Q4 2023 Texas Pacific Land Corp Earnings Call

Operator: Ladies and gentlemen, good morning and welcome to the Texas Pacific Land Corporation fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode.

Ladies and gentlemen, good morning, and welcome to the Texas, That's affect land Corporation fourth quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Amini, Director of Finance and Investor Relations. Please go ahead.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star and zero on the telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Sean Our Muni Finance and Investor Relations. Please go ahead.

Sean Amini: Thank you for joining us today for Texas Pacific Land Corporation's fourth quarter 2023 earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10-K with the Securities and Exchange Commission, which is available on the investor section of the company's website at www.texaspacific.com. As a reminder, remarks made on today's conference call may include forelooking statements. Such statements are subject to risk 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.

Sean: Thank you for joining us today for Texas specific land Corporation's fourth quarter 2023 earnings Conference call Yesterday afternoon. The company released its financial results and filed its Form 10-K with the Securities and Exchange Commission, which is available on the investors section of the company's website at Www dot.

Dot com.

Sean: As a reminder remarks made on today's conference call May include statements forward looking statements are subject to risks uncertainties that may cause actual results to differ materially from those discussed today.

Sean: We do not undertake any obligation to update our forward looking statements in light of new information or future events, a more detailed discussion of the factors that may affect the companys results. Please refer to our earnings release for this quarter and for most of our most recent SEC filings.

Sean Amini: 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 filing. 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 that we may at times refer to our company by its stock ticker, TPL. This morning's conference call will be hosted by TPL's Chief Executive Officer, Ty Glover, and Chief Financial Officer, Chris Dedham. Management will make some prepared comments, after which we'll open the call for questions. Now we'll turn the call over to Ty. Good morning, everyone, and thank you for joining us today.

Sean: 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.

Sean: Also note the Maritimes in support of our company by a stock ticker T. P L.

Sean: This mornings conference call is hosted by Ttl's, Chief Executive Officer, Ty Glover, and Chief Financial Officer, Chris setup.

Speaker Change: Management will make some prepared comments after which we will open the call for questions.

Speaker Change: Now I'll turn the call over to Todd.

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

Ty Glover: TPL ended 2023 with the best quarter we had all year. Performance was led by oil and gas royalty production of approximately 26,300 barrels of oil equivalent per day, which represents 20% sequential quarter over quarter growth and a new company record. We also received excellent contributions from our surface and water-related businesses as they accounted for over 40% of quarterly consolidated revenue. For produced water, we generated a royalty fee on 2.7 million barrels of oil per day during the quarter, also a record.

Ty Glover: T. L ended 2023 with the best quarter. We've had all year performance was led by oil and gas royalty production of approximately 26300 barrels oil equivalent per day, which represents 20% sequential quarter over quarter growth and a new company record.

Ty Glover: We also received excellent contributions from our surface water related businesses as they accounted for over 40% of quarterly consolidated revenues.

Ty Glover: Produced water with generated a royalty fee of $2 7 million barrels per day during the quarter also a record.

Ty Glover: On source water, we recorded 517,000 barrels per day of sales volumes, of which 62% were outside of our footprint, as demand for both brackish and treated water remained elevated. Our surface leases, easements, and materials segment, which we refer to by the acronym SLIM, generated $19 million of revenues, representing 5% growth sequential quarter-over-quarter. Performance for full year 2023 highlights the virtues of TPO's unique business model, especially during periods of volatile commodity prices. Despite oil prices falling by 18% year-over-year and natural gas prices declining by 64%, our water and swim businesses collectively grew revenues by 30%. For fiscal year 2023, our source water revenues grew by 32% year-over-year.

Ty Glover: Source water, we recorded 517000 barrels per day of sales volumes with 62% were off of our footprint as demand for both brackets and treated water remain elevated.

Ty Glover: Surface leases easements and materials segment, which we referred to by the acronym Slim generated 19 million of revenues, representing 5% growth sequential quarter over quarter.

Ty Glover: Performance for full year 2023 highlights the virtues of Ppl's unique business model, especially during periods of volatile commodity prices.

Ty Glover: Despite oil prices falling by 18% year over year in natural gas prices declining by 64% our water is slim businesses collectively grew revenues by 30%.

Ty Glover: For fiscal year 2023, our source water revenues grew by 32% year over year.

Ty Glover: Produce water royalties grew by 17%, and SLIM grew by 48%. The strong performance from our water and surface endeavors helped to substantially offset the negative impact from lower commodity prices. Overall, TPO's business continues to operate efficiently with fiscal year 2023 adjusted EBITDA on pre-cash flow margins of 86% and 66%, respectively. As we look ahead to 2024, TPL is well positioned to benefit from ongoing activity in the Permian Basin. Our land and water teams remain busy, and thus far, customers have indicated intentions to maintain strong levels of development on our royalty and surface acres. Supermajor operators, in particular, continue to execute on a robust, growth-oriented development pace.

Ty Glover: This water royalties grew by 17% and blended grew by 48%.

Ty Glover: The strong performance from our water and surface endeavors helped to substantially offset the negative impact from lower commodity prices.

Ty Glover: Overall TPS business continues to operate efficiently with fiscal year 2023, adjusted EBITDA and free cash flow margins of 86% and 66% respectively.

Ty Glover: As we look ahead to 2020 for Tpa was well positioned to benefit from ongoing activity in the Permian basin, our land and water teams remain busy and thus far customers have indicated an intention to maintain strong levels of development on our royalty and surface acreage.

Ty Glover: Super major operators in particular will continue to execute on our robust growth oriented development pace.

