Texas Pacific Land Corporation

Good morning and welcome to Texas Pacific Land Corporation's fourth quarter 2021 earnings conference call. This conference call is being recorded, and at this time I'd like to introduce your host for today's call, Sean Amini, Vice President, Finance and Investor Relations. Sir, please go ahead.

Good morning. Thank you for joining us today for Texas Pacific Land Corporation's fourth quarter 2021 earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10-K with the Securities and Exchange Commission. These documents are available on the Investors section of the company's website at www.texaspecific.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 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 we at many times refer to our company by its stock ticker, TTL. This morning's conference call is hosted by TTL's Chief Executive Officer, Ty Glover, and Chief Financial Officer, Chris Tettum. Management will make some prepared comments, after which we will open the call for questions. Now, I will turn the call over to Ty.

I'm pleased to report that TPL finished 2021 in record fashion. The upward momentum we saw last quarter continued into the fourth quarter with consolidated adjusted EBITDA of $130 million and daily royalty production of 22,000 barrels of oil equivalent. Likewise, for full year 2021, this was the best year in our company history by almost any measure. Reflecting back on 2021, the year began with a lot of uncertainty on how the pandemic would turn out. Domestic and global demand for oil products were still far below pre-pandemic levels. Oil prices were below $50 and natural gas under $250, levels I'm not sure anyone in the industry was excited about. The TPL had navigated through the worst of the volatility of 2020, and so we entered 2021 hopeful for a better year. As the year progressed, the global economy and commodity markets did experience some volatility, but overall they continued an upward trend. By mid-year, we had $70 oil and $4 natural gas, and the industry, particularly in the Permian, seemed to find some solid footing. Our source water sales, which are a leading indicator of activity, started to noticeably pick up. You can see rig counts and frack crews also tick up week by week, and our regular discussions with operators reaffirmed that activity would be supportive of permanent production. While the first half of 2021 could be characterized as slow but steady, the second half of the year is when activity started to ramp up, especially on DPL acreage, propelling full-year 2021 royalty production growth 15% compared to full-year 2020 production. Commodity prices also steadily improved throughout 2021, with TPL's full year 2021 all-in average commodity price realization over 80% higher than 2020 realization. Because TPL was completely unhedged for the entirety of the year, we were able to fully benefit from higher commodity prices. The combined impact of higher production and higher commodity prices resulted in TPL's oil and gas royalties more than doubling in 2021 compared to the prior year. Our non-oil and gas royalty revenue stream also saw meaningful growth in 2021. Sourced water and produced water royalties had year-over-year revenue growth of 24 and 15%, respectively. Our easements and surface-related income was down modestly year-over-year as producers continued to focus development around existing infrastructure and continued to draw down ducts. In aggregate, our non-oil and gas royalty activities generated $164 million of revenue during 2021. In summary, TPL's consolidated 2021 revenues of $451 million were 49% higher than the prior year. Our 2021 total operating expenses only increased by 4% versus 2020, and as a result, the majority of revenue growth dropped to our bottom line. Looking ahead, we hope to carry the momentum from the second half of 2021 into 2022. current commodity prices at levels that we haven't seen in nearly a decade, we see continued strong permian development activity, including strong completion numbers on our gassy-loving northern reeves and Culberson acreage. We've also seen strong permitting, drilling, and completion activities on our Midland Basin footprint. In particular, the Midland royalty interest that we've acquired over the last few years are seeing strong operator activity. gross well completions on acquired royalty interest exceeding PPL's legacy mid-lending PRIs. In the Delaware, overall operator development seems to be a bit more skewed towards the New Mexico side, so activity on our Texas Northern Delaware footprint remains solid. For source water, the strong sales volumes we saw through the second half of 2021 have persisted into 2022. Operators continue to drill longer laterals and are deploying more simulfracs and zipperfracs. These accelerated completion techniques require millions of barrels of water delivered over the course of just a few days. These types of completion methods benefit TPL as our extensive source water infrastructure can accommodate the most demanding operators. On the produced water side, we continue to generate high margin and stable revenue streams. Our produce water volumes have moderated somewhat recently as we see producers focus heavily on the New Mexico side of the northern Delaware. We expect produce water volumes to grow as we are still seeing healthy development activity across both our Delaware and Midland surface acreage. Turning to surface leases, easements, and materials, which we refer to as SLIM, part of the business has been the slowest to recover from pre-pandemic levels as producers continue to draw down doves, focused development around existing infrastructure which has reduced surface revenue opportunities we continue to see duct drawdowns at a pretty healthy clip as producers continue to add more rigs and as pad development extends beyond existing infrastructure revenue opportunities for slim should increase we also continue to work hard on next-gen opportunities This past January, we