Horizon Kinetics commented on the 3rd Quarter recently. As most know, HK is a large holder of TPL and represents the gold standard for TPL commentary and sentiment. Comments on TPL were pretty light this quarter but appear favorable.
Would encourage a read of this whole piece. You don’t find much else like it from other managers.
In prior webinars we reviewed one technique for locating such securities: look among the multitude that have been excluded from the indexation vortex and which might therefore be anomalously cheap, and which might have business models that are not exposed to the same risks. We described some marine shipping companies, even large-cap ones like AP Mollar-Maersk, some drilling service companies like Subsea 7, non-standard security types like Texas Pacific Land Trust, which is not even a corporation, and so on. They have excellent or even perfect balance sheets, so are not at risk from interest rate or credit market shocks, and they operate in cyclically depressed industries so that they have plenty of positive revenue optionality, as well as profit margin and valuation optionality. In the extreme, if you owned only one, you might not be exposed to any conventional systemic risk.
We’ve made use of a similar improvement over existing market structure to be exposed to oil – since energy could be both a source of risk to the economy as well as a source of investment return – without the complexities and limitations of conventional oil producers. An ExxonMobil, for instance, must spend enormous sums of money, each and every year, to explore for new reserves to replace that which is depleted. Texas Pacific Land Trust, like Wheaton Precious Metals, is also a royalty company. Despite its $6 billion market value, it has only 47 employees. Its latest pre-tax profit margin, for the June quarter, was 89%. The only companies one might be able to identify with profit margins that high, and there are very, very few, are royalty companies.