Q1 2022 Texas Pacific Land Corp Earnings Call
Good morning, and welcome to the Texas specific land Corporation's first quarter 2022 earnings Conference call. This conference is being recorded I would now like to introduce your host for today's call, Sean and meeting Vice President Finance.
<unk> relations. Please go ahead.
Morning, Thank you for joining us today for Texas specific land Corporation's first quarter 2022 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 investors section of the company's website at Www Dot Tech 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 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.
Also note we may at times refer to our company buying stock ticker PPL.
This morning's conference call hosted by Ppl's, Chief Executive Officer, Pak lever 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 Todd.
Thanks, Sean.
Morning, everyone and thank you for joining us today.
Yesterday, we announced a special dividend of $20 per share and the special dividend is incremental to the $100 billion share repurchase plan that we announced in March we're excited that our shareholders will benefit from this increase return on capital driven by strong Permian activity commodity prices that are some of the best we've seen in a decade and our balance sheet.
It is debt free.
Looking forward to the rest of 2022, we're bullish that our underlying business fundamentals will remain constructive.
Seeing more rigs added onto our surface and looking at our water sales schedule. We can see that producers are intent on maintaining and growing completions pacing throughout the year.
And our surface leases easements and materials business, which we refer to as slim we are seeing a noticeable uptick requests for new infrastructure and well pad.
Holly in the northern Delaware.
All of these signs are a good leading indicator for future development activity.
As we look at our well inventory, we have yet more reasons to be encouraged.
Permitting activity and drilling activity have moved higher.
For the first quarter of 2022, our data indicates that we had 200 gross spuds on our royalty acreage, which is the highest level since the pandemic.
Although some of the increased drilling can be attributed to the fact that operators have less inventory of ducks to complete. We also continue to see strong overall completions as well.
In particular, we're seeing a nice ramp in activity in loving County.
Overall, it was a solid quarter for the water segment. We did have a couple of frac jobs get preferred where we had source water sales lined up with the deferrals, mostly related to operator struggles with procuring frac sand.
The outlook for water on both the source and produce side remains strong and we expect volumes to increase throughout the year, though maybe not without a few hiccups here and there as operators navigate various supply chain and labor constraints.
We're also excited about our updated alliance with Arris, which we announced last month.
We've worked with areas for a long time, and we consider them to be a great partner.
With our expanded agreement, we believe that we'll be able to serve operators more efficiently and effectively as we can leverage our combined competencies and assets to provide operators supply assurances on the source side and also have readily available solutions on the produced water side. So that we can help keep operators oil and gas development moving along.
We have a lot of exciting projects in the Nextgen pipeline as well.
Just recently, we signed an agreement with a longhorn power and utilities Corp.
Behind the meter solar project on our surface in Culberson County.
The project will support oil and gas development for a large energy multinational company operating in the region.
Project does not require any capital from us and we will receive annual payments with inflation escalators.
We continue to have numerous constructive conversations for similar behind the meter solar projects with producers that are on our surface and we're excited to participate as the domestic oil and gas industry continues to evolve its best practices and show leadership in minimizing scope, one and scope two emissions associated with development.
We're also advancing discussions on utility scale renewable projects bitcoin mining carbon capture and many other innovative and unique opportunities.
We'll share updates and details as we get things signed up and I'm hopeful we'll be able to cross the finish line on some of these projects in the near term.
A few weeks ago, we issued a press release in an 8-K with an update on our board of directors and the evaluation of the reclassification process.
I am excited to welcome Rhys best in Crawford as New Board members. Both recent Carl are highly experienced and they will bring a lot of skills and insights to our boardroom.
Excited about the business and what we can accomplish and I think our shareholders are going to benefit tremendously from having them on our board.
On the declassification side, our board and the nominating and corporate governance Committee continue to work through that.
I don't have specific timing to share at this time, but I know our committee is committed to working diligently and quickly on the matter and the board and the committee will have more to share later this year as they make progress.
Wrapping it all up the business is in a great place today.
