Texas Pacific Land Corporation (TPL) Q4 2022 Earnings Call Transcript

Texas Pacific Land Corporation (NYSE:TPL) Q4 2022 Earnings Conference Call February 23, 2023 8:30 AM ET

Company Participants

Shawn Amini - Vice President-Finance & Investor Relations

Ty Glover - Chief Executive Officer

Chris Steddum - Chief Financial Officer

Conference Call Participants

Derrick Whitfield - Stifel

Hamed Khorsand - BWS Financial

Operator

Good morning, and invited to Texas Pacific Land Corporation's Fourth Quarter and Full Year 2022 Earnings Conference Call. This convention telephone is being recorded.

I would now for illustration to present your big for today's call, Shawn Amini, Vice President, Finance and Investor Relations. Please spell ahead.

Shawn Amini

Thank you for joining america coming for Texas Pacific Land Corporation's 4th fourth and afloat twelvemonth 2022 net convention call. Yesterday afternoon, nan institution released its financial results and revenge its Form 10-Q pinch nan Securities and Exchange Commission, which is disposable connected nan Investors conception of nan company's website astatine www.texapacific.com.

As a reminder, remarks made connected today's convention telephone whitethorn see forward-looking statements. Forward-looking statements are taxable to risks and uncertainties that whitethorn origin existent results to disagree materially from those discussed today. We do not undertake immoderate responsibility to update our forward-looking statements successful ray of caller accusation aliases early events. For a much elaborate chat of nan factors that whitethorn impact nan company's results, please mention to our net merchandise for this 4th and to our astir caller SEC filings.

During this call, we will besides beryllium discussing definite non-GAAP financial measures. More accusation and reconciliations astir these non-GAAP financial measures are contained successful our net merchandise and SEC filings. Please besides note, we whitethorn astatine times mention to our institution by its banal ticker, TPL.

This morning's convention telephone is hosted by TPL's Chief Executive Officer, Ty Glover; and Chief Financial Officer, Chris Steddum. Management will make immoderate prepared comments, after which, we will unfastened nan telephone for questions.

Now, I will move nan telephone complete to Ty.

Ty Glover

Good morning, everyone, and convey you for joining america today. 2022 was a consecutive grounds twelvemonth for TPL. Full twelvemonth 2022 gross of $667 cardinal exceeded nan erstwhile grounds by complete $170 million. We not only generated grounds revenues from our lipid and state royalties, but our mixed h2o sales, produced h2o royalties and easements and service-related income besides had its champion twelvemonth ever, generating complete $200 cardinal of revenue.

We achieved a afloat twelvemonth consolidated adjusted EBITDA separator of 89% arsenic we proceed to efficiently person gross into rate flow. We returned $335 cardinal of superior backmost to shareholders done dividends and buybacks, and we exited nan twelvemonth pinch zero indebtedness and complete $500 cardinal of rate connected nan equilibrium sheet.

The institution besides made advancement towards expanding our gross opportunities beyond our bequest business. In 2022, we accrued our contracted renewable accumulation connected our aboveground by 37% year-over-year. We signed agreements for nan imaginable improvement of c capture, artillery retention and bitcoin mining facilities, and we proceed to person a batch of bully discussions connected different absorbing fronts.

On nan taxable of c capture, we were gladsome to onslaught an statement past period pinch Ozona. We've been impressed pinch Ozona's expertise and initiatives, and it's encouraging to spot these projects move person towards reality. Our extremity astatine TPL is to thief laic nan groundwork arsenic nan c seizure manufacture scales up and position ourselves to beryllium a cardinal portion of nan solution and worth chain.

Another opportunity that we've been moving to utilization is soil deposits located connected our acreage. We precocious executed 4 abstracted contracts connected in-basin bedewed soil mines. This reflects years of effort by nan squad present successful conducting geologic studies to place soil deposits, to measure nan feasibility of utilizing bedewed soil for good completion and to proactively initiate discussions pinch operators and customers to underwrite development.

These imaginable projects would make nonstop gross use to TPL. They would besides present nan dual use of sourcing a captious input utilized successful nan improvement of TPL royalty acreage, while besides importantly reducing motortruck congestion and associated emissions compared to utilizing soil originated and transported from retired of basin.

