Texas Pacific Land Corporation Price & Performance (TPL)

Yesterday afternoon, the company released its financial results and filed its Form 10 ks with the Securities and Exchange Commission, which available on the Investors section of the company's website at www.texaspacific. As a reminder, remarks made on today's conference call may include forward looking statements. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our recent SEC filings. During this call, we will also be discussing certain non GAAP financial measures, More information and reconciliations about these non GAAP measures are contained in our earnings release and SEC filings. Please also note, we may at times refer to our company by stock ticker, TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Todd Lever and TPL's Chief Financial Officer, Chris Dunham. Management will make some prepared comments, after which we will open the call for questions.

For Now, I will turn the call over to Ty. Good morning, everyone, and thank you for joining us today. Fourth quarter closed a remarkable year as TPL set records across nearly every key operating driver despite sideways crude oil and natural gas prices. Year over year 2024 oil and gas royalty production volumes increased 14% water sales volumes increased 31%, and produced water royalty volumes increased 37%. With all three of those performance indicators representing corporate records. Our strategic investments into people, technology and infrastructure are paying major as our surface and water revenues were collectively up 23% year over year.

In addition, last year, we acquired over $400,000,000 of high quality Permian mineral royalty water and service assets providing TPL with additional growth lever. The cumulative impact of all these successes culminated in record shareholder return of capital in 2024 with a combined $376,000,000 returned via dividends and buybacks. It was very simply a great year. I'd like to focus my prepared comments today on three topics. First, a debrief on the Permian during 2024 and an outlook for this year. Second, a description of our latest efforts towards next generation opportunities. And lastly, an update on our produced water desalination and beneficial reuse endeavors. Starting with the Permian, Despite a steady decline in rigs throughout 2024, Permian oil and gas production ex According to Baker Hughes, Permian horizontal rigs peaked at around three forty five in the first half of twenty twenty three, which then declined to about 300 However, as the industry has demonstrated time and again, operators continue to find efficiencies through innovations such as longer laterals and formation co development.

Based on preliminary industry data on a full year basis to [indiscernible] The number of spudted wells was down only 2%.

Furthermore, well laterals were approximately 5% longer year over year which translated into 2024 having approximately 3% more drilled lateral feet compared to 2023. The net of all this, Permian production still managed to grow approximately mid single digit percentage exit to exit from fourth quarter twenty twenty three to fourth quarter twenty twenty four.

Looking ahead to 2025, we see Fourth quarter twenty twenty four new permits basin wide were up approximately and up 24% year over year on a total lateral feet basis. The Matterhorn pipeline coming into service has helped to ease the bottleneck on natural gas takeaway. Which should help reduce basin differentials and improve price realizations. This is especially meaningful for the Delaware Basin, where gas and NGLs production splits certain subregions can in aggregate represent over 60% a well's energy content. We still see a healthy inventory basin wide of drilled on completed wells otherwise known as DUCs where we estimate current DUC counts of less than two years of age to be roughly equivalent to levels from 2023 and 2022. Current Permian rig count should be able to generate growth assuming new spuds are turned to sales on normal development cadence and not used to build excess DUC inventory.

Of course, Permian development and production will still be heavily influenced by the price of oil and the ultimate path of crude oil prices over the course of 2025 will likely dictate whether activity accelerates or slows down. Next, I'd like to discuss TPL's efforts beyond our legacy oil and gas business. Over the last few quarters, we've seen a robust increase in interest towards the development of data centers, power generation and grid infrastructure. As we've discussed in the past, Permian's vast hydrocarbon and non hydrocarbon resources make it an attractive option for developing energy intensive assets. Our years long efforts to attract substations renewable projects, battery storage, and other infrastructure combined with our leading source water network our emerging produced water desalination technology and our sizable oil and gas royalty position has positioned TPO to take advantage of emerging opportunities. We believe that just owning the land itself is not sufficient to create durable incremental value. Rather by also bringing other major elements such as high spec freshwater, access to grid infrastructure, and availability of hydrocarbon and renewable energy we can participate in the value chain as these next gen industries emerge and capture as they grow and mature.

