Texas Pacific Land Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022. TPL owns approximately 874,000 surface acres and royalty interests in West Texas, primarily in the Permian Basin. It is not an oil and gas producer. Its two segments are Land and Resource Management and Water Services and Operations.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $146.4 million | $147.3 million |
| Operating income | $105.0 million | $124.3 million |
| Net income | $86.6 million | $97.9 million |
| Diluted EPS | $11.24 | $12.64 |
| Operating cash flow | $114.8 million | $107.7 million |
| Capital expenditures | $3.8 million | $3.0 million |
| Cash dividends per share paid | $3.25 | $3.00 |
Revenue was nearly flat year over year, down 0.7%; net income declined 11.6%. Operating margin was approximately 71.7% versus 84.4%, and net margin approximately 59.2% versus 66.4% (calculated from reported figures). Adjusted EBITDA, a non-GAAP measure, was $115.9 million versus $129.8 million; free cash flow, as defined by the company, was $88.0 million versus $99.9 million.
At March 31, 2023, cash and cash equivalents were $590.6 million, with total cash, cash equivalents and restricted cash of $597.4 million. Current assets were $711.0 million and current liabilities $61.0 million. TPL reported no debt or credit facilities. Total liabilities were $126.2 million and equity was $829.1 million. Cash rose from $510.8 million at year-end 2022; operating cash flow exceeded dividends paid and share repurchases.
Material changes versus prior year
- Oil and gas royalty revenue fell 14.4% to $89.1 million. Excluding an $8.7 million arbitration-related recovery included in Q1 2023 revenue, royalties declined $23.7 million, primarily due to lower realized commodity prices. Realized price per Boe decreased 23.2% to $44.76, while production was broadly stable at 20.9 thousand Boe per day.
- Water Services and Operations revenue increased 24.6% to $42.3 million: water sales rose 15.5%, and produced water royalties increased to $20.1 million. Segment net income rose to $21.2 million from $16.7 million.
- Land and Resource Management revenue decreased 8.2% to $104.0 million, and segment net income fell to $65.3 million from $81.2 million. Higher easement and surface-related revenue partly offset lower royalties.
- Operating expenses increased $18.4 million, chiefly because legal and professional fees rose to $16.6 million from $1.7 million, primarily related to stockholder matters. Water service-related expenses also increased by $2.9 million.
- Other income rose to $5.4 million, primarily from interest earned on cash balances. Operating cash flow increased 6.5%; management attributed the increase mainly to lower income tax payments.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management said cash on hand and operating cash flow should be sufficient for foreseeable capital expenditures, working capital and other cash needs. It expects liquidity to support business growth, potential repurchases, dividends at the board’s discretion and general corporate purposes. The board declared a $3.25-per-share dividend on May 2, 2023, payable June 15, 2023 to holders of record June 8.
Management cited lower oil and gas prices, natural gas price and takeaway-capacity uncertainty, inflation, constrained industry supply chains and labor, and possible changes in commodity supply and demand. Results also depend on third-party operator decisions and Permian development activity; surface income, water sales and produced water royalties can fluctuate. The company noted its concentrated geographic exposure and that interim results may not indicate future performance.
An operator agreed to pay TPL $8.7 million in an ongoing arbitration concerning alleged underpayment of royalties through April 2022; the amount was recorded as a receivable and Q1 royalty revenue. TPL is also pursuing a Delaware Chancery Court action concerning stockholder voting commitments; a trial took place April 17, 2023, with post-trial briefing to follow. The company reported no other material pending legal proceedings and said management was unaware of contingencies expected to materially affect financial condition, results or liquidity. It has accrued or paid certain disputed historical ad valorem taxes and intends to seek reimbursement, but cannot estimate recovery; no receivable was recorded.
The board’s $250 million stock repurchase program became effective January 1, 2023. During Q1, TPL repurchased $6.7 million of shares, including unsettled purchases; approximately $243.3 million remained available under the program at quarter-end. Management said there were no material changes to previously disclosed risk factors or market-risk disclosures. Disclosure controls were considered effective as of March 31, 2023.
Important facts for investors to verify
- How oil and gas prices, realized royalty prices and Permian production activity affect royalty revenue in subsequent quarters.
- Whether growth in water sales, produced water royalties and surface-related income continues, and how associated service costs evolve.
- The nature, timing and possible financial impact of stockholder-related legal expenses and the Delaware litigation.
- Outcome and collectability of the $8.7 million arbitration recovery, and potential reimbursement for historical ad valorem taxes.
- Future capital spending, share repurchases and dividends, including any board changes to the repurchase program or dividend policy.