Kimbell Royalty Partners (KRP) Q2 2025: Rig Market Share Rises to 17% as Permian Activity Defies Industry Slowdown
Kimbell Royalty Partners expanded its U.S. land rig market share to 17% in Q2, outpacing industry-wide declines and signaling asset quality and acquisition discipline. The partnership’s diversified footprint, robust cash flow, and conservative balance sheet position it to capitalize on evolving M&A dynamics as growth expectations reset in the Permian. Management affirmed full-year guidance, underscoring confidence in both organic development and a broad opportunity set for accretive acquisitions.
Summary
- Rig Share Expansion: Kimbell’s acreage captured a larger share of active U.S. land rigs even as the total market contracted.
- Cost Discipline: Cash G&A per BOE beat guidance, reflecting operational efficiency and lower professional fees.
- Strategic Optionality: Leadership remains focused on diversified M&A while monitoring shifting Permian and gas market opportunities.
Performance Analysis
Despite a 7% industry-wide drop in U.S. land rig count, Kimbell’s acreage saw only a 2% decline in active rigs, with notable gains in the Permian Basin (up four rigs) and Haynesville (up five rigs). This resilience in drilling activity speaks to the partnership’s asset selection and the stickiness of development by large, well-capitalized operators. Net drilled but uncompleted wells (DUCs) increased by 9% quarter-over-quarter, especially in the Permian, setting up near-term production tailwinds.
On the financial front, cash G&A expense per BOE came in below the low end of guidance, driven by lower professional fees and ongoing efficiency gains. The partnership distributed 38 cents per common unit, with 75% of cash available for distribution returned to unitholders and the remainder allocated to debt reduction. Kimbell’s net debt to trailing 12-month adjusted EBITDA sits at a conservative 1.6x, further supported by increased borrowing capacity following the spring redetermination and redemption of half the Series A preferred units.
- Rig Activity Divergence: Kimbell’s acreage outperformed the broader market, highlighting portfolio quality and operator mix.
- Distribution Stability: The 38-cent payout, largely classified as return of capital, enhances after-tax returns for unitholders.
- Balance Sheet Flexibility: Expanded credit facility and reduced preferred equity provide headroom for future deals.
Management’s affirmation of full-year guidance and continued debt paydown reinforce confidence in both operational execution and capital allocation discipline heading into the second half of 2025.
Executive Commentary
"Our rig count remains robust and our market share of overall U.S. land rigs actively drilling increased by 1% to 17%... In the Permian Basin, our rig count actually increased by four rigs and Haynesville increased by five rigs, while the MidCon experienced a decline in drilling activity."
Bob Ravenous, Chairman and Chief Executive Officer
"We continue to maintain a conservative balance sheet and remain very comfortable with our strong financial position, the support of our expanding bank syndicate, and our financial flexibility... We remain confident about the prospects for continued robust development as we progress through 2025, given the number of rigs actively drilling on our acreage, especially in the Permian, as well as our line-of-sight wells materially exceeding our maintenance well count."
Davis Ravenous, President and Chief Financial Officer
Strategic Positioning
1. Rig Market Share and Asset Quality
Kimbell’s ability to increase its market share of active U.S. land rigs to 17%, despite an overall industry contraction, points to the strength and diversification of its mineral portfolio. The partnership’s multi-basin exposure and focus on high-quality acreage have made its rig activity more resilient than peers, particularly in the Permian and Haynesville. This outperformance is attributed to a disciplined acquisition strategy built over 25 years, targeting areas with above-average development prospects and operator stability.
2. Capital Allocation and Distribution Policy
The decision to allocate 75% of cash available for distribution to unitholders and 25% to debt reduction illustrates a balanced approach to capital returns and balance sheet management. The recent increase in the secured revolving credit facility and partial redemption of preferred units further simplify the capital structure and lower the cost of capital, providing flexibility for opportunistic M&A as market conditions evolve.
