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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.

 

 

Environmental and Social Concience?

Produced Water Society on TPL and TPWR

Now, 130 years later, the scrub land owned by Texas Pacific Land Trust is a cash farm. Like University Lands, it makes money on mineral and surface rights. Unlike UL, it manages its water assets. Last June they formed a subsidiary called Texas Pacific Water Resources (TPWR). They have since grown from 2 employees to 52 and generated $25 million in 2017. Water revenue came in from selling brackish water (>1,000 mg/L TDS). They do not sell fresh water for fracking because they want to maintain an environmental and social conscience. They gather, treat, recycle and dispose of produced water. They track water, perform analytics and offer well testing services.

There is no use of the word “conscience” in the 10k or annual report.

Makes me wonder about the profitability of fresh water sales.

TPWR at Arm’s Length

I’m trying not to read too much into this, but it is notable that TPWR and TPL employees are in different locations with the water folks based in Midland and the “corporate” folks based in Dallas.

Additionally, TWPR has it own page on Linkedin that is a separate entity from the TPL corporate office page.  Only Tyler Glover (as far as I can tell) is listed in both directories.

While looking at these pages, it is worth noting that both units have been staffing up which is a departure from TPL’s old spending patterns but could be indicative of growth to come.

 

Recycle That Water!

UT News: Study Quantifies Potential for Water Reuse in Permian Basin Oil Production

The UT Bureau of Economic Geology led the study that highlights key differences in water use between conventional drill sites and sites that use hydraulic fracturing, which is rapidly expanding in the Permian. The study was published in Environmental Science & Technology on Sept. 6, with results indicating that recycling water produced during operations at other hydraulic fracturing sites could help reduce potential problems associated with the technology. These include the need for large upfront water use and potentially induced seismicity or earthquakes, triggered by injecting the water produced during operations back into the ground.

For conventional operations, the produced water is disposed of by injecting it into depleted conventional reservoirs, a process that maintains pressure in the reservoir and can help bring up additional oil through enhanced oil recovery. Unconventional wells generate only about a tenth of the water produced by conventional wells, but this “produced water” cannot be injected into the shales because of the low permeability of the shales. The study found that the produced water from unconventional wells is largely injected into non-oil-producing geologic formations—a practice that can increase pressure and could potentially result in induced seismicity or earthquakes.

The study points out that instead of injecting the produced water into these formations, operators could potentially reuse the water from unconventional wells to hydraulically fracture the next set of wells. Enough water is produced in the Midland and Delaware basins in the Permian to support hydraulic fracturing water use, and the water needs only minimal treatment (clean brine) to make it suitable for reuse.

Who’s got enough land to store and re-distribute vast quantities of water throughout the basin?

Below is a link to the study.  More to come from me after I dig in.

Study:  Water Issues Related to Transitioning from Conventional to Unconventional Oil Production in the Permian Basin

 

Another Good Overview (link)

Keith Schaefer: The Biggest Failure in US Shale is Also The Most Profitable

This website is very sales-y but Schaefer does a good job summarizing the basics of $TPL.

 

The quote below isn’t entirely correct as I’ve come to learn that Texas Pacific Water Resources (TPWR) is becoming more of a regular presence on the conference/ marketing scene and rightly so.

If you are looking to attend a Texas Pacific Land Trust session at an oil and gas conference you will be disappointed.

They won’t be there.

You aren’t going to be able to read an analyst report on this company either.  Nobody follows them since there are no investment banking fees to be earned here.

Even press releases from these guys are few and far between.  They announce quarterly earnings and that’s it.

The corporate website is functional and nothing more.

 

 

Royal Oils

Laurentian Research at Seeking Alpha: 

The Oil Royalty Companies: Get An Exposure To Rising Oil Price At Half Of The Risk

Good article here on interest types and valuations.  Great primer to understand an important part of TPL’s business.

 If buying“even slivers of royalty interests can dramatically improve the economic life of a field“, then it naturally follows that a portfolio purely of royalty interests, unblemished by cost-burdened working interests, is supposed to deliver superior economics. If you can have all the good stuff, nothing but the good stuff, why bother to own the inferior stuff? The good stuff here is the royalty interest, while the inferior stuff is the working interest.

This is where the royalty companies come in.

TPL differs from most if not all of the trust below by virtue of its surface land ownership.  Royalties are an important part of the TPL circus but they certainly aren’t the only act.

The oil royalty trusts typically produce from and gradually deplete the royalty-interest-bearing properties without asset replacement until their exhaustion. Examples of the royalty trusts include Texas Pacific Land Trust (TPL), BP Prudhoe Bay Royalty Trust (BPT), Sabine Royalty Trust (SBR), Permian Basin Royalty Trust (PBT), San Juan Basin Royalty Trust (SJT), SandRidge Permian Trust (PER), Enduro Royalty Trust (NDRO), MV Oil Trust (MVO), Pacific Coast Oil Trust (ROYT), VOC Energy Trust (VOC), Cross Timbers Royalty Trust (CRT), Chesapeake Granite Wash Trust (CHKR), North European Oil Royalty Trust (NRT), SandRidge Mississippian Trust II (SDR), SandRidge Mississippian Trust I (SDT), ECA Marcellus Trust I (ECT), Mesa Royalty Trust (MTR), Hugoton Royalty Trust (OTCQX:HGTXU), and Marine Petroleum Trust (MARPS).

The authors give TPL it’s due later in the article.   Nice of them to make an exception.

Asset durability

Fee simple mineral title and overriding royalty interest last forever, while net profit interest and volumetric production payment expire along with the underlying leasehold (see here). Perpetual ownership enhances the intrinsic value of the royalty interest immensely.

Texas Pacific Land Trust (TPL) is one of the largest landowners in Texas with 890,000 acres in the much-prized West Texas, which were previously held by the Texas and Pacific Railway Company. By retaining perpetual non-participating oil and gas royalty interests, the trust generates revenue from royalties from oil and gas and from pipeline easements and leases. The trust also generates revenue from royalties on sales of water and direct sales of water. Generally, we avoid trusts, but Texas Pacific’s sheer size makes it an exception (Fig. 7).

Fig. 7. The land holdings of Texas Pacific Land Trust

Some Color on TPL’s Royalty Interest. Go Get ‘Em $CVX!

Glenn Stehle comments at Peakoilbarrel.com

The performance of the Texas Pacific Land Trust stock certificates gives a glimpse of what investors believe is to come once Chevron begins drilling shale wells on its acreage.

The trust owns a 1/16 non-participating royalty interest under 377,777 acres of the Chevron acreage, and a 1/128 non-participating royalty interest under 85,414 acres. Most of the acreage is in the Delaware Basin, but a small part is in the Midland Basin. Another part is outside the Permian Basin.

When the Wolfbone play began in 2005 the stock certificates went from about $10 a share to about $40. But the big jump occurred in 2013 when the shale play began in the Permian Basin. Since then the stock went from $40 to $300.

So overall there has been about a 3,000% appreciation in the price of the stock over the last ten years. And Chevron hasn’t even began drilling shale wells on the acreage in any significant way yet.

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