Texas Pacific Land Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. TPL owns approximately 880,000 surface acres in West Texas, mainly in the Permian Basin, and derives revenue primarily from oil and gas royalties, water services and royalties, easements, and land-related income.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $176.3 million | $95.9 million | $323.6 million | $180.1 million |
| Operating income | $151.7 million | $71.3 million | $276.0 million | $133.3 million |
| Net income | $118.9 million | $57.0 million | $216.8 million | $107.1 million |
| Diluted EPS | $15.37 | $7.36 | $28.01 | $13.81 |
- Q2 operating margin was approximately 86.1% and net margin approximately 67.4%; H1 margins were approximately 85.3% and 67.0%, respectively.
- Q2 revenue increased 83.7% year over year, led by oil and gas royalties of $121.3 million, up 108.3%. Water sales were $22.3 million and produced-water royalties were $18.7 million.
- For H1, oil and gas royalties rose to $225.4 million from $107.7 million. The company reported its share of production at 20.3 thousand Boe per day, versus 16.4 thousand, and an average realized equivalent price of $64.22 per Boe, versus $37.94.
- H1 operating cash flow was $195.4 million, compared with $96.5 million. Investing cash outflow was $8.3 million and financing cash outflow was $225.6 million. Cash and cash equivalents were $389.8 million at June 30, down from $428.2 million at year-end.
- The balance sheet showed $764.7 million of assets and $119.4 million of liabilities. TPL reported no debt or credit facilities. Current assets were $523.9 million versus current liabilities of $57.1 million.
Changes, capital returns, and business activity
- H1 revenue rose 79.7% and net income more than doubled year over year, primarily reflecting higher commodity prices and increased oil and gas production; operating expenses were broadly flat.
- Water Services and Operations revenue rose 49.5% in Q2 and 39.6% in H1. H1 sourced and treated water sales volumes increased approximately 26.7%.
- H1 dividends paid totaled $201.0 million, including a $20-per-share special dividend; reported cash dividends per share were $26 for H1. A further regular $3-per-share dividend was declared after quarter-end for payment in September.
- TPL repurchased 17,478 shares for approximately $25.5 million in H1 at an average price of $1,461 per share. The $100 million 2022 repurchase program had approximately $74.5 million remaining at June 30.
- H1 capital expenditures were approximately $10.3 million, primarily for water-related assets. About $6.0 million was for electrifying water-sourcing infrastructure.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management said cash, together with operating cash flow, should fund foreseeable capital expenditures, working capital, and other needs.
- Management highlighted volatile oil and gas prices, inflation and higher labor and supply costs, potential interest-rate and macroeconomic changes, and dependence on Permian operators’ drilling and development decisions. These factors can affect production, water volumes, easements, and revenue; results may fluctuate substantially.
- TPL accrued approximately $4.0 million for ad valorem taxes on historical royalty interests after a third party said it would no longer pay them. TPL intends to pay the taxes to protect the interests and may seek reimbursement, but the likelihood of recovery is uncertain; no receivable was recorded.
- Management reported no material pending legal proceedings or material changes to previously disclosed risk factors. It stated that enhanced controls addressing a previously identified tax-related material weakness had operated effectively and that the weakness was remediated in management’s view; testing will continue through year-end.
Investor verification points
- Assess how much of the revenue and earnings increase reflects commodity prices versus production growth, and how results might change if prices or Permian activity weaken.
- Review the disputed ad valorem tax obligation, the basis for the accrual, and any later reimbursement developments.
- Track water-services investment, operating performance, and the effect of electrification spending on costs and capacity.
- Monitor cash returned through dividends and repurchases, remaining authorization, and the effects on cash balances and share count.
- Confirm year-end testing and auditor assessment of the tax-control remediation, and review any subsequent updates to operating, market, or legal risks.