TXO Partners Stock: 10.6%-Yielder Has 25% Upside Potential
July 25, 2024
TXO Partners LP Reports Q1 Earnings & Revenue Beat
TXO Partners stock is a potential opportunity that shouldn’t be overlooked.
The world is transitioning to green energy, but the fact remains that we still need oil and gas, with the exploration and production industry providing better value proposition than ever before. In fact, with many energy transition targets set for 2030, it’s fair to say the green movement is significantly behind schedule.
Not surprisingly, global demand for oil is still projected to increase over the next 25+ years, from 96.5 million barrels of oil per day (Mb/d) in 2022 to 97.4 Mb/d by 2050. Over the same time period, demand for natural gas is expected to increase from 4,159 billion cubic meters (bcm) in 2022 to 4,179 bcm in 2050. (Source: “Oil and gas in the global economy through 2050,” Canadian Energy Centre, March 26, 2024.)
Taking that worldwide demand into account, between 2023 and 2050, the cumulative global oil and gas investment (upstream, midstream, and downstream) is expected to reach $21.1 trillion.
Not all oil and gas exploration and production (E&P) companies are created equal. Try to find overlooked E&P companies with strong balance sheets, significant free cash flow generation, and low cash flow breakeven prices. And of course, companies with big dividends, like TXO Partners LP (NYSE:TXO).
Most people aren’t familiar with TXO Partners stock, but that’s only because the company’s initial public offering (IPO) was in early 2023. With a market cap of just $802.0 million, it is a smaller company, but it has a lot going for it.
TXO Partners LP is an oil and gas company in Fort Worth, Texas, focused on conventional oil, natural gas, and natural gas liquid reserves in North America. Its current acreage positions are concentrated in the Permian Basin of West Texas and New Mexico and the San Juan Basin of New Mexico and Colorado. (Source: “Company Profile,” TXO Partners LP, last accessed July 16, 2024.)
As of December 31, 2023, TXO Partners’ assets consisted of approximately 846,000 gross (372,000 net) leasehold and mineral acres with total estimated proved reserves of approximately 100 million barrels of oil equivalent (MMBoe), of which approximately 56% were liquids and approximately 90% were proved developed. (Source: “424B5,” Securities and Exchange Commission, June 6, 2024.)
TXO Partners recently expanded its presence into the Greater Williston Basin back in June. The company announced that it had entered separate purchase agreements with Eagle Mountain Energy Partners and a private company to purchase assets in the Elm Coulee field in Montana and the Russian Creek field in North Dakota for total cash considerations of $243.0 million and 2.5 million common units of TXO. (Source: “TXO Partners, L.P. Announces Entry Into Definitive Agreements for Assets in the Greater Williston Basin,” TXO Partners LP, June 25, 2024.)
The assets are made up of 244,000 gross acres, with 359 operated wells and 284 non-operated wells.
Should the deal close as expected in the third quarter, the transitions are expected to add 4,500 daily barrels of oil equivalent production (~90% liquids).
Increases Dividend 30% to $0.65
For the first quarter ended March 31, 2024, TXO Partners reported revenue of $67.44 million, topping Wall Street forecasts by 3.38%. First-quarter earnings slipped to $0.33, but topped Wall Street’s calls for $0.24 per share. (Source: “Form 10-Q,” Securities and Exchange Commission, May 7, 2024.)
Commenting on the results, Bob R. Simpson, the company’s chairman and chief executive officer, said, “Our first quarter performance highlights the effectiveness of our unique financial enterprise in the energy sector.
“As a production and distribution company, we manage our cashflow and maintain our vision on the long term. This allows us to announce a distribution of $0.65 per unit to our shareholders for the period.”
TXO Partners stock’s $0.65 per unit distribution represents a 30% increase over the $0.50 per unit distribution announced in May of 2023. This translates into an annual payout of $2.23 per unit for a current forward dividend yield of 10.68%. (Source: “TXO Partners Declares a First Quarter 2024 Distribution of $0.65 on Common Units; Files Quarterly Report on Form 10-Q,” TXO Partners LP, May 7, 2024.)
This represents the fourth consecutive increase to the partnership’s quarterly distribution. As is the case with variable dividends, the amount of cash available for distribution is dependent on current commodity prices. What isn’t up for debate is the low natural decline of TXO Partners’ reserves and the relatively low cost to maintain production, which will help support distributions. The base decline rate for all of the company’s properties is approximately nine percent. That doesn’t include new developments or wells.
The three-year decline rate on the newly acquired Williston assets is roughly 15%.
TXO Units Up 22%, But There’s Still Additional 25% Upside
Thanks to solid financial results, new acquisitions, and industry tailwinds, TXO Partners stock has been performing well, up 19% year to date and eight percent year over year. Despite the big gains, Wall Street is increasingly bullish on TXO units, providing a 12-month price forecast of $26.00; this points to potential gains of approximately 28%.
Why the positive outlook on TXO Partners stock?
While the current consensus is for TXO Partners’ 2024 revenue to slip to $329.4 million from $380.7 million in 2023, it’s expected to jump to $413.4 million in 2025. (Source: “TXO Partners, L.P., (TXO), Yahoo! Finance, last accessed July 16, 2024.)
Chart courtesy of StockCharts.com
The Lowdown on TXO Partners Stock
TXO Partners LP is a great energy company with a growing property portfolio in the Permian, San Juan, and Williston Basins, each of which is characterized by low geological risk, low decline rates, and high recoveries.
Thanks to a loophole, the partnership is required to distribute all of its cash on hand at the end of each quarter. Management has said that the low-decline nature of its reserves and the relatively low cost to maintain production, combined with its low leverage profile, will continue to support distributions.
