Texas Pacific Land Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars unless noted.
Business context
TPL owns approximately 880,500 acres in West Texas, largely in the Permian Basin, and oil and gas royalty interests. It reports two segments: Land and Resource Management, and Water Services and Operations. Revenue comes chiefly from oil and gas royalties, water sales and produced-water royalties, easements, and land sales. The company completed its reorganization from a business trust to a corporation on January 11, 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $123.7m | $74.4m | $303.8m | $228.3m |
| Operating income | $103.2m | $56.7m | $236.5m | $162.0m |
| Net income | $83.8m | $46.3m | $190.9m | $131.3m |
| Operating margin | 83.5% | 76.3% | 77.9% | 71.0% |
| Net margin | 67.8% | 62.2% | 62.8% | 57.5% |
| Operating cash flow | Not separately presented | Not separately presented | $174.5m | $161.9m |
Q3 revenue rose 66.3% and net income rose 81.2%; nine-month revenue rose 33.1% and net income rose 45.5%. Oil and gas royalties drove much of the improvement: Q3 royalties increased to $79.1m from $31.8m, reflecting higher realized commodity prices and production. For nine months, royalties were $186.8m versus $94.6m.
For the first nine months, Water Services and Operations revenue increased 6.8% to $92.0m: higher produced-water royalties and surface-related income more than offset lower water-sales revenue. Land and Resource Management revenue increased 49.0% to $211.8m, primarily on higher royalties; easement income and land sales were lower than in 2020.
Cash, liquidity and capital allocation
Cash and cash equivalents were $372.8m at September 30, 2021, up from $281.0m at December 31, 2020. Total liabilities were $94.6m. TPL reported no debt or credit facilities. Nine-month investing cash use was $10.0m, including $11.1m of fixed-asset purchases; financing cash use was $74.8m, including $64.0m of dividends and $10.8m of share repurchases. Management said cash and operating cash flow should be sufficient for foreseeable capital, working-capital and other needs.
The company paid dividends of $8.25 per share during the first nine months. Its board declared a further $2.75-per-share quarterly dividend on October 28, payable December 15, 2021. The $20.0m repurchase authorization had $8.8m remaining at September 30.
Changes, outlook and risks
- Management said Permian development and production activity had rebounded from 2020 lows but remained below pre-pandemic levels. Higher oil, gas and NGL prices supported royalty revenue; operator development decisions also affect production, water volumes and surface income.
- TPL provided no specific financial guidance. It highlighted uncertainty from commodity prices, COVID-19 and related economic conditions, operator spending decisions, and potential labor, equipment and cost pressures in the Permian Basin. Easement and land-sale revenue can vary substantially between periods.
- Nine-month employee costs included $6.7m of severance. Water-service costs in Q3 rose with higher volumes, including fuel, equipment rental, and repairs and maintenance. The 2020 comparison also included a $1.2m insurance reimbursement in other income related to prior legal fees.
- The filing reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management stated disclosure controls were effective.
- The company invested approximately $7.0m in water projects during the nine-month period, including $3.9m to electrify water-sourcing infrastructure.
Important facts for investors to verify
- How much future earnings growth depends on commodity prices versus production volumes and operator activity; Q3 realized oil and gas prices were materially higher year over year.
- Whether water-sales pricing recovers: nine-month water-sales revenue fell despite higher sourced and treated water volumes.
- The sustainability and timing of variable easement and land-sale revenue, including the lower nine-month pipeline-easement income.
- The impact of severance, corporate-reorganization costs, water infrastructure spending, and remaining share-repurchase authorization on future cash allocation.
- Comparability of 2020 revenue categories: the filing reclassified produced-water royalties and land-sales expenses to conform to the 2021 presentation.