This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
LandBridge Company LLC Class A Shares Representing Limited Liability Company Interests
Q2 2024 Earnings Conference Call
8/8/2024
spk05: revenue figure. During the second quarter, total revenues grew 36% sequentially and 20% year-over-year to $26 million. The sequential growth was broad-based across revenue streams, as surface use royalties and revenues grew 55% sequentially, driven primarily by incremental royalties associated with the East Stateline Ranch acquisition. Resource sales and royalties increased 28% sequentially, also driven predominantly by the East Stateline Ranch acquisition. and revenue from oil and gas royalties increased 7% sequentially, largely as a result of mineral lease bonus income. We generated $114 of non-oil and gas royalty revenue per owned surface acre during the second quarter, which is down from $232 in the same period last year, reflecting our recent expansion through the acquisition of an additional 148,000 strategically located surface acres. Because this land has been historically underutilized, we see tremendous growth opportunities from applying our proven active land management strategy. As a result of our lean operating model, we delivered adjusted EBITDA at $23.4 million during the quarter, which represents a 90% adjusted EBITDA margin. SG&A expenses during the quarter were $2.1 million, which represent a step up from the first quarter and same quarter last year due to higher professional service fees primarily associated with amending our credit facilities and pre-IPO entity restructuring. We generated free cash flow of approximately $16 million and free cash flow margins of 60%. The sequential decrease in free cash flow margin was due to non-recurring costs associated with M&A activity during the quarter. As a reminder, we closed our IPO in early July, providing net proceeds of approximately $271 million, which were used to further strengthen our balance sheet and distribute a dividend to our legacy shareholders. We ended the quarter with total liquidity of approximately $50 million. We had $400 million of debt under our term loan and revolving credit facility, of which approximately $265 million was used to fund the East Stateline Ranch and Speed Ranch acquisitions during the quarter and ended the quarter with a net leverage ratio of 4.2 times. Subsequent to the end of the quarter, we paid down $100 million of debt with IPO proceeds and made a regular amortization payment, bringing our net leverage ratio down to 2.6 times. Turning to capital management, as Jason mentioned, we expect our high-margin business model to generate substantial free cash flow over time. As we continue to grow free cash flow, our capital allocation priorities are threefold. First, maintaining a strong balance sheet to ensure maximum financial flexibility over time. Deleveraging is an accretive use of our excess cash, and we will continue to pay down borrowings under our credit facility. Following our IPO, our leverage ratio was approximately 2.6 times adjusted EBITDA, and we expect to be around two times by the second quarter of 2025. We are also committed to returning capital to shareholders through dividends. Our board will be discussing our dividend policy during the second half of the year, and we anticipate introducing a quarterly dividend following Q3 earnings. Finally, we will continue to pursue value-enhancing land acquisitions. We operate in a fragmented market with significant opportunity to acquire underutilized and undercommercialized land. and we have proven our ability to create value through our active land management strategy. Before closing, I'd like to flag that we intend to provide annual guidance alongside Q3 earnings following our first full quarter as a public company. In conclusion, we are pleased with our second quarter results and we see significant opportunities ahead as we leverage our high margin, high capital efficient business to drive long term revenue and free cash flow growth, creating substantial value for our shareholders. With that operator, we are now ready for questions.
spk08: Thank you, we will now begin the question and answer session if you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your questions simply press star one again we'll take our first question from john mckay at Goldman Sachs.
spk02: hey good morning congrats on the first call and thanks for the time understand you guys aren't giving kind of formal guidance at this point for the year. But maybe if you could just talk a little bit about how you expect your overall EBITDA growth to look like on the base business, maybe, you know, for now, excluding the data center opportunity, etc.
