Month: January 2019

4Q Earnings

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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”

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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

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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

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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

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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

 

An Update from Murray and Steven

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FRMO Investor Call

Required listening if you are a TPL-head (or a BTC-head) like myself.   Unfortunately, the transcription isn’t great.   Ctrl+F is your friend here.

But you can’t forget that what you are sitting on, you are sitting on like the greatest hydrocarbon property in North America and you can even make a strong argument maybe even the world. The technology keeps getting better. This pipelines being constructed as gas being flared that in 11 month is not going to be flared and this is going to theirs is leases, there is water being sold is all kind of things happening except those variables don’t change in any appreciable way in a matter of week.

Call details if you can’t get it on SA.

Murray Stahl, Chairman and CEO, and Steven Bregman, President and CFO, will host a conference call on Thursday, January 17, 2019 at 4:15 p.m. ET. Only questions submitted to info@frmocorp.com before 1:00 p.m. on the day of the call will be considered. The call can be accessed by dialing 1-855-710-4181 (domestic toll free) or 334-323-0516 (international toll) and entering the following conference ID: 5792922. A replay will be available from 7:15 p.m. on the day of the teleconference until Thursday, November 15, 2018. To listen to the archived call, dial 1-888-203-1112 (domestic toll free) or 719-457-0820 (international toll) and enter conference ID number 5792922. 

Major Spending

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Chevron Touts Nimble Shale as Electric Cars Dim Big Oil’s Future

Hot and heavy but ready to shut down at a moment’s notice.  A big operator’s dream.  Portends high quarterly earnings vol at $TPL but we’ll (I’ll) take it.

Chevron Corp. will spend about half its capital budget on projects that yield quick returns over the next three years, underscoring the importance of shale as it prepares for growing uncertainty in how the world consumes energy.

The U.S. oil giant will spend about $9 billion to $10 billion a year on “short-cycle investments” through 2022, primarily focused on the Permian Basin, the world’s biggest shale oil region, the San Ramon-based company said in a presentation on its website Friday. The Permian is on course to make up about one in five barrels the super major pumps worldwide.

But now they’re investing heavily, attracted by the ability to ramp up production quickly and potentially reduce it if oil prices crash.

That’s a particularly useful trait when the future of oil and gas consumption is unclear, with electric vehicle usage growing and governments clamping down on greenhouse gas emissions.

Land Sale Closed

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Form 8-K

On January 7, 2019, Texas Pacific Land Trust (the “Trust”) consummated the previously announced sale of approximately 14,000 surface acres of land in Loving and Reeves Counties, Texas to WPX Energy Permian, LLC for an aggregate price of $100,000,000 (the “Sale”). The Sale excludes any mineral or royalty interest in the lands to be conveyed and the Trust reserved certain usage, disposal and water rights in approximately 1,280 acres of the lands conveyed.
The Trust intends to use the proceeds from the Sale to acquire like kind properties.
The sale announced on 11/29 has close.  I’m fond of the condition that allows TPL to do it’s water thang on 1,280 of the 14k acres sold.

Michael Boyd on SA

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Texas Pacific Land Trust: A Different Approach

Fun read here.  Good alternative viewpoint on valuation.  I agree that 2019 comps are going to be a challenge.

I don’t think bulls would disagree that the company’s greatest assets are its land and mineral interest holdings. Given that, it’s puzzling to me to see focus on earnings per share, cash dividend distributions, or other measures of earnings power. Investors have lost sight of what’s supporting the underlying valuation: The land and its value. As any commercial real estate owner will agree, while commercial property values often correlate to earnings power, they frequently do not align. I see a lot of similarities here to the real estate sector, followers of my work know I spend a good chunk of time analyzing REITs. With that in mind, a focus on the actual current trading value of the land itself is natural for me, but even in REITs it has not common among smaller shareholders. That is clearly a mistake, as investors that have chased earnings yields at all costs in distressed real estate (malls, senior housing) have gotten shellacked. Coming into looking at this company at the request of a peer, this disconnect was my No. 1 concern and something I felt was missing in the discussion. While there’s going to be some correlation – higher revenue and earnings from lands naturally will tend to drive associated land values higher – they do not necessarily move in lock step.

On the far west land held by the Trust…

According to the most recent Texas Rural Lands report (data above), this rangeland is worth about $400/acre in the Far West Texas and Trans-Pecos. While acreage sales in this area are minimal (mainly trading hands between conservationists and ranchers), the Texas Rural Lands report has reported stable valuations in this region for some time, albeit with some range. In valuing the firm, I’ve used the low end of the range based on grazing rental revenue. Why? Texas Pacific Land Trust has historically booked about $0.55-$0.60/acre in grazing lease rental revenue on these lands which is at the low end of the rental range given in the above report. Logic follows that lower-than-average grazing lease revenue implies lower-than-average property value. Additionally, there would be some clear discounting involved in an accelerated wind down in this part of the portfolio given the lack of transactions out there.

In 2015, the surface acreage constituted roughly a third of total enterprise market valuation – on my analysis of the sum of the parts today it will be closer to 10%. The business model has shifted from high multiple, low earnings power assets (rangeland surface acreage) to low multiple, high earnings power assets (royalties). This is the danger of using historical multiples in projecting future value; business models change.

On the value of mineral rights…

With the company looking to post around $115mm in revenue this year, this values these assets at between $1,500-1,750mm on the high end of comps, not too far off the above figure based off usual private market rule of thumb.

On water…

At the end of the day, I think the assets can be valued similarly to the oil business. Margins are similar enough, and while the water reserves are not going to be depleted at the same rates as wells, water usage will be highest when exploration activity is aggressive and new wells are being drilled. Perhaps there’s some room for interpretation here, but I’d peg the business as a $900-1,000mm business as it stands today.

Boyd values the company at $3.3B via a conservative sum of the parts analysis.

It’s tough to call what investor expectations might be into Q4 and 2019 when it comes to earnings – particularly because there’s no Wall Street coverage – but my gut is that flat/negative comps beginning in Q2 2019 are going to surprise many people that own the company. I’ve learned that owning companies with that kind of outlook rarely plays out well, and my feeling is that this will be much cheaper before it sees the $700-800/share level again unless bulls are blessed with a dramatic reversion in the collapse in crude oil pricing. I think there are better opportunities out there in the oil patch.

Overall, I don’t disagree with the sum of the parts valuation.  $3.3B is certainly short of the current $4.2B market capitalization.  Sum of the parts puts the price at $430.  We were just there so it’s not out of the realm of possibility.

That said, and I may sound naive here, but I what I think is overlooked is 1) no debt, 2) unique governance (long term decisions take precidence over quarerly beats), 3) share cancellations (ownership concentration), and 4) long term optionality on the land.

If you’re in for the long term, all four factors work in your favor.  My gut says that a simple sum of the parts undersells all that TPL entails.  That (my gut) and a dollar will get you a cup of coffee.

I follow many industrials in my line of work.  Over the past ten years I’ve seen most all of them all 1) add leverage, 2) make short sighted moves to “beat” earnings, 3) buy stock back at high valuations only to neutralize the concentration via issuance for management comp, and 4) squander and neutralize competive assets and divisions by buying “synergistic” losers via M&A.  TPL seems, to me, to be the opposite of that.