Texas Pacific Land Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. TPL owns approximately 868,000 surface acres in West Texas and royalty interests, and operates through Land and Resource Management and Water Services and Operations. It is not an oil and gas producer.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $158.0m | $191.1m | $464.9m | $514.7m |
| Operating income | $127.0m | $162.1m | $352.2m | $438.1m |
| Net income | $105.6m | $129.8m | $292.5m | $346.6m |
| Diluted EPS | $13.74 | $16.82 | $38.04 | $44.82 |
| Operating margin | 80.4% | 84.8% | 75.8% | 85.1% |
| Net margin | 66.8% | 67.9% | 62.9% | 67.3% |
Q3 revenue fell 17.3% and net income fell 18.7% year over year. For the first nine months, revenue declined 9.7% and net income declined 15.6%. Oil and gas royalties were $87.1m in Q3 (down 33.2%) and $258.6m year to date (down 27.3%). Water sales and produced-water royalties, along with easements and other surface income, partly offset the royalty decline.
Cash provided by operating activities was $306.9m for the nine months, versus $314.6m. Investing used $55.9m, including $21.4m for intangible assets, $20.3m for land, and $10.6m for fixed assets. Financing used $108.6m, including $75.0m in dividends and $32.3m in stock repurchases. Management’s non-GAAP free cash flow was $299.2m, compared with $350.8m.
At September 30, cash and cash equivalents were $654.2m (cash, cash equivalents and restricted cash totaled $659.5m). Current assets were $790.9m and current liabilities $47.4m. TPL reported no debt, credit facilities, or off-balance-sheet arrangements. Total liabilities were $114.8m and equity $964.6m.
Material changes and drivers
- Lower commodity prices drove the royalty decline: Q3 realized revenue per Boe was $45.41 versus $63.42; nine-month realized price was $42.49 versus $63.93. Q3 production attributable to TPL also declined to 21.8 thousand Boe per day from 23.4 thousand; year-to-date production rose to 22.6 thousand from 21.3 thousand.
- Water Services and Operations revenue increased 9.4% in Q3 and 23.9% year to date, supported by higher water sales and produced-water volumes. Nine-month water sales volumes increased 22.9%; related service expenses also increased.
- Nine-month legal and professional fees rose to $28.5m from $5.0m, principally due to stockholder matters. Other income rose to $20.2m from $2.6m, primarily from interest earned on higher cash balances and yields.
- TPL sold 18,061 acres for $6.8m and acquired 12,141 acres for approximately $20.0m during the first nine months. It also acquired a saltwater-disposal easement and groundwater rights for $21.4m.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management said cash and operating cash flows should be sufficient for foreseeable capital expenditures, working capital and other needs. It expects liquidity to support business investment, dividends, repurchases and general corporate purposes. The board declared a $3.25 per-share quarterly dividend on October 31, payable December 15, 2023.
Management highlighted exposure to oil and gas prices, operator drilling and development decisions, Permian activity, water demand, and easement activity. It also noted natural-gas price volatility and negative Waha Hub differentials at times, constrained takeaway capacity, inflation, supply-chain and labor constraints, and macroeconomic uncertainty. Results may fluctuate significantly given the company’s geographic concentration and reliance on activity by third-party operators.
An operator agreed to pay TPL $8.7m in an ongoing royalty-underpayment arbitration; the amount was recorded as a receivable and in nine-month oil and gas royalty revenue. Separately, a Delaware Chancery Court stockholder-agreement dispute had gone to trial, but no ruling had been issued as of the filing. TPL also accrued or paid certain historical ad valorem taxes after a third party stopped paying them; reimbursement is being sought, but the amount and likelihood are uncertain and no recovery receivable was recorded. Management reported no other known contingencies expected to materially affect financial condition, results or liquidity.
Management stated disclosure controls were effective as of September 30, 2023, and there were no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether commodity prices, realized royalty prices, and operator production/development activity recover or further weaken.
- Whether water-sales growth and produced-water royalties can continue, and how higher water-service costs affect profitability.
- Progress and outcome of the stockholder litigation and royalty arbitration, including collection of the $8.7m receivable.
- Potential exposure to historical ad valorem taxes and whether TPL obtains reimbursement from the third party.
- Capital allocation, including the remaining stock-repurchase authorization, future dividends, and spending on land, water assets and acquired rights.