Rig Dominance And Operational Efficiency Set To Propel Growth Amid Energy Market Shifts

Key Takeaways

• A strong market share and operational efficiency position the company for future growth and improved net margins, enhancing shareholder value.
  
• Conservative financial strategies and the potential of significant boosts in production from new wells indicate a favorable outlook on revenue and financial flexibility.
  
• Kimbell Royalty Partners faces challenges from volatile natural gas prices, reliance on energy market performance, conservative financial strategies, and acquisition risks impacting growth and profitability.

Catalysts

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

• The robust rig count of 91 actively drilling rigs represents a 16% market share in the Continental United States, indicating significant operational capacity and a strong position to capitalize on future growth opportunities, likely affecting revenue and earnings positively.
  
• The company's line-of-sight wells being meaningfully above the number needed to maintain flat production suggests a forward-looking confidence in sustaining or increasing production levels, positively impacting future revenue streams.
  
• Achieving a record low cash G&A per BOE and exceeding internal production expectations signifies operational efficiency and discipline, which can lead to improved net margins and enhance shareholder value.
  
• The strategy of using 25% of the cash available for distribution to pay down debt contributes to maintaining a conservative balance sheet and improving financial flexibility, which could lead to a more favorable risk profile and positively affect earnings.
  
• The mention of two large interest wells coming online later in the year, with a notably higher average royalty interest compared to the norm, indicates potential significant boosts in production and revenue, especially given their oil focus in a favorable pricing environment.

Assumptions

• Analysts are assuming Kimbell Royalty Partners's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.9% today to 42.4% in 3 years time.
• Analysts expect earnings to reach $156.6 million (and earnings per share of $1.27) by about September 2027, up from $34.9 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 16.7x on those 2027 earnings, down from 37.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.0x.
• Analysts expect the number of shares outstanding to grow by 2.01% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

Risks

• The volatile nature of natural gas prices and the challenging environment for acquiring gas assets could adversely affect Kimbell's ability to expand and diversify their portfolio, potentially impacting revenue growth and profitability.
  
• A significant portion of their revenue depends on the performance of oil and natural gas rigs, making them vulnerable to downturns in the energy market or reductions in drilling activity, which could negatively affect their net income.
  
• The reliance on a conservative balance sheet and the strategy to maintain low leverage might limit Kimbell's ability to pursue aggressive growth opportunities or acquisitions, potentially constraining revenue growth and earnings expansion.
  
• The transition and integration risks associated with acquisitions, such as the LongPoint acquisition, could lead to operational inefficiencies, increased costs, or distractions from their core business, affecting net margins and cash flow.
  
• The strategic focus on returning value to unitholders through distributions while managing debt repayment obligations may limit available capital for reinvestment into growth opportunities, potentially affecting long-term earnings growth and financial flexibility.

Valuation

• The analysts have a consensus price target of $21.0 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 $25.0, 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 $369.3 million, earnings will come to $156.6 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $16.09, the analyst's price target of $21.0 is 23.4% 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.