We're thrilled to be returning a significant amount of cash back to shareholders through our regular dividend.
Through this most recent special dividend and through our recent share buyback program.
As many of you know we have a high margin low capital intensity business, which means our revenues dropped the free cash flow in a very efficient manner.
And as we progress through the year, our business will continue generating more free cash flow.
Certainly room for more dividends and buybacks beyond what we've announced up to today and it's our priority to make sure our shareholders benefit from the constructive industry environment and the strong underlying business performance.
With that I'll turn the call over to Chris to discuss our quarterly results.
Thanks, Ty total revenue for the first quarter of 2022 was $147 million on a sequential quarter basis, our revenues were about flat compared to fourth quarter of 2021.
Although this most recent quarter benefited from higher oil prices royalty production was down modestly on a sequential quarter basis recall last quarter benefited from higher than normal prior period production.
And as Todd mentioned, our well inventory data suggest strong activity on our royalty acreage we feel good about the growth trajectory of our royalty production for the next year and over the long term those certain quarters will be influenced by various factors such as a specific tracts of land each new well crosses and also timing related to when we actually receive.
Cash royalty receipts.
Our crude oil price realizations continue to be strong generally we receive a dollar or two less than WTS Midland our gas realizations have improved over the last six months or so and we see some of our larger operators with pricing above Henry hub, and wahoo spot prices and overall, we've been receiving Henry hub spot pricing or better.
Our NGL price realizations tend to fluctuate between 40% to 50% of W. T. I know our NGL realizations this quarter were a bit weaker than normal due to some cash royalty receipts, we received for NGL production associated from earlier months with lower pricing.
I also want to point out that there's a new operating expense line item for AD valorem taxes, which we accrued an approximate $2 million charge for some background, which we also detailed in our last 10-K filing when the company was a trust there was a legacy agreement, where the mineral estate AD valorem taxes associated with our M. P. R.
Following our reorganization to a C Corp. There was a dispute with the mineral estate on whether they were still obligated to pay those taxes with a C Corp.
Out of Prudence, we began accruing for these taxes and our GAAP financial statements.
Adjusted EBITDA and net income for the quarter were $130 million and $98 million, respectively. We ended the quarter with approximately $507 million of cash. So that is before the effect of the $20 per share special dividend, we announced with earnings and before our previously announced 100 million share buyback program was active.
The buyback program cleared at 30 day cooling off period in early April and is currently active and with that operator, we will now take questions.
Thank you we will now be conducting a question and answer session. If you'd 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.
Press Star two if you'd 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 one.
One moment, please while we poll for questions.
Yes.
Thank you. Our first question comes from John <unk> with Stifel. Please proceed with your question.
Good morning, all.
For my first question could you offer any color on Q1 oil production, how you see overall production trends playing out for the year.
And then on the water side of the business could you expand on your prepared remarks and speak to the demand for source water more broadly.
Hey, good morning, this is Chris.
Yeah, I think I kind of mentioned in his prepared remarks, when we look at.
Permitting activity that we saw in <unk> 'twenty two.
And we look at the.
New docs that were drilled during <unk> 22.
Those were some of the highest activity levels for.
For both of those that we've seen really since pre pandemic, probably <unk> 2020.
So that backdrop is definitely encouraging when we think about what is the near term inventory that the operators are going to be going after.
For the rest of the year and so that makes us feel pretty good about the position. We're in I think as we've mentioned we are.
And <unk> 21, we had some prior period production that probably added to increase that production a little bit above normal and.
We're at the point now where some of that is caught up and so hopefully we'll have some normalized quarters here for the rest of the year and I might let pie.
To some of the.
Some of the water our activity levels.
Yes. Thanks.
Yes, I would say on the source water side of the business. We had a couple of things happen first we had like I said earlier.
New Fracs get deferred.
And so those frac jobs got pushed on our schedule, mostly because operators were unable to procure frac site.
So I would say that those jobs were pushed back.
So we do expect the volumes to come to us at some point this year.
Secondly, the.
