Q1 2021 Texas Pacific Land Corp Earnings Call
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Good morning, and welcome to Texas specific 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. Christian <unk>, 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 specific 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 Dot, Texas Pacific Dot 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.
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 earnings release and SEC filings. Please also note. We may at times referred to are accompanied by a stock ticker T. P. L.
This mornings conference call is hosted by <unk>, 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 <unk> and then.
And 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 specific was formed as a trust and 18 88 to manage the checkerboard and land assets of the former Texas and Pacific Railway Company.
We have been listed on the New York Stock Exchange since 1927, and and the first quarter of 2021, we completed our reorganization from a trust to a corporation.
Today, we own over 880000 acres across 19 counties and Western Texas with a majority located within the Permian Basin.
We are very unique and that although we are a pure play Permian focused company, we are not and oil producer or exploration company.
Either we have three core revenue streams oil and gas royalties surface management and water solutions.
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 and the form of our vast and largely undeveloped royalty acreage and our core surface positioning and our sizable market share and the sourcing and produced water aspect of our water solutions business.
We'll walk through each of these three core revenue streams and turn.
Our oil and gas royalties accounted for 59% of our revenues and the first quarter.
We own approximately 530000 gross royalty acres with the vast majority leased for oil and gas development, which entitles <unk> to a certain percentage of revenue interest based on oil and gas production.
Our average royalty per acre is four 4%, which translates to about 23007 hundred net royalty acres on and eight eight spaces are 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 had been highly supportive for royalties with daily average well production up 150% from 2018 through 2020.
At March 31, 2021, Texas specific at a robust inventory of 541 drilled, but uncompleted wells or ducks, and 488 permits providing clear visibility into future royalty earnings.
<unk> grew from 91, and the fourth quarter to 152, new docs and the first quarter, providing line of sight into future production.
New permits grew from 139, and the fourth quarter to 176 and the first quarter.
As of March 31, 17% of all Permian rigs were located on TPS drilling spacing units or <unk> up from 11% of Permian rigs as of December 31.
In terms of spud count and <unk> accounted for 18% of total spuds across the Permian during the first quarter.
14% of all permits approved by the Texas Railroad Commission and the first quarter intersect <unk>.
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 <unk>.
Overall, our oil and gas royalties are only 10% developed with the Delaware basin being less developed and the Midland Basin.
Within the Texas portion of the Delaware PPL 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 and exploration and development and 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 PPO enormous optionality to generate additional cash flows utilizing our surface assets.
We call. This part of our business S. L E M or slim, which stands for surface leases easements and material sales.
We are and income from uses ranging from easements for pipelines and power lines and utilities agriculture wind farms access roads material sales and various other infrastructure projects.
Most of our service revenues come from pipeline infrastructure, demonstrating our ability to capture value all along and 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 and Houston construction for energy companies and textile 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 and the first quarter, 64% were for upstream activities and 36% were for midstream further demonstrating our diversification along the value chain.
Selim accounted for 10% of our revenues and 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 practice water sourcing and disposal and treatment solutions, which are essential to oil and gas development.
A major barrier for other water companies and the Permian is highly fragmented landownership, which limits their ability to move around.
Often need to negotiate agreements with multiple landowners for pipeline right of way to transport, our product to a desired and user significantly increasing their cost per barrel.
Texas specific is unique that we own strategically located surface assets, allowing us to provide water services without meeting 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 Stateline and ownership also play a crucial role in capturing and produced water volumes, although TPS and does not operate any saltwater disposal wells, we have agreements covering over 460000 acres within Texas, where the characteristics and Delaware bedrock produce a high water to oil ratio.
These long term contracts combined with volume stemming from new Mexico, and provide immediate revenue with tremendous upside from future development.
Our contracts are structured so that PPL has paid a fixed fee per barrel royalty for produced water being disposed off on tcl land or for produced water being transported across PPL surface.
These factors enable us to capture a large market share and 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 enabled 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.
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 capitalized 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 continued to generate positive operating results and in fact 2020 was our second largest revenue year and the Companys history.
I think this highlights the premium quality of our assets.
First we're diversified and while our royalties are tied to oil prices were also anchored by steady cash flows from multiple business activities.
Second we have no debt and many of the energy companies that ran into trouble last year and at similar points in past cycles, where 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 are even better positioned to capitalize on the oil and gas recovery that is now taking place and.
First quarter oil price has returned to $60 per barrel.
