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.

7 thoughts on “Surprisingly Productive

  1. This is a wonderful post……I wish every TPL shareholder could read it….it shows the temperament
    and viewpoints of Murray Stahl. I can’t think of anyone better representing long term shareholders.
    he is interested in the long term value of TPL And his goal is to maximize that value.

    Liked by 1 person

  2. FRMO and HK basically say the same things in every letter and presentation they do. They’re like a broken record.


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