Can TPL Do That?

TPL Declaration of Trust

There have been a number of questions on Seeking Alpha and Yahoo Conversations pertaining to 1) TPL’s dividend policy, 2) TPL entering into the water business, and 3) TPL’s recent (though not complete) land swap.

To me, it appears as if management is acting in accordance with the Declaration of Trust (linked above).  Here is why I think that…

Can TPL pay a dividend?  I thought they were a liquidating trust?

SEVENTH. Dividends to the certificate holders out of moneys derived from
royalties for coal and minerals, and from the net rents, issues and profits
derived from the use of the said lands, premises and property, and proceeds of
sale of said lands, premises and property, or of any part thereof, shall be made
by the trustees in their discretion whenever such moneys, net profits and
proceeds shall be sufficient for that purpose after providing for all taxes,
expenses, liabilities and engagements of the trust; but the trustees shall have
power in their discretion whenever it shall appear to them for the interests of
the certificate holders, to apply such parts of the funds derived as aforesaid,
which would otherwise be applicable to dividends, as they may think fit, to the
purchase of outstanding certificates under such proper regulations as they may
prescribe, and all certificates purchased under this power shall be forthwith
canceled. Dividends shall be payable only to the persons who are by the books of
the trustees shown to be certificate holders at the time the dividend shall be
payable and the books may be closed by the trustees for a reasonable time for
the payment of such dividend.

I thought TPL was a liquidating trust, why did are they spending money on the water business? 

TPL sold a bunch of land.  Why are they swapping for other properties and not buying back stock? 

     FIRST. The said Charles J. Canda, Simeon J. Drake and William Strauss and
the survivors and survivor of them, and their successors or successor in the
trust (hereinafter, for brevity, styled "the Trustees"), shall have and exercise
the management, control and ownership (both legal and equitable) of the said
lands, premises and property. They shall have all the powers in respect of said
property of an absolute owner, as to selling, granting, leasing, alienating,
improving, encumbering or otherwise disposing of the same or of any part or
parcel thereof, and they may, whenever they shall deem it necessary or advisable
for the protection or benefit of the property or any part thereof, purchase
other lands and premises, and when purchased such other lands and premises shall
be held and managed by the said trustees under the terms and provisions of this
declaration of trust in the same manner as the lands and premises hereinbefore
described are held and managed.

Land Sale!


On November 21, 2018, Texas Pacific Land Trust (the “Trust”) entered into a Purchase and Sale Agreement (the “Sale Agreement”), pursuant to which the Trust agreed to sell approximately 14,000 surface acres of land in Loving and Reeves Counties, Texas for an aggregate purchase price of $100,000,000 (the “Sale”) as may be adjusted based on the terms and conditions of the agreement. The Sale excludes any mineral interest in the lands to be conveyed.
The Sale is subject to a number of closing conditions, including the buyer’s due diligence investigation and option to reduce the acreage to be conveyed by as much as 1,920 acres with a corresponding reduction of the purchase price. The Sale Agreement contains standard representations and warranties related to each party, and may be terminated prior to the closing under certain circumstances. The Trust anticipates that the closing of the Sale will occur during the first quarter of 2019.
The Trust intends to use proceeds of the Sale to acquire like kind properties.
The foregoing description of the Sale Agreement is qualified in its entirety by reference to such agreement, which will be filed in accordance with SEC regulations.
Sounds to me like a land swap.  Perhaps TPL is looking for acreage adjacent to other parcels of land it owns to make contiguous land for the purposes of a pipeline (oil/gas) or to support/grow the water business in some way (water pipeline, water disposal, etc).
My second hunch is that these proceeds plus the $110MM on the balance sheet will work in combination to achieve first hunch described immediately above.
Thinking out loud.  $100MM is 2.2% of the current market cap.  The 14k acres sold are 1.6% of the 890k acres owned by the Trust.  Of course the acres sold are likely not representative of the whole but the implications are positive.

From the WSJ Archives

Texas Pacific Land Trust Offers A Get-Rich-Slow Opportunity

Oldy but goody here from 1998.  The modern owner has to wonder if Bregman’s quote around a “creeping buyout” will hold true from here.

“People are going to become less interested in ‘concept’ stocks that sell at hope times greed times infinity,” says Mr. Shaefer, who is also editor of the Investor’s Edge newsletter, which has pushed Texas Pacific. Instead, investors will “be looking for real underlying asset value in the companies they own.”

