Texas Pacific Land Corporation
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good morning and welcome to Texas Pacific Land Corporation First Quarter 2021 Earnings Conference Call. This conference call is being recorded. I would now like to introduce your host for today’s call, Mr. Chris Steddum, Vice President of Finance and Investor Relations. Please go ahead, sir. Thank you. You may begin.

[Chris Steddum:]

Good morning. Thank you for joining us today for Texas Pacific Land Corporation’s first quarter 2021 earnings conference call. Yesterday afternoon, the Company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission. These documents are 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.

[Ty Glover:]

Thanks, Chris. And thank you everyone for joining us today. Since this is our first quarterly earnings call. I’d like to begin with some background for those who are new to TPL. Then, I’ll cover our business strategy, our performance during the first quarter and our plans for the road ahead. Lastly, I’ll turn it over to our CFO, Robert Packer, to discuss our financial results in more detail. Texas Pacific, was formed as a trust in 1888 to manage the checkerboard of land assets of the former Texas and Pacific Railway Company. We have been listed on the New York Stock Exchange since 1927, and in the first quarter of 2021, we completed our reorganization from a trust to a corporation. Today, we own over 880,000 acres across 19 counties in Western Texas, with the majority located within the Permian Basin. We are very unique and that, although we are a-pure play Permian-focused company, we are not an oil producer or exploration company. Rather, we have three core revenue streams, oil and gas royalties; surface management, and water solution. And our customers include nearly every major E&P and midstream company operating in the Permian. We believe this provides exceptionally diversified exposure to best-in-class Permian operators across multiple facets of their operations, with added value in the form of our vast and largely undeveloped royalty acreage, our core surface positioning and our sizable market share in the sourcing of produced water aspect of our water solutions business. We’ll walk through each of these three core revenue streams in turn. Our oil and gas royalties accounted for 59% of our revenues in the first quarter. We own approximately 530,000 gross royalty acres with the vast majority leased for oil and gas development, which entitles TPL to a certain percentage of revenue interest, based on oil and gas production. Our average royalty per acre is 4.4%, which translates to about 23,700 net royalty acres on 8x basis. Our oil & gas royalties are perpetual real property rights that require no capital expenditure from us for continued development, making this a very high margin business.

[Robert Packer:]

Thank you, Ty. Beginning with our operating results, for the first quarter of 2021, we had net income of $50.1 million or $6.45 per common share. This compares to $57.4 million in net income or $7.40 per sub-share certificate in the same quarter of the prior year, a decrease of $7.3 million or $0.95 per share. For clarity, when the reorganization was completed in January of this year, we converted these sub-share certificates to common shares on a one-to-one basis, so the number of shares outstanding for each period is identical. The decrease in net income and earnings per share is primarily due to a $14 million decrease in water sales revenue, which I’ll detail shortly. This decrease in water sales revenue was partially offset by an increase of $7.2 million in oil and gas royalty revenue in the first quarter of 2021 compared to first quarter of 2020.

[Ty Glover:]

Thanks, Robert. Before we go to Q&A, I want to conclude by thanking Robert for his years of outstanding service to TPL as CFO. As previously announced, Robert will retire at the end of May and will be succeeded by Chris Steddum, our Vice President of Finance and Investor Relations. We will miss Robert greatly, and we know that Chris will continue to build on the achievements that Robert has helped us realize. With that, operator, we will now take questions.

[Operator:]

Our first question comes from the line of Derrick Whitfield with Stifel. You may proceed with your question.

[Derrick Whitfield:]

Good morning all, and congrats on a strong quarter and update. It’s certainly a nice start for your first call.

[Ty Glover:]

Thanks, Derrick.

[Derrick Whitfield:]

With my first question, I wanted to focus on your return of capital strategy, and thinking about your share buyback announcement and your strong cash position. Could you speak to your long-term strategic view on return of capital, and what’s the right balance between stock repurchases and dividends?

[Ty Glover:]

Yes. Hey Derrick, this is Ty. Thanks for the question. To give you a little bit of color on that, TPL has increased its dividend consistently over the last 17-plus years. We’ve paid a dividend much longer than that. I mean, ultimately, those decisions are made at the Board level. But, we’re very confident that our Board is focused on making the best capital allocation decisions for our shareholders.

[Derrick Whitfield:]

And as my follow-up and perhaps focusing with you, Ty, shifting over to growth regarding the potential outside growth opportunities referenced in your press release and prepared comments. Could you speak to your appetite for acquisitions and the parameters you would use to assess such opportunities?

