CS Writes Again

TPL management views an eventual share authorization as a key piece of the puzzle to position TPL as a consolidator long term. We believe management views the steps the company has taken over the past several years as setting it up to be an eventual consolidator (e.g. C-Corp conversion, new Board of Directors, enhanced operational disclosure, new accounting firm, recent hires, etc.). And that adding a share authorization is a key piece to their long-term outlook for the company. Since we initiated coverage, it has become increasingly clear that this is in direct contrast with a group of vocal long-term retail shareholders who want to see the company return to its roots (TPL was originally a liquidating trust) with a focus on continued share buyback, maximizing margins/capital efficiency, and an aversion to large-scale M&A activity. Our view is that as management fully articulates its strategic outlook, it will likely drive an accelerated shift in the investor base toward an institutional audience.

If share authorization for M&A is so important to management, why isn’t it on the proxy this year? Is it possible that the board and management aren’t aligned on this? And why does CS keep beating this drum? Who is feeding this line of thinking to CS?

2021 Proxy Statement

https://ir.stockpr.com/tpltrust/sec-filings-email/content/0001104659-21-122327/tm2129101d1_def14a.htm

One accounting firm, three board members, and four (4) comp proposals.

The proposals in the prior post didn’t make the cut. I suspect HQ will be up to their eyeballs in proposals next summer.

“The maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is 75,000 shares, all of which can be issued pursuant to the exercise of incentive stock options.”

SEC is “Unable to Concur”

https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/shareholder-proposal-no-action-responses.htm

The link above will take you to a list of “shareholder proposal no action responses” from the SEC.  The SEC issues these responses after a company has contacted the Commission with a request to validate their reasoning for excluding a shareholder proposal in its proximity materials.

TPL management appears to have contacted the SEC in regards to two seperate proposals

Proposal from Robert J. Zaccheo, Jr 

Proposal from Special Opportunities Fund, Inc 

In both instances, TPL management claims that the proposals were received late and aren’t eligible for inclusion.  In both instances, the SEC states that it is “unable to concur” that the grounds claimed for exclusion are legitimate.

Only a court can truly decide whether the exclusion of a proposal is legitimate so be sure scout the materials to see if the proposals above made the cut.

At the very least, this is a sneak peak into the things that shareholders care about, namely a contination of TPL’s historic legacy of share repurchases and high profit margins.

 

CS targeting $800

Credit Suisse Initiates Coverage On Texas Pacific Land with Underperform Rating, Announces Price Target of $800

https://seekingalpha.com/news/3745827-texas-pacific-land-tumbles-as-credit-suisse-slaps-with-sell-equivalent-rating

TPL’s first annual shareholder meeting is scheduled for November 16th, which means the proxy statement should be out by October 7th at the latest. We expect all three of its Class I directors (Barbara Duganier, Dana McGinnis, and CEO Tyler Glover) who officially joined the board in January to be nominated for reelection, and while we were hopeful to see a share authorization proposal, we believe that is more likely a 2022 event. That said, we believe a share authorization would be a meaningful potential positive that would enable the company to include stock-based compensation as part of its long-term incentive plan (LTIP) for management. In addition to greater transparency around the process, we believe including stock-based comp to its LTIP would help address concerns around greater incentive alignment between management and shareholders. In Figures 12-13, we provide a comparison of management plus board ownership to the rest of our royalty coverage universe. Notably, without a share authorization, TPL is also unable to use equity to help finance a large-scale acquisition.

Two things are apparent:

1) CS is attempting to frame TPL as a yieldco though it has never traded as such. That said, it might be good for management to think about the signal they are sending with the dividend. Appears as if high div = low multiple.

2) The pressure to turn this thing into a management/Wall Street enrichment vehicle (see above) will continue.

If you turn it into a shitco, it will trade like a shitco.

Interview

Came across this on Twitter last night. Technology, optimism, and progress abound.

https://www.retailbull.co.uk/blog/tpl-an-employees-insights

Companies that constructed pad sites designed for one to three wells have been expanding their existing drill pads to add six to 10 more.

This shows that they have seen good production on their existing wells. By drilling more wells in the same leaseholds, they aim to hit different intervals to get all the production they can out of a specific location. 

Over the next couple of years, TPL is likely to be more aggressive in looking for acquisitions on the minerals side.