Ty Glover: This is especially relevant for TPL, as these large operators account for a majority of the development on TPL's Royalty Acquisition Program. With respect to recent commodity class volatility, it's important to remember that TPL's royalty and surface acreage overlaps with some of the most economically viable shale within both the Delaware and Linden Basins, and North America more broadly. Should we see a prolonged period of weak commodity prices, we would expect operators to maintain healthy development levels across their core Permian leaseholds while triaging other parts of their non-Permian portfolio. However, should oil prices remain supportive at current levels or higher, then we'd expect activity levels to support higher production. We're optimistic and encouraged by what we see so far, and we're looking forward to maximizing our opportunities for this year. Chris will have more to share later on our outlook for the Permian as TPL's business into 2024. I would also like to spend some time this morning reiterating and elaborating on PPO's capital allocation priorities. First, our North Star is maximizing shareholder value. That's always been the goal, and that dictates everything we do.

Ty Glover: This is especially relevant for T. C. L. A as these large operators account for a majority of the development of T. P O S royalty acreage.

Ty Glover: With respect to recent commodity price volatility, it's important to remember their T cells royalty and surface acreage overlap with some of the most highly economic shale within both the Delaware and Midland Basin in North America more broadly.

Ty Glover: Should we see prolonged period of weak commodity prices, we would expect to operators to maintain a healthy development levels across their core Carmen leasehold, while triage in other parts of their non Permian portfolio.

Ty Glover: Should oil prices remain supportive at current levels are higher than we would expect activity levels to support higher production.

Speaker Change: We're optimistic and encouraged by what we see so far and we're looking forward to maximizing our opportunities for this year.

Speaker Change: Chris will have more to share later on our outlook for the Permian is the T bills business into 'twenty 'twenty four.

Chris: I would also like to spend some time this morning, reiterating it elaborating on T bills capital allocation priorities.

Chris: First our north star is maximizing shareholder value, that's always been the goal and that dictates everything we do there.

Ty Glover: On that point, we believe the key to maximize TPL shareholder value is to maximize free cash flow per share because cash is finite. Over the long term, what a company can pay in dividends, repurchase shares, and invest in itself is fundamentally limited to the cash it generates. Thus, if we can expand free cash flow on a per share basis, and not just in the near term but also in the long term, and future free cash flow per share, then we'll be able to sustainably and consistently increase our capacity to return greater amounts of capital back to shareholders. The more cash we can ultimately return to shareholders, the more valuable to Enterprise. If maximizing free cash flow per share is the goal, the question then becomes, how do we achieve it? Our primary options are to invest in organic opportunities, buy back our stock, acquire external assets, or pay dividends, or some combination thereof. Each one of those options has an economic and strategic reality.

Chris: On that point, we believe the key to maximize shareholder value is to maximize free cash flow per share.

Chris: Cash is finite.

Over the long term water company can pay dividends repurchase shares and invest in itself are fundamentally limited to the cash you generate.

Chris: If we can expand free cash flow on a per share basis, and not just near term, but also long term productive capacity for future free cash flow per share.

Chris: And we'll be able to sustainably and consistently increase our capacity to return greater amounts of capital back to shareholders.

Chris: The more cash we can ultimately return to shareholders the more valuable the enterprise.

Chris: If maximizing free cash flow per share is to go. The question then becomes how do we achieve it.

Chris: Our primary options are to invest in organic opportunities.

Chris: Buyback our stock.

Chris: Acquire external assets or pay dividend or some combination thereof.

Chris: Each one of those options contains an economic and strategic reality.

Ty Glover: Our job is to determine the long-term returns for each option and then allocate capital accordingly. If we can do that well, we create shareholder value. In practice, there are no simple answers, but we try and solve these issues with a fundamental, bottoms-up, intrinsic value approach.

Chris: Our job is to determine the long term returns for each option and then allocate capital accordingly.

If we can do that well we create shareholder value.

Chris: In practice there are no simple answers, but we try and solve these items with the fundamental bottoms up intrinsic value approach.

Ty Glover: Let's quickly go through our capital allocation options, deconstruct how we evaluate returns, and where those returns and priorities stand today, starting with organic investment. Here, we look at what opportunities are available to leverage the company's existing assets, people, and expertise to expand its business. Potential organic investments are predicated on generating double-digit returns on capital while also balancing our preference for high margins and a capital-wide business model. Our investment in the water business serves as a great case study. For most of TPL's long history, going as far back as the 19th century, there was basically zero organic investment.

Chris: So let's quickly go through our capital allocation options deconstruct, how we evaluate returns and where those returns are priority stand today.

Chris: Starting with organic investment.

Chris: Here, we look at what opportunities are available to leverage the company's existing assets people and expertise to expand its business.

Chris: Potential organic investments are predicated on generating double digit returns on capital while also balancing our preference for high margins at a capital light business model.

Chris: Our investment into the water business serves as a great case study.

Chris: For most of <unk> long history.

Chris: As far back as the 19th century, it was basically zero organic investment.

Ty Glover: In 2017, that changed as we began to take advantage of TPO's unique ownership of both royalty and surface acres. Without diving too deeply into the commercial and competitive dynamics that drove why we structured the individual pieces that make up the water basin, namely an operated source water business and a contracted 3-foot ruralty for produced water. The key takeaway is that each business was deliberately and carefully commercialized to provide the optimal balance between generating high returns on investment, moderating capital requirements, enhancing the overall business profile, and ultimately maximizing long-term free cash flow per share. Since 2017, we have cumulatively invested approximately $140 million of capital into the water business. The water business and returns generated about $470 million of cumulative after-tax cash flow.

