4Q Margin Compression

rude and crude

Rude and crude analysis warning.  I was looking at 4Q and was thinking that net income looked fairly light relative to revenue so I did a little digging and confirmed my suspicion.

The top analysis attempts to isolate the water business to determine profitability.  We start with net income and add taxes back in to get an EBT.  EBT is then reduced by TPL’s legacy “low expense” businesses (Royalty, Sundry, and Sales) to get towards earnings from the water business.  This new adjusted EBT number is further adjusted by adding back an estimate for the expenses (2x 2016 full year expenses) of the “low expense” businesses.  The result is something that might approximate income generated by the Water business.  Water’s reported top line can be compared to the water income estimate to get a picture of what Water’s expenses and margin look like.

The conclusion is that Water’s expenses were up significantly in 4Q which drove the estimated margin down to ~21%.  Lots of assumptions and brute force in here.  Everything highlighted in green is a custom creation.

The bottom analysis gets to ongoing margins more directly.  Here we compile the revenues from Royalty, Sundry, and Water and compare them to a “non-sale” income number that is generated by adding taxes and proceeds from asset sales back into net income.  Adjusted income / adjusted sales = margin of repeating buiness.  This analysis too points to materially lower margins in 4Q.

Where’s that margin going?

Update:  Quick update 15 minutes after posting.  Please take some time to look at the column all the way to the right.  Margin compression or not, $TPL is on fire.  Oh, and thank you Mr. Taxman.


5 thoughts on “4Q Margin Compression

  1. Thanks for this analysis. I too had the same reaction that the net income for 4Q seemed be increasing at a slower rate than the revenue growth. While TPL earnings reports always make the comparison year-over-year, most of us who follow the stock are more interested in comparing to the previous quarter. If I’m reading the reports right (and please correct me if I’m astray), revenue skyrocketed three-fold from 3Q to 4Q (growing from $31.3 million to $93.2 million) but net income “only” grew by 23%. I’m not sure how the $18 million land sale in 4Q impacted these comparisons, but I think you are drawing the correct conclusion that the expenditure on the water business is reducing the margins. I’m hoping for some good commentary in the 2018 annual report from the trustees to reassure us that the current and future potential of the water business is worth the opportunity cost (i.e. buybacks, dividends, and higher margins).

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  2. Jeff, I’m not seeing a jump that big in revs but it was material. We’re in a good spot here. Put it this way, the water business as a standalone would be considered successful but when you compare it to the growth of the other segments the comps are tough.


  3. Quick question. Typically when does TPL announce dividend or buybacks? I was expecting it in the earnings given the large cash balance but didn’t see anything.

    Thanks for this blog it’s awesome


  4. The special div has been declared on Feb 21 in each of the past two years. So I expect soon. Buybacks aren’t explicitly announced though share counts are reported quarterly in 10Qs as is other repurchase data.


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