McGinnis Resigns

On March 28, 2022, the Board of Directors (the “Board”) of Texas Pacific Land Corporation (the “Company”) accepted the tendered resignation of Dana McGinnis, a member of the Company’s Board of Directors, effective immediately. Mr. McGinnis previously tendered his resignation, subject to Board acceptance, in response to having received less than a majority of the votes cast for his election at the 2021 Annual Meeting, in accordance with the Section 2.10 of the Company’s Amended and Restated Bylaws.

The Board’s Nominating and Corporate Governance Committee has recommended several highly qualified candidates to the Board and the Board is expected to make an appointment to fill the vacancy resulting from Mr. McGinnis’ resignation in the near future.

Five Counties

Bloomberg – Why the Global Oil Market Hinges on Five U.S. Counties

Stacked up against other producers, the Permian stands out. Unlike OPEC countries such as Kuwait and Iraq, drillers in the Permian aren’t beholden to alliances that restrict production. The region also doesn’t face the same political headwinds of places in Europe, which are quickly moving away from fossil fuels, and it doesn’t face the daunting financial obstacles of Venezuela. Costly infrastructure is mostly already in place, drillers have high rates of productivity and the basin features relatively low breakeven costs, which measure the minimum oil price needed for profitability.

But the biggest advantage of the Permian is its massive, untapped reserves that are buried in the layers of shale rock. The potential is so big that it outstrips even the Middle East’s famed fields.

“We’ll stop using oil long before we run out of Permian inventory,” said Artem Abramov, head of shale research at Rystad Energy.

The consultancy estimates the U.S. has more than 76 billion barrels of untapped reserves in oil fields that aren’t yet producing, most of which can be found in the Permian.

This is why concentrating the equity base and pumping ROIC is so much more important to TPL than anything else. Any other use of capital will almost assuredly have a lower rate of return.

Santa Monica Partners : Letter to the Board

Larry Goldstein of Santa Monica Partners submitted the letter below to the board recently. Larry asked me to share his letter with TPL blog readers.

While I don’t agree with all of Larry’s points (more buybacks, fewer dividends!), Larry’s perspective as a seasoned (and LARGE) investor is important.

I would urge the Board and the C-suite to consider why their key constituent base remains so aggrieved and vocal.

Narrative Shift

WSJ – U.S. Shale Oil and Gas Are the Key to a Renewable Future

The episode taught valuable lessons for the current crisis. The first and most immediate step is to prioritize North American oil production over imports from less desirable suppliers. Permian Basin shale oil can be brought online quickly to substitute for the absence of Russian oil on global markets. Alongside the obvious security and economic benefits to the West, the oil-and-gas industry has the opportunity to ensure the Permian is the cleanest hydrocarbon source in the world. To do this, producers should set aggressive emission-reduction targets and drive methane emissions as close to zero as possible with measuring and monitoring verified by third parties.

Further, shale oil and gas production represents arguably the most transition-aligned oil and gas production today. Because of the indeterminate demand for fossil fuels in the coming decades and beyond, it makes economic sense to encourage quick-turnaround, high-return oil-and-gas projects while actively discouraging long-duration, capital-intensive projects with uncertain futures. This is an opportunity for U.S. oil and gas companies to replenish their balance sheets while preparing their own unique strategies to drive value over the coming

Schwartz Urges Action on Declassification

PLYMOUTH, Mich.–(BUSINESS WIRE)–The Texas Pacific Land Corporation (TPL) Board of Directors has refused to act on an advisory ballot proposal approved by 55.9% of shareholders. Despite the majority vote held on December 29, 2021, to declassify the Board of Directors, the Board has not taken action to do so.

Schwartz Investment Counsel, Inc., on behalf of clients, owns over 74,000 shares of TPL (approximately 1% of the shares outstanding) with a market value more than $96,000,000. Having invested in TPL since 2015, Schwartz Investment Counsel, Inc. is one of TPL’s largest shareholders and believes TPL’s board has a fiduciary obligation to implement the owners’ wishes. Schwartz Investment Counsel, Inc. believes doing so would clearly be in the best interest of the company and all its shareholders.

TPL currently has three classes of board members. If declassified, all directors would be required to stand for re-election yearly. Currently, only one-third of the board members stand for re-election each year. Schwartz Investment Counsel, Inc. is against staggered boards and believes they only serve to entrench board members, which is not in the best interest of all shareholders.

On December 29, 2021, Schwartz Investment Counsel, Inc., along with the majority of shareholders, voted to declassify, which the TPL Board has refused to do. We recommend that other TPL shareholders also encourage the Board to implement the declassification for which we owners have voted.

George P. Schwartz, Chairman & CEO
Schwartz Investment Counsel, Inc.

Class Action

In anticipation of disappointment at the end of March (90 days after 2021 annual meeting), a group of investors is discussing the possibility of a class action suit. Below is the rationale:

TPL shareholders who are exasperated and economically damaged by the governance failures of the TPL Board. The Delaware Supreme Court has addressed the fundamental deprivation of the shareholder voting franchise in the 2021 case of Coster v.UIP, a case which reenergizes Blasius Industries v. Atlas Corp. Based on many actions and omissions taken by this Board upon and since the conversion from the Trust we believe the only means of shedding the opaqueness that obscures the deprivation of shareholders voting franchise is a lawsuit that will force the discovery and disclosure of the Boards malfeasance. In order to secure competent counsel to prosecute such an action, we need to raise an expense fund to cover the prospective expenses of such a lawyer and firm. We believe that we need to target a $1 million dollar amount for this fund although we admit the amount is at best an educated guess. We have indications of pledges toward 25% of the fund. We have no lawyer or law firm yet targeted for this retainer and will only approach such legal professionals once we have secured the expense fund. Can you help! “Boards must act equitably toward the company and its stockholders.”

