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!

FORM 8-K

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.