Texas Pacific Land Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Record second-quarter performance with $188 million revenue, 33,200 boe/d royalty production, and an 89% adjusted EBITDA margin despite oil price weakness.
  • Negative Sentiment: Water sales revenue fell by $13 million sequentially as lower oil prices led operators to defer completion activity.
  • Positive Sentiment: Management highlights a long Permian runway with over 60,000 breakeven drilling locations, supported by efficiency gains like longer laterals, increased proppant intensity, and horseshoe wells.
  • Positive Sentiment: Phase 2B desalination plant in Orla, Texas is under construction and remains on track for year-end start-up at a 10,000 bbl/day capacity with unchanged CapEx.
  • Positive Sentiment: Strong financial position with $130 million free cash flow (up 12% YoY), a debt-free balance sheet, and readiness to deploy capital via buybacks, organic investments, or acquisitions.
AI Generated. May Contain Errors.
Earnings Conference Call
Texas Pacific Land Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Ladies and gentlemen, greetings and welcome to Texas Pacific Land Corporation Second Quarter twenty twenty five Earnings Conference 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.

Operator

Please go ahead.

Speaker 1

Thank you for joining us today for Texas Pacific Land Corporation's second quarter twenty twenty five earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10 Q with the Securities and Exchange Commission, which is available on the Investors section of the company's website at www.texaspecific.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 discussed today. We do not undertake any obligation to update our forward looking statements in light of new information or future events.

Speaker 1

For more detailed discussions of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our 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 at times refer to our company by its stock ticker TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Ty Glover TPL's Chief Financial Officer, Chris Stethem, and Executive Vice President of Texas Pacific Water Resources, Robert Crane.

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. The 2025 marked another quarter of record performance across TPL's major revenue streams and key performance indicators, showcasing the company's ability to prosper amid commodity price volatility. Average WTI Cushing oil price during the quarter averaged $64 per barrel, which was the lowest average oil benchmark price since the 2021. Despite this oil price weakness, TPL still set quarterly revenue records for produced water royalties and easements and other surface related income. Oil and gas royalty production of 33,200 barrels of oil equivalent per day also represents a company record.

Speaker 2

Even with our direct and indirect commodity price exposure, TPL still efficiently converted revenues to cash flow with second quarter adjusted EBITDA margin of 89%. Tariff uncertainty and OPEC's decision to reduce voluntary cuts were significant factors contributing towards slumping oil prices and sentiment, with WTI struggling to regain $70 Over the last few months, various operators have publicly signaled intention to reduce activity. According to Baker Hughes, Permian horizontal oil directed rig counts have declined over 20% from the peak in 2023. Because of this broader slowdown, we now hear more speculation about this idea of peak Permian. This

Speaker 3

is

Speaker 2

the notion that Permian production is soon set to forever be on a plateau or terminal decline. Given TPL's experience in Permian centric position, I'd like to spend some time in my prepared remarks to share our perspective. First, some stats to put things into context. The Permian spans millions of acres spread across West Texas and New Mexico, and it contains numerous high quality stacked pay formations. On a production basis, the Permian is oil and gas basin in the world, with oil production currently averaging approximately 6,500,000 barrels per day.

Speaker 2

The Permian accounts for roughly half of all U. S. Oil production, and it produces more than every OPEC nation other than Saudi Arabia. Just 10 ago, Permian production was less than 2,000,000 barrels of oil per day. The Permian also produces approximately 3,000,000 barrels per day of natural gas liquids, bringing its total liquids production to close to 10,000,000 barrels per day, which represents about 9% of total liquids supply globally.

Speaker 2

Simply put, the Permian is a major force in the global market. After such a remarkable run of resource development and combined with recent activity reduction, it might be easy to conclude that Permian geology is nearing exhaustion and past its peak. In our view, this is a misguided conclusion. First, a slowdown in activity due to lower oil prices should not be conflated as a slowdown due to limited drilling inventory. Upstream companies are still price sensitive.

