Texas Pacific Land Corporation (TPL) — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020; this is an annual filing, not a standalone Q4 report. Financial statements cover the Trust before its January 11, 2021 reorganization into Texas Pacific Land Corporation. Unless noted, amounts are U.S. dollars.
Business context
TPL owns approximately 880,523 surface acres in West Texas, plus substantial perpetual oil-and-gas royalty interests. It is not an oil-and-gas producer. Its two segments are Land and Resource Management and Water Services and Operations, which provides sourced and treated water and related services in the Permian Basin.
Key financial results
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $302.6 million | $490.5 million |
| Operating income | $217.3 million | $399.6 million |
| Net income | $176.0 million | $318.7 million |
| Net income per Sub-share | $22.70 | $41.09 |
| Operating margin | 71.8% | 81.5% |
| Net margin | 58.2% | 65.0% |
| Operating cash flow | $207.0 million | $342.8 million |
| Cash and cash equivalents at year-end | $281.0 million | $303.6 million |
Capital expenditures were $5.1 million; investing cash outflow was $26.0 million and financing cash outflow was $201.7 million, principally dividends. TPL reported no debt or credit facilities. Total assets were $571.6 million and total liabilities were $86.5 million at year-end. Operating lease liabilities were $2.8 million; contractual operating lease payments totaled $3.1 million.
FY 2020 dividends totaled $26.00 per Sub-share, including $16.00 in special dividends, or $201.7 million in cash. No Sub-shares were repurchased during 2020.
Material changes and drivers
- Revenue declined 38.3% and net income declined 44.8% from 2019. The comparison is affected by a $100 million land sale in 2019. Excluding that sale, 2019 revenue was $390.5 million and net income was $239.7 million; 2020 remained lower.
- Oil-and-gas royalty revenue fell 10.8% to $137.9 million. Oil royalty revenue declined as the average oil price received fell 24.1%, partly offset by 11.9% higher oil production subject to TPL’s royalty.
- Land and Resource Management revenue fell to $195.1 million from $363.3 million, reflecting much lower land-sale and pipeline-easement income as well as lower oil royalties. Land sales were $17.4 million in 2020 versus $135.0 million in 2019.
- Water Services and Operations revenue declined 15.5% to $107.4 million. Water sales and royalties decreased 35.4%, reflecting lower water prices and volumes, a $7.0 million deferral under take-or-pay contracts, and declining legacy royalties. Higher produced-water royalties partly offset the decline.
- Cost reductions, including lower contract labor and water-service expenses, helped reduce operating expenses to $85.3 million from $90.9 million. Depreciation, depletion and amortization increased to $14.4 million from $8.9 million, largely due to water assets placed in service.
Outlook, risks and unusual items
- Management said COVID-19, reduced oil-and-gas demand, lower prices and operator capital conservation adversely affected 2020 results; the duration and future effects were uncertain. TPL reported positive operating results and said cash and operating cash flow were expected to meet foreseeable needs, including water-business investment, dividends and potential repurchases.
- TPL invested approximately $4.9 million in water projects in 2020. Management described TPWR as a developing business exposed to customer spending, competition, regulation and execution risks.
- Revenue depends on commodity prices and third-party operator production and investment decisions. Land sales and easement income are variable; two customers accounted for approximately 28.3% of 2020 revenue. Climate and decarbonization trends, COVID-19 and other disruptions are also identified risks.
- The January 11, 2021 reorganization converted the business trust into a Delaware corporation and distributed one common share for each Sub-share. The Board declared a $2.75 quarterly dividend in February 2021, payable March 15, subject to Board discretion. Management cautioned that future dividends and repurchases are not assured.
- Post-reorganization counterparties could dispute transfer rights or benefits under existing agreements. One potential exposure is ad valorem taxes on certain royalty interests that a third party had historically paid; TPL estimated 2020 payments on its behalf at $4.3–$7.2 million and said it could have to pay if that arrangement does not continue. The tax-free treatment of the reorganization also depends on assumptions and is not binding on tax authorities.
- Other notable items: $10.8 million of 2020 legal and professional fees included reorganization costs and a final $1.35 million settlement payment; the pension plan had a $2.15 million underfunded status at year-end. The auditor identified the $20.7 million oil-and-gas royalty accrual as a critical audit matter because it relies on estimates of timing, historical payments and commodity prices.
Investor facts to verify
- Compare performance with 2019 after accounting for the unusually large land sale, and assess the variability of land and easement revenue.
- Track oil and gas prices, royalty volumes and operator activity, alongside water-sales pricing, volumes and take-or-pay deferrals.
- Review customer concentration, collectability and the assumptions supporting the royalty accrual.
- Confirm whether counterparties recognize transferred agreements and whether the historical ad valorem tax payments continue after the reorganization.
- Evaluate the sustainability of dividends and water-business investment against cash generation; the filing provides no earnings or revenue guidance.