TEXAS PACIFIC LAND CORPORATION 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 Form 10-Q or other filings with theSecurities 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 severity and duration of the COVID-19 pandemic and related economic repercussions, 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 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 theSEC , 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 endedDecember 31, 2020 , 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 together with (i) the factors discussed in Item 1A. "Risk Factors" of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , (ii) the factors discussed in Part II, Item 1A. "Risk Factors," if any, of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. 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 theState of Texas with approximately 880,000 acres of land, comprised of a number of separate tracts, located in 19 counties inWest Texas , with the majority of our ownership concentrated in thePermian 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 in the western part ofTexas , as well as approximately 4,000 additional net royalty acres (normalized to 1/8th). We completed our reorganization from a business trust to a corporation (the "Corporate Reorganization") onJanuary 11, 2021 , changing our name fromTexas Pacific Land Trust (the "Trust") toTexas Pacific Land Corporation . Any references in this Quarterly Report on Form 10-Q to the Company, TPL, our, we, or us with respect to periods prior toJanuary 11, 2021 are in reference to the Trust, and references to periods on that date and thereafter are in reference toTexas Pacific Land Corporation or TPL Corporation. For further information on the Corporate Reorganization, see Note 7, "Changes in Equity" in the notes to the condensed consolidated financial statements. Our surface and royalty ownership allow steady revenue generation through the entire value chain of oil and gas development. While we are not an oil and gas producer, we benefit from various revenue sources throughout the life cycle of a well. During the initial development phase where infrastructure for oil and gas development is constructed, we receive fixed fee payments for use of our land and revenue for sales of materials (caliche) used in the construction of the infrastructure. During the drilling and completion phase, we generate revenue for providing sourced water and/or treated produced water in addition to fixed fee payments for use of our land. During the production phase, we receive revenue from our oil and gas royalty interests and also revenues related to saltwater disposal on our land. In addition, we generate revenue from pipeline, power line and utility easements, commercial leases and seismic and temporary permits principally related to a variety of land uses, including midstream infrastructure projects and processing facilities as hydrocarbons are processed and transported to market. A significant portion of our revenues is generated from our business activity in thePermian Basin and derived primarily from oil, gas and produced water royalties, sales of water and land, easements and commercial leases. Due to the nature of our operations, our revenue is subject to substantial fluctuations from quarter to quarter and year to year. The demand 12 -------------------------------------------------------------------------------- Table of Contents for, and sale price of, particular tracts of land are influenced by many factors beyond our control, including general economic conditions, the rate of development in nearby areas and the suitability of the particular tract for commercial uses prevalent in westernTexas . As our oil and gas revenue is derived from our oil and gas royalty interests, in addition to fluctuating in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject to decisions made by the owners and operators of the oil and gas wells to which our royalty interests relate as to investments in and production from those wells. Our revenue from easements is primarily generated from pipelines transporting oil, gas and related hydrocarbons, power line and utility easements and subsurface wellbore easements. The majority of our easements have a thirty-plus year term and subsequently renew every ten years with an additional payment. Commercial lease revenue is derived primarily from processing, storage and compression facilities and roads.Texas Pacific Water Resources LLC ("TPWR"), a single memberTexas limited liability company owned by the Company, provides full-service water offerings to operators in thePermian Basin . These services include, but are not limited to, water sourcing, produced-water gathering/treatment, infrastructure development, disposal solutions, water tracking, analytics and well testing services. TPWR's revenue streams principally consist of revenue generated from sales of sourced and treated water as well as revenues from produced water royalties. We are committed to sustainable water development. Our significant surface ownership in thePermian Basin provides TPWR with a unique opportunity to provide multiple full-service water offerings to operators. During the nine months endedSeptember 30, 2021 , we invested approximately$7.0 million in TPWR projects to maintain and/or enhance water sourcing assets, of which$3.9 million related to electrifying our water sourcing infrastructure.
