Q3 2023 Texas Pacific Land Corp Earnings Call

Greetings and welcome to Texas Best strict land Corporation third quarter 2023 earning squad at this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation, if anyone should require operator assistance.

During the conference. Please press Star zero on your telephone keypad.

Reminder, this conference is being recorded it is now my pleasure to introduce your host Sean Amini Finance and Investor Relations. Thank you. Mr. <unk> you may begin.

Okay.

Thank you for joining us today for Texas, specifically Incorporation's third quarter 2023 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 future events or a more detailed discussion of the factors that may affect the companys 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 reconciliation to these non-GAAP financial measures are contained in our earnings release and SEC filings. Please also note we may attached for the company by stock ticker GPL.

This mornings conference call is hosted by <unk>, Chief Executive Officer, Pi Glover, and Chief financial officers Christos.

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

Now I'll turn the call over to die.

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

PPL delivered another strong quarter, driven by improving commodity prices and continued performance of our surface water assets.

Starting with oil and gas royalties revenues increased 6% sequential quarter every quarter as lower royalty production was more than offset by higher oil natural gas and NGL prices.

Past quarter, we've heard from operators that development activities were negatively impacted by infrastructure downtime electricity challenges during the summer heat wave.

With those issues, having subsided and with some additional natural gas takeaway capacity coming online, we think infrastructure and logistics will be less of a constraint for development in the near term.

While our surface leases easements and materials segment, which we referred to a slim we continue to benefit from broad strength across our various endeavors there.

Particular pipeline easements have been robust driven by expanding infrastructure development in the Permian.

For source water year to date revenues have already eclipsed what we did in all of 2022, though down from a record sales volumes off the prior sequential quarter third quarter 2023 source water sales volumes of approximately 545000 barrels per day represent high utilization across our system.

In particular demand for treated water remains elevated with this past quarter, representing record revenues and volumes.

On the produced water side volumes have grown steadily and quarterly revenues are up 9% year over year.

Produced water volumes continue to grow across the Permian of which PPL continues to capture a significant portion through our large <unk> agreements across our surface.

To give some additional visibility on ppl's production outlook I wanted to take some time. This morning to provide recent well development trends on our royalty acreage.

Starting with our near term well inventory at the end of the third quarter 2023 T. P. L had six seven net permit.

Seven nine net drilled but uncompleted wells also referred to as Ducks and five two net completed wells.

This near term inventory totaled $19 nine net wells, which represents a 29% increase from second quarter 2023 level.

Although we had relatively lower net new producing wells added in this most recent quarter the higher balance of completed wells represents a level much higher than what we've generally seen historically, which give some visibility into near term production trends as those get turned to sales soon.

For wells already turned to sales in 2023.

Timing of completion to initial production has averaged around 20 days, which is significantly longer than prior year averages of approximately three to five days.

We believe this timing delays in large part attributable to more operators utilizing co development strategies as more wells are frac together within a pad and then those group of wells are collectively not turned to sales until after the last well is being completed.

All else being equal the effect of this is that the production contribution from new wells becomes lumpier in the short term.

It's also worth noting the timing its permit to spud and spud to completion.

<unk> considerably in 2023 versus prior years in total for wells turned to sales in 2023, the average permit to production timing, it's approximately 10 months, whereas in 'twenty. Two is approximately 11 months in 2020. One it was approximately 13 months.

With respect to rigs, although rig counts in the overall Permian have declined by approximately 10% compared to last year. We've recently seen more rigs operating on T. P. L acreage.

Last year at this time, we estimated that there were approximately 42 rigs operating on PPL acres, whereas today, we estimate we currently have more than 50 rigs. These.

These rig totals align with a well data with third quarter 2023, new spud activity right around record levels on a gross and net basis.

In addition, new carpet activity on our acreage as elevated as third quarter 2023 represents a record for new permits both on a gross and net basis.

