Asset Acquisitions And Debt Reduction Will Strengthen Permian Operations By 2025

Key Takeaways

• Robust development and acquisitions are expected to drive revenue growth and enhance earnings, especially with active drilling in the Permian Basin.
  
• Capital structure improvements, including debt reduction and preferred stock redemption, aim to lower costs and bolster net margins.
  
• M&A execution risks, regulatory changes, and commodity price fluctuations may impact net margins and revenue, while strategic acquisitions in competitive basins increase financial vulnerability.

Catalysts

Engages in acquiring and owning mineral and royalty interests in oil and natural gas properties in the United States.

• The company recently closed a $230 million acquisition and completed a successful primary equity offering, which is expected to contribute to record-high daily production guidance for 2025, potentially increasing revenue and earnings.
  
• With 91 rigs actively drilling and a strong line-of-sight well inventory, Kimbell expects robust development in 2025, particularly in the Permian Basin, likely supporting revenue and production growth.
  
• The company plans to use 25% of cash flow to reduce debt, which should lower interest expenses and enhance net margins.
  
• The company has the capacity to make further acquisitions thanks to its substantial undrawn credit facilities, which could further bolster revenue and earnings through increased production.
  
• The planned redemption of half of their preferred stock should simplify the capital structure and reduce financing costs, positively impacting net margins and future earnings.

Kimbell Royalty Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kimbell Royalty Partners's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.8% today to 37.3% in 3 years time.
• Analysts expect earnings to reach $133.6 million (and earnings per share of $0.88) by about March 2028, up from $-8.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from -148.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• 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 7.49%, as per the Simply Wall St company report.

Kimbell Royalty Partners Future Earnings Per Share Growth

Risks

• The anticipation of regulatory changes by the new administration might not have been fully accounted for, potentially leading to operational or financial impacts, which could affect revenue or net margins.
  
• There is potential execution risk associated with M&A activities and working interest acquisitions, particularly as the company expands across the U.S. and targets larger deals, possibly impacting earnings if acquisitions do not deliver expected returns.
  
• Risks associated with commodity price fluctuations, especially in natural gas, might not have been fully neutralized due to the company’s policy of not taking a position on commodity pricing, potentially impacting revenue.
  
• The company's strategy of utilizing revolvers to finance preferred redemptions and acquisitions could increase leverage risk, which may lead to heightened financial vulnerability and affect net margins.
  
• The focus on strategic growth through acquisitions in competitive basins, like the Permian, may face significant competition, potentially driving up asset prices and affecting the earnings yield of these investments.

Valuation

• The analysts have a consensus price target of $18.0 for Kimbell Royalty Partners based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $358.6 million, earnings will come to $133.6 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 7.5%.
• Given the current share price of $13.99, the analyst price target of $18.0 is 22.3% 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.