Executive Summary / Key Takeaways

• TXO Partners, L.P. (NYSE:TXO) is an independent oil and natural gas company executing a "production and distribution enterprise" strategy, aiming to deliver consistent cash returns to unitholders through a long-lived, low-risk asset base.
• Recent strategic acquisitions, particularly in the Williston Basin, have significantly boosted production and revenue, offsetting natural declines in other core basins and driving a 47% increase in Q3 2025 revenues to $100.9 million.
• The company maintains a focus on operational optimization and efficient capital allocation, exemplified by the successful integration of new assets and the drilling of prolific horizontal wells in the Elm Coulee field.
• Despite strong revenue growth, profitability has been impacted by increased production, DDA, and G&A expenses tied to acquisitions, alongside volatile commodity prices and persistent inflationary pressures.
• TXO is committed to its distribution policy, declaring $0.35 per common unit for Q3 2025, and expects to fund its 2025 capital programs and distributions through operating cash flow, recent equity offerings, and its expanded Credit Facility.

A Foundation in Hydrocarbons: TXO's Strategic Blueprint

TXO Partners, L.P. operates as an independent oil and natural gas company, strategically focused on the acquisition, development, optimization, and exploitation of conventional and unconventional reserves across North America. Established in January 2012, TXO has built its operational footprint primarily in the Permian Basin of New Mexico and Texas, the San Juan Basin of New Mexico and Colorado, and the Williston Basin of Montana and North Dakota. The company's overarching strategy is to provide ongoing cash returns and long-term value to its unitholders, underpinned by a portfolio of long-lived, low-risk properties and disciplined financial stewardship.

The broader oil and natural gas industry is inherently cyclical, marked by significant commodity price volatility. For instance, WTI crude oil prices fluctuated from a high of $86.91 per barrel in April 2024 to $57.52 per barrel by October 20, 2025, while natural gas prices peaked at $4.49 per MMBtu in March 2025 before declining to $3.40 per MMBtu by October 20, 2025. This volatile environment, coupled with global economic uncertainties, supply chain disruptions, and persistent inflation, shapes the operational and financial landscape for TXO. The company acknowledges these pressures, particularly the rising costs for labor, materials, and energy, which are not expected to reverse in the short term.

Within this dynamic backdrop, TXO's operational differentiator lies in its approach to resource extraction and development. While specific proprietary technologies with quantifiable performance metrics are not detailed, the company emphasizes "optimization and exploitation" of its reserves and "thoughtful capital allocation" in its "high-impact basins." This operational expertise is demonstrated by the successful drilling of "several prolific horizontal wells in the Elm Coulee field" following recent acquisitions. This focus on efficient execution within established basins, rather than on novel technological breakthroughs, forms the bedrock of its production and distribution model.

Growth Through Acquisition and Operational Excellence

TXO's recent history is characterized by strategic expansion designed to enhance its asset base and production capabilities. A pivotal period began in August 2024 with the acquisition of producing properties in the Elm Coulee and Russian Creek fields from Eagle Mountain Energy Partners and VR 4-ELM, LP, followed by another acquisition from Kaiser-Francis Oil Company in the Russian Creek field. These moves were significantly amplified in July 2025 with the $338.6 million acquisition of oil and gas assets from White Rock Energy, LLC, primarily in the Elm Coulee field. These acquisitions, particularly those in the Williston Basin, have been instrumental in boosting the company's production volumes, effectively offsetting natural declines observed in its San Juan and Permian Basin assets.

To fund this expansion, TXO undertook a public offering in May 2025, generating approximately $189.5 million in net proceeds from the sale of common units. These funds were strategically deployed to repay outstanding borrowings under its Credit Facility and to finance a portion of the White Rock Energy acquisition. Concurrently, the company strengthened its financial flexibility by amending its senior secured credit facility in July 2025, increasing the borrowing base from $275 million to $410 million and extending its maturity to August 30, 2029. This financial maneuvering underscores TXO's commitment to supporting its growth initiatives while maintaining liquidity.