If you have interest in participating (and spending the funds to do so!), send me an email or use the contact page. I will catalogue and relay interest to the lead investors. I’m a likely participant if it becomes clear that the board has disregarded/minimized/ignored stockholder votes.

Cold Winds

It could have been a signature quarter. The quarter that could have turned the page. The quarter that could have shed some sunlight and happiness on our governance malaise.

Instead, cold, icy clouds moved in and blocked out the sun.

What could have been. Sunny day! Everything was working. Record production. Record royalties. Water business comes alive! Here comes the sun!

And then all of the sudden. A $19mm cloud full of freezing rain and cold wind appears on the horizon. Poor accounting controls. Bad depletion accounting! A ~$2.50 per share drag on EPS. A miss below estimates!

Ouch! Who’s accountable? Was this discovered before or after the comp agreements were finalized?

The ETF of the Permian deserves better.

They have the golden goose in a headlock.

The material weakness identified by management relates to the design of internal controls over the periodic evaluation of historical tax returns for uncertain tax positions in accounting for income taxes. As a result of this design gap, management did not timely identify the incorrect tax treatment of depletion related to our oil and gas royalty interests in our filed income tax returns related to prior periods until the fourth quarter of 2021. The material weakness led to the understatement of income tax expense and income taxes payable for the years ended December 31, 2018, 2019, and 2020 and the quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021. Management evaluated the effects of the out-of-period adjustment related to prior periods, both quantitatively and qualitatively, and concluded that this adjustment was not material to the Company’s financial position or results of operations for the current or any prior periods. As of December 31, 2021, this material weakness had not been remediated. During the first quarter of 2022, we implemented a remediation plan to update the design and implementation of controls to remediate the above-mentioned deficiency and enhance the Company’s internal control environment. If our remedial measures are insufficient, or if additional material weakness or significant deficiencies in our internal control over financial reporting or in our disclosure controls occur in the future, our future consolidated financial statements or other information filed with the SEC may contain material misstatements and could require a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the market value of our securities.

Earnings and 10-K Out

Items of note:

At the annual meeting of stockholders held on December 29, 2021, Mr. McGinnis did not receive a majority of the votes cast with respect to his re-election as a director. Notwithstanding the terms of the Stockholders’ Agreement, Horizon and SoftVest did not vote for the re-election of Mr. McGinnis. If Horizon and SoftVest had voted for Mr. McGinnis, he would have received a majority of the votes cast. Pursuant to our amended and restated bylaws, Mr. McGinnis promptly tendered his resignation, subject to acceptance by the Board, to the Board. The Nominating and Corporate Governance Committee of the Board will make a recommendation to the Board as to whether to accept or reject the tendered resignation. The Board will act on the tendered resignation, taking into account the Nominating and Corporate Governance Committee’s recommendation and the failure of Horizon and Soft Vest to vote for Mr. McGinnis as described in the previous paragraph, and publicly disclose its decision regarding the tendered resignation within ninety days of the date of the certification of the annual meeting results

Salaries and related employee expenses. Salaries and related employee expenses were $40.0 million for the year ended December 31, 2021 compared to $32.2 million for the comparable period of 2020. The increase in salaries and related employee expenses during 2021 as compared to the same period of 2020 is principally due to $6.7 million of severance costs and a $1.4 million increase in pension costs, partially offset by decreased usage of contract labor by our Water Services and Operations segment.

Total income tax expense was $93.0 million and $43.6 million for the years ended December 31, 2021 and 2020, respectively. During the quarter ended December 31, 2021, the Company recorded an out of period tax adjustment of $19.4 million to current income tax expense and income taxes payable, $13.0 million of which related to historical annual periods and $6.4 million of which related to current year quarterly periods.

Who resigned?

Who negotiated the employment agreement that ended up in a $7mm severance payment?

Who was overzealous with the depletion accounting?

Who is accountable? Or is $19mm just table scraps these days?

Another fumble at the one yard line…

What Are the Odds?

Earnings today.

Call tomorrow.

What are the odds we get any update on actions taken by the company in the wake of the election in December?

If you’ll recall, shareholders voted to 1) end the board term of Dana McGinnis and 2) urge the board to take prompt action towards declassification.

Will we hear anything on either of these topics?

Write to the company to let them know that you are interested.

Shawn Amini should be able to direct your email to the right right readers.

Game of Chicken

Does the slate of board members that is up for election in 2022 have any chance of being endorsed by ISS/passive/big active/etc if Dana McGinnis remains on the board?

Would a board member on this year’s slate have a chance of re-election if he/she was vocal about (as vocal as board members can get) shareholder concerns?

Does not taking action now raise the probability of challengers in the coming election?

Is anyone going to take a stand for good governance? Or do the investors have to do all the work?

How is any of this good for the long term careers of management/board? Why does it all feel like a short term cash grab? Where is the leadership?

Perhaps things are happening behind the scenes but investors feel frustrated and abandoned. Is that what this team wants their legacy to be?