Cautionary Statement Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding management's expectations, hopes, intentions or
strategies regarding the future. Words or phrases such as "expects" and
"believes", or similar expressions, when used in this Quarterly Report on Form
10-Q or other filings with the Securities and Exchange Commission (the "SEC"),
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements regarding the Company's future operations and prospects, the
markets for real estate in the areas in which the Company owns real estate,
applicable zoning regulations, the markets for oil and gas including actions of
other oil and gas producers or consortiums worldwide such as the Organization of
the Petroleum Exporting Countries ("OPEC") and Russia (collectively referred to
as "OPEC+"), expected competition, management's intent, beliefs or current
expectations with respect to the Company's future financial performance and
other matters. All forward-looking statements in this Report are based on
information available to us as of the date this Report is filed with the SEC,
and we assume no responsibility to update any such forward-looking statements,
except as required by law. All forward-looking statements are subject to a
number of risks, uncertainties and other factors that could cause our actual
results, performance, prospects or opportunities to differ materially from those
expressed in, or implied by, these forward-looking statements. These risks,
uncertainties and other factors include, but are not limited to, the factors
discussed in Item 1A. "Risk Factors" of Part I of our Annual Report on Form 10-K
for the year ended December 31, 2022, and in Part I, Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.
The following discussion and analysis should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2022 filed with the
SEC on February 22, 2023 and the condensed consolidated financial statements and
accompanying notes included, in Part I, Item 1 of this Quarterly Report on Form
10-Q. Period-to-period comparisons of financial data are not necessarily
indicative, and therefore should not be relied upon as indicators, of the
Company's future performance.
Overview
Texas Pacific Land Corporation (which, together with its subsidiaries as the
context requires, may be referred to as "TPL", the "Company", "our", "we" or
"us") is one of the largest landowners in the State of Texas with approximately
874,000 surface acres of land in West Texas, with the majority of our ownership
concentrated in the Permian Basin. Additionally, we own a 1/128th
nonparticipating perpetual oil and gas royalty interest ("NPRI") under
approximately 85,000 acres of land and a 1/16th NPRI under approximately 371,000
acres of land, as well as approximately 4,000 additional net royalty acres
(normalized to 1/8th), all located in the western part of Texas. The Company was
originally organized under a Declaration of Trust, dated February 1, 1888, to
receive and hold title to extensive tracts of land in the State of Texas,
previously the property of the Texas and Pacific Railway Company.
We completed our reorganization on January 11, 2021 from a business trust, Texas
Pacific Land Trust, into Texas Pacific Land Corporation, a corporation formed
and existing under the laws of the state of Delaware (the "Corporate
Reorganization").
We are not an oil and gas producer. Our business activity is generated from
surface and royalty interest ownership in West Texas, primarily in the Permian
Basin. Our revenues are primarily derived from oil, gas and produced water
royalties, sales of water and land, easements and commercial leases. Due to the
nature of our operations and concentration of our ownership in one geographic
location, our revenue and net income are subject to substantial fluctuations
from quarter to quarter and year to year. In addition to fluctuations in
response to changes in the market price for oil and gas, our financial results
are also subject to decisions by the owners and operators of not only the oil
and gas wells to which our oil and gas royalty interests relate, but also to
other owners and operators in the Permian Basin as it relates to our other
revenue streams, principally water sales, produced water royalties, easements
and other surface-related revenue.
For a further overview of our business and business segments, see Item 1.
"Business - General" in our Annual Report on Form 10-K for the year ended
December 31, 2022.
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Market Conditions
Average oil and gas prices during the first quarter of 2023 have declined
compared to quarterly average prices during 2022. Oil prices have been impacted
by certain actions by OPEC+, uneven global supply and demand trends, and
Russia's incursion into Ukraine, among other factors. Global and domestic
natural gas markets have experienced volatility due to macroeconomic conditions,
infrastructure and logistical constraints, weather, and geopolitical issues,
among other factors. Since mid-2022, the Waha Hub located in Pecos County, Texas
has at times experienced significant negative price differentials relative to
Henry Hub, located in Erath, Louisiana, due in part to growing local Permian
natural gas production and limited natural gas pipeline takeaway capacity.
Midstream infrastructure is currently under construction by operators to provide
additional takeaway capacity, though the impact on future basis differentials
will be dependent on future natural gas production and other factors. Industry
supply chains and labor supply remain constrained, which has contributed to
elevated inflation, among other factors. Changes in macro-economic conditions,
including rising interest rates and lower global economic activity, could result
in additional shifts in oil and gas supply and demand in future periods.
Although our revenues are directly and indirectly impacted by changes in oil and
natural gas prices, we believe our royalty interests (which require no capital
expenditures or operating expense burden from us for well development), strong
balance sheet, and liquidity position will help us navigate through potential
commodity price volatility.
Permian Basin Activity
The Permian Basin is one of the oldest and most well-known hydrocarbon-producing
areas and currently accounts for a substantial portion of oil and gas production
in the United States, covering approximately 86,000 square miles in 52 counties
across southeastern New Mexico and western Texas. Exploration and production
("E&P") companies active in the Permian have generally increased their drilling
and development activity in 2023 compared to recent prior year activity levels.
Per the U.S. Energy Information Administration ("EIA"), Permian production is
currently in excess of 5.5 million barrels per day, which is higher than the
average daily production of any year prior to 2023.