Mr. Shaefer says his fund bought an undisclosed stake in Texas Pacific in January 1997 at $27.63 a share, and he doesn’t plan to sell until the stock reaches at least $80. By his calculations, the underlying assets are worth about $100 a share right now.

At its current rate, the trust is buying back stock more quickly than it’s selling land. Between 1980 and 1995, the trust reduced its number of outstanding shares by 34% but reduced its land inventory only 8%, from 1.2 million acres to 1.1 million acres.

Steven Bregman, president of Horizon Asset Management in New York, has researched Texas Pacific for his firm’s Contrarian Research Report and believes the stock is worth buying. “It’s cheap,” he says. “As long as you want to hold it for a decade, you put it away and forget about it and get rich slowly.”

The buybacks, says Mr. Bregman, are “like a creeping buyout. It’s a snowball effect.”



Repurchase Ability

Just a quick post to put the $110MM in cash on $TPL’s balance sheet in perspective.

$110MM / $560 (current price ) = 196k shares.

196k shares / 7.774MM total share float = 2.5% of total.

That’s big.  And as a material holder, it’s certainly preferable relative to a cash dividend (read: taxes!).



Desperately Seeking Alpha

Shareholders Unite via SA: Texas Pacific Land Crashed Along With Oil, What Now?

Some new analysis on Seeking Alpha is linked above.  Along with the analysis comes with a spicy comment section.  Lots of long term bulls mixed in with a few heroes that sold and plan to reload at the “bottom”.  Godspeed.

The article concludes that TPL will be ok (my words) as long as the price of oil stays reasonable.  “Reasonable” happens if OPEC/Saudi cuts production to take some supply out of the market.

While it’s fair to think about TPL as a strong derivative of oil, it is also worth thinking about the long game.  What is the terminal value of the land?  What drives that terminal value?  What about solar?  Migration/settling patterns?  Water?  New oil extraction technology?  Defense?  900k acres of arid land in the good old USA.

I’m not hanging my hat on OPEC playing ball.

Some quotes from the article:

You see that the volume effects are actually far outweighing the price effects, which is potentially worrying should the reverse happen:

-Because they compound, a lower oil price directly leads to lower royalty revenue per barrel, but also to less barrels produced.

-Insofar as the present explosion in the natural gas price is caused by production cuts in oil, it doesn’t provide much of a compensation as volume effects will counterbalance the price effects.

So OPEC is our friend here, they have learned an (expensive) lesson in 2015 and will try to limit output to support prices. As we already mentioned, there is considerable support from the price of natural gas:

And this at least provides some compensation from the loss from oil, but we should keep in mind that the gas price is rather volatile. Whether the present spike is going to last remains very much to be seen, although there are signs a tighter market is a more structural feature, as SA contributor Atlas Research has argued.

That is, if the world economy doesn’t slow down big time, and OPEC instigates production cuts and gas prices stay high, the damage to TLP could be fairly modest.

Unless we’re entering a really prolonged bear market in oil with no help from OPEC cutting whatsoever affecting not only prices but also production volumes of oil and gas in the Permian (and planned pipeline investments), we see no reason to get particularly worried about TPL. That scenario isn’t impossible, but we think it’s fairly remote.

More likely is that OPEC will cut production, and prices will stabilize or recover a bit. In this case, we’ll probably won’t see any production volume effect and we would argue that the price effect is already fully priced in, especially given the very firm natural gas price of late.

Still, the decline of the share price is understandable as production volume growth is likely to be more muted going forward, but this is a process that takes quite a lot of time to produce any meaningful impact, and what happens between now and then is anybody’s guess.

In short, we think at current prices offer a first entry point for a fairly unique kind of company.


Home Made Selloff

WSJ: In Oil’s Huge Drop, All Signs Say Made in the U.S.A.

Investors remain skeptical that the OPEC meeting in Vienna on Dec. 6 will be able to turn the tide on oil supply enough to support prices.

A big reason why: the emergence of the U.S. oil industry as one of the world’s most important players. Ballooning shale production—American output has nearly doubled since the start of 2012—has made the U.S. a key supplier and exacerbated worries about a global glut of crude.

“I never thought I would hear these kinds of numbers coming out of the U.S.,” said Bob Yawger, director of the futures division at Mizuho Securities USA. “This is going to force OPEC’s hand.”

