From the WSJ Archives

Texas Pacific Land Trust Offers A Get-Rich-Slow Opportunity

Oldy but goody here from 1998.  The modern owner has to wonder if Bregman’s quote around a “creeping buyout” will hold true from here.

“People are going to become less interested in ‘concept’ stocks that sell at hope times greed times infinity,” says Mr. Shaefer, who is also editor of the Investor’s Edge newsletter, which has pushed Texas Pacific. Instead, investors will “be looking for real underlying asset value in the companies they own.”

Mr. Shaefer says his fund bought an undisclosed stake in Texas Pacific in January 1997 at $27.63 a share, and he doesn’t plan to sell until the stock reaches at least $80. By his calculations, the underlying assets are worth about $100 a share right now.

At its current rate, the trust is buying back stock more quickly than it’s selling land. Between 1980 and 1995, the trust reduced its number of outstanding shares by 34% but reduced its land inventory only 8%, from 1.2 million acres to 1.1 million acres.

Steven Bregman, president of Horizon Asset Management in New York, has researched Texas Pacific for his firm’s Contrarian Research Report and believes the stock is worth buying. “It’s cheap,” he says. “As long as you want to hold it for a decade, you put it away and forget about it and get rich slowly.”

The buybacks, says Mr. Bregman, are “like a creeping buyout. It’s a snowball effect.”

 

 

History Lesson : Mineral Interest Sale

Fun read at Findlaw.com

In the late 1800’s, TPLT was given several million surface acres by the Texas Legislature in exchange for constructing the Trans-Texas Railroad. In 1954, TPLT obtained a declaratory judgment in a Texas district court authorizing it to create a subsidiary company, TXL Oil Corporation, for the purpose of conveying to that company all of TPLT’s mineral interests. On December 10, 1954, TPLT conveyed to TXL all of its mineral interests underlying its 2 million surface acres. Under this conveyance, TXL reserved all of its surface acres as well as a non-participating royalty interest in those lands under an oil and gas lease to third parties. In 1962, TXL sold all of the mineral interests to Texaco, Inc., and Texaco, Inc. conveyed these mineral interests to Texaco Exploration and Production, Inc. (TEPI) in 1991. Texaco, Inc. and/or TEPI owned and operated the mineral interests until 2002 when they were acquired by Chevron U.S.A. in the merger between Chevron Corporation and Texaco, Inc.

Anyone know what happened with the proceeds?

Mental Models: a Changing of the Guard

A Tontine!

A Tontine is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases.

Posts like the one above reflect the old mental model of TPL.  (Though I never tire about thinking about tontines.  Tontines are the investment/insurance product that that the world doesn’t know it needs.)

Anyhow, the old mental model goes like this: TPL sells land and collects miscellaneous income.  Proceeds are used to repurchase and cancel shares.  The guy to hold the last share out wins whatever is left.

I’d argue that the new mental model is more growth oriented:  TPL is growing a water business which to me seems ripe for a spin-off (tax free!) or a sale at some point.  Royalty interests are growing in value at a pace far greater than inflation (thanks technology!).  Land not used for water has many uses in other oil extraction and logistics activities.  The stock is painfully illiquid and hard to repurchase (thus lower repurchases).  The company pays a dividend and has signaled an intention to make it regular.  What we have here is an asset rich growth stock! 

All signs point to liquidation and repurchase being pretty low on the priority list.  Growing (top line, bottom line, capex, head count, etc) appears to be the main focus.

How are you reconciling the two? I admit to having some trouble as I worry/think about the growth trajectory/asset value tops of the land and its associated income product (though these two things are a circular value).  Does TPL not do its best for the trust if it doesn’t sell all or materially all of its assets at the top?  Is there a new agency problem that needs to be explored with the growth? Employees don’t want to fire themselves; the internal incentive to liquidate has to be lower.  In my estimation, we’ve got a beautiful push/pull going on.  It’s going to be fun watching from here on out.

 

 

Another Good Overview (link)

Keith Schaefer: The Biggest Failure in US Shale is Also The Most Profitable

This website is very sales-y but Schaefer does a good job summarizing the basics of $TPL.

 

The quote below isn’t entirely correct as I’ve come to learn that Texas Pacific Water Resources (TPWR) is becoming more of a regular presence on the conference/ marketing scene and rightly so.

If you are looking to attend a Texas Pacific Land Trust session at an oil and gas conference you will be disappointed.

They won’t be there.

You aren’t going to be able to read an analyst report on this company either.  Nobody follows them since there are no investment banking fees to be earned here.

Even press releases from these guys are few and far between.  They announce quarterly earnings and that’s it.

