M&A Hurdle

Hey, what’s TPL’s cost of equity? I have no idea. The nature of the business and the long duration of the company’s assets and cashflow make it impossible to estimate.

HOWEVER, we can look at the estimated (not an exact science) IRR of historical TPL share repurchases as a proxy. It’s a high hurdle.

Using TPL’s equity to buy assets at current market rates is like buying and operating an SR-71 Blackbird to fly from Dallas to Midland. Not advised. Not logical. Not highest and best use.

Judging by today’s price ($2668), every day (except a few last week) that cash on the balance sheet wasn’t used to repurchase shares has been a bad one.

Vote no on #4. (Polls are still open if you didn’t know)

3 thoughts on “M&A Hurdle

  1. With all due respect, by this logic, if the share price were to double on Monday – even if for no ostensible reason – that would make share repurchases look even more attractive on Tuesday.
    So I’m not sure using historical IRR as a proxy for future IRR makes sense here.
    But I’d love to hear what I’m misunderstanding.

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    • Agree. It’s not perfect. But it is also 30 years of history. I think it’s a hard trend to trade against. Imagine if they did this in the spring of this year? What if they paid equity for a purchase with shares at $1100 for a project with a 15% projected return? Takes huge arrogance and a lack of common sense to swim against this tide.

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