Market Conditions
COVID-19 Pandemic and Global Oil Market Impact in 2021
The uncertainty caused by the global spread of COVID-19 commencing in 2020, among other factors, led to a significant reduction in global demand and prices for oil. These events generally led to production curtailments and capital investment reductions by the operators of the oil and gas wells to which the Company's royalty interests relate. This slowdown in well development has negatively affected the Company's business and operations for 2020 and 2021. More recently, development activity has also been impacted by shortages in labor and certain equipment as well as escalating costs which have generally impacted operators in thePermian Basin . While labor and resource shortages and rising costs have not directly impacted us yet, these shortages and rising costs could potentially impact our future operating activity. With current oil, natural gas, and NGL prices broadly higher than the comparable period in 2020, development activities in thePermian Basin have rebounded from the lows in 2020, and producer activity has increased, albeit at a pace still below pre-pandemic levels. Future production and development activity will continue to be influenced by changes in commodity prices and by the evolving economic and health impact of COVID-19. Though the global spread of COVID-19 and the associated economic impact are still uncertain, COVID-19 containment measures have eased in certain regions globally, and as a result, demand for oil and gas has begun to recover. However, COVID-19 continues to impact certain regions domestically and globally, and any additional containment measures, now or in the future, could impede a recovery. In addition, oil prices in 2021 have been supported by oil supply cuts by theOrganization of the Petroleum Exporting Countries ("OPEC") andRussia (collectively referred to as "OPEC+"). Although our revenues are directly and indirectly impacted by changes in oil 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 oil price volatility. In 2020, we implemented certain cost reduction measures to manage costs with an initial focus on negotiating price reductions and discounts with certain vendors and reducing our usage of independent contract service providers. In 2021, we continue to identify additional cost reduction opportunities. As part of our longer-term water business strategy, we have invested in electrifying our water sourcing infrastructure. The use of electricity instead of fuel-powered generators to source and transport water is anticipated to further reduce our dependence on fuel, equipment rentals, and repairs and maintenance. Additionally, our investment in automation has allowed us to curtail our reliance on independent contract service providers to support our field operations.
Our business model and disciplined approach to capital resource allocation have helped us maintain our strong financial position while navigating the uncertainty of the current environment. Further, we continue to prioritize maintaining a
13
--------------------------------------------------------------------------------
Table of Contents
safe and healthy work environment for our employees. Our information technology
infrastructure allowed our corporate employees to transition to a remote work
environment starting in March 2020 and we were able to deploy additional safety
and sanitation measures for our field employees. As vaccination rates in the
United States have risen, we have taken a phased-in approach to returning
employees to the office and continue to monitor guidance provided by the Centers
for Disease Control and Prevention as new information becomes available. We
continue to provide safety and sanitation measures for all employees and
maintain communication with employees regarding any concerns they may have
during the transition.
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 inthe United States , covering approximately 86,000 square miles in 52 counties across southeasternNew Mexico and westernTexas . All of our assets are located inWest Texas . With our ownership concentration in thePermian Basin , our revenues are directly impacted by oil and gas pricing and drilling activity in thePermian Basin . Below are metrics for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Oil and Gas Pricing Metrics:(1) WTI Cushing average price per bbl$ 70.58 $ 40.89 $ 65.05 $ 38.04 Henry Hub average price per mmbtu$ 4.35 $
2.00
Activity Metrics specific to thePermian Basin :(1)(2) Average monthly horizontal permits 527 389 573 502 Average monthly horizontal wells drilled 405 189 376 316 Average weekly horizontal rig count 235 121 215 235 DUCs as ofSeptember 30 for each applicable year 4,519 4,683 4,519 4,683 Total Average US weekly horizontal rig count (2) 450 217 405 424 (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)
The metrics above demonstrate the shifts in activity in thePermian Basin for the three and nine months endedSeptember 30, 2021 and 2020. While oil and gas prices, which began declining in the first quarter of 2020 (prior to oil reaching record lows in the second quarter of 2020), have rebounded through the first nine months of 2021, development, drilling and completion and production activities broadly across the Permian have not returned to their pre-pandemic levels. Operators continue to manage their capital allocations by deploying at a decreased pace of development while oil demand continues to recover. As we are a significant landowner in thePermian 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. 14 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our principal sources of liquidity are revenues from oil, gas and produced water royalties, easements and other surface-related income and water and land sales. 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 as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , we had cash and cash equivalents of$372.8 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 (the "Common Stock") subject to market conditions, to pay dividends subject to the discretion of our board of directors and for general corporate purposes. 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. For 2021, our board of directors has approved repurchases of our Common Stock up to$20.0 million of shares, and throughSeptember 30, 2021 , we have repurchased$11.2 million of shares.