2Q21 Earnings

Texas Pacific Land Corporation Announces Second Quarter Results :: Texas Pacific Land Corporation (TPL)

Production pretty flat but prices up. $330MM in cash on the sheet.

Our total revenues increased $38.6 million for the second quarter of 2021 compared to the same period of 2020, largely driven by the $37.7 million increase in oil and gas royalty revenue. Our share of production was approximately 16.4 thousand barrels of oil equivalent (“Boe”) per day for the second quarter of 2021 compared to 15.7 thousand Boe per day for the same period of 2020. The average realized price was $40.83 per Boe for the second quarter of 2021, compared to $15.02 per Boe for the comparable period of 2020. Water sales and produced water royalties increased $4.1 million and $2.3 million, respectively, for the second quarter of 2021 compared to the second quarter of 2020. The increase in water sales for the second quarter of 2021 compared to the same period of 2020 is principally due to a 70.8% increase in the number of barrels of sourced and treated water sold. These increases in revenue were partially offset by easements and other surface-related income, which decreased $2.7 million for the second quarter of 2021 compared to the same period of 2020. These revenue streams are directly impacted by development and operating decisions in the Permian Basin made by our customers and commodity prices, among other factors.

Russel 3000

Now with TPL!

https://content.ftserussell.com/sites/default/files/russell_3000_index_additions_-_2021.pdf

Good read below (from last year) on 3K reconstitution.

https://www.nasdaq.com/articles/what-small-caps-should-know-about-the-russell-rebalance-2020-06-22

Does it make the 1000 or the 2000?  Looks like 1000 to me.

https://www.ftserussell.com/research-insights/russell-reconstitution/market-capitalization-ranges

https://www.bloomberg.com/news/articles/2021-06-06/how-to-tell-whether-amc-and-gamestop-will-make-the-russell-1000?sref=QaCYRngK

russ

Earnings Call

Transcript

My favorite part:

At March 31, 2021, Texas Pacific at a robust inventory of 541 drill but uncompleted wells wells or DUCs and 488 permits providing clear visibility in the future royalty earnings. New DUCs grew from 91 in the fourth quarter to a 152 new ducks in the first quarter providing line of sight into future production. New permits grew from a 139 in the fourth quarter to a 176 in the first quarter. As of March 31, 17% of all Permian rigs were located on TPL drilling spacing units or DSU’s up from 11% of Permian rigs as of December 31. In terms of spuds, TPL DSU’s accounted for 18% of total spuds across the Permian during the first quarter. 14% of all permits approved by the Texas Railroad Commission in the first quarter intersect TPL DSU’s Importantly, most of our net royalty acres are concentrated within the Northern Delaware region and core of the – Basin. This diverse exposure represents a significant competitive advantage for TPL Overall, our oil and gas royalties are only 10% developed with the Delaware Basin being less developed than the Midland Basin. Within the Texas portion of the Delaware, TPL accounted for 49% of all spuds during the first quarter.We believe this gives us more runway to grow our royalties over time compared to our peers, as the Delaware should continue to support a high pace of growth in production. In addition to our oil and gas royalties, we also have surface ownership of our land. Over the past decade, technological advances in exploration and development have unlocked a tremendous amount of additional reserves contributing to a rapid build out of oil and gas infrastructure across the basin. These activities and others provide TPL enormous optionality to generate additional cash flows utilizing our surface assets.

I could have used more Q&A but overall I’d call this first call a win. Presenters were impressive and well prepared. Confidence building. I get the sense that cash is being kept on the balance sheet for opportunistic lifts. The little engine that was in the business of going out of business appears to be going the other way.

1Q21 Earnings

10-Q

Press Release

I was coaching first base when I heard my phone whistle its notifcation for the earnings press release.  During a pitching change I quickly skimmed the document.  When the batter stepped in I got so distracted thinking about the $20MM buyback number that I sent my runner to steal 2nd with a runner already on that bag.  Thankfully the third base coach, who probably owns BSM, saw my folly and called his runner.  Some bad thows later and it all ended up ok.  But $20MM?

My expectations for the quarter were pretty light due to the tough winter conditions and pandemic hangover but I expected more from the buy back.  Is this management telling us the price is too high?

The quarter ended with $310MM (~$40/share) in cash on the balance sheet.  Do I get a dividend?  M&A inbound?

Water was challenging.  What’s the plan there?