The seismic response areas are definitely creating some limitations on downhole ingestion of produced water in some reason regions.
So as we see that downhole capacity reduce some of that incremental produced water is being recycled and compete against some of our source water for completion activity.
That being said we.
Can compete on the recycling side as well, especially with the Reits, we've secured the pool water off most of the produced water gathering infrastructure that we have on our lands.
And we're definitely seeing an uptick in activity in that part of the business as well so.
We have seen some near term disruption, but I think longer term in the water business will continue to perform very well.
Great I appreciate the color.
For my follow up could you share with us your thoughts on where the best opportunities lie as you balance your growth versus return of capital priorities.
Even after the special dividend and if we assume you complete the 100 million buyback it still looks like you're going to be generating a substantial amount of free cash flow.
Yes.
Look I mean, there is still some deals out there.
We're running through some of those deals, but I would say.
Given the current environment with $100 crude and $7 gas or willingness to transact is probably a little bit diminished.
This moment.
So say sellers are maybe a little aggressive on their ask.
This kind of environment.
Okay.
We've put in place the $100 million buyback program, which is now active.
Obviously, we have our regular dividend, which we raised this year.
And we just did the special and so I think we've got a lot of flexibility and our intent is just to maintain that flexibility.
And I think we've got a nice mix of.
Buybacks and dividends going right now.
Going forward, we will continue to evaluate.
Market environment in the industry fundamentals.
And like I said, just maintaining that flexibility for people.
Makes sense, thanks for taking my questions.
Thank you. Our next question comes from <unk> <unk> with AWS financial. Please proceed with your question.
Good morning.
Question I had was the drilling activity Youre seeing is there any way for you to know if this is because the producers are low on inventory or if this is <unk>.
Price driven.
Hey, Matt.
When you say low on inventory or are you kind of referring to their inventory.
And if they're talking to the docs.
Yes, I think so I mean, we definitely had seen.
A DUC drawdown that had been occurring.
So I think one of the questions at least on our acreage is at some point or are they going to kind of continue that draw down or what's the point, where they start to backfill it.
So <unk> definitely seem to be a quarter, where they've started to kind of backfill and increase back up that kind of current inventory that's available.
And so you know.
Some of it's just timing, but I think it is probably safe to say, we have seen a trend of ducks getting drawn down.
Over the last few quarters and this would be one of the first quarters, where they've kind of replenished.
Replenish that.
No.
Okay.
Okay and my other question was.
Given the sand sourcing issue is that.
Rod amongst your customers.
Customers, who pay you royalties or is this really just.
One off or the producers just not.
Adequately ready for the lack of sand availability.
Yes.
Yes, Amit.
I would say is it's a pretty broad issue across the basin, we're seeing.
I think so.
Maybe some of your smaller operators are suffering with it a little more than maybe your.
Larger operators that have a broader supply chain team.
But I think it's something that everybody is struggling with a little bit at the moment. When you look at the last few years and all the bankruptcies that happened.
In the San market.
There's definitely a short supply there is also a short supply of it.
Truckers to get that sand, where it needs to go and so it's an overall basin wide problem, but I think everybody's moving in the right direction to solve that issue.
And would this hamper the value you've represent from drilling costs and some are saying, it's going to take the overall cost up.
Yes, I mean, theres definitely some issues there, but I think most operators have baked that in.
The guidance for the year.
Okay. Thank you.
Thank you our last question comes from Chris Baker with Credit Suisse. Please proceed with your question.
Hey, good morning.
I guess just maybe on the.
On the volume side.
It looks like <unk> oil declined 13% versus <unk> and you mentioned that your accrual, but I'm just curious on a run rate basis, if you back out the accrual.
Asset generate growth quarter over quarter.
Hey, Chris.
I'm sure as you and lots of folks know.
But we're always a little bit in the past when it comes to royalty.
Revenues in production that we're seeing.
And so.
Yeah.
Well, we probably have seen with the data that we have as you know.
Obviously oil production was growing through.
The broad part of 2021.