This summer, the U.S. surpassed Saudi Arabia and Russia as the largest crude-oil producer—a title it hadn’t held since 1973, according to the International Energy Agency. Monthly output in the U.S. was a record 11.65 million barrels a day in September and nearly the same amount in October, according to energy consulting firm Wood Mackenzie, while Saudi Arabia’s supply was nearly 11 million barrels a day last month and Russian production stood at 11.4 million a day.

“It used to be the world was divided into OPEC and non-OPEC,” said Daniel Yergin, vice chairman of IHS Markit, which projects the U.S. will be a net exporter of petroleum in the early 2020s. “Now it’s the world of the big three.”

If the price of oil drops too far, too fast, that could also hurt U.S. producers, especially in the shale patch. Most shale drillers now maintain they can break even at $50 or lower. But the falling prices have begun to eat into their profitability, and some may be forced to curtail spending next year and reduce ambitious growth plans if prices decline much more.


Don’t Mess With Texas

Bloomberg: Texas Is About to Create OPEC’s Worst Nightmare

Fairly sensational headline but some good soundbites.  The pain trade that nobody/everybody expects is for Saudi to keep pumping.  Yes, I know it exhausts their fields and plays havoc with revenue for their massive social programs but it didn’t stop them in ’15/’16.

Now growth is speeding up. In Houston, the U.S. oil capital, shale executives are trying out different superlatives to describe what’s coming. “Tsunami,’’ they call it. A “flooding of Biblical proportions’’ and “onslaught of supply’’ are phrases that get tossed around. Take the hyperbolic industry talk with a pinch of salt, but certainly the American oil industry, particularly in the Permian, has raised a buzz loud enough to keep OPEC awake.

Only a few months ago, the consensus was that the Permian and U.S. oil production more widely was going to hit a plateau this past summer. It would flat-line through the rest of this year and 2019 due to pipeline constraints, only to start growing again — perhaps — in early 2020.

If that had happened, Saudi Arabia would’ve had an easier job, most likely avoiding output cuts next year because production losses in Venezuela and sanctions on Iran would have done the trick.

Instead, August saw the largest annual increase in U.S. oil production in 98 years, according to government data. The American energy industry added, in crude and other oil liquids, nearly 3 million barrels, roughly the equivalent of what Kuwait pumps, than it did in the same month last year. Total output of 15.9 million barrels a day was more than Russia or Saudi Arabia.

“The narrative has shifted significantly,’’ said John Coleman, a Houston-based oil consultant at Wood Mackenzie Ltd. “Six months ago, the market expected the bottleneck to ease in the first quarter of 2020. Now, it expects it in the second to third quarter of 2019.’’





Cimarex Buys Resolute


$1.6B / 21k acres = $76,190/acre.

Resolute’s 21k acres compares well with TPL’s 24k net acre position though I’m learning that non-operating stakes are generally valued higher.

Anyhow, if we say TPL’s mineral rights are worth $1.6B, the rest of it is worth $2.85B with the stock price at $573.

Royalties were 42% of top line over the nine months ended 9/30/18 and for Q3 by itself.  If we take out the O&G top line from net income (meaning no expenses are attributed to it), we get to a projected quarterly after tax net income of $25.7MM/quarter and $102.6MM/year simply based on Q3 results.  ~$100MM in earnings per year implies a 28 P/E on all non-royalty income.

$63,195k before tax Q3 net income – $31,253k O&G top line = $31,942k projected net income before tax.  After tax, we can estimate it to be $25,657k or $3.30/share.

$25,657k x 4 = $102.6MM in earnings per year.

$2.85B remaining market cap / $102.6MM earnings = 27.7x estimated P/E.

Oh, and the land is worth something too…



Valuation Checkup

Trailing 12mo EPS stands at $21.79 as of 9/30/18.

12mo trailing eps

Since the quarter printed, we’ve seen the Trailing 12mo Earnings multiple contract from 39.6x to 26.3x.

26.3x is below the long term mean of 28.8x but comfortably inside one standard deviation from the mean (17.4x).

px and pe

It appears that TPL’s multiple had a bit of a regime shift in late 2005.  After that point, P/Es were generally higher with an average of 36.1x.  Though the P/E also appears more volatile, the standard deviation of the smaller sample is 10.9x vs 11.4x for the entire history displayed.

