Author: tpltblogger

Odds and Ends

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$TPL-specific news is pretty scant as we await dividend declaration and the 10-K.  News from the Permian, however, remains constant.  Here are a few things that caught my eye recently:

MRT: Projected Permian production growth raises water management challenges

Produced water in the Permian Basin is projected to grow 5 percent a year to between 7.5 billion and 8 billion barrels a day by 2025, according to Helstrom.

“Just the amount of produced water coming online will strain the system without everyone working together to find solutions,” he said.

He said the water cut is very high in the Permian Basin, with two to four barrels of water produced with each barrel of oil. If those water barrels can’t be managed, operators may have to shut in wells and limit production, he said.

Reuters: New pipelines drain West Texas crude stocks to four-month low

This will be a theme for 2019

The decline began in mid-November after Plains All American Pipeline LP expanded the capacity of its about 300,000 barrels per day (bpd) Sunrise Pipeline.

The drawdown accelerated this month when Enterprise Products Partners LP began shipping crude on a converted natural gas liquids pipeline, the 200,000 bpd Seminole-Red line, two months ahead of schedule.

Rigzone.com: Permian Frac Scene Could Get Busier Soon

“They talked about improvement and now it was about hyper-targeting completions even more methodically in 2019,” explained Johnson. “Then a crude pricing anomaly happened over the holidays and everyone hit pause.”

Although concerns about market risk and perceived global demand linger, service companies have had the opportunity to put the less frenetic pace to their advantage by refining some of their internal processes, Johnson added.

“With a bit more patience this year operators can have their logistical systems improved (think water and proppant strategy), oilfield services will continue to give further pricing incentives to pump and more pipelines will come online,” said Johnson. “These are all considerations that make both logical and economical sense.”

Although his firm holds the view that much of the downward spiral in crude pricing was algorithmic, Johnson opined that operators “wanted the dust to settle first and see the market act more rationally.” Now, he added, “smart operators” hold the advantage.

“Strategic planning and expert-level execution takes position and timing, all things smart operators have on their side now,” said Johnson. “We’ve heard of stories where the biggest operators in the world have break-evens in the teens and low-20s in the Permian. Kudos to the operators that learned their lessons from the rough patches of last cycle and improved every department under the sun.”

WSJ: Frackers Face Harsh Reality as Wall Street Backs Away

Concho Resources Inc., one of the largest operators in the booming West Texas region, fell more than 13% in the two days last week after it released earnings that failed to meet analyst expectations for cash flow. Concho also said it plans to cut spending 17% from previous guidance, a reduction that would lead to oil output growth of 15% from the fourth quarter of 2018 to the same period this year, instead of 25%.

The bond between U.S. producers and financiers doesn’t appear to be completely broken, and the strongest shale companies continue to attract Wall Street backers. Industry bellwethers such as EOG Resources Inc. have begun to generate free cash flow and don’t need outside funds. They also have locked up land for future drilling locations and have less need to pay out billions for new inventory, a significant source of capital demands in previous years.

DallasNews.com: Permian-fueled shale boom shows little sign of abating, even with capital spending cuts

The tumble in oil prices at the end of 2018, combined with investor demands for fiscal discipline, has prompted most shale executives to only invest what they earn in cash flow, ending years of debt-fueled growth. But the scale of past investments and low service costs mean that the cutbacks will only put a dent in growth projections.

On average, U.S. explorers have cut their capital budgets 4 percent but are predicting a 7 percent increase in production, according to RS Energy Group, a Calgary-based researcher.

Bloomberg: Exxon Partners With Microsoft to Boost Permian Oil Production

Exxon has homed in on the Permian Basin of West Texas and New Mexico as it struggles with dwindling production in formerly prolific oil provinces such as West Africa. The Microsoft partnership, which could add as much as 50,000 barrels of daily output, marks a strategic shift for Exxon, which historically developed technological tools and techniques in-house.

“We realized that we have to do something fundamentally different from a technology standpoint to enable us to grow to meet those volumes,” Anish Patel, Exxon’s leader on the project, said by phone.

JPT: Permian Basin Production Will Grow as Long as Well Productivity Allows It

TPL, among many otber things, is partly a call option on drilling technology.

