Q4 2022 Texas Pacific Land Corp Earnings Call

Good morning, and welcome to task since specific land Corporation's fourth quarter and full year 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, he is the president finance and Investor Relations. Please go ahead.

Thank you for joining us today for specific land Corporation's fourth quarter and full year two earnings conference call yesterday afternoon. The company released its financial results in the Form 10-K Security and Exchange Commission, which is available on the investors section of the company website.

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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 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 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 measures more information reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings.

Please also note we may at times, a photo of accompanied by Arctic or P. P. L.

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

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

Good morning, everyone and thank you for joining us today.

2022, with the consecutive record year for T. P. L. Full year 2022 revenue of $667 million exceeded the previous record by over $170 million.

Not only generated record revenues from our oil and gas royalties, but our combined water self produced water royalties and easements and surface related income also had its best year ever generating over $200 million of revenue.

We achieved a full year consolidated adjusted EBITDA margin of 89% as we continued to efficiently convert revenue into cash flow.

We returned $335 million of capital back to shareholders through dividends and buybacks and we exited the year with zero debt and over $500 million of cash on the balance sheet.

The company also made progress towards expanding our revenue opportunities beyond our legacy business in 2022, we increased our contracted renewable production on our surface by 37% year over year.

We signed agreements for the potential development of carbon capture battery storage and bitcoin mining facilities and we continue to have a lot of good discussions on other interesting fronts.

On the topic of carbon capture we were glad to strike an agreement last month with ozona.

We've been impressed with ozone is expertise in initiatives and it's encouraging to see these projects move closer towards reality.

Our goal that Tcl is to help lay the groundwork is the carbon capture industry scales up and position ourselves to be a key part of the solution and value chain.

Another opportunity that we've been working to exploit as sand deposits located on our acreage.

We recently executed four separate contracts on in basin wet sand mine.

This reflects years of effort by the team here in conducting geologic studies to identify sand deposits.

We assess the feasibility of utilizing wet sand for well completion and to proactively initiate discussions with operators and customers to underwrite development.

These potential projects would generate direct revenue benefits of TPS.

They would also deliver the dual benefit of sourcing of critical input used in the development of PPL royalty acreage, while also significantly reducing truck congestion and associated emissions compared to using.

It's sourced and transported from out of basin.

Yesterday, we announced an agreement with BPH.

City area of BP to provide comprehensive source water produced water uptake and surface access across approximately 270000 acres spanning culberson loving and Reeves County.

This agreement will facilitate <unk> as oil and gas development of a high quality resource base in the Delaware basin, while providing PPL incremental value across multiple water and surface revenue streams.

We have known and worked with the BP team for a long time, and we're very excited to see them ramp Permian development.

Yeah.

Also want to spend some time today discussing some broader Permian topics pertinent to PPL.

First is the potential trend of declining well productivity.

<unk> of course doesn't operate oil and gas wells. So we don't have the detailed perspective that our operators do.

We do monitor what's going on in our backyard.

What we've observed is that operators continue to experiment with optimal development strategy, especially for acreage prospective for multiple zones.

And it seems to be that an increasing number of operators are moving towards co development of multiple zones within a section as opposed to drilling one zone first and then returning at a later time to develop the other zones.

We would note that a large portion of our operators have been deploying the pharma co development strategy for quite some time, resulting thus far and consistently robust well productivity.

In addition laterals on our acreage continue to trend longer fourth quarter 2022 was the first quarter were new permitted wells, new spuds, new completions and new producing wells each averaged over 10000 feet.

Overall, we continue to see strong well performance and productivity across our acreage.

One other industry focal point as the increasing price differential between local Permian natural gas in coastal markets.

Many are aware natural gas pipeline capacity out of the Permian remains tight summer.

Some relief will come this year with a couple of pipeline capacity expansion and repairs.

That said, we have started to see natural gas pricing realizations weakened, especially amongst smaller independent and private producers.

Although marginally weaker gas realizations will negatively impact our royalty revenue it presents significant upside for <unk> on the surface side.

