Executive Summary / Key Takeaways

• Diversification as a Defensive Moat: Kimbell's 16.1 million gross acres across 28 states, balanced commodity exposure (approximately 50% gas-weighted), and industry-leading low PDP decline rate of 14% create a resilient royalty model that generates stable cash flows through oil and gas price volatility, distinguishing it from basin-concentrated peers.

• Acquisition Engine with Capital Discipline: The company has grown production 733% since its 2017 IPO through a disciplined M&A strategy focused on $100M+ deals, funding growth with a conservative 1.6x net debt/EBITDA ratio while allocating 75% of cash flow to unitholders and 25% to debt reduction, demonstrating an ability to scale without compromising balance sheet strength.

• Tax-Advantaged Income Stream: With Q3 2025 distributions estimated as 100% return of capital and a 12.6% yield at recent prices, KRP offers a materially higher after-tax return than traditional dividend stocks, making it particularly attractive in a higher-tax environment.

• Positioned for Consolidation: As one of few publicly-traded mineral companies in a $700 billion fragmented market, KRP's scale and relationship-based acquisition approach give it a structural advantage in consolidating smaller private competitors, particularly for deals under $500 million that can be meaningfully accretive.

• Key Variables to Monitor: The investment thesis hinges on management's ability to maintain its 16% market share of U.S. land rigs and execute accretive acquisitions while navigating commodity price volatility; any deterioration in operator activity or increase in acquisition multiples would pressure both growth and yield sustainability.

Setting the Scene: The Royalty Business Model in a Fragmented Market

Kimbell Royalty Partners, LP, founded in 2015 but with operational roots tracing back to 1998, operates from its Fort Worth, Texas headquarters as a pure-play mineral and royalty interest owner in U.S. oil and natural gas properties. The business model is elegantly simple yet powerfully differentiated: Kimbell owns perpetual mineral interests that entitle it to a percentage of production revenue—typically 12.5% to 25%—while bearing zero drilling, completion, or operating costs. This asset-light structure means every dollar of commodity price improvement flows directly to the bottom line, while cost inflation that plagues exploration and production companies never touches KRP's financial statements.

The company sits in the middle of a highly fragmented $700 billion U.S. mineral market, where over 90% of ownership remains in private hands. This fragmentation creates a persistent opportunity set, with dozens of $100M+ deals available at any given time. KRP's strategy focuses on these larger, institutionally-owned packages rather than the labor-intensive "ground game" of small individual acquisitions. Such an approach enables KRP to deploy capital efficiently on deals that can move the needle—like the January 2025 Boren Acquisition for $230.4 million—while avoiding the high transaction costs and minimal impact of piecing together small interests.

KRP's positioning within the industry value chain is unique. Unlike Viper Energy (VNOM), which concentrates heavily in the Permian Basin for scale efficiency, or Black Stone Minerals (BSM), which maintains working interests that introduce cost variability, KRP has built a deliberately balanced portfolio across every major U.S. basin. Approximately 55% of its 16.1 million gross acres sit in the Permian and Mid-Continent regions, but meaningful positions in the Haynesville, Appalachia, and other basins provide natural hedging against regional slowdowns. This diversification explains why KRP's rig count dropped only 2% in Q2 2025 while the overall U.S. land rig count fell 7%—operators stayed active on KRP's higher-quality, diversified acreage.

The historical evolution of this strategy reveals management's long-term thinking. Since the 2017 IPO, production has grown from 3,116 BOE/day to 25,946 BOE/day—a 733% increase—fueled by acquisitions like the 2018 Haymaker deal in the gas-weighted Haynesville basin when natural gas prices were depressed. This counter-cyclical acquisition approach, buying quality assets when others retreat, has created a low-decline production base that requires just 6.5 net wells annually to maintain flat output. Most E&P companies face 30-40% base declines, forcing continuous capital spending. KRP's 14% PDP decline rate means it can generate free cash flow with minimal reinvestment, a structural advantage that becomes more valuable as the portfolio matures and decline rates naturally compress further.