Occidental has developed a detailed, standardized subsurface workflow that draws on a large company database to evaluate where and how to develop its huge inventory of Permian acreage, said John Polasek, vice president of geoscience for Occidental. The database consolidates its rock and reservoir data as well as results from companies actively working these plays.

Predictions are based on its store of geological, geophysical, geochemical, and petrophysical information. They are compared to the well results. If model predictions are validated by the “actual performance we know we have this figured out,” Polasek said.

Early results are promising. Occidental’s 30-day average production has increased annually since 2012, and it has drilled 26 of top of 50 wells in the basin while drilling 5% of the wells, he said.

Polasek pointed out that those top wells were completed with “25% less proppant than our peers. We feel we have done quite well with less and that is critical to becoming profitable in shale.”

Oilprice.com: The World’s Largest Battery To Power The Permian

Anyone know of a trust with lots of land that could host solar and wind projects?

Texas is also sixth in the top ten U.S. solar states, according to the Solar Energy Industry Association (SEIA).

In 2018, wind power provided 18.6 percent of the energy use in Texas, while wind will make up 23.4 percent of the 2019 generation capacity, according to ERCOT estimates from last month. Solar power is expected to account for 2.1 percent of the 2019 generation capacity in Texas.

Renewable energy and battery storage in Texas is set to increase in coming years. So is oil and gas production in the fastest-growing U.S. shale basin. Booming oil drilling will require more power to the grid and some of it, as odd as it may seem, will be coming from solar and wind power.

Forbes: It’s Not Just The Permian. Super Basins Are A Global Phenomenon

The Permian Basin is the prototype onshore unconventional super basin. It possesses key geological fundamentals in abundance. In addition, the Permian Basin and other North American basins are a fertile cradle of technology. They possess critical factors for innovation: private mineral ownership, a strongly networked community, service company partnerships and immediate rewards for risk taking. The Permian offers hard won lessons from more than a decade that include: addressing needs for energy transport, water handling, sand usage and variations in gas/oil ratios. Building on this experience, other basins can leapfrog ahead.

Chron: Refining, Pipelines, and Solaris

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Chron: California company seeks to build $1 billion refinery in Permian Basin

Kermit is directly east of $TPL’s surface land in Loving, Reeves, and Culberson counties. The quote below speaks to the sheer amount of physical activity in the Permian right now.

With the increase of 18-wheelers and other vehicles on the roads of the Permian Basin, Prentice said the refinery will take advantage of locally produced crude oil and sell the gasoline and diesel locally.

“If the refinery were in operation right now, every single barrel would be sold within 100 miles,” Prentice said. “There’s been such an increase in demand.”

Chron: Two pipelines hold joint open season to move crude oil from Permian Basin to Houston Ship Channel

This is some of the end-of-2019 capacity we’ve been hearing about.

As construction for the 850-mile Gray Oak Pipeline draws to a finish, a joint venture led by Phillips 66 Partners has teamed up with Houston pipeline operator Kinder Morgan to move crude oil to more destinations.

Designed to move 900,000 barrels of crude oil per day by the end of the year, one of the end points of the Permian Basin to Gulf Coast pipeline is the Phillips 66 Sweeny Refinery in Brazoria County.

Chron: Solaris Water Midstream begins water recycling operations in the Permian Basin

I may have saved the best information for last here.  Important to know that Solaris started its build out in 2015/2016.  Two year head start relative to $TPL.

Launched in November 2015 and financially backed by the private equity firm Trilantic Capital Partners North America, Solaris Water Midstream sources and delivers freshwater to drilling operations and moves and recycles oilfield wastewater.

The company reports having 16 current customers already either connected or in the process of connecting to its Pecos Star System.

A subsidiary of Marathon Oil Company signed a long-term contract for water services in a 369,000-acre area of Lea County, New Mexico that will allow for a 125-mile expansion of the Pecos Star pipeline network.

Once the construction for the expansion is complete, the Pecos Star System will include more than 300 miles of large diameter permanent pipelines and more than 200 miles of temporary pipelines.

Waterfield Midstream Makes a Splash

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Blackstone Energy Partners Press Release

We’ve heard this story before.  Substitute TPL and EOG for Waterfield and Anadarko.

