Texas Pacific Land Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the Texas Pacific Land Corporation Second Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sean Eminy, Vice President, Finance and Investor Relations, please go ahead.

Speaker 1

Thank you for joining us today for Commission, which is available on the Investors section of the company's website at www.sexospacific.com. As a reminder, remarks made on today's conference call may include forward looking Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company'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.

Speaker 1

More information and reconciliations about these non GAAP financial measures are contained in our earnings release and SEC filings. Please also note, we may at times 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 Dunn. 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. Thank you for joining us today. PBL delivered an impressive quarter, capturing opportunities underpinned by robust Permian activity. We set new company records for quarterly oil and gas royalty production, source water revenues and produced water revenues. Easements and surface related income, which we refer to as SLIM, had its best quarterly revenue performance since 2019.

Speaker 2

Unlike our oil and gas royalty revenues, which are predominantly derived from our perpetual royalty interest carved from a mineral estate, Water and swim revenues originate from our ownership of the surface estate. That surface ownership is unique compared to other public oil and gas mineral royalty and lease Combining our surface ownership with active management, TPL extracts multiple incremental cash flow streams. These surface derived opportunities have been thoughtfully commercialized to maintain our capital light, high margin business philosophy, which ultimately contribute substantial Free cash flow to the overall entity, while also accelerating development of our oil and gas royalty interest. This most recent quarter is a great example of the built in hedges That protect TPL during periods of volatile commodity prices. Although oil and gas royalty production this quarter increased 26% year over year, Our oil and gas royalty revenues were still down 32% due to WTI Crude Oil and Henry Hub Natural Gas Prices They declined approximately 32% and 71% respectively.

Speaker 2

However, for that same quarterly year over year comparison, our Source water revenues were up 69%, produced water revenues up 12% and swim revenues were up 34%. During this last quarter, these surface derived revenue streams and aggregate comprised 48% of TPL's overall consolidated revenue And help to maintain strong consolidated earnings and free cash flow despite much lower commodity prices. For Slim specifically, we're seeing broad across each subcategory. Pipeline easements, electrifying easements and caliche sales have been especially good as operators Our team of land agents and GIS specialists Turning to water. During the quarter, we averaged over 700,000 barrels per day of source water sales volumes, driven by robust brackish and treated water demand.

Speaker 2

Year to date through Q2 2023, total source treated and brokered water volumes are up 31% year over year. For the last 12 months, we've sold nearly 200,000,000 barrels of water and many of those barrels were used to complete oil and gas wells on TPL royalty acreage. Produced water volumes during the quarter averaged approximately 2,300,000 barrels per day. Just as a reminder, TPL contracts with operators and other third parties for use of our surface for produced water facilities, including disposal wells, we generate a contracted fee for produced water barrels. Produced water volumes for Q2 2023 are up 15% year over year.

Speaker 2

This was by far our best ever Quarterly revenue and free cash flow performance for the Water business, contributing just under $60,000,000 of high margin revenue, while only spending less than $2,000,000 in CapEx. The cumulative efforts of prior capital investments and commercial negotiations going back to the inception of our dedicated in house water business in 2017 Are paying substantial dividends today. In many of our water contracts with operators, we have negotiated exclusive offtake to produce water across large areas of mutual interest. This is an important feature because it provides TPL holistic control over both source And produced water throughout the basin and across our surface. It allows us to continue sales of brackish water while also providing us incremental upside and opportunities to reuse and treat produced water for completion activities.

Speaker 2

Our operations team also deserves tremendous credit for During and moving water for our customers at volume levels we've never done before. TPL continues to demonstrate its ability to offer a full spectrum of reliable water During the last quarter, we spent approximately $20,000,000 to acquire 12,000 surface acres in Andrews County along the Texas, New Mexico State line. This acreage fits nicely with our current surface footprint and will provide incremental opportunities for our teams to pursue and commercialize. As previously disclosed on November 22, 2022, the company filed a complaint to Delaware Chancery Court to resolve the disagreement with Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, Softvest Advisors LLC and Softvest LT Over their voting commitment pursuant to a stockholders agreement with the company. We recently concluded the trial and we're now waiting for the court to issue its opinion.

Speaker 2

We expect that to happen in due course and we will update our stockholders when we have more to share. Also the company recently announced It has nominated Marguerite Wong Chapman and Robert Russa as 2 independent director nominees for election at the upcoming 2023 Annual Meeting with Stockholders. Both candidates bring a strong mix of industry skills and experience. Current directors and co chairs of the Board, David Barry and John Norris I've decided to retire and not stand for reelection at the 2023 Annual Meeting. Dave and John have been involved with The company for decades back to its days as a trust.

