Texas Pacific Land Corporation (NYSE: TPL) — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 23, 2022. This is an annual filing, not a standalone fourth-quarter report, and the supplied filing text does not provide a clear Q4-only financial-results breakdown. TPL completed its conversion from a business trust to a Delaware corporation on January 11, 2021.
Business context
TPL owns approximately 880,581 surface acres and substantial perpetual oil and gas royalty interests in West Texas, principally the Permian Basin. It is not an oil and gas producer. Its two segments are Land and Resource Management and Water Services and Operations. Revenue comes chiefly from oil and gas royalties, water sales and produced-water royalties, easements, leases, and land sales.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $451.0 million | $302.6 million |
| Operating income | $362.4 million | $217.3 million |
| Net income | $270.0 million | $176.0 million |
| Diluted earnings per share | $34.83 | $22.70 |
| Cash provided by operating activities | $265.2 million | $207.0 million |
| Cash used in investing activities | $15.0 million | $26.0 million |
| Cash used in financing activities | $104.9 million | $201.7 million |
Revenue increased 49.0% and net income increased 53.4%. Operating margin was approximately 80.4%, compared with 71.8% in 2020; net margin was approximately 59.9%, compared with 58.2%. The filing reports no debt or credit facilities and no off-balance-sheet arrangements. Year-end cash and cash equivalents were $428.2 million, versus $281.0 million a year earlier. Total liabilities were $112.4 million, including $2.1 million of operating lease liabilities. Cash and cash flows were described as sufficient for foreseeable needs.
Revenue by principal stream: oil and gas royalties $286.5 million (up 107.7%); water sales $67.8 million (up 23.5%); produced-water royalties $58.1 million (up from $50.6 million); easements and other surface-related income $37.6 million (down from $41.4 million); and land sales and other operating revenue $1.0 million (down from $17.7 million). Land and Resource Management revenue was $320.4 million; Water Services and Operations revenue was $130.6 million. Segment net income was $208.9 million and $61.1 million, respectively.
TPL paid $11.00 per share in dividends during 2021, totaling $85.3 million, and repurchased $19.9 million of stock. Water-segment capital expenditures were approximately $11.7 million, including $6.4 million for electrifying water-sourcing infrastructure; total segment capital expenditures were $16.4 million.
Material changes versus FY2020
- Oil and gas royalty growth drove most of the improvement: production attributable to TPL rose to 18.6 thousand Boe per day from 16.2 thousand, while realized equivalent price increased to $44.14 per Boe from $24.29.
- Water sales benefited from a 14.7% increase in sourced and treated barrels sold. Produced-water royalties also increased with higher volumes.
- Easements and other surface-related income declined, mainly due to lower pipeline and power-line easement revenue. Land sales were minimal in 2021, versus 22,160 acres sold in 2020.
- Operating cash flow increased by $58.1 million. Investing cash use declined as acquisitions of land and royalty interests fell, partly offset by higher capital expenditures.
- Operating expenses included $6.7 million of severance costs. Income tax expense included a $19.4 million out-of-period adjustment, of which $13.0 million related to prior annual periods and $6.4 million to 2021 quarterly periods.
Outlook, risks, and unusual items
- Outlook: No quantitative revenue or earnings guidance is provided. Management reported that Permian activity and commodity prices rebounded from 2020 lows, but development remained below pre-pandemic levels. Future results depend on commodity prices and operators’ investment and production decisions. Labor, equipment shortages, and rising costs could affect future activity.
- Control weakness and tax correction: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness in controls over evaluation of historical tax positions, involving depletion deductions on royalty interests. TPL recorded the $19.4 million tax adjustment and said it was not material to current or prior-period financial statements. The weakness had not been remediated by December 31, 2021; remediation activities began in Q1 2022. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
- Concentration and commodity exposure: Three customers accounted for approximately 41% of FY2021 revenue. Royalty income is exposed to oil and gas prices and to third-party operator decisions; water and surface revenues also depend on Permian activity.
- Corporate-reorganization exposure: TPL disclosed that an obligor had indicated it might stop paying ad valorem taxes on certain royalty interests. The company may pursue legal action; if payments cease, TPL could have to pay those taxes. The filing does not quantify a likely outcome or cost.
- Other risks: The filing identifies COVID-19 and other disruptions, changing energy demand and decarbonization, water-business competition and regulation, cybersecurity, and stock-price and governance risks. No material pending legal proceedings were reported.
- Subsequent event: On February 11, 2022, the Board declared a $3.00-per-share quarterly dividend payable March 15, 2022, subject to the stated record date.
Important facts for investors to verify
- Whether the tax-control remediation is implemented effectively and whether any further tax payments, penalties, interest, or amended returns result.
- Whether royalty growth is sustained by both commodity prices and production, given dependence on third-party operators and Permian development pacing.
- Customer concentration and the sustainability of water, produced-water royalty, and easement revenues.
- The status and potential financial effect of the ad valorem tax dispute following the corporate reorganization.
- Future capital spending, cash returns, and dividend decisions; the Board retains discretion over dividends and repurchases.