Texas Pacific Land Corp

NYSE:TPL

Earnings Call Analysis

TPL Posts Strong Q3 with Increased Revenue

Texas Pacific Land Corporation reported a buoyant third quarter in 2023, achieving a 6% revenue rise from oil and gas royalties despite lower production, thanks to better prices for oil, natural gas, and NGLs, leading to a total revenue of $158 million and net income of $106 million. Surface leases, easements, materials (SLEM), and source water sales continued to perform well, with a 9% year-over-year increase in produced water revenues and record treated water sales. Though royalty production dipped by 12%, the realized price per barrel surged 19%. The company ended the quarter with $660 million in cash, adjusted EBITDA of $141 million (up 6%), and maintained its dividend at $3.25 per share while repurchasing $6 million worth of shares.

Navigating a Lumpy Production Landscape to Sustained Growth

In the narrative of this quarter, TPL’s performance tells a tale of resilience and strategy. Despite a 6% quarter-over-quarter growth in revenues, thanks to higher commodity prices, the company faced challenges with royalty production affected by the summer heat waves, causing infrastructure downtime and electricity challenges. However, these were temporary setbacks, and improvements are expected in natural gas takeaway capacity, indicating positive near-term trends in infrastructure and logistics, potentially easing constraints on development.

High Utilization and Demand in Water Resources and Surface Leasing

TPL's diversified assets in the water and surface leasing segments (SLEM) are a significant pillar of its income, with record revenues in treated water reflecting a robust demand. Though water sales dipped from the previous quarter's peak, the sales volumes of about 545,000 barrels per day in Q3 2023 indicate an efficient utilization of the company's resources. The produced water volume also grew, adding 9% more to the revenues compared to last year, a sign of the company’s expanding influence in its sector.

A Closer Look at Well Inventory and Production Outlook

Attention to detail is key for TPL's growth. At the end of Q3 2023, the well inventory showed encouraging signs: 6.7 net permits, 7.9 net drilled but uncompleted wells (DUCs), and 5.2 net completed wells, accumulating to a 29% increase from the last quarter. This backlog implies forthcoming production as they turn to sales. Although the production has seen lumpiness due to the co-development strategies by operators, where multiple wells are fracked together in a pad, TPL's management is optimistic. The quicker turnover from permit to production compared to previous years reinforces the positive outlook for future production.

Financial Steadiness Amid Production Volatility

In Q3 2023, TPL secured $158 million in revenue and netted $106 million. The adjusted EBITDA stood at $141 million, a 6% sequential increase, with an impressive adjusted EBITDA margin of about 89%. While royalty production witnessed a 12% dip, leading to a total production of roughly 21,800 barrels per day, the company's realized price per barrel saw a 19% increase to about $45. This balance between reduced production and higher realized prices reveals TPL's stability in volatile markets. Moreover, their commitment to shareholder returns continued with a $3.25 per share dividend and a $6 million share repurchase program.

Land Holdings Realignment and Capital Allocation Enhancements

TPL is continuously optimizing its portfolio. They divested surface acreage in Culberson County due to limited commercial opportunities imposed by a conservation easement. Conversely, the acquisition of additional pore space—for produced water and potential carbon sequestration—demonstrates the company's foresight in capitalizing on future value trends. Moreover, off-lease water sales remained robust, and being able to treat and resell the majority of produced water gathering strengthens its competitive position in the water business.

The Future: Easements, Material Sales, and Expansion

The company's easement revenues have primarily benefited from the buildout of pipeline infrastructure and material sales. With new sand mine operations and expansions into new areas demanding roadways and facilities, TPL anticipates continuous strong SLEM activity. The constructive developments in facilities correlate with TPL's evolving landscape, promising consistency as they ramp up operations in new territories and adapt to an increasing demand in pipeline easements and material sales.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to Texas Pacific Land Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shawn Amini, Finance and Investor Relations. Thank you, Mr. Amini, you may begin.