[Ty Glover:]

Yes, for sure. I mean, look, we’re definitely going to evaluate assets across all of our revenue streams, oil and gas royalties, the SLEM business, the water company. I think, there’s going to be opportunities across all three of those. I mean, ultimately, we’re focused on core Permian assets. We want exposure to Tier 1 operators, because we feel like those assets perform best through the cycle. Our focus is on assets that have good visibility to development timing and fit in well with our existing portfolio of high-quality Permian assets. Historically, we funded these types of transactions through our cash flow. But, I think we’re in a very unique position where we don’t need to chase acquisitions in order to achieve growth. So, we’re going to remain opportunistic and stay very patient and disciplined.

[Derrick Whitfield:]

Certainly makes sense. And shifting over to production visibility, could you share your thoughts on your production profile for the balance of the year, based on your current DUC backlog and rig activity and additionally, perhaps comment on your permits and if they support a sustained level of rig activity?

[Chris Steddum:]

Hey Derrick, this is Chris. I’ll take that question. As I look back, starting in September, we probably started to see about 50 completions happening every month, and that continued definitely through January. With the February storm, it probably slowed down a little bit. But, if you kind of think about our DUC inventory, which is a little bit above 500 DUCs, that certainly is enough to get you through the end of the year at that pace if the operators want it to continue. And to Ty’s point, when you think about the permitting pace, I think we saw something like 170 new permits over the course of the first quarter. And so, again, that would definitely support kind of the pace that we’ve seen at the end of the year. So, we feel really good that given the current DUC count and permit count, we’ve got good visibility for them to continue on kind of the pace that we saw at the end of last year.

[Derrick Whitfield:]

Great. And then, as my final question, really more housekeeping in nature. Could you offer your production split by product for Q1 and comment on the winter storm Uri impact on royalty production?

[Chris Steddum:]

Yes. Sure, Derrick. This is Chris again. For Q1, we saw our oil production was probably about 43% to 44% of the total production, gas was just slightly above 30%, and NGLs were the balance. And I think, when you think about the impact, as Ty has said in his prepared remarks, for February, for most of the operators, I think, five to six days of downtime in terms of production is kind of what we’ve tended to see. If you look at our produced water royalties as another good analog, it was down about 27%, and that would translate to about six or seven days. And so I think across the board, when you think of that kind of five to seven-day window of downtime for production, I think, that’s probably what’s the expectation should be for February.

[Operator:]

Our next question comes from the line of Chris Baker with Credit Suisse. You may proceed with your question.

[Chris Baker:]

Hey. Good morning, guys. And thanks for those on the call. Derrick covered most of it, but I was just hoping that since this is the sort of first public call, you could reflect a bit on the different pieces of the portfolio, how they performed last year, given 2020 was pretty challenging. But, just any color around sort of the different moving pieces there would be helpful.

[Ty Glover:]

Yes. As I mentioned -- this is Ty. As I mentioned earlier, 2020 was actually our second best year in the Company’s history. So, as a whole, our asset performed pretty well. One thing that we saw that I would highlight was the produced water royalty side of the business. That side of the business actually saw roughly 30% over the year. So, it was actually a very nice hedge for some of the other businesses that didn’t perform quite as well. And then, like we mentioned earlier, the wind revenue in February, I think just -- a lot of the hidden value in TPL and the natural hedges that are built into the business are a huge highlight and competitive advantage for TPL over some of the others in the industry.

[Chris Baker:]

That’s great. And just as a follow-up, we’ll look forward to getting the formal ESG report later this year. But, could you just maybe expand on how you guys are thinking about ESG? I think, relative to E&Ps, at least from my view, the lack of Scope 1 emissions is a pretty clear differentiator. But, just wondering how you guys are thinking about that potential opportunity.

[Ty Glover:]

Yes. Look, again, this is Ty. I mean, we see it as a big opportunity for us. We’re very excited about it. I think, the reduction in flaring that we’ve seen as a percentage of our production, just with the infrastructure that we’ve helped to plan and get built out on our property, has been a big win for us over the last few years, a great opportunity for us to work with our operators and kind of be a problem solver there as well and just increase that relationship. So, again, yes, we look forward to get that message out there and super excited about it.

[Operator:]

Ladies and gentlemen, we have reached the end of today’s question-and-answer session. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation. And enjoy the rest of your day.