Technology, Products, and Strategic Differentiation: The Royalty Portfolio as a Financial Technology

Kimbell's core "technology" is not software but a sophisticated portfolio construction methodology that functions as a financial engineering platform. The company has systematized the acquisition and management of mineral interests into a repeatable process that generates superior risk-adjusted returns. This starts with its proprietary evaluation framework that assesses not just current production but line-of-sight inventory—identifying permitted wells, DUCs (drilled but uncompleted wells), and lease obligations that ensure future development. As of Q3 2025, KRP's line-of-sight wells materially exceed the 6.5 net wells needed for maintenance, providing visibility into production stability that competitors cannot match.

The product advantage manifests in three dimensions. First, the overriding royalty interest structure provides exposure to 131,000 gross wells (52,000 in the Permian alone) without capital intensity. Second, the continuous drilling clause in recent acquisitions like Boren ensures development by major operators like ConocoPhillips (COP), effectively guaranteeing production growth. Third, the perpetual nature of mineral interests means KRP benefits from decades of development—an asset purchased in 2006 from an East Coast college endowment recently permitted 17 additional wells in Martin County, Texas, with net revenue interests above 2%. This multi-decade value creation is impossible in traditional E&P where reserves deplete.

Strategic differentiation extends to capital allocation. KRP's 75% payout ratio combined with 25% debt paydown represents a disciplined approach that balances unitholder returns with balance sheet strength. The May 2025 redemption of 50% of Series A preferred units for $182.3 million simplified the capital structure and reduced cost of capital, while the simultaneous increase in the credit facility to $625 million preserved financial flexibility. Such moves underscore management's commitment to maintaining investment-grade leverage metrics (net debt/EBITDA ~1.6x) while still delivering a 12.6% yield, a combination that attracts both income and total return investors.

The acquisition strategy itself serves as a competitive moat. By focusing on relationship-based, portfolio-level deals, KRP avoids bidding wars with private equity buyers who dominate the small-deal market. As President Davis Ravnaas noted, "we historically not pursued small ground game acquisitions" because they are labor-intensive and minimally impactful. Instead, KRP cultivates relationships with institutional sellers, positioning itself as the buyer of choice when portfolios mature and become de-risked. This approach yields better pricing and larger, more efficient transactions that can be immediately accretive to distributable cash flow.

Financial Performance: Evidence of the Model's Resilience

KRP's Q3 2025 results validate the diversified strategy. Production averaged 25,530 BOE/day, up 1% organically from Q2 and exceeding the midpoint of 2025 guidance, while cash G&A came in at $2.51/BOE—below guidance and reflecting positive operating leverage. Total oil, gas, and NGL revenues reached $76.8 million, with natural gas revenue jumping 65% year-over-year to $17.9 million due to higher prices and production volumes. This gas-weighted upside offset oil price weakness, exactly as the balanced portfolio was designed to do.

The revenue mix shift tells an important story. Oil's share of total revenue declined from 73% in Q3 2024 to 64% in Q3 2025, while natural gas rose from 15% to 23%. KRP's ability to capture value from whichever commodity is outperforming stands out here. With natural gas prices above $4/Mcf and management noting "extraordinary and heroic" growth expectations for gas at $5+ pricing, the portfolio's approximately 50% gas weighting positions KRP to benefit disproportionately from LNG export growth and power generation demand. Conversely, if oil prices recover, the Permian-heavy asset base provides immediate leverage.

Margin structure reveals the royalty model's purity. With gross margins of 93.5% and operating margins of 37.4%, KRP retains substantially more revenue per barrel than any E&P company. Depreciation and depletion expense decreased $1.2 million year-over-year to $31 million, with the depletion rate per barrel falling to $13.19 from $14.61. This decline reflects the 2024 impairment that reduced the capitalized asset base, but also the maturing portfolio's naturally decreasing decline rates. Unit costs are falling even as production grows, expanding margins over time.

Balance sheet management underscores conservative stewardship. As of September 30, 2025, KRP had $448.5 million in debt outstanding on its $625 million facility, leaving $176.5 million in undrawn capacity. Net debt to trailing twelve-month EBITDA stood at 1.6x, well below the typical 3-4x levels seen in the E&P sector. The company allocated 25% of Q3 cash available for distribution—approximately $12.6 million—to debt reduction, demonstrating a commitment to maintaining financial flexibility for future acquisitions. Such discipline preserves the ability to act counter-cyclically when distressed sellers emerge.

