TPL - Texas Pacific Land Trust

[Philbert77]

Some small progress being made on the C-Corp transition. I cannot wait to have the opportunity to vote on the board of directors. There are a couple names I am quite confident won't last long.

 

https://www.tpltrust.com/investors/news-events/press-releases/detail/105/texas-pacific-land-trust-provides-update-on-corporate

[Foreign Tuffett]

Just five shale drillers—Exxon, Chevron, Occidental, and Crownquest—can drill new wells at a profit at $31 per barrel of West Texas Intermediate. [The first 3 are TPL producers]

 

The situation is more positive for drilled but uncompleted wells, according to Rystad. The consultancy said yesterday that as much as 80 percent of DUCs in the U.S. shale patch have a breakeven price of less than $25 per barrel of WTI. [TPL has nearly 500 DUCs]

 

https://oilprice.com/Latest-Energy-News/World-News/Only-5-Shale-Drillers-Are-Still-Profitable-At-31-Oil.html

 

Quote from XOM's most recent investor day slide deck regarding its Permian position: "Sustaining ~10% return at $35/bbl." So maybe it can eke out a low single digit profit margin at $31, but why consume acreage position (which XOM spent billions on) to break-even? It wouldn't, which is why it has stacked out 75% of its Permian rigs.

 

 

[Sombunall]

Because A) their other acreage is worse, or not profitable at all B) they have hedged the production at higher prices and C) all Permian acreage is not equal - there is a big difference between Delaware and Midland, maybe laying down Midland, but not so much the Delaware (where TPL is). TPL is a no-brainer here if you think the long-term oil price will average at least $40...

[Arski]

What are you thinking with a price of $580. Growth is still way higher than the EV/EBIT multiple of 21. I have already a position in TPL and understand the business for most part and like to take a 30+% grower to a 15% position in my portfolio, only it still is a commodity on which they are dependent. Future looks bright, but I suspect I'm a little too greedy also.

Thoughts?

[Sombunall]

I think it's cheap, even at $40 oil.

 

Best case for it is here:

 

https://horizonkinetics.com/wp-content/uploads/Q3-CVALUE-Review_FINAL.pdf

 

TPL starts on page 30.

 

 

[Arski]

Thanks, that was a great read and gave me some more clarity.

[mattee2264]

 

I think there is a certain degree of obsolescence risk. A lot of the early shale plays are far less productive and Permian probably will suffer the same eventual fate. That will be offset to some extent by higher prices but I am not sure it will be enough.

[Arski]

 

I think there is a certain degree of obsolescence risk. A lot of the early shale plays are far less productive and Permian probably will suffer the same eventual fate. That will be offset to some extent by higher prices but I am not sure it will be enough.

TPL will definitely be hurt by current prices and it is really difficult to predict the future oil price, but I'm still optimistic about future prices because we are going to need oil for a really long time and of course there will be more green energy etc. - so prices should go down - but oil will be more scarce over a decade and will have a price of $60 or higher with quite some swings. Oil prices have risen from $40 in 2016 to $55 in 2019 and TPL grew a tremendous rates; 79% CAGR for FCF (2016-2019) and 42% CAGR for EBITDA (2014-2019).

 

Besides that, TPL owns 900,000 surface acres in Texas. Texas is growing bigger and bigger in population and while these probably aren't the places you want to live, there is more place needed for businesses for example, or water utilities, infrastructure, electricity etc. So more people want to use TPL's land.

 

Also a problem Texas is facing is water shortage and let TPL just be the one who can help solve these problems. So I see quite some upside in their water business alone. Even if oil prices will stay this low they should be able to grow with double digits.

 

Love to hear if people totally or in some part disagree with me.

[SharperDingaan]

It's implied that todays TPL investment is long term (5-10 yrs) and strategic - over at least one full cycle. The secular analysis is valid, o/g is not going away over the next decade; but Permian basin consolidation suggests a go-forward approach of asset stripping via 'manufacturing'. All else equal, todays liquid rich production changing to gas rich production as the basin is drilled and depleted.

 

'Greening' simply means less liquids, and more gas demand over time. New vehicles that are electric/hybrid vs IC, reducing demand. Replacement electric grid, and more electricity to power those cars; produced by gas as the cleaner burning fuel. Rates of change, and adoption rates open to dispute - but more demand for gas over time. Permian basin gas 'by-product' reasonably assured of a market.

