Texas Pacific Land Corporation (TPL) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. TPL owns approximately 886,000 surface acres in West Texas, primarily in the Permian Basin, and derives revenue mainly from oil and gas royalties, water sales and royalties, easements, and land sales. It is not an oil and gas producer.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $160.6M | $176.3M | $307.0M | $323.6M |
| Operating income | $120.3M | $151.7M | $225.2M | $276.0M |
| Net income | $100.4M | $118.9M | $187.0M | $216.8M |
| Diluted EPS | $13.05 | $15.37 | $24.30 | $28.01 |
| Operating margin (calculated) | 74.9% | 86.1% | 73.4% | 85.3% |
| Net margin (calculated) | 62.5% | 67.5% | 60.9% | 67.0% |
For the six months, operating cash flow was $199.3M versus $195.4M; investing cash outflow was $27.7M versus $8.3M; and financing cash outflow was $77.3M versus $225.6M. Cash and cash equivalents were $609.3M at June 30, 2023 ($611.4M including restricted cash). TPL reported no debt or credit facilities. Six-month non-GAAP free cash flow was $193.2M versus $216.9M.
Changes versus prior comparable periods
- Q2 revenue fell 8.9% and net income fell 15.6%; six-month revenue declined 5.1% and net income declined 13.8%.
- Oil and gas royalty revenue fell 32.0% in Q2 to $82.4M and 23.9% for the six months to $171.5M. Lower realized commodity prices outweighed higher production volumes. Q2 realized price was $38.04/Boe versus $70.36; production averaged 24.9 thousand Boe/day versus 19.8 thousand.
- Water sales and produced-water royalties grew: combined revenue rose $17.5M in Q2 and $25.7M for the six months. Six-month water sales increased 44.5% to $59.4M, while produced-water royalties rose to $41.0M.
- Legal and professional fees increased to $10.2M in Q2 from $1.2M and to $26.8M for the six months from $2.9M, principally due to stockholder-related legal expenses. Six-month water service-related expenses also increased to $15.9M from $6.7M.
- Higher interest income contributed to other income of $6.9M in Q2 and $12.3M for the six months, versus $0.6M and $0.7M, respectively.
Outlook, risks and unusual items
- No specific financial guidance or quantitative outlook is provided. Management says cash and operating cash flow should cover foreseeable operating, investment, and other cash needs.
- Management highlights commodity-price volatility, Permian development and operator decisions, natural-gas price differentials and takeaway constraints, and inflation and labor/supply-chain pressures. Revenue can fluctuate materially because of the company’s geographic and business concentration.
- Q2 oil and gas royalties included an $8.7M receivable from an operator’s agreement in an ongoing arbitration concerning alleged improper deductions of post-production costs through April 2022.
- A Delaware Chancery Court case over stockholder voting commitments had been tried, with post-trial arguments held June 30, 2023; no ruling had been issued as of the filing. TPL reported no other material pending legal proceedings.
- TPL has accrued and/or paid certain ad valorem taxes on historical royalty interests while seeking reimbursement from third parties; recovery is uncertain and no receivable was recorded.
- The company repurchased $26.2M of stock during the six months under a $250M authorization and paid $50.0M in dividends. A $3.25-per-share quarterly dividend was declared August 1, payable September 15, 2023.
Key facts for investors to verify
- Whether oil and gas prices, realized royalty prices, and production volumes sustain or reverse the period’s trends.
- Whether water-sales growth and produced-water royalties continue, and how related service costs affect margins.
- The outcome and financial implications of the operator arbitration and the Delaware stockholder litigation.
- Whether the $8.7M arbitration-related receivable is collected, and the potential recovery of historical ad valorem taxes.
- Subsequent capital allocation, including buybacks, dividends, and land or water-related investment.