Chris: In 2017 that changed as we began to take advantage of T. P. S unique ownership of both royalty and surface acreage.

Chris: Without diving too deeply into the commercial and competitive dynamics that drove why we structured the individual pieces that make up the water business.

Chris: Namely an operated saltwater business at a contracted throughput royalty for produced water. The key takeaway is that each business was deliberately and carefully commercialize to provide the optimal balance between generating high returns on investment.

Chris: Moderating capital requirements enhancing the overall business profile and ultimately maximizing long term free cash flow per share.

Chris: Since 2017, we have cumulatively invested approximately $140 million of capital into the water business.

Chris: The water business and returns generated about $470 million of accumulative after tax cash flow.

Chris: And that does not include any of the significant benefits, we derived both from sourcing water for our operator completion activities.

Ty Glover: And that does not include any of the significant benefits we derive both from sourcing water for our operator completion activities or from facilitating essential produced water solutions for oil and gas wells on PPL voltage. For fiscal year 2023, our water services and operations segment closed with a net PP&E balance of about $84 million, from which we generated $99 million of net income during the year, resulting in excellent returns on cap. As of FANS today, we've developed the largest source water network in the broader northern Delaware Basin.

Chris: Orphan facilitating a central produced water solutions for oil and gas wells on PPL royalty acreage.

Chris: For fiscal year 2023, our water services and operations segment close within that P. P any balance of about $84 million.

Chris: From which we generated 99 million of net income during the year, resulting in excellent returns on capital.

Chris: As it stands today, we have developed the largest source water network and a broader northern Delaware basin.

Chris: We invest approximately $5 million to $10 million annually towards various growth and cost savings initiatives with each project individually assessed to determine economics as we continue to explore various opportunities and ideas to enhance our business.

Ty Glover: We invest approximately $5 to $10 million annually towards various growth and cost-savings initiatives, with each project individually assessed to determine economics as we continue to explore various opportunities and ideas to enhance our business. Overall, the growth of the water business has provided us with substantial free cash flow growth for the overall enterprise. With that growth in free cash flow over the years, TPL has been able to pay out increasingly larger dividends and execute on larger buybacks, all the while maintaining high cash flow margins, low capital intensity, and a net cash balance. Beyond water, we're also searching for new opportunities to leverage our surface ownership. Many fan lines we've discussed in the past are a good example.

Chris: Overall the growth of the water business has provided us with substantial free cash flow growth to the overall enterprise.

Chris: With that growth in free cash flow over the years Tcl has been able to pay out of increasingly larger dividends and execute on a larger buyback all the while maintaining high cash flow margins low capital intensity and a new.

Chris: Net cash balance sheet.

Chris: Beyond water, but also searching for new opportunities to leverage our surface ownership.

Chris: Any fan lines, we've discussed in the past are a good example.

Chris: Consistent with our current makeup the overwhelming preference is to commercialize new projects that are capital light high cash flow margin manner.

Chris: To the extent there is a project that can provide both exceptional returns and strategically critical within the context of the overall enterprise and we have the wherewithal to strategically deploy capital just like we did for the water business.

Ty Glover: Consistent with our current makeup, the overwhelming preference is to commercialize new projects in a capital-light, high cash flow margin manner. To the extent there's a project that can provide both exceptional returns and is strategically critical within the context of the overall enterprise, then we have the wherewithal to strategically deploy capital just like we did for the water ghost. Next, let's discuss share reports. When you buy back company shares, you're basically still buying assets. It's just that these assets are already owned by the company. The question is, what is the return generated by buying back your own shares?

Chris: Next let's discuss share repurchases.

Chris: When you're buying back company shares you're basically still buying asset. It's just that these assets are already owned by the company.

Chris: Question as well.

Chris: What is the return generated by buying back your own shares.

We look at share buybacks in a similar manner as we looked at purchasing external assets.

Chris: If buying back stock or buying a claim on over 20000 net royalty acres on at eight eight spaces and nearly 1 million surface acres.

Chris: Those assets to generate a cash flow stream.

Ty Glover: We look at share buybacks in a similar manner as we look at purchasing external assets. Buying back TPL stock, we're buying a claim on over 20,000 net realty acres on an 8-H basis and nearly 1 million surfaces. Those athletes are generated cash flows.

Chris: What we do is go piece by piece and evaluate the full cash flow potential over the life of each asset.

Chris: After aggregating the various components of the business, we can measure that value against the price to acquire.

Chris: Price for a buyback is a publicly traded share price.

Ty Glover: What we do is go piece by piece and evaluate the full cash flow potential over the life of each asset. After aggregating the various components of the business, we can measure that value against the price to acquire. That price for a buyback is our publicly traded share price. There's just as much art as science to this, given all the various inputs, and we do our best to generate reasonable assumptions.

Chris: There's just as much art as science or just given all the various inputs when we do our best to generate reasonable assumption we.

Chris: We run various scenarios sensitizing important factors commodity prices of course being a major item.

Chris: We have reservoir engineers on staff to assess resource potential track by track for our royalty acreage.

Chris: We ran a bottoms up lifecycle analysis across our water businesses.

Chris: We also own a forever land asset that we are actively working to monetize and that is basically an auction values for future revenue potential. So we account for that.

Ty Glover: We run various scenarios, sensitizing important factors, commodity prices, of course, being a major item. We have reservoir engineers on staff to assess resource potential track-by-track for our Royal Paiute group. We run a bottoms-up lifecycle analysis across our water and spun business. We also own a forever land asset that we are actively working to monetize, and that is basically an option value for future revenue potential, so we account for that. After aggregating everything, we have an internal appraisal of our intrinsic value.