Our approach to these new opportunities is not unlike our approach to the Delaware Basin water business nearly a decade ago. [indiscernible] Back then at TPO, we saw a budding business opportunity with an uncertain competitive landscape fragmentation among developers and operators.

We ultimately executed on a strategy to exploit TPL's latent advantages moved away from the liquidation model that Trust had employed for over a century and instead proactively hired experienced personnel and invested growth capital. We're just as willing today to commit resources to these potential new opportunities especially in domains where TPL has a competitive advantage. We continue to make progress on this front and we will share more as we reach certain milestones Turning to our produced water desalination and beneficial reuse endeavors. We have begun construction of our 10,000 barrel per day test facility, which we refer to as Phase [indiscernible] Equipment is currently being assembled at our manufacturing partner facility, which is located in The U. S. The desalination equipment will be commissioned and tested there. And once it satisfies specifications, it will be sent to Orla Texas for final installation. We still expect completion of this facility in the middle of this year We expect the total cost of Phase 2b to be approximately $25,000,000 having spent approximately $7,000,000 at 2024 for the remaining balance to be spent this year. We also have an option for a behind the grid gas to electric generation that would be tied into a nearby pipeline which would require additional capital investment of approximately $10,000,000 In addition, our engineers are studying various costs and efficiency opportunities as our freeze desalination process provides potential synergies as collocated with other industrial or power generation facilities.

In advance of the completion of our Phase 2b desalination facility that will produce both freshwater and a concentrated brine solution, we are advancing the multiple beneficial reuse initiatives. We expect to receive our second land application permit for the Texas Railroad Commission for an approximate 100 acre plot in Orla, Texas where we plan to undertake a restoration project to native brush grasses reintroduce quail to the area that will be irrigated water produced from our desalination. [indiscernible] This plot itself would be able to accommodate the entire freshwater output from our Phase 2bb salination facility. Additionally, early last year, we submitted an application to the Texas Commission on Environmental Quality otherwise known by its acronym TCEQ, to discharge treated desalinated produced water into the upper region of the Pecos River. That technical review is progressing. We have been responsive to questions and requests from regulators. We hope to have that permit this year We are also looking to leverage the ability to source of highly purified desalinated freshwater ice that might be a critical resource for various industrial uses. Finally, I want to thank all the employees here at TPO. Not many energy companies can claim that fiscal year 2024 was their best year ever but for TPL it was.

And that is owed to the dedication, collegiality and talent of our employees. With that, I will hand the call over Thanks, Ty. For full year 2024, we generated record free cash flow of approximately $461,000,000 which represents an 11% year over year increase. Full year performance benefited from higher daily oil and gas royalty production, which increased 14% year over year higher water sales daily volumes, which increased 31% and higher produced water royalty daily volumes, which Of the approximately 26,800 barrels of oil equivalent per day for full year 2024 royalty production, acquisitions that closed last August and October contributed approximately 1,100 which Consolidated results were partially offset by lower realized oil and natural gas prices which declined year over year by 248% respectively.

Consolidated revenues during the fourth quarter of twenty twenty four were approximately Consolidated adjusted EBITDA was $161,000,000 and adjusted EBITDA margin was 87%. Diluted earnings per share was $5.14 Fourth quarter twenty twenty four royalty production of approximately 29,100 barrels of oil equivalent per day represents an 11% increase compared to the same period last year and a 3% increase sequentially as activity remains robust in our Loving County Central Midland Basin and Northern Rees County subregions.

Quarterly produced water royalty volumes grew 8% sequentially and 44% year over year to approximately 4,000,000 barrels per day, benefiting from our new volumes into our out of basin pore space and [indiscernible] that we acquired in 2023 Source water sales volumes of 737,000 barrels grew 2% sequentially and 42% year over year with demand for treated water especially strong during the quarter. As of quarter end, we had 6.4 net permitted wells 13.2 net DUCs and three point zero net completed but not producing wells. That amounts to $22,600,000 net line of sight inventory We believe this level of near term inventory can support near and medium term production growth above overall Permian production growth Permit and spud activity have been especially strong in our Culberson County royalty acreage. The top six companies operate on our DUCs are currently Chevron, [indiscernible] [indiscernible] [indiscernible] VP and EOG, which in aggregate represent approximately 71% of TPL's total DUCs. With regard to capital allocation, in 2024, we deployed a record amount of capital towards highly accretive M and A while simultaneously investing in our water business and returning a record amount of cash back to shareholders through dividends and buybacks. Looking ahead to this year, because of our high margin business model, Fortress balance sheet, massive Permian royalty and surface acreage footprint, talented commercial team, and innovative engineers and scientists we have both the financial wherewithal and opportunity to invest across numerous while also returning substantial cash back to shareholders.