Insufficient takeaway capacity means that the industry has an incentive to develop additional new midstream infrastructure and given our vast checkerboard at surface footprint. This presents pipeline easement opportunities for <unk> to pursue.

The revenue that we lose from weaker gas differentials, we could potentially more than offset with incremental Eastman.

This is another example of the benefit of our active management approach and the natural hedges that we built into the business here.

Another item, we are watching closely it's evolving practice of handling produced water, especially in response to the previous seismic response areas otherwise referred to as SRA.

As a reminder, these sras were enacted by the State Railroad Commission in response to previous seismic activity.

Among the biggest impact of the SRA is was the reduction of injection rates into deep formation saltwater disposal wells otherwise referred to as <unk>.

As a result deep formation swt's generally experience much lower utilization and we've concurrently seen a large increase in demand for shallow formation has to be the permits on our surface.

Going back to the inception of our water business, we've been very deliberate and limiting the amount of deep SWT permitting on PPL.

This helped to preserve viability of third party infrastructure operating on our surface, while also keeping with our focus on sustainability and safety.

Just to reiterate in PPL does not own or operate SPD, rather we have negotiated with various operators. The type of surface use agreement. The <unk> royalty for any produced water barrels that are either store directly on or that cross CPL surface.

These agreements in aggregate cover acreage spanning approximately half a million acres in west Texas.

Contracts also contains strong indemnification language protecting GPL interest as operator, and water midstream companies continue to build and develop infrastructure on our surface.

Not an accident, how we set up the water business here at Tcl and this all serves as a testament to our water team for their skill and foresight.

Looking forward to 2023, although we do not control the direction of commodity prices, which directly impacts a large portion of our revenues.

<unk> team remains committed to sustaining a positive momentum.

Our assets are positioned in the heart of one of the best resource plays found anywhere in the world.

It should development slowed down response to lower commodity prices or other constraints. The immense resource still remains in the ground and available to be exploited in the future when commodity prices strengthen.

Finally.

I want to thank all the employees here at PPL for their diligent work and commitment.

2022, we had zero spills zero reportable safety incident.

We reduced our scope one emissions by 34%.

Not only did our employees helped the company achieved record revenues.

Industry, leading consolidated adjusted EBITDA margin and record earnings and free cash flow per share.

They did it safely efficiently and with a stakeholder mentality.

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

Thanks Todd.

Total revenue for fiscal year, 2022 was $667 million or 48% year over year increase net income of $446 million during fiscal year. 'twenty. Two was also a corporate record and this represents a 65% increase compared to prior year net income.

This strong performance was driven not only by higher commodity prices and higher royalty production, but also year over year revenue increases of 25% for source water, 24% increase in produced water royalties and 28% increase in easements and other surface related income excluding.

Excluding AD valorem taxes are new expense, we started to accrue in 2022, our total consolidated operating expenses increased 9% year over year.

The increase was mostly driven by an approximately $4 million increase in water service related expenses as a result of higher source water sales volumes.

Royalty production for the full year and for the fourth quarter of 2022. Each came in at approximately 21 300 barrels of oil equivalent per day.

On a sequential quarter over quarter basis oil and gas royalty production declined by approximately 9%.

On a year over year basis royalty production grew by approximately 15%.

As we have regularly discussed in the past quarterly oil and gas royalty production will normally have some embedded volatility related to the timing of when we receive a royalty revenue check stubs versus one that production actually occurred in the field that.

To that end, let me provide some additional context on what we can expect for production going forward.

Based on our internal data to date in 2022, we had new permits of 876 gross and $10 nine on a net basis.

Spuds in 2022, so far our tally show 835, gross and $10 three net we consider these to be very strong level not just for 2022, but also to support 2023 development activity.

Data that occurred during the fourth quarter tends to lag a few months for new completion, and new producing wells, but if we look at third quarter 2022 data, which has been more fully reported we show new completions of 262, gross and $3, one net and new producing wells of 208 gross two seven net.

Again, this represents very robust levels for the company and support strong production levels.

