Margin Watch

2019 margin analysis

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.



3Q 10-Q


Some observations in no particular order:

  • “During the nine months ended September 30, 2019, we purchased and retired 6,258 Sub-shares. During the nine months ended September 30, 2018, we purchased and retired 39,768 Sub-shares.”
  • DUC wells now 424 vs 369 at the end of Q2.  15% jump.  Someone has been busy.
  • $250MM in cash on the balance sheet
  • $87MM in PP&E.  34% growth YTD
  • Water has made $65MM top line YTD.  Up 37% from same period last year.  Top line is generally supposed to grow faster than PP&E, right?
  • $24.7MM in operating expenses during the quarter.  2.4x vs same quarter last year
  • “For the nine months ended September 30, 2019, the Trust sold approximately 21,986 acres (13,180 acres in Loving County, 5,675 acres in Culberson County, 1,651 acres in Hudspeth County, 843 acres in Reeves County, 636 acres in Midland County and approximately 1 acre in Glasscock County) of land in Texas for an aggregate sales price of approximately $113.0 million, with an average of approximately $5,141 per acre.”
  • “For the nine months ended September 30, 2019, the trust acquired approximately 21,671 acres (Culberson, Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $74.4 million, with an average of approximately $3,434 per acre.”
  • I wish we had more details on rationale and benefits of the land swap above.  Flat in acres, took out some $$ (great), but is ending acreage accretive to the grand plan?  How so?
  • EBITDA language from the press release did not carry over to the Q
  • “Legal and professional fees were $5.6 million for the three months ended September 30, 2019 compared to $0.6 million for the comparable period of 2018. The increase in legal and professional fees for the three months ended September 30, 2019 compared to 2018 is principally due to approximately $4.9 million of legal and professional fees related to the proxy contest to elect a new Trustee, the entry into and payments made under the settlement agreement dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust’s Current Report on Form 8-K filed with the SEC on July 30, 2019. We anticipate receiving a partial reimbursement of these legal and professional fees under coverage provided by our director and officer insurance policy. The amount of the reimbursement has not yet been determined.”
  • I’m surprised the D&O underwriter wrote a policy given the Trust structure of the company and it’s (now abused) governance limitations.  I’m guessing they regret it
  • “Salaries and related employee expenses were $8.5 million for the three months ended September 30, 2019 compared to $4.1 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 58 employees as of September 30, 2018 to 89 as of September 30, 2019 and additional contract labor expenses for the three months ended September 30, 2019 compared to the same period of 2018.”
  • “Texas Pacific is not involved in any material pending legal proceedings.”  ??


3Q Earnings and Conversion Committee Update

Earnings press release

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.

q3 margin analysis updated

Simple margins tell you this as well.

simple margins q319

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.


Conversion Committe update

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?

2Q Earnings

Full Press Release

SEC version

2q snapshot

$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.



Q is Out

SEC Filing

Notes (no guarantee that any of this is right):

  • “Simple” balance sheets and ISs are a thing of the tax now as we have tax escrow, depreciated PP&E, and acquisition carrying values to navigate
  • Balance sheet at $405MM is 5.7x that of a year ago.  New property goes on BS at cost.  Old stuff has no accounting value.  Quickly getting on WB’s radar for its excellent price to book
  • Rude and crude water margin calculator shows margin expansion for the quarter. Again, this assumes all expense increases after ’16 are water related.  Certainly not perfect
  • I calculate the “non-sale” (no sale income included) EBTDA to be $73MM.  $73MM taxed at 20% = $58.4MM or $234MM/year.  20x = $4.67B.  30x = $7B.  Current mkt cap is $6.13B.  Implied multiple = 26x.  Again, very back of the envelope
  • The statement of cashflows seems kinda useless now as one has to immediately back out asset sales from CFO
  • Repurchases down 35% from first quarter last year.  Divs up 47%.  I don’t want dividends; I want my % stake increased
  • Water PP&E went from $62.9MM at year end to $71.6MM.  A total increase of $8.7MM.   Total buybacks in the quarter were $4.3MM
  • Fixed asset purchases of $9.3MM in Q1 (assuming mostly water equipment) are pretty close to my calculated $11MM in water EBTDA.  Fixed asset purchases don’t hit expense line.  How long does this last?  How long are the useful lives of water assets?
  • Legal and professional fees increased 175.6% to $1.8 million for the three months ended March 31, 2019 from $0.6 million for the comparable period of 2018. The increase in legal and professional fees for the three months ended March 31, 2019 compared to 2018 is principally due to increased legal and professional fees related to land transactions, new water agreements and proxy fees.”
    • Can we get a more granular breakout?
  • Compensation up 2.5x YoY

q1 analysis


$83MM of the $100MM

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.


For example, the Trust has redeployed approximately $83 million of the $100 million of the sale proceeds in a tax-free 1031 Exchange, creating 53,000 contiguous acres in the core of the Delaware Basin1, including highly strategic acreage on the Texas-New Mexico border. This position is leased by blue chip E&P operators with large capital development budgets and best-in-class safety and environmental implementation.

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?



Earnings Analysis; Q1-19 vs Q1-18

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.

q1 vs q1


The last column in the exhibit above should read 1Q19.