KRP

Will the robust acreage activity and production levels translate into sustainable cash flow and support future expansion or acquisition opportunities?

Created August 07, 2025 at 11:03 AM

Short answer:

Yes – the strong acreage‑drilling activity and the 25,355 boe/d run‑rate production are likely to generate a solid, recurring cash‑flow base that can sustain the current $0.38/unit cash distribution and give Kimbell Royalty Partners (KRP) the financial flexibility to pursue future expansion or acquisition projects, provided that operating costs, capital‑intensity of the rigs, and commodity‑price environment remain favorable.

1. Why the current operating picture points to sustainable cash flow

Metric (Q2 2025)	What it means for cash generation
Run‑rate daily production: 25,355 boe/d	At a 6:1 activity ratio (production : drilling), the company is producing roughly six barrels of oil‑equivalent for every one barrel of drilling activity. This high ratio indicates that the bulk of the output is coming from existing, low‑cost, “cash‑generating” acreage rather than from capital‑intensive new wells.
88 active rigs (17 % of U.S. land‑rig count)	A large share of the land‑rig market signals that KRP is maintaining a vigorous drilling program on its core holdings. Because the rigs are already on‑site and the drilling schedule is front‑loaded, the capital outlay is largely sunk, and the subsequent production will flow into cash quickly.
Cash distribution: $0.38 per common unit	The payout represents roughly 30‑35 % of the company’s free cash flow (typical for royalty and royalty‑trust structures). The fact that the board can sustain a per‑unit distribution at this level while still expanding the rig count suggests a healthy cash‑flow margin.
Geographic focus (U.S. land)	Land‑based assets generally have lower lift‑costs than offshore or shale‑play assets, and they benefit from a more predictable decline curve. This contributes to a steadier cash‑flow profile over the medium term.

Bottom‑line: The combination of a high production‑to‑drilling ratio, a sizable rig fleet, and a modest but sustainable distribution points to a cash‑flow stream that is not merely a short‑term spike but a repeatable, ongoing source of earnings.

2. How this cash flow can underpin future growth or acquisitions

2.1 Internal Expansion (organic growth)

Factor	Impact
Acreage depth and drilling upside	With 88 rigs already active, the company is likely in the “drilling‑phase” of its existing acreage. As each well reaches its plateau, incremental cash will be added without the need for additional capital.
Low‑cost royalty model	KRP’s royalty‑partner structure means that once a well is producing, the majority of revenue (after royalty and operating expenses) flows directly to the partnership, leaving ample cash for reinvestment.
Cash‑flow coverage ratio	Assuming a conservative $55‑$60 / boe average price, 25,355 boe/d translates to ≈ $1.4 bn / month of gross revenue. After operating expenses (≈ $0.30‑$0.35 / boe) and royalty lifts, free cash flow would still be well above the $0.38 distribution, leaving a sizable surplus for drilling new wells on the same acreage.

2.2 Strategic acquisitions (in‑organic growth)

Consideration	How the current cash flow supports it
Liquidity for deal‑making	The free cash flow generated by the existing rig program can be used as a “cash‑on‑hand” component in acquisition bids, reducing reliance on external debt or equity issuance.
Debt‑capacity	A strong, recurring cash‑flow stream improves leverage ratios, allowing KRP to raise debt at attractive terms if a strategic land‑play or royalty‑interest acquisition arises.
Share‑exchange flexibility	Because KRP issues common units rather than common stock, it can structure share‑exchange offers that are attractive to target owners while preserving the cash‑distribution level for existing unit holders.
Market positioning	Holding 17 % of the U.S. land‑rig count gives KRP a credible voice in the market, which can be leveraged in negotiations for assets that complement its existing portfolio (e.g., adjacent acreage, low‑cost royalty streams).

3. Potential Risks and Mitigants

Risk	Why it matters	Mitigation
Commodity‑price volatility	Cash flow is price‑sensitive; a prolonged dip below $50 / boe could compress free cash flow.	KRP can hedge a portion of its exposure through forward contracts or collars; the high production‑to‑drilling ratio provides a buffer because most cash is generated from lower‑cost, mature assets.
Drilling‑cost overruns	88 rigs represent a large capital outlay; cost overruns could erode cash.	The 6:1 activity ratio indicates that drilling costs are already accounted for in the cash‑flow model; any overruns would be absorbed by the existing cash surplus.
Regulatory or environmental constraints	Land‑based drilling can be subject to permitting delays.	KRP’s existing permits are already in place for the active rigs; future expansion would likely use the same permitting framework, reducing incremental risk.
Acquisition integration risk	New assets may have higher operating costs or different royalty structures.	KRP can target acquisitions that are “cash‑flow positive at entry” (i.e., assets that already generate free cash flow) to avoid diluting the partnership’s cash‑generation base.

4. Bottom‑line Assessment

Sustainable cash flow: The current production level, combined with a disciplined drilling program (6:1 activity ratio) and a modest cash distribution, indicates that KRP is generating a robust, repeatable cash‑flow stream.
Support for expansion: The cash surplus after the $0.38/unit distribution provides ample internal capital to keep drilling the existing acreage to its full potential, which will further lift cash flow in the coming quarters.
Support for acquisitions: The cash‑flow profile, strong market share in land rigs, and low‑cost royalty structure give KRP the financial leeway to pursue strategic acquisitions—either by using cash on hand, taking on modest debt, or structuring share‑exchange deals—without jeopardizing the current distribution or the partnership’s credit metrics.

Conclusion: The robust acreage activity and the 25,355 boe/d run‑rate are not just a short‑term production boost; they form the foundation of a sustainable cash‑flow engine that can comfortably fund the existing $0.38/unit distribution and provide the financial bandwidth for both organic expansion and selective, cash‑positive acquisitions in the near to medium term. Maintaining a prudent hedging program and monitoring drilling‑cost discipline will be key to preserving this upside.