TXO Partners: Fueling Growth and Distributions Through Strategic Acquisitions and Operational Discipline (NYSE:TXO) - TXO Stock Research Report

## Executive Summary / Key Takeaways * Strategic Expansion Driving Growth: TXO Partners is executing an aggressive acquisition strategy, notably expanding its Williston Basin footprint with the recent White Rock Energy (TICKER:WRE) acquisition, which is significantly boosting production volumes and revenue, offsetting natural declines in its legacy Permian and San Juan assets. * Operational Expertise as a Core Differentiator: While not relying on novel extraction technologies, TXO's strength lies in its deep expertise in optimizing and exploiting conventional, long-lived oil and gas reserves, complemented by a robust hedging strategy that provides cash flow stability essential for its distribution model. * Shifting Financial Profile: Recent acquisitions have propelled revenue growth, with Q2 2025 revenues up 56.84% year-over-year. However, these growth initiatives have also led to increased operating expenses, depreciation, and interest costs, resulting in a shift to an operating loss in the most recent quarter. * Disciplined Capital Management: The company has proactively managed its capital structure through a successful public offering and an expanded Credit Facility, demonstrating a commitment to funding growth while maintaining a conservative net-debt-to-EBITDAX ratio (projected 1.0x-1.5x post-WRE acquisition). * Distribution-Focused Amidst Volatility: Despite a volatile commodity market and persistent inflationary pressures, TXO remains committed to its "production and distribution partnership" model, aiming to sustain unitholder returns through prudent capital allocation and risk management. ## TXO's Enduring Model and Strategic Evolution TXO Partners, L.P. stands as an an independent oil and natural gas company, deeply rooted in the acquisition, development, optimization, and exploitation of conventional oil, natural gas, and natural gas liquid (NGL) reserves across North America. Established in January 2012, the company's operational footprint is concentrated in the prolific Permian Basin of New Mexico and Texas, the gas-rich San Juan Basin of New Mexico and Colorado, and the emerging Williston Basin of Montana and North Dakota. This geographical diversification, coupled with its "production and distribution partnership" model, underpins its strategy to deliver consistent returns to unitholders. The company's history reflects a deliberate evolution, from its early formation and the establishment of its 50%-owned joint venture, Cross Timbers Energy, LLC, to its recent, more aggressive expansion. A significant branding shift occurred in May 2023, when the company streamlined its name from TXO Energy Partners, L.P. to TXO Partners, L.P., signaling a refined focus. More recently, the first half of 2025 saw a strategic leadership transition, with Gary D. Simpson and Brent W. Clum ascending to Co-Chief Executive Officers of the General Partner, while Bob R. Simpson continues to provide strategic oversight as Chairman of the Board. This blend of seasoned leadership and a clear strategic mandate positions TXO for its next phase of growth. The broader energy landscape presents a complex mix of opportunities and challenges. The oil and natural gas industry is inherently cyclical, marked by significant commodity price volatility. Between January 2024 and June 2025, NYMEX crude oil prices swung from a high of $86.91 per barrel to a low of $57.13 per barrel, while natural gas prices ranged from $4.49 per MMBtu to $1.58 per MMBtu. This volatility, coupled with persistent inflationary pressures on operating costs—including salaries, materials, freight, and energy—creates a demanding environment. TXO's strategic response to these dynamics has been to fortify its asset base through targeted acquisitions and to implement robust financial and operational controls. ## Operational Edge and "Technology" in Conventional E&P TXO's competitive "technology" is not found in groundbreaking new extraction methods, but rather in its highly refined operational expertise in the "acquisition, development, optimization, and exploitation of conventional oil, natural gas, and natural gas liquid reserves." This approach focuses on maximizing value from long-lived, predictable assets, a strategy that differentiates it in a landscape often chasing high-risk unconventional plays. The company's deep understanding of its core basins allows for efficient capital deployment and optimized production, which is critical for sustaining its distribution-oriented business model. A cornerstone of TXO's operational strategy is its comprehensive commodity hedging program. This financial tool acts as a crucial buffer against the inherent price volatility of oil and natural gas, providing a degree of predictability to cash flows. For instance, as of June 2025, TXO had hedged significant crude oil production for July 2025 at a weighted average NYMEX price of $65.11 per barrel and natural gas production at $3.21 per MMBtu for July 2025 through March 2026. This proactive risk management is a tangible benefit, enabling more stable revenue streams and supporting the company's ability to fund distributions and capital expenditures, even when spot prices fluctuate. The "so what" for investors is clear: this operational discipline and hedging strategy translate directly into a more resilient business model, capable of generating the stable cash flows necessary to underpin its commitment to unitholder distributions. ## Competitive Landscape: A Niche Player in a Giant's Arena TXO operates within the "Energy and Pipeline - Master Limited Partnerships" industry, a sector that Zacks Equity Research has consistently ranked within the bottom quartile of over 250 industries, indicating a generally challenging competitive environment. Within this context, TXO is a specialized player, often competing with much larger, more diversified entities such as EOG Resources (TICKER:EOG), ConocoPhillips (TICKER:COP), Devon Energy (TICKER:DVN), and Occidental Petroleum (TICKER:OXY). Comparing TXO's financial performance to these industry giants reveals its distinct positioning. TXO's TTM Gross Profit Margin of 22.21% and Net Profit Margin of 3.82% are notably lower than EOG (43% and 27%, respectively), ConocoPhillips (29% and 17%), Devon Energy (60% and 18%), and Occidental Petroleum (36% and 11%). This disparity underscores the scale advantages and potentially more favorable cost structures or commodity mixes enjoyed by larger, more integrated competitors. TXO's TTM Price-to-Earnings (P/E) ratio of 53.11 also stands significantly higher than its peers (EOG: 10.84, COP: 12.68, DVN: 7.05, OXY: 15.00), suggesting that the market may be pricing in higher growth expectations from its recent acquisitions, or perhaps valuing its distribution model differently.