Chris: After aggregating everything we have an internal appraisal of our intrinsic value.

Chris: We can then measure that against the stock market's appraisal of those exact same assets.

Chris: If we can generate a double digit IRR at mid cycle or class of approximately $75 oil and $3 gas than buybacks become an extremely attractive option to deploy significant capital.

Chris: We still have over $200 million remaining on our current buyback authorization. So we have the tools in place to quickly execute a robust share repurchase program.

Chris: Beyond just these opportunistic parameters, we do anticipate maintaining some level of buybacks throughout the year.

Ty Glover: We can then measure that against the stock market's appraisal of those exact same assets. If we can generate a double-digit IR at a mid-cycle oil price of approximately $75 per barrel at $3 gas, then buy-buys become an extremely attractive option to deploy significant capital. We still have over $200 million remaining on our current buy-back authorization, so we have the tools in place to quickly execute a robust share repurchase program. Beyond just these opportunistic parameters, we do anticipate maintaining some level of biobanks throughout the year.

Chris: They're still benefits to buying more of the assets, we know so well and to just being in the market support and stop.

Chris: We have a long history of repurchasing shares we've recognized that has been an important element of the T. P. L story through the years.

Chris: And that's something we want to reinforce.

Speaker Change: On that point, we receive feedback from some investors on why you feel it doesn't just stick to what it did in the past and just use all of its cash to buy back shares.

Speaker Change: After all of that strategy was a core factor in driving some phenomenal returns through the decade.

Speaker Change: It's a fair point and its worth diving into the buyback strategy F. T. P. L of yesteryear horses to buy that strategy today.

Ty Glover: There are still benefits to buying more of the assets we know so well and to just being in the market supporting stocks. We have a long history of repurchasing shares. We recognize that has been an important element of the TPL story through the years, and that's something we want to reinforce. On that point, we received feedback from some investors on why TPO doesn't just stick to what it did in the past and just use all of its cash to buy that share. After all, that strategy was a core factor in driving some phenomenal returns through the decade. It's a fair point, and it's worth diving into the buyback strategy of TPO of yesteryear versus the buyback strategy today, for most of its existence when TPL was effectively just a liquidating trust.

Speaker Change: For most of its existence when PPL was effectively just a liquidating trust.

Speaker Change: The strategy back then was to take the modest cash are generated from some vertical oil and gas wells raising.

Raising leases and asset sales and to use those proceeds to repurchase shares.

Speaker Change: But the benefit of hindsight those buybacks worked incredibly well because few new or understood that one day modern horizontal drilling and hydraulic fracturing would unlock the ocean of oil that was locked in a shell lying underneath the trusts royalty acreage.

Speaker Change: Thus you were buying back the assets that would later become some of the best shale assets at a valuation that only reflected some minor ancillary operations. It was quite a deal.

Speaker Change: Today, the extent and quality of the shell resource on T. P. O land is widely recognized.

Speaker Change: So much so that our stock trades at a meaningful premium to peers.

Ty Glover: The strategy back then was to take the modest cash it generated from some vertical oil and gas wells, grazing leases, and asset sales and to use those proceeds to repurchase shares. With the benefit of hindsight, those Biobats worked incredibly well because few knew or understood that one day modern horizontal drilling and hydraulic fracturing would unlock the ocean of oil that was locked in a shell lying underneath the truss roll-tape. Thus, you were buying back assets that would later become some of the best shale assets at a valuation that only reflected some minor ancillary operations. It was quite a deal.

That's also become evident recently with nearly $100 billion.

Speaker Change: Our Permian lease operator acquisitions occurring just in the last few months.

Speaker Change: Although we resolutely believe P. P. L has a unique and replicable set of assets and an outstanding team that justifies a premium buying.

Speaker Change: Buying back our stock today isn't the same steel, but it was a decade ago.

Speaker Change: Not to say that it isn't a good deal of that.

Speaker Change: I like the economics from decades past aside we.

Speaker Change: We will not hesitate to aggressively buy back when the opportunity arises.

Speaker Change: Furthermore, if.

Speaker Change: If returns across organic capex, M&A dividends or buyback, where all equivalent our preference would be to lean into buybacks our bias is buybacks.

Ty Glover: Today, the extent and quality of the shale resource on TPO land is widely recognized, so much so that our stock trades at a meaningful premium to peers. This has also become evident recently with nearly $100 billion of Permian lease operator acquisitions occurring just in the last few months. We resolutely believe PPL has a unique, irreplaceable set of assets and an outstanding team that justifies a premium. Buying back our spot today isn't the same steal that it was decades ago, but that doesn't mean that it isn't a good deal. BIVAC economics from decades past aside, we will not hesitate to aggressively grant BIVACs when the opportunity arises. Furthermore, it returns across organic cathodes.

Speaker Change: Turning to external acquisitions over the last few years, we've been candid in our interest in evaluating potential opportunities.

Speaker Change: We have a huge surface and royalty footprint they have a talented team of industry professionals we.

Speaker Change: We have capabilities to monetize land like few others can and we have the technology and systems to efficiently scale.

Speaker Change: It's for all of those reasons why we believe we're in a prime position to consolidate high quality Permian surface and royalty assets.

Speaker Change: We approach M&A similar to buybacks, we evaluate each asset from a bottoms up intrinsic value approach.

Speaker Change: The same assumptions, we use to value of our own assets, whether it's commodity prices track by track resource potential or surface water opportunities, we used to analyze third party assets.