Results of Operations
We operate our business in two segments: Land andResource Management and Water Services and Operations. We eliminate any inter-segment revenues and expenses upon consolidation.
We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in
Note 8. "Business Segment Reporting" in the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Our results of operations for the three and nine months endedSeptember 30, 2021 , have continued to be impacted by oil and gas activity in thePermian Basin not returning to pre-pandemic levels. While our oil and gas royalty revenues have benefited from increased oil prices during this time period, our water sales and surface-related income continue to be impacted by the decreased pace of activity.
For the three months ended
Revenues. Revenues increased$49.3 million , or 66.3%, to$123.7 million for the three months endedSeptember 30, 2021 compared to$74.4 million for the three months endedSeptember 30, 2020 . Net income increased 81.2% to$83.8 million for the three months endedSeptember 30, 2021 compared to$46.3 million for the three months endedSeptember 30, 2020 . 15 -------------------------------------------------------------------------------- Table of Contents The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Three Months Ended
2021 2020
Revenues:
Land and resource management:
Oil and gas royalty revenue $ 79,098 64 % $ 31,758 43 %
Easements and other surface-related income 7,625 6 % 6,588 9 %
Land sales and other operating revenue 69 - % 11,550 15 %
Total land and resource management revenue 86,792 70 % 49,896 67 %
Water services and operations:
Water sales 19,554 16 % 12,139 16 %
Produced water royalties 15,140 12 % 12,246 17 %
Easements and other surface-related income 2,207 2 % 102 - %
Total water services and operations revenue 36,901 30 % 24,487 33 %
Total consolidated revenues $ 123,693 100 % $ 74,383 100 %
Net income:
Land and resource management $ 65,292 78 % $ 34,359 74 %
Water services and operations 18,545 22 % 11,916 26 %
Total consolidated net income $ 83,837 100 % $ 46,275 100 %
Land and Resource Management
Land and Resource Management segment revenues increased $36.9 million to $86.8
million for the three months ended September 30, 2021 as compared with $49.9
million for the comparable period of 2020. The increase in Land and Resource
Management segment revenues is principally due to an increase in oil and gas
royalty revenue, as discussed further below.
16
--------------------------------------------------------------------------------
Table of Contents
Oil and gas royalties. Oil and gas royalty revenue was $79.1 million for the
three months ended September 30, 2021 compared to $31.8 million for the three
months ended September 30, 2020 . The table below provides financial and
operational data by royalty stream for the three months ended September 30, 2021
and 2020:
Three Months Ended September
30,
2021 2020
Our share of production volumes(1):
Oil (MBbls) 810 658
Natural gas (MMcf) 3,111 2,477
NGL (MBbls) 469 374
Equivalents (MBoe) 1,798 1,445
Equivalents per day (MBoe/d) 19.5 15.7
Oil and gas royalty revenue (in thousands):
Oil royalties $ 52,081 $ 24,111
Natural gas royalties 11,528 3,286
NGL royalties 15,489 4,361
Total oil and gas royalties $ 79,098 $ 31,758
Realized prices:
Oil ($/Bbl) $ 67.32 $ 38.35
Natural gas ($/Mcf) $ 4.01 $ 1.43
NGL ($/Bbl) $ 35.69 $ 12.62
Equivalents ($/Boe) $ 46.07 $ 23.02
(1) Commonly used definitions in the oil and gas industry not previously
defined: Boe represents barrels of oil equivalent. MBbls represents one thousand
barrels of crude oil, condensate or NGLs. Mcf represents one thousand cubic feet
of natural gas. MMcf represents one million cubic feet of natural gas. MBoe
represents one thousand Boe. MBoe/d represents one thousand Boe per day.
Our share of crude oil, natural gas and NGL production volumes was 19.5 thousand
Boe per day for the three months ended September 30, 2021 compared to 15.7
thousand Boe per day for the same period of 2020. The average realized prices
were $67.32 per barrel of oil, $4.01 per Mcf of natural gas, and $35.69 per
barrel of NGL, for a total equivalent price of $46.07 per Boe for the three
months ended September 30, 2021 , doubling the total equivalent price of $23.02
per Boe for the same period of 2020.
Easements and other surface-related income. Easements and other surface-related
income was $7.6 million for the three months ended September 30, 2021 , an
increase of 15.7% compared to $6.6 million for the three months ended September
30, 2020 . Easements and other surface-related income includes pipeline, power
line and utility easements, commercial leases and seismic and temporary permits.