Yesterday, we announced an statement pinch bpx, a subsidiary of BP, to supply broad root water, produced h2o offtake and aboveground entree crossed astir 270,000 acres spanning Culberson, Loving and Reeves Counties. This statement will facilitate bpx's lipid and state improvement of a high-quality resourcebase successful nan Delaware Basin, while providing TPL incremental worth crossed aggregate h2o and aboveground gross streams. We person known and worked pinch nan BP squad for a agelong time, and we're very excited to spot them ramp Permian development.

I besides want to walk immoderate clip coming discussing immoderate broader Permian topics pertinent to TPL. First is nan imaginable inclination of declining good productivity. TPL of people doesn't run owned state wells, truthful we don't person nan elaborate position that our operators do, but we do show what's going connected successful our backyard. What we've observed is that operators proceed to research pinch optimal improvement strategy, particularly for acreage prospected for aggregate zones.

Trend seems to beryllium that an expanding number of operators are moving towards co-development of aggregate zones wrong a section, arsenic opposed to drilling 1 area first and past returning astatine a later clip to create nan different zones.

We'd statement that, a ample information of our operators person been deploying nan erstwhile co-development strategy for rather immoderate time, resulting frankincense acold successful consistently robust good productivity. In addition, laterals connected our acreage proceed to inclination longer. Fourth 4th 2022 was nan first 4th wherever caller permitted wells, caller spuds, caller completions and caller producing wells each averaged complete 10,000 feet. Overall, we proceed to spot beardown good capacity and productivity crossed our acreage.

One different manufacture focal constituent is nan expanding value differential betwixt section Permian earthy state and coastal markets. As galore are aware, earthy state pipeline capacity retired of nan Permian remains tight. Some alleviation will travel this year, pinch a mates of pipeline capacity description s and repairs. That said, we person started to spot earthy state pricing realizations weaken, particularly among smaller independent and backstage producers.

Although, marginally weaker state realizations will negatively effect our royalty revenue, it presents important upside for TPL connected nan aboveground side. Insufficient takeaway capacity intends that nan manufacture has an inducement to create further caller midstream infrastructure. And fixed our immense checker-boarded aboveground footprint, this presents pipeline easement opportunities for TPL to pursue.

Any gross that we suffer from weaker state differentials, we could perchance much than offset pinch incremental easements. This is different illustration of nan use of our progressive guidance attack and nan earthy hedges that we've built into nan business here.

Another item, we are watching intimately is nan evolving believe of handling produced water, particularly successful consequence to nan erstwhile seismic consequence areas, different referred to arsenic SRAs. As a reminder, these SRAs were enacted by nan State Railroad Commission successful consequence to erstwhile seismic activity.

Among nan biggest effect of nan SRAs was nan simplification of injection rates into deep-formation saltwater disposal wells different referred to arsenic SWDs. As a result, deep-formation SWDs person mostly knowledgeable overmuch little utilization, and we've concurrently seen a ample summation successful request for shallow-formation SWD permits connected our surface.

Going backmost to nan inception of our h2o business, we've been very deliberate successful limiting nan magnitude of heavy SWD permitting connected TPL. This helps to sphere viability of third-party infrastructure operating connected our surface, while besides keeping pinch our attraction connected sustainability and safety.

Just to reiterate TPL does not ain aliases run SWDs. Rather, we person negotiated pinch various operators a type of aboveground usage statement that pays TPL royalty for immoderate produced h2o barrels that are either stored straight connected aliases that transverse TPL's surface. These agreements successful aggregate screen acreage spanning astir 0.5 cardinal acres successful West Texas.

Contracts besides incorporate beardown indemnification connection protecting TPL liking arsenic usability and h2o midstream companies proceed to build and create infrastructure connected our surface. It's not an accident, really we group up nan h2o business present astatine TPL, and this each serves arsenic a testament to our h2o squad for their accomplishment and foresight.

Looking guardant to 2023, though we do not power nan guidance of commodity prices which straight impacts a ample information of our revenues nan TPL squad remains committed to sustaining our affirmative momentum. Our assets are positioned successful nan bosom of 1 of nan champion assets plays recovered anyplace successful nan world, and should improvement slow down successful consequence to little commodity prices aliases different constraints nan immense assets still remains successful nan crushed and disposable to beryllium exploited successful nan early erstwhile commodity prices strengthen.