Ty Glover: If M&A, dividends, or buyback were all equivalent, our preference would be to lean into buybacks. Our bias is buybacks. Turning to external acquisition, over the last few years, we've been candid in our interest in evaluating potential opportunities. We have a huge service and royalty footprint. We have a talented team of industry professionals. We have the ability to monetize land like few others can, and we have the technology and systems to efficiently scale. It is for all of those reasons why we believe we're in a prime position to consolidate high-quality Permian surface and loyalty assets. We approach M&A similar to buybacks. We evaluate each asset from a bottom-up intrinsic value approach.

Speaker Change: Again, the goal here is to generate at least double digit IRR and invested capital and incremental free cash flow per share.

Speaker Change: For any package that's a meaningful interest is in addition to extensive financial analysis, we also perform significant asset and operational due diligence.

Speaker Change: Because T P. L already owns great assets, we have no interest in diluting down our asset quality, our growth prospects or our unique business model.

Speaker Change: For any deal the economics have to work it has to make us a better enterprise and it has to enhance shareholder value.

Speaker Change: That's a very high bar and we will keep it.

Speaker Change: And finally, if the company only has modest opportunities to deploy capital towards organic or external growth and if buybacks are relatively less attractive.

Ty Glover: The same assumptions we use to value our own assets, whether it's commodity prices, track-by-track resource potential, or surface and water opportunities, we use to analyze third-party assets. Again, the goal here is to generate at least double-digit IRRs on invested capital and incremental free cash flow per share. For any package that's of meaningful interest to us, in addition to extensive financial analysis, we also perform significant asset and operational due diligence. Because TPL already owns great assets, we have no interest in diluting our asset quality, our growth prospects, or our unique business model. For any deal, the economics have to work, it has to make us a better enterprise, and it has to enhance shareholder value. It's a very high bar, and we'll keep it high. And finally, if the company only has modest opportunities to deploy capital towards organic or external growth, and if buybacks are relatively less attractive, then dividends are another effective way to return capital back to shareholders.

Speaker Change: And dividends are another effective way to return capital back to shareholders.

Speaker Change: A good example was back in May of 2022.

Speaker Change: That'd be T. I agree that's over $100 Nat gas over $7, both basically at highs over the last decade.

Speaker Change: Valuations than for external assets were based on essentially peak commodity prices and peak multiples.

Ty Glover: A good example was back in May of 2022. WTI crude was over $100, and natural gas was over $7, both basically at highs over the last decade. Valuations then for external assets were based on essentially peak commodity prices and peak multiples. Firebacks during this time were also relatively less attractive given this above-cycle commodity price.

Ty Glover: We had modest capital needs for our organic endeavors, and without great options to use the capital ourselves, we paid a $20 per share special dividend and gave that cash back to shareholders. We may find ourselves in a similar situation in the future, where large special dividends are readily available. Our capital allocation strategy will adapt as industry and market fundamentals evolve. Our cash balance at year-end has grown to $725 million as we've harvested cash flows over the last couple of years during this period of relatively high commodity prices and as we've held back on large pro-cyclical spending.

Speaker Change: This will benefit tremendously.

Speaker Change: We're very much in a position of strength and the company will it sell and blessed to any environment.

Speaker Change: With that I'll turn the call over to Chris.

Chris: Thanks time.

Chris: Consolidated revenues during the fourth quarter of 2023, approximately $167 million, representing six per cent sequential quarter over quarter growth.

Chris: Justin EBITDA was $151 million in free cash flow was $116 million.

Chris Dedham: Today, commodity prices are lower, and we have an opportunity to deploy substantial capital counter-cyclically as weaker competitors pull back, as valuations fall, and as opportunities grow, or if commodity prices rise. We're very much in a position of strength, and the company will excel in almost any environment. With that, I'll turn the call over to Chris. Thanks, Ty.

Chris: Free cash flow for the corridor grew 15% on a year over year basis, driven by higher royalty production source water sales produced water royalties and slim revenues and partially offset by lower oil natural gas and NGL prices.

Speaker Change: Since I've already reviewed some of our other highlights for the quarter and full year 2023, I'll spend some time now on how we're thinking about things for 2024.

Chris Dedham: Consolidated revenues during the fourth quarter of 2023 were approximately $167 million, representing 6% sequential quarter-over-quarter growth. Adjusted EBITDA was $151 million, and free cash flow was $116 million. Free cash flow for the quarter grew 15% on a year-over-year basis, driven by higher royalty production, source water sales, reduced water royalties, and slim revenues, and partially offset by lower oil, natural gas, and NGL prices. Since Ty has already reviewed some of our other highlights for the quarter and full year 2023, I'll spend some time now on how we're thinking about things for 2024. As it relates to development in the overall Permian, our general view is that if oil prices stay around or above $75 per barrel, that is generally constructive for continued growth.

Speaker Change: As it relates to development and the overall Permian our general view is that if oil prices stay around or above $75 per barrel that is generally constructed for continued growth.

Speaker Change: If oil prices weekend to $70 or less for an extended period of time, we would expect overall Permian activity levels to slow and overall production volume to flatten.

Speaker Change: Specific to T. P. L. R business overall tends to be dominated by Supermajors in large independence.

Speaker Change: Which tend to maintain development plans, even during times of sideways commodity prices.

Speaker Change: Over 50 per cent of our current drill but uncompleted wells otherwise known as Ducks are held by Supermajor, Chevron Exxon Conoco B P and Occidental.

Speaker Change: 80 per cent of our current ducks are held by operators with an enterprise value of at least $15 billion.

Speaker Change: Although rig counts of fallen in the overall Permian compared to a year ago, we have seen rig counts on our acreage remains stable.

