Author: tpltblogger

Kinetics Funds Update : Midland Oil Looking Up

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My notes (not TPL specific):

  • HK funds have active share of 98%+.  No regard for indicies!
  • SEC asked about large cash position in Kinetics funds.  Kinetics guided that cash will stay high given their conservatism.  (magnifies their conviction on TPL when you think about it)
  • Buystocks when their potential rate of return lines up with return on capital of the business.  That alignment is not present now.  Valuations still stretched
  • Yield curve flattening -> banks don’t make money -> economy slows (tho we didn’t see bank NIMs get crushed this quarter)
  • HK overall thinks rates can’t go up without completely crushing the economy (see FRMO call)
  • US rates > overseas rates.  Keeps demand for USD strong
  • $47T in US bonds outstanding and most of them have yields smaller than inflation.  Hard to get > inflation in IG.  Have to go to HY for that
  • This has been the case for quite some time and equity has been the only place to turn.  Thus high valuations
  • Commodity inflation/growth has lagged (prob due to hardship of physical storage; my guess).  Last 10 years = “the asset inflation of everything buy commodities”
  • Permian Delaware is break even at $45 with ALL costs involved (not just marginal). Permian Midland is $47.  DJ Basin is $50.  Eagle Ford is $53.  Bakken is $57.  Only Permian is less than current spot
  • Oil market was oversupplied in 2018 due to Iran waivers and slow adjustment by Saudi.   Supply resizing for better pricing in 2019
  • Saudi Arabia requires $88/bbl to balance their national budget.  Iran = $72.  UAE = $72.  Ouch.  Brent @ $62.
  • Producers under Brent are Iraq at $55, Russia at $53, Kuwait at $48, Qatar at $47
  • Current price not sustainable for most suppliers
  • Pipeline capacity coming online to make Midland price closer to that of Brent.  Permian price in late ’19 = Brent – water transportation costs
  • New pipes will get Permian oil to Houston
  • Right now Brent is $62.  Midland is $51.  $11 basis.  Bloomberg shows average basis of $15 over the past year.  Basis narrowing
  • Cuff Permian at Brent – $5
  • HK takes page from Oaktree/Howard Marks that shows bond troughing lower before each crisis. After the trough comes the pain.  Hiding out in debt market is not an option thus HK’s focus on hard assets and having cash
  • Current US deficit is $855B/year.  Only way out is printing $$$
  • Plays into “crypocurrency is that is not controlled by a government”
  • Fiat money system is broken
  • Buying Franco-Nevada (hard asset theme)
  • Fuel tax revolt in France (yellow vests) show the backlash to “green” governance is real
  • Oil and gas demand could continue to increase to/thru 2040.  20 more years of demand growth
  • High density transportation (buses, planes) and transportation (ships) really can’t be powered by renewables given current technology
  • EV batteries require raw materials that are not in infinite supply
  • Would rather own commodity royalty companies vs open pit miners.  $FNV vs $FCX
  • Royalty companies have no operational risk and limited financial risk.   $WPM
  • HK owns 25% of CVEO and TPL.  “If we had enough capital, we would not minding owning 100% of both businesses”
  • TPL has limited financial risk.  Unlevered with cash on the balance sheet
  • TPL – hard to envision an environment where TPL isn’t significantly higher down the road
  • TPL controls access to aquifers via their surface land.  Competitors are at a disadvantage.  TPL won’t let competitor water cos cross its surface land
  • Private equity is growing their own water biz due to perception of high margins and high stability
  • Most of TPL water revs are on source side by recycling and disposal revs will pick up over time
  • “You will be surprised by the stability of TPL earnings as you get into next year”
  • Gas that is flared is going to get monetized
  • APC and CVX long term numbers show 20-25% annualized growth to 2023
  • Water should grow commensurately with drilling activity
  • 3 years out, TPL earnings could be $50/share
  • “ultimately I think we’re going to make a great rate of return”
  • Royalties are an advantaged and growing business model.  A 70% net margin with no capex and working capital needs > E&P that needs to replace reserves.  People don’t appreciate that.  Static multiples aren’t appropriate for valuation
  • TPL land swap was done with WPX Energy which is a spinoff of WPZ.  They are a traditional E&P (odd that they are buying surface).  No royalties sold and TPL retains water rights.
  • HK belief is that TPL got a very attractive price for surface acreage and will likely try to buy a block to make more contiguous acreage.   Transaction was very encouraging and very positive
  • 2 acres together worth more than 2 separate acres

 

An Update from Murray and Steven

tpltblogger

FRMO Investor Call

Required listening if you are a TPL-head (or a BTC-head) like myself.   Unfortunately, the transcription isn’t great.   Ctrl+F is your friend here.

