Q4 2024 Texas Pacific Land Corp Earnings Call
[music].
Greetings and welcome to the Texas specific land Corporation fourth quarter, 'twenty 'twenty four earnings call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host.
Amini: Amini with the best of relations. Thank you you may begin.
Speaker Change: Thank you for joining us today for Texas Pacific Land Corporation's fourth quarter of 'twenty 'twenty four earnings conference call Yesterday afternoon. The company released its financial results and filed its Form 10-K with the Securities and Exchange Commission.
Speaker Change: It is available on the investors section of the company's website at Www Dot, Texas Pacific Dot Com.
Speaker Change: As a reminder, our remarks made on today's conference call May include forward looking statements forward looking statements are subject to risks uncertainties that may cause actual results to differ materially from those discussed today.
Speaker Change: We do not undertake any obligation to update our forward looking statements in light of new information or future events.
Speaker Change: For 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 recent SEC filings.
Speaker Change: During this call. We will also be discussing certain non-GAAP financial measures more information and reconciliation to adopt these non-GAAP financial measures are contained in our earnings release and SEC filings. Please also know we may at times, if our drug company by stock ticker T. P L.
Glover: This mornings conference call is hosted by T. P L Chief Executive Officer, Glover, and <unk>, Chief Financial Officer, Chris that <unk> management will make some prepared comments after which we will open the call for questions.
Todd: Now I'll turn the call over to Todd.
Glover: Good morning, everyone and thank you for joining us today.
Todd: Fourth quarter closed a remarkable year as T. P. L set records across nearly every key operating driver despite sideways crude oil and natural gas prices.
Todd: Year over year, 2020 for oil and gas royalty production volumes increased 14%.
Todd: Water sales volumes increased 31% and produce water royalty volumes increased 37% with all three of those performance indicators representing corporate records.
Todd: Our strategic investments into people technology and infrastructure are paying major dividends.
Todd: Surface water revenues were collectively up 23% year over year.
Todd: In addition last year, we acquired over $400 million of high quality, Permian mineral and royalty water and surface asset providing GPO with additional growth lever.
Todd: The cumulative impact of all these successes culminated in record shareholder return of capital in 2024, with a combined $376 million returned via dividends and buybacks.
Todd: Very simply a great year.
Todd: I'd like to focus my prepared comments today on three topics.
Todd: First a debrief on the Permian during 'twenty 'twenty, four and an outlook for this year.
Todd: A description of our latest efforts towards next generation opportunities and lastly, an update on our produced water desalination and beneficial reuse endeavors.
Todd: Starting with the Permian, Despite a steady decline in rigs throughout 2020 for Permian oil and gas production exited last year at record highs. According to Baker Hughes Permian horizontal rigs peaked at around 345 in the first half of 2023.
Todd: This should then decline to about 300, entering 2024 and exited the year around 290 <unk>.
Todd: However, as the industry has demonstrated time and again operators continue to find efficiencies through innovations such as longer laterals and multi formation co development.
Todd: Based on preliminary industry data on a full year basis. Despite the average rig count in the Permian being down about 8% from 2023, the number of spud wells was down only 2%.
Todd: Furthermore, well laterals were approximately 5% longer year over year, which translated into 2024, having approximately three more 3% more drilled lateral feet compared to 2023.
Todd: The net of all this Permian production still manage to grow approximately mid single digit percentage exit to exit from fourth quarter 2023 to fourth quarter 2024.
Todd: Looking ahead to 2025, we see a constructive outlook for the Permian fourth quarter 2024, new permits basin wide, we're up approximately 20% year over year on a simple count basis, and up 24% year over year on a total lateral feet basis.
Todd: The matter Werent pipelines coming into service this help to ease the bottleneck on natural gas takeaway, which should help reduce basin differentials and improved price realization.
Todd: This is especially meaningful for the Delaware basin for gas and Ngls production splits and certain sub regions can in aggregate represent over 60% of our wells energy content.
Todd: We still see a healthy inventory base in light of drilled but uncompleted wells otherwise known as stuff.
Todd: We estimate current DUC counts of less than two years of age to be roughly equivalent to the levels from 2023 and 2022.
