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 potential future impact of COVID-19, 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 theOrganization of the Petroleum Exporting Countries ("OPEC") andRussia (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 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, 2021 , 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 endedDecember 31, 2021 filed with theSEC onFebruary 23, 2022 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 theState of Texas with approximately 880,000 surface acres of land 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, as well as approximately 4,000 additional net royalty acres (normalized to 1/8th), all located in the western part ofTexas . 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 or after that date are in reference toTexas Pacific Land Corporation or TPL Corporation. For further information on the Corporate Reorganization, see Note 10, "Changes in Equity" in the notes to the condensed consolidated financial statements. Our business activity is generated from surface and royalty interest ownership inWest Texas , primarily in thePermian Basin . Our revenues are 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 thePermian Basin as it relates to our other revenue streams, principally water sales, 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
13 -------------------------------------------------------------------------------- Table of Contents Market Conditions
Global Oil Market Impact in 2022
Average oil and gas prices during the first quarter of 2022 were meaningfully higher compared to average prices during most of the previous quarterly periods over the last decade. In 2021, oil prices were supported by oil supply cuts by OPEC+. Oil demand in 2021 broadly trended higher throughout the year, which also helped support strengthening oil prices. Beginning inMarch 2022 ,Russia's incursion intoUkraine created volatility in global supply of numerous commodities, including oil. In response, the US has implemented numerous measures to help mitigate potential supply shortfalls and high oil prices, most notably by releasing millions of barrels of crude oil from its Strategic Petroleum Reserve. The confluence of these major events have contributed to increased fluctuations in oil prices during 2022. 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.
COVID-19 Pandemic
We continue to monitor the COVID-19 pandemic as cases and hospitalizations have dropped significantly in 2022. We are following local government mandates, where applicable, and will continue to revise and refine our on-site work to ensure business continuity and the safety and wellbeing of our employees. The full extent to which the Pandemic impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and new variants of the virus.
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 . Exploration and production ("E&P") firms active in the Permian have generally guided towards increased drilling and development activity in 2022 compared to prior year activity levels. Per theU.S. Energy Information Administration ("EIA"), Permian production is currently in excess of five million barrels per day, which is higher than the average daily production of every year prior to 2022. Despite record Permian production volumes, E&P companies continue to experience challenges with labor and supply chains related to drilling and completion activities, which could negatively impact overall production.
With our ownership concentration in the
Three Months Ended March 31, 2022 2021 Oil and Gas Pricing Metrics:(1) WTI Cushing average price per bbl$ 95.18 $ 58.09 Henry Hub average price per mmbtu$ 4.67
Activity Metrics specific to the
572 446 Average monthly horizontal wells drilled 465 343 Average weekly horizontal rig count 265 189 DUCs as ofMarch 31 for each applicable year
3,924 4,617
Total Average US weekly horizontal rig count (2) 575 350 (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. 14
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(2)
The metrics above demonstrate the shifts in activity in thePermian Basin for the three months endedMarch 31, 2022 and 2021. Oil and gas prices in the first quarter of 2022 have rebounded strongly compared to the comparable period in 2021. Development, drilling, completion, and production activities across the Permian broadly have also significantly improved in the first quarter of 2022 compared to the prior year, although operators currently continue to deploy capital at a measured, albeit increased, pace. 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.
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 ofMarch 31, 2022 . As ofMarch 31, 2022 , we had cash and cash equivalents of$507.4 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 subject to market conditions, to pay dividends subject to the discretion of our board of directors and for general corporate purposes. For the three months endedMarch 31, 2022 , we paid$23.2 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 endedMarch 31, 2022 , we invested approximately$2.9 million in TPWR projects to maintain and/or enhance water sourcing assets, of which$0.9 million related to electrifying our water sourcing infrastructure.
Cash Flows from Operating Activities
For the three months ended
The increase in cash flows provided by operating activities for the three months endedMarch 31, 2022 compared to the same period of 2021, was primarily related to increased prices and volumes of oil and gas production and was partially offset by increased working capital requirements.