spk05: Yeah. Hey, good morning, John. Thanks for joining. That's right. We'll be providing guidance after Q3. But I mean, just as it relates to sentiment, I would say, you know, our outlook for 2024 is just as strong as it was at the beginning of the year. Um, you know, what we've seen, what we've really liked seeing is just the commercial traction we've gotten over the last six weeks, particularly on, uh, the East state line ranch opportunities. And as a result of that, I would say we're more optimistic going into 2025. I want to hesitate providing any firm numbers on that just yet, but I would say, uh, you know, we continue to get more traction than we originally anticipated, uh, across all of our assets. Um, and it's really going to shape up to be a good 24, uh, and we think an even stronger 2025.
spk02: I appreciate that. Um, I'm sure they'll get plenty of questions on the data center side, so I'll put that aside for right now. Maybe just talking about the produced water volume growth in the quarter, really strong. Maybe you can unpack that a little bit for us on what was maybe contributions from the new acreage versus the Devon ramp versus anything else you can talk about in there.
spk05: Yeah, so we added, you know, roughly 150,000 barrels a day of incremental capacity in second quarter. So pretty meaningful step up on capacity along the legacy state line asset base. And so we were able to continue to take both an increased amount of Devon volumes that had previously flown on their legacy system, as well as start to realize some commercial volumes, which we continue to kind of see grow here throughout the beginning of this quarter. So That was certainly a big piece of it. You know, on the East State Line Ranch, you're exactly right. You know, there was the combination of first the Conoco system, which we get royalties for, which was a meaningful increase, as well as the infrastructure assets that Waterbridge NDB acquired as part of that acquisition that also contributed to the increase. And so when you think of just that step change from Q2 to Q4 or to Q1 to Q2, Um, you know, a big piece of that is the acquisition, but, um, you know, I would say we still saw a meaningful ramp, uh, just from the organic built out on a legacy, uh, state line system from those Devon volumes.
spk02: All right. Appreciate the detail. Thank you.
spk05: Yep.
spk08: We'll move next to Charles Mead at Johnson Rice.
spk07: Good morning, Jason and Scott. Um, my first question is kind of an open-ended one. Uh, I'd like to ask you guys, your IPO marketing process is just a few weeks ago. And I'd like to ask you to offer, did you have any kind of persistent surprises as part of that? And I'm thinking in particular, are there parts of your business that when you were talking to investors that they immediately understood? And at the other end of the spectrum, is there part of the opportunity that you guys have in front of you that, that may be required repeated explanations, just any, any thoughts you had on that and what, what the investing public, you know, has an easier time understanding what they have, maybe a more difficult time coming to speed on.
spk03: Can you take this one, Jason? Yeah, that's fine. Yeah. I'd probably chime in a little bit.
spk05: Yeah. You know, I would, it's a really good question. I mean, I would say, you know, the, The biggest education effort, I think, as a result of this being just a fairly new business model, I think the folks at TPL have done a great job growing and monetizing their asset base. And there was some familiarity with their model, which certainly helped inform, I think, initial discussions with investors. But more broadly speaking, there just hasn't been a lot of analysis or research done. on the land business that interacts with the energy industry. And so, you know, really kind of talking through the dynamics of how land is so critical, you know, to not just the oil and gas industry in West Texas, but just the broader opportunities that come with surface as a result of just having these large contiguous acreage positions. It's something that I think when we talked through it with investors, you know, folks would nod along and they started to see it. It's just something that hadn't been readily discussed in the past. And as a result, I think it just took a little bit of dialogue. I mean, fortunately, you know, all y'all both on the research side, on the investor side are very, very smart in the energy space. And so, you know, you start to put the pieces together as it relates to maybe their other coverage or their other investments. And people got it pretty quickly. I think the big, you know, the big question ultimately was, you know, how do we think about valuation then? And that was, you know, that continues to be a discussion. I think, again, you know, TPL sitting out there. as uh you know with the assets they have serve as a great metric um and one that you know we were able to point to now that said you know there are some differences between them and us you know we are we are highly focused on the surface side we feel like that is what drives the ultimate premium valuation and we will continue to focus on that going forward uh but it's really just kind of a full cycle discussion of the business model you know what we have in common with um you know with the one comp out there on the energy side and what sets us apart and i think investors were generally very receptive and very excited about the story. And, you know, fortunately, we've seen that continue to play out post-IPO.
