Q2 2021 Texas Pacific Land Corp Earnings Call

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Greetings and welcome to Texas Pacific Land Corporation's second quarter 2021 earnings call. At this time, all participants are in a listen only mode.

On an 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 I would now like to turn the conference over to your host Sean anemia of Investor Relations.

Good morning, Thank you for joining us today for Texas, specifically Incorporations second 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 specific dotcom as <unk>.

Minder 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 so on 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 at times referred to on accompanied by a stock ticker GPL.

This mornings conference call is hosted by <unk>, Chief Executive Officer, Mike Glover, and Chief Financial Officer, Chris that.

Management will make some prepared comments after which we will open the call for questions now I will turn the call over to Ty.

Thanks, Sean and thank you everyone for joining us today I'll begin with an overview of our quarterly performance and then I'll turn it over to Chris to discuss our financial results in more detail.

Oil and gas royalties had a strong quarter supported by solid activity levels across the Permian basin and higher oil prices.

Production during the quarter averaged approximately 16400 barrels of oil equivalent per day, which is roughly flat sequentially from first quarter 2021.

In an effort to provide investors additional useful information PPL has disclosed 3 stream production and realized pricing figures and our recently filed 10-Q and earnings press release.

For second quarter 2021, our production mix was 46% oil, 31% natural gas and 23% natural gas liquids.

Our oil price realizations during the second quarter, 2021 average $65 per barrel, which was 18% higher compared to first quarter of 2021.

PCL does not carry any commodity price hedges during the most recent quarter. So we benefited fully from the oil price rally and we currently remain unhedged.

As of June 30th Defeo royalty inventory included 565, gross drilled, but uncompleted wells or dust and 474 gross permits.

From our vantage point producers remain disciplined, especially the publicly traded integrated and large independent.

Though not a pre COVID-19 activity levels. These producers still remain active in developing their leasehold and based on trends with new permits and does we think <unk> production in the second half of 2021 will be at least on par compared to first half 2021.

Next for our surface leases easements and materials sales or slim total revenues were about flat sequentially from the first quarter 2021.

We saw a nice uptick in pipeline easement and caliche sales during the second quarter, which generally reflects healthy Permian activity levels.

Turning to water produced water royalty revenues during the quarter were up over 20% sequentially from first quarter 2021, we benefited from a onetime catch up payment from a customer although excluding this benefit produced water revenues were still up nicely from last quarter.

Reduced water continues to provide stable high margin royalty cash flows without the direct exposure to commodity prices.

Our source water sales were roughly flat compared to the first quarter 2021 source water sales volumes were negatively impacted by 4 to 5 days of system downtime due to flash flooding.

PPL continues efforts to electrify, our water operations, and we expect to realize cost savings and reduce our emissions once completed.

Before I turn it over to Chris I'd like to summarize the uniqueness of our value proposition and the remarkable opportunity. We believe <unk> provides.

We call ourselves the ETF on the Permian basin, because we can benefit throughout the entire lifecycle of a well generating multiple cash flow streams through this value chain.

Generally before an operator begins development the first call us for easement surface leases and caliche. So they can start constructing and installing vital infrastructure.

As development progresses, we often supply of water that is necessary for drilling the wellbore on fracking the shale reservoir.

Well begins producing hydrocarbons. It will also flow backwater and TPS collects royalties on most produced water that crosses whereas disposed of on our land.

We leveraged this entire integrated value chain to incentivize, a timely and efficient development on our royalty acreage and of course EPS royalty interest benefit directly from all the oil and gas production that flows from it well.

Finally.

Although there is uncertainty with the ongoing impact of COVID-19 on the global economy, and there is always uncertainty with future commodity prices. We are confident about our position in the Permian and we believe the asset quality underlying our royalties and extensive surface acreage footprint will create tremendous value over the long term.

Now I'll turn it over to Chris to discuss our financials.

Thank you Ty beginning with our operating results for the second quarter of 2021, we had net income of $57 million or $7.36 per share. This compares to $27.6 million on net income or $3.56 per share in the same quarter of the prior year.

The increase in net income and earnings per share in the second quarter is primarily due to an increase in oil and gas royalty revenue and partially offset by a decrease in easements and surface related income in the second quarter of 2021 compared to the second quarter of 2020.

Total revenue for the second quarter of 2021 was $95.9 million compared to $57.3 million for the same quarter last year.

