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Item 7. Management’s Discussion and Analysis

2025-02-20 compared with 2024-02-22 · 49 added, 38 removed, 151 unchanged (37% of the section changed)

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A discussion of results of operations and liquidity and capital resources for fiscal year 2022 has been omitted from this report but may be found at “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 22, 2024, and is incorporated by reference in this report from such prior Annual Report on Form 10-K.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes.

We intend for this discussion to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from period to period, and the primary factors that accounted for those changes.

2024 Overview

Our results during 2023 were mainly affected by industrywide decreases in realized oil and natural gas sales prices versus 2022, partially offset by increases in Royalty Properties and NPI sales volumes from continued drilling activity in the Permian Basin and Bakken region and incremental production from 2022 and 2023 acquisitions.

Our results during 2024 were mainly driven by increases in Royalty Properties sales volumes from continued drilling activity in the Permian Basin and Bakken region and incremental production from 2023 and 2024 acquisitions, offset by decreases in NPI sales volumes, leasing activity, and lower industrywide realized natural gas sales prices versus 2023.

Significant results include the following:

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Distributions of $146.5 million to our limited partners;

Acquisition of mineral and royalty interests representing approximately 716 net royalty acres located in three counties in Texas in exchange for 494,000 common units representing limited partnership interests in the Partnership valued at $14.4 million and issued pursuant to the Partnership's registration statement on Form S-4;

Acquisition of mineral and royalty interests representing approximately 568 net royalty acres located in three counties across Texas in exchange for 374,000 common units representing limited partnership interests in the Partnership valued at $10.4 million and issued pursuant to the Partnership's registration statement on Form S-4;

Acquisition of mineral and royalty interests representing approximately 900 net royalty acres located in 13 counties and parishes across Louisiana, New Mexico, and Texas in exchange for 343,750 common units representing limited partnership interests in the Partnership valued at $11.0 million and issued pursuant to the Partnership's registration statement on Form S-4;

First payments on 1,052 gross and six net new wells on our Royalty Properties, of which 612 gross and two net wells were attributable to our 2022 and 2023 acquisitions, and 126 gross and four net new wells on our NPI Properties.

The wells were located in 65 counties and parishes in 11 states with the majority of the activity concentrated in the Bakken region, Permian Basin, and South Texas.

Included in these totals are wells in which we own both a royalty interest and a net profits interest.

Acquisition of mineral, royalty, and overriding royalty interests in producing and non-producing oil and natural gas properties representing approximately 14,225 net mineral acres located in 14 counties across New Mexico and Texas in exchange for 6,721,144 common units representing limited partnership interests in the Partnership valued at $202.6 million and issued pursuant to the Partnership's registration statements on Form S-4;

Acquisition of overriding royalty interests representing approximately 1,204 net royalty acres located in Weld County, Colorado in exchange for 530,000 common units representing limited partnership interests in the Partnership valued at $16.0 million and issued pursuant to the Partnership's registration statement on Form S-4;

Acquisition of mineral interests representing approximately 1,485 net royalty acres located in two counties in Colorado in exchange for 505,369 common units representing limited partnership interests in the Partnership valued at $17.0 million and issued pursuant to the Partnership's registration statement on Form S-4;

First payments on 1,943 gross and 12 net new wells on our Royalty Properties, of which 1,240 gross and eight net wells were attributable to our 2023 and 2024 acquisitions, and 146 gross and two net new wells on our NPI properties.

The wells were located in 53 counties and parishes in eight states with the majority of the activity concentrated in the Permian Basin, Bakken region, South Texas, and the Rockies.

Included in these totals are wells in which we own both a royalty interest and a net profits overriding royalty interest.

Wells with such overlapping interests are counted in both categories.

Total lease bonus of $12.7 million includes consummation of leases or extension of existing leases of our mineral interest in undeveloped properties located in 11 counties in three states.