spk07: Thank you for that color. You know, it's interesting. Now the market votes every day on what you're worth. The follow-up, I think you alluded to this just briefly in your response to the previous question. I wanted to ask the state line and, I guess, the East State line, rather, and Speed Ranch, those are newer assets for you. What's new for you guys on your view of the low-hanging fruit or the most immediate opportunities to add revenue there?
spk03: Yeah, Charles. This is Jason. I'll take that one. The branch itself, both the East State line and the Speed Ranch, were just really not developed from a commercial standpoint at all. We look at that as really a blank canvas to open up a ton of opportunity, not just on the oil and gas side, but both in renewables. And, you know, we've got major thoroughfares that run through that ranch that really feed the Delaware Basin. And we think that there's a massive opportunity on the real estate side, whether that's man camps, fueling stations, et cetera, to really feed the basin as a whole. On top of that, I would say that, you know, Well, the only thing I would say on the top of that is that the produce water infrastructure was not utilized at all. So we looked at it. It was not only strategic as it was located on the state line, but also just the fact that there was limited disposal wells outside of ConocoPhillips' wells and system that are on the surface. And so a really good running room. We did a really deep dive on the geology and the geophysics there to make sure that we've got plenty of pore space to really handle
spk04: produce water in a sustainable way for the future thank you yeah thanks y'all our next question comes from alexander goldfarb at piper sandler hey uh good morning morning down there and uh welcome to uh to public land uh so uh two questions for me first uh as you know i'm a real estate guy not an energy guy, but still on a political landscape, changing candidates for the White House and certainly seems like a more progressive team from the Dem ticket. Do you have any thoughts on a Harris presidency, what that would mean to regulations, especially around the water injection and some of the other business lines that underlie the pipeline side of your business?
spk05: Hey, Alexander, good talking to you. Thanks for opening up with a softball here. Yeah, you know, we're certainly keeping an eye on it. You know, I think we're generally not too concerned, I think, regardless of which way the election goes. We're certainly, you know, kind of focused more on the broader geopolitical situation and its ultimate impact on commodity prices, I think. I think that is one that just impacts us, you know, as an industry. You know, we saw, you know, we saw the regime change, so to speak, back in 2000, you know, but ultimately, you know, while there was some impact on commodity prices and where folks were focusing on development and so on, you know, I think most of the direct regulation that impacts us is much more driven at the state level. And as a result of that, you know, it's tough to think that there's going to be any kind of knee-jerk reaction, regardless of who steps into office, that could really impact us, you know, quickly in an unexpected way. And so, you know, we're keeping a watchful eye on it, but at this point, I would say no strong opinions one way or the other in terms of, you know, an impact on us.
spk04: Okay. And then the second question is on the data center and commercial, you know, rollout of the land that you have, the holdings. Can you just talk a little bit more about, you know, the initial data center in terms of the deal, the timing on deal closing, entitlements that, you know, how that's being managed as far as who's obtaining the entitlements and what the financial recourse is, and if there's any end user pre-leasing that's going on, basically trying to understand, you know, uh you guys protecting yourselves so you're not left holding the bag while you know you're the third party user which is also partly your sponsor you know it's out there trying to get things their ducks lined up and get this entitled and you know sign up users and stuff like that that you're not left there you know with no recourse and also whether you're precluded from pursuing additional data center deals or other similar large-scale commercial deals until this first one pans out?
