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.
  11. NO DEBT!

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).

Update 6/22/20:  This post was originally written on 8/11/19.  Almost a year later we have some clarity on the board makeup.  Looks like a win and a loss.  Highlighted above.

A Dividend and a Date

https://www.tpltrust.com/investors/news-events/press-releases/detail/109/texas-pacific-land-trust-declares-special-dividend-of

The specificity of the planned conversion date is most welcome. And $10/share is better than a sharp stick in the eye while a heavy slug of cash remains on the balance sheet.

I’ll stay away from over-reading the dividend tea leaves for the time being. The “new guys”, having a ton of cash and freedom, might go in a direction that makes us wish conversion happened a long time ago.

Let us never forget that this all could have been avoided.

Happy Thanksgiving!

Conversion

We’ve been conditioned to expect a big lump of coal in our stocking.

The period between now and 1/1 is relatively unproductive in banking, capital markets, law, and the like. My base case is a postponement. What’s yours?

3Q20 Earnings

https://www.sec.gov/Archives/edgar/data/97517/000009751720000051/exhibit991q32020earnin.htm

Expenses moving down.

What was sold?

The Trust recognized land sales revenue of $11.5 million for the third quarter ended September 30, 2020 and $4.6 million for the comparable period of 2019.

$46mm in net income + $4mm in depreciation = $50mm more cash on the balance sheet.  Add that to the $258mm from the end of Q2 to get $308mm or ~$40/share or 8.5% of market cap.

Update:  The actual cash number is $316mm.

 

Management Purchase Deadline

Deadline for CEO and CFO required stock purchases is today though managment might be in “blackout” given the pending conversion.

Trustees + management own 1,300 shares or $625k in market value combined. Not a whole lot of skin in the game.

https://sec.report/Document/97517/000009751719000039/exhibit101employmentag.htm

Cash Bonus. During the Employment Term, Employee shall be eligible for an annual cash bonus of up to 300% of the Base Salary for the same year (the “Cash Bonus”) as determined in accordance with reasonable and customary performance metrics to be developed annually by the Trustees in consultation with the Employee, but subject to the ultimate decision of the Trustees. With respect to the calendar year 2019 only, the Cash Bonus shall be determined as set forth in Exhibit A. The Cash Bonus, if any, shall be paid no later than March 15th of the year following the year in which the Bonus is earned (i.e., March 15, 2020 for the Cash Bonus earned in 2019), provided, however, that except as set forth in Sections 5 and 6 of this Agreement, Employee shall be eligible for the Cash Bonus for a year only to the extent he continued to be employed by the Trust through the end of that year; and provided further, that, until such time as Employee becomes eligible to participate in an equity compensation plan established by the Trust, Employee shall use no less than twenty-five percent (25%) of the value of the Cash Bonus (net of estimated taxes) to purchase shares of the Trust’s common stock; such purchase shall be completed no later than six (6) months after payment of the Cash Bonus has been completed unless, at that time Employee is in possession of material non-public information in which event the purchase shall occur as soon as practically available in accordance with Federal securities laws. The Trust’s exercise of its decision not to renew this Agreement voluntarily pursuant to the terms of Section 3 shall not affect Employee’s right to receive any calendar year bonus that has already accrued and remains to be paid. Further, the requirement upon Employee to use any portion of a Cash Bonus to purchase shares of the Trust’s common stock shall not apply in any situation where a Section 5 notice of termination has been issued

WFH; Conversion Pushed Back

The great “productivity from home” competency that companies and workers took pride in during the pandemic apparently didn’t extend to the TPL management or its legal representation. Not surprised.

New board members now getting a taste of the shit show to which they are attached.

https://www.tpltrust.com/investors/news-events/press-releases/detail/107/texas-pacific-land-trust-updates-timeline-for-corporate

PrairieSky

Remember when TPL used to repurchase shares?

CALGARY, Alberta, Sept. 09, 2020 (GLOBE NEWSWIRE) — PrairieSky Royalty Ltd. (“PrairieSky” or the “Company“) (TSX: PSK) announced today that its Board of Directors has declared a quarterly dividend of CDN $0.06 per common share, payable in cash on October 15, 2020 to shareholders of record on September 30, 2020.  This dividend is designated as an “eligible dividend” for Canadian income tax purposes.