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However, TXO demonstrates a remarkably conservative balance sheet, with a TTM Debt-to-Equity ratio of 0.03, considerably lower than EOG (0.17), ConocoPhillips (0.39), Devon Energy (0.63), and Occidental Petroleum (0.79). This low leverage provides financial flexibility, although it is important to note that the recent White Rock Energy acquisition, funded partly by Credit Facility borrowings, is expected to increase its net-debt-to-EBITDAX ratio to between 1.0 times and 1.5 times. This strategic use of debt for growth, while still within conservative limits, is a key aspect of its competitive response. TXO's competitive advantage lies in its regional expertise and focused exploitation of conventional assets, which can lead to operational efficiencies and a streamlined approach in its core basins. This contrasts with the broader, often more complex and capital-intensive operations of its larger rivals. While TXO may not match the scale or technological R&D budgets of the supermajors, its agility and deep local knowledge allow it to effectively compete in its niche. Barriers to entry in the E&P sector, such as high capital requirements, extensive regulatory approvals, and the need for specialized technical expertise, also help protect TXO's established position by limiting new entrants. ## Financial Performance: Growth Amidst Shifting Tides TXO's recent financial performance reflects a company in a period of significant transformation, driven by its strategic acquisition strategy. For the three months ended June 30, 2025, total revenues surged to $89.88 million, marking a substantial 56.84% increase from $57.31 million in the prior-year quarter. Similarly, for the six months ended June 30, 2025, total revenues grew 39.65% to $174.20 million, up from $124.75 million in the same period of 2024. This robust revenue growth was primarily fueled by a significant increase in production volumes, largely attributable to the August 2024 acquisitions in the Williston Basin (EMEP and KFOC), which added 407 MBoe in Q2 2025 and 689 MBoe in H1 2025. These new assets successfully offset natural declines in TXO's legacy San Juan and Permian Basin properties. Additionally, a 73% increase in the average selling price of natural gas (excluding derivatives) contributed $5.70 million to Q2 revenues, and net gains from hedging activities added $14.50 million in Q2 2025. However, these gains were partially mitigated by a 23% decrease in the average selling price of oil (excluding derivatives) in Q2 2025. Despite strong top-line growth, profitability metrics shifted. The company reported an operating loss of $(3.72) million for the three months ended June 30, 2025, compared to an operating income of $10.11 million in the prior-year quarter. Net income for Q2 2025 was $0.14 million, a notable decrease from $2.81 million in Q2 2024. This shift was largely due to increased expenses associated with the expanded asset base. Production expenses rose by $6.90 million in Q2 2025, with $7.10 million attributable to the Williston Basin acquisitions. Depreciation, depletion, and amortization (DDA) saw a significant 110% increase to $21.70 million in Q2 2025, primarily due to the higher DDA rate of the newly acquired Williston Basin properties. General and administrative (G&A) expenses also increased by $4.90 million, driven by higher personnel costs and acquisition-related expenses.

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From a cash flow perspective, net cash provided by operating activities increased by $9.40 million to $57.46 million for the six months ended June 30, 2025, reflecting improved operating results before the effects of derivatives. However, net cash used in investing activities increased by $11.10 million to $49.57 million, primarily due to higher development costs and proved property acquisitions. This indicates that while operations are generating more cash, the company is actively reinvesting in its asset base. The "so what" for investors is that TXO is successfully growing its revenue and production base through strategic acquisitions, but this growth comes with increased operational and capital costs that are currently impacting short-term reported profitability. The long-term investment thesis hinges on the ability of these new assets to generate substantial, sustained cash flows to cover these costs and support distributions.