Of the total, $11.8 million was attributable to a lease on 243 net acres in two tracts of land in Reagan County, Texas for $30,000 per acre and a 25% royalty and an amendment to an existing lease on two separate tracts of land also totaling 243 net acres in Reagan County, Texas for $18,750 per acre.

Critical Accounting Estimates

The Partnership’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United State (“U.S.

GAAP”), which requires us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements.

GAAP”), which requires us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our consolidated financial statements.

Actual results may differ from those estimates.

The Partnership’s accounting policies are summarized in Note 2 of the Notes to Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data”.

Management continually reviews our accounting policies, how they are applied, and how they are reported and disclosed in our financial statements.

Management continually reviews our accounting policies, how they are applied, and how they are reported and disclosed in our consolidated financial statements.

The following items require significant estimation or judgment:

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Comparison of the years ended December 31, 2024 and 2023

The increase in oil sales volumes attributable to our Royalty Properties during 2023 versus 2022 is primarily a result of higher suspense releases on new wells in the Permian Basin, and Bakken region and higher suspense releases on new wells and increased production from acquired wells in South Texas, partially offset by decreased production in the Permian Basin, Bakken region, and the Rockies.

The increase in natural gas sales volumes attributable to our Royalty Properties during 2023 compared to 2022 is primarily a result of higher suspense releases on new wells in the Permian Basin, East Texas, and Mid-Continent and higher suspense releases on new wells and increased production from acquired wells in South Texas, partially offset by decreased production in the Permian Basin, Mid-Continent, and Southeast, lower suspense releases on new wells in the Rockies, and natural production declines in the Barnett Shale and Fayetteville Shale.

The increase in oil and natural gas sales volumes attributable to our NPI properties during 2023 is primarily a result of increased production and higher suspense releases on new wells in the Permian Basin and Bakken region.

The increase in lease bonus revenue from 2022 to 2023 is primarily attributable to receipt of approximately $11.8 million from a lease and lease amendment transaction executed on November 6, 2023, wherein the Partnership leased 243 net acres in two tracts of land in Reagan County, Texas for $30,000 per acre and a 25% royalty and amended an existing lease on two separate tracts of land also totaling 243 net acres in Reagan County, Texas for $18,750 per acre.

This is compared to receipt of approximately $7.3 million from a lease executed on September 30, 2022, wherein the Partnership leased 243 net acres in two tracts of land in Reagan County, Texas for $30,000 per acre and a 25% royalty.

Production taxes and operating expenses decreased a combined 5% from 2022 to 2023.

The decrease is primarily a result of lower proportionate production taxes due to lower oil and natural gas sales revenue attributable to our Royalty Properties resulting from lower realized oil and natural gas sales prices, partially offset by higher oil and natural gas volumes.

The increase in oil sales volumes attributable to our Royalty Properties during 2024 versus 2023 is primarily a result of higher suspense releases on new wells in the Permian Basin and Bakken region, suspense releases on first payments in the Permian Basin from wells acquired in the third quarter of 2024, higher suspense releases on first payments in the Rockies from wells acquired in the third quarter of 2024 and first quarters of 2024 and 2022, and increased baseline production in South Texas from wells acquired in 2023 and 2022, partially offset by lower suspense releases from first payments on acquired wells in South Texas and decreased baseline production in the Permian Basin, Bakken region, and the Rockies, particularly in the fourth quarter of 2024 compared to the same period of 2023.

The increase in natural gas sales volumes attributable to our Royalty Properties during 2024 compared to 2023 is primarily attributable to higher baseline production and higher suspense releases on new wells in the Permian Basin, suspense releases on first payments in the Permian Basin from wells acquired in the third quarter of 2024, higher suspense releases on first payments in the Rockies from wells acquired in the first and third quarters of 2024, higher suspense releases on first payments and increased baseline production in East Texas from wells acquired in 2022, and increased baseline production in the Mid-Continent, partially offset by decreased baseline production and lower suspense releases from first payments on acquired wells in South Texas and decreased production from legacy wells in the Rockies, Fayetteville Shale, Barnett Shale, and Southeast.