The increase in easements and other surface-related income is principally
related to increases in well bore easements and material sales for the three
months ended September 30, 2021 compared to the same period of 2020. Easements
and other surface-related income is dependent on development decisions made by
companies that operate in the areas where we own land and is, therefore,
unpredictable and may vary significantly from period to period. See "Market
Conditions" above for additional discussion of development activity in the
Permian Basin during the three months ended September 30, 2021 relative to the
same time period of 2020.
Land sales and other operating revenue. Land sales and other operating revenue
includes revenue generated from land sales and grazing leases. There were no
land sales for the three months ended September 30, 2021 . Land sales were $11.5
million for the three months ended September 30, 2020 . For the three months
ended September 30, 2020 , we sold approximately 20,820 acres of land for an
aggregate sales price of approximately $10.1 million , or approximately $483 per
17
--------------------------------------------------------------------------------
Table of Contents
acre. Additionally, we recognized land sales revenue of $1.4 million for the
three months ended September 30, 2020 related to land exchanges where we had no
cost basis in the land conveyed.
Net income. Net income for the Land and Resource Management segment was $65.3
million for the three months ended September 30, 2021 compared to $34.4 million
for the three months ended September 30, 2020 . The increase in net income is
principally due to the $36.9 million increase in segment revenues, partially
offset by an increase in segment expenses, including income tax expense. Total
segment expenses were $21.5 million and $15.5 million for the three months ended
September 30, 2021 and 2020, respectively. The overall increase in segment
expenses was principally related to increased income tax expense for the three
months ended September 30, 2021 . Expenses are discussed further below under
"Other Financial Data - Consolidated."
Water Services and Operations
Water Services and Operations segment revenues increased 50.7% to$36.9 million for the three months endedSeptember 30, 2021 as compared with$24.5 million for the comparable period of 2020. The increase in Water Services and Operations segment revenues is principally due to an increase in water sales revenue and produced water royalties, which are discussed below. As discussed in "Market Conditions" above, our segment revenues are directly influenced by development decisions made by our customers and the overall activity level in thePermian Basin . Accordingly, our segment revenues and sales volumes, as further discussed below, will fluctuate from period to period based upon those decisions and activity levels. Water sales. Water sales revenue was$19.6 million for the three months endedSeptember 30, 2021 , an increase of 61.1%, compared with the three months endedSeptember 30, 2020 when water sales revenue was$12.1 million . This increase was principally due to a 60.4% increase in the number of barrels of sourced and treated water for the three months endedSeptember 30, 2021 compared to the same period in 2020. Produced water royalties. Produced water royalties are royalties received from the transportation or disposal of produced water on our land. We do not operate any salt water disposal wells. Produced water royalties were$15.1 million for the three months endedSeptember 30, 2021 compared to$12.2 million compared to the same period in 2020. This increase is principally due to increased produced water volumes for the three months endedSeptember 30, 2021 compared to the same period of 2020. Easements and other surface-related income. Easements and other surface-related income was$2.2 million for the three months endedSeptember 30, 2021 , an increase of$2.1 million compared to$0.1 million for the three months endedSeptember 30, 2020 . The increase in easements and other surface-related income related to an increase in temporary permits for sourced water lines for the three months endedSeptember 30, 2021 compared to the same period in 2020. Net income. Net income for the Water Services and Operations segment was$18.5 million for the three months endedSeptember 30, 2021 compared to$11.9 million for the three months endedSeptember 30, 2020 . As discussed above, segment revenues increased 50.7% for the three months endedSeptember 30, 2021 compared to the same period of 2020. Total segment expenses, including income tax expense, were$18.4 million for the three months endedSeptember 30, 2021 as compared to$12.6 million for the three months endedSeptember 30, 2020 . The overall increase in segment expenses during 2021 is principally related to increased income tax expense and water service-related expenses, primarily fuel, equipment rental and repairs and maintenance. Expenses are discussed further below under "Other Financial Data - Consolidated."