The Boren Acquisition's integration is proceeding as planned. The $230.4 million deal, funded with $163.6 million in equity proceeds and borrowings, added core Permian acreage with a continuous drilling clause ensuring near-term development. Q3 marked the first full quarter of Boren contribution, and production already exceeded the midpoint of guidance. The deal's structure—funded with equity rather than debt—prevented leverage from spiking, keeping net debt/EBITDA at a manageable 1.6x post-closing.

Outlook, Guidance, and Execution Risk

Management's 2025 guidance, reaffirmed in Q3, targets 25,500 BOE/day at the midpoint—a record high that implies flat to modest growth from current levels. This conservative approach reflects prudence in an uncertain macro environment, but also confidence in the asset base's resilience. As CEO Bob Ravnaas stated, "I don't think there's anything at this time that we see that would cause us to alter guidance," citing robust DUC inventory, permitted wells, and active lease bonus activity that runs "a little bit counter to the narrative that things are slowing down."

The maintenance capital requirement of 6.5 net wells annually provides a critical floor on performance. This figure, updated annually, represents the number of new wells needed to offset the 14% PDP decline rate. With 86 rigs actively drilling on KRP's acreage—representing 16% of all U.S. land rigs—and line-of-sight wells exceeding this maintenance threshold, production stability is highly probable. Management expects this number to "slightly go down a little bit" over time as decline rates compress, further reducing capital intensity.

Commodity price scenarios create clear upside and downside asymmetries. If natural gas prices sustain $4-5/Mcf levels, the Mid-Continent and Haynesville assets will drive production growth above guidance, with management noting they would "expect a greater contribution to our production growth...from the Mid-Con, the Haynesville and other areas." Conversely, if oil prices recover to $80+/bbl, the Permian assets provide immediate leverage. This two-way optionality is precisely why the balanced portfolio was constructed—to perform regardless of which commodity leads.

Execution risks center on acquisition integration and operator activity. While KRP's acreage quality has shown "stickiness" relative to broader rig count declines, a sustained downturn in operator capital budgets could eventually impact drilling schedules. The company's hedging strategy—targeting 20% of production—provides some protection but leaves substantial upside exposure. Management runs internal stress tests on production at "very low levels" to ensure distribution coverage, giving confidence in the 75% payout ratio even under adverse scenarios.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is a prolonged downturn in both oil and gas prices simultaneously. While the diversified portfolio mitigates single-commodity exposure, a 2008-style demand collapse would pressure revenues and potentially trigger impairments. KRP recorded a $6 million impairment in 2024 due to 12-month average price declines, and further price deterioration could reduce proved reserves and future net revenues. The mitigating factor: the low-decline asset base requires minimal capital to maintain production, preserving cash flow better than E&P companies that must drill to survive.

Acquisition multiple expansion poses a subtler threat. As Davis Ravnaas noted, sellers in the Permian currently "want multiples of cash flow that reflect...a growth environment," but buyers expect lower multiples for flat production profiles. If private equity competition drives prices higher, KRP's disciplined approach could result in fewer accretive deals, slowing growth. The company's size—smaller than VNOM's $13.3 billion market cap—means it must be more selective, but also allows it to target the "vast majority of royalty transactions" under $500 million that larger players may overlook.

Operator concentration risk exists despite diversification. Over 99% of KRP's acreage is leased to working interest owners, with substantial exposure to major Permian operators like ConocoPhillips. While these companies have strong balance sheets and drilling obligations, any financial distress or strategic shift could impact development timing. The continuous drilling clauses in recent acquisitions mitigate this, but do not eliminate it entirely.

Regulatory and tariff changes represent a wildcard. Potential executive orders affecting the oil and gas industry, or tariffs on steel and equipment, could increase operator costs and reduce drilling economics. While KRP itself bears no operating costs, reduced operator activity would directly impact royalty volumes. Management monitors these developments but has not quantified potential impacts, leaving uncertainty around future production growth.

Interest rate sensitivity cuts both ways. KRP's variable-rate credit facility ($448.5 million drawn at September 30, 2025) exposes it to higher borrowing costs if rates remain elevated, though the 1.6x leverage ratio provides cushion. Conversely, rate cuts would lower interest expense and potentially boost energy sector valuations, creating a favorable backdrop for equity-funded acquisitions. The company's 0.31 beta indicates low correlation to broader markets, but interest rate cycles remain a key external variable.

