Texas Pacific Land Corporation — Q1 2022 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2022. TPL owns approximately 880,000 surface acres in West Texas, largely in the Permian Basin, plus oil and gas royalty interests. Its two segments are Land and Resource Management and Water Services and Operations. Results are compared with the three months ended March 31, 2021.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $147.3 million | $84.2 million |
| Operating income | $124.3 million | $62.0 million |
| Net income | $97.9 million | $50.1 million |
| Diluted EPS | $12.64 | $6.45 |
| Cash provided by operating activities | $107.7 million | $52.4 million |
| Cash and cash equivalents at quarter-end | $507.4 million | $428.2 million at year-end 2021 |
- Revenue grew approximately 75%, operating income 100%, and net income 96% year over year. Operating margin was approximately 84% versus 74%; net margin was approximately 66% versus 59%.
- Oil and gas royalties were $104.2 million, up 110%; water sales were $18.8 million, up 45%; produced-water royalties were $14.9 million, up 19%.
- Oil and gas royalty production averaged 20.8 thousand BOE/day versus 16.4 thousand. Realized equivalent price increased to $58.31/BOE from $35.04.
- Capital expenditures were $3.0 million; investing cash outflow was $5.2 million. Financing cash outflow was $23.4 million, including $23.2 million of dividends paid at $3.00 per share.
- Total liabilities were $128.7 million, including $67.3 million of current liabilities. The company reported no debt or credit facilities. Management said cash and operating cash flow should be sufficient for foreseeable requirements.
- Adjusted EBITDA, a non-GAAP measure, was $129.8 million versus $69.8 million; the filing reconciles it to net income and excludes specified items.
Material changes versus the prior comparable period
- Higher oil and gas prices and royalty volumes drove most of the increase in revenue and earnings. Average WTI was $95.18/barrel versus $58.09; average Henry Hub gas was $4.67/MMBtu versus $3.50.
- Water Services and Operations revenue increased 29% to $34.0 million, principally from higher water sales pricing and produced-water volumes. Segment net income was $16.7 million versus $10.5 million.
- Operating expenses rose to $23.0 million from $22.1 million. Q1 2022 included a $2.0 million ad valorem tax accrual and $1.5 million share-based compensation; Q1 2021 included $2.0 million severance and $2.0 million corporate reorganization costs.
- Operating cash flow more than doubled, with higher earnings partly offset by working-capital needs. The company acquired 92 net royalty acres for $1.6 million.
Outlook, risks, contingencies, and unusual items
- No formal revenue or earnings guidance was provided. Management noted that oil prices and Permian drilling and completion activity affect royalties, water sales, produced-water volumes, and surface income. Operator decisions, labor and supply-chain constraints, commodity-price volatility, and the company’s Permian concentration may cause significant period-to-period fluctuations.
- Management cited elevated oil-price volatility in 2022 amid Russia’s invasion of Ukraine and related global supply uncertainty. It also continued to monitor COVID-19 developments.
- The company accrued approximately $2.0 million for ad valorem taxes on historical royalty interests after a third party indicated it would no longer pay them. TPL disputes that it should bear the obligation but intends to pay taxes when due to protect the interests from potential tax liens.
- Disclosure controls were not effective because of a material weakness in income-tax controls concerning periodic evaluation of historical tax returns and tax positions. The issue involved incorrect depletion tax treatment in prior returns; no financial-statement restatement resulted. Controls were designed, implemented, and tested in Q1, but remediation requires successful operation for at least two quarters.
- Management reported no material pending legal proceedings and no material contingencies known to affect financial condition, results, or liquidity. Risk factors were unchanged from the prior 10-K.
- After quarter-end, the board declared a regular $3.00-per-share dividend and a special $20.00-per-share dividend, payable June 15, 2022. A $100 million repurchase program was approved March 11; repurchases under its trading plan began April 18.
Important facts for investors to verify
- Whether higher commodity prices and production volumes, and Permian operator activity, persist and translate into royalty and water-related revenue.
- Progress in remediating the income-tax control weakness, and the outcome and amount of the disputed ad valorem tax obligation.
- Payment of the announced regular and special dividends and execution of the $100 million repurchase authorization.
- Capital needs for water infrastructure, working-capital movements, and the effect of oil-price, supply-chain, and operator-development risks on cash generation.