On Water

The 1) wording around the opportunity and activity of the water business in the 10-K combined with 2) the capital spending on the water biz and 3) big hikes in executive comp are all signs (in my mind) that $TPL is going to get extremely aggressive with water.

This may be obvious to others but I think they are going to be more water-forward than most investors expect.

You don’t pay your top two dudes $2mm+ each to collect royalty checks and do small ticket land sales.  More is happening here…

2018 10-K

Edgar: 2018 TPL 10-K Filing

Some of my favorite sentences are below:

Oh and Glover and Packer got P A I D.  The numbers speak for themselves; they appear to be deserving of their comp.   Have to expect that operators in the area have those two gents on the shortlist for other big jobs down the road.

I’m fully expecting them both to buy more TPL in the open market.

As of December 31, 2018, TPWR continues to build out its water production, storage and delivery infrastructure system in the Permian Basin. TPWR has entered into multiple sourcing contracts with oil and gas operators throughout the basin, the terms of which provide justification for continued investment. During the year ended December 31, 2018, the Trust invested approximately $35.2 million in TPWR projects to develop brackish water sourcing and re-use assets.

While there is competition in the water service business in West Texas, we believe our position as a significant landowner of approximately 900,000 acres in West Texas gives us a unique advantage over our competitors who must negotiate with existing landowners to source water and then for the right of way to deliver the water to the end user.

As of December 31, 2018, Texas Pacific owned the surface estate in approximately 902,177 acres of land, comprised of numerous separate tracts, located in 19 counties in the western part of Texas. There were no material liens or encumbrances on the Trust’s title to the surface estate in those tracts.  As of December 31, 2018, the Trust also owns a 1/128th nonparticipating perpetual oil and gas royalty interest under 84,934 acres of land and a 1/16th nonparticipating perpetual oil and gas royalty interest under 370,737 acres of land in the western part of Texas. Generally speaking, if the Trust sells the surface estate in real property with respect to which it holds an oil and gas royalty interest, that oil and gas royalty interest is excluded from the sale and retained by the Trust. In addition, the Trust acquired oil and gas royalty interests in approximately 1,826 net royalty acres during 2018.

The Trust has not incorporated equity-related compensation elements in its compensation programs. During the year ended December 31, 2018, the Trust did not issue or sell any equity securities.

The Trust purchased and retired 19,417 Sub-shares in the open market. (~0.25% of total).

Revenues increased $145.6 million, or 94.1% to $300.2 million for the year ended December 31, 2018 compared to $154.6 million for the year ended December 31, 2017. Net income increased $112.5 million, or 115.7% to $209.7 million for the year ended December 31, 2018 compared to $97.2 million for the year ended December 31, 2017.

Salaries and related employee expenses were $18.4 million for the year ended December 31, 2018 compared to $3.8 million for the comparable period of 2018. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 26 employees as of December 31, 2017 to 64 as of December 31, 2018 as well as an increase in contract labor expenses over the same time period.

Cash flows used in investing activities were $81.5 million compared to $18.7 million for the years ended December 31, 2018 and 2017, respectively. The increased use of investing cash flows is principally due to our investment of $44.7 million in water service-related assets during 2018, an increase of $27.0 million over our investment during 2017. Additionally, for the year ended December 31, 2018 we acquired $24.3 million of royalty interests and $9.4 million of land acquisitions. There were no such acquisitions of royalty interests and land for the year ended December 31, 2017.

As of December 31, 2018, we had a cash and cash equivalents balance of $119.6 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business, particularly the growth of TPWR, to repurchase additional Sub-share Certificates subject to market conditions, and for general corporate purposes. We believe that cash from operations, together with our cash and cash equivalents balances, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.

For the year ended December 31, 2017, the Trust sold approximately 11.0 acres of the Trust’s Assigned land in Texas for an aggregate sales price of approximately $0.2 million, an average of approximately $20,000 per acre.  For the year ended December 31, 2016, the Trust sold approximately 774.6 acres of the Trust’s Assigned land in Texas for an aggregate sales price of approximately $2.9 million, an average of approximately $3,803 per acre.  For the year ended December 31, 2018, the Trust acquired approximately 14,650 acres of land in Texas for an aggregate purchase price of approximately $9.4 million, an average of approximately $640 per acre.

As of December 31, 2018 and 2017, the Trust owned the following oil and gas royalty interests (in thousands, except number of interests): 1/16th: Nonparticipating perpetual royalty interests in 370,737 and 373,777 gross royalty acres as of December 31, 2018 and 2017, respectively.  1/128th:  Nonparticipating perpetual royalty interests in 84,934 and 85,414 gross royalty acres as of December 31, 2018 and 2017, respectively.

For the year ended December 31, 2018, the Trust sold nonparticipating perpetual oil and gas royalty interests in approximately 812 net royalty acres (1/8th interest) for approximately $18.9 million, an average price of approximately $23,234 per net royalty acre. In conjunction with this sale, the Trust acquired oil and gas royalty interests in approximately 1,480 net royalty acres for an aggregate purchase price of $20.6 million, an average of approximately $13,949 per net royalty acre. (This doesn’t tie with the table?)

On January 7, 2019, the Trust sold approximately 14,000 surface acres of land in Loving and Reeves Counties, Texas for an aggregate price of $100.0 million (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.

On February 22, 2019, the Trust used approximately $46.9 million of the sales proceeds to acquire approximately 11,700 acres of land in Reeves and Culberson Counties, Texas. The remaining $53.1 million of sales proceeds will be used to acquire other like kind properties.

There are a number of oil and gas wells that have been drilled but are not yet completed (“DUC”) where the Trust has a royalty interest. Currently, the Trust has identified 309 DUC wells affected by our royalty interest. The process of identifying these wells is ongoing and we anticipate updates going forward to be affected by a number of factors including, but not limited to, ongoing changes/updates to our identification process, changes/updates by Drilling Info (our main source of information in identifying these wells) in their identification process, the eventual completion of these DUC wells, and additional wells drilled but not completed by companies operating where we have a royalty interest.