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## Liquidity and Capital Allocation: Fueling Growth and Distributions TXO's liquidity and capital resources are primarily derived from its operating cash flows and its senior secured Credit Facility. The company has been proactive in strengthening its financial flexibility to support its growth ambitions. On July 31, 2025, the Credit Facility was significantly amended (Amendment No. 5.00), increasing the borrowing base from $275 million to $410 million and extending its maturity to August 30, 2029. This expansion provides substantial headroom for future operations and strategic initiatives. A key funding event in May 2025 was a successful public offering of common units, which generated approximately $165.6 million in net proceeds, with an additional $23.9 million from the underwriters' full option exercise. These proceeds were strategically deployed to fund a portion of the cash consideration for the White Rock Energy (WRE) Acquisition and to repay outstanding borrowings under the Credit Facility. The remaining $233.8 million required to close the WRE Acquisition on July 31, 2025, was funded through additional borrowings under the expanded Credit Facility. Following this acquisition, TXO anticipates its net-debt-to-EBITDAX ratio to be between 1.0 times and 1.5 times, demonstrating a disciplined approach to leverage despite significant growth investments. The company's Credit Facility includes financial covenants, notably requiring a current ratio greater than 1.0x and a total net debt-to-EBITDAX ratio not exceeding 3.0x. TXO was in compliance with all debt covenants as of June 30, 2025, and management believes it possesses adequate liquidity for at least the next twelve months. For 2025, TXO has budgeted approximately $65 million for drilling, completion, and recompletion activities, with flexibility to adjust these expenditures based on market conditions. This capital allocation strategy, combined with its hedging program, is designed to support its "production and distribution enterprise" model. The board of directors declared a cash distribution of $0.45 per common unit for Q2 2025, payable on August 22, 2025, following a $0.61 per common unit distribution for Q1 2025. This commitment to distributions, even amidst significant capital deployment, is central to the investment thesis.

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## Risks and Outlook: Navigating Volatility and Inflation The outlook for TXO Partners is shaped by a confluence of strategic opportunities and macroeconomic headwinds. Management explicitly anticipates continued volatility in crude oil and natural gas markets, a factor that directly impacts the company's revenue and profitability. Furthermore, the company expects persistent inflationary pressures on its cost structure, affecting everything from salaries and wages to materials, freight, and energy. These cost increases are not expected to reverse in the short term, posing a challenge to margin expansion. The successful integration of the recent Williston Basin acquisitions, particularly the White Rock Energy assets, is paramount. While these acquisitions are expected to boost reserves and production, the integration process carries inherent risks and could introduce uncertainty to future distribution levels if not managed effectively. The company's ability to fund its ambitious capital expenditure program and maintain distributions is contingent on generating sufficient cash flow from operations and accessing capital on acceptable terms, which cannot be guaranteed in a dynamic market. Despite these challenges, TXO's management maintains a clear strategic vision. The company intends to employ a "dynamic allocation of funds" from its long-lived asset base to achieve the "highest projected economic returns on our capital budget, acquisition opportunities that fulfill our strategy, and cash distributions for the life of our legacy assets." This includes the flexibility to prioritize debt repayment or shift funds towards distributions based on market conditions. Based on current commodity prices and drilling success, management expects to fund its 2025 capital development programs and distributions from operating cash flow and Credit Facility borrowings. Analyst consensus estimates for Q2 2025 projected a loss of $0.02 per share on $81.09 million in revenue, while full-year 2025 estimates anticipate earnings of $0.77 per share on $372.59 million in revenue, reflecting a mixed but generally positive growth trajectory. The "so what" for investors is that TXO is actively pursuing a growth-oriented strategy to enhance its long-term distribution capacity, but this path requires careful execution in a volatile and inflationary environment. ## Conclusion TXO Partners is undergoing a significant transformation, strategically expanding its asset base through targeted acquisitions in the Williston Basin to bolster its "production and distribution partnership" model. This narrative is one of a company actively reshaping its future, leveraging its operational expertise in conventional reserves and a disciplined hedging strategy to generate stable cash flows for its unitholders. While recent acquisitions have driven substantial revenue growth, they have also introduced increased operating costs and a temporary shift to an operating loss, reflecting the investment phase of this expansion. The company's proactive capital management, highlighted by a successful public offering and an expanded Credit Facility, demonstrates a commitment to funding growth while maintaining a conservative financial posture. However, TXO operates in a competitive landscape dominated by larger players, and its ability to sustain its premium valuation and distribution yield will depend on the successful integration of its new assets and its continued ability to mitigate commodity price volatility and inflationary pressures. For discerning investors, TXO represents an opportunity to participate in a growth-oriented E&P company focused on consistent distributions, provided it can effectively execute its strategy and navigate the inherent complexities of the energy market.