Texas Pacific Land Corp Q3 FY2024 earnings call

• Strong third quarter 2024 performance driven by an active management strategy, with oil and gas royalty production reaching a record and water sales showing growth. - The produced water royalties business features a unique cash flow stream, with an expected $100 million in 2024 royalties, incurring no capital expenditures or operating expenses aside from negotiation costs. - Recent strategic acquisitions, totaling nearly $0.5 billion across three deals, have enhanced the asset portfolio, with royalty acquisitions anticipated to add approximately 30,000 barrels of oil equivalent per day. - The Board approved a 37% increase in the quarterly dividend to $1.60 per share. - Desalination efforts are progressing, with the Phase 2b test facility expected to be completed in mid-2025 at a cost of approximately $25 million. - Surface assets offer optionality, with non-oil and gas revenue opportunities in areas such as solar, battery projects, and Bitcoin mining.

TPL's oil and gas royalty production was approximately 28,300 barrels of oil equivalent per day, a corporate record. Water sales revenues were up 37% year-over-year. Produced water royalty revenues were up 46% year-over-year, with produced water royalty volumes up 46% year-over-year. Royalty production of ~28,300 BOE per day represents 13% sequential quarter-over-quarter growth. Recent M&A activity added approximately 900 barrels of oil equivalent per day and $3 million of cash flow. The recent royalty and minerals acquisitions are expected to add over 3,000 barrels of oil equivalent per day on a full quarterly run rate basis.

• The recent royalty and minerals acquisitions are expected to add over 3,000 barrels of oil equivalent per day on a full quarterly run rate basis. - The Board approved a 37% increase in the quarterly dividend. - The Phase 2b desalination facility is expected to be completed in mid-2025. - It is expected that the aggregate contribution from current and future produced water agreements will support multiple hundreds of thousands of barrels per day.

• Commodity price volatility, with oil prices declining 8% and natural gas prices dropping 65% respectively. - Regulatory uncertainties related to produced water ownership and downstream revenues. - Uncertainties in the development of non-oil and gas surface assets, including data centers and renewable energy projects.

Q: Starting on M&A, could you help frame what led you to be more active as of recent and your view on the opportunity set that meets your checklist?

A: Yes, sure. I think we've talked about it for the last couple of years, like we have a lot of interest in owning more assets that look just like what we own today. I mean we love surface, minerals, water. The overall environment has been pretty good for M&A lately where commodity prices are, sellers are willing to sell, and it's an attractive time to buy. So those deals were directly sourced, nonmarketed deals, but just really attractive asset classes, high-quality long-duration cash flows, very similar to what we own today. I mean a lot of the interest we bought was actually in DSUs that we already own. So some intelligence there on development timing and pretty easy to manage when you're just going in and changing decimal places in the database that we already have. So again, just really high quality, very attractive assets that are really easy to integrate into our management system.

Q: Shifting over to the surface side of the business. I mean there's been a tremendous uptick in interest in surface rights since the LandBridge IPO. Given that you guys own one of the largest surface acre spreads in Texas, could you speak to the level of non-oil and gas revenue you're generating to date and the potential you see in opportunities surrounding AI, data centers, renewable energy, crypto mining, et cetera?

A: Yes. I mean surface is a fantastic asset. I think the thing we like about it the most is just the optionality that you have. Minerals are a great asset as well, but you don't have as much control over the actual development. Whereas surface, you can be more proactive and kind of have more control over how and when that asset is developed. So as far as non-oil and gas revenue, it's pretty immaterial today, but we've signed a lot of contracts in the last couple of years. I think we've got over 700 megawatts of solar that we've contracted in the last 24 months that's in development phases. We've got seven utility-scale battery projects going. I think we've got four Bitcoin mines, like 78 megawatts that are active today with another 50 in development stages. So I think there's a lot of opportunity outside of oil and gas. We've seen an increase in wind power interest lately. And then there's been a lot of talk about data centers, as you know, I think Diamondback and Permian Resources have mentioned that lately. But that's something that we've been working on for some time now. And if you think about data centers as compute centers, then we've actually got a couple of small compute centers in the form of Bitcoin mining, like I mentioned, that are up and running with a couple more in negotiations. So we know what it takes to negotiate these things and every deal is unique, but if you think about the large data center you might see for hyperscalers, those are still in the early days of development for the Permian. And I would just say that there's a lot of conversations taking place within the industry and definitely within TPL. And we feel that we're positioned as well as anyone in West Texas to provide land and water solutions as those opportunities unfold. And so we've got a lot of experience negotiating and contracting compute facilities, but also all the things that might be ancillary to a data center, things like solar, wind, gas generation, pipeline and electric easements, water, grid-scale batteries, like I mentioned, and carbon capture. So we've signed contracts. We're cash flowing along a lot of those items already today. So again, TPL just has a lot of positive attributes for data centers and nobody has more land than us in West Texas. So another thing, too, is if we need to buy more land to accommodate a data center, then we have proven that, that's not hard for us to do so. I think there's also a lot of other parts of the country that are also attractive for data centers. So we're working hard to make TPL as attractive as possible. But again, we're just -- we're having a lot of good discussions, and we'll definitely update you guys along the way.

Q: A few of your midstream peers are pursuing mineral extraction opportunities with iodine and lithium. Is there a royalty opportunity for you guys on that front?

A: Yes, sure. We talk about beneficial extraction of the produced water. A lot of folks are chasing it. I think those conversations are very similar to the very early stages of large data centers, judging that opportunity. What we've done, I'll say, from a long time out is to start identifying and cataloging by strata and by spatial area, what those concentrations are and in a compounded in a raw and then in a compounded environment, is that marketable? We -- I think we have a good line of sight internally on what are those analytes that can be compounded in our commercial at scale. And we continue to evaluate it. And then conversations regarding that, whatever beneficial use comes of that water and how that goes into play. I think it's still developing in the regulatory world on ownership of produced water and is going to kind of to be determined on the ownership of produced water and any downstream revenues that are associated with it.

Q: Just referencing the new midstream agreement you mentioned in your prepared remarks that will bring additional produced water in Q4. How material of a step-up in SWD volumes is that?

A: I think that contract is a couple of hundred thousand barrels a day. And if you look at our run rate, we're just under 4 million barrels a day on average today.