Kimbell Royalty Partners (KRP): A Defensive Energy Play with Double-Digit Yield and Structural Resilience

Philip CarterFriday, Jun 6, 2025 7:05 am ET
94min read

In a sector prone to volatility,

Partners (KRP) has emerged as a standout defensive energy investment. Its royalty and mineral ownership model, robust 10.2% yield, and disciplined debt management create a rare combination of income stability and long-term growth potential. Q4 2024 results underscore its ability to thrive even as commodity prices fluctuate—a critical advantage in today's uncertain markets.

The Structural Edge of Royalty Ownership

KRP's core asset base—mineral and royalty interests—provides a unique moat in energy investing. Unlike operators that face drilling costs, production delays, and operational risks, KRP earns cash flow based purely on the extraction of hydrocarbons it owns. This model insulates it from the day-to-day headaches of oil and gas production, while still benefiting from rising volumes.

Q4 2024 results highlight this resilience:
- Run-rate production hit 24,082 Boe/d, a 23% increase over 2023, driven by strategic acquisitions.
- 2025 guidance projects a midpoint of 25,500 Boe/d, with upside to 27,000 Boe/d—a level that would mark a historic high.
- Drilling inventory efficiency has improved, requiring just 6.5 net wells annually to maintain flat production—a 20% reduction from prior needs.

The company's recent $230.4 million acquisition of Permian Basin assets exemplifies its growth strategy: expanding its footprint in high-margin, long-lived reserves while avoiding operational risk. Since its 2013 IPO, production has surged 733%, from 3,116 Boe/d to 25,946 Boe/d post-acquisition—a testament to the scalability of its model.

Defensive Strength in Volatile Markets

Energy markets are in a perpetual state of flux, with oil prices swinging between $60 and $90 per barrel in recent years. For KRP, this volatility is less impactful. The company's hedging program, which includes fixed prices of $71.55/barrel for oil in 2025, mitigates downside risk. Meanwhile, its cash flow stability supports a 10.2% annualized yield—one of the highest among energy income stocks—backed by a $0.40 per unit distribution.

Critically, KRP's financial discipline ensures this yield remains sustainable. Despite a $9.1M drop in Q4 Adjusted EBITDA (to $59.8M), it maintained distributions and continued debt reduction. Total debt has been slashed by $192M since May 2020, with net debt-to-EBITDA now at 0.8x—a conservative ratio by industry standards. This balance sheet resilience positions KRP to weather commodity downturns while continuing acquisitions. However, a backtest of a strategy buying KRP on earnings announcement dates and holding for 30 days revealed a negative CAGR of -0.53%, a maximum drawdown of -50.69%, and volatility of 29.83%, underscoring the importance of risk management even with its structural advantages.

Tax Efficiency and Long-Term Growth Catalysts

KRP's tax treatment further amplifies its appeal. Approximately 100% of its distributions are non-taxable in the near term, reducing investor tax liability. Over time, distributions may shift to 15–20% taxed dividends, but this structure remains more favorable than many energy MLPs or C-corporations.

Long-term growth hinges on KRP's ability to capitalize on the fragmented U.S. royalty sector—a $700 billion market with limited consolidation. CEO Robert Ravnaas has emphasized the company's role as a consolidator, leveraging its equity-raising flexibility and institutional investor support. The recent $230.4M acquisition, partially funded by an oversubscribed equity offering, demonstrates this strategy in action.

Investment Thesis: A Must-Hold for Income-Seekers

KRP checks all boxes for investors seeking energy exposure without operational risk:
1. Defensive Cash Flow: Royalty model shields against operational pitfalls.
2. High Yield: 10.2% distribution with tax efficiency.
3. Debt Discipline: Strong balance sheet to fund growth and dividends.
4. Growth Pipeline: Acquisition opportunities in a fragmented sector.

Risks and Considerations

No investment is without risk. KRP's performance is tied to commodity prices, and while hedges provide a buffer, prolonged low prices could pressure distributions. Additionally, the energy sector's regulatory and geopolitical risks remain omnipresent. A backtest of the strategy of buying on earnings announcement dates also revealed a maximum drawdown of 50.69%, highlighting the need for caution in volatile environments.

Final Take

Kimbell Royalty Partners is a rare blend of income security and growth potential. Its structural advantages—stable cash flow, low operational risk, and a proven acquisition track record—make it a compelling choice for investors navigating energy market volatility. While shorter-term strategies like buying on earnings announcement dates showed poor historical performance, KRP's long-term fundamentals remain robust. With a 23% production growth trajectory and a fortress balance sheet, KRP stands out as a defensive stalwart. For income-focused investors, this is a name to hold for years, though shorter-term trades should be approached with awareness of elevated risk.

Disclosure: This analysis is for informational purposes only and does not constitute investment advice. Readers should conduct their own research or consult a financial advisor before making investment decisions.

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