Kevin Crowley of Bloomberg on TPL. May 2018

Bloomberg: The 130-Year-Old Bankruptcy That Created a $5 Billion Oil Giant

bloomberg map

I assume that most TPL-heads have seen this article but in the spirit of posting up all the resources / news / articles I find, here goes.

Kevin Crowley and David Wethe do a bang up job covering the the energy space for Bloomberg.  Kevin and David are particularly strong when it comes to writing about West Texas.  Be sure to give their stuff a look.

A couple notable takes from the article are below.  I worry/think about both:

Glover’s pay rose almost three times to $724,000 last year, while Packer got a similar increase to $753,000, according to the annual report.

Tyler Glover and Robert Packer (TPWR) are in the catbird seat and are going to want/deserve higher comp as some point in the future.  The Trust does not have a history of high pay though it seem like they are moving in that direction.

While it may have a unique history, Texas Pacific isn’t the only company making money from the Permian’s mineral leases. Diamondback Energy Inc. spun off its mineral rights into Viper Energy Partners LP in 2014. So far this year, Viper has climbed 28 percent.

Parsley Energy Inc.’s CEO last week said he’s “definitely looking into” doing something similar.

I think about bulk asset sales often.  TPL could hit a bid on the the mineral rights or the water biz (and its related land) and do a massive return of capital at any time.  The Trust, as designed (as far as I know) isn’t really a growth entity.

Maybe I’m way off?  Let me know.

 

Hot Then, Hot Now

Business Insider in 2014: One Of The Hottest Stocks On The NYSE Is A Company Most Of Us Have Never Heard Of — And It’s Got An Incredible Backstory

Much has changed in 4 years!

The Trust is a highly atypical company, and not only in terms of its financial performance. It manufactures no products and provides no services. It has never released a killer app or built a game-changing innovation, and it controls no patents. It maintains no factories, facilities, equipment, machinery, or inventory, nor does it carry any other meaningful expenses, aside from eight employees occupying a modest 27th-floor suite in a bland office tower in Dallas’ City Center. It has no competitors, no liabilities, and no debt. Its chief asset — land, lots of land — is finite and tends to steadily, reliably increase in value over time, that is, until someone figures out a way to suck out more oil, at which point it goes bananas.

TPL’s only real goal is to maximize returns while gradually liquidating its assets.

“Imagine the PowerPoint presentation,” muses Louis Geser, chief analyst for White Space marketing and an independent microcap analyst, who began purchasing TPL when it was around $35. “You could list what this company does on one hand, and it’s on autopilot.”

Not exactly, says David Peterson, the Trust’s CEO, who along with his team is kept pretty busy making real estate deals and keeping an eye on the accounts receivable. “It’s not as sleepy as it once was, that’s for sure, sir,” he says.

Tweet tweet

Search for $TPL on Twitter and you mostly come up with Binance lists to buy a crypto coin with the ticker TPL.  But every once in a while you come up with someone who is hip to what’s going on at TPL.

This might seem mundane but I think monitoring chatter in forums, twitter, bloomberg chat rooms, etc is very important for small cap stocks.

History of Oil In Texas

Texas State Historical Association: Oil and Gas Industry

Good and fun read here.  The article presents a digestible history of oil and gas in Texas.  Of note is a a great map of the original Texas & Pacific Railway line.

The record stops short of the modern fracking era.  There is still much more history to be made.

During the 1970s and 1980s the Texas oil and gas industry had what might well have been its last boom. Subsequently, economic, social, and political life in the state changed greatly. The petroleum industry, more than one-quarter of the state’s economy in 1981, fell to half that level ten years later. Massive losses in energy and real estate lending brought the collapse of the large home-owned financial institutions that had commonly been at the center of community development; of the large banks, Frost National alone survived. One-third of oil and gas employment was lost between 1982 and 1994. Workers left producing regions as rigs shut down and producers carried through successive reductions in staff; white-collar ranks thinned noticeably from the late 1980s onward, as producers cut technical and managerial personnel in the face of stagnant prices and rising costs. State and local governments found that lower income from production and property taxes necessitated austere budgets, and affected communities launched searches for new revenue and increased efforts to diversify their economies. The proportion of state government revenue from the petroleum industry declined to 7 percent in 1993, one-quarter of its level ten years earlier. In the final decade of the twentieth century, a great industry and the aspects of Texas life that were related to it were downsizing. Only petrochemicals gained: lower prices for oil and gas caused facilities to expand and related employment to increase by one-tenth between 1988 and 1991. This sector of the industry remained competitive in international markets, despite pollution control and abatement costs, which approached $1 billion a year in 1994. At a rate governed by international prices and technology, the rest of the petroleum industry in Texas was inching down the road from Spindletop.

Mental Models: a Changing of the Guard

A Tontine!

A Tontine is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases.

Posts like the one above reflect the old mental model of TPL.  (Though I never tire about thinking about tontines.  Tontines are the investment/insurance product that that the world doesn’t know it needs.)

Anyhow, the old mental model goes like this: TPL sells land and collects miscellaneous income.  Proceeds are used to repurchase and cancel shares.  The guy to hold the last share out wins whatever is left.

I’d argue that the new mental model is more growth oriented:  TPL is growing a water business which to me seems ripe for a spin-off (tax free!) or a sale at some point.  Royalty interests are growing in value at a pace far greater than inflation (thanks technology!).  Land not used for water has many uses in other oil extraction and logistics activities.  The stock is painfully illiquid and hard to repurchase (thus lower repurchases).  The company pays a dividend and has signaled an intention to make it regular.  What we have here is an asset rich growth stock! 

All signs point to liquidation and repurchase being pretty low on the priority list.  Growing (top line, bottom line, capex, head count, etc) appears to be the main focus.

How are you reconciling the two? I admit to having some trouble as I worry/think about the growth trajectory/asset value tops of the land and its associated income product (though these two things are a circular value).  Does TPL not do its best for the trust if it doesn’t sell all or materially all of its assets at the top?  Is there a new agency problem that needs to be explored with the growth? Employees don’t want to fire themselves; the internal incentive to liquidate has to be lower.  In my estimation, we’ve got a beautiful push/pull going on.  It’s going to be fun watching from here on out.