Other Financial Data - Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were$8.5 million and$7.7 million for the three months endedSeptember 30, 2021 and 2020, respectively. The increase in salaries and related employee expenses for the three months endedSeptember 30, 2021 compared to the same period of 2020 is principally due to an increase in contract labor expenses. Water service-related expenses. Water service-related expenses were$3.7 million for the three months endedSeptember 30, 2021 compared to$2.3 million for the comparable period of 2020. The increase in expenses during 2021 is primarily due to increased fuel, equipment rental and repairs and maintenance expenses related to higher water sales volume, as discussed above.
General and administrative expenses. General and administrative expenses were
18
--------------------------------------------------------------------------------
Table of Contents
administrative expenses during the three months ended September 30, 2021
compared to the same period of 2020 is principally related to increases in board
of director fees resulting from our Corporate Reorganization in January 2021 .
Other income, net. Other income, net was $0.5 million and $1.3 million for the
three months ended September 30, 2021 and 2020, respectively. Other income, net
for the three months ended September 30, 2020 , includes a $1.2 million accrued
insurance reimbursement related to legal fees incurred in 2019 associated with
the proxy contest.
For the nine months ended
Revenues. Revenues increased$75.5 million , or 33.1%, to$303.8 million for the nine months endedSeptember 30, 2021 compared to$228.3 million for the nine months endedSeptember 30, 2020 . Net income increased 45.5% to$190.9 million for the nine months endedSeptember 30, 2021 compared to$131.3 million for the nine months endedSeptember 30, 2020 .
The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Nine Months Ended
2021 2020
Revenues:
Land and resource management:
Oil and gas royalty revenue$ 186,835 62 %$ 94,631 41 % Easements and other surface-related income 24,029 8 % 31,385 14 % Land sales and other operating revenue 959 - % 16,134 7 % Total land and resource management revenue 211,823 70 % 142,150 62 % Water services and operations: Water sales 44,983 15 % 47,525 21 % Produced water royalties 43,147 14 % 37,863 17 % Easements and other surface-related income 3,827 1 % 722 - % Total water services and operations revenue 91,957 30 % 86,110 38 % Total consolidated revenues$ 303,780 100 %$ 228,260 100 % Net income: Land and resource management$ 150,248 79 %$ 92,197 70 % Water services and operations 40,687 21 % 39,061 30 % Total consolidated net income$ 190,935 100 %$ 131,258 100 %
Land and
Land andResource Management segment revenues increased 49.0% to$211.8 million for the nine months endedSeptember 30, 2021 as compared with$142.2 million for the comparable period of 2020. The increase in Land andResource Management segment revenues is principally due to an increase in oil and gas royalty revenue, partially offset by decreases in land sales and easements and other surface-related income, as discussed further below. 19 -------------------------------------------------------------------------------- Table of Contents Oil and gas royalties. Oil and gas royalty revenue was$186.8 million for the nine months endedSeptember 30, 2021 compared to$94.6 million for the nine months endedSeptember 30, 2020 , an increase of$92.2 million . The table below provides financial and operational data by royalty stream for the nine months endedSeptember 30, 2021 and 2020:
Nine Months Ended
2021 2020
Our share of production volumes:
Oil (MBbls) 2,139 2,081
Natural gas (MMcf) 8,627 6,983
NGL (MBbls) 1,194 1,142
Equivalents (MBoe) 4,771 4,387
Equivalents per day (MBoe/d) 17.5 16.0
Oil and gas royalty revenue (in thousands):
Oil royalties $ 128,907 $ 76,794
Natural gas royalties 26,400 6,804
NGL royalties 31,528 11,033
Total oil and gas royalties $ 186,835 $ 94,631
Realized prices:
Oil ($/Bbl) $ 63.12 $ 38.64
Natural gas ($/Mcf) $ 3.31 $ 1.05
NGL ($/Bbl) $ 28.54 $ 10.45
Equivalents ($/Boe) $ 41.01 $ 22.59
Our share of crude oil, natural gas and NGL production volumes was 17.5 thousand
Boe per day for the nine months ended September 30, 2021 compared to 16.0
thousand Boe per day for the same period of 2020. The average realized prices
were $63.12 per barrel of oil, $3.31 per Mcf of natural gas, and $28.54 per
barrel of NGL, for a total equivalent price of $41.01 per Boe for the nine
months ended September 30, 2021 , an increase of 81.5% over a total equivalent
price of $22.59 per Boe for the same period of 2020.
