The 1) wording around the opportunity and activity of the water business in the 10-K combined with 2) the capital spending on the water biz and 3) big hikes in executive comp are all signs (in my mind) that $TPL is going to get extremely aggressive with water.
This may be obvious to others but I think they are going to be more water-forward than most investors expect.
You don’t pay your top two dudes $2mm+ each to collect royalty checks and do small ticket land sales. More is happening here…
Kermit is directly east of $TPL’s surface land in Loving, Reeves, and Culberson counties. The quote below speaks to the sheer amount of physical activity in the Permian right now.
With the increase of 18-wheelers and other vehicles on the roads of the Permian Basin, Prentice said the refinery will take advantage of locally produced crude oil and sell the gasoline and diesel locally.
“If the refinery were in operation right now, every single barrel would be sold within 100 miles,” Prentice said. “There’s been such an increase in demand.”
This is some of the end-of-2019 capacity we’ve been hearing about.
As construction for the 850-mile Gray Oak Pipeline draws to a finish, a joint venture led by Phillips 66 Partners has teamed up with Houston pipeline operator Kinder Morgan to move crude oil to more destinations.
Designed to move 900,000 barrels of crude oil per day by the end of the year, one of the end points of the Permian Basin to Gulf Coast pipeline is the Phillips 66 Sweeny Refinery in Brazoria County.
I may have saved the best information for last here. Important to know that Solaris started its build out in 2015/2016. Two year head start relative to $TPL.
Launched in November 2015 and financially backed by the private equity firm Trilantic Capital Partners North America, Solaris Water Midstream sources and delivers freshwater to drilling operations and moves and recycles oilfield wastewater.
The company reports having 16 current customers already either connected or in the process of connecting to its Pecos Star System.
A subsidiary of Marathon Oil Company signed a long-term contract for water services in a 369,000-acre area of Lea County, New Mexico that will allow for a 125-mile expansion of the Pecos Star pipeline network.
Once the construction for the expansion is complete, the Pecos Star System will include more than 300 miles of large diameter permanent pipelines and more than 200 miles of temporary pipelines.
We’ve heard this story before. Substitute TPL and EOG for Waterfield and Anadarko.
Waterfield is led by Co-Chief Executive Officers Scott Mitchell and Mark Cahill, who previously built and led Anadarko’s and Western Gas’s Permian Basin commercial water infrastructure platform. Since partnering with Blackstone last summer, Waterfield has put together a highly skilled team that brings together upstream and midstream technical expertise with a deep understanding of the subsurface and operating characteristics of the Permian Basin. This expertise positions Waterfield to provide reliable, turn-key services for its customers.
Waterfield’s progress should be of interest to TPL follows as there are parallels between the two entities. Waterfield appears to be well capitalized and has a strong management team; looks like prime competition.
“It used to be (water management) was trucking water to saltwater disposal wells. Then the next generation was to pipe water to SWDs to get trucks off the road and enjoy the economic benefits of pipelines,” said Cahill, an engineer who got his start at Chevron. “I think we’re entering the next phase, where you’ll see subsurface expertise. It’s not just pipes and facilities but knowing where you’re putting the water and how you’re putting the water,”
“The eye-opener for us was when we were talking to other producers and we were talking about our focus on the subsurface, and no one else was looking at the subsurface,” Mitchell said. “That gave them comfort things would be done right. It dawned on us that this is how it will be done.”
He said producers have been reluctant to grant water management to other companies “because it’s so critical and it has to be done right. They know the subsurface, so they’re reluctant to hand it off to someone without that expertise.”
Already, Waterfield has a 15-year contract with Guidon Energy to construct a new system to handle Guidon’s water gathering and disposal needs across its 40,000-acre position in Martin County. That system, which will target deeper disposal zones, is expected to come online by mid-year. Waterfield also has an agreement with EagleClaw Midstream to operate EagleClaw’s Reeves County water assets — 58 miles of gathering lines and 390,000 barrels per day of permitted water disposal capacity.
Those contracts have met the company’s goal of “planting our flag, getting a platform in the Midland Basin and the Delaware Basin,” said Cahill.
15 year contracts are music to my ears.
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.