Q4 2021 Texas Pacific Land Corp Earnings Call
Good morning, and welcome to Texas specific 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 Shawn Amini, Vice President Finance and Investor Relations.
Sir Please go ahead.
Good morning, Thank you for joining us today for tax specific 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 Dot specific 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 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 Companys results. Please refer to our earnings release for this quarter and so 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.
It's also note we have made times referred to our company by stock ticker PPL.
This mornings conference call is hosted by Ppl's, Chief Executive Officer, Hi, Glover, and Chief Financial Officer, Christopher <unk>.
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 PPL finished 2021 in record fashion. The upward momentum we saw last quarter continued into the fourth quarter consolidated adjusted EBITDA of $130 million in daily royalty production at 42000 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, and 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 $2 50 levels I'm not sure anyone in the industry was excited about.
The PPL and navigated through the worst of the volatility of 2020. So we enter 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.
Mid year, we had $70 oil $4 natural gas in 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.
See rig counts and Frac crews also pick up a week in a regular discussions with operators reaffirm that activity would be supportive of Permian production.
While the first half 2021 could be characterized as slow and steady second half of the year is what activity started to ramp up, especially on PPL acreage propelling full year 2021 royalty production growth of 15% compared to full year 2020 production.
Commodity prices also steadily improved throughout 2021, <unk> full year 2021, all in average commodity price realization over 80% higher than 2020 realizations.
Because <unk> 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 at our commodity prices resulted in details 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.
Source water and produced water royalties had year over year revenue growth of 44% and 15% respectively.
Our easements and surface related income was down modestly year over year as producers continue to focus development around existing infrastructure and continued to draw down ducks and.
In aggregate, our non oil and gas royalty activities generated $164 million of revenue during 2021.
In summary, <unk> consolidated 2021 revenues of $451 million were 49% higher than the prior year.
Our 2021 total operating expenses only increased by 4% versus 2020 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.
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.
Particular, 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 Midland <unk>.
In the Delaware overall, operator development seems to be a bit more skewed towards the new Mexico side productivity on our Texas, Northern Delaware footwear remained solid.
Were sourced water the strong sales volumes, we saw through the second half of 2021 have persisted into 2020 to.
Operators continue to drill longer laterals that are deploying more simulcast <unk> zipper fracs. These accelerated completion techniques require billions of barrels of water delivered over the course of just a few days.
These types of completion methods benefit CPL is 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 stream. Our produced water volumes have moderated somewhat recently as we see producers focus heavily on the new Mexico side of the northern Delaware.
We expect produced 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 referred to as slim or the business has been the slowest to recover from pre pandemic levels as producers continue to drawdown does.
<unk> development around existing infrastructure, which has reduced surface revenue opportunities.
We continue to see debt drawdowns at a pretty healthy clip.
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 Nextgen opportunities. This past January we executed an agreement with Texas A&M Agri life extension to begin assessing and eventually implementing sold carbon sequestration opportunities across a few land plots spanning approximately 20000 acres.
Our goal with this project is to generate a syndicated carbon credit. We can then use to offset our own scope, one and scope two emissions are also potentially monetize.
We continue to work on many other next gen opportunities that we hope to share more updates in the near future.
Our capital allocation, our board raised our base dividend by quarter to $3 per share.
Broadly our capital allocation priorities are still predicated on voluntary 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 of evaluations at significant discounts to historic level.
Institutional capital drawing up for legacy oil and gas assets.
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. All day, we remain disciplined and focus on trying to grow for the sake of growth itself, rather we want to add more royalty production more free cash flow or surface.
Our nextgen cash flows on a per share basis near term and long term basis.
Our stock price continues to be dislocated underlying fundamentals remained strong.
Retains a lot of flexibility to execute buybacks dividends and possibly special dividends.
Our capital allocation strategy is agnostic across method, we will pursue those strategies that will add the most long term value for shareholders.
So if that means buying back stock and we will buy back a lot of stock.
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 recent regulatory actions.
As many are aware in Texas, and new Mexico regulators have established certain seismic response areas or otherwise referred to as <unk> outlined regions experiencing increase in seismic activity.
Seismic activity in these areas has been attributed in part to saltwater disposal wells otherwise known as <unk>.
In short its generally understood that disposing of produced water and deep subsurface zones, along preexisting fault is likely instigating seismic activity.
Thus the primary attention for regulators and the industry is to try and limit SWT injection rates within these sensitive areas.
So far there has been two SRA isn't deadline and one in the Delaware imposed by the Texas Railroad Commission.
Only the Delaware SRA that spans northern Culberson, and Reeves counties over last with PPL surface acreage.
Regulators here, if requested an operator's 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 Tcl, the Culberson Reeves SRA and covers a fraction of the swt's located on PPL surface.
