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.’’
$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…
Trailing 12mo EPS stands at $21.79 as of 9/30/18.
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).
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
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.
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?
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?