10-Q: Kimbell Royalty Partners Reports Strong Q2 Net Income

Kimbell Royalty Partners announced its second-quarter 2025 financial results, highlighting increased net income and strategic acquisitions despite a slight dip in oil and NGL revenues.

Summary

• Net income for the three months ended June 30, 2025, increased significantly to $26.7 million, up from $15.2 million in the same period of 2024.
• Total revenues for Q2 2025 rose to $86.5 million, compared to $76.6 million in Q2 2024, primarily driven by a $9.3 million gain on commodity derivative instruments.
• Operating income for Q2 2025 was $37.8 million, a substantial increase from $23.9 million in Q2 2024.
• The company completed the Boren Acquisition of mineral and royalty interests for approximately $230.4 million on January 17, 2025, funded partly by a $163.6 million equity offering.
• Kimbell Royalty Partners redeemed 162,500 Series A preferred units, representing 50% of the then-outstanding units, for $182.3 million on May 7, 2025.
• The borrowing base and aggregate elected commitments under the secured revolving credit facility were increased from $550.0 million to $625.0 million on May 1, 2025.
• A quarterly cash distribution of $0.38 per common unit was declared for Q2 2025, payable on August 25, 2025, which is a decrease from $0.49 in Q1 2024 and $0.42 in Q2 2024.
• Oil production volumes increased to 768,711 Bbls in Q2 2025 from 691,819 Bbls in Q2 2024, while natural gas production slightly decreased.
• Average prices received for oil and NGLs decreased in Q2 2025 compared to Q2 2024, while natural gas prices increased.

Sentiment

Score: 7

Explanation: The company demonstrated strong net income and operating income growth, driven by effective derivative strategies and increased lease bonus income. Strategic acquisitions and a strengthened credit facility borrowing base are positive. However, the decline in core oil/NGL revenues due to lower commodity prices and a reduced per-unit distribution are areas of concern, indicating a mixed but generally positive financial health and strategic execution.

Positives

• Net income for Q2 2025 increased by 75% to $26.7 million from $15.2 million in Q2 2024.
• Total revenues for Q2 2025 increased by 13% to $86.5 million from $76.6 million in Q2 2024.
• Operating income for Q2 2025 grew by 58% to $37.8 million from $23.9 million in Q2 2024.
• Realized a $9.3 million gain on commodity derivative instruments in Q2 2025, a significant improvement from a $1.0 million loss in Q2 2024.
• Lease bonus and other income increased by $1.8 million to $2.5 million in Q2 2025, indicating increased activity.
• Successfully completed the Boren Acquisition for approximately $230.4 million, expanding mineral and royalty interests.
• Raised $163.6 million in net proceeds from an equity offering, partially funding the Boren Acquisition.
• Redeemed 50% of outstanding Series A preferred units for $182.3 million, reducing future preferred equity obligations.
• Increased the borrowing base and aggregate elected commitments of the secured revolving credit facility from $550.0 million to $625.0 million, enhancing liquidity.
• Oil production volumes increased to 768,711 Bbls in Q2 2025 from 691,819 Bbls in Q2 2024, primarily due to the Boren Acquisition.
• NGL production volumes increased to 448,887 Bbls in Q2 2025 from 383,092 Bbls in Q2 2024.
• Average natural gas price received increased by 11.4% to $2.34 per Mcf in Q2 2025 from $2.10 per Mcf in Q2 2024.
• Depreciation and depletion expense decreased by $2.5 million to $30.5 million in Q2 2025, partly due to a prior year impairment reducing net capitalized oil and natural gas properties.
• General and administrative expenses decreased by $0.7 million to $9.6 million in Q2 2025, primarily due to lower unit-based compensation expense.
• The company was in compliance with all covenants included in its secured revolving credit facility as of June 30, 2025.

Negatives

• Oil, natural gas, and NGL revenues decreased by $2.3 million to $74.7 million in Q2 2025 compared to $77.0 million in Q2 2024, primarily due to lower average prices for oil and NGLs.
• Average oil price received decreased by 17.7% to $63.52 per Bbl in Q2 2025 from $77.20 per Bbl in Q2 2024.
• Average NGL price received decreased to $23.56 per Bbl in Q2 2025 from $24.75 per Bbl in Q2 2024.
• Combined production volumes for the six months ended June 30, 2025, decreased by 89,938 Boe compared to the same period in 2024.
• Interest expense increased by $2.0 million to $8.9 million in Q2 2025, primarily due to an increase in the overall debt balance from additional borrowings for preferred unit redemption.
• The quarterly cash distribution per common unit decreased to $0.38 for Q2 2025 from $0.42 in Q2 2024 and $0.49 in Q1 2024.
• The Baker Hughes United States Rotary Rig count decreased by 4.8% year-over-year and 7.3% quarter-over-quarter, indicating a slowdown in drilling activity.
• Total active rigs operating on the company's acreage decreased from 91 in June 2024 to 88 in June 2025.