Over the years, we've been deliberate in spacing swt's throughout our surface footprint as a reminder, <unk> does not own or operate disposal wells are related is that with the infrastructure.
Rather our produced water royalties are derived and governed by a previously negotiated long term contracts.
Most of these contracts or acreage dedications hovering around 450000 acres for PPL generate the sea for produced water that is store directly on our travels across our land.
Even if a specific disposal well on or near Tcl surface gets shut down that diverted water crosses our check reported surface footprint, so another well on or off detailed 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 a re PPL will generate a fee.
Cleared last years ago that the Delaware is high water cuts with likely necessitate multiple solution development increase at all.
Contracts were designed specifically with this in mind, allowing <unk> to participate in the value chain regardless of outcome.
Longer term, it's swt's areas adjacent to our surface footprint shutdown are restricted from accepting incremental produced water volume converted water that ends up crossing PPL surface to excess 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 our 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 were.
We're not just seeking ways to deal with current produced water volumes.
Much of the efforts are also focused on how to proactively implement longer term best practices to accommodate future development.
So it's still early solutions are likely to entail a mix of options such as perhaps storing produced water and shallower geologic zone.
Taking greater care to space Swt's 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 at year end financial results.
Beginning with our operating results total revenue for the fourth quarter of 2021 was $147 $2 million compared to $74 3 million for the same quarter last year.
98% year over year increase.
The increase in revenues is primarily from higher royalty production higher commodity prices higher source water sales volumes and higher produced water volumes, we were able to fully benefit from rising commodity prices as we were completely unhedged during the quarter and we remain unhedged today.
For the fourth quarter of 2021, we had net income of $79 million were $10 21 per share and this compares to $44 8 million of net income or $5 77 per share in the same quarter of the prior year.
Adjusted EBITDA was $133 million compared to $61 2 million for the same period last year.
Oil and gas royalty production volumes were approximately 22000 Boe per day in the fourth quarter 2021, compared to 17000 Boe per day for the fourth quarter 2020.
Production this quarter benefited from increased activity on our royalty acreage and from production associated with periods prior to the beginning of the most recent quarter.
At the end of the first quarter 2021, <unk> royalty acreage had seven two net well permits six six net drilled but uncompleted wells two five net completed wells and 48, one net producing wells.
Moving to the expense side operating expenses were $21 $3 million for the fourth quarter of 2021 up from $19 $1 million in the fourth quarter of 2020.
Turning to our balance sheet at the end of the fourth quarter, we had $428 million of cash and cash equivalents and we continue to carry no debt.
In the fourth quarter of 2021 capital expenditures were $4 $9 million, which was primarily spent on electrifying, our water sourcing infrastructure and investments in corporate assets.
On February 11, 2022, our board declared a cash dividend of $3 per common share payable on March 15th to shareholders of record as of March eight.
This represents a 25 increase from our most recent regular dividend during.
During the fourth quarter of 2021, we bought back 6970, <unk> nine shares of stock at an average per share price of $1248.
That operator, we will now take questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
In order to ask a question. Please press star and then one using a touchtone telephone.
To withdraw your questions you May press star into.
If you are using a speaker phone, we do ask that you. Please pick up the handset to ensure the best sound quality.
Once again that is star and then one to join the question queue.
Our first question today comes from Derrick Whitfield from Stifel. Please go ahead with your question.
Sure good morning, and congrats on a strong year end.
Thanks, Derek good morning.
With my first question I wanted to focus on your views on return of capital in light of the health of your business and your balance sheet could.
Could you share with us your thoughts on where the best opportunities lie as you balance your very.
Very versus return of capital priorities over the next few quarters.
More specifically on return of capital.
Do you perceive as the best mechanism to affect return of capital It Might've your stock performance.
Yes.
I would say.
Like I said in my prepared remarks, as far as return on capital or return of capital.
If our stock price continues to remain dislocated for a period of time, then we will look at increasing buybacks.
<unk> raised our regular dividend.
So I think we've got a lot of flexibility there and at the end of the day.
Our rate of return driven organization. So just wherever we feel like we can get the best return.
Okay.
Certainly fair and then with.
My follow up I wanted to focus on corporate governance.
It's likely received due attention as a result of your stock and the performance.
More specifically I wanted to ask if you guys could speak to the process. The board is following to evaluate the data again.
The nation in the <unk>.
Note from last year's annual meeting to Disaggregate board and perhaps provide a reasonable timeline for the progression of these developments.
Yes so.
Process is being handled by the nomination and governance Committee.
As we.
Announced after the voting results were released.
That process is.
It's being handled by the committee, which consists of three independent directors.
Okay.
I would just say one of those directors as our largest shareholder.
The process for <unk> for both is definitely our priority is something that they are working on and I certainly wouldn't take a lack of public disclosure is an indication of lack of progress.