Speaker 2

It is reasonable to slow down development when commodity prices have declined. This slowdown does not diminish or change how much resource remains underground. Preserving those reserves for when commodity prices are higher is a sensible strategy for upstream companies looking to maximize long term shareholder value, which brings me to my second point. From our perspective, the Permian still retains a long runway of undeveloped inventory. For example, a report published earlier this year by Enveris, which is a leading provider of oil and gas analytics, estimates that there are over 60,000 locations remaining with breakevens below $60 oil and $3 natural gas.

Speaker 2

This represents undeveloped resource upwards of 30,000,000,000 barrels of oil. For context, in 2024, the Permian turned to sales approximately 5,700 wells. Assuming that same pace, which would put the Permian on a growth trajectory, that would translate to approximately eleven years of drilling inventory just for the subset of wells that break even below $60 As you move up the oil price beyond $60 that would potentially pull in tens of thousands of additional economic locations, billions of barrels of additional resource, and years or decades worth of additional runway. Furthermore, these types of analysis are generally predicated on prevailing drilling and completion practices. Improvements in technology and operational efficiency can further extend the basin's longevity.

Speaker 2

As development techniques continue to evolve, which they consistently have since the advent of horizontal drilling and fracking, upstream companies will continue to drive breakeven economics lower and improve resource recovery. Past and ongoing advancements, such as increased fluid and proppant loading, produced water recycling, increased lateral length, simul fracs, and co completions are examples of industry innovation that have generally become standard practice for modern day Permian well development. To provide a specific example, for horizontal wells developed in Loving County, Texas in 2025 compared to 2015, you've seen Lateral lengths doubled to over 10,000 feet. Proppant intensity per foot increased over 50%. Fluid intensity per foot nearly doubled, all of which has resulted in a doubling of the NPV per well with an illustrative $60 oil and $3 gas price deck.

Speaker 2

Development trends for more recent periods show that operators continue to make impressive efficiency gains. For example, in 2023, the Permian averaged three twenty three horizontal rigs during the year, which then declined in 2024 to an average of two ninety six rigs, an eight percent decrease year over year. Despite the drop in rig counts, total drilled feet increased approximately 5% during the same period. This equates to an approximate year over year increase of 15% lateral feet drilled per rig. In other words, declining rig counts were more than offset by increased drilling efficiency.

Speaker 2

A more recent example of an exciting innovation by a major operator on our royalty acreage is the use of new lightweight proppants to enhance recovery factors. This operator has been utilizing this material derived from relatively low value refinery co products to drive improved recoveries up to 20%, and the operator has plans to deploy it in roughly a quarter of its Permian wells this year. In other more mature basins, such as the Eagle Ford and Bakken, you also see operators recomplete wells that have already been producing for a while. Economics for recompletions can be just as good, if not better, than for new drills. In the Permian, there have been upwards of tens of thousands of wells that have been completed years ago using older, less productive development techniques.

Speaker 2

Down the road, even if it might be decades away, recompletion in the Permian could shallow decline rates, further extend the basin's resource life, and ultimately allow the industry to recover significant incremental reserves. With current development techniques, only a fraction of oil reserves are recovered from shale, Whether through new profits, recompletions, or any other future advancements, even just a few percentage points improvement and recovery factors could mean billions of barrels of incremental future production. This is especially lucrative for royalty owners given that these incremental recoveries are pure upside without having to bear any of the cost to implement. It's a free call option on innovation. Another example of industry ingenuity are horseshoe wells.

Speaker 2

Horseshoe wells are basically a U shaped horizontal lateral. These are used when operators are unable to pool or unitize leasehold acreage to accommodate longer straight line laterals. What operators are doing instead of drilling one mile laterals within a section, they're drilling a U shaped or horseshoe shaped lateral that allows longer lateral length while staying within the leasehold boundaries. Horseshoe wells can also contribute to reduced surface footprint, which can be an advantage in areas with environmental concerns or limited surface availability. Though this is more operationally complex, it can save operators substantial capital and improve well economics by only having to drill one horseshoe well with, say, 10,000 lateral feet versus drilling two shorter straight line wells, each with their own vertical section and then 5,000 feet of lateral.

