Hook / Thesis
Kimbell Royalty Partners (KRP) is a classic income-with-downside-protection story: the company collects royalty and mineral payments on oil, natural gas and NGL production across major U.S. basins, and it continues to pay meaningful quarterly distributions even after recent market weakness. At a last quoted price of $12.65 and trailing four-quarter distributions that sum to roughly $1.60, KRP currently yields north of 12% on paper. That eye-catching yield is the reason to look closer, not the reason to buy blindly.
My thesis: KRP is a tactical long for income-oriented investors who are patient and disciplined. The business produces strong operating cash flow, the balance sheet shows meaningful equity relative to liabilities, and the partnership continues to return cash to unitholders. Take a defined-sized position, place a stop to protect capital, and let distributions plus modest capital appreciation produce the return.
What the company does and why the market should care
Kimbell Royalty Partners owns mineral and royalty interests across multiple U.S. basins - Permian, Mid-Continent, Terryville/Cotton Valley/Haynesville, Appalachian, Eagle Ford, Bakken/Williston and DJ/Niobrara. The model is simple: KRP does not operate wells; it receives revenue as a percentage of production sold by operators and occasionally sells NGLs extracted during processing. That model means low operating capital expenditure and earnings tied mainly to production volumes and commodity prices - two variables that are relatively observable and often more predictable than running an operator business.
Why investors care: the partnership converts production royalties into distributable cash with minimal reinvestment needs. For investors seeking current income, royalty vehicles are attractive because operating cash flow is typically high relative to distributable cash - and KRP's reported operating cash flow is healthy relative to distributable payments.
Numbers that matter
Recent quarterly results show the cash engine is intact. For the quarter ended 09/30/2025 (Q3 2025):
- Revenues: $80.62 million
- Operating income: $28.85 million
- Net income: $22.32 million
- Net cash flow from operating activities: $62.763 million
- Net cash flow (overall): $5.479 million
For the preceding quarters (Q2 2025 and Q1 2025) the company reported revenues of $86.55 million and $84.21 million, and operating cash flow of $72.32 million and $54.15 million respectively. The quarterly numbers bounce around, which is normal for a business tied to commodity pricing and timing of receipts, but the operating cash flow is consistently large relative to the quarter's distribution amount.
Distributions (selected recent declarations):
- 11/06/2025 - $0.35 per unit (pay date 11/24/2025)
- 08/07/2025 - $0.38 per unit (pay date 08/25/2025)
- 05/08/2025 - $0.47 per unit (pay date 05/28/2025)
- 02/27/2025 - $0.40 per unit (pay date 03/25/2025)
Sum those four most recent payments and you get roughly $1.60 per unit annualized. At the most recent quoted price near $12.65 that implies a yield around 12.6% (1.60 / 12.65). That yield is the obvious headline - but don't let the yield mask the main point: coverage is supported by strong operating cash flow. In Q3 2025, operating cash flow was $62.8 million while distributions were materially smaller on a quarterly basis.
Balance sheet snapshot (Q3 2025):
- Total assets: $1,253,813,000
- Liabilities: $469,391,000
- Equity: $625,828,000
- Temporary / redeemable equity: $158,594,000
Liabilities are meaningful but not overwhelming relative to equity and asset base. That gives KRP room to weather a commodity downturn, though not without pain if producers sharply cut activity or default on payments.
Valuation framing
Market snapshot: last quotes show around $12.65 per unit (most recent trade prints near $12.17-$12.65 range). The dataset does not include a market capitalization value, so valuation here is a price-per-unit and yield story rather than a market-cap comparison. Historically KRP traded in the mid-teens; the one-year daily series shows a peak near $16 and sustained trading in the $13-$15 range before sliding toward the low $12s. So current price is nearer to the lows of the past 12 months.
Logic-based valuation: for royalty vehicles, two anchors matter - distributable cash flow and asset quality (reserve life, basin mix, operator credit). If KRP continues to generate ~ $60M+ of operating cash flow per quarter in the higher quarters and if distributions remain in the $0.35-$0.50 range quarterly, then the yield and a path back toward $15-$17 is reasonable. If operating cash flow materially drops, the market will reprice the unit lower quickly.
Catalysts (what could drive the trade)
- Stability or upside in commodity prices - even modest oil/gas strength increases distributable cash.
- Incremental asset acquisitions or tuck-ins that are accretive to distributable cash per unit.
- Quarterly results that show consistent operating cash flow and confirmed distribution coverage - that calms yield-focused investors.
- Improved operator activity in core basins (Permian, Eagle Ford) increasing volumes over time.
Trade plan - actionable
Trade direction: Long. Time horizon: swing (several weeks to 6 months). Risk level: medium.
Entry: establish a starter position on pullbacks in the $12.00 - $12.80 range. If you prefer a staggered approach, split buys: half at $12.80, half at $12.10.
Stops: initial hard stop at $10.80 (protects against a >15% downside from entry and against a distribution-risk repricing). For more conservative traders use $11.00 stop.
Targets: partial profit-taking at $15.50 (first target - near recent 3-6 month resistance), add/trim around $16.50-$17.50 as a stretch target if distribution coverage remains healthy and commodity tailwinds arrive.
Position sizing: because the unit is yield-rich but event-sensitive, keep allocation small to moderate in income portfolios - e.g., 2-5% of equity allocation depending on risk tolerance. This is not a core large-cap bond replacement; this is higher-yield, higher-volatility income.
Risks and counterarguments
- Distribution cut risk - the biggest single negative outcome is a distribution reduction. If operating cash flow weakens and management cuts the quarterly payout, the market price would likely fall sharply.
- Commodity and production volatility - royalties benefit from volumes and prices. A sustained drop in oil & gas prices or a step-down in drilling/activity by key operators in KRP's acreage lowers revenue quickly.
- Operator credit / collection risk - KRP collects from third-party operators. If a major operator faces financial stress, royalty receipts could be delayed or reduced.
- Leverage and structural equity - liabilities are non-trivial (roughly $469M) and the partnership has a sizable temporary/redeemable equity component. Structural financing changes could pressure distributions or cause dilution.
- Counterargument: the high yield can be a signal of real deterioration - the market may be pricing in a sustained decline in royalties or a distribution cut. If you assume commodity prices and production deteriorate materially, KRP's current yield is simply compensation for that risk, and higher-yield today can become total loss if earnings collapse.
What would change my mind
I would downgrade this trade if we saw any of the following:
- A confirmed distribution cut or a formal statement from management signalling they need to reduce the quarterly payout to preserve liquidity.
- Operating cash flow falling more than 20% quarter-over-quarter without an immediate and credible rebound explanation.
- Material write-downs or impairment to core mineral assets that indicate reserves are lower than previously modeled.
Conclusion
KRP looks like a trade for investors who value current income and are willing to own a cyclical royalty business. The partnership converts production into cash with low maintenance capex and has shown consistent operating cash flow in recent quarters (Q3 2025 operating cash flow $62.763M). The distribution profile provides a >10% yield at current prices, which is compelling but rightly accompanied by higher risk. Take a defined, modest-sized position, use the stop described above, and monitor distribution coverage and operator health closely. If distributions hold and commodity conditions stabilize, the yield will attract buyers and the unit should re-rate toward prior trading bands.
Disclosure: This is a trade idea, not personal financial advice. Position size and suitability depend on your portfolio and risk tolerance.