The decision of whether to convert TPL into a c-corporation is subject to determination of the current Trustees. The Committee recommended that, if the Trustees elect to authorize the conversion, the conversion should follow a process intended to ensure a smooth transition that would be tax-free to shareholders. As proposed, TPL would transfer all its assets, including cash, land, Texas Pacific Water Resources, and other assets, to a wholly-owned limited liability company subsidiary of TPL (“TPL Holdco”). TPL would then contribute all of the equity in TPL Holdco, holding all of TPL’s assets, to a newly-created corporation (“TPL Corporation”). Current shareholders of the Trust would receive an amount of shares in TPL Corporation proportional to their ownership of shares in the Trust. When this process as recommended is completed, shares of the Trust would be cancelled. Shareholders of the Trust would not need to take any action to receive the new shares in TPL Corporation.
Great opportunity to split the new shares too. Would be amazing/horrifying if the Trustees went rogue and decided not to adopt. Given all we’ve been through I wouldn’t be surprised. That certainly isn’t the base case though.
Some folks were wondering about a unit holder vote to convert. That doesn’t appear to be the case.
Much remains unsaid about governance of the new entity. Also not mentioned is the plan for returning accumulated cash and cash going forward.
The Texas Pacific Land Trust Investor 
I think this makes is sound like it’s a done deal. No need to worry about anyone going Rouge. We can finally rejoice! $1,000 per share here we come!
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I would be interested in people’s best EDUCATED guess as to:
1) The timing of the conversion
2) Next steps as far as electing a board, stock split or anything else
Thank You!
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Not sure on the actual conversion, but the timing of the announcement from the committee turned out to be during a bad week – oil down 7.5%. I would think 4th quarter at the earliest at this point, but that’s just a wild guess.
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A couple of observations on this good news.
o It does not appear there will be a spin-off of the water business, at least not at this time. With the narrative of “ETF of the Permian”, they want to keep the water business as part of the new corporation.
o The feature of a self-liquidating trust continually buying and retiring shares was not mentioned, and sadly may be over once we convert to a corporation.
o No timeline was offered on how long this conversion process is anticipated to take, or guidance given on a process for electing a required board of directors for the new corporation. It seems obvious to me that a large stock split will be needed to get institutional support and cut down on the onerously wide bid/ask spreads. Would expect to see a 10 or 20 to 1 split.
o I was surprised to not see any shareholder approval of what is a truly significant event in the history of a trust formed in 1888. I spent some time this morning reviewing the trust agreement, and found there is actual language in the trust to cover such a conversion, which I have cut/pasted below. It appears no vote is required, and the trust founders considered this might happen with specific language to address this possibility.
“NINTH. The trustees may in their discretion take such action as they may
deem advisable under any general or special law of any State, to form a
corporation for carrying out the purposes declared in this instrument, and to
this end the trustees may convey to such corporation all the lands and property
held by them or which they may be entitled as herein before provided, and
thereupon the registered certificate holders at the time of the formation of
such corporation shall be entitled, as stockholders, to the same rights which
they then have as owners of the certificates issued under this instrument, and
such certificates shall be exchangeable for stock in such corporation in the
proportion that the capital of said corporation shall bear to the amount of
certificates outstanding.”
Source: https://www.sec.gov/Archives/edgar/data/97517/000093244003000112/texaspacificdecl_oftrust.txt
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There’s no reason why they couldn’t maintain a share buyback philosophy similar to the self-liquidating nature of the current Trust. Particularly while the shares remain significantly undervalued. If the new C-Corp shares became overvalued at some point in the future I would be apprehensive about the company buying back shares rather than distributing cash to the shareholders so having the flexibility to pay a dividend instead of self-liquidate I think is a net-positive.
It strikes me that the overarching goal of this C-corp process is really to enhance the “buyability” of TPL to the broader investing public to correct for how undervalued the Trust has been (yes – even despite the large run-up in market value over the past years). This is currently a ~$6.0 bn market capitalization company that is barely held at all by the major index funds, investment management companies, mutual funds, and ETFs. The corporate governance characteristics of the current Trust (lifetime appointments, lack of effective controls, seeming lack of independence of the Trustees, limited number of members, etc.) disqualifies many if not all of these types of investors from purchasing the Trust. Once these buyers are eligible to purchase the Trust units/C-corp shares, in theory we will see increased buying demand in the market; if all of us fine current unit/shareholders do not sell, then you will have high demand coupled with limited supply and the price should rise.
A split (or other type of “reset” in the price per share/unit) also makes a lot of sense. This improves the buyability of the Trust for the average retail investor (who rightly or wrongly may balk at paying $1500 just to buy two shares/units of something). For what it’s worth, if we were ever to have robust options trading in TPL, the smaller unit price would also potentially make this market more liquid (since options price off of 100 unit lots).
It’s also worth noting that the Trust isn’t too far off from being big enough to warrant inclusion in the SP500 and other major indexes that dictate the buying of many investors, mutual funds, and other passive holders of stock. General guidelines require a market cap of ~$8.2 Bn or greater, public float of 50% or more of the total shares/units, consistent profits and positive earnings, domiciled in the US and trading on a major US exchange, and trading for at least a year. By my count TPL is only lacking in the market cap department. Unit trusts are ineligible entities, buy once converted to a C-Corp the Trust would be knocking on the door of inclusion which in theory could drive additional buyers (again, high demand, limited supply = rising prices). (For what it’s worth, $8.2 Bn by my math would imply ~$1,057 per unit.)
Net-net I think the C-Corp conversion should be immensely beneficial to the current unitholders. We would likely see higher demand for TPL in the market which will drive rising prices. Coupled with TPL’s inherent growth profile and the newfound investor relations efforts, I suspect we’ll see a meaningful appreciation in value in year or so after conversion becomes effective (and potentially in the run-up to conversion if traders/speculators hop on early).
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Nailed it. Seems like navigating towards logic is happening and it’s exciting. Thanks for writing.
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As a share holder, I expected a lot more detail. This is a disgrace after 6 months of deliberation.
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Once the Trust converts into a corporation, let’s vote for OUTSIDERS who had no involvement in this b.s. move, and let’s get the Trust put back into place, with some new powers given to the unitholders (like removing lifetime trustee, CEO and CFO posts). The Trust system worked…we only needed some new governance. This, to me, is terrible for the long-term prospects of TPL.
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One topic has not been brought up and i agree that it is probably a minor one. On the Texas Comptroller unclaimed property page there are 4 items unclaimed in the name of our entity one of which dates back to 2012. The dollar amount is not great at all, but if the CFO can’t take care of small amounts –?? One person posted recently that our TPL had over 300 mil in cash. I am not a CPA but I have not been able to find an entry showing any interest earnings. It is very easy to earn 1.5% (annually) on short term money. Please correct me if I missed the interest line.
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Easily over $300m in cash with zero debt … we will know more once they report.
I wonder if they will start holding quarterly calls with analysts for Q&A !
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