Easements and other surface-related income. Easements and other surface-related
income was $24.0 million for the nine months ended September 30, 2021 , a
decrease of 23.4% compared to $31.4 million for the nine months ended September
30, 2020 . Easements and other surface-related income includes pipeline, power
line and utility easements, commercial leases and seismic and temporary permits.
The decrease in easements and other surface-related income is principally
related to a decrease of $9.7 million in pipeline easement income to $5.6
million for the nine months ended September 30, 2021 from $15.3 million for the
nine months ended September 30, 2020 . The amount of income derived from pipeline
easements is a function of the term of the easement, the size of the easement
and the number of easements entered into for any given period. Easements and
other surface-related income is dependent on development decisions made by
companies that operate in the areas where we own land and is therefore,
unpredictable and may vary significantly from period to period. See "Market
Conditions" above for additional discussion of development activity in the
Permian Basin during the nine months ended September 30, 2021 relative to the
same time period of 2020.
Land sales and other operating revenue. Land sales and other operating revenue
includes revenue generated from land sales and grazing leases. Land sales were
$0.7 million and $15.9 million for the nine months ended September 30, 2021 and
2020, respectively. For the nine months ended September 30, 2021 , we sold 30
acres of land for an aggregate sales price of $0.7 million or approximately
$25,000 per acre. For the nine months ended September 30, 2020 , we sold
approximately 21,347 acres of land for an aggregate sales price of approximately
$14.5 million , or approximately $676 per acre. Additionally, we recognized land
sales revenue of $1.4 million for the nine months ended September 30, 2020
related to land exchanges where we had no cost basis in the land conveyed.
20
--------------------------------------------------------------------------------
Table of Contents
Net income. Net income for the Land and Resource Management segment increased
63.0% to $150.2 million for the nine months ended September 30, 2021 compared to
$92.2 million for the comparable period in 2020. The increase in net income is
principally due to the $69.7 million increase in segment revenues, partially
offset by an increase in segment expenses, including income tax expense. The
increase in segment revenues is principally due to an increase in oil and gas
royalty revenue, partially offset by decreases in land sales and easements and
other surface-related income, as discussed above. Total segment expenses were
$61.6 million and $50.0 million for the nine months ended September 30, 2021 and
2020, respectively. The overall increase in segment expenses was principally due
to increased income tax expense related to increased operating income. Expenses
are discussed further below under "Other Financial Data - Consolidated."
Water Services and Operations
Water Services and Operations segment revenues increased 6.8% to$92.0 million for the nine months endedSeptember 30, 2021 as compared with$86.1 million for the comparable period of 2020. The increase in Water Services and Operations segment revenues is principally due to increases in produced water royalties and easements and other surface-related income, partially offset by a decrease in water sales revenue, which is discussed below. As discussed in "Market Conditions" above, our segment revenues are directly influenced by development decisions made by our customers and the overall activity level in thePermian Basin . Accordingly, our segment revenues and sales volumes, as further discussed below, will fluctuate from period to period based upon those decisions and activity levels. Water sales. Water sales revenue decreased$2.5 million to$45.0 million for the nine months endedSeptember 30, 2021 compared to the same period of 2020. While sourced and treated water sales volumes have increased approximately 12.5% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , the average sales price per barrel of water in 2021 is still below pre-pandemic pricing. Produced water royalties. Produced water royalties are royalties received from the transportation or disposal of produced water on our land. We do not operate any salt water disposal wells. Produced water royalties were$43.1 million for the nine months endedSeptember 30, 2021 compared to$37.9 million compared to the same period in 2020. This increase is principally due to increased produced water volumes for the nine months endedSeptember 30, 2021 compared to the same period of 2020. Easements and other surface-related income. Easements and other surface-related income was$3.8 million for the nine months endedSeptember 30, 2021 , an increase of$3.1 million compared to$0.7 million for the nine months endedSeptember 30, 2020 . The increase in easements and other surface-related income relates to an increase in temporary permits for sourced water lines for the nine months endedSeptember 30, 2021 compared to the same period in 2020. Net income. Net income for the Water Services and Operations segment was$40.7 million for the nine months endedSeptember 30, 2021 compared to$39.1 million for the same period in 2020. As discussed above, segment revenues increased 6.8% for the nine months endedSeptember 30, 2021 compared to the same period of 2020. Total segment expenses, including income tax expense, were$51.3 million for the nine months endedSeptember 30, 2021 as compared to$47.0 million for the nine months endedSeptember 30, 2020 . The overall increase in segment expenses during 2021 is principally related to increased corporate overhead allocations related to our Corporate Reorganization. Expenses are discussed further below under "Other Financial Data - Consolidated."