Financial Performance: A Snapshot of Expansion and Market Realities

The impact of TXO's strategic acquisitions is clearly reflected in its recent financial performance. For the three months ended September 30, 2025, total revenues surged by $32.1 million, or 47%, reaching $100.9 million, compared to $68.7 million in the prior-year quarter. This robust growth was primarily driven by a 521 MBoe increase in production, largely attributable to the Williston Basin acquisitions. Additionally, a 34% increase in the average selling price of natural gas, excluding the effects of derivatives, contributed an extra $4 million in revenue. Net gains from hedging activities further bolstered revenues by $10.9 million, comprising $7.8 million in unrealized gains and $3.1 million in realized gains. However, these gains were partially mitigated by a 13% decrease in the average selling price of oil and a 17% decrease in NGLs, excluding derivatives.

On the expense side, the increased operational footprint led to higher costs. Production expenses rose by $8.4 million, or 21%, to $47.9 million, with $8 million directly linked to the Williston Basin acquisitions. Despite this, on a per-unit basis, production expenses saw a slight decrease from $18.73 per Boe to $18.23 per Boe, indicating some efficiency gains from higher production volumes. Depreciation, depletion, and amortization (DDA) significantly increased by $10.1 million, or 75%, to $23.7 million, primarily due to the higher DDA rate associated with the Williston Basin assets. General and administrative (G&A) expenses also climbed by $1.6 million, or 48%, to $4.8 million, driven by higher personnel costs and public company expenses. Interest expense saw a substantial increase of 142% to $4.5 million, reflecting increased borrowings to fund acquisitions.

From a profitability standpoint, TXO's gross profit margin for the trailing twelve months (TTM) stands at 22.21%, with an EBITDA margin of 32.89%. The net profit margin for the TTM period is 3.82%. The company reported net income of $4.35 million for the three months ended September 30, 2025.

Liquidity and Capital Allocation for Sustainable Returns

TXO's liquidity is primarily supported by its cash flows from operating activities and its Credit Facility. As of September 30, 2025, outstanding borrowings under the Credit Facility amounted to $264 million, with $146 million remaining available. The company's net working capital, including cash but excluding derivative instruments, was negative $86.3 million at the end of the third quarter of 2025.

Capital expenditures, including acquisitions, totaled $305.4 million for the nine months ended September 30, 2025. The company incurred approximately $46.1 million for drilling, completion, and recompletion activities during this period, with a budgeted $65 million for such costs in 2025. Management retains the flexibility to adjust these planned capital expenditures based on prevailing commodity prices and market conditions. TXO was in compliance with all its debt covenants as of September 30, 2025, and believes it possesses adequate liquidity to continue as a going concern for at least the next twelve months.

A cornerstone of TXO's investment thesis is its commitment to distributions. The partnership agreement mandates the distribution of all available cash to unitholders, though quarterly distributions can vary with business performance and commodity price fluctuations. For the quarter ended September 30, 2025, a cash distribution of $0.35 per common unit was declared. Management expects to fund its distributions, meet debt obligations, and finance its 2025 capital development programs through a combination of operating cash flow, proceeds from the recent public offering, and borrowings under its Credit Facility.

Competitive Landscape and Strategic Positioning

TXO operates within a highly competitive oil and natural gas industry, vying with a diverse group of exploration and production (E&P) companies. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, TXO's standing is that of a mid-sized player with a focused approach on specific basins. Key competitors include larger, more diversified entities such as EOG Resources , ConocoPhillips , Devon Energy (DVN), and APA Corporation (APA).

TXO's competitive strengths lie in its regional expertise and operational focus within its core basins. This specialized knowledge allows for efficient asset management and potentially more agile decision-making in targeted areas, which can be a differentiator against larger players who may have broader, more complex portfolios. For instance, TXO's emphasis on optimizing conventional reserves could provide a more stable production profile compared to some competitors' more aggressive shale plays.

