Texas Pacific Land Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 6 speakers on the call.

Operator

Greetings and welcome to Texas Pacific Land Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Amini, Finance and Investor Relations.

Operator

Thank you, Mr. Amini. You may begin.

Speaker 1

Thank you for joining us today for Texas Specifically, LAND Corporation's Q3 2023 earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10 Q with the Securities and and Exchange Commission, which is available on the Investors section of the company's website at www.exaspecific.com. As a reminder, remarks made on today's conference call may include forward looking statements. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those yesterday. We do not undertake any obligation to update our forward looking statements in light of new information or future events.

Speaker 1

For a more detailed discussion of the factors that may affect For today's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will also be discussing certain non GAAP financial measures. More information and reconciliations about these non GAAP financial measures are contained in our earnings release and SEC filings. Please also note, we may have time to refer to our company by stock ticker, TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Ty Glover and Chief Financial Officer, Chris Gutten.

Speaker 1

Management will make some prepared comments, after which we will open the call for questions. Now I will turn the call over to Ty.

Speaker 2

Good morning, everyone, and thank you for joining us today. TPL delivered another strong quarter driven by improving commodity prices and Continued performance

Speaker 3

of our surface and water

Speaker 2

assets. Starting with oil and gas royalties, revenues increased 6% Sequential quarter over quarter as lower royalty production was more than offset by higher oil, natural gas and NGL prices. This past quarter, we've heard from operators that development activities were negatively impacted by infrastructure downtime and electricity challenges during the summer heat waves. With those issues having subsided and with some additional natural gas takeaway capacity coming online, we think infrastructure and logistics will be less of constraint for development in the near term. For our surface leases, easements and materials segment, which we refer to as SLIM, We continue to benefit from broad strength across our various endeavors there.

Speaker 2

In particular, pipeline easements have been robust driven by expanding infrastructure development in the Permian. For Source Water, year to date revenues have already eclipsed what we did in all of 2022, Though down from our record sales volumes off the prior sequential quarter, Q3 2023 source water sales volumes Approximately 545,000 barrels per day represent high utilization across our system. In particular demand for treated water remains elevated with this past quarter representing record revenues and volumes. On the produced water side, volumes have grown steadily and quarterly revenues are up 9% year over year. Produced water volumes continue to grow across the Permian, which TPL continues to capture a significant portion through our large AMI agreements across our surface.

Speaker 2

To give some additional visibility on PPL's production outlook, I wanted to take some time this morning to provide recent well development trends on our royalty acreage. Starting with our near term well inventory, at the end of the Q3 2023, TPL had 6.7 net permits, 7.9 net drilled but uncompleted wells also referred to as DUCs and 5.2 net completed wells. This near term inventory totals 19.9 net wells, which represents a 29% increase from Q2 2023 levels. Although we had relatively lower net new producing wells added in this most recent quarter, the higher balance of Completed wells represents a level much higher than what we've generally seen historically, which gives some visibility into near term production trends as those get turned to sales soon. For wells already turned to sales in 2023, the timing of completion to initial production has averaged around 20 days, which is significantly longer than prior year averages of approximately 3 to 5 days.

Speaker 2

We believe this timing delay is in large part attributable to more operators utilizing co development strategies as more wells are fracked together within a pad and then those group of wells are collectively not turned to sales until after the last well has been completed. All else being equal, the effect of this is that the production contribution from new wells becomes lumpier in the short term. It's also worth noting the timing of permit to spud and spud to completion have compressed considerably in 2023 versus prior years. In total, for wells turned to sales in 2023, the average permit to production timing is approximately 10 months, Whereas in 2022 is approximately 11 months and 2021 it was approximately 13 months. With respect to rigs, although rig counts in the overall Permian have declined by approximately 10% compared to last year, We've recently seen more rigs operating on TPL acreage.

Speaker 2

Last year at this time, we estimated that there were approximately 42 rigs operating on TPL acreage, Whereas today we estimate we currently have more than 50 rigs. These rig totals align with our well data with Q3 2023 new spot represents a record for new permits both on a gross and net basis. With a strong backlog of completed wells and inventory, High levels of ongoing new permits, accelerated development timing of converting permit to sales and currently supportive oil and natural gas prices, Those fundamentals in aggregate underpinned what we believe to be constructive backdrop for development on TPL royalty acreage and the Permian more broadly. Of course, commodity prices can change and development schedules can evolve. But as we've shown before, TPL is well positioned to succeed through most any environment.