As I mentioned, we have and inventory of 541 Ducks 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 impacts of the winter storm in February.
First and foremost our thoughts go out and all of those who are still dealing with the long term effects of the storm.
And PPO, we were fortunate to be and are positioned to help support the energy grid at a time of high strength.
As I mentioned before we have some wind energy exposure within our slim business that active 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 recognized higher than average slim revenue from our wind leases.
The storm was more impactful to our water business, where our downtime was $10 five days or about 12% of the quarter.
We Fortunately had preventative steps in place well ahead of the storm, including emergency protocols winter innovation 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 specific water resources was the final remaining source of water for producers and the northern Delaware as the storm hit and the first to resume production.
And 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 interest of management the board and shareholders and 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 and we are engaged and implementing a formal environmental social and governance policy later this year.
We look forward to discussing our ESG efforts and future messages.
Looking ahead, we are focused on increasing efficiencies and our existing business lines and continuing to grow our market share we.
We may also take advantage of opportunities for bolt on acquisitions that align with our core revenue streams.
Noted while E&P is dominated by larger players we operate within a highly fragmented segment of the pardon me and 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.
And now I'll turn it over to Robert to discuss our financials.
Thank you Todd beginning.
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.
This compares to 57 4 million and net income are $7 46 per sub share certificate and the same quarter at the prior year, a decrease of $7 3 million or <unk> 95 per share for clarity when the reorganization was completed in January of this year.
Converted the 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 and water sales revenue, which I'll detail shortly.
This decrease and water sales revenue was partially offset by an increase of $7 2 million and.
And oil and gas royalty revenue and the first quarter of 2021 compared to first quarter of 2020 now.
And now moving to revenue detail.
Total revenue for the first quarter of 2021 was $84 2 million.
Compared to $96 6 million for the same quarter last year.
Oil and gas royalty revenue increased 16, 9% to $49 5 million as compared to the prior year. This increase was due to an $8 8 million increase and gas royalty revenue, primarily driven by a 121% increase.
And the average realized price and the first quarter of 2021 as compared to first quarter of 2020.
Water sales revenue was $13 million and the first quarter of 2021 down from $27 million and the prior year.
This decrease was primarily due to and approximately 41% decrease and the number of sourced and treated barrels of water sold and the first quarter of 2021 as compared to a record level of sales and the first quarter of 2020.
This is a direct result of the decreased pace of development employed by operators as they manage their capital allocation. Following the onset of COVID-19, and the disruption caused by OPEC plus decisions and the first quarter of last year per.
Reduced water royalty revenue was $12 5 million for first quarter of 2021 and 2020.
Please note that beginning this quarter produced water royalties are shown on a separate line on the income statement to give clarity to the readers of our financials. They were previously included and the easements and other surface related revenue line item.
Produced water royalties were impacted by the winter storm with February volume is down 27% compared to January.
<unk> and other surface related revenue was $9 million down from $13 8 million and the prior year quarter. This was primarily due to a decrease and pipeline easement income of $4 9 million, which is again related to the decreased pace of development and first quarter 2020.
And one compared to first quarter of 2020.
The decrease was partially offset by a $2 million increase and wind revenue year over year as a result of the higher electrical rates during the winter storm.
Moving to the expense side, our largest cost savings, where oil and water service related expenses, which were $3 $3 million down from $6 8 million and the prior year's quarter. A decrease of 51, 4%. This decrease was primarily a result of the lower water sales.
<unk> previously discussed in addition, we continue to see cost savings due to our capital spend on electrifying, our water sourcing infrastructure the.
And the use of electricity in lieu of diesel power generators reduces cost for equipment rental fuel and maintenance and repairs.
Salary and related employee expenses were $10 million down from $10 6 million and the prior year.
G&A expenses were $2 $8 million down from $3 million and the same quarter last year.
These contributed to a total reduction in operating expenses from $26 1 million and the first quarter of 2020 to $22 1 million and the first quarter of 2021.
Lastly, cash flow from operating activities for the first quarter was $52 $4 million and.
Now turning to our balance sheet.
And as of the end of the first quarter, we had $310 $7 million of cash and cash equivalents and increase of $29 6 million premiere and 2020, we continue to carry no debt as time mentioned previously we did not purchase or sell any land or oil and gas.
Royalty interest and the first quarter.
And the first quarter of 2021, we invested $2 7 million and capital to maintain and enhance our water sourcing assets as discussed previously the bulk of the investment was on electrifying, our water sourcing infrastructure to further reduce our water sourcing and transportation.