 

The 'downside' is that Permian oil is light, a gulf coast refiner needs to blend it with heavy oil to get a reasonable crack spread. Restrict the flow of heavy oil (VZ, Canada) and a refiner needs less Permian oil. The upside is close, and scalable, proximity to the refineries - allowing the refiner to inventory heavy oil, versus light.

 

Longer term, most would expect VZ (or alternatives) crude to come back online at some point, displacing cdn crude going into new Alberta refineries. Gulf coast refining cutting back over time as Alberta refineries takes some market share, and ageing plants are retired and not replaced.

 

Assume Alberta and Gulf Coast refiners are owned by the same entities. Displaced Gulf Coast throughput, earning a higher spread on 21st century Alberta plant, as variable cost/bbl is lower. Alberta offsetting the C02 via carbon trading and carbon sequester. Both Canada and the US demonstrating progress on climate change commitments.

 

Point? TPL is a great long-term strategic investment, but it's not because of the oil. It's the gas as growing by-product, and easy ability to 'manufacture' it.

 

SD

 

 

 

[bizaro86]

It's implied that todays TPL investment is long term (5-10 yrs) and strategic - over at least one full cycle. The secular analysis  is valid, o/g is not going away over the next decade; but Permian basin consolidation suggests a go-forward approach of asset stripping via 'manufacturing'. All else equal, todays liquid rich production changing to gas rich production as the basin is drilled and depleted.

 

'Greening' simply means less liquids, and more gas demand over time. New vehicles that are electric/hybrid vs IC, reducing demand. Replacement electric grid, and more electricity to power those cars; produced by gas as the cleaner burning fuel. Rates of change, and adoption rates open to dispute - but more demand for gas over time. Permian basin gas 'by-product' reasonably assured of a market.

 

The 'downside' is that Permian oil is light, a gulf coast refiner needs to blend it with heavy oil to get a reasonable crack spread. Restrict the flow of heavy oil (VZ, Canada) and a refiner needs less Permian oil. The upside is close, and scalable, proximity to the refineries - allowing the refiner can inventory heavy oil, versus light.

 

Longer term, most would expect VZ (or alternatives) crude to come back online at some point, displacing cdn crude going into new Alberta refineries. Gulf coast refining cutting back over time as Alberta refineries takes some market share, and ageing plants are retired and not replaced.

 

Assume Alberta and Gulf Coast refiners are owned by the same entities. Displaced Gulf Cost throughput, earning a higher spread on 21st century Alberta plant, as variable cost/bbl is lower. Alberta offsetting the C02 via carbon trading and carbon sequester, Both Canada and the US demonstrating progress on climate change commitments.

 

Point? TPL is a great long-term strategic investment, but it's not because of the oil. It's the gas as growing by-product, and easy ability to 'manufacture' it.

 

SD

 

I evaluated building refining assets in AB for one of Canada's largest oil companies. This was a few years ago, but the economics were terrible. Even if we assume refining utilization goes back up post covid such that refining investment makes sense, buying US refineries and upgrading them to heavy was way cheaper. And that was in an environment where US refineries were expensive to buy.

 

Unless you think the AB government is going to subsidize more new refineries I think its very unlikely any get built. And given how heartland has worked out so far I doubt there is much appetite for that.

[SharperDingaan]

Agreed re Alberta refineries, but this was pre Covid, pre Saudi-Alberta discussion, and pre Biden. Todays 'stars' line up very differently, and if the Keystone build is to continue, there has to be some flexibility. Rational parties, with common interests, aught to be able to come up with something. https://www.theglobeandmail.com/business/article-saudi-company-eyes-alberta-for-petrochemical-facility-as-province/

 

Our own thoughts are that upstream/downstream/sequesture integration is inevitable, and that it will come with carbon trading. Ultimately, the additional cost of that pollution makes the business case for investment in carbon removal. The various green lobbies become your friends, not your enemies.

 

Generational thing, but the old guard is a steadily declining minority.

Times are changing.

 

SD

 

 

 

 

[Arski]

I don't understand how this will impact TPL. Can you give some easy words clarity for me?

[SharperDingaan]

Frac ban applies to federal land only, TPL is private land. They can frac all they want.

TPL land is on the Permian o/g basin, frac base decline rates are typically 30-40%/yr. Liquids displaced by gas/water cut.

Assume a 3 yr payback (conservative), initial 1,000 bbl/d production, 1st yr base decline of 45%, 35% 2nd yr, 30% 3rd yr. Average 15%/yr water cut, 6:1 oil/gas conversion.