The decrease in oil sales volumes attributable to our NPI properties during 2024 versus 2023 is primarily the result of lower suspense releases on new wells in the Permian Basin, partially offset by increased baseline production in the Permian Basin and Bakken region and higher suspense releases on new wells in the Bakken region.

The decrease in natural gas sales volumes attributable to our NPI properties during 2024 compared to 2023 is primarily the result of lower suspense releases on new wells in the Permian Basin and Mid-Continent, partially offset by higher suspense releases on new wells in the Bakken region and increased baseline production in the Permian Basin, Bakken region, and Mid-Continent.

The decrease in lease bonus revenue from 2023 to 2024 is primarily attributable to receipt of $11.8 million from a lease and lease amendment transaction executed in 2023, wherein the Partnership leased 243 net acres in two tracts of land in Reagan County, Texas for $30,000 per acre and a 25% royalty and amended an existing lease on two separate tracts of land also totaling 243 net acres in Reagan County, Texas for $18,750 per acre.

Production taxes and operating expenses increased a combined 19% from 2023 to 2024.

The increase is primarily a result of higher proportionate oil production taxes due to higher oil sales revenue attributable to our Royalty Properties and higher proportionate post-production costs, such as compression, transportation, processing, and marketing, due to higher oil and natural gas sales volumes attributable to our Royalty Properties.

Depreciation, depletion and amortization increased 62% from 2023 to 2024.

We adjust our depletion rate each quarter for significant changes in our estimates of oil and natural gas reserves, including acquisitions.

Depletion is the amount of cost basis of oil and natural gas properties at the beginning of a period attributable to the volume of reserves extracted during such period, calculated on a units-of-production basis.

Estimates of proved developed producing reserves are a major component in the calculation of depletion.

We adjust our depletion rate each quarter for significant changes in our estimates of oil and natural gas reserves, including recent acquisitions and suspense releases on new wells.

General and administrative expenses increased 7% from 2023 to 2024.

The increase is primarily attributable to higher compensation expenses due to market adjustments and an expanded Operating Partnership equity program designed for employee retention, increased professional services fees, and one-time, non-recurring professional services expenses of $1.2 million related to an unsuccessful acquisition in the first nine months of 2023.

The increase is primarily attributable to higher compensation expenses due to market adjustments, increased bonuses and an expanded Equity Incentive Program designed for employee retention, and increased legal and other professional services fees, partially offset by a decrease resulting from one-time, non-recurring professional services expenses of $1.2 million related to an unsuccessful acquisition in the first nine months of 2023.

Net cash provided by operating activities decreased 5% from 2023 to 2024.

The decrease is primarily due to lower revenue receipts attributable to our Royalty Properties, net of production and operating expenses, and higher general and administrative expenses, partially offset by higher NPI payment receipts and higher lease bonus receipts.

The decrease is primarily due to lower NPI payment receipts and lower lease bonus receipts, partially offset by higher revenue receipts attributable to our Royalty Properties, net of production and operating expenses.

Acquisitions for Units

On September 29, 2023, pursuant to a non-taxable contribution and exchange agreement with an unrelated third party, the Partnership acquired mineral and royalty interests totaling approximately 716 net royalty acres located in three counties in Texas in exchange for 494,000 common units representing limited partnership interests in the Partnership valued at $14.4 million and issued pursuant to the Partnership’s registration statement on Form S-4.

On September 30, 2024, pursuant to a non-taxable contribution and exchange agreement with West Texas Minerals LLC, a Delaware limited liability company, Carrollton Mineral Partners, LP, a Texas limited partnership, Carrollton Mineral Partners Fund II, LP, a Texas limited partnership, Carrollton Mineral Partners III, LP, a Texas limited partnership, Carrollton Mineral Partners III-B, LP, a Texas limited partnership, Carrollton Mineral Partners IV, LP, a Texas limited partnership, CMP Permian, LP, a Texas limited partnership, CMP Glasscock, LP, a Texas limited partnership, and Carrollton Royalty, LP, a Texas limited partnership, the Partnership acquired mineral, royalty, and overriding royalty interests in producing and non-producing oil and natural gas properties representing approximately 14,225 net mineral acres located in 14 counties across New Mexico and Texas in exchange for 6,721,144 common units representing limited partnership interests in the Partnership valued at $202.6 million and issued pursuant to the Partnership’s registration statements on Form S-4.