Cash Flows Used in Investing Activities
For the three months endedMarch 31, 2022 and 2021, net cash used in investing activities was$5.2 million and$1.4 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 increased$2.2 million for the three months endedMarch 31, 2022 compared to the same period of 2021. Acquisitions of royalty interests increased approximately$1.6 million for the three months endedMarch 31, 2022 compared to the same period 2021. 15 -------------------------------------------------------------------------------- Table of Contents Cash Flows Used in Financing Activities For the three months endedMarch 31, 2022 and 2021, net cash used in financing activities was$23.4 million and$21.3 million , respectively. Our cash flows used in financing primarily consist of activities which return capital to our stockholders such as payment of dividends. During the three months endedMarch 31, 2022 , we paid total dividends of$23.2 million consisting of cumulative paid cash dividends of$3.00 per share. During the three months endedMarch 31, 2021 , we paid total dividends of$21.3 million consisting of cumulative cash dividends of$2.75 per share.
Results of Operations
The following table shows our consolidated results of operations for the three
months ended
Three Months Ended March 31, 2022 2021 Revenues: Oil and gas royalties$ 104,172 $ 49,533 Water sales 18,820 12,956 Produced water royalties 14,870 12,549
Easements and other surface-related income 9,192 9,047 Land sales and other operating revenue
281 70 Total revenues 147,335 84,155
Expenses:
Salaries and related employee expenses 9,385 9,979 Water service-related expenses 2,782 3,298 General and administrative expenses 3,000 2,806 Legal and professional fees 1,719 2,212 Ad valorem taxes 2,010 - Depreciation, depletion and amortization 4,126 3,838 Total operating expenses 23,022 22,133 Operating income 124,313 62,022 Other income, net 76 5 Income before income taxes 124,389 62,027 Income tax expense 26,489 11,975 Net income$ 97,900 $ 50,052
For the Three Months Ended
Consolidated Revenues and Net Income:
Total revenues and net income increased$63.2 million and$47.8 million , respectively, for the three months endedMarch 31, 2022 compared to the same period for the three months endedMarch 31, 2021 . These increases were principally due to the$54.6 million increase in oil and gas royalty revenue and the$5.9 million increase in water sales over the same period. Individual revenue line items are discussed below under "Segment Results of Operations."
Consolidated Expenses:
Salaries and related employee expenses. Salaries and related employee expenses were$9.4 million for the three months endedMarch 31, 2022 compared to$10.0 million for the comparable period of 2021. Salaries and related employee 16 -------------------------------------------------------------------------------- Table of Contents expenses for the three months endedMarch 31, 2021 included a$2.0 million severance accrual. Salaries and related employee expenses for the three months endedMarch 31, 2022 include$1.3 million of share-based compensation expense. Water service-related expenses. Water service-related expenses decreased to$2.8 million for the three months endedMarch 31, 2022 from$3.3 million for the same period of 2021. This decrease in expenses was principally the result of a decrease in fuel and equipment rental expenses due to our investment in electrifying our water sourcing infrastructure. Legal and professional fees. Legal and professional fees decreased$0.5 million to$1.7 million for the three months endedMarch 31, 2022 from$2.2 million for the comparable period of 2021. Legal and professional fees for the three months endedMarch 31, 2021 were higher principally due to legal expenses associated with our Corporate Reorganization which was completed onJanuary 11, 2021 . Ad valorem taxes. For the three months endedMarch 31, 2022 , the Company recorded an accrual of approximately$2.0 million for ad valorem taxes. Prior toJanuary 1, 2022 , the ad valorem taxes with respect to our historical royalty interests were paid directly by certain third parties pursuant to an existing arrangement. Since the completion of our Corporate Reorganization onJanuary 11, 2021 , we have received notice from one such third party that they no longer intend to pay the ad valorem taxes related to such historical royalty interests. While we continue to believe the obligation to pay these ad valorem taxes should belong to the third party, we are accruing an estimate of such taxes and intend to pay the taxes when they become due in order to protect the royalty interests from any potential tax liens for nonpayment of future ad valorem taxes. Total income tax expense. Total income tax expense was$26.5 million and$12.0 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in income tax expense is primarily related to increased operating income resulting from increased revenues from oil and gas royalties and water sales.
