Texas Pacific Land Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Greetings, and welcome to Texas Pacific Land Corporation First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Shawn Amini, Vice President, Finance and Investor Relations. Thank you, Mr. Amini. You may begin.
Thank you for joining us today for Texas Pacific Land Corporation's First Quarter 2024 Earnings Conference Call. Yesterday afternoon, the company released its financial results and filed its Form 10-K with the Securities and Exchange Commission which is available on the Investors section of the company's website at www.texaspacific.com. In addition, the company has posted an investor presentation that we will be referencing today.
Good morning, everyone, and thank you for joining us today. Driven by the continued strength of our surface-derived cash flows, our first quarter 2024 results are an excellent start to the year. “Water Sales, Produced Water Royalties, and Easements and Other Surface-Related Income and aggregate had revenue growth of 19% sequential quarter-over-quarter, which totaled approximately $81 million and accounted for nearly 50% of total consolidated revenues.
Thanks, Ty. For those of you that don't know me, I run TPWR. I joined TPL in 2017 and Ty recruited me to help build out TPL's nascent water business. Prior to TPL, I led water resource development efforts for EOG Resources across multiple basins, including the Permian and Eagle Ford, excited to be here today and talk about water.
Thanks, Robert. Consolidated revenues during the first quarter of 2024 were approximately $174 million, representing 4% sequential quarter-over-quarter growth. Adjusted EBITDA was $152 million and free cash flow was $115 million for the first quarter. Free cash flow for the quarter grew 30% on a year-over-year basis, driven by higher royalty production, source water sales, produced water royalties and easements and other surface related income and partially offset by lower natural gas and NGL prices.
[Operator Instructions] The first question comes to the line of Hamed Khorsand with BWS Financial.
First off, I just wanted to ask about your water desalination. What is the reason to highlight it now? Is it the scientific breakthrough or do you think you're at a point where you can get revenue soon? Or is it really just to let investors know about the CapEx that's required going forward?
This is Robert. Thank you for the question. I think it's a combination of everything you just said. It is a capital investment, and we felt it prudent to let investors know and shareholders know that it is -- for now, it's a $20 million investment. While we're looking to offset that, TPL will have some capital burden in the near term.
And then as far as water sales is concerned, do you think this is a sustainable level? I mean last year, you had a record number, but it sounded like it was onetime related. Is this more sustainable?
Well, I think second quarter of last year was a record quarter for water sales, and we were right there close this quarter. And looking at the sales schedule for second quarter this year, we've got some really strong numbers on the schedule, a lot of wells to be completed. So I think we will continue to put up strong numbers on that front.
Okay. And last question here is that could you just talk about what your expectations here are with the capital you're adding on to the balance sheet? Is it just focused on the water business that you're now expanding into the technology. There was a Reuters article this past week about OXY looking to sell some land. What are your intentions here?
I think our general capital allocation thoughts are really still kind of unchanged from what we talked about during the last earnings call. Certainly, we continue to look and different opportunities are available. It's a constant topic of discussion between management and the board.
Next question comes from the line of John Annis with Stifel.
I wanted to focus in on the announcement of your desalination and beneficial reuse efforts, which is really exciting stuff and timely given the growing sensitivities around impacts of oil and gas development in the Permian. To start -- and I apologize in advance for a dense question, but I wanted to try to get a better understanding of the beneficial reuse market and how the value chain works? With the freshwater that's produced from your process, can you talk more about the potential end markets, the size of those markets? Any green incentives that you would be eligible for and any potential applications for your process outside of the oil and gas industry?
Sure. This is Robert. I'll take that. There's been a lot of discussion on the beneficial analytes, and any downstream revenues that could come from the distillate water of beneficial reuse technologies. I think they're still emerging. There's a lot of discussion on hydrogen beneficial analytes such as lithium, water rights retention once this water is reintroduced. As those develop, our kind of marching orders was develop a technology and structure a commercial model that stand on its own legs.
Got it. And then with the $0.75 per barrel treatment costs you provided in the presentation, you mentioned that it becomes competitive with subsurface injection, is that expectation based on the ongoing discussions you're having with customers? And then more broadly, how do you envision those commercial agreements for monetizing the water working?
We don't have a firm commercial structure in place. I think this is a new concept for the industry in general. And beneficial reuse is going to be at a higher price per barrel than traditional injection. But it still has to be economic in the sense that it incentivizes the drill bit to continue to turn. The commercial model and the structure of it is still being developed. We're in talks right now with operators what that looks like.
Makes sense. Then I wanted to understand more about the operational complexities as you scale. What, in your view, are the biggest hurdles or technical challenges as you move from a larger pilot and then ultimately to a commercial scale facility?
I think the regulatory piece is initially presenting some hurdles that we've tackled. And I think we're getting over. As we look at any beneficial reuse technology, energy consumption is 75% to 80% of the OpEx of any piece of it. And it's what we mentioned in the talk earlier, continuing to drive down cost on the energy perspective.
Great. And then shifting back to your core businesses. You were able to achieve significant quarter-over-quarter revenue growth in water. Can you talk more about what drove that growth? And are you seeing any tailwinds on source water demand just with the increase of simul frac development across industry that are generally more water-intensive.
Yes. We definitely are seeing some tailwind from simul fracs. Just the volume of water needed delivered to pad per day for those fracs is enormous. And I think the scale that we've built our business to is a huge competitive advantage for us. There's just not a lot of water providers that can provide those kind of volumes, with as far a reach as we have across the basin, especially on the Delaware side.
Terrific. And for my last one, on the governance front, you recently announced the formation of a strategic acquisition committee as a standing committee of the Board. Would this mean that M&A will be a board-led rather than management-led decision? I'm just trying to understand how that dynamic will work.
Yes. We've had an ad hoc acquisition committee in the past just to kind of bet projects that management is working on before we take it to the full Board and make sure that we've got buy-in from that committee. So this is just kind of formalizing that with a standing committee. So it gives management the opportunity to vet new projects, get some feedback before we take it to the full Board. So that's the purpose of the committee.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.