Yesterday, we announced a regular dividend of $1.6 per share which represents a 37% year over year increase. We expect capital expenditures in fiscal year twenty twenty five to be approximately $65,000,000 to $75,000,000 This includes approximately $28,000,000 for our produced water desalination and co located gas generation. The balance of CapEx for the year is primarily for our Brackish source and treated water business, CapEx toward the higher end of the range would be predicated on growth opportunities should upstream activity ramp in and around our footprint. With respect to M and A, we still see ample opportunity consolidate Permian minerals, royalties, water and surface assets. Our focus remains on assets that are at least as good or better quality than our legacy assets [indiscernible] and any acquisition would be intention on enhancing maximizing intrinsic value per share.

Acquisitions over the last couple of years serve as a good example of what this M and A growth lever can provide shareholders. The minerals and royalties we purchased last year are contributing a double digit percentage uplift to production while also substantially augmenting our near term and long term well inventory. Acreage and pourspace acquisitions in Andrews and Winkler County are already driving significant produced water volume growth and these assets are especially critical towards providing the industry with out of basin disposal options.

Recall last year, we announced the target cash cash equivalents balance of approximately $700,000,000 were above this level TPL will seek to deploy the majority of its free cash flow towards share repurchases and dividends our current cash and cash equivalents balance at year end was approximately $370,000,000 Though I would add nothing precludes us from accelerating shareholder return of capital.

Even if we're under that $700,000,000 level.

In summary, we'll continue to be thoughtful and opportunistic with our capital allocation as we remain focused on maximizing shareholder value the legacy business is performing incredibly well We have a multitude of exciting growth opportunities in front of us. And we have the team, business strength and balance sheet to execute. And with that operator, we will now take questions.

Thank you. Our first question comes from Derek Witt with Texas Capital. Please proceed. Good morning, Ty and Kristen. Congrats on your progress during 2024. [indiscernible] You guys are discussing. Maybe starting there and referencing Page 33 of your presentation, Could you further elaborate on the potential desal synergies with behind the meter power generation in data centers and how your discussions are on this opportunity?

Yes, sure. Robert, you want to take that one? Sure.

Think when you look at all the ingredients that are required for a data center, and the growth of data centers not just in the Permian, but across Texas [indiscernible] are being felt everywhere. When you say that, when you look at the synergies and the ingredients that it takes and what the Permian has, it truly is a transformational opportunity to do it. The behind the grid generation, to see data centers come to West Texas. And it's going to take behind the grid generation. And then when you look at the synergies, there's waste heat capture off of that generation. For use in diesel is pretty tremendous. And then also just the water component. The water component of the look at the synergies of we've got too much water and Permian in form of produced water. And then the demand that these data centers need and tying all three of those together is truly a tremendous Great. And I think it makes complete sense. And then maybe staying you, Robert, just on the decel opportunities. Is the goal still 75% volume reclamation, 75% analyte removal at a cost of 75% And I guess further now with the benefit of another year of assessment and your progress with Phase two how confident are you guys in achieving that $0.75 per barrel treatment cost with a commercial scale facility? [indiscernible] With all treatment [indiscernible] to get to that point.

I'll take it kind of 70 each 75 as you go. We're on track on the first two. The 75% volume reduction was 75% We're trending toward that. And again, mentioned in the call is the testing we're doing right now in North Carolina When you look at the 75% cost outside of just scale to get there, And we see that scale and that economy to scale it's required even in our traditional treatment used for hydraulic fracturing. The bulk of that $0.75 for any [indiscernible] comes from the energy consumption that's required.