Chris Dedham: If oil prices weaken to $70 or less for an extended period of time, we would expect overall Permian activity levels to slow and overall production volumes to flatten. Specific to TPL, our business overall tends to be dominated by supermajors and large independents, which tend to maintain development plans even during times of sideways commodity prices. Over 50% of our current drilled but uncompleted wells, otherwise known as ducts, are held by supermajors Chevron, Exxon, Conoco, BP, and Occidental. Additionally, 80% of our current wells are held by operators with an enterprise value of at least $15 billion.

Speaker Change: New spud activity on a net basis in the fourth quarter with a company record and our overall near term well inventory remains robust we.

Speaker Change: We are seeing persistent strong activity and loving and northern Culberson and in the Central Midlands sub region.

Speaker Change: In addition continued operator efficiencies have condensed permit to production pacing, even despite wells with increasingly longer lateral links.

Speaker Change: Our water team today is just as busy as last year.

Speaker Change: And indications that they've received from operators is that development activity will remain at high levels.

Speaker Change: Our land agents also remain active as demand for pipeline easements surface leases wellbore easements and caliche as strong as.

Chris Dedham: Although rig counts have fallen in the overall Permian compared to a year ago, we have seen rig counts on our acreage remain stable. New SPUD activity on a net basis in the fourth quarter at a company record, and our overall near-term well inventory remains robust. We are seeing persistent, strong activity in Loving and Northern Culverson and in the Central Midland Subregion.

Speaker Change: As we previously indicated we believe that T. P. L royalty production can grow at a level that exceeds overall permiam growth, although like we've experienced over the past year or so short term quarter to quarter performance can be somewhat volatile due to greater code completion developments, operator short term development patterns specific.

Chris Dedham: In addition, continued operator efficiencies have condensed permit-to-production pacing, even despite wells with increasingly longer lateral lengths. Our water team today is just as busy as last year, and indications that they've received from operators are that development activity will remain at high levels. Our land agents also remain active as demand for pipeline easements, surface leases, wellbore easements, and caliche is strong.

Speaker Change: Net revenue interest for various tracks and checks the timing.

Speaker Change: To conclude T P L as in a great spot today, our balance sheet arguably has never been stronger.

Speaker Change: Business still maintain strong cash flow and profitability margins.

Speaker Change: T P. L still remains unhedged on commodity prices. So we capture the full upside as commodity prices improve and.

Speaker Change: And if commodity prices weekend, and we have ample means in multiple ways to take advantage and with that operator, we will now take questions.

Chris Dedham: As we've previously indicated, we believe that TPL royalty production can grow at a level that exceeds overall permian growth, although, like we've experienced over the past year or so, short-term, quarter-to-quarter performance can be somewhat volatile due to greater co-completion developments, operator short-term development patterns, and the cost, net revenue interest for various tracts and check stub timing. To conclude, TPL is in Our balance sheet arguably has never been stronger.

Speaker Change: Thank you.

Speaker Change: <unk>, we will now be conducting a question and answer session if.

Speaker Change: If you would like to ask a question <unk> and one on your telephone keypad.

Speaker Change: Confirmation Dawn will indicate your line isn't a question Q.

Speaker Change: You May press Star and two if you would like to remove your question from the queue.

Speaker Change: Four participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.

Chris Dedham: The business still maintains strong cash flow and profitability margins. TPL still remains unhedged on commodity prices, so we capture the full upside if commodity prices improve. And if commodity prices weaken, then we have ample means and multiple ways to take advantage of it. And with that, operator, we will now take questions. Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question zone. May press star and 2 if you would like to remove your question from. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button.

Speaker Change: Ladies and gentlemen, even wait for a moment, let me pull for questions.

Speaker Change: Our first question is from Hamid continent, but B W. S financial Please go ahead.

Hamid: Hi, Good morning, So first off could you just talk a little bit more about the water business and what you're doing there are as far as the the cost structure goes I noticed that if I combine.

Hamid: Both water Ah line items on sale Friday, and then look at your cost basis the cost is.

Hamid: More than outpaced the sales sales growth. So if you could just comment there and what your expectations are.

Speaker Change: [noise] Yeah [noise].

Speaker Change:

Operator: Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from Hamed Khorsand with BWS Financial. Please go ahead. Hey, good morning.

Hamid: I think it's tie it set in his prepared remarks, you know at the end of the day. What we are trying to do is grow our free cash flow.

Hamid: And you know last.

Hamid: Last year was a bad unique there was a few times, where you know depending on where that water was moving and some of the contracts. It was a little bit more expensive as we continue to reach out further into the basin. Some of the expenses to get water to the further reaches of the Permian have increased.

Hamed Khorsand: So first off, could you just talk a little bit more about the water business and what you're doing there as far as the cost structure goes? I noticed that if I combine both water line items on the sales side and then look at your cost basis, the cost is, you know, more than outpaced the sales growth. So if you could just comment on what you're expecting. Hey Ahmed, this is Chris.

Hamid: On the flip side, we continued to electrify a lot of the operations, which helps regulate and even bring down some of the cost through the ability to automated systems have less personnel required to run them, but at the end of the day you know the cost to deliver some of that water as we expand has come down but.

Chris Dedham: You know, I think, as Ty said in his prepared remarks, at the end of the day, what we are trying to do is grow our free cash flow. And, you know, last year was a bit unique. There were a few times where, you know, depending on where that water was moving and some of the contracts, it was a little bit more expensive. As we continue to reach out further into the basin, some of the expenses to get water to the farther reaches of the Permian have increased. On the flip side, we continue to electrify a lot of the operations, which helps regulate and even bring down some of the cost through the ability to automate systems and have less personnel required to run them.