Speaker 2

Three years ago, we had zero horseshoe wells on TPL's royalty acreage. Today, TPL has 48 horseshoe wells by multiple operators across both the Midland and Delaware that are in various stages of development. This royalty acreage could have otherwise been stranded single sections, but with the advancement of horseshoe wells, these sections are now economic for operators to develop. The old patch will always find a way. Even today, with the Permian already the largest producing basin in the world, these evolving and improving development practices are allowing operators to pursue new formations while also pushing the boundaries of the basin, potentially adding significant incremental drilling inventory.

Speaker 2

Some notable recent examples include the emerging Barnett formation in the Midland Basin, the Harkey formation in Culberson County and the surrounding state line, and the Bone Springs in the Northwest Shelf of the Delaware. We're also seeing operators push the northern and eastern boundaries of the Northern Delaware and basically the entire Midland Basin boundaries on all sides. New developments in these formations and boundary extension trends are evident in new leasing activity from our acquired minerals portfolio primarily located in the Midland Basin. Leasing activity has increased meaningfully this year, and most of these were for unleased mineral assets where we originally had not ascribed any value to when we acquired the broader portfolios. Already the preeminent engine of global oil supply growth over the last decade, the Permian still fosters a vibrant entrepreneurial industry.

Speaker 2

We are constantly impressed by all the technology and innovation that occurs here, and we're excited to see operators still exploring new formations and new areas Longer term, as the oil cycle will inevitably turn upwards, the Permian will play a critical role towards satisfying the world's growing energy needs. And as the world will depend on the Permian to supply critical energy for many decades to come, TPL stands to benefit from our extensive footprint. There's arguably no better basin in the world to be in than the Permian, and there's undoubtedly no other public company in the Permian with TPL size and scale combined across royalties, surface, and water. Turning to our desalination efforts. We continue to make progress with our Phase 2B desalination facility.

Speaker 2

Recall, this will be a 10,000 barrel per day facility that will intake Permian produced water and output high quality freshwater in addition to a concentrated brine solution. We have broken ground on location in Orla, Texas. Most of the desalination equipment has been received and is on-site. We expect installation to take a few months, and we still anticipate the unit to begin taking produced water by year end. Our CapEx estimates related to the facility remain unchanged.

Speaker 2

We have made a number of process improvements since our previous prototype, and we look forward to bringing online the largest desalination facility in the Permian to date. In addition, we have submitted permit applications for both land application and environmental discharge, and we hope to procure regulatory approvals within the next few months. As a reminder, the Permian is now generating north of 23,000,000 barrels per day of produced water. Even if Permian oil production were to stay flat, we believe Permian produced water volumes could still grow by millions of barrels per day over the next few years due, first, to increased water to oil ratio as well as age, and second, to increased water cuts from the development of secondary benches. For TPL, we've been proactive across numerous fronts towards making sure we can provide the industry with essential produced water solutions.

Speaker 2

First, TPL's surface acreage still retains millions of barrels per day of additional in basin disposal capacity. From the beginning, we have been intentional in limiting the amount of disposal wells per section. With increased regulatory attention on surface and reservoir pressure gradients, our conservative approach to siting SWDs has allowed us to preserve ample injection capacity. Second, we have been proactively acquiring tens of thousands of acres of out of basin pore space. We currently have well over 100,000 barrels per day of produced water that is currently being injected into out of basin pore space that we own, and we expect that volume to continue growing for the foreseeable future.

Speaker 2

Third is the desalination and beneficial reuse efforts that I just discussed. Conceptually, if it works economically at scale, this would reduce the amount of produced water that would need to be injected subsurface while also providing a valuable freshwater stream that could potentially be repurposed for power and data center cooling, hydrogen production, or a number of other industrial activities. Today, TPL already touches and generates royalties on over 4,000,000 barrels per day of produced water. We believe with our industry leading and comprehensive solutions across in basin disposal, out of basin disposal, and desalination plus beneficial reuse that we are well positioned to capture a substantial amount of the produced water volume growth going forward. In conclusion, for TPL, we're not overly concerned with near term commodity price vacillations.