Risks

• Ability to replace reserves.
• Ability to make, consummate, and integrate acquisitions of assets or businesses and realize the benefits or effects of any acquisitions or the timing, final purchase price or consummation of any acquisitions.
• Volatility of realized prices for oil, natural gas, and natural gas liquids (NGLs), including as a result of actions by, or disputes among or between, members of the Organization of Petroleum Exporting Countries (OPEC) and other foreign, oil-exporting countries.
• The level of production on properties.
• The level of drilling and completion activity by the operators of properties.
• Ability to forecast identified drilling locations, gross horizontal wells, drilling inventory, and estimates of reserves on properties and on properties sought to acquire.
• Regional supply and demand factors, delays or interruptions of production.
• Industry, economic, business, or political conditions, including energy and environmental proposals being considered and evaluated by the federal government and other regulating bodies.
• Trade policies and tensions, including changes in, or the imposition of, tariffs and/or trade barriers and the economic impacts, volatility, and uncertainty resulting therefrom, which may have varying effects on commodity prices.
• The continued threat of terrorism and the impact of military and other action and armed conflict, such as the current conflict between Russia and Ukraine and the conflict in the Middle East.
• Revisions to reserve estimates as a result of changes in commodity prices, decline curves, and other uncertainties.
• Impact of impairment expense on financial statements, particularly during periods of low commodity prices.
• Competition in the oil and natural gas industry generally and the mineral and royalty industry in particular.
• The ability of the operators of properties to obtain capital or financing needed for development and exploration operations.
• Title defects in the properties in which an interest is acquired.
• The availability or cost of rigs, completion crews, equipment, raw materials, supplies, oilfield services, or personnel to the operators of properties.
• Restrictions on or the availability of the use of water in the business of the operators of properties.
• The availability of transportation facilities.
• The ability of the operators of properties to comply with applicable governmental laws and regulations and to obtain permits and governmental approvals.
• Federal and state legislative and regulatory initiatives relating to the environment, hydraulic fracturing, tax laws, and other matters affecting the oil and gas industry, including regulation, proposals, and executive orders focused on addressing climate change.
• Future operating results.
• Exploration and development drilling prospects, inventories, projects, and programs.
• Operating hazards faced by the operators of properties.
• The ability of the operators of properties to keep pace with technological advancements.
• Uncertainties regarding United States federal income tax law, including the treatment of future earnings and distributions.
• Ability to maintain effective internal controls over financial reporting and disclosure controls and procedures.
• Inflation in wages and other costs has the potential to adversely affect results of operations, cash flows, and financial position by increasing the overall cost structure.
• The existence of inflation in the economy has the potential to result in higher interest rates, which could result in higher borrowing costs, supply shortages, increased costs of labor, and other similar effects.

Future Outlook

The Board of Directors intends to continue allocating a portion of cash available for distribution on common units to repay outstanding borrowings under the secured revolving credit facility. The company expects to pursue acquisitions of mineral and royalty interests from third parties and affiliates, intending to finance these largely through external sources such as borrowings under its secured revolving credit facility and the issuance of equity and debt securities. The company is currently evaluating the full impact of 'The One Big Beautiful Bill Act,' enacted July 4, 2025, on its consolidated financial statements. Commodity prices are expected to remain highly volatile due to ongoing international supply and demand imbalances and limited international storage capacity.

Management Comments

• "Our primary business objective is to provide increasing cash distributions to unitholders resulting from acquisitions from third parties, our Sponsors and the Contributing Parties and from organic growth through the continued development by working interest owners of the properties in which we own an interest."
• "The Board of Directors approved the allocation of 25% of our cash available for distribution on common units for the second quarter of 2025 for the repayment of $13.6 million in outstanding borrowings under our secured revolving credit facility during its determination of available cash for the second quarter of 2025."
• "With respect to future quarters, the Board of Directors intends to continue to allocate a portion of our cash available for distribution on common units to the repayment of outstanding borrowings under our secured revolving credit facility and may allocate such cash in other manners in which the Board of Directors determines to be appropriate at the time."
• "It is our intent, subject to market conditions, to finance acquisitions of mineral and royalty interests that increase our asset base largely through external sources, such as borrowings under our secured revolving credit facility and the issuance of equity and debt securities."

