Texas Pacific Land - Q2 2023

Transcript

Operator (participant)

Good day, welcome to the Texas Pacific Land Corporation Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then two. Sorry, star then one on your touch-tone telephone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Shawn Amini, Vice President, Finance and Investor Relations. Please go ahead.

Shawn Amini (VP of Finance and Investor Relations)

Thank you for joining us today for Texas Pacific Land Corporation Second 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 Investor 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'll 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 (CEO)

Good morning, everyone. Thank you for joining us today. TPL 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. Unlike our oil and gas royalty revenues, which are predominantly derived from our perpetual royalty interest carved from a mineral estate, water and SLIM 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 interest companies. 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 contributes 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 that declined approximately 32% and 71% respectively. However, for that same quarterly year-over-year comparison, our source water revenues were up 69%, produced water revenues up 12%, and SLIM revenues were up 34%.

During this last quarter, these surface-derived revenue streams in aggregate comprised 48% of TPL's overall consolidated revenues and helped maintain strong consolidated earnings and free cash flow despite much lower commodity prices. For SLIM specifically, we're seeing broad strength across each subcategory. Pipeline easements, electric line easements, and caliche sales have been especially good as operators deplete DUC inventory and push development across broader areas. Our team of land agents and GIS specialists has done a tremendous job working with upstream, midstream, and other operators to accommodate their development needs and procure revenue opportunities for our surface. 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. Year to date, through 2Q 2023, total source, treated, and brokered water volumes are up 31% year-over-year.

For the last 12 months, we've sold nearly 200 million barrels of water. Many of those barrels were used to complete oil and gas wells on TPL Royalty Acreage. Produced water volumes during the quarter averaged approximately 2.3 million 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 second quarter 2023 are up 15% year-over-year. This was by far our best-ever quarterly revenue and free cash flow performance for the water business, contributing just under $60 million of high-margin revenue while only spending less than $2 million 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 of produced 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. Our operations team also deserves tremendous credit for procuring 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 services. During the last quarter, we spent approximately $20 million 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 in the Delaware Chancery Court to resolve a disagreement with Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors, LLC, and SoftVest, LP, over their voting commitments pursuant to a stockholders agreement with the company. We recently concluded the trial, we're now waiting for the court to issue its opinion. We expect that to happen in due course, we will update our stockholders when we have more to share.

The company recently announced that it has nominated Marguerite Woung-Chapman and Robert Roosa as two independent director nominees for election at the upcoming 2023 annual meeting of 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, have decided to retire and not stand for re-election at the 2023 annual meeting. Dave and John have been involved with the company for decades, back to its days as a trust. 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 expertise it has today.

They saw and understood the potential that TPL's unique assets possessed, and they took a chance to support a pivot to active management. On behalf of the entire management team here at TPL, 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.

Chris Steddum (CFO)

Thanks, Ty. Total revenues for the second quarter of 2023 were $161 million, representing a 10% increase from the first quarter 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 million and $105 million, respectively. Consolidated CapEx was $1.4 million, with most of the spend related to the water business. We ended the quarter with $609 million 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. 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 second quarter 2023 averaged realized oil price of $73 per barrel, which represents an approximate 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.

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&Ps that tend to own and/or commit to new infrastructure, which generally provides them better net backs 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 maintained our $3.25 per share dividend. We also spent approximately $20 million to repurchase approximately 14,000 shares. With that, operator, we will now take questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star and one on your telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, I will announce the first questioner, which is Derrick Whitfield from Stifel. Please go ahead.

Derrick Whitfield (Managing Director)

Good morning, all, and congrats on a strong quarter.

Tyler Glover (CEO)

Thanks, Derrick. Good morning, sir.

Derrick Whitfield (Managing Director)

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've 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.

Tyler Glover (CEO)

Yeah, look, the water team did a, a phenomenal job this past quarter. We saw strength, you know, across brackish water sales, treatment volumes, as, as well as produced water. You know, the team really pushed the limits of our system, delivering over 700,000 barrels a day. There's a couple of reasons for that increase in volume this quarter. One is increased activity in contracted areas of mutual interest. We've talked about those type of agreements in the past. You know, where, 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.