With our ownership concentration in the Permian Basin, our revenues are directly
impacted by oil and gas pricing and drilling activity in the Permian Basin.
Below are metrics for the three months ended March 31, 2023 and 2022:
Three Months Ended
March 31,
2023 2022
Oil and Gas Pricing Metrics:(1)
WTI Cushing average price per bbl $ 75.93 $ 95.18
Henry Hub average price per mmbtu $ 2.64 $ 4.67Activity Metrics specific to the Permian Basin:(1)(2)
Average monthly horizontal permits
680 572
Average monthly horizontal wells drilled 535 465
Average weekly horizontal rig count 338 265
DUCs as of March 31 for each applicable year 4,986 3,924
Total Average US weekly horizontal rig count (2) 697 575
(1) Commonly used definitions in the oil and gas industry provided in the table
above are defined as follows: WTI Cushing represents West Texas Intermediate.
Bbl represents one barrel of 42 U.S. gallons of oil. Mmbtu represents one
million British thermal units, a measurement used for natural gas. DUCs
represent drilled but uncompleted wells.
(2) Permian Basin specific information per Enverus analytics. US weekly
horizontal rig counts per Baker Hughes United States Rotary Rig Count for
horizontal rigs. Statistics for similar data are also available from other
sources. The comparability between these other sources and the sources used by
the Company may differ.
The metrics above show selected domestic benchmark oil and natural gas prices
and approximate activity levels in the Permian Basin for the three months ended
March 31, 2023 and 2022. Oil and gas prices in 2023 to date have decreased
compared to the comparable period in 2022. Although E&P companies broadly
continue to deploy capital at a measured pace, drilling and development
activities across the Permian have remained robust through the first quarter of
2023. As we are a
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significant landowner in the Permian Basin and not an oil and gas producer, our
revenue is affected by the development decisions made by companies that operate
in the areas where we own royalty interests and land. Accordingly, these
decisions made by others affect not only our production and produced water
disposal volumes but also directly impact our surface-related income and water
sales.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash and cash flows generated from our
operations. Our primary liquidity and capital requirements are for capital
expenditures related to our Water Services and Operations segment (the extent
and timing of which are under our control), working capital and general
corporate needs.
We continuously review our liquidity and capital resources. If market conditions
were to change and our revenues were to decline significantly or operating costs
were to increase significantly, our cash flows and liquidity could be reduced.
Should this occur, we could seek alternative sources of funding. We have no debt
or credit facilities, nor any off-balance sheet arrangements as of March 31,
2023.
As of March 31, 2023, we had cash and cash equivalents of $590.6 million that we
expect to utilize, along with cash flow from operations, to provide capital to
support the growth of our business, to repurchase our common stock, par value
$0.01 per share (the "Common Stock") subject to market conditions, to pay
dividends subject to the discretion of our board of directors (the "Board") and
for general corporate purposes. For the three months ended March 31, 2023, we
repurchased $6.7 million of our Common Stock (including share repurchases not
settled at the end of the period), and we paid $25.1 million in dividends to our
stockholders. We believe that cash from operations, together with our cash and
cash equivalents balances, will be sufficient to meet ongoing capital
expenditures, working capital requirements and other cash needs for the
foreseeable future.
During the three months ended March 31, 2023, we invested approximately $3.6
million in Texas Pacific Water Resources LLC ("TPWR") projects to maintain
and/or enhance water sourcing assets.
Cash Flows from Operating Activities
For the three months ended March 31, 2023 and 2022, net cash provided by
operating activities was $114.8 million and $107.7 million, respectively. Our
cash flow provided by operating activities is primarily from oil, gas and
produced water royalties, water and land sales, and easements and other
surface-related income. Cash flow used in operations generally consists of
operating expenses associated with our revenue streams, general and
administrative expenses and income taxes.
The increase in cash flows provided by operating activities for the three months
ended March 31, 2023 compared to the same period of 2022 was primarily related
to the decrease in income tax payments during 2023 as compared to 2022.
Cash Flows Used in Investing Activities
For the three months ended March 31, 2023 and 2022, net cash used in investing
activities was $1.7 million and $5.2 million, respectively. Our cash flows used
in investing activities are primarily related to capital expenditures related to
our water services and operations segment and acquisitions of royalty interests.
Capital expenditures decreased $1.9 million for the three months ended March 31,
2023 compared to the same period of 2022. Acquisitions of royalty interests
decreased approximately $1.6 million for the three months ended March 31, 2023
compared to the same period of 2022.
Cash Flows Used in Financing Activities
For the three months ended March 31, 2023 and 2022, net cash used in financing
activities was $32.8 million and $23.4 million, respectively. Our cash flows
used in financing primarily consist of activities which return capital to our
stockholders such as payment of dividends and repurchases of our Common Stock.
During the three months ended March 31, 2023, we paid total dividends of $25.1
million consisting of cumulative paid cash dividends of $3.25 per share. During
the three months ended March 31, 2022, we paid total dividends of $23.2 million
consisting of cumulative paid cash dividends of $3.00 per share. We repurchased
$6.7 million of our Common Stock (including
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share repurchases not settled at the end of the period) during the three months
ended March 31, 2023. There were no share repurchases during the three months
ended March 31, 2022.
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