We believe that the acquisition is considered complementary to our business.

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Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $8.8 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2024.

On August 31, 2023, pursuant to a non-taxable contribution and exchange agreement with multiple unrelated third parties, the Partnership acquired mineral and royalty interests totaling approximately 568 net royalty acres located in three counties in Texas in exchange for 374,000 common units representing limited partnership interests in the Partnership valued at $10.4 million and issued pursuant to the Partnership’s registration statement on Form S-4.

On September 30, 2024, pursuant to a non-taxable contribution and exchange agreement with an unrelated third party, the Partnership acquired overriding royalty interests totaling approximately 1,204 net royalty acres located in Weld County, Colorado in exchange for 530,000 common units representing limited partnership interests in the Partnership valued at $16.0 million and issued pursuant to the Partnership’s registration statement on Form S-4.

We believe that the acquisition is considered complementary to our business.

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Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $1.4 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2024.

On July 12, 2023, pursuant to a non-taxable contribution and exchange agreement with multiple unrelated third parties, the Partnership acquired mineral and royalty interests totaling approximately 900 net royalty acres located in 13 counties and parishes across Louisiana, New Mexico, and Texas in exchange for 343,750 common units representing limited partnership interests in the Partnership valued at $11.0 million and issued pursuant to the Partnership’s registration statement on Form S-4.

On March 28, 2024, pursuant to a non-taxable contribution and exchange agreement with multiple unrelated third parties, the Partnership acquired mineral interests totaling approximately 1,485 net royalty acres located in two counties in Colorado in exchange for 505,369 common units representing limited partnership interests in the Partnership valued at $17.0 million and issued pursuant to the Partnership’s registration statement on Form S-4.

We believe that the acquisition is considered complementary to our business.

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Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $4.4 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2024.

On September 30, 2022, pursuant to a non-taxable contribution and exchange agreement with Excess, the Partnership acquired mineral, royalty and overriding royalty interests totaling approximately 2,100 net royalty acres located in 12 counties across Texas and New Mexico in exchange for 816,719 common units representing limited partnership interests in the Partnership valued at $20.4 million and issued pursuant to the Partnership's registration statement on Form S-4.

We believe that the acquisition is considered complementary to our business.

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Accordingly, the cost of the acquisition was allocated on a relative fair value basis and transaction costs were capitalized as a component of the cost of the assets acquired.

Contributed cash delivered at closing, net of capitalized transaction costs paid, of $0.9 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2022.

Final settlement net cash received, net of capitalized transaction costs paid, of $0.5 million is included in the net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2023.

On March 31, 2022, pursuant to a non-taxable contribution and exchange agreement with multiple unrelated third parties, the Partnership acquired mineral and royalty interests representing approximately 3,600 net royalty acres located in 13 counties across Colorado, Louisiana, Ohio, Oklahoma, Pennsylvania, West Virginia and Wyoming in exchange for 570,000 common units representing limited partnership interests in the Partnership valued at $14.8 million and issued pursuant to the Partnership’s registration statement on Form S-4.

Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $0.9 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2023.

We believe that the acquisition is considered complementary to our business.

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Accordingly, the cost of the acquisition was allocated on a relative fair value basis and transaction costs were capitalized as a component of the cost of the assets acquired.

Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $0.8 million are included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2022.

Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $0.3 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2023.

Final settlement net cash received, net of capitalized transaction costs paid, of $0.2 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2024.

We believe that the acquisition is considered complementary to our business.

The transaction was accounted for as an acquisition of assets under U.S.

Accordingly, the cost of the acquisition was allocated on a relative fair value basis and transaction costs were capitalized as a component of the cost of the assets acquired.

