4Q Earnings

Press Release

$8.06 per Sub-share Certificate!

A not often used tool in toolkit below.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the year ended December 31, 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Back royalty sales out of earnings and you get to $43.8MM which is light to $50.8MM last quarter which (I guess) shouldn’t be surprising given a dip in realized oil prices.  Royalties were still up on the quarter nevertheless as barrels produced continued to rise the Permian.  Sundry top line was flat.  Water top line down was down 9.3% vs Q3 to $16.5MM.

I’m inclined not to panic about the dip in water revenues as the business is still in its infancy.  That said, my expectation was for modest growth given continued increases in Permian region oil production throughout the quarter.  More to come on that topic.

 


Texas Pacific Land Trust Announces Fourth Quarter 2018 Financial Results

DALLAS, TX (January 31, 2019) – Texas Pacific Land Trust (NYSE: TPL) today announced financial results for the fourth quarter ended December 31, 2018.

Results for the fourth quarter of 2018:

  • Net income of $62.7 million, or $8.06 per Sub-share Certificate, for the fourth quarter of 2018, compared with $24.6 million, or $3.14 per Sub-share Certificate, for the fourthquarter of 2017.

 

  • Revenues of $93.2 million for the fourth quarter of 2018, compared with $40.0 million for the fourth quarter of 2017.

 

  • Increases of 177.0% in water sales and royalty revenue, 135.8% in oil and gas royalty revenue and 17.0% in easements and sundry income for the fourth quarter of 2018, compared with the fourth quarter of 2017.

Results for the year ended December 31, 2018:

  • Net income of $209.7 million, or $26.93 per Sub-share Certificate, for the year ended December 31, 2018, compared with $97.2 million, or $12.38 per Sub-share Certificate, for the year ended December 31, 2017.
  • Revenues of $300.2 million for the year ended December 31, 2018, compared with $154.6 million for the year ended December 31, 2017.
  • Increases of 150.3% in water sales and royalty revenue, 112.0% in oil and gas royalty revenue (144.2% excluding the arbitration settlement with Chevron U.S.A., Inc. (the “Chevron Settlement”) in September 2017) and 26.8% in easements and sundry income for the year ended December 31, 2018, compared with the year ended December 31, 2017.

Further details for the fourth quarter of 2018:

Oil and gas royalty revenue was $35.8 million for the fourth quarter of 2018, compared with $15.2 million for the fourth quarter of 2017, an increase of 135.8%. Crude oil and gas production subject to the Trust’s royalty interests increased 98.5% and 225.0%, respectively, in the fourth quarter of 2018 compared to the fourth quarter of 2017. In addition, the prices received for crude oil production increased 15.4% in the fourth quarter of 2018 compared to the same quarter of 2017 while prices received for gas production decreased 21.2% over the same time period.

Easements and sundry income was $21.9 million for the fourth quarter of 2018, an increase of 17.0% compared with the fourth quarter of 2017 when easements and sundry income was $18.7 million. This increase resulted primarily from an increase in pipeline easement income and lease rental income, partially offset by a decrease in permit income and material sales for the fourth quarter of 2018 compared to the fourth quarter of 2017. Pipeline easement income increased $4.3 million in the fourth quarter of 2018 compared to the same quarter of 2017.

Water sales and royalty revenue was $16.5 million for the fourth quarter of 2018, an increase of 177.0% compared with the fourth quarter of 2017 when water sales and royalty revenue was $6.0 million.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the fourth quarter of 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Further details for the year ended December 31, 2018:

Oil and gas royalty revenue was $123.8 million for the year ended December 31, 2018, compared with $58.4 million for the year ended December 31, 2017, an increase of 112.0% (144.2% excluding the $7.7 million Chevron Settlement received in September 2017). Crude oil and gas production subject to the Trust’s royalty interests increased 110.0% and 178.5%, respectively, in the year ended December 31, 2018 compared to the year ended December 31, 2017. In addition, the prices received for crude oil production increased 21.6% in the year ended December 31, 2018 compared to the year ended December 31, 2017, while prices received for gas production decreased 24.2% over the same time period. The changes in production and price for the year ended December 31, 2018 compared to the year ended December 31, 2017 exclude the effect of the Chevron Settlement.

