Texas Pacific Land Corporation

Pacific Land Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Amini, finance, and industrial relations. Thank you, Mr. Amini. You may begin.

Thank you for joining us today for Texas Pacific Land Corporation's third 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 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 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 we may have answered for 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 Bedham. Management will make some prepared comments, after which we will open the call for questions.

Now, I will turn the call over to Ty.

Good morning, everyone, and thank you for joining us today. TPL delivered another strong quarter driven by improving commodity prices and continued performance of our surface and water assets. Starting with oil and gas royalties, revenues increased 6% sequential quarter over quarter as lower royalty production was more than offset by higher oil, natural gas, and NGL prices. This past quarter, we've heard from operators that development activities were negatively impacted by infrastructure downtime and electricity challenges during the summer heat waves. With those issues having subsided and with some additional natural gas takeaway capacity coming online, we think infrastructure and logistics will be less of a constraint for development in the near term. For our surface leases, easements, and materials segment, which we refer to as SLIM, we continue to benefit from broad strength across our various endeavors there. In particular, pipeline easements have been robust, driven by expanding infrastructure development in the Permian. For source water, year-to-date revenues have already eclipsed what we did in all of 2022. Though down from our record sales volumes off the prior sequential quarter, third quarter 2023 source water sales volumes of approximately 545,000 barrels per day represent high utilization across our system. In particular, demand for treated water remains elevated, with this past quarter representing record revenues and volumes. On the produced water side, volumes have grown steadily, and quarterly revenues are up 9% year over year. Produced water volumes continue to grow across the Permian, of which TPL continues to capture a significant portion through our large AMI agreements across our surface. To give some additional visibility on TPL's production outlook, I wanted to take some time this morning to provide recent well development trends on our royalty acreage. Starting with our near-term well inventory, at the end of the third quarter 2023, TPL had 6.7 net permits, 7.9 net drilled but uncompleted wells, also referred to as DUPs, and 5.2 net completed wells. This near-term inventory totals 19.9 net wells, which represents a 29% increase from second quarter 2023 levels. Although we had relatively lower net new producing wells added in this most recent quarter, the higher balance of completed wells represents a level much higher than what we've generally seen historically. which gives some visibility into near-term production trends as those get turned to sales soon. For wells already turned to sales in 2023, the timing of completion to initial production has averaged around 20 days, which is significantly longer than prior year averages of approximately three to five days. We believe this timing delay is in large part attributable to more operators utilizing co-development strategies as more wells are fracked together within a pad and then those group of wells are collectively not turned to sales until after the last well has been completed. All else being equal, the effect of this is that the production contribution from new wells becomes lumpier in the short term. It's also worth noting that timing as permit to spud and spud to completion have compressed considerably in 2023 versus prior years. In total, for wells turned to sales in 2023, the average permit to production timing is approximately 10 months, whereas in 2022, it was approximately 11 months. In 2021, it was approximately 13 months. With respect to rigs, although rig counts in the overall Permian have declined by approximately 10% compared to last year, we've recently seen more rigs operating on TPL acreage. Last year at this time, we estimated that there were approximately 42 rigs operating on TPL acreage, whereas today we estimate we currently have more than 50 rigs. These rig totals align with our well data, with third quarter 2023 new spot activity right around record levels on a gross and net basis. In addition, new permit activity on our acreage is elevated, as third quarter 2023 represents a record for new permits, both on a gross and net basis. With a strong backlog of completed wells and inventory, high levels of ongoing new permits, accelerated development timing of converting permit to sales, and currently supportive oil and natural gas prices, those fundamentals and aggregate underpin what we believe to be constructive backdrop for development on TPL Royalty Acreage and the Permian more broadly. Of course, commodity prices can change and development schedules can evolve. But as we've shown before, TPL is well positioned to succeed through most any environment. Before concluding my remarks, I also wanted to mention that next week TPL will be hosting its 2023 Annual Meeting in Dallas. I want to remind and encourage shareholders to review the proxy materials, which you can find on our website and on the SEC website, and to submit votes. If anyone needs any assistance, please reach out to Investor Relations. With that, I'll turn the call over to Chris.

Thanks, Ty. Third quarter 2023 total consolidated revenue and net income were $158 million and $106 million, respectively. Total adjusted EBITDA was $141 million, which is 6% higher compared to the prior sequential quarter, and adjusted EBITDA margin was approximately 89%. During the quarter, the company benefited from higher commodity prices and lower operating expenses, though partially offset by lower royalty production and lower source water sales. Free cash flow was approximately $106 million, and we exited the quarter with approximately $660 million of cash on the balance sheet. Royalty production of approximately 21,800 barrels of oil equivalent per day represented a 12% decrease on a sequential quarter basis. Our realized price per barrel of oil equivalent increased 19% to approximately $45. Benchmark prices for each oil, gas, and NGLs each rose over the prior sequential quarter and our realizations relative to the benchmark prices also improved. For this quarter, we have maintained our $3.25 per share dividend. We also spent approximately $6 million to repurchase approximately 3,600 shares of our common stock. And with that, operator, we will now take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from the line of Derek Whitfield with Stufel. Please go ahead.

Good morning, all. Good morning, Derek. Good morning, Derek.

For my first question, I wanted to focus on your Q3 production and your 6- to 12-month production trajectory. Regarding the quarter, do you have a sense on the production impact split between elevated temperatures and brownouts versus delayed tills due to larger pad development? And secondarily, with the record amount of completion on line of sight inventory, as well as you have exiting the quarter, how should we think about the trajectory as we exit this year and into next?

Hey, Derek, will you repeat the first part of your question?

