Q2 2023 Texas Pacific Land Corporation Earnings Call
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Yeah.
Good day and welcome to the Texas Pacific Corp, second quarter 2020 free earnings call.
But this one to be listen only mode.
So do you need a system pretty siegler conference specialists by pressing the stock he followed by zero.
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The question you May press start then too sorry, Stockton one on your Touchtone telephone.
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Two.
Please note does event is being recorded.
I would now like to turn the conference over to Sean how many vice Presidents finance and Investor Relations.
Please go ahead.
Thank you for joining us today, if our Texas, specifically incorporation second quarter of 2023 earnings conference call Yes.
Yesterday afternoon. The company released its financial results and filed this Form 10-Q with the Securities and Exchange Commission, which is available on the Investor section of the company's website at Www Dot, Texas specifics Dot com.
As a reminder of of Mark Twain on today's conference call May include forward looking statements forward looking statements are subject to risks uncertainties that may cause actual results differ materially from those discussed today.
We do not undertake any obligation to update a forward looking statements from out of new information for future events.
More detailed discussion of the factors that may affect the company's results. Please refer to our earnings release for this quarter Anti-war. Most recent S. A C filings.
Driving this call will also be discussing certain non-GAAP financial measures more information and reconciliation is about these non-GAAP financial measures are contained in our arms released inefficacy Pollock. He's also know he may at times are part of our company buy stock ticker T. P L.
This morning's conference call posted by Ttl's, Chief Executive Officer tie Glover, and Chief Financial Officer Christa.
Management will make some prepared comments after which will open the call for questions.
Now I will turn the call over to tie.
Good morning, everyone. Thank you for joining us today T. P. L delivered an impressive quarter capturing opportunities underpinned by robust permeant activity.
We set new company records quarterly oil and gas royalty production source water revenues and produced water revenues.
And that's in surface related income, which we refer to as slim as best quarterly revenue performance of 2019.
Like our oil and gas royalty revenues, which are predominantly derived from our perpetual royalty interest carved from a mineral.
Water insulin revenues originate from our ownership of the surface of state.
That surface ownership is unique compared to other public oil and gas mineral royalty and lease interest companies.
Binding or surface ownership with active management T. P O like stripes multiple incremental cash flow streams.
The surface derived opportunities had been thoughtfully commercialized to maintain are capitalized high margin business philosophy, which ultimately contribute substantial free cash flow to the overall entity.
I'll also accelerating development of our oil and gas royalty interest.
This most recent quarter is a great example of the built in hedges that protect T. P. L. During periods of volatile commodity prices.
Although oil and gas royalty production this quarter increased 26% year over year, our oil and gas royalty revenues were still down 32% due to that'd be T. I crudele and Henry had natural gas prices the declined approximately 32% and 71% respectively.
However for that same quarterly year over year comparison, our source water revenues were up 69%.
Produce water revenues up 12% and slim revenues were up 34%.
During this last quarter the surface derive revenue streams in aggregate comprised 48% a P. P. LS overall consolidated revenue and helped maintain strong consolidated earning some free cash flow despite much lower commodity prices porcelain, specifically, we're seeing Brian scraped across each subcategory.
Hi, Bonnie Smith Electric line easements, glitchy sales had been especially good as operators complete duck inventory and pushed development across broader areas.
Our team of land agent. The Gis specialists has done a tremendous job working with upstream midstream and other operators to accommodate their development needs and procured revenue opportunities for service.
Turning to water during the quarter, we averaged over 700000 barrels per day of source water sales volumes, driven by robust brackish and treated water demand.
Year to date through second quarter of 2023 total source treated in brokered water volumes are up 31% year over year.
The last 12 months, we've sold nearly 200 million barrels of water and many of those barrels were used to complete oil and gas wells on T. B L royalty acreage.
Produce water volumes during the quarter averaged approximately 2.3 million barrels per day.
Just as a reminder, T P O contracts with operators and other third parties for use of our surface for produce water facilities, including disposal wealth and we generate a contracted fee or produce water bear dishwater volumes for second quarter of 2023, you're up 15% year over year. This was by far our best ever quarterly revenue free cash flow performance.
Water business contributing just under $60 million of high margin revenue only spending less than $2 million in cabinet.
The cumulative efforts of prior capital investments in commercial negotiations going back to the inception of our dedicated in-house water business in 2017 are paying substantial dividends today and.
And many of our water contracts with operators, we have negotiated exclusive off to produce water across large areas of mutual interest.