Easements and sundry income was $88.7 million for the year ended December 31, 2018, an increase of 26.8% compared with the year ended December 31, 2017 when easements and sundry income was $70.0 million. This increase resulted primarily from increases in pipeline easement income, lease rental income and permit income for the year ended December 31, 2018 compared to the same period of 2017. Pipeline easement income increased $8.0 million for the year ended December 31, 2018 compared to the same period of 2017.

Water sales and royalty revenue was $63.9 million for the year ended December 31, 2018, an increase of 150.3% compared with the year ended December 31, 2017 when water sales and royalty revenue was $25.5 million.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the year ended December 31, 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Land sales revenue was $4.4 million for the year ended December 31, 2018. The Trust sold approximately 171 acres of land for an average price of approximately $25,464 per acre. Land sales revenue was $0.2 million for the year ended December 31, 2017.

Texas Pacific Land Trust Announces Fourth Quarter 2018 Financial Results

“Water Is The New Oil”

Bloomberg: Water Is Almost as Precious as Oil in the Permian Basin

Demand for water to use in fracking in the Permian has more than doubled from 2016 levels, according to industry consultant Rystad Energy. Demand should grow to more than 2.5 billion barrels by next year, accounting for nearly half of all U.S. oilfield needs.

“It used to be you’d get a great cow ranch that had good grass for your cattle, and hunting or recreation was an add-value revenue stream and discovery of oil or gas was also this cream on the cake,” Uechtritz said. “Now, it’s wind and water.”

Wayback Machine – Dallas Morning News

The most unusual stock tip I’ve ever gotten

This article from 2012 was linked today in the Yahoo Finance TPL conversation board.  A good one for the archives!

Chief executive Roy Thomas, who offices in downtown Dallas on Pacific Avenue, said the trust still holds about 1 million acres in 20 counties in West Texas. He explained that in the early years after the trust was established, the land was difficult to sell because of its location in the middle of nowhere.

Then the West Texas oil boom hit the Permian Basin in the early 1900s, and this land became more valuable because of the oil and gas royalties. So the trustees back then and now have been in no hurry to sell it.

Even today, he said, the company sells only a few thousand acres every year but makes a bundle in oil and gas royalties. Texas Pacific booked $34 million in revenue last year, and about $14 million came from royalties. That is a 50 percent increase in revenue from the previous year.

“Buying back shares and retiring them is really the main thing we do with our cash flow,” Thomas said. “We only retire shares. The trust is prohibited from reissuing shares or giving me shares because someone thinks I’m doing a good job.”

 

 

 

Net Exporter

How OPEC Is Helping U.S. Oil Reach a Tipping Point

Quick read here but a good one.  The subtext is that US production keeps exceeding expectations.

Soaring U.S. production, driven by the extraction of oil from shale, has transformed the country’s prospects. Two years ago, when the EIA first started publishing its detailed forecast for 2018, it saw U.S. output ending the year at 9.44 million barrels a day. It now sees last month’s figures at a staggering 11.8 million.

Its most recent forecast shows the growth trend slowing for much of 2019, before picking up again in 2020, following the expected start-up of new pipelines to carry oil from the Permian Basin to the Gulf coast in the second half of this year. A similar pause in growth was forecast for the summer of 2018, but it didn’t materialize. The EIA has consistently underestimated the U.S. production rate, and could do so again.