Todd: Current Permian rig count should be able to generate growth assuming new spas are turned to sales on a normal development cadence and not use to build excess DUC inventory.
Todd: Of course, Permian development and production will still be heavily influenced by the price of oil and the ultimate path of crude oil prices over the course of 2025 will likely dictate whether activity accelerates or slows down.
Todd: Next I'd like to discuss Ppl's efforts beyond our legacy oil and gas business.
Todd: Over the last few quarters, we've seen a robust increase in interest towards the development of our data centers power generation and grid infrastructure.
Todd: As we've discussed in the past the Permian vast hydrocarbon and non hydrocarbon resources make it an attractive option for developing energy intensive asset.
Todd: Our year's long efforts to attract substations renewable projects battery storage and other infrastructure combined with our leading source water network are emerging produced water desalination technology, and our sizeable oil and gas royalty position is positioned to be able to take advantage of emerging opportunities.
Todd: We believe that just owning the land itself is not sufficient to create durable incremental value.
Todd: Rather my also bring other major elements such as high spec freshwater access to great infrastructure and availability of hydrocarbon in renewable energy, we can participate in the value chain. As these next gen industries emerge and captured commensurate value as they grow and mature.
Todd: Our approach to these new opportunities is not unlike our approach to the Delaware basin water business nearly a decade ago.
Todd: Back then in <unk>, we saw a budding business opportunity with an uncertain competitive landscape fragmentation among developers and operators.
Todd: We ultimately executed on our strategy to exploit T bills late and advantages.
Todd: Moved away from the liquidation model that the trust and employee for over a century and instead proactively hired experienced personnel and invested growth capital.
Todd: We're just as willing today to commit resources to these potential new opportunities, especially in domains, where <unk> has a competitive advantage. We continue to make progress on this front and we will share more as we reach certain milestones.
Todd: Yeah.
Todd: Turning to our produced water desalination and beneficial reuse endeavors, we have begun construction of our 10000 barrel per day test facility, which we referred to as phase II B equip.
Todd: Equipment is currently being assembled at our manufacturing partners facility, which is located in the U S.
Todd: The desalination equipment will be commission and tested there and once it satisfies specifications it will be sent to Orla, Texas for final installation.
Todd: We still expect completion of this facility in the middle of this year, we expect the total cost of phase <unk> to be approximately $25 million, having spent approximately $7 million in 2024, and the remaining balance to be spent this year.
Todd: We also have an option for a behind the grid gas to electric generation that would be tied into a nearby pipeline, which would require additional capital investment of approximately $10 million in.
Todd: In addition, our engineers are studying various cost and efficiency opportunities as our freeze desalination process provides potential synergies is co located with other industrial or power generation facilities.
Todd: In advance of the completion of our phase <unk> desalination facility that will produce both freshwater and a concentrated Brian solution. We are advancing the multiple beneficial reuse initiatives.
Todd: We expect to receive our second land application permits from the Texas Railroad Commission for an approximate.
Todd: <unk> and acre plot in Orla, Texas, where we plan to undertake a restoration project to restore native breast grasses, and reintroduce coil to the area that will be irrigated freshwater produced from our desalination system.
Todd: This plot itself would be able to accommodate the entire freshwater output from our phase <unk> desalination facility.
Todd: Additionally, early last year, we submitted an application to the Texas Commission on environmental quality, otherwise known by its acronym T. C. Q to discharge treated desalinate of produced water into the upper reason of the Pecos River.
Todd: That technical review is progressing and we have been responsive to questions request from regulators, we hope to have that permit this year.
Todd: We are also looking to leverage the ability to source substantial quantities of highly purified desalinated freshwater is that might be a critical resource for various industrial uses.
Todd: Finally, I want to thank all the employees here at PPL.
Todd: Many energy companies can claim that fiscal year 2020 for their best year ever but for <unk>. It was and that is owed to the dedication collegiality and talent of our employees.
Chris: With that I'll hand, the call over to Chris.
Chris: Thanks Todd.
Chris: For full year 2024, we generated record free cash flow of approximately $461 million, which represents an 11% year over year increase full year performance benefited from higher daily oil and gas royalty production, which increased 14% year over year.
Chris: Higher water sales daily volumes, which increased 31% and higher produced water royalty daily volumes, which increased 37%.
