3Q Earnings and Conversion Committee Update

Earnings press release

Impressive top line growth.  I can’t help but see that EBITDA (newly included by TPL in releases) is pretty much equal to revenues from royalties, land sales, and easements.  It appears as if all profits from water are being eaten by legal fees and comp.  Estimated water margins appear to have stabilized near 50%.  The sheet below isn’t perfect but it’s likely directionally right.  Margins are being squeezed by expenses.

q3 margin analysis updated

Simple margins tell you this as well.

simple margins q319

Can’t wait until legal fees are in the rear view mirror.

D&A increasing.

I’m not operating the business but my guess is that there are some aspects that can be tightened up.  We shall see.

That all being said, $7.74/share x 4 = $31/share annualized.  $569 / $31 = 18 P/E.  Low to historic multiples.   We’re looking at a $775 price at a 25x multiple which is more consistent with historical valuations.


Conversion Committe update

The Committee has continued to meet with its advisors, including Credit Suisse, which is assisting the Trust and the Committee in developing its recommendation to the Trustees. The Committee has met 5 times, both in person and over the phone, since its inception, and deliberations to date have been productive and informative. Although its deliberations are confidential, the Committee will continue to provide monthly progress reports to shareholders as required by its Charter before issuing a final recommendation to the Trustees.

Was hoping for a bit more progress than that!  So 2 meetings in October?

You Hate To See It

File this under “things we don’t want”.


From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. That works out to an average purchase price of $67.37.

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five year period were used to sterilize stock issuance to senior management and the board of directors.


In 2018, JP Morgan bought back 181.5 million shares of stock for $20 billion. Also in 2018, JP Morgan issued 32 million new shares to management (18% of buyback). Those newly issued shares were worth $3.5 billion then, and are worth $4.2 billion today.

In 2017, JP Morgan bought back 166.6 million shares of stock for $15.4 billion. Also in 2017, JP Morgan issued 31 million new shares to management (18% of buyback). Those newly issued shares were worth $2.9 billion then, and are worth $4.03 billion today.

In 2016, JP Morgan bought back 140.4 million shares of stock for $9.1 billion. Also in 2018, JP Morgan issued 38 million new shares to management (27% of buyback). Those newly issued shares were worth $2.5 billion then, and are worth $4.94 billion today.

Were these newly issued shares spread evenly throughout the company, perhaps as part of an employee stock ownership program (ESOP)?

No. In each year, there were fewer than 1 million shares issued for the JP Morgan ESOP program, less than 3% of the dilutive issuance. Senior management received more than 97% of the newly issued shares.


Late Week Reading

Oxford Institute for Energy Studies: Prospects for US shale productivity gains

Fears over the shale industry re-erupted in 2019. Some worry that the best resources have now been produced and productivity has peaked. However, we find these conclusions are premature, as they are based on backward-looking, volatile data. By contrast, to provide forward-looking indicators, we have assessed the industry’s innovation across a longitudinal sample of 650 technical papers from 2018-2019. Our methodology is very different from listening to the commentary on earnings calls, which tends to be backwards looking, very high-level, and shies away from technological innovations that are on the cusp of commercialisation. We believe the trends in US shale are still constructive. The quantity, quality, basin-focus, technical-focus and methodologies of these papers all imply continued productivity gains, not problems. The most exciting innovation areas are in enhanced oil recovery, digital instrumentation, machine learning, advanced modelling and overcoming parent-child issues. Therefore it is premature to discount the shale industry yet.


DCF Approach

John Hopper: Texas Pacific Land Trust Is Greatly Undervalued On A DCF Basis

For the years 2020 through 2026, the sales revenue forecasted growth rate is 5%. The terminal value occurs in year 2023. The resulting value of $7,158,560,998 is obtained by calculating the net present value (NPV) of the free cash flow (FCF) from years 2019 to 2023, discounted at my required rate of return of 8%. The resulting value represents the future cash flows discounted back to the present. We can use the $7,158,560,998 value as the value of what TPL’s market cap should be worth today. You can also see in the table below that the current market cap of TPL is $4,679,987,000.

If we divide $7,158,560,998 by the current number of shares outstanding, we get a resulting value per share of $919.30.

Not the most precise analysis in the world but at least he’s trying.  Problem with DCF is that TPL’s top and bottom line include both recurring (as recurring as royalties, water services, and easements can be) and non-recurring items (land and royalty sales).    #doubledipping


Infrastructure Update

Oilprice.com:  The Pipeline Lifeline For Texas Oil

Good update on pipeline and storage capacity.