Segment Results of Operations
We operate our business in two reportable segments: Land andResource Management and Water Services and Operations. We eliminate any inter-segment revenues and expenses upon consolidation. We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. The reportable segments presented are consistent with our reportable segments discussed in Note 11, "Business Segment Reporting" in the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Our results of operations for the three months endedMarch 31, 2022 have benefited from a rebound in oil and gas activity in thePermian Basin and commodity prices compared to 2021. While our oil and gas royalty revenues have benefited from increased royalty production and higher commodity prices during this time period, our surface-related income continues to be impacted by the development pace of operators in the Permian. 17 -------------------------------------------------------------------------------- Table of Contents For the Three Months EndedMarch 31, 2022 as Compared to the Three Months EndedMarch 31, 2021
The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Three Months Ended March 31, 2022 2021 Revenues: Land and resource management: Oil and gas royalty revenue$ 104,172 71 %$ 49,533 59 % Easements and other surface-related income 8,894 6 % 8,187 10 % Land sales and other operating revenue 281 - % 70 - % Total land and resource management revenue 113,347 77 % 57,790 69 % Water services and operations: Water sales 18,820 13 % 12,956 15 % Produced water royalties 14,870 10 % 12,549 15 % Easements and other surface-related income 298 - % 860 1 % Total water services and operations revenue 33,988 23 % 26,365 31 % Total consolidated revenues$ 147,335 100 %$ 84,155 100 % Net income: Land and resource management$ 81,156 83 %$ 39,513 79 % Water services and operations 16,744 17 % 10,539 21 % Total consolidated net income$ 97,900 100 %$ 50,052 100 % Land andResource Management Land andResource Management segment revenues increased$55.6 million , or 96.1%, to$113.3 million for the three months endedMarch 31, 2022 as compared to the comparable period of 2021. The increase in Land andResource Management segment revenues is principally due to an increase in oil and gas royalty revenue, as discussed further below. Oil and gas royalties. Oil and gas royalty revenue was$104.2 million for the three months endedMarch 31, 2022 compared to$49.5 million for the three months endedMarch 31, 2021 , an increase of 110.3%. The table below provides financial and operational data by royalty stream for the three months endedMarch 31, 2022 and 2021: 18
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Three Months Ended March 31, 2022 2021 Our share of production volumes(1): Oil (MBbls) 796 646 Natural gas (MMcf) 3,279 2,709 NGL (MBbls) 528 383 Equivalents (MBoe) 1,871 1,480 Equivalents per day (MBoe/d) 20.8 16.4 Oil and gas royalty revenue (in thousands): Oil royalties$ 71,681 $ 34,249 Natural gas royalties 16,175 7,360 NGL royalties 16,316 7,924 Total oil and gas royalties$ 104,172 $ 49,533 Realized prices: Oil ($/Bbl)$ 94.24 $ 55.53 Natural gas ($/Mcf)$ 5.33 $ 2.94 NGL ($/Bbl)$ 33.42 $ 22.36 Equivalents ($/Boe)$ 58.31 $ 35.04 (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 20.8 thousand Boe per day for the three months endedMarch 31, 2022 compared to 16.4 thousand Boe per day for the same period of 2021. The average realized prices were$94.24 per barrel of oil,$5.33 per Mcf of natural gas, and$33.42 per barrel of NGL, for a total equivalent price of$58.31 per Boe for the three months endedMarch 31, 2022 , an increase of$23.27 per Boe compared to the total equivalent price of$35.04 per Boe for the same period of 2021. Easements and other surface-related income. Easements and other surface-related income was$8.9 million for the three months endedMarch 31, 2022 , an increase of 8.6% compared to$8.2 million for the three months endedMarch 31, 2021 . 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 of$1.5 million in pipeline easement income,$0.9 million in power line and utility easements, and$0.6 million in material sales for the three months endedMarch 31, 2022 compared to the same period of 2021. These increases were partially offset by a$2.4 million decrease in commercial lease revenue for the three months endedMarch 31, 2022 . 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 thePermian Basin during the three months endedMarch 31, 2022 . Net income. Net income for the Land andResource Management segment was$81.2 million for the three months endedMarch 31, 2022 compared to$39.5 million for the three months endedMarch 31, 2021 . Expenses, including income tax expense, for the Land andResource Management segment were$32.2 million and$18.3 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in expenses during 2022 is principally related to a$12.9 million increase in income tax expense for the three months endedMarch 31, 2022 compared to the same period of 2021. Expenses are discussed further above under "Results of Operations." 19
