This is why we all own it. Clean quarter that is demonstrative of the power of the assets. All eyes on capital return / allocation policy from here…
Call tomorrow 8:30 eastern, 7:30 central
Edit: Below is what I wrote to a contact after the call. What was your reaction?
“I think they took a well deserved victory lap on water. Margins are turning up and that business does need active management. Using bid/ask as an excuse for keeping $400MM in cash on the sheet seems like a stretch.”
Production pretty flat but prices up. $330MM in cash on the sheet.
Our total revenues increased $38.6 million for the second quarter of 2021 compared to the same period of 2020, largely driven by the $37.7 million increase in oil and gas royalty revenue. Our share of production was approximately 16.4 thousand barrels of oil equivalent (“Boe”) per day for the second quarter of 2021 compared to 15.7 thousand Boe per day for the same period of 2020. The average realized price was $40.83 per Boe for the second quarter of 2021, compared to $15.02 per Boe for the comparable period of 2020. Water sales and produced water royalties increased $4.1 million and $2.3 million, respectively, for the second quarter of 2021 compared to the second quarter of 2020. The increase in water sales for the second quarter of 2021 compared to the same period of 2020 is principally due to a 70.8% increase in the number of barrels of sourced and treated water sold. These increases in revenue were partially offset by easements and other surface-related income, which decreased $2.7 million for the second quarter of 2021 compared to the same period of 2020. These revenue streams are directly impacted by development and operating decisions in the Permian Basin made by our customers and commodity prices, among other factors.
I was coaching first base when I heard my phone whistle its notifcation for the earnings press release. During a pitching change I quickly skimmed the document. When the batter stepped in I got so distracted thinking about the $20MM buyback number that I sent my runner to steal 2nd with a runner already on that bag. Thankfully the third base coach, who probably owns BSM, saw my folly and called his runner. Some bad thows later and it all ended up ok. But $20MM?
My expectations for the quarter were pretty light due to the tough winter conditions and pandemic hangover but I expected more from the buy back. Is this management telling us the price is too high?
The quarter ended with $310MM (~$40/share) in cash on the balance sheet. Do I get a dividend? M&A inbound?
Water was challenging. What’s the plan there?
https://www.sec.gov/Archives/edgar/data/97517/000009751720000051/exhibit991q32020earnin.htm
Expenses moving down.
What was sold?
The Trust recognized land sales revenue of $11.5 million for the third quarter ended September 30, 2020 and $4.6 million for the comparable period of 2019.
$46mm in net income + $4mm in depreciation = $50mm more cash on the balance sheet. Add that to the $258mm from the end of Q2 to get $308mm or ~$40/share or 8.5% of market cap.
Update: The actual cash number is $316mm.
Rough one as expected. That said, it’s hard not to be impressed by volumes. Also, six month top line vs last year looks decent if you like to see the bright side of things. Adjust for land sales, revenue for the first six months of 2020 was $149.5mm. First six months of 2019 was $170.2mm adjusted. Maybe we call that a win given the pandemic backdrop?
Still on track for conversion by the end of this quarter.
As previously announced on March 23, 2020, our Trustees approved a plan to reorganize the Trust from its current structure to a corporation formed under the laws of the State of Delaware. We continue to progress towards the conversion. On June 15, 2020, the Trust announced the new corporation will be named Texas Pacific Land Corporation (“TPL Corp”) and the persons selected to serve as directors on the Board of Directors of TPL Corp. Additionally, a draft registration statement on Form 10 has been submitted to the Securities and Exchange Commission for review, on a non-public basis. It is currently anticipated that the corporate reorganization will be effective by the end of the third quarter of 2020, barring any unforeseen impacts of the COVID-19 pandemic or other developments, which could potentially extend this timeframe.
My way of backing into water. Back non-water revenue out of EBITDA. Add “old expenses” and legal (big $$$$) to the adjusted EBITDA number to get a ballpark water income. Look at water income relative to water top line to observe expenses and margins.
Seperately we can look at margin without asset sales.
Both margins are contracting.
It is understood that one has to spend money to make money, expecially in the water business, but I’d love more information on the end game.
Some observations in no particular order:
Impressive top line growth. I can’t help but see that EBITDA (newly included by TPL in releases) is pretty much equal to revenues from royalties, land sales, and easements. It appears as if all profits from water are being eaten by legal fees and comp. Estimated water margins appear to have stabilized near 50%. The sheet below isn’t perfect but it’s likely directionally right. Margins are being squeezed by expenses.
Simple margins tell you this as well.
Can’t wait until legal fees are in the rear view mirror.
D&A increasing.
I’m not operating the business but my guess is that there are some aspects that can be tightened up. We shall see.
That all being said, $7.74/share x 4 = $31/share annualized. $569 / $31 = 18 P/E. Low to historic multiples. We’re looking at a $775 price at a 25x multiple which is more consistent with historical valuations.
The Committee has continued to meet with its advisors, including Credit Suisse, which is assisting the Trust and the Committee in developing its recommendation to the Trustees. The Committee has met 5 times, both in person and over the phone, since its inception, and deliberations to date have been productive and informative. Although its deliberations are confidential, the Committee will continue to provide monthly progress reports to shareholders as required by its Charter before issuing a final recommendation to the Trustees.
Was hoping for a bit more progress than that! So 2 meetings in October?
$49,586 / $87,310 = 56.8% Q219 margin
$52,503 / $73,844 = 71.1% Q218 margin
Revenue up 18.4%
Net income down 5.6%
Tough quarter. Back out the $4.9MM in land sales and it looks even worse.
The word expense is only used in the release twice and the context there was income tax expense.
Share count unchanged on the quarter at 7,756,156.
Time for change.
Notes (no guarantee that any of this is right):
Looks like I was beat to the punch on this topic. Here is the same question in the comments thread on the SA earnings release report.
If $83MM has already been spent under 1031, does the reported gain get backed out of EPS next quarter? If so, shouldn’t that have been reported in the press release? There probably is a regulatory/accounting reason for reporting it in the manner that it was. Can anyone help clear this up?
The rows below should be pretty self explanatory. Ultimately I wanted to get to earnings adjusted for asset sales. “Operating” after tax EPS is calculated to be $7.40 for Q1-19 vs $5.29 for Q1-18. Implies 39.8% growth.
Lower than normal “operating” margins stay with us. Looks like an 82.0% margin on “operating” earnings in Q1-19 vs 90.6% in Q1-18. Expenses over the same time peried (implied from data provided in the release) are estimated to be up 192%.
I’m impressed by the figures quoted immediately below. Production growth marches on!
Oil and gas royalty revenue was $33.2 million for the first quarter ended March 31, 2019, compared with $26.5 million for the first quarter ended March 31, 2018, an increase of 25.1%. Crude oil and gas production subject to the Trust’s royalty interests increased 58.5% and 119.6%, respectively, in the first quarter ended March 31, 2019 compared to the first quarter ended March 31, 2018. While crude oil and gas production increased in the first quarter ended March 31, 2019 compared to March 31, 2018, the prices received for crude oil and gas production decreased 16.7% and 46.7%, respectively, over the same time period.
The last column in the exhibit above should read 1Q19.
Earnings at $140MM with $103MM in land sales.
Looking forward to more expense details in the 10Q.
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.
The Texas Pacific Land Trust Investor 