Oil and gas royalty revenue increased 184% to $58.2 million.

As compared to the prior year quarter.

Production volumes were approximately $16.400 Boe per day in the second quarter of 2021 compared to 15700 Boe per day for the second quarter 2020.

The average realized price of oil was approximately $65 per barrel in the second quarter of 2021 compared to approximately $25 per barrel during the same period last year.

On a revenue was $27.9 million on the second quarter of 2021 up from $21.5 million on the prior year. This increase was primarily due to year over year increases in both source water sales volumes and produced water royalty volumes.

Easements and other surface related revenue was $9 million down from $11.7 million in the prior year quarter.

This was primarily due to a decrease in pipeline easement income of $3.8 million.

Moving to the expense side operating expenses were $24.7 million for the second quarter of 2021.

Up from $22.5 million in the second quarter of 2020.

The increase was primarily due to $4.7 million related to severance costs, partially offset by a decrease of $1.5 million on legal expenses and professional fees.

Adjusted EBITDA was $80.3 million compared to $40.6 million for the same period last year.

Turning to our balance sheet at the end of the second quarter, we had $329 million of cash on cash equivalents and we continue to carry no debt.

In the second quarter of 2021 capital expenditures were $2.2 million, which was spent primarily for electrifying our water sourcing infrastructure.

Looking to the balance of 2021, we anticipate spending an additional $5 million to $7 million of capital on our water sourcing infrastructure.

On August <unk>, our board declared a cash dividend of $2.75 per share payable on September 15th to shareholders of record as of September 8.

Through June 30, our year to date dividends totaled $5.50 per share.

Under our recently authorized share repurchase program, we bought back $1.633 shares of stock at an average per share price of $1533 as of June 30, we had $17.5 million remaining on the current repurchase authorization.

<unk> recently joined the Russell 1000 Index. This is a great milestone for the company and we're glad to be new members of the index. We look forward to engaging with growing set of investors with that operator, we will now take questions.

Thank you.

Like to ask a question. Please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the Q you.

You May press Star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we pull for questions.

Yeah.

Our first question is from Chris Baker with Credit Suisse. Please proceed.

Hey, good morning, guys.

Maybe 1 for Frank Good morning, 1 for tie just.

We'd love to hear a bit more about the approach to capital allocation and where you guys see the most attractive opportunities today.

Yes, Chris.

For the question.

You know look we're always looking for deals where we're very picky. That's 1 of the benefits of being GPO, we don't have to buy to growth.

So we can be very disciplined on our approach, but deal flows up and there are some attractive packages out there. So we're definitely looking.

And Chris I would just yes or no.

So the benefit that we have as well with a strong cash balance as it just gives us a lot of optionality.

So whether thats potential.

Potential deals on the market.

Increasing dividends.

Just really allows us to.

They can choose what's the best return.

Any given time and we want that optionality. So.

That's great and then just as a follow up.

Great to see the additional disclosure on volumes.

I know you guys said in terms of the near term production outlook that you expect the second half to be at least flat with the first half day.

You have a sense of.

How many net wells you would need to come online and sort of a maintenance scenario I'm just trying to frame up that.

7.9 net DUC.

Backlog.

Sure, Yes, I think and I'm going to.

When I refer to the net wells right now I'm going to kind of referred to them on like a net normalized basis, because what we've seen through time right is the lateral links have tended to increase.

So.

If you just said on average net well was a mile and a half well I think something like 7 net wells would be enough for us to.

To maintain our production and maybe some simple math to think about is our base level of production you may lose something like 6000 Boe.

Call it 35% to 40% over the course of the year.

And for US each 1 of those net wells, that's again like a mile and a half kind of normalized well it probably does something like 800 or 900 Boe per day on average through the course of the year. So 7 of those wells would what kind of replace that production you would see through the normal decline.

And the 1 other thing I would reference.

If you use that same normalized basis, our DUC numbers, probably like 9 net wells.

If you normalize it so the 7.9 is because on average those wells are a little bit longer than a mile and a half.

So we've got a pretty robust level of current inventory, but I think it's a tie in point in the in the earlier comments would certainly support.

US being able to hold production flat.

<unk>.

At the current rate that we've seen people, bringing wells online in <unk> on <unk> and starting to get data coming in and <unk>. They would probably be a little bit ahead of that pace.

Okay, Great I appreciate the comments.

Thanks, a lot Chris.