PrairieSky is also pleased to provide an update on its previously announced normal course issuer bid (the “NCIB”). During the period from July 1, 2020 to September 9, 2020, the third quarter to date (“Q3TD”), PrairieSky has purchased for cancellation a total of 7,215,000 common shares under the NCIB. Shares were purchased at a weighted average price of $9.34 per share, for a total purchase price of $67.4 million. Share purchases were funded using funds from operations and PrairieSky’s credit facility, which PrairieSky expects to pay down using excess cash flow above its quarterly dividend.

PrairieSky’s President and Chief Executive Officer, Andrew Phillips, commented, “We view the 7.2 million common share repurchase as an opportunistic acquisition at an attractive point, well below the intrinsic value of the Company. PrairieSky shareholders will continue to receive a fully-funded dividend and will own approximately 3% more of the business, equating to an acquisition of 468,000 acres of royalty lands and approximately 560 BOE per day of current royalty production. As our assets sit on the some of the best parts of the development cost curve, management views this as the highest quality acquisition available in the current environment. We also expect the share repurchase will enhance the dividend growth potential of the business over time. The Company expects to pay down the entirety of the debt incurred to make the share repurchases within the next 12 months, assuming current commodity prices, and has the flexibility to make further opportunistic share repurchases or acquisitions, which are a key component of our capital allocation strategy.”

Two Articles, One Day

Two fun reads posted today on Seeking Alpha.

https://seekingalpha.com/article/4371699-texas-pacific-land-revisited-resilient-profitable-and-undervalued

https://seekingalpha.com/article/4371740-texas-pacific-land-owns-permian-basin

As always, the comment section is where the magic happens.  I particularly liked (and agree with) the comment highlighted below.  I echo the sentiment of playing the long game with the assets while being fastidious about balance sheet and expense management.

To the board:  Don’t change into every other company.  Don’t become an agency problem disguised as a functioning company.  Don’t get hijacked by quarterly EPS and managment options awards/vesting culture.  Management should be rewarded for serving the holders of equity, not for serving themselves.  It’s a slippery slope.  Be brave and work hard.

MJ-07

Much here depends on how responsibly TPL’s BOD manages this.If management hands out free stock like candy we’d have a problem.If management were smart, they would “signal” their intent to continuewith share buybacks at opportune times with the intent to shrink outstandingshares over the long run. Maybe they will use their stock to acquire situationsthat will add value to TPL. The asset base TPL has is “top shelf” and potentialis there to manage it to shareholders advantage, not managements paycheck.Hopefully they will not squander this opportunity before them. Land assets couldbe used to support a move into “green” operations such as solar and wind farms.Would be fantastic to get Tesla to build on TPL lands if at all feasible. Solidmanagement could do great things here. Bad management could do severedamage. Too early in the game to know what we have. Thanks for writing thisarticle…I was hoping we’d see one soon!

2Q

Rough one as expected. That said, it’s hard not to be impressed by volumes.  Also, six month top line vs last year looks decent if you like to see the bright side of things.  Adjust for land sales, revenue for the first six months of 2020 was $149.5mm.  First six months of 2019 was $170.2mm adjusted.  Maybe we call that a win given the pandemic backdrop?

https://www.tpltrust.com/investors/news-events/press-releases/detail/106/texas-pacific-land-trust-announces-second-quarter-2020

Still on track for conversion by the end of this quarter.

As previously announced on March 23, 2020, our Trustees approved a plan to reorganize the Trust from its current structure to a corporation formed under the laws of the State of Delaware. We continue to progress towards the conversion. On June 15, 2020, the Trust announced the new corporation will be named Texas Pacific Land Corporation (“TPL Corp”) and the persons selected to serve as directors on the Board of Directors of TPL Corp. Additionally, a draft registration statement on Form 10 has been submitted to the Securities and Exchange Commission for review, on a non-public basis. It is currently anticipated that the corporate reorganization will be effective by the end of the third quarter of 2020, barring any unforeseen impacts of the COVID-19 pandemic or other developments, which could potentially extend this timeframe.

 

Continuity in Seats Held

Barbara J. Duganier is a certified public accountant and currently serves on the boards of MRC Global Inc. (NYSE:MRC), where she chairs the audit committee and is a member of the governance committee; Noble Energy, Inc. (Nasdaq:NBL), where she is a member of the audit and governance committees; and West Monroe Partners, where she is the lead independent director and chairs the nominating and governance committee. Ms. Duganier previously served on the boards of the general partner of Buckeye Partners, L.P. and HCC Insurance Holdings. Ms. Duganier held various leadership and management positions during her tenures at Accenture, from 2004 to 2013, including as Global Chief Strategy Officer and as Global Growth and Offering Development Lead of the outsourcing business, and Arthur Andersen LLP, from 1979 to 2002, including as Global Chief Financial Officer of Andersen Worldwide.

https://www.businesswire.com/news/home/20200615005178/en/Texas-Pacific-Land-Trust-Update-Corporate-Reorganization

https://www.linkedin.com/in/barbara-duganier-4286725/   Did I miss an 8-K?

