TPL 2.0 : Investor Preferences

Investor Preferences in C-Corp Conversion:

  1. No dilution.  Share issuance of any kind should be prohibited in the corporate charter.  Any changes to this policy should require a significant majority vote. 
  2. Share repurchases should remain the primary method of returning capital.
    1. If a dividend is necessary, it should be regular and consistent.
  3. Board members, including originating board members, must be voted upon by shareholders.  Board terms should be of reasonable length.
  4. Board should be of reasonable size so as to function healthily at all times. Independent directors should outnumber executive members. 
  5. Remain in “business of going out of business”.  Primary duty of corporation is return of capital via royalty collections and asset sales.
    1. State limitations on additional business activity such as new business ventures and additional land/royally acquisitions.  
  6. Executives shall be required to purchase shares via dedicated cash compensation and/or company loans to ensure that shareholder and management incentives are aligned.  Executives should be required to attain and maintain some material level of ownership. 
  7. Executive compensation should be simple and oriented towards long term results.
  8. Stock shall be split regularly so as to facilitate liquidity for repurchases.
  9. Transparency in reporting of results and material events should be commensurate with those expected of a $5B+ publicly traded corporation.
  10. Corporation must hold an annual meetings and be regularly open to investor communcation.

The list above was kept short deliberately.  Spin-offs, head count, and other business decisions (in my opinion) should be the responsibility of directors and management with interests and incentives that are aligned with those of shareholders (TPL 2.0).

Produced Water

High Country News: There’s a new boom in the Permian Basin — wastewater

In five years, the Permian is forecast to generate 32 million barrels of produced water per day, up from four million a day currently. By 2030, that number could rise to 38 million barrels daily, analysts say. And it will be increasingly difficult to dispose of the wastewater. Industry analysts say the basin will eventually run out of suitable places to drill disposal wells — another incentive for oil and gas operators to recycle.

From the Raymond James report linked above:

In our forecast and this piece, we have placed an undue focus on the Permian basin, particularly the Delaware. While most readers will know it is the heart of U.S. oil activity, there is a particular reason why it is top of mind for produced water. New wells in the Delaware Basin are coming online with water-oil-ratios as high as 10-to-1, a level of water production typically exhibited in a decades-old conventional well. Across the basin, initial WORs of 4 or even 6-to-1 are viewed as “normal.” This is in contrast to other prolific shale basins such as the Midland, Eagle Ford, and Bakken, where WORs start at a 1-2x range, and expand slowly to 2-5x. In the graph on the left, we forecast water production grows to over 32 million barrels per day by 2025, for a CAGR of 10% over the period. As the Permian basin shifts further into manufacturing mode, the water growth we project will create the need for nearly 1,000 additional salt water disposal wells by 2030. Even taking an impossibly bullish outlook with water recycling (100% of frac water coming from recycling), we will still need ~750 additional disposal wells in the Permian Basin (more on this below). By 2030, we predict there will be a total need for ~1750 salt water disposal wells, assuming 80% utilization. While many companies involved in SWDs cite 80% as their target utilization, water pressure at the surface and in the formation can limit disposal capabilities, meaning demand for SWDs may be closer to 3,000 under realistic utilization assumptions. This incremental demand for SWDs we estimate represents a $7-$9 billion dollar investment in the Permian Basin alone.

Margin Watch

2019 margin analysis

My way of backing into water.  Back non-water revenue out of EBITDA.  Add “old expenses” and legal (big $$$$) to the adjusted EBITDA number to get a ballpark water income.  Look at water income relative to water top line to observe expenses and margins.

Seperately we can look at margin without asset sales.

Both margins are contracting.

It is understood that one has to spend money to make money, expecially in the water business, but I’d love more information on the end game.



4Q19 Earnings

Strong!  Some land swapping reported.

The Trust reported net income of $71.3 million for the fourth quarter ended December 31, 2019, an increase of 13.8% over net income of $62.7 million for the fourth quarter ended December 31, 2018. The increase was principally related to increased oil and gas royalties, easements and other surface-related income and water sales.

In an exchange transaction, the Trust conveyed approximately 5,620 acres of land in exchange for approximately 5,545 acres of land, all in Culberson County. As the Trust had no cost basis in the land conveyed, the Trust recognized land sales revenue of $22.0 million for the fourth quarter ended December 31, 2019.

Back of the envelope I see a 23% increase in non-sale earnings and a 50% increase in expenses.  Non-sale operating income is up 16%.


Looks to be about $40/share in cash on the balance sheet.  Cash on the balance sheet is equivalent to ~5.5% of the market cap @ $726.50/share.


