Q2 2022 Texas Pacific Land Corp Earnings Call

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So Glenn Corporation second quarter 2022 earnings Conference call. This conference call is being recorded I would now like to introduce your host for today's call Shawn I mean, Vice President Finance and Investor Relations. Please go ahead.

Good morning, Thank you for joining us today for Texas specific land Corporation's second 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 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 our most recent SEC filings.

During this call. We will also be discussing certain non-GAAP financial measures more information and reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings.

Please also note we may at times refer to are accompanied by a stock ticker EPL.

This mornings conference call is hosted by <unk>, Chief Executive Officer, Glover, and Chief Financial Officer for setup.

Management will make some prepared comments after which we'll open the call for questions.

Now I will turn the call over to die.

Thank you Sean good morning, everyone and thank you for joining us today.

Second quarter 2022 results demonstrated business operating at a high level.

All of T bills major revenue streams reported double digit percentage growth on a sequential quarter over quarter basis. The total consolidated revenue growing 20%.

Adjusted EBITDA of $158 million represents a new corporate record and our adjusted EBITDA margin of 90% demonstrates our continued focus on maintaining a lean cost structure and generating high margin.

During this most recent quarter alone we returned over $200 million back to our shareholders in the form of dividends and share buybacks, while still maintaining a balance sheet with zero debt and retaining nearly $400 million of cash.

Although our royalty production came in slightly lower sequentially. This quarter is a great example of the resiliency and the numerous high quality revenue streams the company benefits from beyond just oil and gas royalties.

First quarter revenues were up 18% produced water royalty revenues were up 26% and revenues for surface leases easements and materials, which we referred to as slim were up 52%.

Clemens source water sales in particular are generally good leading indicators for royalty production with the increased business activity this quarter, providing confidence that we'll continue to see strong development on our royalty acreage.

On the source water side sales volumes increased 40% sequentially with increases across all the major channels brackish brokered and treatment.

Due to high water demand, we have increased our capex budget to accommodate new frac ponds tanks pipes and pumps and we now expect full year capex of approximately $18 million to $20 million.

In particular demand from the Midland Basin in Reeves County is very strong.

We're still observing some operator supply chain issues in the field. So they do seem to be using slightly.

However, excess Doug balances appear close to depleting and we're now seeing some friction and delays related to scheduling as operators try to manage quick turnaround timing in finishing new spuds in advance of planned completion.

On the produced water side increase revenues were largely driven by higher volumes from new tie ins and overall increase injection demand.

Now turning to slim the large percentage increase in revenues this quarter was particularly encouraging.

For the last couple of years performance in that business had been flat as operators generally concentrated development around existing infrastructure.

However, in second quarter, we saw broad strength and swim with meaningful higher demand for new surface subsurface wellbore easement pipeline easements and caliche.

When the activity is strong across both our Delaware and Midland surface position with demand from both upstream and midstream operators.

All of this activity is broadly suggestive of continued strong development pacing on and around our royalty acreage.

The outlook for the oil and gas industry remains promising and our shareholder should continue to benefit from the free cash flow afforded by ongoing development in the Permian and high commodity prices.

That said it CPO. We're also excited about the future beyond just oil and gas.

And we continue to dedicate meaningful time and resources towards finding and executing on next generation opportunities that can leverage our unique and expansive surface position in west Texas.

During the quarter, we revealed a couple of projects that we've been working on for quite some time we.

We announced a bitcoin mining venture with Mas and infrastructure group and Jay energy to develop a 60 megawatt facility on PPL surface.

Once complete the facility will generate a unique high margin royalty stream for CBL.

We also announced an agreement with milestone carbon to evaluate the potential to sequester captured cotwo on PPL acreage.

Milestone team is amongst the best in the industry and we look forward to working with them and potentially bringing more carbon capture opportunities to the Permian.

<unk> continues to have numerous constructive conversations on a wide array of nextgen opportunities.

We look forward to advancing these projects as we strive to maximize value of <unk> expansive surface footprint.

On the ESG front, we have posted updated 2021 data on our website.

<unk> scope, one and scope two emissions by 6% year over year.

Through our continued electrification and efficiency efforts, we can improve that further.

We continue to make progress across multiple ESG initiatives and we encourage everyone to visit the ESG portion of our website for more disclosures.