Kinetics Funds Update : Midland Oil Looking Up

My notes (not TPL specific):

  • HK funds have active share of 98%+.  No regard for indicies!
  • SEC asked about large cash position in Kinetics funds.  Kinetics guided that cash will stay high given their conservatism.  (magnifies their conviction on TPL when you think about it)
  • Buystocks when their potential rate of return lines up with return on capital of the business.  That alignment is not present now.  Valuations still stretched
  • Yield curve flattening -> banks don’t make money -> economy slows (tho we didn’t see bank NIMs get crushed this quarter)
  • HK overall thinks rates can’t go up without completely crushing the economy (see FRMO call)
  • US rates > overseas rates.  Keeps demand for USD strong
  • $47T in US bonds outstanding and most of them have yields smaller than inflation.  Hard to get > inflation in IG.  Have to go to HY for that
  • This has been the case for quite some time and equity has been the only place to turn.  Thus high valuations
  • Commodity inflation/growth has lagged (prob due to hardship of physical storage; my guess).  Last 10 years = “the asset inflation of everything buy commodities”
  • Permian Delaware is break even at $45 with ALL costs involved (not just marginal). Permian Midland is $47.  DJ Basin is $50.  Eagle Ford is $53.  Bakken is $57.  Only Permian is less than current spot
  • Oil market was oversupplied in 2018 due to Iran waivers and slow adjustment by Saudi.   Supply resizing for better pricing in 2019
  • Saudi Arabia requires $88/bbl to balance their national budget.  Iran = $72.  UAE = $72.  Ouch.  Brent @ $62.
  • Producers under Brent are Iraq at $55, Russia at $53, Kuwait at $48, Qatar at $47
  • Current price not sustainable for most suppliers
  • Pipeline capacity coming online to make Midland price closer to that of Brent.  Permian price in late ’19 = Brent – water transportation costs
  • New pipes will get Permian oil to Houston
  • Right now Brent is $62.  Midland is $51.  $11 basis.  Bloomberg shows average basis of $15 over the past year.  Basis narrowing
  • Cuff Permian at Brent – $5
  • HK takes page from Oaktree/Howard Marks that shows bond troughing lower before each crisis. After the trough comes the pain.  Hiding out in debt market is not an option thus HK’s focus on hard assets and having cash
  • Current US deficit is $855B/year.  Only way out is printing $$$
  • Plays into “crypocurrency is that is not controlled by a government”
  • Fiat money system is broken
  • Buying Franco-Nevada (hard asset theme)
  • Fuel tax revolt in France (yellow vests) show the backlash to “green” governance is real
  • Oil and gas demand could continue to increase to/thru 2040.  20 more years of demand growth
  • High density transportation (buses, planes) and transportation (ships) really can’t be powered by renewables given current technology
  • EV batteries require raw materials that are not in infinite supply
  • Would rather own commodity royalty companies vs open pit miners.  $FNV vs $FCX
  • Royalty companies have no operational risk and limited financial risk.   $WPM
  • HK owns 25% of CVEO and TPL.  “If we had enough capital, we would not minding owning 100% of both businesses”
  • TPL has limited financial risk.  Unlevered with cash on the balance sheet
  • TPL – hard to envision an environment where TPL isn’t significantly higher down the road
  • TPL controls access to aquifers via their surface land.  Competitors are at a disadvantage.  TPL won’t let competitor water cos cross its surface land
  • Private equity is growing their own water biz due to perception of high margins and high stability
  • Most of TPL water revs are on source side by recycling and disposal revs will pick up over time
  • “You will be surprised by the stability of TPL earnings as you get into next year”
  • Gas that is flared is going to get monetized
  • APC and CVX long term numbers show 20-25% annualized growth to 2023
  • Water should grow commensurately with drilling activity
  • 3 years out, TPL earnings could be $50/share
  • “ultimately I think we’re going to make a great rate of return”
  • Royalties are an advantaged and growing business model.  A 70% net margin with no capex and working capital needs > E&P that needs to replace reserves.  People don’t appreciate that.  Static multiples aren’t appropriate for valuation
  • TPL land swap was done with WPX Energy which is a spinoff of WPZ.  They are a traditional E&P (odd that they are buying surface).  No royalties sold and TPL retains water rights.
  • HK belief is that TPL got a very attractive price for surface acreage and will likely try to buy a block to make more contiguous acreage.   Transaction was very encouraging and very positive
  • 2 acres together worth more than 2 separate acres