Waterfield is led by Co-Chief Executive Officers Scott Mitchell and Mark Cahill, who previously built and led Anadarko’s and Western Gas’s Permian Basin commercial water infrastructure platform.  Since partnering with Blackstone last summer, Waterfield has put together a highly skilled team that brings together upstream and midstream technical expertise with a deep understanding of the subsurface and operating characteristics of the Permian Basin.  This expertise positions Waterfield to provide reliable, turn-key services for its customers.

Waterfield’s progress should be of interest to TPL follows as there are parallels between the two entities.  Waterfield appears to be well capitalized and has a strong management team; looks like prime competition.

MRT: Blackstone bets $500 million on growing full-cycle water management trend

“It used to be (water management) was trucking water to saltwater disposal wells. Then the next generation was to pipe water to SWDs to get trucks off the road and enjoy the economic benefits of pipelines,” said Cahill, an engineer who got his start at Chevron. “I think we’re entering the next phase, where you’ll see subsurface expertise. It’s not just pipes and facilities but knowing where you’re putting the water and how you’re putting the water,”

“The eye-opener for us was when we were talking to other producers and we were talking about our focus on the subsurface, and no one else was looking at the subsurface,” Mitchell said. “That gave them comfort things would be done right. It dawned on us that this is how it will be done.”

He said producers have been reluctant to grant water management to other companies “because it’s so critical and it has to be done right. They know the subsurface, so they’re reluctant to hand it off to someone without that expertise.”

Already, Waterfield has a 15-year contract with Guidon Energy to construct a new system to handle Guidon’s water gathering and disposal needs across its 40,000-acre position in Martin County. That system, which will target deeper disposal zones, is expected to come online by mid-year. Waterfield also has an agreement with EagleClaw Midstream to operate EagleClaw’s Reeves County water assets — 58 miles of gathering lines and 390,000 barrels per day of permitted water disposal capacity.

Those contracts have met the company’s goal of “planting our flag, getting a platform in the Midland Basin and the Delaware Basin,” said Cahill.

15 year contracts are music to my ears.

 

The Gray Lady Speaks

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Last year alone, the Permian’s production rose by a million barrels a day, and it could surpass the Ghawar field in Saudi Arabia, the world’s biggest, within three years. Now producing four million barrels a day, the Permian generates more oil than any of the 14 members of OPEC except Saudi Arabia and Iraq.

As many as 15 oil and gas pipelines serving the Permian are expected to be completed by the middle of 2020, potentially increasing exports from the Gulf of Mexico fourfold to eight million barrels a day after 2021, according to a recent Morningstar Commodities Research report.

“I will have work here forever,” said Mike Wilkinson, a truck driver who came from Dallas a year ago and moved into a trailer with his teenage daughter. “As hard a place as this is to look at, they are going to need guys like me to move equipment around here for years to come.”

With a major acquisition in New Mexico last year, Exxon Mobil became the most active driller in the basin, and projects that it will increase production fivefold by 2025. Also growing rapidly here, Chevron estimates that one in six of every barrels it produces globally will come from the Permian by 2021.

“For Shell, the Permian is absolutely critical,” said Gretchen Watkins, president of Shell Oil. “The Permian is massive; it’s a game changer for U.S. shale. It is the powerhouse field.”

4Q Margin Compression

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rude and crude

Rude and crude analysis warning.  I was looking at 4Q and was thinking that net income looked fairly light relative to revenue so I did a little digging and confirmed my suspicion.

The top analysis attempts to isolate the water business to determine profitability.  We start with net income and add taxes back in to get an EBT.  EBT is then reduced by TPL’s legacy “low expense” businesses (Royalty, Sundry, and Sales) to get towards earnings from the water business.  This new adjusted EBT number is further adjusted by adding back an estimate for the expenses (2x 2016 full year expenses) of the “low expense” businesses.  The result is something that might approximate income generated by the Water business.  Water’s reported top line can be compared to the water income estimate to get a picture of what Water’s expenses and margin look like.

The conclusion is that Water’s expenses were up significantly in 4Q which drove the estimated margin down to ~21%.  Lots of assumptions and brute force in here.  Everything highlighted in green is a custom creation.

The bottom analysis gets to ongoing margins more directly.  Here we compile the revenues from Royalty, Sundry, and Water and compare them to a “non-sale” income number that is generated by adding taxes and proceeds from asset sales back into net income.  Adjusted income / adjusted sales = margin of repeating buiness.  This analysis too points to materially lower margins in 4Q.