I mentioned earlier current commodity prices across the board have declined from the elevated levels. We saw for much of 2022 and natural gas takeaway is tight.

We have seen this diminished price realizations, most especially for smaller independents and privates that generally don't have as much committed pipe capacity.

Those factors among others could contribute to a moderated growth trajectory in the short term for the Permian as a whole.

PPL, we do have a few things working in our favor first activity on our acreage is dominated by large integrated and large independent energy companies, which tend to have more contracted pipeline takeaway capacity and more resilient capital budgets through periods of commodity price volatility.

Second our northern Delaware royalty acreage, which has significantly higher net royalty interest compared to our Midland royalty acreage continues to receive a lot of attention from operators our.

Orlando motto teams continue to be as busy as ever and although quarterly production figures can jump around somewhat quarter to quarter. We have strong conviction that <unk> royalty production continues to trend upward.

In conclusion last week, we announced that our board has approved increasing our quarterly dividend by 25.

The $3 25 per share.

For the fourth quarter of 2022, we repurchased approximately 12000 shares for approximately $29 million.

Starting in 2023, we now have an expanded $250 million share repurchase plan that replaces our previous $100 million repurchase plan we.

We intend to repurchase shares under this plan throughout the year and the expanded size of this plan provides us the ability to accelerate share repurchases, depending on factors such as commodity prices market volatility and the relative attractiveness of special dividends and other value enhancing options.

Our high margin capital light and net cash position ensures the company will have substantial free cash flow even during potential prolonged periods of depressed commodity prices and those unique virtues provide us with a lot of flexibility and opportunity to actively allocate capital to enhance shareholder value through virtually any commodity.

Price environment.

That operator, we will now take questions.

Thank you Andy we'd like to ask a question. Please press star one on your telephone keypad.

Chantal will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star teams.

Our first question is from Derek Glynn.

<unk> with Stifel. Please proceed.

Good morning, all.

Hey, good morning, Dr wanted there.

Well My first question I wanted to focus on the growth outlook for your business segments with the understanding that you don't provide quarterly guidance, how should we think about the near term production trajectory in light of your line of site activity and what appears to be a one off quarter in Q4.

Yes, Thanks Derik.

Like we said in the comments any given quarter, there is going to be some volatility.

Timing under which some of these wells get completed and where rigs are related to our interests can certainly cause some volatility.

<unk> quarter to quarter, but.

I think our general view is TTL can continue to outperform the Permian as a whole.

Over the near to medium term.

And some of the things. We also look at it that encourage us that we're still on a real strong position.

When we exited <unk> 22.

When I look at our normalized DUC count.

It's basically as high as it's ever been.

And so you know to your point, when we think about near term inventory.

Count is really that near term inventory, we have available to draw from and and where most of our production for the coming year is going to come from and so the fact that we've got a really nice.

Set of normalized net docs gives me a lot of encouragement about the.

The production that'll be coming here in the near term for us.

It's Eric I would just add.

Yes.

One of the main things that gives us that comfort that Chris was talking about.

These broad development agreements like we announced yesterday that we put in place with VTS, yes.

We've talked about these agreements in the past that cover these large <unk>.

If you look at that one that's a multifaceted agreement that covered.

Surface use.

Water sale.

Produced water offtake.

Recycling treatment.

So getting an agreement in place with them.

Major operator, like ETS covered that much acreage here.

Now we've got most of our acreage in the Delaware with most of our major operators covered.

Development agreements similar to that.

And so that really gives the operator.

The certainty that they need for their operations, so that they can ramp up development.

Across our leasehold.

And then also make sure that PPL is involved in the entire value chain produced from that development.

We're really excited about that.

It's going to create a lot of value for both companies.

We've been working on for a long time and.

I'm really excited to see it all come together.

That's great maybe just to clarify to you on that.

<unk> analysis does that add third party services across your footprint, meaning new acreage dedications that you wouldn't have had otherwise are really simply just facilitate <unk> ability to grow by streamlining the processes.

Yes, I think it is.

A bit of both so.

