Texas Pacific Land Corporation (NYSE: TPL) — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are principally with FY2022. This is an annual filing, not a standalone fourth-quarter report.
Business context
TPL owns approximately 868,000 surface acres and royalty interests totaling about 195,000 net royalty acres in West Texas, principally the Permian Basin. It is not an oil and gas producer. Its two segments are Land and Resource Management, which includes oil and gas royalties and surface-related income, and Water Services and Operations, which provides water sales and earns produced-water royalties.
Financial and operating performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $631.6 million | $667.4 million | Down 5.4% |
| Operating income | $486.1 million | $562.3 million | Down 13.6% |
| Net income | $405.6 million | $446.4 million | Down 9.1% |
| Basic / diluted EPS | $52.81 / $52.77 | $57.80 / $57.77 | Lower year over year |
| Cash provided by operations | $418.3 million | $447.1 million | Down 6.5% |
| Adjusted EBITDA (non-GAAP) | $541.4 million | $591.8 million | Down 8.5% |
| Free cash flow (non-GAAP) | $415.5 million | $451.6 million | Down 8.0% |
Operating margin was approximately 76.9% versus 84.3% in FY2022; net margin was approximately 64.2% versus 66.9%. Adjusted EBITDA margin was 85.7% in FY2023. These margins are calculated from reported figures; EBITDA and free cash flow are company-defined non-GAAP measures.
- Revenue mix: Oil and gas royalties were $357.4 million, down 21.0%; water sales were $112.2 million, up 32.4%; produced-water royalties were $84.3 million, up 16.7%; and easements and other surface-related income were $70.9 million, up 47.6%. Land sales and other operating revenue were $6.8 million versus $10.0 million.
- Commodity and production trends: Realized oil, gas and NGL equivalent price declined 30.0% to $42.58 per Boe, while TPL’s royalty production increased to 23.5 thousand Boe per day from 21.3 thousand. Lower prices, particularly for natural gas, outweighed higher production.
- Segment results: Land and Resource Management revenue fell 14.8% to $432.1 million; segment net income was $306.7 million. Water Services and Operations revenue rose 24.3% to $199.5 million; segment net income increased to $98.9 million. Water sales volumes grew 21.8%.
- Cash, liquidity and debt: Cash and cash equivalents were $725.2 million at year-end, up from $510.8 million. TPL reported no debt, credit facilities or off-balance-sheet arrangements. Total liabilities were $113.2 million. Management said cash and expected operating cash flow should cover foreseeable capital, working-capital and other cash needs.
- Investments and capital returns: Investing cash outflow was $60.3 million, including $21.4 million for a saltwater-disposal easement and groundwater rights, $20.3 million for real estate and $15.0 million for fixed assets. TPL paid $100.0 million in dividends, or $13.00 per share, and repurchased $42.4 million of stock in FY2023.
Material changes and unusual items
- Oil and gas royalty revenue declined $95.0 million year over year. Water sales and produced-water royalties together increased $39.5 million, while easements and other surface-related income rose $22.9 million, partially offsetting the decline.
- Operating expenses increased to $145.5 million from $105.1 million. Legal and professional fees rose to $31.5 million from $8.7 million, principally due to stockholder matters. Water service-related expenses increased $16.1 million as the company met higher-volume and shorter-notice customer demand.
- Other income rose to $31.5 million, principally reflecting $28.6 million of interest income on cash balances, compared with $6.2 million in FY2022.
- An operator agreed to pay $10.1 million to settle royalty underpayment claims: $8.7 million was recorded as royalty revenue and $1.4 million as other income. TPL received payment in January 2024.
- TPL is accruing and/or paying certain historical ad valorem taxes after a third party indicated it would stop paying them. The company intends to seek reimbursement, but the amount and likelihood of recovery are uncertain; no recovery receivable was recorded.
Outlook, risks and contingencies
The filing provides no formal quantified revenue or earnings guidance. Management expects cash and operating cash flow to support foreseeable needs. The company says its renewable and other “next generation” agreements are not expected to have a significant near-term revenue impact, though they may contribute over the longer term. A quarterly dividend of $3.50 per share was declared on February 13, 2024, subject to the Board’s discretion.
- Results remain exposed to oil and gas prices, regional natural-gas price differentials, operator drilling and completion decisions, and customer spending. These factors affect royalties, water activity and surface income.
- Water operations face competition, operating-cost variability and regulatory risk. Texas Railroad Commission seismic response areas may restrict or redirect produced-water disposal volumes and affect TPWR’s plans and royalty income.
- Three customers accounted for 42.5% of FY2023 revenue, creating customer concentration exposure.
- A Delaware Chancery Court ruling that a shareholder proposal to increase authorized shares had passed is on appeal. The company reported no other material pending legal proceedings.
- Other disclosed risks include drought and severe weather, supply-chain disruption, cybersecurity threats, decarbonization trends and dependence on third-party operators. TPL reported no cybersecurity incidents to date.
Deloitte issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Key facts for investors to verify
- How much of the royalty revenue decline reflects commodity prices versus production, and whether increased volumes can persist.
- Water-segment profitability after the substantial increase in service-related expenses, and the returns expected from the new water rights and disposal easement.
- Customer concentration and operator development plans, including how they may change with commodity prices or capital spending.
- Outcome of the authorized-share appeal and any potential implications for future share issuance or dilution.
- Exposure to the disputed ad valorem taxes, prospects for reimbursement, and any further royalty settlements or disputes.
- Capital-return decisions, including the sustainability of dividends and the pace of repurchases; the Board retains discretion over both.