Industry Context

Global conflicts in Ukraine and the Middle East continue to cause regional instability, dramatic fluctuations in global financial markets, and increased volatility in worldwide oil supply and demand, impacting commodity prices. The Baker Hughes United States Rotary Rig count decreased by 4.8% year-over-year and 7.3% quarter-over-quarter, reflecting a general slowdown in drilling activity, primarily influenced by lower average oil prices, partially offset by higher natural gas prices. Average oil prices, as reported by the EIA, decreased by 14.5% for the six months ended June 30, 2025, compared to the prior year, while natural gas prices increased by 73.5%. Potential changes in U.S. government regulations and tariffs could further impact the oil and gas industry, affecting commodity demand, prices, and supply costs.

Comparison to Industry Standards

• The change in average prices received for oil and natural gas is consistent with prices experienced in the market, specifically when compared to the EIA average price decrease of 21.1% or $17.24 per Bbl of oil and an increase of 54.1% or $1.12 per Mcf of natural gas for the comparable periods.
• The Baker Hughes United States Rotary Rig count decreased by 4.8% to 533 active land rigs at June 30, 2025, compared to 560 active land rigs at June 30, 2024, and decreased by 7.3% compared to 575 active land rigs at March 31, 2025.

Corporate Governance

Legal Proceedings

• Management is not aware of any legal, environmental, or other commitments or contingencies that would have a material effect on the Partnership's financial condition, results of operations, or liquidity as of June 30, 2025.

Related Party Transactions

• The Partnership has a management services agreement with Kimbell Operating, which has a separate services agreement with K3 Royalties, LLC, for management, administrative, and operational services.
• Affiliates of the Partnership's Sponsors may identify, evaluate, and recommend acquisition opportunities to the Partnership.
• Payments made to K3 Royalties were $30,000 for the three months ended June 30, 2025, and $60,000 for the six months ended June 30, 2025.
• Reimbursements received from Rivercrest Capital Management, LLC for shared operating expenses were $41,732 for the three months ended June 30, 2025, and $82,888 for the six months ended June 30, 2025.

Stakeholder Impact

• **Shareholders (Common Unitholders):** Will receive a Q2 2025 cash distribution of $0.38 per common unit, a decrease from previous quarters. The recent equity offering diluted existing common units but funded a significant acquisition aimed at long-term growth.
• **Preferred Unitholders (Series A):** 50% of Series A preferred units were redeemed for $182.3 million, reducing future distribution obligations for the remaining units. Remaining preferred unitholders will receive a Q2 2025 distribution of approximately $2.4 million.
• **Employees/Directors:** Benefited from grants of restricted units under the A&R LTIP, which generally vest over three years, providing long-term incentives tied to company performance.
• **Creditors (Lenders):** The borrowing base on the secured revolving credit facility was increased to $625.0 million, and the company remains in compliance with all covenants. A portion of cash available for distribution is being allocated to debt repayment, indicating prudent financial management.
• **Operators:** Drilling activity on the company's acreage is dependent on these operators, and a decrease in overall rig counts could impact future production volumes and, consequently, royalty revenues.

Next Steps

• Pay Q2 2025 cash distribution of $0.38 per common unit on August 25, 2025.
• Pay Q2 2025 cash distribution of $0.380261 per OpCo common unit on August 25, 2025.
• Pay quarterly cash distribution on Series A preferred units of approximately $2.4 million for Q2 2025, subsequent to August 7, 2025, and prior to common unit distribution.
• Continue to monitor global conflicts and uncertainties for potential material impacts on operations and financial statements.
• Evaluate the full impact of 'The One Big Beautiful Bill Act' on consolidated financial statements.
• Continue to allocate a portion of cash available for distribution on common units to repay outstanding borrowings under the secured revolving credit facility.
• Pursue acquisitions of mineral and royalty interests from third parties, Sponsors, and Contributing Parties.
• Finance acquisitions largely through external sources like borrowings under the secured revolving credit facility and issuance of equity and debt securities.

Key Dates

Recommendation

While Kimbell Royalty Partners demonstrated strong net income growth and strategic execution through the Boren Acquisition and preferred unit redemption, the decline in per-unit distributions and the decrease in average oil prices and overall rig count present headwinds. The increased debt load, despite an expanded credit facility, warrants caution. The company's hedging strategy provided a significant boost to revenues this quarter, but reliance on derivatives for revenue gains can be volatile. The long-term strategy of acquisitions and organic growth is sound, but current market conditions and a reduced distribution suggest a 'Hold' position until clearer trends emerge in commodity prices and sustained distribution growth.

Keywords

Oil and Gas, Royalty Interests, Mineral Interests, Permian Basin, Mid-Continent, NGL, Energy, SEC Filing, 10-Q, Kimbell Royalty Partners, KRP, Commodity Prices, Acquisitions, Dividends, Distributions, Financial Results, Exploration and Production, Drilling, DUCs, Hedging, Credit Facility