Fair value at long term P/E mean = $21.79 x 28.8x = $628

Fair value at 9/2005 through current P/E mean = $21.79 x 36.1x = $726

Source: Bloomberg


Playing the Long Game

Chevron, EOG Resources, Exxon Mobil and Royal Dutch Shell are among 17 companies backing the Permian Strategic Partnership, as the consortium is called, Don Evans, a former U.S. government official and energy executive helping launch the group, told Reuters on Saturday.

The group seeks to address labor and housing shortages, overtaxed health care and traffic congestion caused in part by companies descending on the Permian Basin, the nation’s largest oilfield, where they hope to pump billions of dollars’ worth of oil and gas in coming decades, experts said.


Large Players Ramping Up Shale Production

WSJ: Oil Giants Start to Dominate U.S. Shale Boom

Some good stats and soundbites here on US onshore shale production.

Chevron’s output in the Permian Basin of Texas and New Mexico rose 80% for the year ended in September, eclipsing some of the small producers that spent years building up their fracking positions.

While many big oil companies were slow to fracking, bigger companies have tended to benefit as technology matures and drillers shift from exploration to large-scale production.  That trend is most apparent in the Permian Basin. Large companies including Exxon, Chevron, BP, Shell and Occidental this year are set to produce an average of about 600,000 barrels a day of crude in the region, up 54% from last year. By 2021, their output there will exceed 1.1 million barrels a day, or about 20% of the area’s total shale-related output, according to consulting firm Rystad Energy.

Pipeline access is another area where bigger companies fared better. As U.S. oil production soared above 11 million barrels a day, growth exceeded existing pipelines, forcing smaller companies to sell their oil at a discount. Crude sold in the Permian Basin was discounted by an average of $14 a barrel during the third quarter, according to S&P Global Platts. That differential has since contracted to about $5.

Endeavor Energy for Sale

Chevron, Exxon Mobil Weigh Bids for Endeavor Energy

There is talk that XOM or COP could by Endeavor for up to $15B.  Endeavor is a Midland based producer that owns 320k net mineral acres.

$15B / 320k acres = $46,875/acre.

TPL owns 24,028 net acres in mineral rights.  (Acreage x 1/16 or 1/128).

At that rate, TPL’s mineral rights business is worth $1.13B.

Adjusting TPL’s $4.65B market cap for the $1.13B = $3.52B for all surface land and revenues derived thereof.  Surface land @888k acres = $3,963/acre.

Said another way, the mineral business is worth $144 share.

So what would you pay for all that land and $200MM+ a year top line (soon) from water, sundry, and easements?

History Lesson : Mineral Interest Sale

Fun read at

In the late 1800’s, TPLT was given several million surface acres by the Texas Legislature in exchange for constructing the Trans-Texas Railroad. In 1954, TPLT obtained a declaratory judgment in a Texas district court authorizing it to create a subsidiary company, TXL Oil Corporation, for the purpose of conveying to that company all of TPLT’s mineral interests. On December 10, 1954, TPLT conveyed to TXL all of its mineral interests underlying its 2 million surface acres. Under this conveyance, TXL reserved all of its surface acres as well as a non-participating royalty interest in those lands under an oil and gas lease to third parties. In 1962, TXL sold all of the mineral interests to Texaco, Inc., and Texaco, Inc. conveyed these mineral interests to Texaco Exploration and Production, Inc. (TEPI) in 1991. Texaco, Inc. and/or TEPI owned and operated the mineral interests until 2002 when they were acquired by Chevron U.S.A. in the merger between Chevron Corporation and Texaco, Inc.

Anyone know what happened with the proceeds?

Duc Duc Goose

Bloomberg: End Is Near for ‘Frack Holiday’ While Permian Readies 2019 Boom

But with at least three major pipeline projects scheduled to come online next year, producers are now seeing the problem as a mere footnote in the basin’s ongoing story of surging production growth. Pioneer Natural Resources Co. has enough pipe space to transport all its oil out of the basin through 2020 while Diamondback Energy Inc. has substantial capacity coming on new pipelines next year, the companies said Wednesday.

This year, the number of wells drilled but waiting to be fracked has increased 50 percent to 3,722, indicating a new wave of production is set to be unleashed once the pipes are ready, spending budgets are approved and frack crews are available.

TPL reports being party to 303 DUCs.  Could it be true that they have partial royalty rights on 8% of all the wells in the Permian?