Valuation Context: A Yield-Plus-Growth Proposition

At $12.83 per share, KRP trades at a $1.38 billion market capitalization and $1.80 billion enterprise value. The stock offers a 12.6% dividend yield based on recent distributions, which management estimates to be 100% return of capital and thus not subject to dividend taxes. This tax advantage effectively boosts the after-tax yield to approximately 18% for high-income investors, a compelling proposition in a 5% Treasury environment.

Cash flow multiples appear reasonable for the royalty model. KRP trades at 5.6x price to operating cash flow and 7.4x EV/EBITDA based on trailing twelve-month figures. This compares favorably to Viper Energy at 16.3x EV/EBITDA and 16.3x price to operating cash flow, reflecting VNOM's premium for Permian concentration and C-Corp structure. Black Stone Minerals trades at 9.3x price to operating cash flow and 9.99x EV/EBITDA, despite having working interests that introduce cost variability KRP avoids.

Balance sheet strength supports the valuation. With net debt/EBITDA of 1.6x and $176.5 million in undrawn capacity, KRP maintains financial flexibility that smaller peers like Dorchester Minerals (DMLP) (zero debt, $1.07B market cap) cannot leverage for growth. The current ratio of 5.4x and quick ratio of 5.1x indicate exceptional liquidity, while the 0.58 debt-to-equity ratio remains well below the 1.0x+ levels common in the E&P sector.

Profitability metrics demonstrate the royalty model's purity. Gross margins of 93.5% exceed even VNOM's 97.8% when adjusted for working interest differences, while operating margins of 37.4% reflect the minimal overhead required to manage a passive royalty portfolio. Return on assets of 6.0% and ROE of 4.1% appear modest but must be evaluated in context: KRP's asset base is carried at depreciated historical cost while generating growing cash flows, meaning economic returns exceed accounting returns.

The valuation puzzle centers on the appropriate multiple for a depleting asset base. Unlike industrial companies with growing terminal values, royalty trusts face natural decline. However, KRP's 14% decline rate is substantially lower than the 30%+ typical of E&P companies, and its active acquisition program replaces depletion while growing scale. The market appears to be pricing KRP at a slight discount to sum-of-parts NAV, creating potential upside if management executes on its visible acquisition pipeline.

Conclusion: A Defensive Growth Story in an Uncertain Energy Landscape

Kimbell Royalty Partners has engineered a royalty model that turns commodity volatility into a competitive advantage. Through deliberate diversification across 28 states, balanced oil and gas exposure, and a low-decline asset base requiring minimal maintenance capital, KRP generates stable, growing cash flows that support a 12.6% tax-advantaged yield while retaining 25% for debt reduction and future acquisitions. This capital discipline, combined with a relationship-based M&A strategy targeting $100M+ deals, positions KRP to consolidate the fragmented mineral market from a position of financial strength.

The central thesis hinges on two variables: operator activity on KRP's acreage and management's ability to source accretive acquisitions at reasonable multiples. The 16% market share of U.S. land rigs and line-of-sight inventory well above maintenance requirements provide confidence in production stability through 2026. Meanwhile, the $176.5 million in undrawn capacity and 1.6x leverage ratio create firepower for counter-cyclical deals when distressed sellers emerge.

What makes this story attractive is its defensive characteristics in a cyclical industry. While E&P companies slash budgets and concentrated royalty owners face basin-specific risks, KRP's diversification ensures consistent results. The tax-advantaged yield provides immediate income while the acquisition engine offers long-term growth. The primary risk is a simultaneous collapse in both oil and gas prices, but even here, the low-decline asset base and hedging strategy provide downside protection that peers lack.

For investors, KRP represents a rare combination of high current income and visible growth in an energy sector starved of both. The valuation at 7.4x EV/EBITDA appears reasonable for a business with 93.5% gross margins and minimal capital requirements. Whether the story plays out depends on management's execution of its consolidation strategy and the durability of operator activity across its diversified footprint. With a decade-plus inventory of development opportunities and a proven ability to grow through cycles, KRP is built to deliver steady distributions while scaling its asset base for years to come.