Open Thread: Valuation

A couple of readers have asked that I start up a valuation thread.  No wrong answers here if you’d like to add your thoughts.  I’d particularly like to hear how you handle asset valuation vs income from assets; I’ve seen a fair amount of double counting.

I’ll start with a quicky that I wrote after the Q: “I calculate the “non-sale” (no sale income included) EBTDA to be $73MM.  $73MM taxed at 20% = $58.4MM or $234MM/year.  20x = $4.67B.  30x = $7B.  Current mkt cap is $6.13B.  Implied multiple = 26x.  Again, very back of the envelope.”


10 thoughts on “Open Thread: Valuation

  1. How to factor in the following: 1) Historical buyback and what that does to future EPS 2) Water Biz 3) Activity in the Permian etc… 4) Increased rev from sundry income (ie: pipeline fees) etc… these are the critical questions 🙂

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  2. I think there are several factors that need to be considered beyond production. Commodity prices, the buyback and how well the company is managed. Right now there is no buyback and I am beginning to think that the trustees and management are idiots.
    I do expect that revenues should increase through 2023 or 2025 and I could see 50 to 100 dollars per share in earnings. Now if they are buying in lots of stock that makes a big difference. My expectation is that the stock well be worth between 1500 and 3000 per share in the 2023 to 2025 timeframe. But it is just an educated guess.
    One of the things that would provide upside is the formations that are deeper than the wolfcamp in the delaware portion of the Permian. The wolfcamp is fairly young geologically and there are several formations below it that are very productive elswewhere. While they are likely to be gas or ngls they could provide upside. The other big potential catalyst is drilling and fracking technology breakthroughs. This is likely. Just my opinion

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  3. I think most all of us on this board have concluded that TPL is currently worth a lot more than it’s share price. Hence why a lot of us have a large concentration of our assets in this one stock. We are not sure if it is worth $1,000 per share, $1,500 per share, or $2,000 per share. But we know it is worth more than $800 per share.

    This leads me to my question. Is there a realistic scenario in which TPL is stuck trading at $400 per share throughout the 2023-2025 timeline. Never exceeding $500 per share? Where is the downside future risk?

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  4. It’s different than a going concern. The multiple can exist only until we can see the peak. If you have one share left and no oil is pumping and the Permian boom is over, what’s the point?

    You really have to take a speculative, yet conservative, swipe at what the potential is for the Permain, chart the peak, and bail prior to everyone else bailing.

    At some point in the decline, share buybacks are moot because you’re owning more of a declining asset.

    It’s terribly confusing. There will be a rush to sell the trust before that suspected peak.

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  5. I have been watching this valuation measure over the past few years: Since TPL’s biggest value comes from the fact that it owns @900K acres, along with royalty interests AND those assets are valued at $0 on the books, I came up with a quick and dirty valuation measure for the land. This is what I would term a liquidation value for TPL. If we take 892,627 acres and assign it a ‘current’ valuation of $10,000 an acre, we get a land market value of $8.926 billion. Which gives a per share value of $1,150, based on 7.756 million shares outstanding. I realize the land can and will have values ranging from $1,000 an acre to over $20,000 an acre. So, $10k seemed a decent middle ground.

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  6. When providing forecasts, a good prognosticator should either forecast an event or a timeframe, but not both simultaneously. I will break that rule with a guesstimate with a timeframe. :^)

    Some framing thoughts:
    The Permian is still in the growth stage of development, and the main formations being exploited today are not the only ones. As frac technology increases the zone of exploitable formations also will increase.

    Oil will be the dominant transportation fuel for several decades to come. Demand will stay strong and with unstable world politics and monetary printing policies, hard assets will have pricing strength.

    Right of way and easements are worth a lot of money, as seen by the WPX land rights only deal for 100 million on 14,000 acres. Revenue in this category is going to stay on a rapid growth curve.

    The water business is a wild card. Will it keep growing, will it stay as profitable, and will it even stay part of TPL, or be spun off? Based on other deals for oil field frac and disposal water, 550 thousand barrels a day of capacity is worth about a billion. From the only place I can find anything about TPL water capacity (TPL’s recently released 34 page pdf) they claim about 1 million barrels of water processing capacity a day.

    A tripling of the net income and revenue in ten years, and with current multiples on P/E’s suggests $2400 a share by 2029, or a compounding in the 20-30% range per year based on current price. The water business is worth perhaps 2-3 billion of this if it gets spun off before 2029.

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  7. I’ll leave the valuation estimates to you financial types (thanks for the keen insight you’ve shared on this thread!). In the end, value is whatever someone is willing to pay for the assets, which is why I would be intrigued if buyout offers for TPL were to materialize in the near future from big players in the Permian. This is a distinct possibility, especially if E.O. gets elected and HK et al gradually increase their ownership stake. I hope they will find ways to solicit bids, which would help us greatly ascertain the value of TPL’s assets. Already we’ve seen through the proxy battle that two offers have surfaced (though they were likely lowball offers for which we will probably never learn the details). Everyone has their price, which will vary based on cost basis, risk tolerance, and time horizon. For my holdings, I would be tempted at, say, $1500 pps to bank a small fortune and move on. Others are probably inclined to shoot for much higher. The current trustees and management with such little skin in the game probably want nothing to do with buyout offers, no matter how viable they might be.
    What’s your price that would tempt you to cash out on such a unique investment opportunity?

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