spk05: Yeah, those are all really, really good questions. So as we mentioned in the earnings release, we're currently sitting on a non-binding LOI that's being worked through with both affiliates, our sponsors, as well as some other parties. We're obviously optimistic in the opportunity, but we're not going to release any of those details at this point. A lot of that is still being ironed out. I would say we have a focus on ensuring that we are protected and being cognizant of a lot of the concerns you flagged. And I think once we get a little further along in the process and the ground lease, for example, is executed, we plan on circling back and discussing it in a bit more detail. But You know, at this point, we're not going to really call it talk through or call it speculating on all those high-level concerns until the dust settles.
spk04: Okay. Thank you. Yeah, thank you.
spk08: We'll go next to Kevin McCurry at Pickering Energy Partners. Hey, good morning, guys.
spk06: Yeah, following up on the data center, I just was curious if you guys have quantified how many data center and solar lease opportunities you had out there. And if you wanted to provide some high level thoughts on what the potential revenue impact could be from, you know, either a single deal or from all the opportunities you see.
spk03: Yeah, Kevin. So we've we've roughly identified, you know, five to six right off the bat from a data center standpoint. As far as you think about solar, one of our one of the first data centers that we're focused on would be co-located with a with a large solar development, roughly 250 megawatts. As we think about, you know, the new acquisition, you know, obviously we just closed in May, and so we're still exploring a ton of opportunities. There's a lot of again, like I said, a really a blank canvas of opportunity. both for solar and for wind. So, you know, the ability to have those co-located with some of these data center opportunities seems to be a good win for the hyperscalers.
spk05: Yeah, I mean, on the economic side, you know, we obviously mentioned the upfront payment and the earnings release. You know, I think this initial opportunity we're working through as we kind of refine the terms and the details is is really going to help inform us, to call it the range of economic opportunities and impact on Lambert. I'll say it's something that we're very excited about. It's something we think that will be meaningful, but it's too early to really throw out any numbers at this point. in a responsible way. So again, you know, we're looking forward to circling back to y'all, to the market, and kind of talking in a bit more detail when the time is right, which we don't think is too far down the road. But we do want to have things firmed up a bit more before we start discussing economics.
spk06: Yeah, sure. That makes sense. And then as a follow-up question, just given the success of the IPO and the subsequent trading, you know, does that change anything on your M&A strategy? Are there any more opportunities that are arising from or increased interest from your side to get bigger?
spk05: Yeah, I mean, we're always evaluating M&A opportunities. You know, I would say just as a general rule, we're not going to really talk to anything in particular until it's far enough along where we've got, you know, a meaningful amount of confidence in it. But just taking a step back and I think addressing your question, more high-level M&A ideology is Um, you know, ultimately the answer is, is, you know, we're going to continue to define opportunities that make sense. And, um, you know, we've said, you know, previously that we're really focused on ensuring we're not going out and executing on M&A that would cannibalize, you know, the existing opportunity set that exists on our surface today. And that's something we remain highly focused on. Now, you know, there are smaller tuck-in and bolt-on opportunities where the economics make all the sense in the world. Um, much smaller denominations but i'll say you know our desire to pursue those really aren't driven or impacted necessarily by where we're trading um you know ultimately our underwriting criteria haven't you know hasn't shifted as a result of where we're trading um you know we're ultimately really focused on making sure that we find a creative deals that generate meaningful free cash flow um and free cash flow growth for our company and that's going to continue to be the focus going forward all right thank you for the answers and congratulations on the success so far
spk06: Yeah, thanks, Kevin. Appreciate it.
spk08: We'll move next to Roger Reed at Wells Fargo.
spk01: Yeah, good morning, and welcome to the world of public companies and quarterly earnings calls. Thanks, Kevin. Let me kind of change tack a little bit with some of the guys. Surface, you know, you have obviously SandSales, Access, things like that. Just curious. you know, from where you were at the time of the most recent acquisition to what you see now looking forward on that front?
spk05: Yeah, I guess I want to make sure I understand the question. Are you talking about the opportunity set or what are you addressing exactly there?
spk01: Yeah, if anything has changed, I guess, you know, looks a little better, looks a little clearer as we think about just the surface access, right? Whether it's roads, whether it's pipes, whether it's, you know, sand, sails, something along those lines?
