Jean Philippe Tissot via MOI Global

Pull the link up in Google Chrome and click translate if you too failed first semester Spanish in undergrad.

Some highlights:

TPL royalties have an approximate weighted average value of 5%, which is considerably lower than the standard paid in the Permian; This is a powerful incentive for producers to continue increasing production on TPL lands.

Another obstacle for investors who are comfortable with TPL is the near impossibility of assigning a value and anchoring it. TPL is an example of how optionality plays an important role. If I had to value TPL in the past, I would have assigned zero to the water business. I would not even have known.

In last year’s letter, I explained that I was looking for convex situations. These are situations in which, when the facts appear and are positive, they have a greater effect than when they are negative; TPL perfectly fulfills that attribute.

Permian Takeaway Fills Energy Executives’ Thoughts

Sorry for two non-TPL-specific articles on the same day.  It’s not my intention to turn this into an energy news blog.  That said, I think this article provides a really good lay of the land for the current state and circumstances of West Texas.  The area is in full boom mode and is suffering from lack of takeaway (oil transportation infrastructure) and other constraints such as rising wages, employee mobility, jammed roads, and higher general input costs.

Like 2015/2016, it is probably reasonable to assume that too much $$ will be thrown at these problems and perhaps, in the long run, the area and infrastructure could be overbuilt.   The boom / bust / boom / bust “feature” of West Texas remains a key to mentally modeling and valuing the unique entity that is TPL.

Some comments from industry executives were included in the article linked above:

• Pipeline and trucking constraints in the Permian Basin are hurting us now. There was a $13 per barrel price deduction for August, and I hear it may go to $20 per barrel. This, over a long period of time, is going to impact my drilling program.

• We are still lacking enough qualified drivers who are able to pass motor vehicle record checks and Department of Transportation preemployment drug tests. Additionally, the market is so competitive for drivers that they will jump ship for an extra 50 cents per hour.

• We saw two factors capping growth in the second quarter. The Permian pipeline capacity and discount on WTI [Midland] have slowed completions. We expect to see fewer wells completed in the second half of 2018. Many E&P companies will spend their budgets for 2018 before the end of third quarter 2018. This higher spending rate was a result of higher efficiency and higher service company prices. The net result will be a decline in total completions in the second half of 2018. We think a rebound will happen in first quarter 2019, but the Permian will continue slow growth until the pipeline capacity is increased and the WTI [Midland] discount is eliminated.

Business Insider in 2014: One Of The Hottest Stocks On The NYSE Is A Company Most Of Us Have Never Heard Of — And It’s Got An Incredible Backstory

Much has changed in 4 years!

The Trust is a highly atypical company, and not only in terms of its financial performance. It manufactures no products and provides no services. It has never released a killer app or built a game-changing innovation, and it controls no patents. It maintains no factories, facilities, equipment, machinery, or inventory, nor does it carry any other meaningful expenses, aside from eight employees occupying a modest 27th-floor suite in a bland office tower in Dallas’ City Center. It has no competitors, no liabilities, and no debt. Its chief asset — land, lots of land — is finite and tends to steadily, reliably increase in value over time, that is, until someone figures out a way to suck out more oil, at which point it goes bananas.

TPL’s only real goal is to maximize returns while gradually liquidating its assets.

“Imagine the PowerPoint presentation,” muses Louis Geser, chief analyst for White Space marketing and an independent microcap analyst, who began purchasing TPL when it was around $35. “You could list what this company does on one hand, and it’s on autopilot.”

Not exactly, says David Peterson, the Trust’s CEO, who along with his team is kept pretty busy making real estate deals and keeping an eye on the accounts receivable. “It’s not as sleepy as it once was, that’s for sure, sir,” he says.