An update on the governance side, our board has approved a proposal to amend the company's charter to declassify The board, which will be included in the proxy materials for the company's 2022 annual meeting.

Pleased to see our board make progress on this item and we look forward to hosting our annual meeting this upcoming November .

Finally, I want to thank all the employees here at PPL.

Without their dedication hard work and talent, it's outstanding performance, we've had across the entire business would not be possible.

We ask a lot from our field and corporate employees and they consistently rise to the challenge.

With that I'll turn the call over to Chris to discuss our quarterly results.

Thanks, Ty total revenue for the second quarter of 2022 was $176 million, which.

Which was driven by double digit percentage increases across all of our major revenue streams on a sequential quarter over quarter basis.

Oil and gas royalty revenue was up 16% quarter over quarter, primarily due to higher commodity prices, partially offset by lower royalty production.

Quarter royalty production of 19 8000 barrels of oil equivalent per day did come in slightly lower compared to last quarter. The oil production was slightly higher at approximately 8900 barrels of oil per day.

Alrighty price realizations continue to be excellent as each oil natural gas and NGL price realizations increased by double digit percentages sequential quarter over quarter, which we fully benefited from as we are still completely unhedged.

I alluded the strong performance in water and swim are encouraging data points as we look ahead to the second half of the year to elaborate a bit more on the outlook. Our well inventory data is also aligned in what we consider to be a positive trajectory for the overall business.

We've seen a meaningful uptick in new permits during the first half of the year with over 500 gross well permits through June compared to approximately 750 gross well apartments for all of 2021.

We averaged approximately 70 gross spuds per month year to date through June which represents an approximate 37% increase compared to the 2021 average of approximately 55 gross spuds per month or.

Our data suggest a bit of a slowdown during the first quarter of 2022 for new completions compared to the pacing during the second half of 2021.

However, we do maintain a higher than normal inventory of completed but unproductive well and we expect these to turned to sales. Once those wells are tied to our 100 million buyback authorization was active during the quarter and we repurchased approximately 17000 shares for approximately $26 million, we intend for the <unk>.

Back program to remain active through the end of the year.

We continue to evaluate our capital allocation priorities and with a large cash balance and a business that continues to generate robust free cash flow, we retain a tremendous amount of flexibility as we look to maximize shareholder value with that operator, we will now take questions.

Thank you we do welcome all questions or comments to register. Please press one four on your telephone you will hear a three ton prompt to acknowledge your request. If your question has been answered or you would like to withdraw a registration. Please press one.

Again, we do welcome all questions or comments to register please press one four on your telephone one moment. Please for the first question.

And our first question comes from the line.

Of anise of Stifel. Please proceed with your question.

Hey, good morning, guys and congrats on a strong update.

Good morning, Ken.

Can you provide some additional detail on slim strength. This quarter as you mentioned in your prepared remarks that business has been flat for a while is there.

There anything you can share on the outlook.

Look I would just say.

That's that's very promising usually when we see.

And.

That's the operators getting prepared for additional development in those areas.

I would also say that.

<unk>.

The additional revenue we saw this quarter in that business line was spread out kind of over.

Surface subsurface wellbore is in the pipeline easements electric easements materials sales.

And so it kind of hits.

The entire business segment I think thats.

That's good news.

Kind of signals to us that may be.

Yes.

More of a durable trend than just volume.

Activity.

But.

The land easement really busy lately.

And a lot of projects.

So I think we're going to continue to see some strength in that area of the business.

Got it.

Then on the Nextgen opportunities can you share how those came about and any initial thoughts on revenue potential and timing for those things.

Yes, So look we've got a we've got a team part of our BD team internally is dedicated to seeking out next gen opportunities. So.

Those opportunities came through the team just reaching out with in the different industries and kind of trying to track down different opportunities for us to expand the use of our surface.

So.

With the.

Bitcoin mining deal with mass and a J I think Boston recently put out a press release back in May.

That facility will be operational by Q4 of 'twenty, two so thats very promising.

On the carbon capture side, we're having some really good conversations there we announced the deal.

The letter is that we signed with milestone.

So theyre going to do some studies on some of our property to see if it's viable for carbon sequestration. So I think we'll continue to see some promising conversations regarding that area of the business.

Got it thanks for taking my questions.