 

Start of yr 4. The well is paid for, but it is now producing primarily gas.

Oil production is 250 bbl/d [1000*(1-.45)*(1-.35)*(1-.30)]. Gas production is 2,484 MCF/d [1000*(.45-.15)*(1+(.35-.15))*(1+(.30-.15)) x 6]

 

Without a market for that gas, the well is either shut in or the gas flared off. But if there WERE a market for the gas (ie: new power generation for overnight vehicle charging)? - the well becomes a money spinner.

 

SD

 

 

[NoCalledStrikes]

 

I think there is a certain degree of obsolescence risk. A lot of the early shale plays are far less productive and Permian probably will suffer the same eventual fate. That will be offset to some extent by higher prices but I am not sure it will be enough.

TPL will definitely be hurt by current prices and it is really difficult to predict the future oil price, but I'm still optimistic about future prices because we are going to need oil for a really long time and of course there will be more green energy etc. - so prices should go down - but oil will be more scarce over a decade and will have a price of $60 or higher with quite some swings. Oil prices have risen from $40 in 2016 to $55 in 2019 and TPL grew a tremendous rates; 79% CAGR for FCF (2016-2019) and 42% CAGR for EBITDA (2014-2019).

 

Besides that, TPL owns 900,000 surface acres in Texas. Texas is growing bigger and bigger in population and while these probably aren't the places you want to live, there is more place needed for businesses for example, or water utilities, infrastructure, electricity etc. So more people want to use TPL's land.

 

Also a problem Texas is facing is water shortage and let TPL just be the one who can help solve these problems. So I see quite some upside in their water business alone. Even if oil prices will stay this low they should be able to grow with double digits.

 

Love to hear if people totally or in some part disagree with me.

 

This land is barren. It can barely support jack rabbits. You might run one head of cattle per 15 acre. Even if you found a business seeking a square mile of unoccupied land in the middle of nowhere, the buyer would have a hundred parcels to choose from.

[MrB]

 

I think there is a certain degree of obsolescence risk. A lot of the early shale plays are far less productive and Permian probably will suffer the same eventual fate. That will be offset to some extent by higher prices but I am not sure it will be enough.

TPL will definitely be hurt by current prices and it is really difficult to predict the future oil price, but I'm still optimistic about future prices because we are going to need oil for a really long time and of course there will be more green energy etc. - so prices should go down - but oil will be more scarce over a decade and will have a price of $60 or higher with quite some swings. Oil prices have risen from $40 in 2016 to $55 in 2019 and TPL grew a tremendous rates; 79% CAGR for FCF (2016-2019) and 42% CAGR for EBITDA (2014-2019).

 

Besides that, TPL owns 900,000 surface acres in Texas. Texas is growing bigger and bigger in population and while these probably aren't the places you want to live, there is more place needed for businesses for example, or water utilities, infrastructure, electricity etc. So more people want to use TPL's land.

 

Also a problem Texas is facing is water shortage and let TPL just be the one who can help solve these problems. So I see quite some upside in their water business alone. Even if oil prices will stay this low they should be able to grow with double digits.

 

Love to hear if people totally or in some part disagree with me.

 

This land is barren. It can barely support jack rabbits. You might run one head of cattle per 15 acre. Even if you found a business seeking a square mile of unoccupied land in the middle of nowhere, the buyer would have a hundred parcels to choose from.

In our analysis TPL's landbank value is similar to companies like Sears and Dillards; 80% of the value sits in 20% of the properties. Valuable land around El Paso and then generally speaking have good tracks where the county averages are pretty high. Point being that you don't have to dig to deep to find that not all their land is barren.

Having said that in light of the current valuation the land alone does not get you there.

[Castanza]

barren land could bode well for a solar field no?

[MrB]

barren land could bode well for a solar field no?

Solar in TX a bit like selling snow to an Eskimo? LOL

Already reports of them doing solar https://www.solarpowerworldonline.com/2020/01/rwe-renewables-completes-100-mw-texas-solar-project/

Also according to 10k do leasing for wind farms.

[Gregmal]

Yea this is kind of my problem with what TPL has recently turned into. They shouldn't be doing anything. They became one of the best and most unique assets in the market by function with the purpose of slowly selling land, collecting royalty revenue, and buying back stock. Now you have employees, and operations, and discussions about "lets get into this and that biz" and its just a totally different ballgame so to speak.