Speaker 2

Before concluding my remarks, I also wanted to mention that next week TPL will be hosting its 2023 Annual Meeting in Dallas. I want to remind and encourage shareholders to review the proxy materials, which you can find on our website and on the SEC website and to submit votes. If anyone needs any assistance, please reach out to Investor Relations. With that, I'll turn the call over to Chris.

Speaker 3

Thanks, Ty. 3rd quarter 2023 total consolidated revenue and net income were $158,000,000 $106,000,000 respectively. Total adjusted EBITDA was $141,000,000 which is 6% higher compared to the prior sequential quarter and adjusted EBITDA margin was approximately 89%. During the quarter, the company benefited from higher commodity prices and lower operating expenses, though partially offset by lower royalty production and lower source water sales. Free cash flow was approximately $106,000,000 And we exited the quarter with approximately $660,000,000 of cash on the balance sheet, royalty production of approximately 21,800 barrels of oil equivalent per day represented a 12% decrease on a sequential quarter basis.

Speaker 3

Our realized price per barrel of oil equivalent increased 19% to approximately $45 Benchmark prices for each oil, gas and NGLs each rose over the prior sequential quarter and our realizations We also spent approximately $6,000,000 to repurchase approximately 3,600 shares of our common stock. And with that, operator, we will now take questions.

Operator

Thank you. We will now be conducting a question and answer The first question comes from the line of Derrick Whitfield with Stifel. Please go ahead.

Speaker 4

Good morning, all.

Speaker 2

Good morning, Derek. Hey,

Speaker 3

good morning, Derek.

Speaker 4

For my first question, I wanted to on your Q3 production and your 6 to 12 month production trajectory. Regarding the quarter, Hi, do you have a sense on the production impact split between elevated temperatures and brownouts versus delayed tills Due to larger pad development? And secondarily, with the record amount of completion in line of sight inventory, well as you have exiting the quarter, How should we think about the trajectory as we exit this year and into next?

Speaker 2

Hey, Derek, will you repeat the first part of your question?

Speaker 4

Sure. Just on the production impacts for the quarter, you talked about in your prepared remarks, There were elevated temperatures and brownouts and then you also talked about some delayed hills due to larger pad development. I wanted to get a sense from you if you have a view on the split between those two categories?

Speaker 2

I don't have the exact split, but I think we were probably more heavily impacted by the delay in TILs just because we had a lot of Mega Pads this last quarter, where we had quite a few wells being drilled from the same pad. And so like I mentioned in my prepared remarks, what happens there is they wait till all of those wells are completed to bring them online. And so That makes the near term production a little bit lumpier and that's what we saw this quarter. We did see Some effects of the heat waves with some problems with electricities and some compressor stations going down. And I think you'll see some midstream operators talk about those issues as well this quarter.

Speaker 2

For the second part of that question, Chris, you want to take that? Yes.

Speaker 3

So Derek to your point, I think we have had a little bit of lumpiness in our production over the last couple of quarters, Really strong last quarter, down a little bit this quarter. And I think as we always say, I mean, our view is we want to look toward the long term Trend because as Tay has mentioned, I think especially as you see some of these operators move these large pads, it's going to introduce A little more volatility in the production quarter to quarter. But I think in our view nothing has really changed And how we think about long term or let's say medium term production, everything still looks good. I think we still expect overall to see production growth In the coming year, again, like we said that really high amount of permits, the quicker turnaround of permits and DUCs, All of those things continue to be positive indicators. And I think as some of these big pads get brought online And we get through some of those temperature issues and pipeline constraint issues.

Speaker 3

We're going to see that production come to market to the benefit of TPL.

Speaker 4

Terrific. And then maybe shifting over to capital, could you comment on the surface Acreage you sold and the importance of disposal and groundwater rights you purchased?

Speaker 2

Yes. I'll take that one. The surface that we sold, so that acreage was In Culberson County, so this is way out like oil and gas fairway. Rangeland That one big issue that it had was it had a conservation easement on it. So this is acreage that wasn't part of the original land grant, but that the company's owned for A while.

Speaker 2

And so because of that conservation easement and because of the remoteness, we just didn't see any commercial opportunities and so we had the opportunity to sell it to a local rancher. And so that's kind of where we were at on that. So moving on to the pore space that we purchased, We feel like pore space is just becoming more and more valuable as we see produced water volumes continue to grow in the basin. And then also looking at other uses of pore space, carbon sequestration, things like that. We just feel like any time that we can add to our pore space inventory at attractive prices, then that's a really good opportunity and really good use for our capital.

