Texas Pacific Land Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. TPL owns approximately 880,000 surface acres and oil and gas royalty interests in West Texas, principally the Permian Basin. Its two segments are Land and Resource Management and Water Services and Operations.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $191.1 million | $123.7 million | $514.7 million | $303.8 million |
| Operating income | $162.1 million | $103.2 million | $438.1 million | $236.5 million |
| Net income | $129.8 million | $83.8 million | $346.6 million | $190.9 million |
| Diluted EPS | $16.82 | $10.82 | $44.82 | $24.62 |
| Operating margin (approx.) | 84.8% | 83.5% | 85.0% | 77.8% |
- Q3 revenue increased 54.5%; net income increased 54.9%. For the nine months, revenue rose 69.4% and net income rose 81.5%.
- Nine-month operating cash flow was $314.6 million, versus $174.5 million. Investing cash outflow was $14.6 million; financing cash outflow was $281.7 million.
- At September 30, cash and cash equivalents were $446.6 million; current assets were $589.2 million and current liabilities $43.6 million. Total liabilities were $107.8 million. The company reported no debt or credit facilities.
- Nine-month dividends paid were $224.1 million, including $20 per share in special dividends and $9 per share in regular dividends. Share repurchases totaled approximately $58.4 million, including unsettled amounts.
Business drivers and changes versus prior year
- Oil and gas royalties drove the increase: Q3 royalties rose to $130.3 million from $79.1 million; nine-month royalties rose to $355.7 million from $186.8 million. Both higher realized prices and greater production contributed. TPL’s share of production averaged 23.4 thousand Boe/day in Q3, up from 19.5 thousand.
- Q3 water sales were $24.4 million, up 24.9%, and produced-water royalties were $19.1 million, up from $15.1 million. Nine-month water sales increased 45.7% to $65.5 million; produced-water royalties increased to $52.7 million from $43.1 million.
- Q3 Land and Resource Management revenue was $147.2 million; Water Services and Operations revenue was $43.9 million. Nine-month segment revenues were $393.9 million and $120.8 million, respectively.
- Nine-month operating cash flow benefited from higher oil and gas prices and production, partly offset by increased tax payments. Water-service expenses increased with activity and infrastructure electrification. Nine-month salaries and related expenses decreased year over year, partly because 2021 included $6.7 million of severance costs; 2022 included share-based compensation expense.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said cash, operating cash flow and the strong balance sheet should be sufficient for foreseeable capital, working-capital and other needs.
- Management noted oil and gas price volatility, OPEC+ actions, Russia’s invasion of Ukraine, elevated inflation, rising interest rates, natural-gas transportation constraints, and labor and supply-chain challenges. Results are sensitive to commodity prices and third-party drilling and development decisions in the Permian; easement income and water activity can vary substantially.
- TPL accrued approximately $6.9 million of ad valorem taxes for the nine months after a third party said it would no longer pay taxes associated with historical royalty interests. TPL intends to pay the taxes to protect its interests and seek reimbursement, but the likelihood of recovery is uncertain and no receivable was recorded.
- On November 1, 2022, the board declared a $3-per-share quarterly dividend and approved a new stock repurchase program of up to $250 million, effective January 1, 2023. The 2022 repurchase authorization was up to $100 million and expires December 31, 2022.
- Management did not expect the Inflation Reduction Act to have a significant financial impact. The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
Key facts for investors to verify
- Whether commodity prices, Permian production and operator development activity can sustain the royalty growth reflected in 2022 results.
- The amount and timing of future ad valorem tax payments and any reimbursement from the third party.
- Capital allocation: completion of the 2022 repurchase program, implementation of the 2023 authorization, and ongoing dividend levels.
- Water-services growth, required infrastructure investment, and related operating costs; nine-month water-segment capital expenditures were $11.8 million.