Where’s that margin going?

Update:  Quick update 15 minutes after posting.  Please take some time to look at the column all the way to the right.  Margin compression or not, $TPL is on fire.  Oh, and thank you Mr. Taxman.

 

XOM’s Permian Infrastructure Build-out Continues

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Exxon Bounces Back as Crude-Oil Production, Refining Surge

Exxon was a latecomer to shale production in the booming Permian Basin, but the company has invested heavily in recent years, including the $6.6 billion purchase of acreage from the Bass family in 2017, and plans announced this week to expand a Texas refinery to use more of the light oil produced nearby.

ExxonMobil to Proceed with New Crude Unit as Part of Beaumont Refinery Expansion

“With access to terminals, railways, pipelines and waterways nearby, the Beaumont refinery is strategically positioned to benefit from Permian production growth,” said Bryan Milton, president of ExxonMobil Fuels and Lubricants Company. “The addition of a third crude unit in Beaumont will enhance the refinery’s competitive position and truly establish it as a leader in the U.S. refining industry.”

4Q Earnings

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Press Release

$8.06 per Sub-share Certificate!

A not often used tool in toolkit below.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the year ended December 31, 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Back royalty sales out of earnings and you get to $43.8MM which is light to $50.8MM last quarter which (I guess) shouldn’t be surprising given a dip in realized oil prices.  Royalties were still up on the quarter nevertheless as barrels produced continued to rise the Permian.  Sundry top line was flat.  Water top line down was down 9.3% vs Q3 to $16.5MM.

I’m inclined not to panic about the dip in water revenues as the business is still in its infancy.  That said, my expectation was for modest growth given continued increases in Permian region oil production throughout the quarter.  More to come on that topic.

 

Texas Pacific Land Trust Announces Fourth Quarter 2018 Financial Results

DALLAS, TX (January 31, 2019) – Texas Pacific Land Trust (NYSE: TPL) today announced financial results for the fourth quarter ended December 31, 2018.

Results for the fourth quarter of 2018:

  • Net income of $62.7 million, or $8.06 per Sub-share Certificate, for the fourth quarter of 2018, compared with $24.6 million, or $3.14 per Sub-share Certificate, for the fourthquarter of 2017.

 

  • Revenues of $93.2 million for the fourth quarter of 2018, compared with $40.0 million for the fourth quarter of 2017.

 

  • Increases of 177.0% in water sales and royalty revenue, 135.8% in oil and gas royalty revenue and 17.0% in easements and sundry income for the fourth quarter of 2018, compared with the fourth quarter of 2017.

Results for the year ended December 31, 2018:

  • Net income of $209.7 million, or $26.93 per Sub-share Certificate, for the year ended December 31, 2018, compared with $97.2 million, or $12.38 per Sub-share Certificate, for the year ended December 31, 2017.
  • Revenues of $300.2 million for the year ended December 31, 2018, compared with $154.6 million for the year ended December 31, 2017.
  • Increases of 150.3% in water sales and royalty revenue, 112.0% in oil and gas royalty revenue (144.2% excluding the arbitration settlement with Chevron U.S.A., Inc. (the “Chevron Settlement”) in September 2017) and 26.8% in easements and sundry income for the year ended December 31, 2018, compared with the year ended December 31, 2017.

Further details for the fourth quarter of 2018:

Oil and gas royalty revenue was $35.8 million for the fourth quarter of 2018, compared with $15.2 million for the fourth quarter of 2017, an increase of 135.8%. Crude oil and gas production subject to the Trust’s royalty interests increased 98.5% and 225.0%, respectively, in the fourth quarter of 2018 compared to the fourth quarter of 2017. In addition, the prices received for crude oil production increased 15.4% in the fourth quarter of 2018 compared to the same quarter of 2017 while prices received for gas production decreased 21.2% over the same time period.

Easements and sundry income was $21.9 million for the fourth quarter of 2018, an increase of 17.0% compared with the fourth quarter of 2017 when easements and sundry income was $18.7 million. This increase resulted primarily from an increase in pipeline easement income and lease rental income, partially offset by a decrease in permit income and material sales for the fourth quarter of 2018 compared to the fourth quarter of 2017. Pipeline easement income increased $4.3 million in the fourth quarter of 2018 compared to the same quarter of 2017.

