TPL 2.0 : Investor Preferences

tpltblogger7 Comments

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).

3Q 10-Q

tpltblogger14 Comments

Filing

Some observations in no particular order:

  • “During the nine months ended September 30, 2019, we purchased and retired 6,258 Sub-shares. During the nine months ended September 30, 2018, we purchased and retired 39,768 Sub-shares.”
  • DUC wells now 424 vs 369 at the end of Q2.  15% jump.  Someone has been busy.
  • $250MM in cash on the balance sheet
  • $87MM in PP&E.  34% growth YTD
  • Water has made $65MM top line YTD.  Up 37% from same period last year.  Top line is generally supposed to grow faster than PP&E, right?
  • $24.7MM in operating expenses during the quarter.  2.4x vs same quarter last year
  • “For the nine months ended September 30, 2019, the Trust sold approximately 21,986 acres (13,180 acres in Loving County, 5,675 acres in Culberson County, 1,651 acres in Hudspeth County, 843 acres in Reeves County, 636 acres in Midland County and approximately 1 acre in Glasscock County) of land in Texas for an aggregate sales price of approximately $113.0 million, with an average of approximately $5,141 per acre.”
  • “For the nine months ended September 30, 2019, the trust acquired approximately 21,671 acres (Culberson, Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $74.4 million, with an average of approximately $3,434 per acre.”
  • I wish we had more details on rationale and benefits of the land swap above.  Flat in acres, took out some $$ (great), but is ending acreage accretive to the grand plan?  How so?
  • EBITDA language from the press release did not carry over to the Q
  • “Legal and professional fees were $5.6 million for the three months ended September 30, 2019 compared to $0.6 million for the comparable period of 2018. The increase in legal and professional fees for the three months ended September 30, 2019 compared to 2018 is principally due to approximately $4.9 million of legal and professional fees related to the proxy contest to elect a new Trustee, the entry into and payments made under the settlement agreement dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust’s Current Report on Form 8-K filed with the SEC on July 30, 2019. We anticipate receiving a partial reimbursement of these legal and professional fees under coverage provided by our director and officer insurance policy. The amount of the reimbursement has not yet been determined.”
  • I’m surprised the D&O underwriter wrote a policy given the Trust structure of the company and it’s (now abused) governance limitations.  I’m guessing they regret it
  • “Salaries and related employee expenses were $8.5 million for the three months ended September 30, 2019 compared to $4.1 million for the comparable period of 2018. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 58 employees as of September 30, 2018 to 89 as of September 30, 2019 and additional contract labor expenses for the three months ended September 30, 2019 compared to the same period of 2018.”
  • “Texas Pacific is not involved in any material pending legal proceedings.”  ??

 

3Q Earnings and Conversion Committee Update

tpltblogger18 Comments

Earnings press release

Impressive top line growth.  I can’t help but see that EBITDA (newly included by TPL in releases) is pretty much equal to revenues from royalties, land sales, and easements.  It appears as if all profits from water are being eaten by legal fees and comp.  Estimated water margins appear to have stabilized near 50%.  The sheet below isn’t perfect but it’s likely directionally right.  Margins are being squeezed by expenses.

q3 margin analysis updated

Simple margins tell you this as well.

simple margins q319

Can’t wait until legal fees are in the rear view mirror.

D&A increasing.

I’m not operating the business but my guess is that there are some aspects that can be tightened up.  We shall see.

That all being said, $7.74/share x 4 = $31/share annualized.  $569 / $31 = 18 P/E.  Low to historic multiples.   We’re looking at a $775 price at a 25x multiple which is more consistent with historical valuations.

 

Conversion Committe update

The Committee has continued to meet with its advisors, including Credit Suisse, which is assisting the Trust and the Committee in developing its recommendation to the Trustees. The Committee has met 5 times, both in person and over the phone, since its inception, and deliberations to date have been productive and informative. Although its deliberations are confidential, the Committee will continue to provide monthly progress reports to shareholders as required by its Charter before issuing a final recommendation to the Trustees.

Was hoping for a bit more progress than that!  So 2 meetings in October?

You Hate To See It

tpltblogger6 Comments

File this under “things we don’t want”.

https://www.epsilontheory.com/yeah-its-still-water/

From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. That works out to an average purchase price of $67.37.

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five year period were used to sterilize stock issuance to senior management and the board of directors.

https://www.epsilontheory.com/the-rake/

In 2018, JP Morgan bought back 181.5 million shares of stock for $20 billion. Also in 2018, JP Morgan issued 32 million new shares to management (18% of buyback). Those newly issued shares were worth $3.5 billion then, and are worth $4.2 billion today.

In 2017, JP Morgan bought back 166.6 million shares of stock for $15.4 billion. Also in 2017, JP Morgan issued 31 million new shares to management (18% of buyback). Those newly issued shares were worth $2.9 billion then, and are worth $4.03 billion today.

In 2016, JP Morgan bought back 140.4 million shares of stock for $9.1 billion. Also in 2018, JP Morgan issued 38 million new shares to management (27% of buyback). Those newly issued shares were worth $2.5 billion then, and are worth $4.94 billion today.

Were these newly issued shares spread evenly throughout the company, perhaps as part of an employee stock ownership program (ESOP)?

No. In each year, there were fewer than 1 million shares issued for the JP Morgan ESOP program, less than 3% of the dilutive issuance. Senior management received more than 97% of the newly issued shares.