But you can’t forget that what you are sitting on, you are sitting on like the greatest hydrocarbon property in North America and you can even make a strong argument maybe even the world. The technology keeps getting better. This pipelines being constructed as gas being flared that in 11 month is not going to be flared and this is going to theirs is leases, there is water being sold is all kind of things happening except those variables don’t change in any appreciable way in a matter of week.

Call details if you can’t get it on SA.

Murray Stahl, Chairman and CEO, and Steven Bregman, President and CFO, will host a conference call on Thursday, January 17, 2019 at 4:15 p.m. ET. Only questions submitted to info@frmocorp.com before 1:00 p.m. on the day of the call will be considered. The call can be accessed by dialing 1-855-710-4181 (domestic toll free) or 334-323-0516 (international toll) and entering the following conference ID: 5792922. A replay will be available from 7:15 p.m. on the day of the teleconference until Thursday, November 15, 2018. To listen to the archived call, dial 1-888-203-1112 (domestic toll free) or 719-457-0820 (international toll) and enter conference ID number 5792922. 

Major Spending

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Chevron Touts Nimble Shale as Electric Cars Dim Big Oil’s Future

Hot and heavy but ready to shut down at a moment’s notice.  A big operator’s dream.  Portends high quarterly earnings vol at $TPL but we’ll (I’ll) take it.

Chevron Corp. will spend about half its capital budget on projects that yield quick returns over the next three years, underscoring the importance of shale as it prepares for growing uncertainty in how the world consumes energy.

The U.S. oil giant will spend about $9 billion to $10 billion a year on “short-cycle investments” through 2022, primarily focused on the Permian Basin, the world’s biggest shale oil region, the San Ramon-based company said in a presentation on its website Friday. The Permian is on course to make up about one in five barrels the super major pumps worldwide.

But now they’re investing heavily, attracted by the ability to ramp up production quickly and potentially reduce it if oil prices crash.

That’s a particularly useful trait when the future of oil and gas consumption is unclear, with electric vehicle usage growing and governments clamping down on greenhouse gas emissions.

Land Sale Closed

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Form 8-K

On January 7, 2019, Texas Pacific Land Trust (the “Trust”) consummated the previously announced sale of approximately 14,000 surface acres of land in Loving and Reeves Counties, Texas to WPX Energy Permian, LLC for an aggregate price of $100,000,000 (the “Sale”). The Sale excludes any mineral or royalty interest in the lands to be conveyed and the Trust reserved certain usage, disposal and water rights in approximately 1,280 acres of the lands conveyed.
The Trust intends to use the proceeds from the Sale to acquire like kind properties.
The sale announced on 11/29 has close.  I’m fond of the condition that allows TPL to do it’s water thang on 1,280 of the 14k acres sold.

Michael Boyd on SA

tpltblogger4 Comments

Texas Pacific Land Trust: A Different Approach

Fun read here.  Good alternative viewpoint on valuation.  I agree that 2019 comps are going to be a challenge.

I don’t think bulls would disagree that the company’s greatest assets are its land and mineral interest holdings. Given that, it’s puzzling to me to see focus on earnings per share, cash dividend distributions, or other measures of earnings power. Investors have lost sight of what’s supporting the underlying valuation: The land and its value. As any commercial real estate owner will agree, while commercial property values often correlate to earnings power, they frequently do not align. I see a lot of similarities here to the real estate sector, followers of my work know I spend a good chunk of time analyzing REITs. With that in mind, a focus on the actual current trading value of the land itself is natural for me, but even in REITs it has not common among smaller shareholders. That is clearly a mistake, as investors that have chased earnings yields at all costs in distressed real estate (malls, senior housing) have gotten shellacked. Coming into looking at this company at the request of a peer, this disconnect was my No. 1 concern and something I felt was missing in the discussion. While there’s going to be some correlation – higher revenue and earnings from lands naturally will tend to drive associated land values higher – they do not necessarily move in lock step.