[Shawn Amini, executive]

Thank you for joining us today for Texas Pacific Land Corporation's Third Quarter 2023 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.texaspacific.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. 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. 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; and Chief Financial Officer, Chris Steddum. Management will make some prepared comments, after which we will open the call for questions. Now I will turn the call over to Ty.

[Tyler Glover, executive]

Good morning, everyone, and thank you for joining us today. TPL delivered another strong quarter, driven by improving commodity prices and continued performance of our surface and water 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 a constraint for development in the near term.

For our surface leases, easements and materials segment, which we refer to as SLEM, we continue to benefit from broad strength across our various endeavors there. 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, third quarter 2023 source water sales volumes of 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, of which TPL continues to capture a significant portion through our large AMI agreements across our surface.

To give some additional visibility on TPL'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 third quarter 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 second quarter 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. 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 that 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 '22, it was approximately 11 months and in 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. 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 third quarter 2023 new spud activity right around record levels on a gross and net basis. In addition, new permit activity on our acreage is elevated as third quarter 2023 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 underpin 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 almost any environment.

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.

[Chris Steddum, executive]

Thanks, Ty. Third quarter 2023 total consolidated revenue and net income were $158 million and $106 million, respectively. Total adjusted EBITDA was $141 million, 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 million, and we exited the quarter with approximately $660 million 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. 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 relative to the benchmark prices also improved. For this quarter, we have maintained our $3.25 per share dividend. We also spent approximately $6 million to repurchase approximately 3,600 shares of our common stock.

And with that, operator, we will now take questions.

[Operator]

[Operator Instructions] The first question comes from the line of Derrick Whitfield with Stifel.

[Derrick Whitfield, analyst]

For my first question, I wanted to focus on your Q3 production and your 6- to 12-month production trajectory. Regarding the quarter, Ty, do you have a sense on the production impact split between elevated temperatures and brownouts versus delayed TILs due to larger pad development?

And secondarily, with the record amount of completion on line-of-sight inventory as well as you have exiting the quarter, how should we think about the trajectory as we exit this year and into next?

[Tyler Glover, executive]

Derrick, will you repeat the first part of your question?

[Derrick Whitfield, analyst]

Sure. Just on the production impact for the quarter, you talked about in your prepared remarks, there were elevated temperatures and brownouts, and then you also talked about some delayed TILs due to larger pad development. So I wanted to get a sense from you if you have a view on the split between those 2 categories.

[Tyler Glover, executive]

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 until 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 electricity and some compressor stations going down. And I think you'll see some midstream operators talk about those issues as well this quarter.

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

[Chris Steddum, executive]

Yes. So Derrick, 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 Ty 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, we're going to see that production come to market to the benefit of TPL.

[Derrick Whitfield, analyst]

Terrific. And then maybe shifting over to capital. Could you comment on the surface acreage you sold and the importance of the disposal and groundwater rights purchase?

[Tyler Glover, executive]

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 has owned for a while.

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.

[Derrick Whitfield, analyst]

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 -- or how off-lease performed this quarter?

[Tyler Glover, executive]

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 third quarter was no different. I think as far as volumes on the treatment side, it was a record quarter for us.

And I would just mention too, that -- I 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. So 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 outside of our footprint. The water team has done a really good job of contracting additional sales and expanding our footprint, so...

[Operator]

Next question comes from the line of Hamed Khorsand with BWS Financial.

[Hamed Khorsand, analyst]

Just a follow-up on this water topic. Given production having declined this past quarter and how your customers or the land leasers 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?

[Tyler Glover, executive]

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.

[Hamed Khorsand, analyst]

Okay. And then 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?

[Tyler Glover, executive]

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 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. And so the same operators that we talk to that gave us that feedback were 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 bump in sand royalties. I think we were just under $1 million 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. And as we continue to expand our rock crushing activities and things like that, I think we'll continue to see strong SLEM activity in the future.

[Operator]

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