With a strong backlog of completed wells and inventory high levels of ongoing permit accelerated development timing of converting permit because sales and currently supported oil and natural gas prices those fundamentals in aggregate underpinning what we believe to be constructive backdrop for development on PPL royalty acreage in the Permian.

More broadly.

Of course commodity prices can change and development schedule is kind of ball.

But as we've shown before <unk> is well positioned to succeed through most any environment.

Before concluding my remarks I also wanted to mention that next week <unk> will be hosting its 2023 annual meeting in Dallas.

I want to remind and encourage shareholders to review the proxy materials, which you can find on our website and on the SEC website and to submit votes.

Anyone need any assistance, please reach out to Investor relations.

That I will turn the call over to Chris.

[laughter].

Third quarter, 2023, total consolidated revenue and net income or $158 million and $106 million respectively.

Total adjusted EBITDA was $141 million, which is 6% higher compared to the prior sequential quarter and adjusted EBITDA margin was approximately 89%.

During the quarter the company benefited from higher commodity prices and lower operating expenses, partially offset by lower royalty production on lower source water sales.

Free cash flow was approximately $106 million and we exited the quarter with approximately $660 million of cash on the balance sheet.

Royalty production of approximately 21800 barrels of oil equivalent per day, representing a 12% decrease on a sequential quarter basis.

Realized price per barrel of oil equivalent increased 19% to approximately $45.

Benchmark prices for each oil gas and Ngls each rose over the prior sequential quarter and our realizations relative to the benchmark prices also improved for this quarter. We have maintained our $3 25 per share dividend. We also spent approximately $6 million.

Purchase approximately 3600 shares of our common stock.

Operator, we will now take questions.

Okay.

Thank you.

We'll now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Our transformation tone will indicate your line is in the question queue.

Stopped too if you would like to remove your questions from the queue for.

For participants using speaker equipment it.

May be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

The first question comes from the line of Derrick Whitfield with Stifel. Please go ahead.

Good morning, all.

Good morning, Hey, good morning, Derek.

My first question I wanted to focus on your Q3 production and you're six to 12 months production trajectory regarding the quarter idea makes sense on the production impact split between elevated temperatures and brown outs versus delayed pills.

The larger pad development.

Secondarily with the record amount of completion and line of sight inventory wells you had exiting the quarter, how should we think about the trajectory as we exit this year and into next.

Yeah.

Hey, Derek will you repeat the first part of your question.

Sure.

Just on the on the production impact for the quarter you talked about in your prepared remarks, there were elevated temperatures and brown outs and then you also talked about.

Some delayed hill due to larger pad development, but wanted to get a sense from you. If you have a view on the split between those two categories.

Okay.

I don't have the exact split but I think we were probably more heavily impacted by the delay until just because we had a lot of mega pads. This last quarter.

We had quite a few wells being drilled from the same pad and so like I mentioned in my prepared remarks, what happens there.

As you know they wait till all of those wells are completed to bring them online and so that makes the near term production a little bit Lumpier and that's what we saw this quarter.

We did see them.

Some effects of of the heat waves with some problems with electricity and so compressor stations going down and I think you'll see some midstream operators talk about those issues as well this quarter.

For the second part of that question, Chris do you want to take that.

Yeah.

So Derek to your point I think we have had a little bit of Lumpiness in our production over the last couple of quarters.

Strong last quarter down a little bit this quarter.

I think as we always say I mean, our view as well.

We want to look towards the long term trend because as Ty has mentioned I think especially as you see some of these operators move.

These large pads, it's going to introduce a little more volatility in the production quarter to quarter, but I think.

And our view nothing has really changed and how we think about long term, let's say medium term production ever.

Everything still looks good I think we still expect overall to see production growth in the coming year.

Again, like we said that really high amount of permits the quicker turnaround of permits and ducks all of those things continue to be positive indicators.

And I think as some of these big pads brought online and we get through some of those.

Temperature issues and pipeline constraint issues.

See that production come to market to the benefit of GPO.

Terrific and then maybe shifting over to capital.

Could you comment on the surface acreage you sold and the importance of disposal and groundwater rights purchase.