Hamid: Thank the good news is is that still leads to increased cash flow for the business.

Speaker Change: Okay and then my other question was as far as the <unk> business goes alone gas was there any supply chain issues that you can see that you know could hamper production.

Speaker Change: Or are you.

Hamid: Seeing the production can stay steady with leather.

Hamid: Leather is electricity is permitting.

Chris Dedham: But at the end of the day, you know, the cost to deliver some of that water as we expand has come down. But I think the good news is that it still leads to increased cash flow for the business.

Hamid: I think most of the supply chain issues that we've seen over the last few years has been worked out.

Hamid: Obviously, there's still a lot of infrastructure buildout that needs to be done in the Permian, but talking to our operators in midstream operators as well I think infrastructure planning is going well and companies seem to be making the right moves to prevent those bottlenecks in the future.

Chris Dedham: And then my other question was, as far as the oil side of the business goes, oil and gas, are there any supply chain issues that you can see that, you know, could hamper production? Or are you, you know, just seeing that production can stay steady with, you know, if weather is, electricity is permitted? I think most of the supply chain issues that we've seen over the last few years have been worked out. Obviously, there's still a lot of infrastructure built out that needs to be done in the Permian, but talking to our operators and midstream operators as well, I think infrastructure planning is going well, and companies seem to be making the right moves to prevent those bottlenecks in the future. I think most of those issues, overall, have been worked out.

Hamid: <unk> so.

Hamid: I think most of those issues over all of them.

Hamid: And then last question is on your easement side is there anything of a one time nature of their this past quarter that won't repeat in Q1 or in 2024.

Hamid: I mean for the most part.

Hamid: Big part of that is pipeline easement material sales have increased as well, but those should be ongoing like I said I'm talking to our midstream operators, there's still a lot of infrastructure build out of data plan for 2024.

Chris Dedham: And then last question: on the easement side, is there anything of a one-time nature there this past quarter that won't repeat in Q1 or in 2024? I mean, for the most part, you know, a big part of that is pipeline easements. Material sales have increased as well, but those should be ongoing. You know, like I said, talking to our midstream operators, there's still a lot of infrastructure build out that they have planned for 2024. Material sales continue to be strong.

Hamid: Material sales continue to be strong growing our San royalties as well so I would anticipate that stay strong through 2024 and really over the next few years.

Speaker Change: Great. Thank you.

Speaker Change: Thanks.

Speaker Change: Thank you.

Hamid: Next question is from Nate Pendleton with Stifel. Please go ahead.

Chris Dedham: We're growing our sand royalties, as well, so I would anticipate that staying strong through 2024 and really going on forever. Great, thank you. Thank you. Thank you. Our next question is from Nate Pendleton with Stiefel. Please go ahead.

Nate Pendleton: Good morning, and congrats on the stone corner.

Nate Pendleton: Starting with production coming off this wrong key for an understanding that historically production has been lumpy how should we think about the production trajectory heading into Q1 versus full year.

Nate Pendleton: Good morning and congratulations on this strong quarter. Starting with production, coming off a strong Q4 and understanding that historically production has been lumpy, how should we think about the production trajectory heading into Q1 versus full year? Yeah, hey, I think what you said is right, you know; we still expect that production is going to kind of remain lumpy through time. Just the nature of how the wells get completed, the big co-completions, the way that operators are, you know, moving around, and which pads they select can have a lot of impact quarter to quarter as to what our production looks like. But again, I think we should just, you know, reaffirm a couple things that Ty had mentioned in his prepared remarks.

Nate Pendleton: Yeah, Hey.

Nate Pendleton: I think what you said is right you know, we we still expect that production is kind of kind of remain lumpy through time.

Nate Pendleton: Just the nature of how the wells get completed the big co completions, the way that operators or you know moving around and which pads. They select can can I have a lot of impact quarter to quarter as to what our production looks like but again I think we would just you know reaffirm a couple of things at that time.

Nate Pendleton: Mentioned in the prepared remarks, one would be.

Nate Pendleton: We still think overall over the long term.

Nate Pendleton: We've got a good chance to help perform the overall Permian in terms of production.

Nate Pendleton: And you know when we look at 2024, and we look at kind of our current backlog of net wells. It looks really strong we've seen a big bill of Ducks occurring.

Chris Dedham: One would be we still think, overall, over the long term, we've got a good chance to outperform the overall Permian in terms of production. And you know, when we look at 2024 and we look at kind of our current backlog of net wells, it looks really strong. We've seen a big build of ducts occur. And so all of those things would lead us to believe that, at least over the course of the year, there's going to be plenty of inventory to continue to deliver strong production results. But as to whether that happens each quarter like clockwork, that is always a more difficult thing to predict. And so I think there is going to be some lumpiness when exactly that occurs. It's hard to know for sure.

Nate Pendleton: And so all of those things would lead us to believe that at least over the course of the year.

Nate Pendleton: There's going to be plenty of inventory to continue to deliver strong production results, but as to whether that happens each quarter like clockwork is always a more difficult thing to to predict and so I think there is going to be some lumpiness when exactly that occurs it's hard to know, but the overall trend and we still feel.

Nate Pendleton: Really good about and I think like I said, if we have a supportive commodity price environment. This year.

Nate Pendleton: We would expect a continued strong production performance.

Chris Dedham: But the overall trend, we still feel really good about it, and I think, like we said, if we have a supportive commodity price environment this year, we would expect a continued strong production performance. Got it. Thanks.

