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. 

“I Buy It For Myself Everyday”

Murray Stahl Lunch Roundtable 12/13/2018


All quotes are quite loose. Not verbatim.

-Baseline is that Murray thinks the stock market is still very rich.  Valuations high and Murray isn’t bullish on earnings growing into valuations going because ROE is already so high.  Tarrifs hurting and will continue to hurt.

-Murray thinks there is collectively way too much debt in the system.  Public plus private = $72T (I love the over personally).  100bp increase in rates = $717B in increased carry cost = 3.5% of GDP.

-Real rates are still negative as the float of the currency increases 4.4% yearly.  Add taxes on that.  Murray gets to a -2% real yield on the 10yr Tsy.

-“One way or another the bond market is going to get a positive real rate of return.  Could be deflation.  Could be higher rates.  Anyway it happens, equity valuations are going to take it on the chin as bonds become a viable alternative and discount rates increase.”

-“Texas Pacific Land is my favorite stock”  (12:35)

-TPL comments go from 12:30 to 27:30

-“Land has some economic value.  Assuming inflation is going to be 4%, the land is going to appreciate by 4%.  We know that about 1% of the stock gets taken out each year.  The trust also pays a small dividend.   My base return is a little over 5%.”

-“On top of base I get: 1) at the money call on inflation, 2) the optionality of technology improvements, 3) long term optionality on land and the oil below it, 4) long term option of benefitting from overseas political regime change.

-“In 2014 TPL was $100 and oil was over $100/bbl.  Not oil is $50 and TPL is $500.  There are other variables over the fullness of time that will differentiate TPL from oil.”

-“What a broker charge you for an infinitely long, at the money call option on oil?  That’s embedded in TPL’s price.”

-“Middle eastern monarchies are inherently not stable.”

-“If I find something good, I don’t want to sell it.”  Murray would prefer not to sell TPL in client accounts and mutual funds.

-“The taxes we would have paid on the sale are basically equal to the recent downdraft.”

-“The technology option has paid off.  The increase in oil price option has not paid off”

-“The technology option keeps resetting itself.”

-“Not a lot of things like TPL.  The odds of finding something as good are exceedingly low.  A normal investor is going to find 6 great investments over the time of their career”  (I love the under).  “If you find something good, you should leave it alone”

-Murray is buying for himself daily!   And adds it to new client accounts though not to 30% like other accounts.

-TPL comes back up in Q&A at 1hour 25min mark.  “TPL water business is expanding and will keep expanding.  There is lots of territory that hasn’t been touched yet.  Private equity is building many water purification facilities and they need water.  I’m really excited about water.”

-“USGA survey that recently doubled expectations is based on 2017 data.  Lots of 2018 data out there and the expectations could keep expanding.”

-“TPL is the greatest piece of real estate in the US”.

-“Very little is know for strata below current levels being mined.”

-“Extraction gets cheaper every week and the quality of the oil is very high”

-“I bought some today and unless something happens I will buy some tomorrow.  It’s very cheap.”


Side note:  If you are into crypto you should do yourself a favor and listen to the whole call.





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.


Murray Stahl Lunch Roundtable

Horizon Kinetics on Soundcloud

I came across this in a kick ass comments thread over on Seeking Alpha.  SA and Yahoo conversations are my two favorite places to read up on TPL as there are many passionate TPL holders that are willing to share their thoughts.  I’m active on both boards and may, from time to time, post links directly to comments and messages of note.  As I said at the outside, I’m using this blog to flag stuff that pertains to TPL that I find interesting.  I’m not looking to compete with/replace Yahoo or SA.

As most of us know, Murray Stahl is THE TPL guru.  He and his team may know this name likely better than anyone on the planet save for TPL management.  As a consumer of the information that HK so graciously shares, it’s hard not to get long some of their other favorite picks such as overseas freight shippers, gold trusts, and (yes) even Bitcoin (via GBTC before the NAV premium went bananas).

Some notes on the call:

  • Overall Stahl thinks equities are overvalued (indicators at the high end of the range) so use that for context as he talks about TPL
  • Hold some cash for opportunities
  • Find stocks that are durable into a downtrade
  • TPL chatter starts at 9:00 mins
  • 880k surface acres, 450k royalty acres, West Texas, holdings look like a checkerboard
  • New tech makes oil in Texas readily extractable
  • All property benefits via oil, easements, water
  • Going to go on for “many, many, years”
  • Go on Google Earth and look at Reeves county.  You won’t see roads, infrastructure, etc.  Compare it to Midland county which is very big in oil related activity.  One day Reeves, Culberson, Loving, and Hudspeth counties (all TPL territory) are going to look like Midland
  • At night, wet gas is going flared off in west Texas due to lack of pipeline.  “If they just had pipelines, revenue would go up a lot”
  • Gas comes up with the oil during fracking.  Operators don’t have anything to do with most of the gas so they have to flare it.  Need pipeline or storage tanks to move or store it.  No railroad to move it either.  Largely the only way to move oil/gas is truck
  • Murray says he’d buy more of it if it was considered prudent.  I assume he’s talking about the positioning of his mutual funds and client accounts.  He goes on to say that he buys more for his PA all the time
  • Most of TPL is still a dormant asset
  • Pipelines are extremely hard to build as imminent domain laws are centered on public use.  Hard to argue that oil pipelines are public use.  Only specific parties (operators, owners of other land, oil buyers) benefit; not a slam dunk case.  All pipeline deals take time and many, many people to get on
  • First major pipe comes online in Spring 2019
  • Lots of DUCs along this line (Murray doesn’t say who is building the pipe or who has constructed the DUCs)
  • “I believe that area (TPL acreage) is going to be developed regardless of what happens”
  • Higher oil prices are good for TPL.  Makes stock durable into some systemic risks
  • Companys (TPL and CVEO) are valued on earnings.  Dormant assets are heavily discounted
  • Stahl talks about water at 1:41:30
  • TPL management does not make the decision to make wells.  They just the royalties.  Land owner / operate make the decision to drill wells.  It appears as if wells on TPL royalty land are increasing in number
  • TPL’s TPWR could capture 25-50% of the water biz in West Texas (I personally love the under).  Stahl says there are two giant owners of land (TPL and U of T) are the big landowners and it will be hard to beat them

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.”