Finally, I want to convey each nan labor present astatine TPL for their diligent activity and commitment. In 2022, we had zero spills, zero reportable information incidents, reduced our Scope 1 emissions by 34%. So not only did our labor thief nan institution execute grounds revenues, industry-leading consolidated adjusted EBITDA margins and grounds net and free rate travel per share, but they did it safely efficiently and pinch a stakeholder mentality.

With that, I'll move nan telephone complete to Chris to talk our financial results.

Chris Steddum

Thanks, Ty. The full gross for fiscal twelvemonth 2022 was $667 million, a 48% year-over-year increase. Net income of $446 cardinal during fiscal twelvemonth 2022, was besides a firm grounds and this represents a 65% summation compared to anterior twelvemonth nett income. The beardown capacity was driven not only by higher commodity prices and higher royalty production, but besides year-over-year gross increases of 25% for root water, 24% summation successful produced h2o royalties, and 28% summation successful easements and different surface-related income.

Excluding advertisement valorem taxes, a caller disbursal we started to accrue successful 2022, our full consolidated operating expenses accrued 9% year-over-year. The summation was mostly driven by an astir $4 cardinal increase, successful h2o service-related expenses arsenic a consequence of higher root h2o income volumes.

Royalty accumulation for nan afloat twelvemonth and for nan 4th fourth of 2022, each came successful astatine astir 21,300 barrels of lipid balanced per day. On a sequential quarter-over-quarter basis, lipid and state royalty accumulation declined by astir 9%. On a year-over-year basis, royalty accumulation grew by astir 15%. As we regularly discussed successful nan past, quarterly lipid and state royalty accumulation will usually person immoderate embedded volatility related to nan timing of erstwhile we person our royalty gross cheque stubs, versus erstwhile that accumulation really occurred successful nan field.

To that end, fto maine supply immoderate further discourse connected what we tin expect for accumulation going forward. Based connected our soul information to day successful 2022, we had caller permits of 876 gross and 10.9 connected a nett basis. For spuds successful 2022, truthful acold our tally show 835 gross and 10.3 net. We see these to beryllium very beardown levels, not conscionable for 2022, but besides to support 2023 improvement activity.

Data that occurred during nan 4th quarter, tends to lag a fewer months for caller completion and caller producing wells. But if we look astatine 3rd 4th 2022 data, which has been much afloat reported we show caller completions of 262 gross and 3.1 nett and caller producing wells of 208 gross and 2.7 net. Again, this represents very robust levels for nan institution and supports beardown accumulation levels.

I mentioned earlier, existent commodity prices crossed nan committee person declined from nan elevated levels we saw for overmuch of 2022, and earthy state takeaway is tight. We person seen this diminished value realizations astir particularly for smaller independents and privates that generally, don't person arsenic overmuch committed tube capacity. Those factors among others could lend to a moderated maturation trajectory successful nan short word for nan Permian, arsenic a whole.

At TPL, we do person a fewer things moving successful our favor. First, activity connected our acreage is dominated by ample integrated and ample independent power companies, which thin to person much contracted pipeline takeaway capacity and much resilient superior budgets, done periods of commodity value volatility.

Second, our Northern Delaware royalty acreage, which has importantly higher nett royalty interest, compared to our Midland royalty acreage, continues to person a batch of attraction from operators. Our onshore and h2o teams proceed to beryllium arsenic engaged arsenic ever. And although, quarterly accumulation figures tin jump astir somewhat quarter-to-quarter, we person beardown condemnation that TPL's royalty accumulation continues to inclination upward.

In conclusion, past week we announced that our Board has approved expanding our quarterly dividend by $0.25 to $3.25 per share. For nan 4th fourth of 2022, we repurchased astir 12,000 shares for astir $29 million. Starting successful 2023, we now person an expanded $250 cardinal stock repurchase scheme that replaces our erstwhile $100 cardinal repurchase plan.

We intend to repurchase shares nether this scheme passim nan year, and nan expanded size of this scheme provides america nan expertise to accelerate stock repurchases depending connected factors specified arsenic commodity prices, marketplace volatility and nan comparative attractiveness of typical dividends and different value-enhancing options.

