Persistent Global Demand Will Fuel US Shale Royalty Upside

Key Takeaways

• Persistent rig activity and cost discipline position Kimbell to outperform expectations in revenue, cash flow, and net margins as scale increases.
  
• Diverse drilling inventory and strategic acquisitions enable Kimbell to capitalize on industry shifts, supporting long-term revenue and compound free cash flow growth.
  
• Shifting energy trends, regulatory risks, regional concentration, unattractive acquisitions, and market volatility threaten future royalty income, cash flow growth, and reliable distributions.

Catalysts

Owns and acquires mineral and royalty interests in oil and natural gas properties in the United States.

• While analyst consensus expects record production and incremental margin uplift from Kimbell's recent $230 million acquisition, the exceptionally "sticky" and increasing rig activity on Kimbell's acreage-even as industry rig counts decline-suggests the company could substantially outperform both its own guidance and market expectations for top-line revenue and cash flow into 2026 and beyond.
  
• Analysts broadly agree that cash flow deployment toward debt reduction will lower interest expense and support net margins, but the ongoing reduction in cash general and administrative expenses per BOE-now substantially below guidance-points to structurally higher operating leverage, which could drive materially higher net margins and distributable earnings for several years as scale increases.
  
• With more than a decade of drilling inventory, a demonstrated track record of accretive deals across all major U.S. basins, and ongoing sector M&A, Kimbell is uniquely positioned to capture high-quality assets at attractive valuations as sellers ultimately lower cash flow multiples, leading to step changes in production and long-term revenue growth.
  
• Kimbell's natural gas exposure across regions like the Haynesville positions it to directly benefit from the sustained global demand for U.S. LNG exports and domestic gas fuel switching, creating significant upside to royalty income and earnings as natural gas prices firm over the coming years.
  
• Structural constraints on new fossil fuel supply due to ESG and capital discipline in developed markets continue to increase the intrinsic value of Kimbell's existing mineral and royalty assets, implying sustained, premium valuation multiples and above-average risk-adjusted free cash flow compounding well beyond the current cycle.

Kimbell Royalty Partners Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Kimbell Royalty Partners compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Kimbell Royalty Partners's revenue will grow by 7.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.2% today to 21.1% in 3 years time.
• The bullish analysts expect earnings to reach $81.5 million (and earnings per share of $0.88) by about August 2028, up from $-548.7 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 47.9x on those 2028 earnings, up from -2304.5x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Kimbell Royalty Partners Future Earnings Per Share Growth

Risks

• The accelerating transition to renewable energy sources and increasing adoption of electric vehicles are likely to decrease long-term demand for oil and gas, which would negatively impact Kimbell's royalty revenue as drilling activity and production volumes on its mineral interests decline.
  
• Increasing regulatory scrutiny and potential climate-related policies, such as carbon taxes or emissions limits, could raise operator costs, slow or halt drilling, and reduce production on Kimbell's acreage, ultimately resulting in lower royalty payments and weaker cash available for distribution.
  
• The company's heavy concentration in the Permian Basin and U.S. shale regions exposes it to regional production declines and potential state-level regulatory changes, which may reduce future revenue streams and hinder distributable cash flow growth.
  
• There is evidence that acquisition opportunities, especially in the Permian, are becoming less attractive, with fewer packages coming to market and sellers demanding high cash flow multiples despite slowing production growth, which risks compressing net margins and limiting accretive M&A as a growth driver.
  
• The industry faces long-term risks from volatile commodity prices, oversupply, OPEC+ decisions, and global capital flight from fossil fuels due to ESG pressures, all of which could cause lower and less predictable royalty income and hinder Kimbell's future earnings and capital access.

Valuation

• The assumed bullish price target for Kimbell Royalty Partners is $24.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kimbell Royalty Partners's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $385.2 million, earnings will come to $81.5 million, and it would be trading on a PE ratio of 47.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $13.54, the bullish analyst price target of $24.0 is 43.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.