Drilling Expansion And Calculated M&A Could Fuel Robust Growth In The Energy Sector

Key Takeaways

• Strategic focus on drilling and increased lease bonuses indicate potential for strong production growth and future revenue enhancement.
  
• Redeeming preferred stock and exploring M&A opportunities aim to optimize financials and improve earnings through cost efficiency and strategic acquisitions.
  
• Geographical concentration and high debt levels pose significant financial risks, compounded by market uncertainties and potential cash flow challenges impacting future revenue and earnings.

Catalysts

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

• Increased drilling activity with 90 rigs on Kimbell's acreage, maintaining 16% market share, suggests ongoing strong production growth which could impact future revenue positively.
  
• Record lease bonuses indicate heightened operator interest in developing Kimbell's acreage, potentially driving future revenue increases through expanded production capabilities.
  
• A 34% quarter-over-quarter increase in net DUCs, mainly in the Permian Basin, suggests a pipeline of forthcoming production which is expected to bolster future revenue streams.
  
• Plans to redeem Apollo preferred stock in May 2025 for cost efficiency are expected to optimize the company’s financials through reduced interest expenses, positively impacting net margins.
  
• Exploration of M&A opportunities, particularly in less competitive Appalachian and other areas, could lead to strategic acquisitions that enhance earnings and improve overall financial performance.

Kimbell Royalty Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kimbell Royalty Partners's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 29.1% in 3 years time.
• Analysts expect earnings to reach $104.6 million (and earnings per share of $0.99) by about November 2027, up from $38.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.2x on those 2027 earnings, down from 34.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 3.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

Kimbell Royalty Partners Future Earnings Per Share Growth

Risks

• The company's reliance on continued strong performance from drilling activity and lease bonuses could face risks if market conditions change or if operators decide to focus elsewhere, impacting future revenue.
  
• High levels of debt, with $252.2 million outstanding under the revolving credit facility, could pose financial risk, limiting earnings if interest rates increase or if company needs to leverage further.
  
• Dependency on the Permian Basin and similar locations for production and net well completions introduces geographical concentration risk, potentially affecting revenue if these areas underperform.
  
• Delays in redeeming the Apollo preferred stock indicate potential cash flow management challenges, which could impact net margins and financial efficiency.
  
• Uncertainty in oil and gas markets and potential unforeseen events could disrupt production projections and revenue consistency, affecting the company's earnings outlook.

Valuation

• The analysts have a consensus price target of $20.0 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 $16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $359.3 million, earnings will come to $104.6 million, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $16.37, the analyst's price target of $20.0 is 18.1% 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.