Woodlock House

You may know the author of this letter/Woodlock founder, Christopher Mayer,  from the book 100 Baggers: Stocks That Return 100-to-1 and How To Find Them.  I read 100 Baggers by the lake this summer and found it entertaining, eduational, and inspiring.  Still waiting for my own 100 bagger tough…

Texas Pacific Land Trust (NYSE:TPL)

Cheap: Acquired at a discount of at least 20% to a growing net asset value

Owner-operator: Horizon Kinetics owns nearly one quarter of the shares

Disclosures: Improving as part of Horizon’s campaign

Excellent financial condition: Debt-free

Texas Pacific Land Trust has been one of the best performing stocks of the last 20 years, returning 17% annually. The Trust dates to 1888 and formed part of the land holdings of the old Texas & Pacific Railroad. It is the largest landowner in the state of Texas. And it was lucky to have its land in the heart of the Permian Basin in West Texas.

The Permian is one of the richest oil resources in the world. Nearly half of US oil production comes from the Permian. All the big players are at work here – especially Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Occidental (NYSE:OXY).

TPL owns “non-participating perpetual royalty interests” (NPRIs) in about 460,000 acres. NPRIs entitle TPL to a perpetual right to receive a fixed cost-free percentage of production revenue. TPL also charges users for easements – for pipelines, work crews, roadway rights, power lines, storage facilities, etc. Since its land covers such a large area, almost any infrastructure project will cross TPL land.

Finally, TPL controls the water rights to these acres. As drilling is water intensive, this creates an opportunity for TPL to charge for access to its aquifers and for water recycling. TLP created Texas Pacific Water Resources in 2017 to meet this demand.

TPL came on our radar after a near 30% decline from a high of ~$900 in April. I had been following the story casually through Horizon Kinetics, who owns about a quarter of the shares and is involved in a case against the trustees to convert TPL to a C corp. and improve disclosures and governance. (This seems to be going well. On December 4, TPL announced the case for converting to a C corp. was “compelling.”)

The company also continues to report strong results. I would highlight in particular the $32 earned per share (or unit) for 9 months. TPL is on pace to do $42 per share in earnings. At $650 per share, the stock trades for about 15x estimated 2019 earnings. This for a fast-growing company with a 66% net margin (for 9 months) and no debt… Using a variety of valuation methodologies, TPL is worth at least $900 per share and growing.

We picked up shares at an average cost of $645 and the stock is already 20% higher. TPL has a wonderful business model and earns high returns on its assets, exceeding 100%. It is a way to own real assets but by skimming off the cream.

TPL is another cannibal of its own shares. It’s retired 8.5% of its stock since 2014. With Horizon’s involvement, I expect future free cash flow will reduce the share count further.

Be Patient

It is true, nothing much has changed so far. For better or worse, that could probably be said about most of the stocks we own at some point during the time we’ve held them. Even the very successful ones. There have been periods measuring in years during the time we’ve held Texas Pacific Land Trust (“TPL”) when nothing had changed. Lately, of course, there have been ongoing changes at TPL. It is probably common knowledge, now, but can’t not be mentioned, that last week the Conversion Exploration Committee announced that it had arrived at its much awaited conclusion. The Committee unanimously recommended to the Trustees of TPL that the Trust convert to a Delaware C-corp. That recommendation was made with the input of Credit Suisse as outside financial advisor as well as outside legal counsel. It should not escape notice that the Trustees are, in fact, on the Committee, so I suppose they took part in formally notifying

The Committee also recommended that if such a conversion takes place, it should be structured so as to be a tax-free transaction to shareholders. Such changes require the customary regulatory filings and approvals, such as with and by the SEC and NYSE. No doubt, we’ll be hearing more in the coming weeks, since the Committee chose to extend its term for one more month, through the end of February. It could as easily have made it two months or three.


Despite the media narrative, the majors are still very much into shale expansion.

Will Burton, vice president, midstream operations said that what’s different about the company’s Permian Basin presence is the significant investment it plans.

The first step is building up the company’s midstream infrastructure, expanding the midstream assets the company acquired from BHP, Burton said. While declining to provide a specific amount, he said the company is making significant capital expenditures in infrastructure, including pipeline and gathering lines for gas, oil and water and nine central delivery points with adjoining water disposal facilities.

The first central delivery point is currently under construction in the Orla region of Reeves County. The first two are expected to be completed by the end of the year, at which time BPX will begin ramping up its drilling operations later and carrying through the next four to six years, Burton said.

BPX overview