Chris: Of the approximately 26800 barrels of oil equivalent per day for full year 2024 royalty production acquisitions that closed last August and October contributed approximately 1100 barrels of oil equivalent per day.
Chris: Consolidated results were partially offset by lower realized oil and natural gas prices, which declined year over year by 2% and 48% respectively.
Chris: Consolidated revenues during the fourth quarter of 2024 or approximately $186 million consolidated adjusted EBITDA was $161 million and adjusted EBITDA margin was 87%.
Chris: Diluted earnings per share was $5.14.
Chris: Fourth quarter 2024 royalty production of approximately 29100 barrels of oil equivalent per day represents an 11% increase compared to the same period last year and a 3% increase sequentially as activity remains robust in our loving County, Central Midland Basin, and Northern Reeves County sub.
Chris: Regions.
Chris: Quarterly produced water royalty volumes grew 8% sequentially and 44% year over year to approximately 4 million barrels per day benefiting from our new volumes into or out of basin for space in Andrews County that we acquired in 2023.
Chris: Source water sales volumes of 737000 barrels per day grew 2% sequentially and 42% year over year with demand for treated water, especially strong during the quarter.
Chris: As of quarter end, we had six four net permitted wells 13.2, net docks and 3.0 net completed but not producing wells that amounts to 22.6 net line of sight inventory we.
Chris: We believe this level of near term inventory can support near and medium term production growth above overall Permian production growth.
Chris: <unk> and spud activity had been especially strong in our Culberson County royalty acreage the top six companies operate all docs are currently Chevron Kotara, Exxon Oxy, BP and EOG, which in aggregate represent approximately 71% of Ppl's total docs.
Chris: Yeah.
Chris: With regard to capital allocation in 2024, we deployed a record amount of capital towards highly accretive M&A, while simultaneously investing in our water business and returning a record amount of cash back to shareholders through dividends and buybacks.
Chris: Looking ahead to this year because of our high margin business model fortress balance sheet massive Permian royalty and surface acreage footprint talented commercial team and innovative engineers and scientists we have both the financial wherewithal and opportunity to invest across numerous avenues toward generating long term value while also rich.
Chris: Turning substantial cash back to shareholders.
Chris: Yesterday, we announced our regular dividend of $1 60 per share, which represents a 37% year over year increase.
Chris: We expect capital expenditures in fiscal year 2025 to be approximately $65 million to $75 million. This includes approximately $28 million for our produced water desalination and co located gas generation the.
Chris: The balance of Capex for the year is primarily for our brackish source and treated water business capex toward the higher end of the range would be predicated on our growth opportunities should upstream activity ramp in and around our footprint.
Chris: With respect to M&A, we still see ample opportunity consolidate Permian minerals royalties water and surface assets. Our focus remains on assets that are at least as good or better quality than our legacy asset base and any acquisition would be intention on enhancing and maximizing intrinsic value per share.
Chris: <unk> over the last couple of years serve as a good example of what this M&A growth lever can provide shareholders. The minerals and royalties. We purchased last year are contributing a double digit percentage uplift of production, while also substantially augmenting our near term and long term well inventory.
Chris: Acreage and poor space acquisition and Andrews in Winkler County are already driving significant produced water volume growth and these assets are especially critical towards providing the industry with out of basin disposal options.
Chris: Recall last year, we announced the target cash and cash equivalents balance of approximately $700 million or above this level T. P. L will seek to deploy the majority of its free cash flow towards share repurchases and dividends our balance sheet still has zero debt and our current cash and cash equivalents balance at year end was approximately.
Chris: $370 million.
Chris: Though I would add nothing precludes us from accelerating shareholder return of capital, even if we're under that $700 million level.
In summary, we will continue to be thoughtful and opportunistic with our capital allocation as we remain focused on maximizing shareholder value. The legacy business is performing incredibly well, we have a multitude of exciting growth opportunities in front of us and we have the team business strength and balance sheet to execute and with that operator, we will now take questions.
Chris: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Chris: Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys once again Thats star one at this time, one moment, while we poll for our first question.
Chris: Yeah.
Derrick Whitfield: My first question comes from Derrick Whitfield with Texas Capital. Please proceed.
