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


6 thoughts on “Kinetics Funds Update : Midland Oil Looking Up

  1. Thanks for the link, I sometimes forget to check HK for their always interesting commentary. And I appreciate your annotated highlights.

    A thought I had given the comment about HK owning 25% of the shares and would be happy to own it all. I wonder why in this age of mergers and acquisitions, why somebody has not taken them out? What if an acquirer offered $1,000 a share, its likely they could get tendered enough shares to eventually get full control? Sure, its a lot of money, but in this age of mega deals, still somewhat easy access to capital at a reasonable rate, 7.8 billion is not really that big. I hope it does not happen, but I wonder if it could happen?

    Liked by 1 person

    • I was talking to a friend about this. He wondered why CVX doesn’t come through with a bid at $1200/share for the whole thing. They get the royalties and lots of leverage on competitors (own royalties on their land, own valuable surface land for logistics, control water passage and disposal, etc).

      Just don’t pay me in CVX stock!


      • The possibility of some kind of takeover attempt has always been in the back of my mind and would be fascinating if it ever unfolded, but it would take a heck of lot more than $1200/share to tear me away from my shares. Many other longs on TPL probably share my ‘last man standing’ attitude.


  2. back when TPL was around $250 Murray Stahl was asked if he would accept 10x that amount…and he said no. Its worth much much more. Hell I think I read where he projected the water business to generate 100M revenue alone. I need to dig through the archives to see if I can find it. This trust is worth far more than what others value it at.

    Liked by 1 person

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