Surprisingly Productive

FRMO Corp. 2019 Shareholder Letter

Texas Pacific Land Trust is a unique enterprise that was formed as a result of the bankruptcy of the Texas Pacific Railroad in 1888. Much of the land holdings are located in the Delaware Basin, which forms a part of the Permian Basin in West Texas. In our view, it is an irreplaceable asset that simply could not be recreated in this form, even by a very large company with huge resources. Its developmental possibilities are beginning to be exploited.

However, the area lacks pipeline capacity, which will probably require years to adequately provide. As a consequence, natural gas is being flared and brings no revenue in cases of flaring. Adequate pipeline capacity will solve this problem. The area contains extremely valuable water rights that could become royalty income, as well as surface rights that can provide easement income. This is in addition to conventional oil and gas royalties. It is also important to observe that hydrocarbons have been in a bear market for the past five years. The price of West Texas Intermediate oil has declined by about 50% in the past five years.

Essentially, Texas Pacific Land Trust is a royalty income stream with free infinite call options on the price of energy as well as advances in drilling technology. In a royalty situation, price increases simply increase revenue and net profit with no concomitant increase in cost. Similarly, improvements in technology by other firms result in enhanced production, which increases revenue and net profit with no concomitant cost. Consequently, it is not difficult to understand our enthusiasm for this investment.

Of course, an issue with this investment is the 19th century governance structure of the enterprise, which we believe should be updated in accordance with the modern conception of corporate governance. Toward that end, Horizon Kinetics engaged in a proxy contest and ultimately in some litigation as well. At the end of July 2019, the various parties agreed to establish a Conversion Exploration Committee consisting of seven members.

Since we are committed to confidentiality under the terms of the agreement, we are not at liberty to comment on the work of the committee. However, civil discourse can be surprisingly productive. In any case, when one views the progress of Texas Pacific Land Trust in the context of the energy bear market of the past five years, one finds it difficult to restrain one’s optimism asto what might happen in a better environment.

Fasken Oil & Ranch Ltd

Bloomberg: He Paid $1.50 an Acre for Barren Texas Land Now Worth $7 Billion

Then there’s the holdout, Fasken Oil & Ranch Ltd., still seemingly bound by the fading West Texas ethic that ruled in the days when ranches were handed from generation to generation, with the dictum of “Never sell the minerals” as guidance. “They’re one of the very rare owners that never severed their minerals and surface rights,” Wurtz said.

E&P Consolidation

Bloomberg: Big Oil Circles Permian Riches as Shale Stocks Collapse

Pioneer Natural Resources Co. or Concho Resources Inc., which have both struggled this year, would be a good fit for Exxon, while Shell may look at smaller players like WPX Energy Inc. and Cimarex Energy Co., according to Tudor, Pickering, Holt & Co.

The collapse in valuations has been so severe that the biggest shale producers may also come into play. EOG Resources Inc. and Occidental Petroleum Corp. could also be targeted, Ben Cook, a portfolio manager at BP Capital in Dallas, said earlier this year. Activist investor Carl Icahn is pushing for a shakeup of the board at Occidental.

 

Shale Production

Oilprice.com : The Real Reason Why US Oil Production Has Peaked

Good skim here.

Thanks to the Great Recession, U.S. oil production dipped briefly below 4.0 MMBOPD in September 2008 but rebounded to over 5.3 MMBOPD within six months. The “Shale Revolution” started around 2010; saving the U.S. oil & gas industry. Jumping forward, U.S. crude oil production increased 2.4 MMBOPD from 9.7 MMBOPD in December 2017 to 12.1 MMBOPD in December 2018. EIA’s projection that oil production would go up at least 2.0 MMBOPD this year seemed reasonable back in January, but shale oil production has definitely hit a wall.