Be Patient

It is true, nothing much has changed so far. For better or worse, that could probably be said about most of the stocks we own at some point during the time we’ve held them. Even the very successful ones. There have been periods measuring in years during the time we’ve held Texas Pacific Land Trust (“TPL”) when nothing had changed. Lately, of course, there have been ongoing changes at TPL. It is probably common knowledge, now, but can’t not be mentioned, that last week the Conversion Exploration Committee announced that it had arrived at its much awaited conclusion. The Committee unanimously recommended to the Trustees of TPL that the Trust convert to a Delaware C-corp. That recommendation was made with the input of Credit Suisse as outside financial advisor as well as outside legal counsel. It should not escape notice that the Trustees are, in fact, on the Committee, so I suppose they took part in formally notifying

The Committee also recommended that if such a conversion takes place, it should be structured so as to be a tax-free transaction to shareholders. Such changes require the customary regulatory filings and approvals, such as with and by the SEC and NYSE. No doubt, we’ll be hearing more in the coming weeks, since the Committee chose to extend its term for one more month, through the end of February. It could as easily have made it two months or three.

SEC Filing Roundup : 4/26

Mission Advisors 14a-6(g)

In the proxy statement he makes one of his old nonsensical ideas yet again. He wants to fully explore converting the Trust into a Delaware Corporation. He fails to outline even one reason why the corporation would make more sense than the current structure. Not one.

General Cook Expanding Twitter’s Revenues for Q2

Your responsibility is to the corporation and not to outside interests.

When did TPL incorporate?  Did I miss a filing?

White Card 14A with Horizon Kinetics Update to Investors

Texas Pacific Land Trust, a major – sometimes the major – holding in a number of our strategies, is now the subject of a proxy contest between the two trustees who control its activities and an investment group. A shareholder voting period will end with the Special Meeting  that is scheduled to be held on May 22, 2019. The trustees have put forth a candidate to replace the late Maurice Meyer III, who retired in February due to ill health. The investment group has proposed a different person to be the third trustee. Both assert that their candidate would best serve the interests of the Trust.
Central to the proxy contest is that the Trust is as unique in its governance structure as it is in its asset inheritance. The assets are probably unmatched in the scope of their royalty interests, surface acreage and water rights in the oil and gas rich Permian basin of west Texas. The Permian Basin is unmatched in the U.S. for the extent of its reserves, now second in the world only to Saudi Arabia. It is no exaggeration to say that the Permian Basin has enhanced the global geo-political economic position of the U.S.
As to governance, there is probably no other SEC-registered, publicly traded company with trustees or directors who are tenured for life.  One can see why it is especially strongly felt by both parties that the choice of this third trustee is most important.
In almost all such cases, the contesting parties are referred to as an outside investor group, and I have here chosen to exclude that term. This is because this particular group holds over 25% of the shares, is TPL’s largest shareholder group by far, and has held the shares for many, many years. In this sense, they might be said to embody the ideal of a long-term equity stake holder, which is, in its essence, the counterpoint to an outsider. The trustees, in contrast, hold a negligible amount of shares.

Form 4

HK Edgar Filing

It’s very possible that I’m wrong about this but it looks like HK is going to have to file a Form 4 on a daily basis (if they trade) given their new “insider” status after Friday’s filings.  I don’t run stocks but my experience with similar issues tells me that this filing is likely an operational PITA for the team.  It seems like a small thing but I bet doing this type of work was considered in the calculus of nominating an alternate trustee.  Again, its small, but it points to the decision having been well considered.

Just my gut…

Kinetics Funds Update : Midland Oil Looking Up

My notes (not TPL specific):