-------------------------------------------------------------------------------- Table of Contents Water Services and Operations Water Services and Operations segment revenues increased 28.9%, to$34.0 million for the three months endedMarch 31, 2022 as compared with revenues of$26.4 million for the comparable period of 2021. The increase in Water Services and Operations segment revenues is due to increases in water sales and produced water royalty revenue. 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$18.8 million for the three months endedMarch 31, 2022 , an increase of$5.9 million or 45.3%, compared with the three months endedMarch 31, 2021 when water sales revenue was$13.0 million . The increase in water sales is principally due to increased average pricing for the three months endedMarch 31, 2022 , compared to the same period of 2021. Average pricing in 2022 has generally returned to pre-pandemic levels, while pricing in 2021 continued to be impacted by the lows in 2020 brought on by COVID-19. 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 saltwater disposal wells. Produced water royalties were$14.9 million for the three months endedMarch 31, 2022 compared to$12.5 million for the same period in 2021. This increase is principally due to increased produced water volumes for the three months endedMarch 31, 2022 compared to the same period of 2021. Easements and other surface-related income. Easements and other surface-related income was$0.3 million for the three months endedMarch 31, 2022 , a decrease of$0.6 million compared to$0.9 million for the three months endedMarch 31, 2021 . The decrease in easements and other surface-related income relates to a decrease in temporary permits for sourced water lines for the three months endedMarch 31, 2022 compared to the same period in 2021. Net income. Net income for the Water Services and Operations segment was$16.7 million for the three months endedMarch 31, 2022 compared to$10.5 million for the three months endedMarch 31, 2021 . As discussed above, revenues for the Water Services and Operations segment increased 28.9% for the three months endedMarch 31, 2022 compared to the same period of 2021. Expenses, including income tax expense, for the Water Services and Operations segment were$17.2 million for the three months endedMarch 31, 2022 as compared to$15.8 million for the three months endedMarch 31, 2021 . The overall increase in segment expenses during 2022 is principally related to increased income tax expense as a result of increased segment operating income during the same time period. Expenses are discussed further above under "Results of Operations."
Non-GAAP Performance Measures
In addition to amounts presented in accordance with GAAP, we also present certain supplemental non-GAAP measurements. These measurements are not to be considered more relevant or accurate than the measurements presented in accordance with GAAP. In compliance with the requirements of theSEC , our non-GAAP measurements are reconciled to net income, the most directly comparable GAAP performance measure. For all non-GAAP measurements, neither theSEC nor any other regulatory body has passed judgment on these non-GAAP measurements.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP financial measurement of earnings before interest, taxes, depreciation, depletion and amortization. Its purpose is to highlight earnings without finance, taxes, and depreciation, depletion and amortization expense, and its use is limited to specialized analysis. We calculate Adjusted EBITDA as EBITDA excluding the impact of certain non-cash, non-recurring and/or unusual, non-operating items, including, but not limited to: employee share-based compensation, conversion costs related to our Corporate Reorganization, and severance costs. We have presented EBITDA and Adjusted EBITDA because we believe that both are useful supplements to net income in analyzing operating performance. 20
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Table of Contents The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Net income$ 97,900 $ 50,052 Add: Income tax expense 26,489 11,975 Depreciation, depletion and amortization 4,126
3,838
EBITDA 128,515
65,865
Add:
Employee share-based compensation 1,319
-
Conversion costs related to corporate reorganization - 1,973 Severance costs - 2,000 Adjusted EBITDA$ 129,834 $ 69,838
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our condensed 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 2021 Annual Report on Form 10-K filed with theSEC onFebruary 23, 2022 . There have been no material changes to our critical accounting policies or in the estimates and assumptions underlying those policies, from those provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report on Form 10-K.
New Accounting Pronouncements
For further information regarding recently issued accounting pronouncements, see Note 2, "Summary of Significant Accounting Policies" in the notes to the condensed consolidated financial statements included in Item 1. "Financial Statements" in this Quarterly Report on Form 10-Q. 21
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