On the far west land held by the Trust…

According to the most recent Texas Rural Lands report (data above), this rangeland is worth about $400/acre in the Far West Texas and Trans-Pecos. While acreage sales in this area are minimal (mainly trading hands between conservationists and ranchers), the Texas Rural Lands report has reported stable valuations in this region for some time, albeit with some range. In valuing the firm, I’ve used the low end of the range based on grazing rental revenue. Why? Texas Pacific Land Trust has historically booked about $0.55-$0.60/acre in grazing lease rental revenue on these lands which is at the low end of the rental range given in the above report. Logic follows that lower-than-average grazing lease revenue implies lower-than-average property value. Additionally, there would be some clear discounting involved in an accelerated wind down in this part of the portfolio given the lack of transactions out there.

In 2015, the surface acreage constituted roughly a third of total enterprise market valuation – on my analysis of the sum of the parts today it will be closer to 10%. The business model has shifted from high multiple, low earnings power assets (rangeland surface acreage) to low multiple, high earnings power assets (royalties). This is the danger of using historical multiples in projecting future value; business models change.

On the value of mineral rights…

With the company looking to post around $115mm in revenue this year, this values these assets at between $1,500-1,750mm on the high end of comps, not too far off the above figure based off usual private market rule of thumb.

On water…

At the end of the day, I think the assets can be valued similarly to the oil business. Margins are similar enough, and while the water reserves are not going to be depleted at the same rates as wells, water usage will be highest when exploration activity is aggressive and new wells are being drilled. Perhaps there’s some room for interpretation here, but I’d peg the business as a $900-1,000mm business as it stands today.

Boyd values the company at $3.3B via a conservative sum of the parts analysis.

It’s tough to call what investor expectations might be into Q4 and 2019 when it comes to earnings – particularly because there’s no Wall Street coverage – but my gut is that flat/negative comps beginning in Q2 2019 are going to surprise many people that own the company. I’ve learned that owning companies with that kind of outlook rarely plays out well, and my feeling is that this will be much cheaper before it sees the $700-800/share level again unless bulls are blessed with a dramatic reversion in the collapse in crude oil pricing. I think there are better opportunities out there in the oil patch.

Overall, I don’t disagree with the sum of the parts valuation.  $3.3B is certainly short of the current $4.2B market capitalization.  Sum of the parts puts the price at $430.  We were just there so it’s not out of the realm of possibility.

That said, and I may sound naive here, but I what I think is overlooked is 1) no debt, 2) unique governance (long term decisions take precidence over quarerly beats), 3) share cancellations (ownership concentration), and 4) long term optionality on the land.

If you’re in for the long term, all four factors work in your favor.  My gut says that a simple sum of the parts undersells all that TPL entails.  That (my gut) and a dollar will get you a cup of coffee.

I follow many industrials in my line of work.  Over the past ten years I’ve seen most all of them all 1) add leverage, 2) make short sighted moves to “beat” earnings, 3) buy stock back at high valuations only to neutralize the concentration via issuance for management comp, and 4) squander and neutralize competive assets and divisions by buying “synergistic” losers via M&A.  TPL seems, to me, to be the opposite of that.

The Other Side of the Checkerboard and !Abilene Christian!

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Bloomberg: Texas Endowment at $31 Billion Passes Yale With Oil’s Help

The endowment was fueled by mineral rights from land it controls in the Permian Basin. It’s an area bigger than Delaware that has emerged in the past decade as the world’s fastest growing oil-producing region due to advances in hydraulic fracturing, or fracking. The state system shares the mineral rights revenue with Texas A&M University, which saw its endowment value surge to $13.5 billion.

The University of Texas controls 2.1 million acres of land in the Permian, which generated a record 5.3 million barrels in July as drillers built longer and longer horizontal wells to frack. The companies paid out a little more than $1 billion of royalties to the state school endowments in the year through August, the most since 2014 when oil prices topped $100 a barrel.