Speaker 4

That makes sense. And one last if I could. During Q2 that was really a banner quarter for you guys in the water business based on the amount of Off lease activity you experienced, could you offer any perspective on how much off lease or how off lease performed this quarter?

Speaker 2

So really, I mean, right there in line with Last quarter definitely over half of our sales were off of our footprint. We also continue to see Increases in our treatment and so 3rd quarter was no different. I think as far as volumes on the treatment side was a And I would just mention too that I've talked about this a little bit in the past, but Most of the produced water gathering infrastructure on our land, we have the exclusive right to take water off of that system, treat it and resell it. Through good contract structure, we're very well positioned to keep providing brackish water and or Ramp up our treatment based on each operator's needs and we continue to grow further and further out of our footprint. The water team has done a really good job of contracting additional sales and expanding our footprint.

Speaker 4

Very helpful. Thanks for your time.

Speaker 2

Thanks, Derek. Thanks, Derek.

Operator

Thank you. Next question comes from the line of Hamed Khorsand with BWS Financials. Please go ahead.

Speaker 5

Hey, good morning. Just a follow-up on this water topic. Given production having declined this past quarter And how your customers or the land of leases are operating, Would that imply that water sales could actually ramp up as you see these wells come online, it was just a delay factor?

Speaker 2

So water sales is typically paralleled with Completions activity. But I think like Chris mentioned earlier, when you look at The wells that have been recently spud in this last quarter and our permit count being up so high, I think that is definitely an indicator that there will be a lot of completions activity in the coming quarters, which is really good for water sales Both on the brackish and treatment side as well as the produced water side of the business because once you get that flow back that water has got to go somewhere. And so to answer your question, the things that we've talked about on the call here are good indicators for future water revenue. Okay. And then

Speaker 5

what's been the big contributor to the easement revenue line this year? And How tangible is it that it will continue to stay with the business?

Speaker 2

So probably the biggest contributors this year, especially over the last couple of quarters have been pipeline easements and material sales. So we're seeing a lot of infrastructure build out, a lot of Gas gathering lines, we've had a nice ramp in transmission lines as well as new gas Connects and facilities, compressor stations, things like that. And I think that's going to continue. We're seeing operators move Further away from existing infrastructure and into new areas where there are requirements for new roads and gathering infrastructure and facilities. And that was one thing that we saw a little bit of a bottleneck on last quarter was there were some areas where Wells were not turned in line because of a lack of infrastructure.

Speaker 2

And so the same operators that we talked to that Gave us that feedback with the same operators that had a big ramp in easements for say like gas takeaway. And then on the material sales side, we've expanded caliche sales up into New Mexico, which has been a really nice bump for us. We've also got 2 of the sand mines that we signed towards the end of the last year that are actually active now and we've seen a nice And sand royalties, I think we were just under $1,000,000 for sand royalties this last quarter. So that's Progressing well. We've got a couple of other sand leases that should be operational soon.

Speaker 2

And as we continue to expand our rock crushing Activities and things like that. I think we'll continue to see a strong slim activity in the future. Okay, great. Thank you. Thanks, Matt.

Speaker 2

Thanks, Matt.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Powered by Quartr

Key Takeaways

  • Oil & Gas Royalties: Q3 revenues increased 6% sequentially as lower production was more than offset by higher oil, natural gas and NGL prices, while summer infrastructure downtime and electricity challenges are expected to ease with new gas takeaway capacity.
  • Surface, Easements & Materials (SLIM): Pipeline easements surged on Permian infrastructure build-out, source water segment delivered record Q3 revenues and volumes (~545,000 barrels/day), and produced water revenues grew 9% year-over-year.
  • Well Development Inventory: Near-term inventory climbed 29% QoQ to 19.9 net wells (6.7 permits, 7.9 DUCs, 5.2 completed), providing production visibility, although co-development pad strategies extended completion-to-sales timing to ~20 days, making output lumpier.
  • Accelerated Project Timing & Activity: Permit-to-production timing compressed to ~10 months in 2023 (vs. 11 in 2022 and 13 in 2021), rigs on TPL acreage increased to over 50 from ~42 a year ago, and Q3 saw record new permits on both gross and net bases.
  • Financial Highlights: Q3 total revenue was $158 M with net income of $106 M; adjusted EBITDA rose 6% to $141 M (89% margin), free cash flow was $106 M, cash balance was ~$660 M, and $6 M was spent on share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Texas Pacific Land Q3 2023
00:00 / 00:00