Contributed cash delivered at closing and final settlement net cash received, net of capitalized transaction costs paid, of $0.5 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2023.

On September 30, 2022, pursuant to a non-taxable contribution and exchange agreement with Excess Energy, LLC, a Texas limited liability company, the Partnership acquired mineral, royalty and overriding royalty interests totaling approximately 2,100 net royalty acres located in 12 counties across Texas and New Mexico in exchange for 816,719 common units representing limited partnership interests in the Partnership valued at $20.4 million and issued pursuant to the Partnership's registration statement on Form S-4.

We believe that the acquisition is considered complementary to our business.

The transaction was accounted for as an acquisition of assets under U.S.

Accordingly, the cost of the acquisition was allocated on a relative fair value basis and transaction costs were capitalized as a component of the cost of the assets acquired.

Final settlement net cash received, net of capitalized transaction costs paid, of $0.5 million is included in net cash contributed in acquisitions on the consolidated statement of cash flows for the year ended December 31, 2023.

Texas Margin Tax

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We have not guaranteed the debt of any other party, nor do we have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt.

To the extent necessary to avoid unrelated business taxable income, our partnership agreement prohibits us from incurring indebtedness, excluding trade payables, in excess of $50,000 in the aggregate at any given time or which would constitute “acquisition indebtedness” (as defined in Section 514 of the Internal Revenue Code of 1986, as amended).

We currently expect to have sufficient liquidity to fund our distributions to unitholders and operations despite potential material uncertainties that may impact us as a result of the spread of COVID-19 and any ongoing variants and increased oil and natural gas market volatility caused by the Russian invasion of Ukraine, the conflict between Israel and Hamas and the recent rise in inflation and interest rates.

We currently expect to have sufficient liquidity to fund our distributions to unitholders and operations despite potential material uncertainties that may impact us as a result of increased oil and natural gas market volatility caused by ongoing global military conflicts, global supply chain disruptions and the recent rise in inflation and interest rates.

Although demand and market prices for oil and natural gas have remained strong due to the rising energy use and worldwide shortage of oil due to sanctions implemented on Russia, we cannot predict events that may lead to future price volatility.

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February 8, 2024

April 29, 2024

July 29, 2024

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Total distributions paid in 2024

January 29, 2024

February 3, 2025

February 13, 2025

In general, the limited partners are allocated 96% of the Royalty Properties’ net receipts and 99% of NPI net receipts.

Net Profits Interests

We receive monthly payments from the Operating Partnership equal to 96.97% of the net proceeds actually realized by the Operating Partnership from the properties underlying the Net Profits Interest (or “NPI”).

Net Profits Interest

We receive monthly payments from the Operating Partnership equal to 96.97% of the net proceeds realized by the Operating Partnership from the properties underlying the Net Profits Interest (or “NPI”).

The Operating Partnership retains the 3.03% balance of these net proceeds.

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Cash receipts attributable to the Partnership's NPI during the 2024 fourth quarter totaled $5.4 million.

Approximately 77% of these receipts reflect oil sales and natural gas sales during August 2023 through October 2023, and approximately 23% from prior sales periods.

Approximately 61% of these receipts reflect oil and natural gas sales during August 2024 through October 2024, and approximately 39% from prior sales periods.

The average indicated prices for oil and natural gas sales attributable to the NPI were $63.93/bbl and $1.24/mcf, respectively.

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In accordance with our partnership agreement, we bear all general and administrative and other overhead expenses subject to certain limitations.

We reimburse our General Partner for certain allocable costs, including rent, wages, salaries and employee benefit plans.

We reimburse our General Partner for certain allocable costs, including rent, wages, salaries and employee benefit plans that are not direct expenses.

This reimbursement is limited to an amount equal to the sum of 5% of our distributions plus certain costs previously paid.

Through December 31, 2023, the reimbursement amounts actually paid or accrued were less than the limitation.

For the year ended December 31, 2024, the reimbursement amounts actually paid or reserved did not exceed the limitation.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis