4Q Margin Compression

rude and crude

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.

 

4Q Earnings

Press Release

$8.06 per Sub-share Certificate!

A not often used tool in toolkit below.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the year ended December 31, 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Back royalty sales out of earnings and you get to $43.8MM which is light to $50.8MM last quarter which (I guess) shouldn’t be surprising given a dip in realized oil prices.  Royalties were still up on the quarter nevertheless as barrels produced continued to rise the Permian.  Sundry top line was flat.  Water top line down was down 9.3% vs Q3 to $16.5MM.

I’m inclined not to panic about the dip in water revenues as the business is still in its infancy.  That said, my expectation was for modest growth given continued increases in Permian region oil production throughout the quarter.  More to come on that topic.

 


Texas Pacific Land Trust Announces Fourth Quarter 2018 Financial Results

DALLAS, TX (January 31, 2019) – Texas Pacific Land Trust (NYSE: TPL) today announced financial results for the fourth quarter ended December 31, 2018.

Results for the fourth quarter of 2018:

  • Net income of $62.7 million, or $8.06 per Sub-share Certificate, for the fourth quarter of 2018, compared with $24.6 million, or $3.14 per Sub-share Certificate, for the fourthquarter of 2017.

 

  • Revenues of $93.2 million for the fourth quarter of 2018, compared with $40.0 million for the fourth quarter of 2017.

 

  • Increases of 177.0% in water sales and royalty revenue, 135.8% in oil and gas royalty revenue and 17.0% in easements and sundry income for the fourth quarter of 2018, compared with the fourth quarter of 2017.

Results for the year ended December 31, 2018:

  • Net income of $209.7 million, or $26.93 per Sub-share Certificate, for the year ended December 31, 2018, compared with $97.2 million, or $12.38 per Sub-share Certificate, for the year ended December 31, 2017.
  • Revenues of $300.2 million for the year ended December 31, 2018, compared with $154.6 million for the year ended December 31, 2017.
  • Increases of 150.3% in water sales and royalty revenue, 112.0% in oil and gas royalty revenue (144.2% excluding the arbitration settlement with Chevron U.S.A., Inc. (the “Chevron Settlement”) in September 2017) and 26.8% in easements and sundry income for the year ended December 31, 2018, compared with the year ended December 31, 2017.

Further details for the fourth quarter of 2018:

Oil and gas royalty revenue was $35.8 million for the fourth quarter of 2018, compared with $15.2 million for the fourth quarter of 2017, an increase of 135.8%. Crude oil and gas production subject to the Trust’s royalty interests increased 98.5% and 225.0%, respectively, in the fourth quarter of 2018 compared to the fourth quarter of 2017. In addition, the prices received for crude oil production increased 15.4% in the fourth quarter of 2018 compared to the same quarter of 2017 while prices received for gas production decreased 21.2% over the same time period.

Easements and sundry income was $21.9 million for the fourth quarter of 2018, an increase of 17.0% compared with the fourth quarter of 2017 when easements and sundry income was $18.7 million. This increase resulted primarily from an increase in pipeline easement income and lease rental income, partially offset by a decrease in permit income and material sales for the fourth quarter of 2018 compared to the fourth quarter of 2017. Pipeline easement income increased $4.3 million in the fourth quarter of 2018 compared to the same quarter of 2017.

Water sales and royalty revenue was $16.5 million for the fourth quarter of 2018, an increase of 177.0% compared with the fourth quarter of 2017 when water sales and royalty revenue was $6.0 million.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the fourth quarter of 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Further details for the year ended December 31, 2018:

Oil and gas royalty revenue was $123.8 million for the year ended December 31, 2018, compared with $58.4 million for the year ended December 31, 2017, an increase of 112.0% (144.2% excluding the $7.7 million Chevron Settlement received in September 2017). Crude oil and gas production subject to the Trust’s royalty interests increased 110.0% and 178.5%, respectively, in the year ended December 31, 2018 compared to the year ended December 31, 2017. In addition, the prices received for crude oil production increased 21.6% in the year ended December 31, 2018 compared to the year ended December 31, 2017, while prices received for gas production decreased 24.2% over the same time period. The changes in production and price for the year ended December 31, 2018 compared to the year ended December 31, 2017 exclude the effect of the Chevron Settlement.

Easements and sundry income was $88.7 million for the year ended December 31, 2018, an increase of 26.8% compared with the year ended December 31, 2017 when easements and sundry income was $70.0 million. This increase resulted primarily from increases in pipeline easement income, lease rental income and permit income for the year ended December 31, 2018 compared to the same period of 2017. Pipeline easement income increased $8.0 million for the year ended December 31, 2018 compared to the same period of 2017.

Water sales and royalty revenue was $63.9 million for the year ended December 31, 2018, an increase of 150.3% compared with the year ended December 31, 2017 when water sales and royalty revenue was $25.5 million.

Revenue from the sale of oil and gas royalty interests was $18.9 million for the year ended December 31, 2018. The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately $23,234 per net royalty acre.

Land sales revenue was $4.4 million for the year ended December 31, 2018. The Trust sold approximately 171 acres of land for an average price of approximately $25,464 per acre. Land sales revenue was $0.2 million for the year ended December 31, 2017.

Texas Pacific Land Trust Announces Fourth Quarter 2018 Financial Results

Valuation Checkup

Trailing 12mo EPS stands at $21.79 as of 9/30/18.

12mo trailing eps

Since the quarter printed, we’ve seen the Trailing 12mo Earnings multiple contract from 39.6x to 26.3x.

26.3x is below the long term mean of 28.8x but comfortably inside one standard deviation from the mean (17.4x).

px and pe

It appears that TPL’s multiple had a bit of a regime shift in late 2005.  After that point, P/Es were generally higher with an average of 36.1x.  Though the P/E also appears more volatile, the standard deviation of the smaller sample is 10.9x vs 11.4x for the entire history displayed.

Fair value at long term P/E mean = $21.79 x 28.8x = $628

Fair value at 9/2005 through current P/E mean = $21.79 x 36.1x = $726

Source: Bloomberg

 

The Q is Out

SEC / EDGAR link

Some color on Land and Resource Management Easements is below.  Just looks like a quarter where no/few new pipeline contracts were inked.

QUARTER Easements and sundry income. Easements and sundry income was $14.6 million for the three months ended September 30, 2018, a decrease of 32.9% compared to $21.7 million for the three months ended September 30, 2017. Easements and sundry income includes pipeline easement income, seismic and temporary permit income, lease rental income and income from material sales. The decrease in easements and sundry income is principally related to the decrease in pipeline easement income which decreased 42.5% to $9.1 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Easements and sundry income is unpredictable and may vary significantly from period to period. Effective January 1, 2018, the Trust adopted the new revenue recognition accounting standard using the full retrospective method, and no longer defers revenue on its term easements. See more discussion in Note 2, “Summary of Significant Accounting Policies — Recently Adopted Accounting Guidance” for further discussion and analysis of impact on our condensed consolidated financial statements.

NINE MONTHS Easements and sundry income. Easements and sundry income was $49.9 million for the nine months ended September 30, 2018, an increase of 1.1% compared to $49.4 million for the nine months ended September 30, 2017. Easements and sundry income includes pipeline easement income, seismic and temporary permit income, lease rental income and income from material sales. The increase in easements and sundry income is principally related to the increase in material sales which increased 29.6% to $4.9 million for the nine months ended September 30, 2018 from $3.7 million for the nine months ended September 30, 2017. Easements and sundry income is unpredictable and may vary significantly from period to period. Effective January 1, 2018, the Trust adopted the new revenue recognition accounting standard using the full retrospective method, and no longer defers revenue on its term easements. See more discussion in Note 2, “Summary of Significant Accounting Policies — Recently Adopted Accounting Guidance” for further discussion and analysis of impact on our condensed consolidated financial statements.

3Q Earnings Released

Press release here.

There was lots of chatter around $7/share this quarter in Yahoo Finance discussion boards and Seeking Alpha comment threads.  The report of $6.52/share is a little light relative to the aforementioned prediction but it represents a fine period of 53% and 145% growth in the O&G royalty and water businesses respectively.

The $6.52 Q3 print puts TPL at $21.79 per share in trailing 12mo earnings.  If we stick with the 38x P/E that was discussed in the last post, that gets “fair value” to $828.  I say “fair value” loosely as picking a P/E is more art than science.

In the coming days I’m going to do some segment analysis to show top line and bottom line trends.  One thing that is becoming readily apparent is that easements and sundry income will be lumpy as easement income is no longer being smoothed.

One small aberration was the 167 acre land sale at $25.7k/acre.  TPL land sales are rare these days and that price was really something.  This isn’t going to happen but the whole trust sold at that valuation gets the value of the surface acreage to ~$23B.  Again, that is a big stretch but the sale shows the “hidden asset” nature of TPL which is easy to overlook in the current era of high flying top and bottom line growth.