Our high-margin capital-light and nett rate position ensures nan institution will person important free rate flow, moreover during imaginable prolonged periods of depressed commodity prices and those unsocial virtues supply america pinch a batch of flexibility, and opportunity to actively allocate superior to heighten shareholder value, done virtually immoderate commodity value environment.

With that, operator, we will now return questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first mobility is from Derrick Whitfield pinch Stifel. Please proceed

Derrick Whitfield

Good morning, all.

A – Ty Glover

Good morning, Derrick

A – Chris Steddum

Good morning, Derrick

Derrick Whitfield

Good morning. For my first mobility I wanted to attraction connected nan maturation outlook for your business segments. With nan understanding, that you don't supply quarterly guidance, really should we deliberation astir nan near-term accumulation trajectory successful ray of your statement of show activity and what appears to beryllium a one-off 4th successful Q4?

Chris Steddum

Yes. Thanks, Derrick. Like we said successful nan comments, immoderate fixed 4th location is going to beryllium immoderate volatility. The timing nether which immoderate of these wells get completed and wherever rigs are related to our liking tin surely origin immoderate volatility quarter-to-quarter. But I still deliberation our wide position is TPL tin proceed to outperform nan Permian arsenic a full complete nan adjacent to medium-term.

And immoderate of nan things we besides look astatine that promote america that we're still successful a existent beardown position. When we exited 4Q 2022, erstwhile I look astatine our normalized DUC count, it's fundamentally arsenic precocious arsenic it's ever been. And truthful to your constituent erstwhile we deliberation astir near-term inventory, that DUC count is really that near-term inventory we person disposable to tie from and wherever astir of our accumulation for nan coming twelvemonth is going to travel from. And truthful nan truth that we've sewage a really bully group of normalized nett DUCs gives maine a batch of encouragement astir nan accumulation that will beryllium coming present successful nan near-term for us.

Ty Glover

Derrick, I would conscionable add. One of nan main things that gives america that comfortableness that Chris was talking astir are these wide improvement agreements for illustration we announced yesterday that we put successful spot pinch bpx. We've talked astir these agreements successful nan past that screen these ample AMIs.

So if you look astatine that 1 that's a multifaceted statement that covers aboveground usage root h2o sales, produced h2o off-take, recycling treatment. So getting an statement successful spot pinch a awesome usability for illustration bpx that covers that overmuch acreage. Now we've sewage astir of our acreage successful nan Delaware pinch astir of our awesome operators covered pinch a improvement statement akin to this.

And truthful that really gives nan usability for illustration bpx nan certainty that they request for their operations truthful that they tin ramp up improvement crossed their leasehold and it besides makes judge that TPL is progressive successful nan full worth concatenation produced from that development. So we're really excited astir that. We deliberation it's going to create a batch of worth for some companies. Something that we've been moving connected for a agelong clip and I'm really excited to spot it yet travel together.

Derrick Whitfield

That's great. Maybe Ty conscionable to explain excessively connected nan bpx announcement. Does that adhd third-party services crossed your footprint? Meaning caller acreage dedications that you wouldn't person had otherwise, aliases really simply conscionable facilitate bpx's expertise to turn by streamlining nan processes.

Ty Glover

Yes. I deliberation it's a spot of both. So it adds to nan ongoing narration that we've had pinch bpx and past conscionable opening up much acreage for them mounting retired position of improvement up of clip truthful that they tin move faster.

Derrick Whitfield

Terrific. And arsenic my follow-up I wanted to reference immoderate of your prepared comments connected SLEM and specifically, nan bedewed soil opportunity. Could you possibly elaborate connected nan imaginable of that improvement and erstwhile we could first expect meaningful revenue?

Ty Glover

Yes. So we announced 4 soil mines that we've contracted. We've done a batch of activity complete nan past mates of years geologic studies coring, locating nan soil deposits that we person connected TPL's surface. So we've sewage 4 sands. We're still moving connected locating further soil deposits truthful we deliberation there's early imaginable location arsenic well.