Thank you.

Thank you and our next question comes from the line of course and of Dws Financial. Please proceed with your question.

Hey, good morning.

First off I just wanted to ask about the easement revenue bumping up were there any one time revenue in that number or was this purely because of increased activity.

Yes. So what we saw was it was really just increased activity I mean, obviously like a material sale as a onetime event, but we continue to see strong materials sales.

As far as the pipeline easements and stuff most of those.

We're term even with a lot of well connects.

Gathering lines being put in place.

Rather than like a big onetime long haul perpetual easement like we've seen in the past most of this is.

The current revenue.

And the commentary around the increase in Capex to support the water business.

Because you're you have clarity as far as how much demand you're expecting over the next year.

Yes. So if you look at like our original budget. It was kind of in that $12 million to $14 million range. So we continue to see a lot of demand in the water business.

The water team has done a fantastic job of signing additional contracts this year and so we're going to have to spend some additional capital on infrastructure to support those new contracts as well as additional.

Demand from existing customers, so that that additional capital is going to go towards.

Things like pumps Frack pause some treatment takes some additional pipe.

To accommodate that demand and not just 2022 demand, but also just kind of in preparation for 2023 demand.

So and we're also seeing some supply chain issues like pumps that used to take six to eight weeks are now taking.

10 to 12 months to procure so.

To stay ahead of those bottlenecks and just make sure.

With that we're ready to support the ramp development from our operators.

And my last question was on that topic, because the supply chain is there any kind of timeline or estimates when these bottlenecks could smooth out for you and the operators on Atlanta.

No.

I don't know exactly what that timeline looks like.

It seems like things are starting to ease a little bit.

But.

As far as what that timeline looks like.

I don't have a good answer for that.

Okay, Alright, I appreciate it thank you.

Hello.

Thank you and again as a final reminder to register questions or comments. Please press. The one followed by the four on your telephone.

Our next question comes from the line of Baker of Credit Suisse. Please proceed with your question.

Hey, good morning, guys.

Congrats on the strong water services.

Al.

Great to see those investments in electrification start to pay off in the margin profile.

My question was just around whether or not you still see the company as a natural consolidator.

<unk> minerals.

<unk> term.

Just given the recent Reuters report around Brigham minerals potentially.

Pursuing a sale of the company.

Yes.

I would say we continue to look at ways to add value for our shareholders part of that I don't know if part of that strategy is evaluating potential acquisitions not only on the mineral side.

They need to look at potential surface water acquisitions as well.

Yes.

Great. It makes sense and then.

Just could you remind us obviously theres no debt today, but any guidelines in terms of doing a larger scale deal.

Just around sort of net debt leverage you'd be comfortable with for the company.

Yes, Chris I mean, a lot of that depends on the nature of the assets such that you are buying but I think we've been pretty clear in the past that.

<unk>.

Very low to zero leverage is what we think is appropriate for this type of business.

And so that's likely what you should you should expect.

Yeah.

Where are we to do something like that.

Okay and by low sorry, just to clarify sort of sub one times or one and a half so is there like a.

Ballpark number that you've talked about in the past perhaps.

Yeah, I don't think we've specifically talked about a number but.

And I'm not sure I'd be comfortable giving exact guidance on that because when you are talking about theoretical things it's always all.

It's difficult but.

I think we would be on the lowest end.

What you see out there, which is kind of where we sit today anyway. So.

Sure sure and just if I could squeeze in one more.

Obviously, some great announcements in terms of Ccs study in bitcoin mining et cetera.

Do you think about these alternative surface uses any guideposts, there goalposts I guess you could share in terms of what the.

Aggregate cash flows could be from those.

Those efforts over the next few years. Thanks.

I mean, Chris that's a difficult thing to say I mean, as we said like even just on carbon capture there evaluating.

The liability right now and so until some of those studies are completed I think that's a pretty difficult.

Turning to project, but.

Look I would say stay tuned we will deliver more information as it becomes available.

But the team is working very hard to procure new.

Revenue streams on the surface.

They are going to bear fruit.

Great. Thanks, Chris.

Thank you.

And there are no further questions in the queue that does conclude today's question and answer session.

As well as today's presentation. We do thank you for your participation that does conclude today's call have a great rest of the day everyone.

Okay.

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