Fourth quarter.
We may have started to see a level out and this quarter I think it's a bit early to say.
The checks that have come in are really only from a first kind of month month and a half.
Right.
I would say that that.
Decline that you see in the financials is probably not representative of the background you know real lumpy production.
I don't believe that.
That pullback.
It was nearly as much as 13% I don't have a good number unfortunately to give you.
And it'll probably take us a few more months for some of the additional checks to come in and I haven't really good field.
On what that trend was but you know.
It would be our belief.
It was certainly not a 13%.
All right.
Yeah, no that makes sense.
And then I guess just on the.
The $20 special obviously, a positive surprise there.
Could you just maybe share some of your thinking around how you got to $20 is sort of the right number I'm. Just curious if you kind of think about this relative to the cash balance or you know maybe looking to return some percentage of cash.
Obviously peers have.
Pretty explicit targets there, but just how do you kind of frame that up as we.
Perhaps look out to 2023 and think about.
Another special next year could look like.
Yes, sure Chris I think.
There's a lot of factors I don't know that there's any one particular factor.
Being in a business with.
Hi, commodity price volatility, which can lead to the volatility of revenues.
I think our belief is having flexibility with your capital allocation plan and that's a good way to manage a business like this.
And so I think when we thought about returning that excess capital.
When we started the year.
Oil was at a very different place and I think when we started the year, we definitely felt like we had a nice robust.
Cash balance that will allow us to remain opportunistic and will achieve some of the goals for the year, but then as the year progressed.
We saw a pretty tremendous improvement in our pricing across the board really oil gas and Ngls.
And so as we kind of get.
Got a bit of a reset and looked at the type of cash flow generation that was going to create it just seemed like the right time.
Really for two reasons like I said for one and this higher price environment I think our.
Desire.
Transact on acquisitions, especially cash actualization is diminished.
And so that being the case.
And also having a pretty nice buyback program I think the logical.
<unk> wants to.
So to do a special.
And so I don't know if I can give you an exact mathematical formula.
As to how to calculate what our future special might be but I think you know that those are some of the ways. We would look at it.
And work with the board to kind of determine what might be an appropriate return of capital.
You know when the business is really generating.
Strong cash flows.
Okay, great Yeah that makes sense.
And then you touched on M&A earlier, but.
You know there was obviously a.
A little bit of royalty acquisitions this quarter.
Any additional detail you can share on what you bought in and why that kind of made sense just in terms of.
The acquisition sort of punch list, if you will.
Cash flow accretion or enhancing NRI.
Our eyes and you know.
<unk>, you already own or any color there in terms of you know.
The acquisition this quarter would be great. Thanks.
Yes. Thanks.
Thanks for the question Chris.
That was a really small deal.
It was all Midland Basin EBITDA.
EBITDA looks really good operators really good area.
Yes, mostly up in Martin Howard Glasscock counties.
So we just felt like the quality was too good to pass.
It was small enough that we were able to pick it up and.
Honestly I wish it was.
Bigger.
Yes quality was just too good to pass up.
Okay, great and if I could just squeeze one more in just on the Arris.
Enhanced.
Alliance. There is that is your expectation that that would help put upward pressure on water capture rates or I guess any.
And I apologize if I missed this earlier, but any additional sort of.
I guess color on how that's going to show up eventually in the financials.
Yes.
Yes.
Like I said earlier.
The relationship there is for a long time, they've done a really good partner. So this transaction just expands that existing relationship and kind of capitalizes on the synergies that we have as partners to provide better more efficient services for our operators. So.
Think longer term the deal helps both theirs and PPO compete for volumes.
And provide better solutions for operators so.
Obviously, that's going to provide incremental volumes and cash flows for us.
It also helps us drive some efficiencies on the source water side of the business as well.
And.
Maybe most importantly, just ensures that our operators have both the source water and produced water takeaway they need to keep running the drill bit.
Okay, great appreciate the answers guys.
Thanks, Chris.
Okay.
Thank you.
At the end of our question and answer session. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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