Author: tpltblogger

Late Week Reading

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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

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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

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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

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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

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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

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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.

“Eat Our Own Cooking”

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WSJ: A Real-Estate Mogul Is Behind the Hottest Stock in the Oil Patch

No, not TPL (right now), but good information nonetheless.  This ‘skin in the game’ ethos gets me fired up.

Mr. Goff first reported a stake in Contango last summer. He bought more than 18% of the company’s shares when they were trading for more than $4 and pushed the company to cut costs, particularly at its headquarters.

Messrs. Goff and Colyer joined the company’s board in August 2018. Mr. Colyer, who was 33 years old at the time and has worked at Mr. Goff’s side for more than a decade, assumed the CEO role. His first move was to cut his own salary in half.

“We’re going to eat our own cooking and keep costs low and try to get the upside,” Mr. Colyer said in an interview.

Messrs. Goff and Colyer said that in addition to running a lean operation in Contango’s Houston headquarters, they are hoping to grow without spending much on drilling, aiming instead to gather wells that are already producing oil and gas.

“There’s a whole host of avenues to grow without drilling holes in the ground,” Mr. Goff said.

September Update Submitted

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Trust Retains Credit Suisse as Financial Advisor

DALLAS–(BUSINESS WIRE)–The Conversion Exploration Committee (the “Committee”) of Texas Pacific Land Trust (NYSE: TPL) (the “Trust” or “TPL”) today provided the first in a series of updates on its deliberations.

The Trust, after Trust management and the Committee interviewed a number of potential financial advisors, retained Credit Suisse to assist the Trust and the Committee in developing its recommendation to the Trustees.

The Committee’s deliberations to date have been productive and informative. The Committee has met three times, both in person and over the phone. Although its deliberations are confidential, the Committee will provide monthly progress reports to shareholders as required by its Charter before issuing a final recommendation by the end of year.

The Committee is chaired by John R. Norris III and David E. Barry, the incumbent Trustees of TPL. Its additional members are (in alphabetical order): Four-Star General Donald G. Cook, USAF (Retired); Craig Hodges, Chief Executive Officer of Hodges Capital; Dana McGinnis, Founder and Chief Investment Officer of Mission Advisors; Eric L. Oliver, Founder and President of SoftVest Advisors and Murray Stahl, Chairman of Horizon Kinetics.

Productive.  Informative.  Hired bankers.  Met three times.  Sounds like progress.

Current EVP/COO Sameer Parasnis is a CS alum.

Surprisingly Productive

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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.

Fasken Oil & Ranch Ltd

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Bloomberg: He Paid $1.50 an Acre for Barren Texas Land Now Worth $7 Billion

Then there’s the holdout, Fasken Oil & Ranch Ltd., still seemingly bound by the fading West Texas ethic that ruled in the days when ranches were handed from generation to generation, with the dictum of “Never sell the minerals” as guidance. “They’re one of the very rare owners that never severed their minerals and surface rights,” Wurtz said.

E&P Consolidation

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Bloomberg: Big Oil Circles Permian Riches as Shale Stocks Collapse

Pioneer Natural Resources Co. or Concho Resources Inc., which have both struggled this year, would be a good fit for Exxon, while Shell may look at smaller players like WPX Energy Inc. and Cimarex Energy Co., according to Tudor, Pickering, Holt & Co.

The collapse in valuations has been so severe that the biggest shale producers may also come into play. EOG Resources Inc. and Occidental Petroleum Corp. could also be targeted, Ben Cook, a portfolio manager at BP Capital in Dallas, said earlier this year. Activist investor Carl Icahn is pushing for a shakeup of the board at Occidental.