[MrB]

Yea this is kind of my problem with what TPL has recently turned into. They shouldn't be doing anything. They became one of the best and most unique assets in the market by function with the purpose of slowly selling land, collecting royalty revenue, and buying back stock. Now you have employees, and operations, and discussions about "lets get into this and that biz" and its just a totally different ballgame so to speak.

Wait till you get them in front of the sell side on a regular basis.

[DooDiligence]

Yea this is kind of my problem with what TPL has recently turned into. They shouldn't be doing anything. They became one of the best and most unique assets in the market by function with the purpose of slowly selling land, collecting royalty revenue, and buying back stock. Now you have employees, and operations, and discussions about "lets get into this and that biz" and its just a totally different ballgame so to speak.

Wait till you get them in front of the sell side on a regular basis.

 

Complaining about a potential catalyst to an egregious run up? Hmmm.

[Gregmal]

I guess if you are a newer shareholder and used to corporate structure/risk its no big deal, but for the past decade this thing did A-OK as is, delivering pretty remarkable returns in a very choppy O&G market during the same span. But yea, bring in employees, high paid executives, start up new divisions, Wall Streetify the thing...you know the saying...if it aint broke, fix it anyway.

[Gregmal]

For FY 2017 G&A was $1.8M. For FY 2018, it was $4.7M. Salaries and wages in 2018 where $18M vs 3.2M in 2017 and $1.2M for 2016.

 

Now we're at $7.2M for just 3 quarters on G&A and $27.2M for salaries and wages....but hey, its your money. Pretty soon we're going to be talking about "cycles" and headcount reduction, and bloated expenses...all the things that makes every other O&G name great!

[Arski]

For FY 2017 G&A was $1.8M. For FY 2018, it was $4.7M. Salaries and wages in 2018 where $18M vs 3.2M in 2017 and $1.2M for 2016.

 

Now we're at $7.2M for just 3 quarters on G&A and $27.2M for salaries and wages....but hey, its your money. Pretty soon we're going to be talking about "cycles" and headcount reduction, and bloated expenses...all the things that makes every other O&G name great!

Yeah that's definitely not good. They were talking about making TPL a corporation, that should be positive, right? Another question is if they will put it through though or was it just to attract investors?

[Gregmal]

Going the route of corporation is *potentially* positive. Its also potentially negative. Thats the issue. Its brings into the equation execution risk. When you are a trust you have a clear outline of what you need to be doing. Granted, part of the issue the activists had, is the current team trying to take credit for things they didnt/dont deserve credit for....but by amending the structure you are opening up a different can of worms.

[DooDiligence]

I get that changes like this present a lot of challenges & potential for missteps.

I also don't see why opportunities to monetize existing assets shouldn't be pursued.

 

Add in the possibility of the equity being promoted by sell side analysts & you may be able to accelerate your gains when Robin Hood investors pile on.

 

Or simply hold & see if management is able to continue shrinking the share count with increased cash flow. Horizon does have a vested interest in seeing the share price increase & as I see it, legacy management do not.

 

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I may look at it unfavorably if they announced they were going to set up a tool rental business, but this is different. They're using the assets they have. At some point it becomes more profitable to hatch your eggs than to simply sell & eat them.

 

From the last 10K

 

Our Water Services and Operations segment encompasses the business of providing full-service water offerings to

operators in the Permian Basin through our wholly owned subsidiary, TPWR, a single member LLC. Our significant surface ownership in West Texas provides TPWR with a unique opportunity to provide multiple full-service water offerings to operators.

 

These full-service water offerings include, but are not limited to, water sourcing, produced-water gathering/treatment, infrastructure development, disposal solutions, water tracking, analytics and well testing services. TPWR is committed to sustainable water development with significant focus on the large-scale implementation of recycled water operations.

 

Currently, the revenue streams of this segment principally consist of revenue generated from sales of sourced and treated water as well as revenue from produced water royalties. Prior to the formation of TPWR, we entered into agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct.

 

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For FY 2017 G&A was $1.8M vs water sales & royalties of $25.5mm

 

For FY 2018, it was $4.7M vs water sales & royalties of $63.9mm

 

While there is competition in the water service business in West Texas, we believe our position as a significant landowner of approximately 900,000 acres in West Texas gives us a unique advantage over our competitors who must negotiate with existing landowners to source water and then for the right of way to deliver the water to the end user.

 

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I'm in, which means that sensible investors should wait a month or so for the drop. It naturally follows that if I sell, you should wait for the run up.