Get ready for this one…

Other schools that have benefited include Texas Christian University. The school in Fort Worth has 10 percent of its $1.6 billion endowment allocated to energy, with more than two-thirds in mineral rights it received from donors, said James Hille, the investing chief.

Abilene Christian University, a small private college west of Dallas, committed a quarter of its $450 million endowment to energy, including a big bet on the Permian region. The fund gained 15.8 percent in fiscal 2018, better than most wealthy U.S. colleges and eking past Bowdoin College’s 15.7 percent return.

Abilene Christian had a mix of energy investments when it decided in 2013 to ramp up its exposure with shares in Texas Pacific Land Trust, which controls vast tracts of land in the Delaware Basin in the western region of the Permian. The move proved prescient as Texas Pacific became the hottest oil stock from the U.S. shale boom, climbing more than 2,200 percent from 2010 before prices corrected in October.

The university had so much conviction in the investment it lifted its limit on how much the endowment may own in one company, said Jack Rich, the chief investment officer. A 3 percent commitment was increased to 11 percent this year and generated a 130 percent gain when some shares were sold, he said.

“That’s off the rails,” said Rich, who’s worked for the university’s administration for 28 years, creating an investment office about a decade ago. “We took some risk there.”

It’s rare for school funds to hold more than single-digit allocations to energy, said Fund Evaluation’s Busken. Many endowments and foundations have cut oil and gas under pressure to divest from fossil fuels.

Rich said Abilene Christian is diversifying into wind, solar and other sustainable energy producers. It’s also holding a position in Texas Pacific, even as the share price has tumbled with oil prices.

“Our edge is our willingness to buy into what we know, and that’s the energy market,” Rich said.

11% x 450MM = $49.5MM.  If Abilene Christian held that at the top ($870), it implies they held just under 57k shares.  Puts them in the Maurice Meyer ballpark at 0.8% of total market cap.

The quotes in the article are very “past tense” (“We took some risk there.”).  Selling all or part of 57k shares into TPL’s poor liquidity picture has to be a chore and presents one hell of a catalyst for the price to go lower.

XOM Turns It Up

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Bloomberg: Exxon Becomes Top Permian Driller to Combat Falling Oil Output

I was asleep at the switch here.  This article is a few days old but worth reading.

It’s not hard to see why the Permian has become so important to Exxon. A series of strategic mistakes sent the oil giant’s overall production careening to a 10-year low by the middle of this year. Drilling wells in the the Permian, the world’s premier shale field, yields low-cost oil in months rather than the years required for megaprojects to begin producing crude.

Exxon isn’t alone in tapping U.S. shale after years of pursuing overseas resources. Chevron Corp. will spend the highest portion of its capital budget at home in at least a decade. The Permian now accounts for about 10 percent of Chevron’s overall production.

BP Plc this year agreed to spend $10.5 billion on BHP Billiton Ltd.’s shale assets to gain access to the Permian while Royal Dutch Shell Plc is mulling a bid for one of the basin’s largest private companies, people familiar with the matter said Monday.

Exxon’s escalation in the Permian is essentially a bet that it can drill wells so cheaply that they’ll be profitable despite crude’s tumble since early October. The company says its shale wells can make double-digit returns with oil at just $35 a barrel. On Tuesday, prices for oil produced from the Permian in Midland, Texas, dropped below $40 for the first time since August 2016. West Texas Intermediate traded at $47.25 at 2:03 p.m. in New York.

“The business we build in the Permian, we’re building for the long term,” Woods said in a Bloomberg TV interview last month. “It needs to be efficient, low cost and effective.”

Does a Big League Business Need Big League Stock Liquidity?

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Over the past 18mos TPL has evolved from a sleepy Trust to a fairly well known entity that is actively trying to grow EPS via a new and untested (water) strategy.

Can we argue that the purpose / ethos of the Trust has changed?  I think yes.

Do counterparties look at the performance of TPL stock as a sign of health when deciding to contract for water or other services?  Perhaps.

Do “big league” companies regularly have -7% down days in the complete absence of news?  No.

Are such drawdowns good for the confidence of counterparties?  No.

These things happen when the market makers “quote” the stock in 10 point markets.  10 points on $486 base price is 2%.

Is 2% an acceptable round trip trading cost for an entity with a $4B market cap?  No.