Other Financial Data - Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were$31.8 million for the nine months endedSeptember 30, 2021 compared to$27.2 million for the comparable period of 2020. The increase in salaries and related employee expenses during 2021 as compared to the same period of 2020 is principally due to$6.7 million of severance costs, partially offset by decreased usage of contract labor by our Water Services and Operations segment. Water service-related expenses. Water service-related expenses were$10.5 million for the nine months endedSeptember 30, 2021 compared to$11.2 million for the comparable period of 2020. The decrease in expenses during 2021 is primarily related to decreased field logistical expenses and equipment rental expenses. General and administrative expenses. General and administrative expenses increased$1.2 million to$8.5 million for the nine months endedSeptember 30, 2021 from$7.3 million for the same period of 2020. The increase in general and administrative expenses during the nine months endedSeptember 30, 2021 compared to the same period of 2020 was principally related to increased board of director fees resulting from our Corporate Reorganization inJanuary 2021 . 21 -------------------------------------------------------------------------------- Table of Contents Legal and professional expenses. Legal and professional fees were$4.9 million for the nine months endedSeptember 30, 2021 compared to$7.0 million for the comparable period of 2020. Legal and professional fees for the nine months endedSeptember 30, 2020 were principally higher due to legal expenses associated with our Corporate Reorganization. Land sales expenses. There were no land sales expenses for the nine months endedSeptember 30, 2021 compared to$2.8 million for the comparable period of 2020. Land sales expenses represent expenses related to land sales and include cost basis and closing costs associated with land sales. Land sales expenses for the nine months endedSeptember 30, 2020 include$2.7 million of cost basis. Depreciation, depletion and amortization. Depreciation, depletion and amortization was$11.6 million for the nine months endedSeptember 30, 2021 compared to$10.8 million for the nine months endedSeptember 30, 2020 . The increase in depreciation, depletion and amortization is principally related to our investment in water service-related assets placed in service in 2021 and, to a lesser extent, increased depletion related to our oil and gas royalty interests. Other income, net. Other income, net was$0.9 million and$2.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Other income, net for the nine months endedSeptember 30, 2020 , includes a$1.2 million accrued insurance reimbursement related to legal fees incurred in 2019 associated with the proxy contest. Cash Flow Analysis
For the nine months ended
Cash flows provided by operating activities for the nine months endedSeptember 30, 2021 and 2020 were$174.5 million and$161.9 million , respectively. The increase in cash flows provided by operating activities was primarily related to increased prices and volumes of oil and gas production and the associated working capital resulting from such activity during the nine months endedSeptember 30, 2021 . Cash flows used in investing activities were$10.0 million compared to$25.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Acquisitions of land and royalty interests were nominal for the nine months endedSeptember 30, 2021 compared to$20.9 million for the nine months endedSeptember 30, 2020 . This decline in land and royalty acquisitions was partially offset by an increase in purchases of fixed assets. Cash flows used in financing activities were$74.8 million compared to$124.1 million for the nine months endedSeptember 30, 2021 and 2020, respectively. During the nine months endedSeptember 30, 2021 , we paid total dividends of$64.0 million consisting of cumulative paid cash dividends of$8.25 per share. During the nine months endedSeptember 30, 2020 , we paid total dividends of$124.1 million consisting of an annual cash dividend of$10.00 per Sub-share and a special dividend of$6.00 per Sub-share.
Off-Balance Sheet Arrangements
The Company has not engaged in any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 2 to the Consolidated Financial Statements included in our 2020 Annual Report on Form 10-K filed with theSEC onFebruary 25, 2021 . Our most critical accounting policies and estimates include our accrual of oil and gas royalties. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management's basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Annual Report on Form 10-K. 22 -------------------------------------------------------------------------------- Table of Contents New Accounting Pronouncements
For further information regarding recently issued accounting pronouncements, see
Note 2, "Summary of Significant Accounting Policies" in the notes to the
consolidated financial statements included in Item 1. "Financial Statements"
in this Quarterly Report on Form 10-Q.
23--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