This quarter, over 60% of our water sales were off of TPL acreage, and that's purely from our business development team and water team, you know, expanding our reach beyond our footprint. I think we'll continue to see strong activity levels throughout the year. You know, this quarter may be a high watermark for the year, but when we look at our backlog of sales, you know, we continue to see some strength in the near term.

Derrick Whitfield (Managing Director)

That's great. 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?

Chris Steddum (CFO)

Derrick, I'll take that one. You know, when we look at the underlying production data, on kind of a production day basis, it, it, it supports what we're seeing. You know, 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 2023, we think that's probably a pretty good reflection of where the business is at. You know, as, as we've kind of stated, when we look at, at some of the near term inventory, DUCs completions, that are occurring, you know, we feel good that the, that the trajectory for the rest of the year should, should include some continued growth. That's how we're kind of thinking about it right now.

Derrick Whitfield (Managing Director)

Chris, maybe asked 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?

Chris Steddum (CFO)

Yeah, you know, Derrick, it's a good question, and those numbers always move around as production grows. You know, when we think about it, I think something probably in the, in the neighborhood of like eight net wells, give or take. That's probably about the level we would need for flat production and maintenance.

Derrick Whitfield (Managing Director)

All right. That's very helpful. 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?

Tyler Glover (CEO)

Yeah, that, that particular acquisition was a little over 12,000 acres in Andrews County along the state line. Non-marketed deal that we sourced through, you know, internal relationships here on the team. You know, really, when we buy Surface, we're thinking about, you know, how does that potential acquisition fit into our current footprint? Then, you know, also just our broader asset portfolio. Then, you know, really, what are the commercial opportunities that we see to take a, a raw piece of land like that and commercialize it? You know, what kind of Surface opportunities, source water, produce water, other, you know, next-gen opportunities we think we could commercialize, you know, both in, in near term and long term. We really like the optionality that that state line acreage gives us.

You know, if you look at some of our past Surface acquisitions, they've been along the state line. Those have been great investments. You know, with all of the activity that crosses the state line from New Mexico into Texas, we just feel like that's a, you know, really good option for us. You know, as far as the overall market, it's very competitive on the Royalty side right now. You know, on the Surface side, probably a little less competitive, you know, maybe fewer opportunities out there to take an asset that's been underutilized and, and, you know, realize some additional value through commercialization. We do think there's still a lot of opportunity left.

Derrick Whitfield (Managing Director)

That's great. Terrific, Tyler. Thanks for your time.

Chris Steddum (CFO)

Thank you, sir.

Operator (participant)

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

Hamed Khorsand (Founder, Principal, and Director of Research)

Good morning. My first question was on, 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. Why, why, why do you think Q2 was the high watermark?

Tyler Glover (CEO)

Well, look, I, I don't know that it necessarily will be the high watermark, but when you have a quarter like this, you know, looking at the, 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, in the fourth quarter. You know, to have a quarter like this, deliver these kind of volumes is, is fantastic. You know, the team continues to work hard to source additional barrels off of our footprint. We're also seeing, you know, increased activity on our footprint. I, I think sales will continue to be strong.

Hamed Khorsand (Founder, Principal, and Director of Research)

On the easement side of the business, I saw on the queue that you had an increase related to pipeline easement. Will that be recurring, that $2.4 million?

Tyler Glover (CEO)

Most of our pipeline easements are on, term agreements that will recur. I, I assume that's what you're asking, if, if those are recurring agreements.

Hamed Khorsand (Founder, Principal, and Director of Research)

Yeah.

Tyler Glover (CEO)

The majority of those are, yes.

Hamed Khorsand (Founder, Principal, and Director of Research)

Okay. Then what's the appetite to do more of these land acquisitions, and what's, what's the attractiveness that you, that you need, to do something like this again?

Tyler Glover (CEO)

Well, our appetite is strong. You know, we're always looking. Like I said earlier, we're looking for assets that have maybe yet to be commercialized or, you know, maybe, that's just been unrealized. You know, looking for something that, we feel like the expertise that we have here on our team can add some additional value through commercialization, you know, whether that's on the water side of the business, the SLIM side of the business, you know, 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 for.

Hamed Khorsand (Founder, Principal, and Director of Research)

Okay, great. Thank you.

Tyler Glover (CEO)

Thanks, Hamed.

Chris Steddum (CFO)

Thanks, Hamed.

Operator (participant)

This concludes our question-and-answer session. The conference is now concluded. Thank you for your-