Decarbonization And Regulation Will Erode Royalty Cash Flows

Key Takeaways

• Structural decarbonization trends and regulatory pressures threaten future royalty revenue, production growth, and earnings stability.
  
• Intensifying competition, consolidation, and ESG focus may raise acquisition costs, limit capital access, and suppress long-term unitholder returns.
  
• Strong asset quality, disciplined acquisitions, and conservative financial practices support resilient production, stable cash flow, and potential for growing distributions despite industry volatility.

Catalysts

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

• The accelerating transition toward renewable energy and increased decarbonization efforts pose a significant structural risk to long-term oil and gas demand. This could drive persistent declines in Kimbell's royalty revenue and result in cascading pressure on cash flow and future distributions.
  
• Intensifying regulatory pressure, including the looming threat of carbon taxes and tightening federal and state drilling restrictions, may discourage new upstream development on Kimbell's royalty acreage, directly constraining well additions and leading to lower production growth and weaker royalty cash generation.
  
• Natural resource depletion and legacy production declines within Kimbell's existing asset base necessitate continual acquisitions of new interests simply to sustain revenues, but increasing competition for high-quality mineral rights and fewer attractive deal opportunities in core basins could force Kimbell into higher-cost acquisitions, compressing net margins and threatening earnings stability over the long term.
  
• Rising consolidation among upstream operators may narrow Kimbell's bargaining power, leading to less advantageous royalty arrangements and diminishing the company's share of future cash flows from production on its acreage, further undermining revenue and EBITDA growth prospects.
  
• The growing influence of ESG investing and broader industry decarbonization trends is expected to limit capital access and depress valuation multiples for fossil fuel exposed royalty companies, which could ultimately translate into slower distribution growth, increased cost of capital, and weaker long-term returns for unitholders.

Kimbell Royalty Partners Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kimbell Royalty Partners compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kimbell Royalty Partners's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.2% today to 14.1% in 3 years time.
• The bearish analysts expect earnings to reach $51.6 million (and earnings per share of $0.54) by about August 2028, up from $-548.9 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 bearish analyst cohort, the company would need to trade at a PE ratio of 37.8x on those 2028 earnings, up from -2461.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.2x.
• 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 7.19%, as per the Simply Wall St company report.

Kimbell Royalty Partners Future Earnings Per Share Growth

Risks

• The company's diverse and high-quality asset base, with healthy rig activity and a growing share of U.S. drilling rigs, could support sustained production levels and mitigate the impact of broader industry slowdowns, helping to stabilize revenues and potentially protect or expand earnings over the long term.
  
• An active, accretive acquisition strategy focused on deals in advantaged basins like the Permian and Haynesville, combined with more than a decade of inventory for organic growth, may enable ongoing increases in production and royalty cash flows, supporting steady or growing net margins.
  
• Conservative financial management-including regular debt paydown, simplified capital structure, low net leverage, and excess liquidity-positions the company to withstand commodity cycles and maintain high free cash flow, helping protect cash distributions and limit downside in net income.
  
• Cost discipline and a royalty-focused model have resulted in declining general and administrative expense per BOE, creating positive operating leverage that supports sustained EBITDA margins and boosts cash available for distribution.
  
• The ability to adapt acquisition focus based on market and commodity pricing cycles, coupled with evidence of robust well and rig additions in key regions, suggests long-term resilience in production and the potential for rising distribution payouts, which can make units more attractive and support higher valuation multiples.

Valuation

• The assumed bearish price target for Kimbell Royalty Partners is $12.0, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $365.1 million, earnings will come to $51.6 million, and it would be trading on a PE ratio of 37.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $14.47, the bearish analyst price target of $12.0 is 20.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.