There is a 90 day timeframe, there where the board has to make that decision and publicly disclose that and so.
Yes.
Now we are waiting on the non Gov Committee to make a recommendation to the board.
I appreciate that tie and then if I could ask another follow up or two.
I wanted to see if you could broadly speak to your business outlook over the next six to 12 months.
We think about the considerable increase in industry activity we've observed.
And Chevron and Exxon Mobil disclosures it would seem to us that you guys are positioned or relatively strong double digit growth.
Is that a fair statement.
Hey, Derek this is Chris I'll, maybe field that one.
When we look around I guess.
You are correct you have got a couple of operators out there.
Two you mentioned who are definitely.
Steering people towards pretty strong growth.
One thing I would just keep in mind, when you think about US and you look at Chevron and Exxon as examples.
Or still a meaningful piece of Ppl's production profile water sales and disposal, but each of those tends to hover kind of around that 10% Zip code.
And so although those two are are talking about strong growth when we look across the broader portfolio.
I think we also tend to see that being offset by some of the other operators, who are kind of more single digit to flat.
Profiles and when I couple that and I look at kind of our our near term inventory right. So looking at like the current DUC count we've definitely seen a drawdown that's been occurring over the course of the last year.
Oh, that's great.
<unk> of drilling I'm not sure that there has been.
Our replenishment.
And so although we certainly have enough ducks and kind of wells that are in the completed category about to come online.
Produce some growth.
I'm not sure if we feel comfortable saying robust double digit growth I think.
The robust growth we saw last year included a couple of quarters of incredibly strong completion activity like over three net wells and as we look in the fourth quarter.
All the data is not but I would suspect will be just over two.
Net wells that were completed in the fourth quarter.
And so.
It feels like there may have been a little bit of a slowdown from what was an incredibly fast pace kind of in the middle of 2021.
And so when we think about that.
Are those activity levels right now I wouldn't say that we see the same levels as we saw in 2021.
I still think it's going to be a strong year, we've got a nice backlog of inventory and so we certainly will expect to see some continued growth.
Thanks, Chris and then lastly.
Thanks for your commentary on the seismicity and taken that head on.
During the call.
With the understanding that you guys have tight controls around the density of SPD wells could.
Could you speak to your projected near and longer term business impacts if any.
Yes.
I'd just say.
And the SRA.
Affects our property.
<unk> has just implemented recommendations that operators.
Reduced capacity in some of the wells.
But I will say that the way that we've contracted.
That side of the business as far as acreage dedications in big <unk> and the royalty on a lot of.
The pipeline's instead of the wells.
As water is diverted from one well to another.
It doesn't really affect our business because of the way those contracts are structured and that royalty is either on the pipeline.
On an arms.
Water it can move around within the development area and we will still.
Get that royalty fee.
I think.
I think some of the issues could be beneficial.
Yes.
Because of the structure of those contracts, we could see some water come to us.
Through some of these.
This increase regulation so.
We're in constant communication with our operators with midstream companies.
And with the <unk> to stay ahead of the issue and be a part of the solution because the last thing we want is sports.
Holdup development so.
I feel like.
With our involvement in the action that the industry is taking that we will be in a good place and we will find a good solution for that problem.
That's great guys. Thanks for your time and thoughtful responses.
Thanks Darren.
Our next question comes from Ahmad <unk> from AWS Financial. Please go ahead with your question Hi.
Good morning.
Would you be able to provide some details as to the misstatement on your taxes and how you've justify that going forward as far as the corrections you've made.
Yes.
This is Chris.
Yes, let me, let me give you just a little bit of background and color.
As it is.
As I've come in and one of the things that both myself and Stephanie.
Our CEO wanted to do was take a look at some of our advisors and so as you guys have probably seen.
We engaged Deloitte as our new Auditor this year and we also win and engaged a new tax adviser.
And.
As we worked with that tax advisor.
Looking at our current taxes in some historical periods that came to the conclusion that there is a <unk>.
<unk> that had been taken in the past was was more than it was and so we really diligence that and wanted to make sure that that conclusion was correct.
And the team came to.
To the same conclusion is our tax adviser.
Then.
Incorrectly done in the past and so what that statement.
Correct.
Of that past.
Depletion amount.
From 2018 through 2020 and.
And so I think the.
To put it in perspective.
Talking about.
Just over $10 million plus $13 million over the course of three years.
Against billions of dollars' worth of $1 billion worth of revenue and so.
Terms of the materiality.
It was a fairly immaterial.
Adjustments.
That's why it didn't require a full restatement of the financials.
And so.
We're looking to put in place a lot of controls now to make sure that something like that.
Won't occur in the future, but I think we're glad that we were able to find it makes.
To make the correction and move forward and so I think.
Kind of where it stands that's a little bit of background on what that is.
Definitely got a plan in place to get it all.
In the future.