And you try to base that at first in a kilowatt per hour assuming that you're going to tie into line power, And again, it goes even more toward the benefits of going to the Natgas Being able to get that kilowatt per hour cost down via gas and infield gas feed in the generation feed, the 75% is 100% achievable. But we're trending toward all three. That's great. And perhaps for Tyre, Chris, I mean, in the press release, you guys mentioned a compelling opportunity to consolidate enormous yet fragmented market for oil and gas royalty, surface and water assets Where are you seeing the greatest opportunity today between royalties and surface?

Yes. I mean, honestly, the deal pipeline looks really good. The landscape for '25 looks very good. And we've been looking at quite a few opportunities both on the surface and mineral side. So So it seems like there are more opportunities for both on the landscape for 25%, then we've seen in the past. And I think we're get the chance to look at a lot of really high quality opportunities. And there seem to be some larger higher quality packages starting to come available.

So we are very excited about the landscape as far as acquisitions and across surface mineral and the water space as well?

Terrific. And perhaps thinking about things from a macro perspective with the recent change in administration, Could the Trump administration make any federal changes in policy which could have an upgrade or amounts of poor space and then Mexico Texas would be attractive for to industry given the depths of SWD wells in New Mexico in general?

Maybe repeat the last half of that question, Derek, sorry.

Sure. So could the Trump administration make any changes in federal policy, which could have been up greater amounts of poor space in New Mexico Texas federal lands. That would be attractive to industry given the depths of SWD wells in Mexico in general?

I guess it's possible I'm not aware of anything coming down the pipeline that is going to help New Mexico from a regulatory standpoint as far as disposals. Robert, I don't know if you are Do you have any insight there?

I don't. And that would be again not aware of anything. That would be A piece we haven't seen to date, but I would say even beyond any regulatory changes, just the the need for an alternative in water [indiscernible] is going to come just from a functional standpoint. Even beyond a regulatory standpoint, but I'm not aware of anything. [indiscernible] likely be more state level than Fed level.

And correct me if I'm wrong, but I think the wells generally speaking in the Mexican side, aside from the regulatory link maybe that would require or more link that would require from a timing first process, Those are about 50% more expensive in general as I understand. Is that the right ZIP code?

I assume you're referring to the deeper disposal?

That's correct. The D for disposal is, I would say, even greater than 50%.

But you've seen a pullback in New Mexico You know, You saw a pullback on the shallow disposal seven, eight years ago.

You saw a pullback more recent in the last two to three years. That has really seen the overall disposal capacity in the Mexico decline. But the deeper disposals are significantly more expensive. And due to various seismic and costs, And really that payback on the deep disposal, when you see a reduction in in volume given the capital cost to put one in. You've seen a significant reduction on both sides of the border in deep disposal. And as my final question for you guys and just kind of thinking about your 2025 trajectory, referencing your line of sight inventory and recent commentary from industry, How are you thinking about the turn in line quarterly run rate, if you will, for oil and gas if you look at the current line of sight inventory, and you just kind of take your your ducks and your recently completed 13 and kind of three, you put those together you're like 16. I think the three recently completed nearly 100% of those or practically 100% of those are going to come online.

During the course of the year. On the DUCs, the timing of those, it's usually 90% or higher.

That get turned on in the course of the year.

And you might even have like a 5% or 10% of the permits that also kind of make the full cycle trip. In less than a year.

So if history is a guide, if people continue activity levels that we've seen historically, that might lead you to believe that somewhere in the 14 to 15 net wells would get turned in line during 2025, all three of the completeds and Yes, 11 or 12 of the DUCs and maybe less than one net permit or something like that. But And that would be very robust. I mean, that would probably exceed past years and as far as like quarterly run rate. So The potential is definitely there. For a very robust amount of wells coming online. It's really just going to come down to probably oil prices and activity levels. But it's really just going to come down to probably oil prices and activity levels. But as far as the inventory available, Very, very strong right now. [indiscernible] Great update. Thanks for taking my questions. Thanks, Eric.

Thank you. At this time, this does conclude today's teleconference We thank you for your participation may disconnect your lines at this time.