  • HK funds have active share of 98%+.  No regard for indicies!
  • SEC asked about large cash position in Kinetics funds.  Kinetics guided that cash will stay high given their conservatism.  (magnifies their conviction on TPL when you think about it)
  • Buystocks when their potential rate of return lines up with return on capital of the business.  That alignment is not present now.  Valuations still stretched
  • Yield curve flattening -> banks don’t make money -> economy slows (tho we didn’t see bank NIMs get crushed this quarter)
  • HK overall thinks rates can’t go up without completely crushing the economy (see FRMO call)
  • US rates > overseas rates.  Keeps demand for USD strong
  • $47T in US bonds outstanding and most of them have yields smaller than inflation.  Hard to get > inflation in IG.  Have to go to HY for that
  • This has been the case for quite some time and equity has been the only place to turn.  Thus high valuations
  • Commodity inflation/growth has lagged (prob due to hardship of physical storage; my guess).  Last 10 years = “the asset inflation of everything buy commodities”
  • Permian Delaware is break even at $45 with ALL costs involved (not just marginal). Permian Midland is $47.  DJ Basin is $50.  Eagle Ford is $53.  Bakken is $57.  Only Permian is less than current spot
  • Oil market was oversupplied in 2018 due to Iran waivers and slow adjustment by Saudi.   Supply resizing for better pricing in 2019
  • Saudi Arabia requires $88/bbl to balance their national budget.  Iran = $72.  UAE = $72.  Ouch.  Brent @ $62.
  • Producers under Brent are Iraq at $55, Russia at $53, Kuwait at $48, Qatar at $47
  • Current price not sustainable for most suppliers
  • Pipeline capacity coming online to make Midland price closer to that of Brent.  Permian price in late ’19 = Brent – water transportation costs
  • New pipes will get Permian oil to Houston
  • Right now Brent is $62.  Midland is $51.  $11 basis.  Bloomberg shows average basis of $15 over the past year.  Basis narrowing
  • Cuff Permian at Brent – $5
  • HK takes page from Oaktree/Howard Marks that shows bond troughing lower before each crisis. After the trough comes the pain.  Hiding out in debt market is not an option thus HK’s focus on hard assets and having cash
  • Current US deficit is $855B/year.  Only way out is printing $$$
  • Plays into “crypocurrency is that is not controlled by a government”
  • Fiat money system is broken
  • Buying Franco-Nevada (hard asset theme)
  • Fuel tax revolt in France (yellow vests) show the backlash to “green” governance is real
  • Oil and gas demand could continue to increase to/thru 2040.  20 more years of demand growth
  • High density transportation (buses, planes) and transportation (ships) really can’t be powered by renewables given current technology
  • EV batteries require raw materials that are not in infinite supply
  • Would rather own commodity royalty companies vs open pit miners.  $FNV vs $FCX
  • Royalty companies have no operational risk and limited financial risk.   $WPM
  • HK owns 25% of CVEO and TPL.  “If we had enough capital, we would not minding owning 100% of both businesses”
  • TPL has limited financial risk.  Unlevered with cash on the balance sheet
  • TPL – hard to envision an environment where TPL isn’t significantly higher down the road
  • TPL controls access to aquifers via their surface land.  Competitors are at a disadvantage.  TPL won’t let competitor water cos cross its surface land
  • Private equity is growing their own water biz due to perception of high margins and high stability
  • Most of TPL water revs are on source side by recycling and disposal revs will pick up over time
  • “You will be surprised by the stability of TPL earnings as you get into next year”
  • Gas that is flared is going to get monetized
  • APC and CVX long term numbers show 20-25% annualized growth to 2023
  • Water should grow commensurately with drilling activity
  • 3 years out, TPL earnings could be $50/share
  • “ultimately I think we’re going to make a great rate of return”
  • Royalties are an advantaged and growing business model.  A 70% net margin with no capex and working capital needs > E&P that needs to replace reserves.  People don’t appreciate that.  Static multiples aren’t appropriate for valuation
  • TPL land swap was done with WPX Energy which is a spinoff of WPZ.  They are a traditional E&P (odd that they are buying surface).  No royalties sold and TPL retains water rights.
  • HK belief is that TPL got a very attractive price for surface acreage and will likely try to buy a block to make more contiguous acreage.   Transaction was very encouraging and very positive
  • 2 acres together worth more than 2 separate acres


An Update from Murray and Steven

FRMO Investor Call

Required listening if you are a TPL-head (or a BTC-head) like myself.   Unfortunately, the transcription isn’t great.   Ctrl+F is your friend here.

But you can’t forget that what you are sitting on, you are sitting on like the greatest hydrocarbon property in North America and you can even make a strong argument maybe even the world. The technology keeps getting better. This pipelines being constructed as gas being flared that in 11 month is not going to be flared and this is going to theirs is leases, there is water being sold is all kind of things happening except those variables don’t change in any appreciable way in a matter of week.

Call details if you can’t get it on SA.

Murray Stahl, Chairman and CEO, and Steven Bregman, President and CFO, will host a conference call on Thursday, January 17, 2019 at 4:15 p.m. ET. Only questions submitted to before 1:00 p.m. on the day of the call will be considered. The call can be accessed by dialing 1-855-710-4181 (domestic toll free) or 334-323-0516 (international toll) and entering the following conference ID: 5792922. A replay will be available from 7:15 p.m. on the day of the teleconference until Thursday, November 15, 2018. To listen to the archived call, dial 1-888-203-1112 (domestic toll free) or 719-457-0820 (international toll) and enter conference ID number 5792922. 

HK Interview in Value Investor Insight

Active Voice

When we first bought into this in 1995, we basically signed on for a 5% or so return from stock buybacks and the dividend, with pretty much infinite call options on what they could make happen with the land. Maybe people wanted to develop it. Maybe there was oil there that could one day be economically extracted.  We didn’t really know, but we liked the potential odds.

HK has the same questions as the rest of us.

With respect to capital allocation, an increasingly important question for TPL
is how it will deploy its increasing earnings.  The trust has been repurchasing and
cancelling shares for 120 years, but there’s a limit to the number of open-market purchases that can be made when average daily trading volume is less than 20,000 shares. With capital-expenditure requirements limited, it’s not a stretch to conclude we’re going to see a big increase in dividend payments. The dividend yield is still very low on a $600 share price, but in February of this year the Trustees raised the regular dividend from 35 cents per share to $1.05, and paid an additional special dividend of $3 per share. One doesn’t require a graph to infer the near-term slope of the line. We wouldn’t be surprised if over time TPL qualified for a dividend ETF or a REIT ETF.


More early HK

Murray Stahl’s Horizon Kinetics on Texas Pacific Land Trust

“The report’s original estimation, almost 19 years ago when there were 15.4 million shares outstanding, was that by 2010, which was as far as the projection went, the share count would have shrunk to only 8.3 million. As of last September there were 8.6 million, so the model wasn’t all that far off.”

The above was written in 2014.  As of July 31 2018, there are 7,778,426 shares outstanding.

The early years : HK

Horizon Kinetics: How to Buy 1 Million Acres of Fine Texas Grazing Land for $20.00

The report linked above is from the folks at Horizon Kinetics in New York.  HK was on the TPL train early and is still a top source of information and opinion.  This 23 year old report is great resource for understanding TPL at a base level.  Of note:

“Confidence in the relative safety of this investment resides in the capacity and predilection for share repurchases by a debt-free company selling very near the value of its tangible assets. Relative to the average industrial or service company, Texas Pacific is not subject to typical competitive forces nor to marginal changes in consumer and industrial demand. It has very stable base rents and, unlike most energy companies, which must support high fixed costs, its royalty revenues are purely additive, regardless of volume. Its basic business, land and oil, are classic inflation hedges.”