Our next question is from Hamad core Sands with B Ws financial Please proceed.

Hi, Good morning, just a follow up on the capital allocation.

Would you be willing to go into debt. If there was the appropriate are valuable assets is available to you.

Yeah.

Hey, Matt This is Chris.

Look I think in general we've always managed this business without any debt and we even like having a very strong cash position.

And so.

I would never say never but I think we tend to err toward a very low leverage profile for T. P. L and so I would say that in general we would probably tend to capitalize with cash on the balance sheet for other ways, but if there was an excellent opportunity and it required a little bit of debt financing, we would we would consider that.

Okay and my other question was given.

Out of attention.

Headlines about the deals.

Being out there.

Have you seen any.

Any kind of change in activity or posturing as far as potential new production or potential new customers for you or is this purely being done with the price of oil.

Yes, I would.

C.

Through a lot of the consolidation, we now have exposure to a couple operating.

So.

That's been good for <unk>.

And a couple of really good relationships through some of the consolidation that's happened recently.

Okay. Thank you.

Thanks, Matt.

Okay.

Our next question is from.

Derrick Whitfield with Stifel. Please proceed.

Thanks, and good morning all.

Hey, Derek good morning, Hey, Derik.

Shifting back over to the organic growth side of the equation could you speak to your expectations for activity based on what Youre seeing in your latest permits grapes.

Based on Chevron on Q2 earnings commentary.

The activity in your northern Delaware operating areas likely by higher standard than what we were expecting and love to get your views on that.

Yes Derrick.

<unk>.

I would say in general when we look at at the permitting activity.

It continues to be really robust.

It probably really started to pick up in <unk> of 'twenty 1.

So we had a pretty robust level of new permits.

Really when we look at them, though oxy was actually probably the biggest.

Net of permits that we saw especially in Q1.

And then in.

On the second quarter.

Fairly even level of permits across most of our most of our operators and so I would just kind of again also point back to when you think about the net right. The net permits that are coming online.

It would continue to support kind of the level.

Of new wells that we see brought online new docs that are getting drilled.

It's probably something in the kind of mid to net permits that are coming on line each quarter and so in general I think it's it continues to be.

Continues to be pretty.

The robust and continues to kind of support the current pace of development that we've seen in the last 2 quarters, which has been encouraging.

Okay.

Great and then my follow up moving over to the water side of your business. How are you thinking about the trajectory of your 2021 and 2022 capture rates for WD.

WD and source water businesses.

Yes.

We've got pretty robust capture rates on both the source water and produced water side.

We said in the.

The prepared remarks that produced water business just continues to show growth and be a strong business.

Net thing has been steady even through 2020.

Year to date this year, we just continue to see growth.

A lot of that is from volume realization through existing contracts that our team is locked up.

<unk> got very expansive long term contracts across the majority of the northern Delaware Basin.

The team has done a great job on continues to do a great job locking up additional contracts and bringing wells on line into those systems that we have a royalty on so.

Very strong business.

I think it is going to continue to be strong for us.

That's great maybe 1 final question for me.

With the understanding day.

On a high margin low capital intensity business with a pristine balance sheet.

Could you speak to your appetite to hedge your second half 'twenty, 1 and 2022 production profile to <unk>.

Locked in your relatively strong oil.

And gas really more specifically prices.

Yeah, Hey, Derik.

The T Bill we've always manage this business without any.

Without any hedges.

And I think 1 of the benefits of like you said that we do we're fortunate to have a very high margin business.

Is it can withstand the.

The volatility that that this that this industry sometimes brings forth in 2020 was a great example of that and despite the fact that we were on hedged.

At the end of the day. It was 1 of our best years ever and so I think a lot of the folks that that investment <unk> like the fact that we kind of provide that exposure.

And 1 of the benefits of being on hedged was during this year, we've gotten the full.

Bowyer to these great recovery in price, that's really across the board I mean oil gas Ngls everything is significantly up from last year and so just given the nature of our business and our ability to weather the <unk>.

The storms that come.

I think we would continue to just remain on hedged I think 2020 was a great showcase that this business will do just fine even through some difficult times.

And it's nice to be able to fully realize those good times when the commodity cycle turns the other way and so I think we would generally continue that approach on the future.

Makes sense.

Rate update today and thanks for your time.

Thanks, Eric Thanks Derek.

Yeah.

Yeah.

Thank you.

There are no more questions at this time and this will end today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.