Record exports in recent weeks were supported by higher inbound flows via new pipeline capacity. Plains’ Cactus II pipeline and EPIC’s NGL pipeline, which is temporarily in crude service, commenced operations in August. Both lines deliver barrels to the Corpus Christi area from West Texas, alleviating a bottleneck in the Permian Basin and fueling substantial growth in exports from the coast.

We began monitoring Cactus II pipeline flows in September as part of the Gulf Coast Pipeline service. Volumes on the line averaged 361,000 bpd in September and reached an average of 472,000 bpd for the week ending October 4. We are currently assessing monitoring feasibility of the EPIC NGL pipeline, as well as nearly-completed pipeline projects which will bring more crude into the region from West Texas.

Phillips 66’s 900,000 bpd Gray Oak pipeline, which will also transport crude from West Texas to the Corpus Christi area, is expected online in Q4 2019, according to an August Phillips 66 investor presentation. Gray Oak and other expected capacity increases could further facilitate higher export volumes from the Texas Gulf Coast as additional Permian supply gains access to waterborne transit.

Shale Narrative Shift

Bloomberg: America’s Great Shale Oil Boom Is Nearly Over

With the crude price seemingly stuck close to where it is — despite the tensions in the Persian Gulf region which flared up again on Friday —  the next round of discussions between the shale producers and their lenders could be difficult. Some mergers may follow.

Yet fans of U.S. oil shouldn’t be disconsolate. The end of the second shale boom will usher in a third: the period of young adulthood. This will bring a range of new skills, but production will grow at a more measured pace.

This third boom will be driven by the international oil majors and will be characterized by a focus on better extraction, rather than rapid output growth. The application of enhanced oil recovery techniques, consolidation of ownership, automation of drilling, and rationalizing of supply chains will increase the volume of oil extracted over the lifetime of a well and reduce costs. But it won’t deliver the same pace of growth as seen recently.

The recovery rate of oil from shale deposits is typically about 5%-10%, but ConocoPhillips has pushed recovery as high as 20% in some parts of the Eagle Ford shale play in Texas, and it could reach 40% under the right circumstances. The upside to the lifetime recovery rate from Eagle Ford would be huge, potentially extending higher production rates for longer.

The third shale boom is coming. Just don’t expect it to look like the first two.

Bloomberg: Peak Shale: How U.S. Oil Output Went From Explosive to Sluggish

Giants like Exxon Mobil Corp. and Chevron Corp. have plans to expand in the Permian Basin. Unencumbered by the funding problems faced by independent producers, they plan to more than double production by the early 2020s.

Wildest Campaign of the Year

Sidley Ranked No. 1 for Activism Defense

Sidley was ranked No. 1 among law firms for activism defense for the first eight months of 2019, according to data provided by SharkRepellent/FactSet*. The No. 1 ranking reflects 14 public activism campaigns, including the largest director election contest of the 2019 proxy season, Texas Pacific Land Trust in its proxy contest defense against SoftVest and Horizon Kinetics. The Texas Pacific Land Trust defense was also deemed the “Wildest Campaign of the Year” by Activist Insight, marking the second year in a row that Sidley has led the defense in such a campaign.


CVX’s Secret Sauce

Reuters: Chevron’s shale allies are its secret weapon in Exxon race

Chevron’s deals, ranging from large-scale joint ventures to small deals where it has leased land to other operators, give it a share of the oil its partners produce.

They also provide data from thousands of wells stretching back years, allowing Chevron to hone drilling strategies. In return, partners get access to areas adjacent to their wells and pipelines, reducing their costs.

Shale drilling has helped the United States reverse decades of declines in output to become the world’s largest oil producer and all the major U.S. oil companies have jumped on the shale bandwagon to boost their own production.

Occidental outbid Chevron for Anadarko Petroleum in a takeover battle this year, spending $38 billion and vowing to use its technology to squeeze more oil from the deal which gave it a combined 3 million Permian acres.

Exxon, meanwhile, spent $6.6 billion two years ago to buy more Permian land and is now running nearly three times more rigs than Chevron in a race to reach its target of producing 1 million bpd of shale by 2024.

But Chevron has two key advantages: it holds 2.2 million Permian acres, second only to the Occidental-Anadarko trove, and it owns mineral rights on much of its land so it doesn’t pay the 20%-25% production royalties most rivals face.