spk05: Yeah, I mean, I think, you know, with the addition of the state line ranch and these other acquisitions, just having access to more of that contiguous surface, particularly along the state line, just makes, call it our strategy, I don't want to say that much easier to execute, but it allows us to deploy so much in the way of both surface and resources to the industry and the region. And so, you know, it was interesting timing because we closed that acquisition kind of mid Q2 and obviously kind of parlayed that straight into the IPO. So I think a lot of the players and the customers that we interact with, you know, kind of caught wind of what it is we did kind of through the IPO process. And so we're getting a lot of inbounds now. You know, as I mentioned earlier, you know, commercial traction, you know, both on the water bridge side, but just, you know, more broadly on the land bridge side, you know, I think continues to outpace our initial expectations, which is a great problem to have. And I mean, and that I think is, again, a good reflection of, of the asset that we have, you know, and the recognition of the value of that asset. And so, you know, the full call it opportunity set that you laid out there continues to be very, very, I call it interesting for folks in the industry and something that they're very focused on, you know, thinking through again, you know, assets that had been historically underutilized and are now available. And so it's all kind of, you know, good news in that camp. You know, really no call it headwinds from a surface perspective. You know, we continue to see a lot of interest, and we expect to see a lot of growth as a result.
spk01: That sounds great. One other question I had for you, this is on the, I guess, produced water side of it. We've noted several companies on the E&P side have, you know, done a little bit better on the OPEX side, and some of this is even in Marcellus, so I know it's not you or your opportunity suite, but some of them are also Permian guys. that they've been able to lower some of their LOE by getting better on handling water. And I was just curious, you know, if you kind of look at, you know, let's call it not industry best practice versus what you offer, kind of, you know, if you think of the high cost of disposal of water versus what you offer and what sort of opportunity that maybe even builds a greater growth possibility for you than what's sort of baked into the current numbers.
spk05: yeah you know it's a it's an interesting question i think it's one that really points to the water handling industry um you know in the delaware and how that you know subsequently flows through to land bridge i mean the you know i would say the evolution of water handling over the last call it six to eight years in the delaware um has really reflected a shift of folks doing it largely in-house to to looking at folks externally whether it's you know waterbridge ngl eris or one of the other peers that are out there and so I think producers have found that's generally more cost-effective, particularly given the volumetric profile of water as it relates to upstream development in the Delaware, maybe compared to some other basins. But how that ultimately flows through for land bridges, we continue to see the Permian in the Delaware in particular getting an outsized piece of the commodity growth here in the near term. it's just going to drive meaningful increases in water handling capacity and infrastructure to accommodate that growth. And as we've kind of discussed in the past and we have in our material, one of the big core tenets of the investment thesis here was buying the surface along the state line that has kind of meaningfully underutilized pore space subsurface to accommodate that water handling infrastructure. And so All of these call it tailwinds for us and the dynamic around upstream producers continuing to lean on third-party water handling companies to accommodate the water needs for their growth here in the Delaware, I think all plays out very, very well for Lambridge. It's going to result, I think, in more infrastructure being built very quickly on Lambridge, and that's ultimately going to play out for us in terms of surface use revenues and damage payments, also in produced water royalties. So it's all very good momentum kind of where we sit at the moment.
spk08: We'll take our final question from Lawrence Goldstein at Santa Monica Partners.
spk00: We haven't met yet, but I believe I'm the second oldest shareholder of TPL, having purchased it when I was about 13 years old, which was 75 years ago. but I'm not the oldest. Warren Buffett told me he, too, bought when he was 13, and he's older than I. He never bought again, which is the oddest thing for that gentleman. I did over the years, and that, of course, led me to investors who have purchased a great deal of TPL and a great deal of land bridge and I'm just interested the question is all seem to be focused on whether you're going to have a data center this year a deal for one or not what I'm interested in being a long-term investor and my investment partnership which is 42 years old makes nothing but long-term investments what I'm interested in is When this company was put together and you had your dreams, if you just go out 10 years from now, it's now 2034, what would you hope that the profit and loss statement would be looking like?
