You may know the author of this letter/Woodlock founder, Christopher Mayer,  from the book 100 Baggers: Stocks That Return 100-to-1 and How To Find Them.  I read 100 Baggers by the lake this summer and found it entertaining, eduational, and inspiring.  Still waiting for my own 100 bagger tough… 

https://www.woodlockhousefamilycapital.com/post/woodlock-house-q4-letter

Texas Pacific Land Trust (NYSE:TPL)

Cheap: Acquired at a discount of at least 20% to a growing net asset value

Owner-operator: Horizon Kinetics owns nearly one quarter of the shares

Disclosures: Improving as part of Horizon’s campaign

Excellent financial condition: Debt-free

Texas Pacific Land Trust has been one of the best performing stocks of the last 20 years, returning 17% annually. The Trust dates to 1888 and formed part of the land holdings of the old Texas & Pacific Railroad. It is the largest landowner in the state of Texas. And it was lucky to have its land in the heart of the Permian Basin in West Texas.

The Permian is one of the richest oil resources in the world. Nearly half of US oil production comes from the Permian. All the big players are at work here – especially Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Occidental (NYSE:OXY).

TPL owns “non-participating perpetual royalty interests” (NPRIs) in about 460,000 acres. NPRIs entitle TPL to a perpetual right to receive a fixed cost-free percentage of production revenue. TPL also charges users for easements – for pipelines, work crews, roadway rights, power lines, storage facilities, etc. Since its land covers such a large area, almost any infrastructure project will cross TPL land.

Finally, TPL controls the water rights to these acres. As drilling is water intensive, this creates an opportunity for TPL to charge for access to its aquifers and for water recycling. TLP created Texas Pacific Water Resources in 2017 to meet this demand.

TPL came on our radar after a near 30% decline from a high of ~$900 in April. I had been following the story casually through Horizon Kinetics, who owns about a quarter of the shares and is involved in a case against the trustees to convert TPL to a C corp. and improve disclosures and governance. (This seems to be going well. On December 4, TPL announced the case for converting to a C corp. was “compelling.”)

The company also continues to report strong results. I would highlight in particular the $32 earned per share (or unit) for 9 months. TPL is on pace to do $42 per share in earnings. At $650 per share, the stock trades for about 15x estimated 2019 earnings. This for a fast-growing company with a 66% net margin (for 9 months) and no debt… Using a variety of valuation methodologies, TPL is worth at least $900 per share and growing.

We picked up shares at an average cost of $645 and the stock is already 20% higher. TPL has a wonderful business model and earns high returns on its assets, exceeding 100%. It is a way to own real assets but by skimming off the cream.

TPL is another cannibal of its own shares. It’s retired 8.5% of its stock since 2014. With Horizon’s involvement, I expect future free cash flow will reduce the share count further.