Texas Pacific Land Trust: Large Dividend Increases And Steady Buybacks
On the road with the kids so I haven’t had a chance to read this yet. Didn’t want to delay on sharing.
Happy New Year!!
Month: December 2018
Another Insider Buy
Trustee David Barry lifts 100 @ $476
More skin in the game.
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.”
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.
Safe Haven
Bloomberg: U.S. Shale Becomes Oil Industry’s Safe Haven as Prices Languish
The cost of shale production has fallen so much since then that it’s becoming a safe haven for major oil companies in times of volatile prices, providing rapid, reliable growth and quick returns even with crude trading for just over $50 a barrel, down by almost a third since the start of October.
ConocoPhillips said Monday it’s spending half its 2019 budget in the continental U.S., while Chevron Corp. is investing more at home than it’s done for more than a decade, with $3.6 billion going to the Permian Basin alone. Anadarko Petroleum Corp. and Hess Corp., both global operators, plan to increase spending on their American assets more than 40 percent.
Oil’s recent collapse caused “some different allocation going on within the budget,” Conoco Chief Executive Officer Ryan Lance said on Bloomberg TV. “We’re putting more toward our U.S. unconventional position,” he said, referring to shale.
Production growth “slows down at $50 but I don’t think it stops at $50, and it certainly continues if prices get back to $60,” Lance said. Skeptics thought shale “wouldn’t last long, but it’s here, it’s a huge resource and it’s going to be resilient and long lasting.”
Water
Harvard Quietly Amasses California Vineyards—and the Water Underneath
This post is a bit off our normally beaten path but the parallels are interesting.
The university’s endowment manager, Harvard Management Co., was stealthily building a sizable grape-growing business on the Central Coast through entities including Brodiaea. With the land, it was acquiring rights to vast sources of water in a region where the earth’s warming is making the resource an ever-more-valuable asset.
In a warming planet, few resources will be more affected than water, as more-frequent droughts, storms and changes in evaporation alter a flow critical for drinking, farming and industry.
Even though there aren’t many ways to make financial investments in water, investors are starting to place bets. Buying arable land with access to it is one way. In California’s Central Coast, “the best property with the best water will sell for record-breaking prices,” says JoAnn Wall, a real-estate appraiser who specializes in vineyards, “and properties without adequate water will suffer in value.”
HK Interview in Value Investor Insight
Active Voice
When we first bought into this in 1995, we basically signed on for a 5% or so return from stock buybacks and the dividend, with pretty much infinite call options on what they could make happen with the land. Maybe people wanted to develop it. Maybe there was oil there that could one day be economically extracted. We didn’t really know, but we liked the potential odds.
HK has the same questions as the rest of us.
With respect to capital allocation, an increasingly important question for TPL
is how it will deploy its increasing earnings. The trust has been repurchasing and
cancelling shares for 120 years, but there’s a limit to the number of open-market purchases that can be made when average daily trading volume is less than 20,000 shares. With capital-expenditure requirements limited, it’s not a stretch to conclude we’re going to see a big increase in dividend payments. The dividend yield is still very low on a $600 share price, but in February of this year the Trustees raised the regular dividend from 35 cents per share to $1.05, and paid an additional special dividend of $3 per share. One doesn’t require a graph to infer the near-term slope of the line. We wouldn’t be surprised if over time TPL qualified for a dividend ETF or a REIT ETF.
7x Bakken
USGS: Permian’s Wolfcamp is largest potential oil and gas resource ever assessed
The region in the Permian’s western Delaware Basin holds more than twice as much oil as the largest previous assessment – the Wolfcamp shale in the Permian’s separate Midland Basin southeast of Midland. That study was completed two years ago.
To put the new results into perspective, the Delaware Basin’s Wolfcamp and Bone Spring plays would hold almost seven times as much oil as North Dakota’s Bakken shale.
The Wolfcamp shale and overlying Bone Spring in the Permian’s booming Delaware Basin hold an estimate 46.3 billion barrels of oil, 281 trillion cubic feet of natural gas, and 20 billion barrels of natural gas liquids, according to the U.S. Geological Survey’s new assessment.
Management Buys – Updated
Packer: SEC Form 4
Glover: SEC Form 4
Tyler Glover and Robert Packer both bought the dip. Packer lifted 100 @ $589. Glover lifted 100 @ $598. Nice lifts! Hard to take this as anything but a long term positive. Glad to see management continue to put their money beside ours.
Hedgies
Hedge Funds Are Crazy About Texas Pacific Land Trust
I’m fairly sure a robot wrote this but it might be worth adding to your mosaic nonetheless.
At Q3’s end, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. On the other hand, there were a total of 9 hedge funds with a bullish position in TPL at the beginning of this year. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
The largest stake in Texas Pacific Land Trust (NYSE:TPL) was held by Horizon Asset Management, which reported holding $1578 million worth of stock at the end of September. It was followed by Polar Capital with a $24.7 million position. Other investors bullish on the company included Arrowstreet Capital, White Elm Capital, and Renaissance Technologies.
Consequently, key hedge funds have been driving this bullishness. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, created the most outsized position in Texas Pacific Land Trust (NYSE:TPL). Polar Capital had $24.7 million invested in the company at the end of the quarter.
Ruminations
Steven Miller on SA: Texas Pacific Land Trust: Review Of The Quarter And Ruminations About The Future
Good read here. The article includes a good synopsis of recent price and trust performance along with some practical thoughts about the future.
Steven is still long but isn’t optimistic about near term prices due to a forecast flattening earnings and overdone investor optimism. Miller does seem positive about the long term trajectory of TPL.
The water business is new and growing; it already contributes 18.1% of the revenue. How long can the growth continue? The Permian Basin Oil & Gas Magazine reported last May that producers are able to satisfy most drilling requirements with local uses of water. “That and the influx of water treatment companies have made the market ‘brutally competitive.’” The Trust has managed to thrive in that competitive environment to date, but it may not have a large moat.
Projecting a stock price remains quite speculative. Given the increased focus investors have on cash flow and the projected fall in revenues, I do not expect the stock price to rise much from its current point. On the other hand, the pipelines are coming. Management is proactive. The Trust will continue buying back shares, per its charter. Management is doing something interesting with selling and buying land. The Trust remains a favorite among far-sighted investors. All these factors will keep the stock from sinking too far. Taking into account both the short-term bears and the long-term bulls, I project the stock to move sideways in a channel between $500 and $600 per sub-share (the Trust’s unique name for “shares”) for the next two quarters.
Revenues for the next quarter are projected to drop. A corresponding drop in stock price is entirely possible, but long-term investors will likely use any opportunity to buy shares. The Trust will continue to buy back shares as well. Therefore, barring any catalyst, I am looking for the stock to trade in a range of $500 to $600 for the next two quarters. Traders could well find some nice opportunities in that price range. Should management have another surprise announcement, the stock could well soar again far beyond that range.
The Texas Pacific Land Trust Investor 