Sure. Just on the production impact for the quarter, you talked about in your prepared remarks there were elevated temperatures and brownouts, and then you also talked about some delayed tills due to larger pad development. I wanted to get a sense from you if you have a view on the split between those two categories.

I don't have the exact split, but I think we were probably more heavily impacted by the delay in tills just because we had a lot of mega pads this last quarter where we had quite a few wells being drilled from the same pad. And so, like I mentioned in my prepared remarks, what happens there is, you know, they wait until all of those wells are completed to bring them online. And so that makes the near-term production a little bit lumpier, and that's what we saw this quarter. You know, we did see, you know, some effects of the heat waves with some problems with electricity and some compressor stations going down. And I think you'll see some midstream operators talk about those issues as well this quarter. For the second part of that question, Chris, do you want to take that? Yeah.

So, you know, Derek, to your point, I think we have had a little bit of lumpiness in our production over the last couple quarters, really strong last quarter, down a little bit this quarter. And I think as we always say, I mean, our view is, you know, we want to look toward the long-term trend because, as Ty has mentioned, I think especially as you see some of these operators move, you know, these large pads, it's going to introduce a little more volatility in the production quarter to quarter. But I think, you know, in our view, nothing has really changed in how we think about long-term or let's say medium-term production. Everything still looks good. I think we still expect overall to see production growth in the coming year. You know, again, like we said, that really high amount of permits, the quicker turnaround of permits and ducts, All of those things continue to be positive indicators. And I think as some of these big paths get brought online and we get through some of those temperature issues and pipeline constraint issues, we're going to see that production come to market to the benefit of TPL.

Terrific. And then maybe shifting over to capital, could you comment on the surface acreage you sold and the importance of the disposal and groundwater rights you purchased?

Yeah, I'll take that one. The surface that we sold, so that acreage was in Culberson County. You know, so this is way out of like old and gas fairway rangeland that, you know, one big issue that it had was it had a conservation easement on it. So this is, acreage that wasn't part of the original land grant but that the company's owned for a while and so because of that conservation easement and because of the remoteness we just didn't see any commercial opportunities and so we had the opportunity to sell it to a local rancher and so that's kind of you know where we were at on that so Moving on to the pore space that we purchased, you know, we feel like pore space is just becoming more and more valuable as, you know, we see produced water volumes continue to grow in the basin. And then also looking at other uses of pore space, you know, carbon sequestration, things like that. We just feel like any time that we can add to our pore space inventory at attractive prices, then, you know, that's a really good opportunity and really good use for a capital.

That makes sense. And one last, if I could, during Q2, that was really a banner quarter for you guys in the water business based on the amount of off-lease activity you experienced. Could you offer any perspective on how much off-lease or how off-lease performed this quarter?

So really, I mean, right there, you know, in line with last quarter, definitely over half of our sales You know, we're off of our footprint. We also, you know, continue to see increases in our treatment. And so third quarter was no different. I think, you know, as far as volumes on the treatment side was a record quarter for us. And, you know, I would just mention, too, that I've talked about this a little bit in the past, but most of the produced water gathering infrastructure on our land, we have the exclusive right to take water off of that system. treat it and resell it. Through good contract structure, we're very well positioned to keep providing brackish water and or ramp up our treatment based on each operator's needs. We continue to grow further and further out of our footprint. The water team's done a really good job of contracting additional sales and expanding our footprint.

Very helpful. Thanks for your time. Thanks, Derek.

Thanks, Derek. Thank you. Next question comes from the line of Hamid Khorsand with BWS Financials. Please go ahead.

Hey, good morning. Just to follow up on this water topic, given production having declined this past quarter and how your customers or the land... leasers are operating. Would that imply that water sales could actually ramp up as you see these wells come online? It was just a delay factor?

So water sales is typically paralleled with completions activity. But I think, like Chris mentioned earlier, when you look at you know, the wells that have been recently spud in this last quarter and our permit count being up so high, I think that is definitely an indicator that there will be a lot of completions activity in the coming quarters, which is really good for water sales, you know, both on the brackish and treatment side, as well as the produced water side of the business, because once you get that flow back, that water's got to go somewhere. And so, again, To answer your question, the things that we've talked about on the call here are good indicators for future water revenue.

What's been the big contributor to the easement revenue line this year, and how tangible is it that it'll continue to stay with the business?

Probably the biggest contributors this year, especially over the last couple of quarters, have been pipeline easements and material sales. We're seeing a lot of infrastructure build out, a lot of gas gathering lines. We've had a nice ramp in transmission lines as well as new gas connects and facilities, compressor stations, things like that. And I think that's going to continue. We're seeing operators move further away from existing infrastructure and into new areas where there are requirements for new roads and gathering infrastructure and facilities. And that was one thing that we saw a little bit of a bottleneck on last quarter was there were some areas where wells were not turned in line because of a lack of infrastructure. And so the same operators that we talked to that, you know, gave us that feedback were the same operators that had a big ramp in easements for, you know, say like gas takeaway. And then on the material sales side, you know, we've expanded Colichi sales up into New Mexico, which has been a really nice bump for us. We've also got two of the sand mines that, uh, You know, we signed towards the end of the last year. They're actually active now, and we've seen a nice bump in sand royalties. I think we were just under a million dollars for sand royalties this last quarter. So that's progressing well. You know, we've got a couple of other sand leases that, you know, should be operational soon. And as we continue to expand our rock crushing activities and things like that, I think we'll continue to see strong, slim activity in the future.

Okay, great. Thank you. Thanks, Matt. Thanks, Matt.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.