Okay, Great and then the other question I had was.
Just given.
The price of oil is and.
Producers just focusing on.
The ducks they already have is there any.
Actions are strategies Youre looking to undertake.
Take advantage of your land, that's not being access right now be it either through.
Using your balance sheet to finance producers or anything like that.
Just given that there's not a lot of drilling new drilling occurring.
David I would say.
So we're not considering any options as far as like financing at operators drilling program.
We have seen a big drawdown index, which means.
Operators are probably going to need to add some rigs this year.
So we're just making sure that we can do everything we can.
To make it easier for them to access and develop our land versus the acreage next door and so that's that's what we focused on in the past, making sure. They have the appropriate easements and infrastructure in place, making sure. They have a sustainable source of water for completions, making sure. They have some more to go with that produced water.
So that we can get wells turned online quicker.
Reduce costs and the time lag for the operators, so that's where our focus is.
Just using our assets to make it easier for those guys to develop.
Okay. My last question was just given the amount of shares you bought back.
This past year is there a timing or any intention to announce.
Our new stock buyback program and would it be bigger than what you are implemented in 'twenty one.
Hey, Matt I think as Tom said, I mean, we're probably not going to give guidance on on that but it's certainly something clearly with where the prices right now that we're we're going to consider and take a look at it and at the end of the day that is a board level decision and it's certainly something we're focused on.
Then.
And we will communicate once any decision gets made.
Great. Thank you for letting me ask questions.
Thanks, Matt and thanks, Amit.
And our next question comes from Chris Baker from Credit Suisse. Please go ahead with your question.
Hey, good morning, guys.
Gary covered a lot of this but maybe a few different angles on the big topics.
First question just on the impressive growth in oil and gas production. This quarter I'm just curious if you could share.
Any insight into what drove that result.
Perhaps.
If you could share what growth would have been on an organic basis.
Backing out any any accrual noise.
Just in terms of the organic growth profile this year it would be great.
Sure.
Hey, Chris.
Yes, I think.
One of the big drivers I think as I've kind of mentioned when I talked to Derik as in Q2 and Q3 the level of completions that happened across our our property were about as high as they've ever been.
Any time, we have been over three net completions that has marked really strong performance. In fact, the only time I can think of when we had three nine completions.
As in the first quarter of 2020 right before the pandemic hit so that was kind of the end of a culmination of a real high activity level through 2019, and early 2020, and so to have two quarters.
Q2, and Q3 of 'twenty, one where we also have that level of completion activity I think that was really the big driver.
The robust growth that we saw in 2021 and I would still say.
Like you see with us and even some of our peers.
In times of high growth, you definitely get some increasing accrual activity.
As it sounds like the royalty production.
I would still say if you compare our full year production number.
So the 2020 production number.
That's a pretty fair comparison of the actual organic growth.
You saw across those assets the vast majority.
Sometimes on average you probably have a two month lag three months lag for gas and Ngls and so sometimes you certainly have checks that come in from from beyond that period, but I think if you look at the whole year.
For 'twenty, one compared to the whole year for 2020.
Sure.
The idea of the growth profile.
Okay, Great and then just on the acquisition front.
Does seem like the retained cash.
Going towards acquisitions as sort of the.
The strategy today.
Any sort of color on factors that you think might have prevented you from deploying capital there.
Curious if you could make any comments around bid ask spread that youre seeing in the market.
Yes, I mean, theres definitely a lot of competition in the Permian.
Right now people are really paying up for near term development.
Yes, I would say.
'twenty, one we looked at a lot of deals.
We said in the past our bar is really high, but we actually evaluated over $2 billion worth of deals.
'twenty one.
We didn't transact for a number of reasons, but.
I would say I think I think that should give.
Give everyone comfort that.
We are being disciplined and mentally we do transact.
We won't be overpaying for anything so and Youre right about the cash balance right now.
We have an authorized any shares were very hesitant to use the leverage for M&A and so.
Keeping that.
Dry powder.
<unk> for future growth.
It's really the only form of capital that we have right now to grow the business.
Okay, Great and then just my last question on governance, you guys had mentioned the 90 day Mark on the Mcginness and.
Any color you can share in terms of the timeline.
They get sort of a firmer view on staggering or an outcome in terms of that.
That piece of the annual meeting.
Yes.
That's being handled the same way as they began his resignation.
By the nom and Gov Committee.
And.
There.
Right now they have not provided the board.
Eight.
But as soon as.
I have an update we'll have one shortly thereafter.
Yes.
Okay, great. So fair to think that we will get some sort of announcement later this year.
Yes, that's fair.
Okay, great. Thanks, guys.
Thanks, Chris Thanks, Chris.
And ladies and gentlemen, with that we'll end today's question and answer session as well as today's conference call. We do thank everyone for joining today's presentation.
May now disconnect your lines.
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