Speaker Change: Got it. Thank you didn't staying on the activity trains with your net well inventory that you mentioned.

Speaker Change: Uhm with that.

Speaker Change: At around 17 net wells in various stages of development entering 2024.

Nate Pendleton: And then staying on the activity trends with your net well inventory that you mentioned. With that around 17 net wells in various stages of development entering 2024, can you provide a rule of thumb for the number of net wells that would need to be turned in line to hold production flat, all else equal? Yeah, you know, in the past, we probably said that that number was something like eight net wells, but obviously, as your production base grows, that number is going to trend up. So I think we would tell you now that something in the neighborhood of probably nine net wells is going to roughly be your hold flat number that you need. But as you stated, you know, with 17 right now in the backlog, that certainly feels pretty good to us as far as having plenty of inventory available to, again, support strong production.

Speaker Change: Can you provide a rule of thumb for the number of net well that would need to be turned in line to hold production flat all else equal.

Speaker Change: Yeah, I think in the past, we'd probably said that that number was something like eight ninewells, but obviously is your production base grows.

Speaker Change: That number is gonna trend up so I think we would tell you know that something in the neighborhood of probably nine at wells is going to roughly be your hold flat number that you need.

Speaker Change: But as you stated you know with with 17 right now.

Speaker Change: And the backlog that certainly feels pretty good to us as far as having plenty of inventory available to again support strong production.

Nate Pendleton: Got it; thanks for that. And then, shifting over to the water business, looking back at some of your acquisitions over the past year, you probably didn't give much thought to how you see the A&D market for additional SWD infrastructure and what opportunities there are to further expand your leading position there. Yeah, um, most of our focus on the produced water side has been acquiring additional pore space, you know, so you saw a couple of surface acquisitions, a pore space easement that we did last year, and so we just want to make sure that we stay out in front of our operators' needs and have the appropriate amount of pore space available to meet those needs. So that's kind of how we view our part in that business is just, you know, continuing with the same business model, being a poor space owner and using our network and relationships to put people together to make sure that, you know, that water has a place to go and, you know, just support the overall development of the base.

Speaker Change: Got it thanks for that and then shifting over to the water business looking back at some of your application given past year you provide any color on how you see the a D market for additional S. W. D infrastructure and what opportunities there to further expand your link physician there.

Speaker Change: Yeah, most of our focus on on the produce orders side has been acquiring additional force base. So.

Speaker Change: So you saw a couple of.

Speaker Change: Surface acquisitions of force base easement that we did last year.

Speaker Change: And so we just want to make sure that we stay out in front of our operators needs, you know and and have the appropriate amount of force base available to meet those needs.

Speaker Change: So that's kind of how we view our part in that business is just continuing with the same business model being a poor space owner and using our network in relationships to to put people together to make sure that you know that water.

Speaker Change: Has a place to go and just support the overall development of the basin.

Nate Pendleton: Got it, thanks. And then you mentioned core space, so stay on that for just a second and take the CCS angle. Now that the US EPA has started approving Class 6 permits, and there are some operators injecting CO2 for storage today in Class 2 wells that qualify for the same credits, can you provide any updates on how you are viewing that opportunity, given your expansive ownership? Yeah, I mean, we've talked a little bit about it in the past.

Speaker Change: Got it Thanks, and then you mentioned poor space to staying on on that for just a second and taken the C. C. S angle now that the USEPA starting to proving classics permits and there's some operators injecting C O two for storage today and plus two well qualified for the same credits can you.

Speaker Change: Provide any update on how you are viewing that opportunity given your expansive ownership.

Nate Pendleton: Yeah, I mean, we've talked a little bit about it in the past, we think it's a great opportunity for us as well we view it similar you know and business model city to produce water.

Chris Dedham: We think it's a great opportunity for us as well. You know, we view it in the business model similar to the produced water, you know, where we'll continue to be a force-based owner. No real interest in building out any infrastructure in that space. But, you know, leasing our premises for Rolty, I think, is a great opportunity for the company. And so, you know, I think anytime we can add pore space, whether it be for produced water or carbon sequestration, it just continues to add more runway for our business in the long term.

Chris Dedham: Where we will continue to be a force base owner.

Chris Dedham: No real interest in building out any infrastructure in that space, but leasing on our force base for royalty I think it's a great opportunity for the company and so I.

Chris Dedham: I think anytime we can add force base, whether it be for produce water carbon sequestration you know it just continues to add more runway to our business longterm.

Speaker Change: Got it and the last one for me is there any update you can provide regarding the status of the appeal related to the stockholders agreement litigation.

Chris Dedham: Got it. And the last one for me, is there any update you can provide regarding the status of the appeal related to the stockholders agreement litigation? Um, not too much other than oral arguments were heard yesterday, so at this point, we're just waiting on a decision from the court.

Chris Dedham:

Chris Dedham: Not too much other than oral.

Chris Dedham: <unk>, where yesterday so at this point, we're just waiting on a decision from the quarter.

Speaker Change: I appreciate you taking my questions.

Speaker Change: Thank you thanks.

Chris Dedham: Got it. Appreciate you taking my questions. Thank you. Ladies and gentlemen, as there are no further questions, that concludes the conference of Texas Pacific Land Corporation. Thank you for your participation, you may now disconnect your line. Thanks for watching! Produced by Jess Falco Starring Ed Eddard as Ed Eddard Takes The Step, Take The Step: The Force epsis Watch The Episode

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, as there are no further questions that concludes the confidence of Texas specific land Corporation.

Chris Dedham: <unk> for your participation you may now disconnect your lines.

Chris Dedham: Mmm.

Chris Dedham: [music].