3. M&A Landscape and Opportunity Set
Management signaled a shift in the M&A environment, noting fewer Permian packages coming to market and sellers facing pressure to adjust cash flow multiples as growth expectations moderate. Kimbell remains agnostic to basin, focusing on accretive deals under $500 million, and continues to see an “incredible opportunity set” for acquisitions, particularly as private equity portfolios mature and valuation expectations normalize. Leadership is also open to operator partnerships but does not see them as a primary near-term priority.
4. Production Mix Evolution and Gas Exposure
With gas-directed activity increasing, Kimbell anticipates a gradual shift toward a gassier production mix if commodity prices remain favorable. However, management characterizes this transition as “lumpy” and not yet material, emphasizing that the portfolio remains diversified and able to capture upside across both oil and gas cycles.
5. Cost Structure and Operating Leverage
Cash G&A per BOE beat guidance, primarily due to lower professional fees and continued focus on operational efficiencies. Management expects G&A to remain at the lower end of guidance, supporting margin stability even as the company scales through acquisitions.
Key Considerations
Kimbell’s Q2 results underscore the advantages of a diversified mineral portfolio and disciplined capital allocation in a shifting upstream landscape. Investors should weigh the following:
- Rig Activity Outperformance: Kimbell’s acreage is attracting more drilling than the broader market, suggesting higher operator confidence and asset quality.
- Permian Market Cooling: Fewer Permian acquisition packages and lower growth expectations could pressure deal flow and multiples, but may also create buying opportunities for disciplined acquirers.
- Gas Mix Optionality: Increased gas-directed drilling offers upside if commodity prices remain supportive, though production mix changes may be gradual and uneven.
- Balance Sheet Strength: Expanded credit lines and lower leverage provide flexibility to pursue accretive M&A without sacrificing distribution stability.
- Cost Control Durability: Sustained low G&A per BOE is critical for maintaining margin and supporting payouts as the business grows.
Risks
Commodity price volatility remains a core risk, particularly as oil growth in the Permian slows and natural gas prices remain subject to cyclical swings. Acquisition discipline will be tested as sellers adjust to lower growth and cash flow multiples, while the pace of new deal flow may lag historical norms. Operational execution risk exists if drilling activity or development pace materially underperforms expectations, especially in key basins.
Forward Outlook
For Q3 2025, Kimbell guided to:
- Continued robust rig activity on its acreage, particularly in the Permian and Haynesville
- Cash G&A per BOE at the low end of the guidance range
For full-year 2025, management affirmed guidance:
- Production and financial targets as previously disclosed in Q4 2024
Management emphasized:
- Confidence in organic growth from existing inventory and active rigs
- Ongoing evaluation of M&A opportunities across all basins, with a focus on accretive, sub-$500 million deals
Takeaways
Kimbell’s Q2 performance highlights the value of asset quality, operational discipline, and capital flexibility as the royalty sector adapts to a new growth reality.
- Asset Quality Drives Outperformance: The partnership’s diversified and carefully acquired footprint continues to attract above-market drilling activity, supporting future production and cash flow.
- M&A and Capital Allocation Discipline: Management’s balanced approach to distributions, debt reduction, and opportunistic deal-making positions Kimbell to benefit as industry valuations reset.
- Watch for Gas Mix Shift and Deal Flow: Investors should monitor the evolution of production mix and the pace of new acquisitions as market conditions and commodity prices evolve.
Conclusion
Kimbell Royalty Partners navigated a challenging industry backdrop by expanding rig market share, maintaining cost discipline, and preserving capital flexibility. As the upstream M&A landscape shifts and growth moderates in legacy basins, Kimbell’s diversified strategy and disciplined execution provide a foundation for continued value creation.
Industry Read-Through
Kimbell’s results offer a window into the evolving dynamics of the U.S. royalty and minerals space. As rig activity consolidates around higher-quality acreage and sellers adjust to a lower-growth environment, disciplined acquirers with balance sheet strength are poised to benefit. The cooling of Permian M&A and the potential for increased gas exposure signal a broader industry pivot toward diversification and capital efficiency. Other royalty and mineral owners, as well as upstream operators, should expect continued pressure on deal multiples and a premium for portfolios that can demonstrate resilient rig activity and operator commitment.