Speaker 2

We don't have a crystal ball and can't say for sure what commodity prices will be in the near term. However, we are certain that the Permian remains a world class resource and still retains plenty of latent growth. We do ultimately believe that current oil prices are well below longer term mid cycle oil prices. Despite today's broader macro uncertainty, TPL is still generating industry leading cash flow margins. We already have a leading royalty water and surface footprint across key areas of the Permian.

Speaker 2

We believe we're in a favored position, and should this down cycle persist, we're ready to deploy capital opportunistically, whether through substantial buybacks, organic investment or asset acquisitions or some combination thereof. With that, I'll hand the call over to Chris.

Speaker 3

Thanks, Ty. For the 2025, consolidated total revenue was $188,000,000 consolidated adjusted EBITDA was $166,000,000 Adjusted EBITDA margin was 89%. Free cash flow was $130,000,000 representing a 12% increase year over year. Performance year over year benefited from higher oil and gas royalty production, higher produced water royalties and higher easements and other surface related income otherwise known as SLM. Performance was partially offset by lower oil price realizations, which declined 21% year over year and lower water sales.

Speaker 3

Royalty production this quarter was approximately 33,200 barrels of oil equivalent per day, representing a 33% increase year over year and a 7% increase sequential quarter over quarter. As of quarter end, TPL had six net permitted wells, 11.1 net drilled but uncompleted wells and 5.1 net completed but not producing wells. Slim revenues of $36,000,000 was a company record, which benefited from $20,000,000 of pipeline easements. The increase in pipeline easements was due to numerous new large scale pipeline and infrastructure projects crossing our acreage. Produced water royalty revenues of $31,000,000 was also a company record.

Speaker 3

As Ty mentioned, our commercial efforts across out of basin pour space acquisitions and new contracting continue to allow TPL to capture and take advantage of the secular growth trend for Permian produced water. This quarter, we generated a royalty on over 4,000,000 barrels per day for the first time in our history. Water sales of $26,000,000 was down by $13,000,000 sequential quarter over quarter as lower oil prices during the quarter resulted in reduced activity and deferments by operator customers. We have seen operators bring back activity and many of the wells that were deferred during this quarter are now back at our completion schedules for the second half of this year. To conclude, TPL is in an excellent operating and financial position as the broader industry works through this current cycle.

Speaker 3

As Ty mentioned, commodity prices during this quarter led to the weakest realizations we've had since early twenty twenty one during the depths of COVID. However, comparing this quarter with the 2021 when oil last dipped below $60 we've since doubled our royalty production and source water revenue, tripled our produced water royalty volumes and quadrupled our slim revenue. We accomplished that while maintaining a debt free balance sheet and returning hundreds of millions of dollars of capital back to shareholders. We've proven we can grow the business through cycles whenever this commodity cycle inevitably turns upward, TPL is positioned to benefit to the fullest extent. And with that operator, we will now take questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for question.

Operator

Our first question comes from Derrick Whitfield with Texas Capital. Please go ahead.

Speaker 4

Good morning, guys, and thanks for your general thoughts on basin activity.

Speaker 3

Morning, Derek. Morning, Derek.

Speaker 4

For my, first question, I wanted to focus on your outlook for water resources over the second half. While you guys achieved company records with produced, water royalties, water sales were a bit weaker than anticipated. And as you guys think about kind of industry activity leveling out following a pretty material reduction in industry activity during the first half, How do you see each of those businesses performing in the second half?

Speaker 5

Derek, is Robert. I'll take that. I mean, when we look at Q2, I think it was two factors at Q2 that really led to the reduction we saw. One was definitely commodity price driven. We had one of our biggest customers delay activity until second half of the year and others reduce in certain areas.