I deliberation we'll commencement to spot immoderate gross this twelvemonth from nan mines that we've contracted. And astir apt wrong a mates of years I deliberation that's astir apt going to adhd location astir $20 cardinal successful gross for nan company. And truthful I deliberation there's a batch of use to in-basin bedewed soil mining right? You're getting person to nan development, truthful you're reducing motortruck traffic, you're redeeming money, reducing emissions, making nan roads safer to travel, you're not moving a dryer. So nan extremity user, which is nan usability is capable to prevention money, which increases their ratio for improvement and should pull further improvement to our acreage.

Derrick Whitfield

Very helpful. Thanks for your clip and thoughts.

Ty Glover

Thanks Derrick.

Operator

Our adjacent mobility is from Hamed Khorsand pinch BWS Financial. Please proceed.

Hamed Khorsand

Good morning. First disconnected I conscionable want to inquire astir this bpx agreement. How -- wherever are these aliases really abundant are these? And why would a institution want to usage truthful galore acres from you, aliases is that much of a item of nan assets that you own?

Ty Glover

Yeah. So nan acreage announced that 270,000 acres, bpx has leasehold dispersed each wrong that AMI. And this really covers parts of 3 different counties. So they're not needfully going to beryllium utilizing each 270,000 acres, it conscionable gives them nan correct to usage our aboveground for definite things gives america nan expertise to proviso them h2o summation h2o offtake things for illustration that. So we're not needfully utilizing each of those acres, but it conscionable gives some parties definite authorities wrong that AMI.

Hamed Khorsand

Okay. Are location deals for illustration of this size retired there? Are location different much of these size deals retired there?

Ty Glover

I mean, we've announced successful nan past that we've sewage ample AMI agreements for illustration this pinch aggregate operators connected our acreage. There's still immoderate acreage astir apt near retired there. But I deliberation particularly successful nan Delaware, we've astir apt sewage astir of our acreage pinch astir of our operators contracted nether immoderate benignant of wide statement for illustration this.

Hamed Khorsand

And nan different mobility I had was astir caller sources of gross successful your existing acreage. Are you putting much accent connected trying to create nan acreage for accepted oil, aliases really overmuch of your clip and resources are you applying for caller gross sources?

Ty Glover

That's a bully question. I mean, obviously, we attraction a batch connected nan bequest business. But successful nan past mates of years we've sewage an soul squad that's focused solely connected next-gen opportunities and creating gross extracurricular of that bequest footprint. So I deliberation much and much we tin proceed to attraction connected those non-legacy type opportunities.

Hamed Khorsand

Okay. And my past mobility is immoderate methodology to nan existent banal buyback program? You haven't really utilized nan $250 cardinal yet.

Chris Steddum

Yeah. Well, I mean, I deliberation that programme conscionable started off. And truthful I deliberation arsenic we've said successful immoderate of nan prepared remarks and property releases, a batch of it is going to beryllium opportunistic. And we're going to look astatine a assortment of different factors to find erstwhile to deploy that superior complete nan coming twelvemonth and years. And -- but I deliberation we're going to proceed to beryllium bully stewards of that superior arsenic we person successful nan past and effort to usage it for what we deliberation is champion for nan shareholders. And arsenic we said, location tin beryllium a assortment of different things. It tin beryllium regular dividends, typical dividends and buybacks. And truthful we conscionable proceed to effort to optimize it successful what is simply a volatile marketplace and effort to usage it arsenic champion we can.

Hamed Khorsand

A follow-up guys. What is your preferred rate level? I mean, you're adding rather a spot each quarter.

Chris Steddum

Yeah. Look I deliberation -- we deliberation that having a robust rate equilibrium particularly successful times for illustration these wherever there's a batch of uncertainty supply america pinch really bully opportunities. And again arsenic we've shown successful nan past erstwhile we deliberation nan clip is correct we tin return that rate and return it to shareholders successful tons of different businesslike ways. But arsenic of correct now, we felt for illustration a bully usage of that rate is to clasp immoderate connected nan equilibrium expanse because we deliberation location whitethorn beryllium immoderate bully opportunities coming up successful nan near-term to utilize it.

Hamed Khorsand

Okay. Thank you.

Ty Glover

Thanks, Hamed.

Chris Steddum

Thanks, Hamed.

Operator

We person reached nan extremity of our question-and-answer session. This will reason today's conference. You whitethorn disconnect your lines astatine this clip and convey you for your participation.