Speaker 2

They have always been great stewards for the company and have played a pivotal role in helping the company achieve the Success it enjoys today. Without their support, TPL would not have a water or surface business or the professional administration anywhere near the scale and They saw and understood the potential that TPL's unique assets possess and they took a chance to support a pivot to active management. On behalf of the entire management team here at TPO, we are thankful for their service, guidance, leadership and friendship over the years And they will leave behind an exceptional legacy at TPL. With that, I'll turn the call over to Chris.

Speaker 3

Thanks, Ty. Total revenues for the Q2 of 2023 were $161,000,000 representing a 10% increase From the Q1 2023 revenues, as previously discussed, revenues benefited from higher royalty production, source water sales, Produced water royalties and SLIM revenues, though partially offset by lower oil and gas prices. Adjusted EBITDA And free cash flow for the quarter were $134,000,000 $105,000,000 respectively. Consolidated CapEx was $1,400,000 With most of the spend related to the water business, we ended the quarter with $609,000,000 of cash on the balance sheet, Royalty production of approximately 24,900 barrels of oil equivalent per day represents a 19% increase on a sequential quarter basis. Although we continue to maintain that individual quarterly production figures can be lumpy, the underlying production on our royalty acreage continues to trend upward.

Speaker 3

This is further supported by new well data as recent permits, spuds and completions remain high across both our Midland and Delaware footprints. In particular, activity in Central Midland, Loving, Reeves and Culberson Counties are especially strong. Our oil price realizations remain high With Q2 2023 average realized oil price of $73 per barrel, which represents 100% realization relative to WTI Cushing price per barrel. However, our natural gas And natural gas liquids realizations weakened this quarter relative to prior quarter realizations. Infrastructure constraints and downtime among other factors Continued to suppress local West Texas price realizations for many operators.

Speaker 3

For TPL, this is somewhat mitigated As we benefit from additional infrastructure build out through our SLIM business as new pipelines, processing facilities And other logistics assets generate easement and lease opportunities. In addition, our royalty acreage is dominated by super majors and large Independent E and Ps that tend to own and or commit to new infrastructure, which generally provides them better netbacks compared to smaller public and private operators. As more infrastructure is developed and completed, we would expect our realizations to improve. For this quarter, we have Our $3.25 per share dividend, we also spent approximately $20,000,000 to repurchase approximately 14,000 shares. And with that operator, we will now take questions.

Operator

We will now begin the question and answer At this time, I will announce the first questioner, which is Derek Weisel from Stifel. Please go ahead.

Speaker 4

Good morning all and congrats on a strong quarter.

Speaker 2

Thanks Derek. Good morning. Thanks Derek.

Speaker 4

For my first question, I wanted to focus on the substantial strength in water resources this quarter With the understanding that source water is activity driven and this is the best quarter you posted in the history of the business, I wanted to ask if you could elaborate on some of the drivers underpinning the strength To allow us to better assess sustainability post Q2?

Speaker 2

Yes. Look, the water team did a phenomenal job this past quarter. We saw strength across brackish water sales, treatment volumes As well as produced water. The team really pushed the limits of our system delivering over 700,000 barrels a day. And there's a couple of reasons for that increase in volume this quarter.

Speaker 2

One is increased activity in Contracted areas of mutual interest. So we've talked about those type of agreements in the past, where we contract a big area of mutual interest with our operators and they're obligated to purchase water from us. The team also did a fantastic job of selling water outside of our footprint. So this quarter over 60% of our water sales were off of TPL acreage. And that's purely from our business development And water team expanding our reach beyond our footprint.

Speaker 2

So I think we'll continue to see Strong activity levels throughout the year. This quarter may be a high watermark for the year, but When we look at our backlog of sales, we continue to see some strength in the near term.

Speaker 4

That's great. And maybe along the same lines, how should we think about your production trajectory given the strength of Q2 production and your line of sight activity?

Speaker 3

Hey, Derek, I'll take that one. When we look at the underlying production data On kind of a production day basis, it supports what we're seeing. And like we said, Any given quarter can always be a little bit lumpy. But when we kind of look at the average of the first half of twenty twenty three, we think that's probably a pretty good reflection Of where the business is at. And as we've kind of stated when we look at some of the near term inventory DUCs completions that are occurring, we feel good that the trajectory for the rest of the year should include some continued growth.

Speaker 3

So that's how we're kind of thinking about it right now.

Speaker 4

Chris, maybe ask slightly differently from my side. When we look at your line of sight activity, How many of those net wells would be required to maintain production?

