The Other Side of the Checkerboard and !Abilene Christian!

Bloomberg: Texas Endowment at $31 Billion Passes Yale With Oil’s Help

The endowment was fueled by mineral rights from land it controls in the Permian Basin. It’s an area bigger than Delaware that has emerged in the past decade as the world’s fastest growing oil-producing region due to advances in hydraulic fracturing, or fracking. The state system shares the mineral rights revenue with Texas A&M University, which saw its endowment value surge to $13.5 billion.

The University of Texas controls 2.1 million acres of land in the Permian, which generated a record 5.3 million barrels in July as drillers built longer and longer horizontal wells to frack. The companies paid out a little more than $1 billion of royalties to the state school endowments in the year through August, the most since 2014 when oil prices topped $100 a barrel.

Get ready for this one…

Other schools that have benefited include Texas Christian University. The school in Fort Worth has 10 percent of its $1.6 billion endowment allocated to energy, with more than two-thirds in mineral rights it received from donors, said James Hille, the investing chief.

Abilene Christian University, a small private college west of Dallas, committed a quarter of its $450 million endowment to energy, including a big bet on the Permian region. The fund gained 15.8 percent in fiscal 2018, better than most wealthy U.S. colleges and eking past Bowdoin College’s 15.7 percent return.

Abilene Christian had a mix of energy investments when it decided in 2013 to ramp up its exposure with shares in Texas Pacific Land Trust, which controls vast tracts of land in the Delaware Basin in the western region of the Permian. The move proved prescient as Texas Pacific became the hottest oil stock from the U.S. shale boom, climbing more than 2,200 percent from 2010 before prices corrected in October.

The university had so much conviction in the investment it lifted its limit on how much the endowment may own in one company, said Jack Rich, the chief investment officer. A 3 percent commitment was increased to 11 percent this year and generated a 130 percent gain when some shares were sold, he said.

“That’s off the rails,” said Rich, who’s worked for the university’s administration for 28 years, creating an investment office about a decade ago. “We took some risk there.”

It’s rare for school funds to hold more than single-digit allocations to energy, said Fund Evaluation’s Busken. Many endowments and foundations have cut oil and gas under pressure to divest from fossil fuels.

Rich said Abilene Christian is diversifying into wind, solar and other sustainable energy producers. It’s also holding a position in Texas Pacific, even as the share price has tumbled with oil prices.

“Our edge is our willingness to buy into what we know, and that’s the energy market,” Rich said.

11% x 450MM = $49.5MM.  If Abilene Christian held that at the top ($870), it implies they held just under 57k shares.  Puts them in the Maurice Meyer ballpark at 0.8% of total market cap.

The quotes in the article are very “past tense” (“We took some risk there.”).  Selling all or part of 57k shares into TPL’s poor liquidity picture has to be a chore and presents one hell of a catalyst for the price to go lower.

XOM Turns It Up

Bloomberg: Exxon Becomes Top Permian Driller to Combat Falling Oil Output

I was asleep at the switch here.  This article is a few days old but worth reading.

It’s not hard to see why the Permian has become so important to Exxon. A series of strategic mistakes sent the oil giant’s overall production careening to a 10-year low by the middle of this year. Drilling wells in the the Permian, the world’s premier shale field, yields low-cost oil in months rather than the years required for megaprojects to begin producing crude.

Exxon isn’t alone in tapping U.S. shale after years of pursuing overseas resources. Chevron Corp. will spend the highest portion of its capital budget at home in at least a decade. The Permian now accounts for about 10 percent of Chevron’s overall production.

BP Plc this year agreed to spend $10.5 billion on BHP Billiton Ltd.’s shale assets to gain access to the Permian while Royal Dutch Shell Plc is mulling a bid for one of the basin’s largest private companies, people familiar with the matter said Monday.

Exxon’s escalation in the Permian is essentially a bet that it can drill wells so cheaply that they’ll be profitable despite crude’s tumble since early October. The company says its shale wells can make double-digit returns with oil at just $35 a barrel. On Tuesday, prices for oil produced from the Permian in Midland, Texas, dropped below $40 for the first time since August 2016. West Texas Intermediate traded at $47.25 at 2:03 p.m. in New York.

“The business we build in the Permian, we’re building for the long term,” Woods said in a Bloomberg TV interview last month. “It needs to be efficient, low cost and effective.”

Rountrip???

$455 as I write this.  Started the year at $444.  Does $TPL stay positive on the year?  YOY EPS will come close to 2.5x-ing but whatever.

Update 12/21/18:  With today’s close at $432 the Trust is offically under water on the year.  Recent trading patterns don’t have me optimistic about where the price will go during the last week of the year.  Guess we’ll get ’em in 2019.

I remain a buyer.  I’m spending more than I budgeted to pick up small blocks down here.  My kids will thank me.

tpl 2018 px action

Source:  Bloomberg

Does a Big League Business Need Big League Stock Liquidity?

Over the past 18mos TPL has evolved from a sleepy Trust to a fairly well known entity that is actively trying to grow EPS via a new and untested (water) strategy.

Can we argue that the purpose / ethos of the Trust has changed?  I think yes.

Do counterparties look at the performance of TPL stock as a sign of health when deciding to contract for water or other services?  Perhaps.

Do “big league” companies regularly have -7% down days in the complete absence of news?  No.

Are such drawdowns good for the confidence of counterparties?  No.

These things happen when the market makers “quote” the stock in 10 point markets.  10 points on $486 base price is 2%.

Is 2% an acceptable round trip trading cost for an entity with a $4B market cap?  No.

The conventional argument against a split was that the Trust is interested in keeping the price low for buybacks.  Well, where are they?  It appears as if capital return is shifting to dividends.

If the return strategy is dividends, why should the Trust care about the price?

If they don’t care about the price, should the Trust split the stock to enhance liquidity?  Yes.

The days of penny stock liquidity should be in the past for $TPL.

 

 

I remain a buyer.

 

 

Trailing P/E Check

23.9x as of 12/17/18.  Certainly at the low end of the range.

trailing pe 12-17-18

Update:  $TPL scraped off of $500 mid day today (12/18).  $500 implies a PE of 22.9x.  So down a turn day over day.

LTM earnings this time next year are likely somewhere between $25 and $30.  $25 x 22.9x = $572.5 or up 15% from here.

For reference, 20x current LTM earnings = $436.  Looks to be a reasonable floor which is funny as it just about half the peak price we saw earlier this year.  Two for one!

Source:  Bloomberg