 

CVX Pasedena

http://www.energyintel.com/pages/eig_article.aspx?DocID=1077720&utm_campaign=top-story&utm_medium=site&utm_source=1&utm_content=Chevron+Plots+%27Thoughtful%27+Downstream+Recovery-1077720&ts=1

Q. Specifically around the Pasadena [Texas] refinery you recently acquired [from Petrobras] to take advantage of your Permian Basin upstream position. How are you adjusting your plans for Pasadena as your upstream development slows? How are you thinking about what you want to accomplish there?

A. That’s a good question. I think we’re happy with our acquisition of Pasadena. May 1 was when it closed a year ago, so we’ve been up in it for about a year. Some planned shutdown work on the crude unit is wrapping up. Our leadership there has done a great job managing a whole bunch of contractors coming onsite while making sure that they stay safe, they have the right PPE on, they’re social distancing. They’re still getting the work done but at the same time we’ve got to make sure we’re taking care of them. So I’ve been really impressed with the team there. You know, going forward, we’re evaluating when we finish that work, when do we start that back up — that’s all part of the conversation we just had around demand and where the world’s going. When we do finish the work, when we do get back up, we will start putting our Permian barrels through that refinery and we’ll start supplying our customers. The beauty of Pasadena is that it’s between our production and our customers, and we plan to continue with that. That strategy still holds, and I’m excited to see it start to happen going forward.

Trustees Absolve Trustees

Lots here:  https://ir.stockpr.com/tpltrust/sec-filings-email/content/0000097517-20-000033/tpl-20200624.htm

  1. New General Counsel/SVP coming on board 8/1/20.  He is a veteran of David Barry’s old firm, Kelley Drye & Warren LLP though I’m sure a nationwide search was conducted.
  2. “On June 30, 2020, the Trust entered into an Indemnification Agreement with each of its Trustees, John R. Norris III and David E. Barry (each, an “Indemnification Agreement”). The Indemnification Agreements are identical in form and each provides that, subject to certain limitations set forth therein, the Trust will indemnify the Trustee to the fullest extent permitted by applicable law, against losses or expenses incurred in relation to the Trustee’s service to the Trust. The indemnification agreements also provide that the Trust will advance expenses, subject to certain limitations, to each Trustee in connection with proceedings covered by the indemnification agreement.”  What are we indemnifying ourselves from?
  3. “Sameer Parasnis, Chief Commercial Officer of the Trust, is no longer employed by the Trust effective June 24, 2020.”  Recall that Mr. Parasnis was formerly an energy banker employed by Stifel and Credit Suisse.  What happened to cause this separation?

Seems like a big information dump.  The optimist in me hopes the conversion isn’t going south but I don’t have a great feeling about this.  Tell me I’m wrong!

 

Clock Ticking on C-Suite Purchases

C’mon team.  Join us.

In all fairness, they could be restricted due to pending conversion.

https://sec.report/Document/97517/000009751719000039/exhibit101employmentag.htm

(b)    Cash BonusDuring the Employment Term, Employee shall be eligible for an annual cash bonus of up to 300% of the Base Salary for the same year (the “Cash Bonus”) as determined in accordance with reasonable and customary performance metrics to be developed annually by the Trustees in consultation with the Employee, but subject to the ultimate decision of the Trustees. With respect to the calendar year 2019 only, the Cash Bonus shall be determined as set forth in Exhibit A. The Cash Bonus, if any, shall be paid no later than March 15th of the year following the year in which the Bonus is earned (i.e., March 15, 2020 for the Cash Bonus earned in 2019), provided, however, that except as set forth in Sections 5 and 6 of this Agreement, Employee shall be eligible for the Cash Bonus for a year only to the extent he continued to be employed by the Trust through the end of that year; and provided further, that, until such time as Employee becomes eligible to participate in an equity compensation plan established by the Trust, Employee shall use no less than twenty-five percent (25%) of the value of the Cash Bonus (net of estimated taxes) to purchase shares of the Trust’s common stock; such purchase shall be completed no later than six (6) months after payment of the Cash Bonus has been completed unless, at that time Employee is in possession of material non-public information in which event the purchase shall occur as soon as practically available in accordance with Federal securities laws. The Trust’s exercise of its decision not to renew this Agreement voluntarily pursuant to the terms of Section 3 shall not affect Employee’s right to receive any calendar year bonus that has already accrued and remains to be paid. Further, the requirement upon Employee to use any portion of a Cash Bonus to purchase shares of the Trust’s common stock shall not apply in any situation where a Section 5 notice of termination has been issued.