Derrick Whitfield: Good morning time, Chris and congrats on your progress during 2024.
Chris: Thanks, Eric Good morning.
Chris: Also certainly thanks for the update on water and some of the Nextgen opportunities you guys are discussing.
Chris: Maybe starting there and referencing page 33 of your presentation.
Chris: Could you further elaborate on the potential D cell synergies with behind the meter power generation and data centers and how advance your discussions are on this opportunity.
Chris: Yes sure.
Robert: Robert you want to take that one.
Chris: Sure.
Chris: I think when you look at all of the ingredients that are required for a data center and the.
Chris: The growth of data centers, not just in the Permian, but across Texas.
Chris: Yep.
Speaker Change: Our can rate them are being felt everywhere. When you when you say that when you look at the <unk>.
Chris: Synergies and the ingredients that it takes and what the Permian has.
Chris: It truly is a transformational opportunity to do it.
Chris: The behind the grid generation to be data centers come to West Texas.
Chris: You're going to take behind the grid generation and then when you look at the synergies as waste heat capture off of that generation for youth and beat out pretty tremendous and then also just the water component. The water component of you know look at the synergies we've got too much water in the Permian in form of produced water and then the demand.
Chris: These data centers need and tie in all three of those together as truly a tremendous opportunity.
Chris: Great.
Speaker Change: Makes complete sense and then maybe staying with you Robert just on the T cell opportunities.
Speaker Change: Gold still 75% of volume reclamation, 75% of analyte removal at a cost of 75% and I guess further now with the benefit of another year of assessment and your progress with phase III. How confident are you guys in achieving that 75 cents per barrel treatment cost with a commercial scale facility.
Speaker Change: With with all treatment scaled take to get to that point.
Speaker Change: It kind of 70, each 75 years ago, we're on track on the first two.
Speaker Change: The 75% volume reduction with 75% were trending toward that.
Speaker Change: And again mentioned in the call.
Speaker Change: We're doing right now North Carolina, when you look at the 75% call. It outside of just scale to get there and we see that scale and that economies of scale it required even our traditional.
Speaker Change: Treatment used for hydraulic fracturing.
Speaker Change: The bulk of that.
Speaker Change: But then for any T cell technology come from the energy consumption that's required.
Speaker Change: And you try to bet that at first Nick kilowatt per hour, a assuming that youre going to tie in blind power.
Speaker Change: And again it goes even more towards the benefits of going to the Nat gas generation.
Speaker Change: Being able to get that kilowatt per hour cost down.
Speaker Change: The gas and infield gas feeding a generation beat.
Speaker Change: The 75% is 100% achievable.
Speaker Change: But we're trending toward all three.
Speaker Change: That's great and perhaps for tire Chris I mean.
Speaker Change: In the press release, you guys mentioned, a compelling opportunity to consolidate enormous yet fragmented market for oil and gas royalty surface and water assets, where are you seeing the greatest opportunities today between royalties and surface.
Speaker Change: Yeah, I mean honestly the deal pipeline.
Speaker Change: It looks really good the landscape for twenty-five looks very good and we've been looking at you know quite a few opportunities both on the surface and mineral side. So.
Speaker Change: It seems like there are.
Speaker Change: More opportunities for both.
Speaker Change: The landscape for twenty-five than we've seen in the past then I think we are.
Speaker Change: Can I get a chance to look at a lot of really high quality opportunities.
Speaker Change: And.
Speaker Change: They are.
Speaker Change: You seem to be some larger higher quality packages starting to come available. So.
Speaker Change: We are very excited about the landscape as far as acquisitions and.
Yeah across surface mineral and in the water space as well.
Terrific and perhaps thinking about things from a macro perspective with the recent change in administration.
The Trump administration make any federal changes in policy, which could open up greater amounts of poor space and in Mexico that would be attractive or to the industry given the depths of S. W. D wells in new Mexico in general.
Derrick Whitfield: They maybe repeat the last time that question Derek sorry.
Derrick Whitfield: Sure So could the Trump administration make any changes in federal policy, which could have been up greater amounts of poor space in new Mexico on federal lands that would be attractive to the industry given the depths of SWT wells in Mexico in general.