Speaker 5

But I'd say Q2 was also combined with just kind of the spatial variation that you can see in completion activities. The decline we saw was not fully representative of commodity price decline. There's times, especially when you look at the consolidated acreage positions that have been a result of M and A over the last couple of years that there's times where spatial variation, a lot of activity is outside of your core areas given the acreage positions they hold now. So when we look at Q3, Q3 looks to be very strong. Q4, which happens a lot in Q4, it's kind of yet to be determined what that activity level is going to be.

Speaker 5

And I'll say probably Q4 is going to be more heavily dependent on commodity prices than any other quarter.

Speaker 4

Great. And maybe just staying on water, I'd love your thoughts on the ARRIS acquisition by Western. While we look at it and question it from a timing perspective as it relates to value recognition, it absolutely supports the Delaware water thesis, yours, and also the value of poor space in the basin. So again, love any thoughts you guys have there.

Speaker 2

Yeah. Derek, I agree. It it supports the the Delaware water thesis that we've been talking about for a while. I mean, you know, we've got a great relationship with ARIS and with Western, so we see this as a huge benefit for TPL. I think consolidation in the water midstream just creates more opportunity for land and forest based owners.

Speaker 4

Great. Maybe, again, Ty, you or Robert, I'd love for you to kind of speak to just your cost objectives for the 10,000 barrel per day desal facility. And more broadly, how important is this project to attracting power gen and data center opportunities to the Permian Basin?

Speaker 5

And Derek, you know this, this is Robert. I mean, when we chose a couple years ago when we saw the produced water, you know, I'd say challenges that we saw that we're going to come in the next five years, we tackled it in two ways. It was out of basin disposal and truly leading the effort on desalving in the Permian. When we look at this project, it's like I said, this is going to be the largest and while it's still research and development, we refer to it as research and development at scale. This is in the field, this is at scale, this is live decel that will be occurring.

Speaker 5

And it's extremely important for us, think it's extremely important for the industry. We know that it's still a multiyear effort to get beneficial reuse at true commercial scale in the hundreds of thousands, if not millions barrels a day. But we've taken that charge to help get it there. When we look at it in terms of in conjunction with data center cooling and cogen power, the opportunities are pretty astounding when you really look at it. And that's what we're going be not only testing this in the field at scale, but then also continuing to explore what those synergies are.

Speaker 5

Waste heat capture, which is a huge component that will be working in conjunction with cogen power and then also the data center cooling aspect of what we do. There's a lot of synergies in both. So, I mean, we're excited. We know the industry has to get there on Beneficial Reuse out of basin is really going to provide that buffer and those years that we need to bring this to scale for what we see beneficiaries can be 2028, 2029.

Speaker 4

That's great. And Robert, maybe just leaning in on the power generation opportunities. With the announcements we've seen with CPV, Basin, Ranch Energy and Lambridge this morning, Could you guys just maybe speak to your expectations for additional announcements based on the dialogue you're having with industry?

Speaker 5

I mean when you look at power generation in the Permian, you know, it makes 100% of sense. I mean, we have the largest component for cogen power and we have water that is truly not part of the water cycle. When we look at produced water and what produced water can do with cogen, all the ingredients are there. A lot of folks can say there's not a lot of sense to build transmission across the state of Texas to the Permian when you've got all the ingredients in the Permian to produce the power. I think the announcement that you saw today with Cotero yesterday with Cotero is the first of many that are going to come.

Speaker 5

Not only when we look at the power demand and power shortages that we're seeing in the Permian and before you look at data centers and things of that nature, it's real and the need for power just to power the upstream industry over the next couple of years. So the talks are continuing. They're accelerating and it's an exciting time for what we I think you'll see in the Permian in the next couple of years.

Speaker 4

Great color guys. I'll turn it back to the operator. Thanks Derek.

Operator

Thank you. At this time, there are no further questions. This concludes Texas Pacific Land Corporation's Second Quarter twenty twenty five Earnings Conference Call. Thank you for joining the call today. You may now disconnect your lines.

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