TPLC 8-K & Stockholders Agreement

https://ir.stockpr.com/tpltrust/sec-filings-email/content/0001213900-20-014919/ea122864-8k_texas.htm

https://ir.stockpr.com/tpltrust/sec-filings-email/content/0001213900-20-014919/ea122864ex10-1_texas.htm

Staggered board:

1. Board Composition and Related Matters.

(a) Immediately following the Distribution Time, TPL Corp shall take all actions necessary to appoint Murray Stahl (together with any replacement designated pursuant to this Section 1(a), the “Horizon Designee”) and Eric L. Oliver (together with any replacement designated pursuant to this Section 1(a), the “SoftVest Designee”, and together with the Horizon Designee, each an “Investor Group Designee” and, collectively, the “Investor Group Designees”) to the Board if each Investor Group Designee fulfills each of the conditions set forth in Section 1(d) below (the “Appointment Conditions”) as of the Distribution Time. Based on the information available to the Trustees (including responses to the director questionnaires and follow-up questions thereto), the Trustees believe that Murray Stahl and Eric L. Oliver satisfy the Appointment Conditions as of the Effective Date. In the event that, prior to the Distribution Time, either of Murray Stahl or Eric L. Oliver fails to satisfy the Appointment Conditions, the Investor Group shall have the right to designate replacement candidates for the Horizon Designee or SoftVest Designee, as applicable, until two candidates satisfy the Appointment Conditions and have been approved as Investor Group Designees by the Trustees (such approval not to be unreasonably withheld).

(b) Immediately following the Distribution Time, TPL Corp shall take all actions necessary to appoint Dana F. McGinnis (together with any replacement designated pursuant to this Section 1(b), the “Mission Designee” and together with the Investor Group Designees, each a “Stockholder Designee” and, collectively, the “Stockholder Designees”) to the Board if the Mission Designee fulfills each of the Appointment Conditions as of the Distribution Time. Based on the information available to the Trustees (including responses to the director questionnaires and follow-up questions thereto), the Trustees believe that Dana F. McGinnis satisfies the Appointment Conditions as of the Effective Date. In the event that, prior to the Distribution Time, Dana F. McGinnis fails to satisfy the Appointment Conditions, the Trustees and Murray Stahl shall agree on a replacement candidate for the Mission Designee, who satisfies the Appointment Conditions (such agreement not to be unreasonably withheld).

(c) Effective immediately following the Distribution Time, (i) the Board shall be divided into three classes of directors, as nearly equal in number as reasonably possible in accordance with the Certificate of Incorporation of TPL Corp (as amended from time to time, the “Charter”), and (ii) the Trust and TPL Corp, as applicable, shall have taken and completed all actions necessary to cause the Mission Designee to be appointed to Class I of the Board (with a term expiring in 2021), the SoftVest Designee to be appointed to Class II of the Board (with a term expiring in 2022) and the Horizon Designee to be appointed to Class III of the Board (with a term expiring in 2023).

“Customary Standstill”:

(b) acquire, offer or seek to acquire, agree to acquire or acquire rights to acquire or otherwise beneficially own (except by way of stock dividends or other distributions or offerings made available to holders of voting securities of the Trust or TPL Corp generally on a pro rata basis), directly or indirectly, whether by purchase, tender or exchange offer, through the acquisition of control of another person, by joining a group, through swap or hedging transactions or otherwise, any voting securities of the Trust or TPL Corp (other than through a broad-based market basket or index) or any voting rights decoupled from the underlying voting securities which would result in (i) Horizon having ownership or control of, or other beneficial ownership interest in, 23.5% or more, in the aggregate, of the then-outstanding Sub-share Certificates or shares of the Common Stock (the “Horizon Cap”), (ii) SoftVest having ownership or control of, or other beneficial ownership interest in, 4.0% or more, in the aggregate, of the then-outstanding Sub-share Certificates or shares of the Common Stock (the “SoftVest Cap”) or (iii) Mission having ownership or control of, or other beneficial ownership interest in, 5% or more, in the aggregate, of the then-outstanding Sub-share Certificates or shares of the Common Stock (the “Mission Cap”, and each of the Horizon Cap, the SoftVest Cap and the Mission Cap, individually, an “Ownership Cap”); provided, however, that, subject to Section 3(c), in the event that the Trust or TPL Corp (A) acquires through share purchases Sub-share Certificates or shares of the Common Stock or (B) undertakes a reverse share split, and any of such actions reduces the number of securities of the Trust or TPL Corp outstanding and thereby increases the proportionate number of Sub-share Certificates or shares of Common Stock that a Stockholder has ownership or control of, or otherwise beneficially owns, to a proportion of Sub-share Certificates or shares of the Common Stock that is equal to or greater than the applicable Ownership Cap for such Stockholder (such event, a “Share Reduction Event”), then such Stockholder shall not be deemed to have acquired or otherwise beneficially own an amount of Sub-share Certificates or shares of the Common Stock that is greater than the number of shares permitted pursuant to such Stockholder’s applicable Ownership Cap (such amount of securities in excess of a Stockholder’s Ownership Cap, the “Excess Shares”) in violation of this Section 3(b) as a result of such Share Reduction Event; provided, further, that such Stockholder shall divest its Excess Shares within a reasonable time period (but in any event, within 30 calendar days of becoming aware of such Share Reduction Event) so that such Stockholder no longer has ownership or control of, or otherwise holds a beneficial ownership interest in, such Excess Shares;

Can HK not buy more TPL on behalf of new client funds?  The standstill section is long and I’m not a lawer.  Sounds like everyone is contractually bound to play nice with respect to ownership stake changes and the like.

Speaking of playing nice:

4. Mutual Non-Disparagement. Without the prior written consent of the other parties, no party shall, nor shall it permit any of its Representatives to, make any public or private statement that undermines, disparages or otherwise reflects detrimentally on (a) another party, (b) another party’s current or former trustees (including the Trustees) or directors in their capacity as such, (c) another party’s officers or employees (including with respect to such persons’ service at the other party), (d) another party’s subsidiaries, or (e) the business of another party or another party’s subsidiaries or any of its or its subsidiaries’ current directors, officers or employees, including the business and current or former directors, officers and employees of the other party’s controlled Affiliates, as applicable. The restrictions in this Section 4 shall not (i) apply (A) in any compelled testimony or production of information in response to a Legal Requirement, or (B) to any disclosure that such party reasonably believes, after consultation with its outside counsel, to be legally required by applicable law, rules or regulations; or (ii) prohibit any party from reporting what it reasonably believes, after consultation with its outside counsel, to be violations of federal law or regulation to any governmental authority pursuant to Section 21F of the Exchange Act or Rule 21F promulgated thereunder.

5. Mutual Releases. Effective at the Distribution Time, and as a condition to the appointment of the Stockholder Designees to the Board, the Trust, the Trustees, and all members of the Investor Group (as defined in the Settlement Agreement) shall execute an agreement substantially in the form attached as Exhibit C to the Settlement Agreement (the “Form of Mutual General Release Agreement”), provided, however, that the Form of Mutual General Release Agreement shall, prior to execution, be modified to expressly provide that such agreement shall be effective upon the Distribution Time.

6. No Litigation. Each party hereby covenants and agrees that it shall not, and shall not permit any of its Representatives to, directly or indirectly, alone or in concert with others, encourage, pursue or assist any other person to threaten or initiate, any lawsuit, claim or proceeding before any court (each, a “Legal Proceeding”) against the other party or any of its Representatives, except for (a) any Legal Proceeding initiated primarily to remedy a breach of or to enforce this Agreement and (b) counterclaims with respect to any proceeding initiated by, or on behalf of one party or its Affiliates against the other party or its Affiliates; provided, however, that the foregoing shall not prevent any party or any of its Representatives from responding to oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands or similar processes (each, a “Legal Requirement”) in connection with any Legal Proceeding if such Legal Proceeding has not been initiated by, on behalf of or at the direct or indirect suggestion of such party or any of its Representatives; provided, further that in the event any party or any of its Representatives receives such Legal Requirement, such party shall give prompt written notice of such Legal Requirement to the other party (except where such notice would be legally prohibited or not practicable). Each party represents and warrants that neither it nor any assignee has filed any pending Legal Proceeding against any other party.