executed an agreement with Texas A&M AgriLife Extension to begin assessing and eventually implementing soil carbon sequestration opportunities across a few land plots spanning approximately 20,000 acres. Our goal with this project is to generate authenticated carbon credit we can then use to offset our own Scope 1 and Scope 2 emissions or also potentially monetize. We continue to work on many other next-gen opportunities, and we hope to share more updates in the near future. On capital allocation, our board raised our base dividend by a quarter to $3 per share. More broadly, our capital allocation priorities are still predicated on long-term value creation, and we continue to see attractive acquisition opportunities in the market. There are a number of structural factors that are motivating sellers, which include upstream public valuations and significant discounts to historic levels, institutional capital drying up for legacy oil and gas assets, and zero mandates driving asset portfolio reduction, and increasing legislative and regulatory uncertainty and complexity. With our exceptional legacy asset base, our ability to manage royalties and surface, our strong balance sheet, and attractive cost of capital, we're in a uniquely advantaged position to purchase assets at attractive prices. All that said, we won't be underwriting acquisitions with a near-term or long-term $90 rollback. We remain disciplined and focused. We are trying to grow for the sake of growth itself. Rather, we want to add more royalty production, more free cash flow, more surface, more next-gen cash flows on a per-share basis, on a near-term and long-term basis. Our stock price continues to be dislocated while underlying fundamentals remain strong, and DPL retains a lot of flexibility to execute buybacks, dividends, and possibly special dividends. A capital allocation strategy is agnostic across methods. We will pursue those strategies that will add the most long-term value for shareholders. So if that means buying back stock, then we will buy back a lot of stock. If that means increasing our dividend, we can increase our regular dividend and issue special dividends. Finally, I wanted to spend some time talking about the seismicity issues in the Permian and recent regulatory action. As many are aware, Texas and New Mexico regulators have established certain seismic response areas, or otherwise referred to as SRAs, to outline regions experiencing an increase in seismic activity. Seismic activity in these areas has been attributed in part to saltwater disposal wells, otherwise known as SWDs. In short, it's generally understood that disposing of produced water in deep subsurface zones along pre-existing faults is likely instigating seismic activity. Thus, the primary attention for regulators and the industry is to try and limit SWD injection rates within these sensitive areas. So far, there have been two SRAs in Midland and one in the Delaware imposed by the Texas Railroad Commission. Only the Delaware SRA that spans northern Culberson and Reeves Counties overlaps with TPL surface acreage. Regulators here have requested that operators limit daily downhole injection volumes, and operators have generally been able to accommodate these limits without much disruption to ongoing development and production activities. Specific to TPL, the Culberson Reeves SRA covers a fraction of the SWDs located on TPL surface. Over the years, we've been deliberate in spacing SWDs throughout our surface footprint As a reminder, PPL does not own or operate disposal wells or related SWD infrastructure. Rather, our produced water royalties are derived and governed by previously negotiated long-term contracts. Most of these contracts are acreage dedications covering around 450,000 acres where PPL generates a fee for produced water that is stored directly on or travels across our land. Even if a specific disposal well on or near TPL surface gets shut down, as long as that diverted water crosses our checkerboarded surface footprint to another well on or off the TPL surface, we will continue to generate a royalty fee. With this contract structure, no matter what happens to produce water, whether it's stored, transported across, treated, or reused, TPL will generate a fee. It was clear to us years ago that Delaware's high water cuts would likely necessitate multiple solutions as development increased, and our contracts were designed specifically with this in mind, allowing TPL to participate in the value chain regardless of outcome. Longer term, if SWDs or areas adjacent to our surface footprint get shut down or restricted from accepting incremental produce water volumes, water that ends up crossing TPL's surface to access nearby disposal wells or infrastructure will have to pay us a fee. We believe that longer term our produced water royalties will ultimately benefit given that we can provide logistical solution flexibility across a vast surface footprint. We've already held many discussions with upstream and midstream operators on this issue and I can assure you that the industry is committed to finding a sustainable resolution We're not just seeking ways to deal with current produce water volumes, either much of the efforts are also focused on how to proactively implement longer-term best practices to accommodate future development. Though it's still early, solutions are likely to entail a mix of options, such as perhaps storing produce water in shallower geologic zones, taking greater care to space SWDs further apart, and more recycling. We're also actively looking at options beyond just downhole injection that would involve new technologies geared towards reuse and repurposing. Fortunately for us, our surface footprint and vertically integrated model allows us to explore every available option, and we can help facilitate and execute on those solutions for the benefit of all stakeholders. With that, I'll turn the call over to Chris to discuss our 2021 fourth quarter and year-end financial results.