This is an important feature because it divides P. P. L holistic control over both source and produce water throughout the base and across our surface.
It allows us to continue sales of brackish water, while also providing us incremental upside and opportunities to reuse and treat produce water for completion activities.
Our operations team also deserves tremendous credit for procuring in moving water for our customers at volume levels, we've never done before.
T. P O continues to demonstrate its ability to offer a full spectrum liable water services.
During the last quarter, we spent approximately $20 million to acquire 12000 surface acres and Andrews County, along the Texas, New Mexico State law.
This acreage fits nicely with our current surface footprint and will provide incremental opportunities for our teams to pursue and commercialized as previously disclosed on November 22nd 2022, The company filed a complaint Delaware Chancery court to resolve the disagreement with horizon kinetics LLC.
Isn't kinetics asset management L. L C.
Soft best advisers, LLC softness L T over their voting commitments pursuant to a stockholders' agreement with the company.
We recently concluded the trial and we're now waiting for the court to issue its opinion.
We expect that to happen in due course, and we will update our stockholders when we have more to share.
Also the company recently announced that it has nominated Margaret wound Chapman and Robert Russa as two independent director nominees for election at the upcoming 2023 annual meeting the stockholders.
Both candidates bring a strong makes it industry skills and experience.
Current directors and co chairs the board, David Barry and John Lewis had decided to retire and not stand for reelection at the 2023 annual meeting.
David John have been involved with the company for decades back to his days as a trust they.
They have always been great stewards, the company and it played a pivotal role in helping the company achieved the success it enjoys today.
Without their support T. P O would not have a water or surface business or the professional administration anywhere near the scale and expertise it has today.
They saw and understood the potential that T. P as unique assets possessed and they took a chance to supportive pivot to active management.
On behalf of the entire management team here at T. P. L. We're thankful for their service guidance leadership and friendship over the years and they will leave behind an exceptional legacy of T. B O.
With that I'll turn the call over to Chris.
Thanks Ty.
Total revenues for the second quarter of 2023 or $161 million, representing a 10% increase from the first quarter 2000 twenty-three revenues is.
As previously discussed revenues benefited from higher royalty production source water sales produced water royalties and slim revenues, though partially offset by lower oil and gas prices.
Adjusted EBITDA and free cash flow for the quarter or $134 million and $105 million respectively.
Consolidated Capex was $1.4 million with most of the spin related to the water business.
We ended the quarter with $609 million of cash on the balance sheet royalty production of approximately 24900 barrels of oil equivalent per day represents a 19% increase on a sequential quarter basis. Although we continue to maintain that individual quarterly production figures candy lumping the underlying production on a royalty.
The acreage continues to trend upward.
This is further supported by new World data is recent permits spuds incompletions remain high across both are Midland in Delaware footprints.
In particular activity in central Midland Loving Reeves and Culbertson counties are especially strong our oil price realizations remain high with the second quarter of 2023 average realized oil price of $73 per barrel, which represents an approximate 100 per cent realisation relative to W. T I Cushing price.
Per barrel.
However, our natural gas and natural gas liquids realizations weekend this quarter relative to prior quarter realizations.
Infrastructure constraints and downtime among other factors continued to suppress local west, Texas price realizations from any operators.
For T. P. L. This is somewhat mitigated as we benefit from additional infrastructure Buildout do are slim business is new pipelines processing facilities and other logistics assets generate easement and lease opportunities.
In addition, a royalty acreage is dominated by Supermajors and large independent anp's that tend to own and or commit to new infrastructure, which generally provide some better netbacks compared to smaller public and private operators.
As more infrastructure is developed uncompleted, we would expect our realizations to improve for this quarter. We have maintained our $3.25 per share dividend. We also spent approximately $20 million to repurchase approximately 14000 chairs and with that operator, we will now take questions.
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<unk> announced the first questionnaire, which is very white scene from Stifel. Please go ahead.
Good morning, all and congrats on a strong.
Thanks to Erica Mr.
Or my first question I wanted to focus on the substantial strengths and water resources this quarter.
With the understanding that source water is activity driven and this is the best quarter you posted in the history of the business I wanted to ask if you could elaborate on some of the drivers underpinning the strength.
To allow us to better assess sustainability posed ski too.
Yeah look the water team did a phenomenal job this past quarter. We saw strange you know a cross brackish water sales treatment volumes uhm.
As well as produce water.
The team really pushed the limits of our system delivering over 700000 barrels a day.