The conventional argument against a split was that the Trust is interested in keeping the price low for buybacks.  Well, where are they?  It appears as if capital return is shifting to dividends.

If the return strategy is dividends, why should the Trust care about the price?

If they don’t care about the price, should the Trust split the stock to enhance liquidity?  Yes.

The days of penny stock liquidity should be in the past for $TPL.

 

 

I remain a buyer.

 

 

Safe Haven

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Bloomberg: U.S. Shale Becomes Oil Industry’s Safe Haven as Prices Languish

The cost of shale production has fallen so much since then that it’s becoming a safe haven for major oil companies in times of volatile prices, providing rapid, reliable growth and quick returns even with crude trading for just over $50 a barrel, down by almost a third since the start of October.

ConocoPhillips said Monday it’s spending half its 2019 budget in the continental U.S., while Chevron Corp. is investing more at home than it’s done for more than a decade, with $3.6 billion going to the Permian Basin alone. Anadarko Petroleum Corp. and Hess Corp., both global operators, plan to increase spending on their American assets more than 40 percent.

Oil’s recent collapse caused “some different allocation going on within the budget,” Conoco Chief Executive Officer Ryan Lance said on Bloomberg TV. “We’re putting more toward our U.S. unconventional position,” he said, referring to shale.

Production growth “slows down at $50 but I don’t think it stops at $50, and it certainly continues if prices get back to $60,” Lance said. Skeptics thought shale “wouldn’t last long, but it’s here, it’s a huge resource and it’s going to be resilient and long lasting.”

 

Water

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Harvard Quietly Amasses California Vineyards—and the Water Underneath

This post is a bit off our normally beaten path but the parallels are interesting.

 

The university’s endowment manager, Harvard Management Co., was stealthily building a sizable grape-growing business on the Central Coast through entities including Brodiaea. With the land, it was acquiring rights to vast sources of water in a region where the earth’s warming is making the resource an ever-more-valuable asset.

In a warming planet, few resources will be more affected than water, as more-frequent droughts, storms and changes in evaporation alter a flow critical for drinking, farming and industry.

Even though there aren’t many ways to make financial investments in water, investors are starting to place bets. Buying arable land with access to it is one way. In California’s Central Coast, “the best property with the best water will sell for record-breaking prices,” says JoAnn Wall, a real-estate appraiser who specializes in vineyards, “and properties without adequate water will suffer in value.”

 

 

HK Interview in Value Investor Insight

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Active Voice

When we first bought into this in 1995, we basically signed on for a 5% or so return from stock buybacks and the dividend, with pretty much infinite call options on what they could make happen with the land. Maybe people wanted to develop it. Maybe there was oil there that could one day be economically extracted.  We didn’t really know, but we liked the potential odds.

HK has the same questions as the rest of us.

With respect to capital allocation, an increasingly important question for TPL
is how it will deploy its increasing earnings.  The trust has been repurchasing and
cancelling shares for 120 years, but there’s a limit to the number of open-market purchases that can be made when average daily trading volume is less than 20,000 shares. With capital-expenditure requirements limited, it’s not a stretch to conclude we’re going to see a big increase in dividend payments. The dividend yield is still very low on a $600 share price, but in February of this year the Trustees raised the regular dividend from 35 cents per share to $1.05, and paid an additional special dividend of $3 per share. One doesn’t require a graph to infer the near-term slope of the line. We wouldn’t be surprised if over time TPL qualified for a dividend ETF or a REIT ETF.

 

7x Bakken

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USGS: Permian’s Wolfcamp is largest potential oil and gas resource ever assessed

The region in the Permian’s western Delaware Basin holds more than twice as much oil as the largest previous assessment – the Wolfcamp shale in the Permian’s separate Midland Basin southeast of Midland. That study was completed two years ago.

To put the new results into perspective, the Delaware Basin’s Wolfcamp and Bone Spring plays would hold almost seven times as much oil as North Dakota’s Bakken shale.

The Wolfcamp shale and overlying Bone Spring in the Permian’s booming Delaware Basin hold an estimate 46.3 billion barrels of oil, 281 trillion cubic feet of natural gas, and 20 billion barrels of natural gas liquids, according to the U.S. Geological Survey’s new assessment.

USGS Press Release