The corporate website is functional and nothing more.

 

 

Cleaning out my closets. Another great read

Texas and Pacific Railway and Texas Pacific Land Trust – a History of Railroads in Texas

Will continue to clean out my evernote notebook dedicate to TPL and deposit here.  This is a great read.

“Texas and Pacific Railway was created by federal charter in 1871. Its charter was to build a southern transcontinental railroad between Marshall, Texas and San Diego, California. Railroad companies were given land grants in exchange for building rail line, and the U.S. Congress granted T&P twenty sections of land per mile in California and forty sections per mile through the territory that is now Arizona and New Mexico. The State of Texas (where there were no federal lands) agreed to grant T&P twenty sections per mile for the portion of the line crossing Texas. The panic of 1873 caused financial difficulties, and by 1876 only 444 miles had been built. In 1879, Jay Gould bought the company and began laying track west. Gould merged T&P with Southern Pacific Railway, and by 1881 it had built a total of 972 miles of track, entitling it to 12.4 million acres of land. But because it had not built all of the line within the time required by its charter, T&P was awarded only 5,173,120 acres, later reduced to 4,917,074 acres – 3.5 million of that in Texas.

In 1888, the T&P went through bankruptcy and receivership, and the bondholders who financed the railroad were awarded the land in Texas that had been granted to T&P. The bondholders created a trust, Texas Pacific Land Trust, to liquidate those lands for the benefit of the bondholders, receiving 3.5 million acres of land. The certificates of trust issued to the bondholders were later listed on the New York Stock Exchange. The mineral estate under the land was spun off into a separate entity and later sold to Texaco, now Chevron. TPLT owns a royalty interest in almost 500,000 acres of its land.”

 

1888 : Declaration of Trust (link to sec filing)

Declaration of Trust

FIRST. The said Charles J. Canda, Simeon J. Drake and William Strauss and the survivors and survivor of them, and their successors or successor in the trust (hereinafter, for brevity, styled “the Trustees“), shall have and exercise the management, control and ownership (both legal and equitable) of the said lands, premises and property. They shall have all the powers in respect of said property of an absolute owner, as to selling, granting, leasing, alienating, improving, encumbering or otherwise disposing of the same or of any part or parcel thereof, and they may, whenever they shall deem it necessary or advisable for the protection or benefit of the property or any part thereof, purchase other lands and premises, and when purchased such other lands and premises shall be held and managed by the said trustees under the terms and provisions of this declaration of trust in the same manner as the lands and premises hereinbefore described are held and managed.

The lands may be sold for cash, or partly for cash and partly on credit, and the trustees may, in their discretion, accept in payment, in lieu of money, certificates of proprietary interest issued under the terms hereof, at their current market price, not exceeding par, and the same when so received shall be canceled; provided, however, that nothing herein contained shall be construed to require the trustees to accept such certificates in payment for lands.

The trustees shall have power to purchase and acquire, in their discretion, any of the outstanding Income and Land Grant bonds and scrip of the Texas and Pacific Railway Company for the benefit of the trust, and they shall have full power and authority to borrow from time to time such sums of money as they shall deem necessary to enable them to purchase such bonds and scrip and also to pay taxes and other expenses connected with the trust, and to secure repayment of the sums so borrowed by a pledge or mortgage of the trust property or any part thereof. In case of such purchase or acquisition the certificate or certificates of proprietary interest under this trust representing the securities so purchased or acquired shall be canceled by the trustees, or, in their discretion, sold and disposed of for the benefit of the trust; and any and all second mortgage bonds of the Texas and Pacific Railway Company which said trustees may receive or acquire as holders of any Income and Land Grant bonds so purchased shall be held or disposed of by the trustees in their discretion for the benefit of the trust.

The trustees shall have power to employ such agents, attorneys and servants as they may think necessary and proper in the execution of their trust, and they shall not be liable for the default or misconduct or any act or omission whatsoever of any such agent, attorney or servant, provided said trustees are not guilty of willful carelessness and negligence in their selection or in providing for their selection; nor shall any of said trustees be liable for the default, negligence, misconduct or any act or omission whatsoever of any other of said trustees, but only for his own willful default, negligence or omission. The said trustees shall receive as compensation for their services, the sum of four thousand dollars per annum to be paid to the chairman and two thousand dollars per annum to be paid to each of the other two trustees.

All the powers of the trustees under this declaration of trust may be executed by a majority of the trustees. Any trustee may, by power of attorney, confer upon the other two trustees or either of them full power and authority to make, execute, acknowledge and deliver on his behalf deeds of conveyance of any of the trust property and any and all other instruments in writing relating thereto or any part thereof.