Derrick Whitfield: Okay.
Derrick Whitfield: I mean, I guess, it's possible I'm not aware of anything you have coming down the pipeline that is going to help.
Derrick Whitfield: New Mexico from a regulatory standpoint as far as disposals, Robert I don't I don't know if you are.
Derrick Whitfield: Yeah.
Derrick Whitfield: Do you have out there.
Derrick Whitfield: I don't and you know that would be again, not aware of anything that would be.
Derrick Whitfield: A piece, we haven't seen to date.
Derrick Whitfield: But I would say.
Derrick Whitfield: <unk> bin.
Derrick Whitfield: Any regulatory changes.
Just the.
Derrick Whitfield: The need for an alternative and water.
Derrick Whitfield: Outside of disposal.
Derrick Whitfield: He's going to come just from a functional standpoint.
Derrick Whitfield: Even beyond the regulatory standpoint, but I'm not aware of anything.
Derrick Whitfield: I think those changes and Robert bodies would likely be more state level, then fed level.
Derrick Whitfield: And correct me, if I'm wrong, but I think the world generally speaking on the Mexico side aside from the regulatory linked maybe they would acquire or more length that would require from a timing for <unk>.
Derrick Whitfield: Those are about 50% more expensive in general as I understand is that does that.
Derrick Whitfield: In the right Zip code.
Derrick Whitfield: I assume you're referring to the deeper disposal.
Derrick Whitfield: That's correct.
Derrick Whitfield: The deeper disposal.
Derrick Whitfield: I was even greater than 50%.
Derrick Whitfield: But you've seen a pullback in new Mexico.
Derrick Whitfield: You know you saw a pullback on the shallow disposal.
Derrick Whitfield: Eight years ago.
Derrick Whitfield: You saw a pullback.
Derrick Whitfield: More recently in the last two to three years.
Derrick Whitfield: It has really been the overall.
Derrick Whitfield: Disposal capacity in the Mexico decline, but the deeper disposals are significantly more expensive.
Derrick Whitfield: And due to various buyers.
Derrick Whitfield: Making cost.
Derrick Whitfield: Really that that payback on the deep disposal when you see a reduction in volume given the capital cost to put one in you've seen a significant reduction on both sides of the border and deep disposal.
Derrick Whitfield: And that's my final question for you guys and just kind of thinking about your 2025 trajectory.
Derrick Whitfield: Senior lighter side inventory and recent comment commentary from industry. How are you thinking about the turn in line quarterly run rate, if you will for oil and gas royalties.
And Eric if you look at the current line of sight inventory and you just kind of take your your docs and your recently completed.
Derrick Whitfield: 13 in kind of three you put those together you are like 16.
Derrick Whitfield: I think the three recently completed in April.
Derrick Whitfield: <unk>.
Derrick Whitfield: Nearly 100% of those are practically 100% of those are going to come online.
Derrick Whitfield: During the course of the year.
Derrick Whitfield: Doug.
Derrick Whitfield: Timing of those it's usually 90% or higher.
Derrick Whitfield: That get turned on in the course of the year.
Derrick Whitfield: And you might even have like apparel.
Derrick Whitfield: Five or 10% of the permits that also kind of make the full cycle trip and.
Derrick Whitfield: Less than a year.
Derrick Whitfield: So.
Derrick Whitfield: If history is a guide if people continue activity levels that we've seen historically.
Derrick Whitfield: Might lead you to believe that somewhere in the 14% to 15 net wells would get turned in line. During 2025, all three of the completed.
Derrick Whitfield: 11 or 12.
Derrick Whitfield: The ducks, and maybe less than one that permit or something like that but.
Derrick Whitfield: And that would be very robust I mean that would probably exceed.
Derrick Whitfield: The.
Derrick Whitfield: Past years, let's talk to as far as like a quarterly run rate. So the potential is definitely there for a very robust.
Derrick Whitfield: It's coming online is really just going to come down to probably oil prices and activity levels, but as far as the inventory available.
Derrick Whitfield: Very very strong right now.
Speaker Change: Alright terrific great update thanks for taking my questions.
Speaker Change: Thanks, Eric.
Speaker Change: Thank you at this time. This does concludes today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].