Water sales and royalty revenue was $16.5 million for the fourth quarter of 2018, an increase of 177.0% compared with the fourth quarter of 2017 when water sales and royalty revenue was $6.0 million.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the fourth quarter of 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Further details for the year ended December 31, 2018:

Oil and gas royalty revenue was $123.8 million for the year ended December 31, 2018, compared with $58.4 million for the year ended December 31, 2017, an increase of 112.0% (144.2% excluding the $7.7 million Chevron Settlement received in September 2017). Crude oil and gas production subject to the Trust’s royalty interests increased 110.0% and 178.5%, respectively, in the year ended December 31, 2018 compared to the year ended December 31, 2017. In addition, the prices received for crude oil production increased 21.6% in the year ended December 31, 2018 compared to the year ended December 31, 2017, while prices received for gas production decreased 24.2% over the same time period. The changes in production and price for the year ended December 31, 2018 compared to the year ended December 31, 2017 exclude the effect of the Chevron Settlement.

Easements and sundry income was $88.7 million for the year ended December 31, 2018, an increase of 26.8% compared with the year ended December 31, 2017 when easements and sundry income was $70.0 million. This increase resulted primarily from increases in pipeline easement income, lease rental income and permit income for the year ended December 31, 2018 compared to the same period of 2017. Pipeline easement income increased $8.0 million for the year ended December 31, 2018 compared to the same period of 2017.

Water sales and royalty revenue was $63.9 million for the year ended December 31, 2018, an increase of 150.3% compared with the year ended December 31, 2017 when water sales and royalty revenue was $25.5 million.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the year ended December 31, 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Land sales revenue was $4.4 million for the year ended December 31, 2018. The Trust sold approximately 171 acres of land for an average price of approximately $25,464 per acre. Land sales revenue was $0.2 million for the year ended December 31, 2017.

Texas Pacific Land Trust Announces Fourth Quarter 2018 Financial Results

“Water Is The New Oil”

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Bloomberg: Water Is Almost as Precious as Oil in the Permian Basin

Demand for water to use in fracking in the Permian has more than doubled from 2016 levels, according to industry consultant Rystad Energy. Demand should grow to more than 2.5 billion barrels by next year, accounting for nearly half of all U.S. oilfield needs.

“It used to be you’d get a great cow ranch that had good grass for your cattle, and hunting or recreation was an add-value revenue stream and discovery of oil or gas was also this cream on the cake,” Uechtritz said. “Now, it’s wind and water.”

Wayback Machine – Dallas Morning News

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The most unusual stock tip I’ve ever gotten

This article from 2012 was linked today in the Yahoo Finance TPL conversation board.  A good one for the archives!

Chief executive Roy Thomas, who offices in downtown Dallas on Pacific Avenue, said the trust still holds about 1 million acres in 20 counties in West Texas. He explained that in the early years after the trust was established, the land was difficult to sell because of its location in the middle of nowhere.

Then the West Texas oil boom hit the Permian Basin in the early 1900s, and this land became more valuable because of the oil and gas royalties. So the trustees back then and now have been in no hurry to sell it.

Even today, he said, the company sells only a few thousand acres every year but makes a bundle in oil and gas royalties. Texas Pacific booked $34 million in revenue last year, and about $14 million came from royalties. That is a 50 percent increase in revenue from the previous year.

“Buying back shares and retiring them is really the main thing we do with our cash flow,” Thomas said. “We only retire shares. The trust is prohibited from reissuing shares or giving me shares because someone thinks I’m doing a good job.”

 

 

 

Net Exporter

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How OPEC Is Helping U.S. Oil Reach a Tipping Point

Quick read here but a good one.  The subtext is that US production keeps exceeding expectations.

Soaring U.S. production, driven by the extraction of oil from shale, has transformed the country’s prospects. Two years ago, when the EIA first started publishing its detailed forecast for 2018, it saw U.S. output ending the year at 9.44 million barrels a day. It now sees last month’s figures at a staggering 11.8 million.

Its most recent forecast shows the growth trend slowing for much of 2019, before picking up again in 2020, following the expected start-up of new pipelines to carry oil from the Permian Basin to the Gulf coast in the second half of this year. A similar pause in growth was forecast for the summer of 2018, but it didn’t materialize. The EIA has consistently underestimated the U.S. production rate, and could do so again.