Yeah.

I'll take that one the surface that we sold so that acreage was in Culberson County.

So this is way out of like oil and gas fairway.

Range land that.

One big issue that it had was it had a a conservation easement on it.

So this is acreage that.

Wasn't part of the original land grant, but that the company's owned for a while.

And so.

Because of that conservation easement and because of the remoteness, we just didn't see any commercial opportunities and so we had the opportunity to sell it to a local rancher.

So that's kind of.

Where we were at on that so.

Moving onto the pore space that we purchased.

We feel like pore spaces, just becoming more and more valuable as well.

You know, we see produced water volumes continue to grow in the basin and then also looking at other uses of our floor space carbon sequestration things like that we just felt like anytime that we can add to our poor space inventory at attractive prices. Then that's a really good opportunity and really good use of our capital.

Yeah.

Yes.

That makes sense and one last if I could.

During Q2 that was really a banner quarter for you guys in the water business based on the amount of off lease activity your experience.

Could you offer any perspective on how much off lease or how off lease performed this quarter.

So really I mean right. There you know in line with the last quarter definitely over half of our sales.

We're off of our footprint. We also continue to see increases in our treatment and so.

Third quarter was no different I think you know as far as volumes on the treatment side was a was a record quarter for us and.

I would just mention too that.

Talked about this a little bit in the past but.

Most of the produced water gathering infrastructure on our land, we have the exclusive right to take water off of that system.

Treat it and resell it so.

Through good contract structure, we're very well positioned to keep providing brackish water and or ramp up our treatment based on each operator's needs and we.

We continue to grow further and further out sort of our footprint. The water team has done a really good job.

Of contracting additional sales.

And expanding our footprint.

Very helpful. Thanks for your time.

Sure.

Thanks, Derrick thank you.

Next question comes from the line of how much cushion, but b Ws financials. Please go ahead.

Hey, good morning, just a follow up on on the water topic. It given production having declined this past quarter end and how are your customers.

Yeah.

Land.

<unk>, our operating would that imply that you know.

Water sales could actually ramp up as you see these wells come online. It was just a delay factor.

Okay.

Uh huh, so water sales as is typically paralleled with completions activity, but I think you know like Chris mentioned earlier when you look at.

The wells that have been recently spud in this last quarter and our permit count being up so high I think that is definitely an indicator that there will be a lot of completions activity in the coming quarters, which is really good for water sales.

Both on the brackish and treatment side.

As well as the produced water side of the business because once you get that flowback that water has got to go somewhere.

So to answer your question.

Things that we've talked about on the call here are good indicators for future our water revenue.

Okay, and then what's been the big contributor to the easement revenue line this year.

How tangible is it that it'll continue to stay with the business.

So probably the biggest contributors.

This year, especially over the last couple of quarter had been pipeline easements and material sales.

So we're seeing a lot of infrastructure build out you know.

A lot of.

Gas gathering lines, you know we've had a nice ramp in transmission lines as well as you know new gas connects and facilities compressor stations things like that.

And I think that's going to continue we're seeing operators move further away from existing infrastructure and into new areas, where there are requirements for new roads and gathering infrastructure and facilities.

And that was one one thing that we saw a little bit of a bottleneck on last quarter was there were some areas where our wells were not turned in line because of a lack of infrastructure and so the same operators that we've talked to that you know.

Gave us that feedback or the same operators that had a big ramp in the easements for you know say like gas takeaway.

And then on the material sales side, we've expanded caliche sales up into new Mexico, which has been a really nice bump for US. We've also got two of the sand mines that.

We signed towards the end of last year that are actually active now and we've seen a nice bump and San royalties I think we were just under $1 million for San royalties.

Last quarter. So that's that's progressing well you know we've got a couple of other sand leases that are you know should be operational soon.

And as we continued to expand our rock crushing activities and things like that I think will continue to see strong slim activity in the future.

Okay, great. Thank you.

Thanks, Matt.

Okay.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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