It adds too.

The ongoing relationship that we've had the CPA.

And then just opening up.

More acreage for them setting out in terms of development ahead of time, so that they can move faster.

Terrific.

My follow up I wanted to record some of your prepared comments on women's specifically.

<unk> seen opportunity.

Are you, perhaps elaborate on the potential of that development and when we could.

First we expect meaningful revenue.

Yes, so we announced.

More sand mines that we've contracted.

We've done a lot of work over the last couple of years geologic studies coring locating the sand deposits.

We have on E Mail server.

So we've got four signs.

We're still working on locating additional sand deposits. So we think there's huge potential there as well.

I think we'll start to see some revenue this year from the mindset was contracted.

And probably within a couple of years I think thats.

Probably going to add somewhere around $20 million in revenue for the company.

And so I think theres a lot of benefit to inmates in wet sand mining right.

Getting closer to the development.

No.

Youre, reducing truck traffic saving money reducing emissions.

Making the roads safer to travel youre not running a dryer.

No.

End user versus the operator's able to save money.

Which.

Increases their efficiency for development and should attract additional development.

Our acreage.

Very helpful. Thanks for your time and thoughts.

Thanks, Sir.

Our next question is from Amit question with BS Dws financial Please proceed.

Hi, good morning.

First off I, just wanted to ask about the <unk> agreement.

Where are these or how abundant are these and why would a company wanted to use so many acres.

From you or is that more of a highlight of the assets you own.

So the acreage announced the 270000 acres.

<unk> has leasehold spread.

All within that.

And this <unk>.

So it covers parts of three different counties.

They're not necessarily going to be using all 270000 acres. It just gives them the right.

Two.

Use our surface for certain things.

It gives us the ability to supply them water produced water off say things like that.

We're not necessarily using all of those acres, but.

Just gives both parties certain rights with that a lot.

Okay are there.

Feels like of this size out there or are there more of these size deals out there.

Yeah.

I mean, we've announced in the past that we've got large IMI agreements like this.

Multiple operators on our acreage.

There's still some acreage.

On the left out there, but I think you know, especially in the Delaware, We've probably got most of our acreage with most of our operators contracted under some sort of a broad agreement like this.

And the other question I had was about the.

New sources of revenue in your existing acreage are you putting more emphasis on trying to develop.

<unk> developed the acreage for traditional oil or how much.

Your time resources are you applying for.

New revenue sources.

That's a good question.

I mean, obviously, we focus a lot on.

The legacy business.

But.

Last couple of years, we've got an internal team that is focused solely on nextgen opportunities and creating revenue.

Outside of that legacy footprint, so I think more and more.

We can continue to focus on on those.

Non legacy type of opportunity.

Okay.

My last question is any methodology to the current stock buyback program.

You Havent really utilized the $250 million.

Okay.

Yeah, well I mean I think.

That program just.

Just start it off and so.

I think as we've said in some of the prepared remarks and press release, there's a lot of it's going to be opportunistic and we're going to look at.

You know a variety of different factors to determine when to.

A lot of that capital.

Over the coming year and years and.

No.

I think we're going to continue to be good stewards of that capital as we have in the past and tried to use it for what we think is.

It's best for the shareholders and as we said that.

That can be a variety of different things that can be regular dividends special dividends and buybacks.

And so we just continue to try to optimize it.

And what is.

A volatile market and tried it.

Is it as best we can.

A follow up what is your preferred cash level on your you're adding quite a bit every quarter.

Yeah look I think we think that.

Having a robust cash balance, especially in times like these where there's a lot of uncertainty.

<unk> provides us with really good good opportunities.

And again as we've shown in the past.

When we think the time is right, we can take that cash and return it to shareholders and lots of different efficient ways.

But as of right now we felt like a good use of that cash is going to hold some on the balance sheet.

Because we think there may be some good opportunities coming up in the in the near term to utilize.

We utilize itself.

Okay. Thank you.

Thanks, a lot.

We have reached the end of our question and answer session. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Yeah.

Okay.

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Yeah.

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