlying production to protect its distributions and the balance sheet, with outstanding borrowings under its credit facility of $148.00 million as of September 30, 2024.
As of September 30, 2024, TXO had a debt-to-equity ratio of 0.25. The company’s liquidity position remained strong with $3.85 million in cash and $127 million available under its $275 million credit facility. The current ratio and quick ratio both stood at 1.02, indicating the company’s ability to meet its short-term obligations.
Product Segments
TXO Partners’ operations are divided into three main product segments: oil and condensate, natural gas liquids (NGLs), and natural gas.
The oil and condensate segment is a significant contributor to the company’s overall revenues. During the nine months ended September 30, 2024, oil and condensate sales accounted for $136.94 million in revenues, representing over 70% of the company’s total revenues. The average sales price for oil and condensate, excluding the effects of derivatives, was $75.35 per barrel for the nine-month period. When factoring in the realized gains and unrealized gains from derivatives, the average oil and condensate price was $77.17 per barrel.
The natural gas liquids (NGLs) segment contributed $20.37 million in revenues during the nine months ended September 30, 2024. The average sales price for NGLs, excluding the effects of derivatives, was $22.92 per barrel, which remained unchanged when accounting for the realized and unrealized gains from derivatives.
The natural gas segment generated $36.17 million in revenues for the nine-month period ended September 30, 2024. The average sales price for natural gas, excluding the effects of derivatives, was $1.96 per Mcf. However, when factoring in the realized and unrealized gains and losses from derivatives, the average natural gas price was $1.75 per Mcf.
Geographic Performance
TXO Partners primarily operates in the Permian Basin, San Juan Basin, and Williston Basin in the United States. The company’s oil and condensate production benefits from its activities in all three basins, while NGL production comes primarily from operations in the Permian Basin and San Juan Basin. Natural gas production is primarily located in the San Juan Basin and Permian Basin, where the company has leveraged its extensive infrastructure and midstream operations to optimize the value of its natural gas resources.
Industry Trends
The oil and gas industry has experienced significant volatility in commodity prices in recent years. WTI crude oil prices ranged from a high of $93.68 per barrel in 2023 to a low of $65.75 per barrel in 2023, while natural gas prices reached a high of $4.17 per MMBtu in 2023 before declining to $2.26 per MMBtu as of October 2024. The industry has also been impacted by rising costs due to inflationary pressures. Despite these challenges, TXO continues to focus on optimizing its operations and pursuing strategic acquisitions to grow its asset base.
Conclusion
Despite the challenges faced by the energy industry in recent years, TXO Partners has demonstrated its ability to navigate through difficult times. The company’s strategic acquisitions, focus on operational efficiency, and proactive approach to risk management have positioned it well for the future. TXO’s diversified asset base, effective hedging strategies, and operational expertise have allowed it to navigate the volatility in commodity prices and generate stable cash flows to support its growth and distribution to unitholders. As the industry continues to evolve, investors will be watching closely to see how TXO Partners capitalizes on its opportunities and navigates the ever-changing landscape of the oil and gas sector.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.