And cost <unk>.
Looking forward for the balance of 2021, we anticipate spending an additional $7 million to $9 million of capital on our water sourcing infrastructure.
With regard to the dividend for the first quarter. Our board has declared a cash dividend of $2 75 per common share payable on June 15 to shareholders of record as of June eight.
Our board will continue to evaluate additional dividends and the future.
We did not repurchase any common stock and the first quarter. However on May <unk>, Our board of directors approved a stock repurchase program to purchase up to an aggregate of $20 million of our outstanding stock through December 31, 2021, we plan to enter into a <unk>.
<unk> one trading plan that would generally permit the company to repurchase shares at times when it might otherwise be prevented from doing so under securities laws and.
In conclusion, we will continue to evaluate our options and be disciplined and our capital decisions in order to maximize shareholder value through distributions share repurchases and select investment activity now back to Todd.
Thanks Robert.
Before we go to Q&A I want to conclude by thanking Robert for his years of outstanding service to TPS CFO as previously announced and Robert will retire at the end of May and will be succeeded by Chris <unk>, 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.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue. You may price starts to try and move your question from the queue and participants using speaker equipment and may be necessary for you to pick up.
And your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Derrick Whitfield with Stifel. You May proceed with your question.
Hi, good morning, all and congrats on a strong quarter and update and that's certainly a nice start for your first call.
Thanks Derek.
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.
Yeah, Hey, Eric This is Ty thanks for the question.
To give you a little bit of color on that <unk> increased the dividend consistently over the last 17 plus years.
And we've paid a dividend much longer than that.
And 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.
Okay and.
My follow up and.
And perhaps focusing with you type 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 east to assess such opportunities.
Yes for sure.
I mean look we're definitely going to evaluate assets across all of our revenue streams oil and gas royalties. The swim business. The water company I think theres going to be opportunities across all three of those I mean, ultimately we're focused on core Permian assets.
We want exposure to tier one operators, because we feel like those assets performed best through the cycle.
Our focus is on assets that have good visibility to development timing and fit and well with our existing portfolio of high quality Permian assets.
And historically, we've 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.
Going to remain opportunistic and stay very patient and disciplined.
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.
<unk>.
Hey, Derek 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 February storm, and probably slowed down a little bit.
But if you kind of think about our DUC inventory, which is a little bit above 500 docs.
Certainly is enough to get you through the end of the year at that pace. If the operators wanted to continue.
And the <unk> point, when you think about the permitting pace I think we saw something like a 170 new permits over the.
Of 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.
And good visibility for them to continue on kind of the.
And the pace that we saw at the end of last year.
Okay, Great and then as my final question really more housekeeping in nature.
Would you offer your production split by product for Q1 and comment on the winter storm impact on royalty production.
Yeah sure Derik 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.
And tie it said in his prepared remarks for February.
For most of the operators I think five to six days of downtime and in terms of production is kind of the what we've tended to see.
If you look at our produced water royalties as another good analogue.
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 thats, probably what expectations should be for February.
That's great. Thanks for your time and thoughtful responses.
Thanks, Derek Thanks, Derrick Thank you.
Our next question comes from the line of Chris Baker with Credit Suisse. You May proceed with your question.
Hey, good morning, guys and thanks for hosting the call.
And they're covered most of it but I was just hoping that since this is the first public call you could reflect a bit on the.
And the different pieces of the portfolio.
And how they performed last year.
Given 2020 was pretty challenging, but just any color around.
And the different moving pieces there would be helpful.
Yes.
As I mentioned this as tight as I mentioned earlier.
2020 was actually our second best year, and the Companys 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.
And 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 and February I think just.
A lot of the hidden value and PPL and the natural hedges that are built into the business are a huge highlights and competitive advantage for PPL over some of the others and the industry.
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.
Relative to E&ps at least from my view.
<unk> and scope one emissions is pretty clear differentiator, but just wondering how you guys are thinking about that potential opportunity.
Opportunity.
Yes look again this is ty.
I mean, we see it as a big opportunity for us.
We're very excited about it.
The reduction and flaring that we've seen.
As a percentage of our production.
With the infrastructure that we've helped plan and get built out on our property has.
And 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 Jim.
As you increase that relationship.
So again I look forward to.
And so getting that message out there and and Super excited about it.
Great. Thanks.
Thanks, guys.
Thank you thank.
Thank you.
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.
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