Oil’s Landlord

Todd Sullivan, Rand Strategic Partners and author of

ValuePlays blog
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 Who Is It?
• This company owns ~900k acres in the Permian Basin in Texas.  Buying this company is
a way to profit on the explosion of oil and gas drilling in the region, now called the Saudi
Arabia of America.  How?  The company leases land to oil and gas companies and when
they do, they retain all mineral rights. Simply put, they get a royalty on all the oil and gas
that comes out of the ground.  But, that's not all. With the explosion of drilling in the
region, companies like KMI and WMB (among others) are rushing to supply the region
with pipeline capacity. How does this help our latest investment?  When pipelines cross
the 900k acres of land moving oil and gas, our company collects easement income from
them. What else? Fracking is very water intensive. Why does this matter? This company
also has a water business since they own all the water rights in the region that sells water
to oil and gas companies and also offers water services. The also lease land to farmers
in the region. Finally, they also collect money on the sales of acreage (this is small).

• With this company, you are getting top to bottom exposure to what is happening in the
Permian.   

• They also regularly buy back their stock. It has climbed 2,000% since 2010 and has
plenty more growth ahead of it......unless you think Permian drilling is going to grind to a
halt. I don't.
Texas Pacific Land
Trust (TPL)
 History
• In 1871, the Texas and Pacific Railway (“T&P”) was created through a
federal charter providing a mandate to build a transcontinental railroad
from Texas to California

• Texas, California and present-day Arizona and New Mexico each agreed
to grant sections of land for every mile of rail built

• Although T&P did not complete the full line, by 1881, T&P had completed
972 miles of track, entitling it to 3.5 million acres of land in Texas

• In 1888, T&P went through bankruptcy and the 3.5 million acres of Texas
land was put into a trust for the benefit of the bondholders who invested
in the railroad

• The certificates of the Texas Pacific Land Trust were later listed on the
New York Stock Exchange and remain actively traded today
 Landholdings
Permian and Delaware Basins in Texas
Acreage by County
 Wolfcamp
• The largest oil deposit in the Permian

• Covers NW Texas into SE New Mexico

• Drillers are deploying assets there at a rapid rate

and tens of billions of dollars are being spent
there

• As the following maps will show, TPL is the

dominant land owner in this region.
Land Resource Management
• Revenue derived from perpetual non-participating oil and gas
royalties in which the Trust has an interest

• Revenue derived from easement contracts covering activities

such as oil and gas pipelines and subsurface wellbore
easements, leases, material sales, etc.

• Revenue generated from the sale of oil and gas royalty interests

• Revenue generated from land sales and grazing leases

• Operators include, OXY, Diamondback, Apache, Chevron, EOG

and others
 The Permian
• Now the largest oil despite on the globe

• Largest than Saudi’s “Anwar” oil field

• Produced 4.1M barrels a day as of June2019 (+21% YOY). Despite rig count
declines

• DUC’s (drilled but uncompleted) well rose to 4,000 up 52% since 2018 (fell 1%
nationally over same time)

• Wells are drilled waiting pipelines to arrive. 2019-2022

• 14Bcfd of nat gas pipelines coming to the Permian. That gas is currently being
flared.

• There are ~3M bpd of oil pipelines coming to the area

• Will cause an explosion of activity

 Water
• Providing brackish water to the well site for use in fracking

• Collection, treatment and recycling of water produced by the

oil and gas wells for reuse into future wells

• Design, construction and management of water infrastructure

(well fields, storage pits (ponds), reuse facilities, etc.)

• Disposal services of produced water through third party

providers

• Tracking, analytics and well testing services providing critical

data to operators to optimize their oil and gas operations
 Trust vs C-corp
• Currently TPL is a Trust controlled by 3 trustees who have life
appointments

• Only replace when one resigns/dies

• Disclosure requirements for a Trust pale to C-corp

• No analyst follow the company

• Currently the reason for very contested proxy contest

• Horizon kinetics owns ~25% (buys 49 shares roughly every

day) of the stock and together with Softvest are waging proxy
battle to get their nominee, Eric Oliver voted as Trustee
 Proxy
• Trustees oppose Eric Oliver

• Moved meeting 3X to avoid a vote

• Reasons for moving vote invalid

• Meeting held anyway 5/22. Oliver won over 65% of the

vote

• Trustees refuse to recognize vote and have filed in court

• Trustees have minimal stock holdings…financial incentive

to keep job forever vs enrich shareholders now
 Committee Formed To
Explore C-Corp Conversion
• 7 Members

• 3 from Horizon group

• Has until 12/31 to make a recommendation on

conversion or not

• Gag-order in effect prior to then and for 30 days

post decision
 What If Trustees Win?
• While company is very undervalued, the stock has done very well

• However, many feel this is due to simply the company’s location,

not necessarily managerial expertise of the current Trustees.

• “Being born to a family of billionaire’s does not make one a financial

genius…..”

• Biggest problem in Permian now is lack of pipeline capacity. Once

it arrives (2019-2022) drilling the region resumes upward trajectory.
Both Chevron, Exxon and others have announced large expansions
in the Permian. This has begun…..

• Even in a “nothing changes” scenario, TPL shareholders will do

very well
 What If Horizon Wins
• Oliver pushes for conversion to C-corp or in worst case
scenario, pressures other Trustees for more disclosure

• Oliver has decades of oil and gas experience, current

Trustees, none.

• Any future buyout offers will surely be presented to

shareholders

• Via the proxy contest we discovered two buyout offers

were presented to Trustees in 2018

• Oliver has big plans for the water business

 Summary
• Perpetual royalty interest generates higher operating margin and mitigates risk associated with
individual operators, both because of operator diversity and the long term nature of the interest

• TPL currently has long term contracts with dozens of counter-parties Substantial Upside Potential

• TPL’s position has allowed the Trust to realize the upside associated with increased development in
the Permian Basin. As drilling continues, the Trust is positioned to realize additional revenues from its
large, undeveloped acreage position

• Sizeable Asset Base > ~900,000 surface acres across land in 19 different counties

• Net profit royalty interests in ~455,000 acres

• The sheer scale of Texas Pacific Land Trust allows for potential that cannot be found in other
companies operating within the Permian Basin

• TPL has recognized a ~40% revenue CAGR from 2010 – 2018 across its asset base

• In 2017, TPL established Texas Pacific Water Resources to focus on the build out of the Water Service
and Operations business. Water business has increased revenue 5X since Q1 2017

• The company has bought back 7% of its stock since 2014

 Why?
• Largely unknown

• Company is unfollowed by any major analyst firm

• Trust vs C-corp structure allows for limited

disclosure making individual analysis of the
company very difficult

• Very little if any media coverage, no press

releases, no earnings calls
 Valuation
• Currently trades 23X EPS which is growing 100% YOY

• Sept 2018 Fed auction of raw Permian lands in New Mexico for drilling
fetch 95k/acre. Lowest price per acre in Permian land sales has been
$30k

• TPL currently trades at ~$6k/acre

• May 2018 water acreage sale in the Permian saw 64k acres go $6.7k
acre

• Napkin valuation of TPL’s 600k acres ~$4B, means “oil valuation” ~$2B
or <$2k/a

• This is a play on Permian “activity” not the price of oil or gas. The stock
is up ~2,000% since 2010 while oil has fallen from $74 to $60