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.
Demand for water to use in fracking in the Permian has more than doubled from 2016 levels, according to industry consultant Rystad Energy. Demand should grow to more than 2.5 billion barrels by next year, accounting for nearly half of all U.S. oilfield needs.
“It used to be you’d get a great cow ranch that had good grass for your cattle, and hunting or recreation was an add-value revenue stream and discovery of oil or gas was also this cream on the cake,” Uechtritz said. “Now, it’s wind and water.”
This post is a bit off our normally beaten path but the parallels are interesting.
The university’s endowment manager, Harvard Management Co., was stealthily building a sizable grape-growing business on the Central Coast through entities including Brodiaea. With the land, it was acquiring rights to vast sources of water in a region where the earth’s warming is making the resource an ever-more-valuable asset.
In a warming planet, few resources will be more affected than water, as more-frequent droughts, storms and changes in evaporation alter a flow critical for drinking, farming and industry.
Even though there aren’t many ways to make financial investments in water, investors are starting to place bets. Buying arable land with access to it is one way. In California’s Central Coast, “the best property with the best water will sell for record-breaking prices,” says JoAnn Wall, a real-estate appraiser who specializes in vineyards, “and properties without adequate water will suffer in value.”
In all of my years as a TPL follower, I don’t think I’ve ever read the Wikipedia entry on the Trust.
I added the line about the water business. Not my best work.
This isn’t in direct reference to TPL but I thought was worth sharing. Sourcewater is a startup aimed at connecting buyers and sellers of water and water disposal services. The company’s website is worth a look to get a better perspective on the West Texas water bonanza.
I have no connection to this company. Sharing for context only.
I enjoyed this long form sales pitch from the company. Some excerpts:
Just in the past few years, the average frac has gone from needing about 4 million gallons of water (100,000 barrels) to needing 20 million gallons (500,000 barrels) or more – sometimes much more. And most operators now frac a bunch of wells at the same time for efficiency (called “pad drilling” or “zipper fracs”) so the amount of water they need in the span of just a few days could be millions of barrels, maybe even close to 100 million gallons – in just a few days.
In fact, water is in such high demand that oil and gas operators are buying water anywhere they can get it. For example, Pioneer Natural Resources, one of the top Permian operators, recently made a deal with the local cities of Odessa and Midland to buy and reuse their sewage water for fracking. Many operators are starting to recycle the water that comes out of the ground with the oil and gas they produce, taking that “produced water” and injecting it into the next frac to save on both freshwater needs and disposal costs.
The UT Bureau of Economic Geology led the study that highlights key differences in water use between conventional drill sites and sites that use hydraulic fracturing, which is rapidly expanding in the Permian. The study was published in Environmental Science & Technology on Sept. 6, with results indicating that recycling water produced during operations at other hydraulic fracturing sites could help reduce potential problems associated with the technology. These include the need for large upfront water use and potentially induced seismicity or earthquakes, triggered by injecting the water produced during operations back into the ground.
For conventional operations, the produced water is disposed of by injecting it into depleted conventional reservoirs, a process that maintains pressure in the reservoir and can help bring up additional oil through enhanced oil recovery. Unconventional wells generate only about a tenth of the water produced by conventional wells, but this “produced water” cannot be injected into the shales because of the low permeability of the shales. The study found that the produced water from unconventional wells is largely injected into non-oil-producing geologic formations—a practice that can increase pressure and could potentially result in induced seismicity or earthquakes.
The study points out that instead of injecting the produced water into these formations, operators could potentially reuse the water from unconventional wells to hydraulically fracture the next set of wells. Enough water is produced in the Midland and Delaware basins in the Permian to support hydraulic fracturing water use, and the water needs only minimal treatment (clean brine) to make it suitable for reuse.
Who’s got enough land to store and re-distribute vast quantities of water throughout the basin?
Below is a link to the study. More to come from me after I dig in.
Study: Water Issues Related to Transitioning from Conventional to Unconventional Oil Production in the Permian Basin