Dallas-based Texas Pacific Land Trust (TPL, Financial) is a business trust that was created way back in 1888. It is currently one of the largest landowners in the state of Texas. The trust is engaged in land and resource management (70% of fiscal 2018 revenue) and water service and operations (30%).
The primary sales model at Texas Pacific is to charge royalties on activities over the approximately 900,000 acres of land that it owns in West Texas. These are mostly no-CapEx, no-OpEx, high-margin and repeatable cash flows.
As of fiscal 2018, oil and gas royalties accounted for 41% of total sales. Meanwhile, the trust owned a 1/128th non-participating perpetual oil and gas royalty interest under 84,934 acres of land and a 1/16th non-participating perpetual oil and gas royalty interest under 370,737 acres of land in the western part of Texas. Major customers include Chevron (CVX, Financial) and Anadarko, among many others, thanks to the advancement of technology that makes drilling and production possible in the Permian Basin region. The management sees significant undeveloped potential, citing that only 7% of royalty acreage is developed.
Although representing only less than one-third of the total revenue, the water-related operations has been proliferating, since Texas Pacific Water Resources (referred to as “TPWR”), a wholly-owned subsidiary, was started in mid-2017 to cater to the rising demand for water in the region. It has seen a nearly 184% year-over-year increase in sales in fiscal 2018. The management believes that water business is still in its early stage of development and expects continuous growth in water demand as drilling and completion activity in the Permian Basin continues to increase.
As you may have imagined, Texas Pacific employs an ultra capital-light operational model. The currently $6 billion market-cap stock was just a 10-person troop until recently it expanded to over 70 employees due to the establishment of TPWR. Furthermore, the business seems to face little or no competition thanks to its unique geographic advantage. As described below, the trust delivered superior free cash returns on assets every year over the past three decades.
The sales of the trust are impacted by oil and gas prices, and hence can be cyclical over time. Nevertheless, the business has little operating leverage, meaning that it is more immune from economic downturn than most energy plays. As is indicated below, the yearly revenue was only mildly down throughout the 2008 Financial Crisis.
Of course, as a land trust, Texas Pacific poses the risk of misalignment of interest between the management and owners. In the meantime, we saw that active investors, such as Horizon Kinetics, have been trying to push for modern corporate governance at the business. By checking the shareholder structure, we came to find inadequate individual insider ownership at the moment. But it is worth pointing out that the largest shareholder, Horizon Kinetics, which currently owns almost a quarter of the trust, has been buying shares virtually every day for the past year, according to the Insider data at GuruFocus.
What is even more lasting than the share accumulation of Horizon Kinetics is the share repurchase at the trust itself. According to the chart below, Texas Pacific reduced its share outstanding by over two-thirds for the past four decades. We notice that the management does not emphasize dividends, with a scant single-digit payout ratio for recent years, and that TPWR can play a vital role in competing for retained capital moving forward.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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