And there's a couple of reasons for that increase in volume this quarter.
One has increased activity in contracted areas of mutual interest. So we've talked about those type of agreements in the past.
You know, where where we contract a big area of mutual interests with our operators and they are obligated to to purchase water from us. The team also did a fantastic job of selling water outside of our footprint. So this quarter.
Over 60% of our water sales were off T. P L acreage in.
And that's purely from our business development team and water team.
Expanding our reach beyond our footprint. So I think we will continue to see strong activity levels throughout the year.
This quarter may be a high watermark for the year, but when we look at our backlog of sales you know we continue to see some strength in the near term.
That's great and maybe along the same lines, how should we think about your production trajectory given the strength the key to production in your line of sight activity.
Derek I'll take that one.
You know when we look at the underlying production data.
Kind of a production day basis. It supports what we're saying and you know.
Like we said any given quarter can always be a little bit lumpy.
But when we kind of look at the average with the first half of twenty-three. We think that's probably a pretty good reflection of where the business is that.
And you know as as we've kind of stated when we look at some of the near term inventory.
Ducks completions that are occurring you know we feel good that the that the trajectory for the rest of the year should should include some continued growth.
So that's how we're kind of thinking about it right now.
Chris maybe asked slightly differently from my side when we look at your line of sight activity. How many of those net wells would be required to maintain production.
Yeah, you know Derek is a good question and those numbers always move around as production grows but.
When we think about it I think something probably in the neighborhood of like eight and that well give or take.
Probably about the level, we would need for flat production.
Maintenance.
Alright, that's very helpful and maybe just one final follow up from my side regarding the surface acquisition, you announced in Q2 could you briefly touch on the strategic importance of that area and perhaps more broadly also just touch on the competitive landscape for surface and royalty opportunities across the basin.
Yeah that that particular acquisition it was a little over 12000 acres and Andrews County, along the state lines. So non marketed deal that we source through internal relationships here on the team.
But you know really when we buy surface. We're thinking about you know how does that potential acquisition fit into our current footprint and then you know also are just are broader asset portfolio. And then you know really what are the commercial opportunities that we see to take a raw piece of land like that and commercialize. It. So you know what kind of surf.
Opportunities source water produce water. Other you know next gen opportunities, we think we can commercialize.
Both in near term and long term.
But we really liked the optionality that that Stateline acreage gives US you know if you look at some of our past surface acquisitions, they've been along the state line.
Has it been great investments and you know.
With all of the activity that crosses the state line from New Mexico into Texas, We just feel like that's you know really good option for us.
Yeah, I think the.
As far as the overall market.
On the royalty side right now you know on the surface side, probably a little less competitive, but you know maybe fewer opportunities out there to taken asset that's been underutilized and and you know realize some additional value through commercialization.
But we do think there's still a lot of opportunity left.
That's great terrific Keller thanks for your time.
Thank you Sir.
The next question will come from <unk> from BW that financial please go ahead.
Good morning. So my first question was on the Waterside, what what a hindrance beech Grove further I mean, if you're doing record pace now.
You, obviously have a greater capacity and your first thought so why why why do you think Q2 was the high water Mark.
Well.
Look I don't know that it necessarily will be the high water mark, but when you have a quarter like this you know looking at the at the back half of the year, our water sales usually taper off towards the end of the year, just because there's less activity in the in the <unk>.
You know, but to have a quarter liked to deliver these kind of volumes is is fantastic.
You know the team continues to work hard to source additional barrels off of our footprint. We're also seeing increased activity in.
On our footprint so.
I think sales will continue to be strong.
Yeah and on the eastern side of the business I I saw on the queue that you had to increase it relate to pipeline easement will that be recurring.
$2.4 million.
So most of our pipeline easements are on term agreements that will recur I assume that's what you're asking if those are recurring agreements. The majority of us are yes.
Okay and then.
What's the appetite to do more of these land acquisitions and what's what's the attractiveness to eve that you need to.
To do something like this again.
Ah well our appetite strong you know we're always looking like I said earlier, we're looking for assets that have maybe yet to be commercialized or you know maybe that's just been unrealized you know looking for something that Ah we feel like.
The expertise that we have here on our team can add some additional value through commercialization whether that's.
On the water side of the business one side of the business you.
Just any anything that we feel like the knowledge that we have in house could create some additional value or the relationships that we have throughout the industry could create some additional value that's what we're looking for.
Okay, great. Thank you.
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