However, TXO's smaller scale presents certain vulnerabilities. It may face higher operational costs compared to the efficiencies achieved by larger rivals like EOG Resources, which benefits from greater bargaining power with suppliers and extensive operational footprints. While TXO's TTM Gross Profit Margin of 22.21% and Net Profit Margin of 3.82% reflect its current operational profile, larger, more established E&P companies often demonstrate stronger profitability and cash flow generation due to their scale and diversified asset bases. For example, EOG Resources' P/E ratio of 10.52 and ConocoPhillips' P/E ratio of 12.45 in 2025 suggest a different valuation and profitability profile compared to TXO's TTM P/E ratio of 51.33. This disparity highlights that TXO trades at a premium relative to its industry, with its P/E ratio significantly higher than the peer average of 20x and the estimated Fair Price-To-Earnings Ratio of 13.6x.

The industry's high barriers to entry, including substantial capital requirements and stringent regulatory approvals, generally favor established players like TXO by protecting their existing asset bases. However, these same barriers also benefit larger rivals who possess greater financial resources to navigate such complexities, potentially posing a challenge for TXO's long-term growth trajectory if it cannot match the investment capacity of its larger peers. The Energy and Pipeline - Master Limited Partnerships industry, which includes TXO, has been ranked in the bottom echelons of all industries by Zacks, suggesting a challenging sector-wide environment.

Outlook and Risks

Looking ahead, TXO Partners anticipates continued volatility in crude oil and natural gas markets. Despite this, the company expects to fund its 2025 capital development programs, meet debt obligations, and maintain distributions through its operating cash flow, the proceeds from its recent public offering, and available credit under its Credit Facility. Management has provided specific guidance, expecting to distribute $0.35 to $0.40 per unit to unitholders for the remainder of 2025. The Elm Coulee field is projected to be the primary development asset over the next twenty-four months, with newly drilled Bakken wells expected to achieve first oil production in November and be "highly economic at current commodity prices."

However, several risks could impact TXO's future performance. The inherent volatility of commodity prices remains a significant concern, as sustained declines could adversely affect the company's financial condition and its ability to meet capital expenditure obligations and financial commitments. Global economic uncertainties, including inflationary pressures, are expected to persist, potentially leading to higher operating costs that may not be fully offset by commodity price increases. The accuracy of reserve estimates, which are subject to data quality, interpretation, and price assumptions, also presents a risk, as revisions could alter production schedules and financial projections. Furthermore, while TXO is currently in compliance with its debt covenants, its ability to raise additional funds through indebtedness could be constrained by these arrangements, impacting its flexibility for future acquisitions or capital programs.

Conclusion

TXO Partners, L.P. presents an investment narrative centered on a disciplined "production and distribution enterprise" strategy, bolstered by recent, impactful acquisitions in the Williston Basin. The company's focus on optimizing its long-lived, low-risk asset base, coupled with prudent capital allocation and a commitment to unitholder distributions, forms the core of its appeal. While TXO has demonstrated strong revenue growth driven by increased production, it operates within a challenging industry characterized by commodity price volatility and persistent inflationary pressures that impact profitability and operational costs.

The company's operational expertise in developing prolific horizontal wells in key basins, such as Elm Coulee, serves as a competitive advantage, allowing it to extract value efficiently. However, its smaller scale compared to industry giants like EOG Resources (EOG) and ConocoPhillips (COP) necessitates a strategic focus on niche market execution to maintain its competitive standing. The outlook for TXO hinges on its ability to continue leveraging its regional strengths, manage its debt effectively, and adapt to fluctuating market conditions while sustaining its distribution policy. Investors should weigh the company's growth trajectory and distribution potential against the inherent risks of commodity price exposure and the ongoing need to manage costs in an inflationary environment. TXO's journey underscores the delicate balance between aggressive expansion and the steady hand of financial stewardship in the dynamic energy sector.