Speaker 3

Yes, Derek, it's a good question. And those numbers always move around as production grows. But when we think about it, I think something probably in the neighborhood of like 8 net wells, Give or take, that's probably about the level we would need for flat production and maintenance.

Speaker 4

All right. That's very helpful. And maybe just one final follow-up from my side. Regarding the Surface acquisition you announced in Q2, Could you briefly touch on the strategic importance of that area? And perhaps more broadly also just touch on the competitive landscape for surface and royalty opportunities across the basin?

Speaker 2

Yes. That particular acquisition, it was a little over 12,000 acres In Andrews County along the state line. So non marketed deal that we source through internal relationships here and the team. But really when we buy surface, we're thinking about how does that potential acquisition fit into our current footprint and then Also just our broader asset portfolio. And then really what are the commercial opportunities that we see to take a raw piece Land like that and commercialize it.

Speaker 2

So what kind of surface opportunities, source water, produce water, other next gen opportunities we think we could commercialize Call? Both in near term and long term. But we really like the optionality that that state line acreage gives us. If you look at some of our past surface Acquisitions, they've been along the state line. Those have been great investments.

Speaker 2

And with all of the activity that crosses the state line from New Mexico into Texas, we just feel like that's a really good option for us. I think the As far as the overall market, it's very competitive on the royalty side right now. On the surface side, probably A little less competitive, but maybe fewer opportunities out there to take an asset that's been underutilized and Realize some additional value through commercialization. But we do think there's still a lot of opportunity left.

Speaker 4

That's great. Terrific color. Thanks for your time.

Speaker 2

Thanks, Derek.

Operator

The next question comes from Hamed Khorsand from BWS Financial. Please go ahead.

Speaker 5

Good morning. So my first question was on the water side, what would the hindrance be to grow further? I mean, if you're Doing record pace now. You obviously have a greater capacity than you first thought. So why do you think Q2 was the high watermark?

Speaker 2

Well, look, I don't know that it necessarily will be the high watermark. But when you have a quarter like this, looking at the back half of the year, our water sales usually taper off towards the end of the year just Because there's less activity in the 4th quarter. But to have a quarter like this deliver these kind of volumes is fantastic. The team continues to work hard to source additional barrels off of our footprint. We're also seeing increased activity On our footprint.

Speaker 2

So I think sales will continue to be strong.

Speaker 5

And on the easement side of the business, I saw in the Q that you had an increase related to pipeline easement. Will that be recurring The $2,400,000

Speaker 2

So most of our pipeline easements are on term agreements that will Recur? I assume that's what you're asking if those are recurring agreements. The majority of those are, yes.

Speaker 5

Okay. And then what's the appetite to do more of these land acquisitions? And What's the attractiveness that you need to do something like this again?

Speaker 2

Well, our appetite is strong. We're always looking. Like I said earlier, we're looking for assets that have maybe yet To be commercialized or maybe that's just been unrealized. Looking for something that We feel like the expertise that we have here on our team can add some additional value through commercialization, whether that's On the water side of the business, the swim side of the business, just anything that we feel like the knowledge That we have in house could create some additional value or the relationships that we have throughout the industry could create some additional value. That's what we're looking

Speaker 5

Okay, great. Thank you.

Speaker 2

Thanks, Ahmad. Thanks, Ahmad.

Operator

This concludes our question and answer session. The conference has now concluded. Thank you

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Key Takeaways

  • TPL delivered a record quarter with highest-ever oil & gas royalty production, source water revenues, produced water revenues and SLIM (surface‐related) income since 2019, showcasing the value of its unique surface ownership model.
  • Although oil and gas royalty production rose 26% year-over-year, lower WTI and Henry Hub prices drove royalty revenues down 32%, but surface‐derived streams (source water, produced water and SLIM) comprised 48% of consolidated revenue, cushioning earnings and free cash flow.
  • The water business achieved historic volumes—over 700,000 barrels/day of source water (+69% YoY) and 2.3 million barrels/day of produced water (+15% YoY)—generating nearly $60 million of high‐margin revenue on less than $2 million of capex.
  • TPL spent ~$20 million to acquire 12,000 surface acres in Andrews County to expand commercial opportunities, advanced its water & SLIM infrastructure, and is awaiting a Delaware Chancery Court ruling in its dispute with Horizon Kinetics while nominating two new independent directors.
  • Financial highlights for Q2 2023 include $161 million in revenues (+10% QoQ), adjusted EBITDA of $134 million, free cash flow of $105 million, ~24.9k boe/day royalty production (+19% sequential), $609 million cash balance, a $3.25/share dividend and $20 million in share repurchases.
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Earnings Conference Call
Texas Pacific Land Q2 2023
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