spk05: Good morning, sir. Good to connect. I hope we can meet in person and congratulations on your TPL acquisition. Yeah, that's quite the whole. I'm sure it's doing fantastic for you. Yeah, it's a good question. You know, I think as we think through the near to medium term evolution of the company, you know, I'll start with the water side and I'll move to the data center side and I can kind of aggregate it here. Over the next few years, I think the water is going to be a big piece of the story. We've talked to the pore space, the subsurface, and its ability to accommodate at least another three and a half to four million barrels a day of water handling capacity. When you think through what does that mean from an economic perspective, each million barrels a day of water handling capacity uh calculates to 40 to 60 million dollars a year of free cash flow and so you know there's there's pretty clear runway with just where we're at today with no m a to add another call roughly 200 million of free cash flow just through the water handling side um now you look kind of a few years out to kind of that 10-year point like you mentioned um you know i think we start seeing other opportunities like solar like that solar like data centers um you know a lot of these other non-oil and gas infrastructure plays really start to take advantages take advantage of the benefits of West Texas. And that's cheap power, that's fiber accessibility, that's large contiguous blocks of land. There's just a lot commercially that Texas has to offer that's going to be challenging to find other landscapes in the U.S. to compete with. And so You know, we could see, you know, just the data center and kind of the auxiliary opportunities that come with that add, you know, another couple hundred million dollars in free cash flow as well. And so I don't want to put, you know, call it discrete numbers against discrete years and get myself into a bind here. But, you know, I would say, you know, you could ultimately look at just orders and orders of magnitude of growth, you know, over the next decade very easily with the surface we have today. and just the opportunity set that we have today. And as you know, I'm sure being a long-term TPL shareholder, you know, there's just a lot of new opportunities that come out of the woodworks when you hold land like this that's not even being contemplated today. And, you know, we always like to point out the data center piece. You know, 12 to 18 months ago, we knew it was an option, but, you know, at the time, latency made Texas maybe not the best location. We've seen the evolution of that very quickly just over the last few quarters with the advent and rapid growth of AI, latency being less of an issue, and all of a sudden everyone's talking data centers in West Texas. It's tough to say what that next phase of evolution is going to be. That would just be additive to us. Again, I'm dancing around your question a bit because I don't want to give any firm numbers, but I would say the outlook is very, very promising. We've got the opportunity to grow both in the oil and gas space.
spk00: uh... you know particularly the water here in the near term but we're also very very focused on data centers solar wind and these non oil and gas infrastructure plays but i think in the more medium to long term is going to be a big piece of the story is the so is the solar uh... and uh... uh... wind going to be associated with the data centers uh... ie are you going to have uh... the uh... utility uh... the power as a separate operation, or does that go hand-in-hand with the data center? Obviously, data centers need that. And so we won't have one or the other. We'll have both. Yes? No?
spk03: No, yes. I think that's exactly right. I mean, the data center, the hyperscaler folks that are building these out would love to be able to check that box and have the code located, whether it's solar or wind, to have that alternative piece of power. Okay.
spk00: Okay, thank you. I look forward to meeting you one day. Yeah, thank you, sir. Appreciate it.
spk08: And that concludes our Q&A session. I will now turn the conference back over to Scott McNeely for closing remarks.
spk05: Yeah, thank you, operator, and thanks again for everyone joining today. You know, we're very excited about, you know, the initial performance of the business. We're obviously very excited about the opportunities that lay ahead for LandBridge going forward. You know, we want to be available to you all as a resource. Please feel free to reach out if there are any follow-up questions. But yeah, look forward to continuing to stay synced up. And, you know, we'll talk soon. Thank you. Thanks for your time.
spk08: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer