Texas Pacific Land Corporation

Good morning and welcome to Texas Pacific Lands 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 Stedham, Vice President, Finance and Investor Relations. Please go ahead, sir. Thank you. You may begin.

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 Investor 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 risk 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 the call, we will also be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earning release and SEC filings. Please also note we may at times refer to our company by its stock ticker, TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Ty Glover, and Chief Financial Officer, Robert Packer. Management will make some prepared comments, after which we will open up the call for questions. Now, I will turn the call over to Ty.

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 Packard, to discuss our financial results in more detail. Texas Pacific was formed as a trust in 1888 to manage the checkerboarded 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 a majority located within the Permian Basin. We are very unique in 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 solutions. And our customers include nearly every major EMP 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 and 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 an eight-eighths basis. Our oil and gas royalties are perpetual real property rights that require no capital expenditure from us for continued development, making this a very high margin business. Fundamental trends in the Permian have been highly supportive for royalties, with daily average well production of 150% from 2018 through 2020. At March 31st, 2021, Texas Pacific had a robust inventory of 541 drilled but uncompleted wells, or ducts, and 488 permits, providing clear visibility into future royalty earnings. New ducts grew from 91 in the fourth quarter to 152 new ducts in the first quarter, providing line of sight into future production. New permits grew from 139 in the fourth quarter to 176 in the first quarter, As of March 31st, 17% of all Permian rigs were located on TPL drilling spacing units, or DSUs, up from 11% of Permian rigs as of December 31st. In terms of spud count, TPL DSUs accounted for 18% of total spuds across the Permian during the first quarter. 14% of all permits approved by the Texas Railroad Commission in the first quarter intersect TPL DSUs. Importantly, most of our net royalty acres are concentrated within the northern Delaware region and core of the Midland Basin. This diverse exposure represents a significant competitive advantage for TPL. Overall, our oil and gas royalties are only 10% developed, with the Delaware Basin being less developed than the Midland Basin. Within the Texas portion of the Delaware, TPL accounted for 49% of all SPUDs during the first quarter. We believe this gives us more runway to grow our royalties over time compared to our peers, as the Delaware should continue to support a high pace of growth and production. In addition to our oil and gas royalties, we also have surface ownership of our land. Over the past decade, technological advances in exploration and development have unlocked a tremendous amount of additional reserves, contributing to a rapid build out of oil and gas infrastructure across the basin. These activities and others provide TPO enormous optionality to generate additional cash flows utilizing our surface assets. We call this part of our business SLEM, or SLIM, which stands for Surface Leases, Easements, and Material Sales. We earn income from uses ranging from easements for pipelines, power lines, and utilities, agriculture, wind farms, access roads, material sales, and various other infrastructure projects. Most of our surface revenues come from pipeline infrastructure, demonstrating our ability to capture value all along the oil and gas supply chain from production to midstream. Surface leases and easements are typically 30-plus year contracts with recurring payments every 10 years, providing stable cash flows along with escalated renewal fees. Our material sales primarily consist of caliche, which is calcium carbonate used in construction for energy companies and TxDOT infrastructure development. This is another way in which we provide services to the operators beyond just land, helping to relieve their pressure points and further solidify our customer relationships. Out of our SLIM contracts in the first quarter, 64% were for upstream activities and 36% were for midstream, further demonstrating our diversification along the value chain. SLIM accounted for 10% of our revenues in the first quarter of 2021, with renewable energy revenue acting as a hedge against the Texas winter storm as our wind revenue increased $2 million from Q4 2020 due to increased pricing. Similar to our royalties business, SLIM can achieve organic cash flow growth through new leasing without any additional capital or operating expenditures, meaning margins are effectively 100%. Lastly, our water solutions business accounted for 31% of first quarter revenues. We provide brackish water sourcing and disposal and treatment solutions, which are essential to oil and gas development. A major barrier for other water companies in the Permian is highly fragmented land ownership, which limits their ability to move around. They often need to negotiate agreements with multiple landowners for pipeline right of way to transport their product to a desired end user, significantly increasing their cost per barrel. Texas Pacific is unique that we own strategically located surface assets, allowing us to provide water services without needing costly leases to transport our product and the ability to move water across the vast majority of the northern Delaware basin. In addition, our surface assets, with emphasis on our state line ownership, also play a crucial role in capturing produced water volumes. Although TPL does not operate any saltwater disposal wells, we have agreements covering over 460,000 acres within Texas where the characteristics of Delaware bedrock produce a high water to oil ratio. These long-term contracts, combined with volume stemming from New Mexico, provide immediate revenue with tremendous upside from future development. Our contracts are structured so that TPL is paid a fixed fee per barrel royalty for produced water being disposed of on TPL land or for produced water being transported across TPL's surface. These factors enable us to capture a large market share in Permian water solutions at low cost, and we believe we can continue to grow our water business organically with limited CAPEX requirements. The water business also creates direct synergies with our oil and gas royalties and surface management business. As we continue to provide water solutions into areas where they were previously unavailable, we enable further development by operators, which in turn drives our royalties and SLIM revenue. This increased development drives more demand for water sourcing and disposal, continuing this virtuous cycle. To summarize, we believe there is no other company that provides the kind of differentiated exposure we provide to the Permian with low risk and low earnings volatility. We are diversified across multiple revenue streams. Our customers include numerous blue chip energy operators. We have exceptionally low capital requirements across our high margin businesses, and we operate at a scale that gives us significant cost efficiencies. We capitalize on all stages of the development process from exploration and production to midstream, and the synergies among our business lines will help drive further organic growth. Next, I'll discuss our recent performance and outlook. Robert will go into details shortly, but I'll provide a few high level thoughts. Oil and gas markets have continued to normalize after the volatility brought on by COVID-19. Through it all, we continue to generate positive operating results, and in fact, 2020 was our second largest revenue year in the company's history. I think this highlights the premium quality of our assets. First, we're diversified. While our royalties are tied to oil prices, we're also anchored by steady cash flows from multiple business activities. Second, we have no debt. Many of the energy companies that ran into trouble last year and at similar points in past cycles were over-levered. We enjoy high margins and have minimal capital needs in order to generate organic growth, and we continue to benefit from our pristine balance sheet. The result is that we're even better positioned to capitalize on the oil and gas recovery that is now taking place. In the first quarter, oil prices returned to $60 per barrel. As I mentioned, we have an inventory of 541 ducts and 488 permits, and current market fundamentals are supportive of getting those in-process wells converted into producing wells and contributing to our royalties. Next, I'd like to touch on the impact of the winter storm in February. First and foremost, our thoughts go out to all of those who are still dealing with the long-term effects of the storm. At TPL, we were fortunate to be in a position to help support the energy grid at a time of high stress. As I mentioned before, we have some wind energy exposure within our slim business that acted as a hedge against the disruption to production activity. But I'd like to focus on the steps we took to mitigate the storm's impact. On the royalty side, we had an estimated five to six days of production loss due to the storm or about 6% of the quarter. As mentioned, we recognize higher than average swim revenue from our wind leases. The storm was more impactful to our water business where our downtime was 10 and a half days or about 12% of the quarter. We fortunately had preventative steps in place well ahead of the storm, including emergency protocols, winterization efforts, and initiatives to protect our infrastructure. As a result, aside from the downtime, we did not incur material cost or damage to our assets from the storm. Texas Pacific Water Resources was the final remaining source of water for producers in the Northern Delaware as the storm hit and the first to resume production. In the first quarter, we are very pleased to have completed our reorganization from a trust to a corporation. We feel this enhanced corporate governance structure better aligns the interests of management, the board, and shareholders. It also allows us to become eligible for certain indexes, which opens us up to a broader base of investors. We view this as a starting point rather than a finish line for continuing to improve our corporate governance, and to that end, we are engaged in implementing a formal environmental, social, and governance policy later this year. We look forward to discussing our ESG efforts with you in future messages. Looking ahead, we are focused on increasing efficiencies in our existing business lines and continuing to grow our market share. We may also take advantage of opportunities for bolt-on acquisitions that align with our core revenue streams. As noted, while E&P is dominated by larger players, we operate within a highly fragmented segment of the Permian ecosystem. Historically, we have funded our acquisitions through our cash flow and we expect this to continue. However, at the end of the day, there is a tremendous amount of value embedded in this portfolio, and we do not need to chase acquisitions in order to achieve outsized growth. We will remain opportunistic, and we have extensive relationships across the Permian which provide us with unique visibility into M&A deal flow. Now, I will turn it over to Robert to discuss our financials. Thank you, Todd.