Texas Pacific Land Corporation (NYSE:TPL) Q2 2023 Earnings Call Transcript

Texas Pacific Land Corporation (NYSE:TPL) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good day, and welcome to the Texas Pacific Land Corporation Second Quarter 2023 Earnings Call. All participants are in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shawn Amini, Vice President of Finance and Investor Relations. Please go ahead.

Shawn Amini: Thank you for joining us today for Texas Pacific Land Corporation Second Quarter 2023 Earnings Conference Call. Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission, which is available on the Investors section of the company's website at www.texaspacific.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings.

During this call, we will also be discussing certain non-GAAP financial measures. More information and reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings. Please also note that we may at times refer to our company by stock ticker, TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Ty Glover; and Chief Financial Officer, Chris Steddum. Management will make some prepared comments after which we will open the call for questions. Now I will turn the call over to Ty.

Ty Glover: Good morning, everyone. Thank you for joining us today. TPL delivered an impressive quarter, capturing opportunities underpinned by robust Permian activity. We set new company records for quarterly oil and gas royalty production, source water revenues and produced water revenues. Easements and surface-related income, which we refer to as SLEM, had its best quarterly revenue performance since 2019. Unlike our oil and gas royalty revenues, which are predominantly derived from our perpetual royalty interest carved from a mineral state, water and SLEM revenues originate from our ownership of the surface estate. That surface ownership is unique compared to other public oil and gas, mineral royalty and lease interest companies.

Combining our surface ownership with active management, TPL extracts multiple incremental cash flow streams. These surface-derived opportunities have been thoughtfully commercialized to maintain our capital light, high margin business philosophy which ultimately contributes substantial free cash flow to the overall entity while also accelerating development of our oil and gas royalty interest. This most recent quarter is a great example of the built-in hedges that protect TPL during periods of volatile commodity prices. Although oil and gas royalty production this quarter increased 26% year-over-year, our oil and gas royalty revenues were still down 32% due to WTI crude oil and Henry Hub natural gas prices that declined approximately 32% and 71% respectively.

However, for that same quarterly year-over-year comparison, our source water revenues were up 69%, produced water revenues up 12% and SLEM revenues were up 34%. During this last quarter, these surface-derived revenue streams in aggregate comprise 48% of TPL's overall consolidated revenue and helped maintain strong consolidated earnings and free cash flow despite much lower commodity prices. For SLEM, specifically, we're seeing broad strength across each subcategory. Pipeline easements, electric line easements and caliche sales have been especially good as operators deplete duct inventory and push development across broader areas. Our team of land agents and GIS specialists have done a tremendous job working with upstream, midstream and other operators to accommodate their development needs and procure revenue opportunities for our surface.

Turning to water, during the quarter, we averaged over 700,000 barrels per day of source water sales volumes driven by robust brackish and treated water demand. Year-to-date, through second quarter 2023, total source, treated, and brokered water volumes are up 31% year-over-year. For the last 12 months, we've sold nearly 200 million barrels of water, and many of those barrels were used to complete oil and gas wells on TPL royalty acreage. Produced water volumes during the quarter averaged approximately 2.3 million barrels per day. Just as a reminder, TPL contracts with operators and other third parties for use of our surface for produced water facilities, including disposal wells, we generate a contracted fee for produced water barrels. Produced water volumes for second quarter 2023 are up 15% year-over-year.

This was by far our best ever quarterly revenue and free cash flow performance for the water business, contributing just under $60 million of high margin revenue while only spending less than $2 million in CapEx. The cumulative efforts of prior capital investments and commercial negotiations going back to the inception of our dedicated in-house water business in 2017 are paying substantial dividends today. In many of our water contracts with operators, we have negotiated exclusive offtake of produced water across large areas of mutual interest. This is an important feature because it provides TPL holistic control over both source and produced water throughout the basin and across our surface. It allows us to continue sales of brackish water while also providing us incremental upside and opportunities to reuse and treat produced water for completion activities.

Our operations team also deserves tremendous credit for procuring and moving water for our customers at volume levels we've never done before. TPL continues to demonstrate its ability to offer a full spectrum of reliable water services. During the last quarter, we spent approximately $20 million to acquire 12,000 surface acres in Andrews County along the Texas New Mexico State Line. This acreage fits nicely with our current surface footprint and will provide incremental opportunities for our teams to pursue and commercialize. As previously disclosed, on November 22, 2022, the company filed a complaint Delaware Chancery Court to resolve a disagreement with Horizon Kinetics, LLC, Horizon Kinetics Asset Management, LLC, SoftVest Advisors, LLC, and SoftVest L.P. over their voting commitments pursuant to a stockholders agreement with the company.

We recently concluded the trial, and we're now waiting for the court to issue its opinion. We expect that to happen in due course, and we will update our stockholders when we have more to share. Also, the company recently announced that it has nominated Marguerite Woung-Chapman and Robert Roosa as two Independent Director nominees for election at the upcoming 2023 Annual Meeting of Stockholders. Both candidates bring a strong mix of industry skills and experience. Current Directors and Co-Chairs of the Board, David Barry and John Norris have decided to retire and not stand for reelection at the 2023 Annual Meeting. Dave and John have been involved with the company for decades, back to its days as a trust. They have always been great stewards for the company and have played a pivotal role in helping the company achieve the success it enjoys today.

Without their support, TPL would not have a water or surface business or the professional administration anywhere near the scale and expertise it has today. They saw and understood the potential that TPL's unique assets possessed, and they took a chance to support a pivot to active management. On behalf of the entire management team here at TPL, we are thankful for their service, guidance, leadership and friendship over the years, and they will leave behind an exceptional legacy at TPL. With that, I'll turn the call over to Chris.

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Chris Steddum: Thanks, Ty. Total revenues for the second quarter of 2023 were $161 million, representing a 10% increase from the first quarter 2023 revenues. As previously discussed, revenues benefited from higher royalty production, source water sales, produced water royalties and SLEM revenues, though partially offset by lower oil and gas prices. Adjusted EBITDA and free cash flow for the quarter were $134 million and $105 million, respectively. Consolidated CapEx was $1.4 million, with most of the spend related to the water business. We ended the quarter with $609 million of cash on the balance sheet. Royalty production of approximately 24,900 barrels of oil equivalent per day represents a 19% increase on a sequential quarter basis.

Although we continue to maintain that individual quarterly production figures can be lumpy, the underlying production on our royalty acreage continues to trend upward. This is further supported by new well data as recent permits, spuds and completions remain high across both our Midland and Delaware footprints. In particular, activity in Central Midland, Loving, Reeves and Culberson Counties are especially strong. Our oil price realizations remain high with second quarter 2023 average realized oil price of $73 per barrel, which represents an approximate 100% realization relative to WTI Cushing price per barrel. However, our natural gas and natural gas liquids realizations weakened this quarter relative to prior quarter realizations. Infrastructure constraints and downtime, among other factors, continued to suppress local West Texas price realizations for many operators.

For TPL, this is somewhat mitigated as we benefit from additional infrastructure build-out through our SLEM business as new pipelines, processing facilities and other logistics assets generate easement and lease opportunities. In addition, our royalty acreage is dominated by super majors and large independent E&Ps that tend to own and/or commit to new infrastructure, which generally provides them better netbacks compared to smaller public and private operators. As more infrastructure is developed and completed, we would expect our realizations to improve. For this quarter, we have maintained our $3.25 per share dividend. We also spent approximately $20 million to repurchase approximately 14,000 shares. And with that, operator, we will now take questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions]. At this time, I will announce the first questioner, which is Derrick Whitfield from Stifel. Please go ahead.

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