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OFFON

TEXAS PACIFIC LAND CORPORATION

(TPL)
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TEXAS PACIFIC LAND TRUST : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2020 | 04:39pm EDT

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. Forward-looking statements include statements
regarding the Trust'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 Trust 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+, the proposed reorganization of
the Trust into a corporation, expected competition, management's intent, beliefs
or current expectations with respect to the Trust'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
Securities and Exchange Commission (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, 2019, 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 ended December 31, 2019, (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 Trust's future performance.
Words or phrases such as "expects" and "believes", or similar expressions, when
used in this Form 10-Q or other filings with the SEC, are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.

Overview


Texas Pacific Land Trust (which, together with its subsidiaries as the context
requires, may be referred to as "Texas Pacific", the "Trust", "our", "we" or
"us") is one of the largest landowners in the State of Texas with approximately
880,000 acres of land, comprised of a number of separate tracts, located in 19
counties in West Texas. 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 of Texas, as well as approximately 4,000 additional net royalty
acres (normalized to 1/8th). We were 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. Our Trustees are empowered under the Declaration of Trust to manage the
lands with all the powers of an absolute owner.

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 a variety
of land uses including midstream infrastructure projects and processing
facilities as hydrocarbons are processed and transported to market.

Our revenues are derived primarily from oil and gas 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 for, and sale price of, particular tracts of land is
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 western Texas.

We are not an oil and gas producer. Rather, our oil and gas revenue is derived
from our oil and gas royalty interests. Thus, in addition to fluctuating in
response to the market prices for oil and gas, our oil and gas royalty revenues
are also subject
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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. We monitor reports from the operators, the Texas Railroad Commission, and
other private data providers to assure that we are being paid the appropriate
royalties.
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 but subsequently renew every ten years with an additional payment.
Commercial lease revenue is derived primarily from saltwater disposal royalties,
processing, storage and compression facilities and roads.

Texas Pacific Water Resources LLC ("TPWR"), a single member LLC and wholly owned
subsidiary of the Trust, provides full-service water offerings to operators in
the Permian 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.

During the nine months ended September 30, 2020, the Trust invested approximately $4.2 million in TPWR projects to develop water sourcing and water re-use assets.


Corporate Reorganization

As previously announced on March 23, 2020, our Trustees approved a plan to
reorganize the Trust from its current structure to a corporation formed under
the laws of the State of Delaware. We continue to progress toward the
conversion. On June 15, 2020, the Trust announced the new corporation will be
named Texas Pacific Land Corporation ("TPL Corp") and the prospective members of
the Board of Directors of TPL Corp. Additionally, a draft registration statement
on Form 10 has been submitted to the Securities and Exchange Commission (the
"SEC") for review, on a non-public basis. The Trust continues to make progress
toward effecting its planned corporate reorganization into a Delaware
corporation and currently anticipates to be in a position to move forward with
the reorganization by the end of the fourth quarter of 2020.

COVID-19 Pandemic and Market Conditions Update


The uncertainty surrounding the severity and duration of the COVID-19 pandemic,
as well as dramatic declines in crude oil prices due in part to the global
spread of COVID-19, has caused volatility in the global financial markets
including the oil and gas industry. The full impact of shut-in oil and gas
wells, production curtailments and/or decreased investments in response to lower
commodity prices and conservation of capital by the owners and operators of the
oil and gas wells to which the Trust's royalty interests relate, is unknown at
this time. While uncertainty remains around COVID-19 mitigation measures and
re-opening efforts, we believe demand is beginning to recover. These events have
negatively affected our business and results of operations for the three and
nine months ended September 30, 2020, and may continue to negatively affect the
Trust's business and results of operations in future periods.

During these uncertain times, we have continued to generate positive operating
results and remain focused on meeting the operational needs of our customers
while maintaining a safe and healthy work environment for our employees. Our
existing information technology infrastructure has afforded us the opportunity
to allow our corporate employees to work remotely. We have deployed additional
safety and sanitization measures, including quarantine facilities for our field
employees, if needed.

In an effort to decrease ongoing operational costs, we have implemented certain
cost reduction measures which include, but are not limited to, negotiated price
reductions and discounts with certain vendors. We continue to monitor our
customer base and outstanding accounts receivable balances as a means of
minimizing any potential collection issues. As a royalty owner, we have no
capital expenditure or operating expense burden for development of wells.
Furthermore, our water operations currently have limited capital expenditure
requirements, the amount and timing of which are entirely within our control.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted
on March 27, 2020. The Trust continues to assess the provisions and potential
impacts of this legislation; however, there have been no significant impacts to
the Company's results of operations or financial position resulting from the
CARES Act in the three and nine months ended September 30, 2020.

Despite the uncertainty caused by the COVID-19 pandemic and the record low oil
prices have had on both the global and U.S. oil and gas industry as a whole, we
believe our longevity in the industry and strong financial position provide us
with
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the tools necessary to navigate these unprecedented times. We have no debt, a
strong cash position (cash and cash equivalents were $315.8 million as of
September 30, 2020) and we continue to maintain our capital resource allocation
discipline.

Results of Operations

We operate our business in two segments: Land and Resource 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 9. "Business Segment Reporting"   in   Item 1. "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 in the United States of America ("GAAP").

Due to the continued economic impacts related to the COVID-19 pandemic and
dramatic declines in crude oil prices during the second and third quarters of
2020, our results of operations for the three and nine months ended September
30, 2020 have been negatively impacted. Given the uncertainty surrounding the
severity and duration of the COVID-19 pandemic, our results of operations may
continue to be impacted in future periods.

For the three months ended September 30, 2020 as compared to the three months ended September 30, 2019


Revenues. Revenues decreased $24.1 million, or 24.5%, to $74.4 million for the
three months ended September 30, 2020 compared to $98.5 million for the three
months ended September 30, 2019. Net income decreased $13.7 million, or 22.9%,
to $46.3 million for the three months ended September 30, 2020 compared to $60.0
million for the three months ended September 30, 2019.

The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):

Three Months Ended September 30,

                                                                   2020                                2019

Revenues:

Land and resource management:
Oil and gas royalties                                 $  31,758                43  %       $ 38,259                39  %
Easements and other surface-related income                6,588                 9  %         22,111                22  %
Land sales and other operating revenue                   11,550                15  %          4,706                 5  %
                                                         49,896                67  %         65,076                66  %
Water services and operations:
Water sales and royalties                                12,139                16  %         21,654                22  %
Easements and other surface-related income               12,348                17  %         11,800                12  %
                                                         24,487                33  %         33,454                34  %
Total consolidated revenues                           $  74,383               100  %       $ 98,530               100  %

Net income:
Land and resource management                          $  34,359                74  %       $ 43,911                73  %
Water services and operations                            11,916                26  %         16,111                27  %
Total consolidated net income                         $  46,275               100  %       $ 60,022               100  %



Land and Resource Management

Land and Resource Management segment revenues decreased $15.2 million, or 23.3%,
to $49.9 million for the three months ended September 30, 2020 as compared with
$65.1 million for the comparable period of 2019. The decrease in Land and
Resource Management segment revenues is principally due to decreases in oil and
gas royalty revenue and easements and other surface-related income, partially
offset by an increase in land sales and other operating revenue, which are
discussed below.
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Oil and gas royalties. Oil and gas royalty revenue was $31.8 million for the
three months ended September 30, 2020 compared to $38.3 million for the three
months ended September 30, 2019. Oil royalty revenue was $24.1 million for the
three months ended September 30, 2020, a decrease of 27.2% compared to the three
months ended September 30, 2019 when oil royalty revenue was $33.1 million. This
decrease in oil royalty revenue is principally due to a 31.9% decrease in the
average price per royalty barrel of crude oil received, partially offset by a
7.3% increase in crude oil production subject to the Trust's royalty interests
during the three months ended September 30, 2020 compared to the same period in
2019. Gas royalty revenue was $7.7 million for the three months ended September
30, 2020, an increase of 48.2% compared to the three months ended September 30,
2019 when gas royalty revenue was $5.2 million. This increase in gas royalty
revenue is principally due to a 61.0% increase in the average price received for
gas production, partially offset by a 2.5% decrease in gas production subject to
the Trust's royalty interests during the three months ended September 30, 2020
compared to the same period in 2019.

Easements and other surface-related income. Easements and other surface-related
income was $6.6 million for the three months ended September 30, 2020, a
decrease of 70.2% compared to $22.1 million for the three months ended September
30, 2019. Easements and other surface-related income includes pipeline, power
line and utility easements, commercial leases, material sales, and seismic and
temporary permits. The decrease in easements and other surface-related income is
principally related to a 77.4% decrease in pipeline easement income to $2.9
million for the three months ended September 30, 2020 from $12.8 million for the
three months ended September 30, 2019. 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. The
demand for pipeline easements is determined by capital decisions made by
companies that operate in the areas where we own land. As such, easements and
other surface-related income is unpredictable and may vary significantly from
period to period.

Land sales and other operating revenue. Land sales and other operating revenue
includes revenue generated from land sales and grazing leases. Land sales were
$11.5 million and $4.6 million for the three months ended September 30, 2020 and
2019, respectively. 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 acre. Additionally, the Trust
recognized land sales revenue of $1.4 million for the three months ended
September 30, 2020 related to land exchanges where the Trust had no cost basis
in the land conveyed. For the three months ended September 30, 2019, we sold
approximately 77 acres of land for an aggregate sales price of approximately
$4.6 million, or approximately $59,960 per acre.

Net income. Net income for the Land and Resource Management segment was $34.4
million for the three months ended September 30, 2020 compared to $43.9 million
for the three months ended September 30, 2019. Expenses, including income tax
expense, for the Land and Resource Management segment were $15.5 million and
$21.2 million for the three months ended September 30, 2020 and 2019,
respectively. The decrease in expenses was principally related to decreases in
legal and professional fees. Expenses are discussed further below under "Other
Financial Data - Consolidated."

Water Services and Operations


Water Services and Operations segment revenues decreased 26.8% to $24.5 million
for the three months ended September 30, 2020 as compared with $33.5 million for
the comparable period of 2019. The decrease in Water Services and Operations
segment revenues is due to a decrease in water sales and royalty revenue,
partially offset by an increase in easements and other surface-related income,
which are discussed below.

Water sales and royalties. Water sales and royalty revenue was $12.1 million for
the three months ended September 30, 2020, a decrease of $9.5 million or 43.9%,
compared with the three months ended September 30, 2019 when water sales and
royalty revenue was $21.7 million. This decrease was principally due to a 27.6%
decrease in the number of barrels of sourced and treated water sold and a $0.8
million decrease in water royalties for the three months ended September 30,
2020 compared to the same period in 2019.

Easements and other surface-related income. Easements and other surface-related
income for the Water Services and Operations segment includes pipeline easement
royalties, commercial lease royalties and income from temporary permits. For the
three months ended September 30, 2020, the combined income from these revenue
streams was $12.3 million, an increase of 4.6%, as compared to $11.8 million for
the three months ended September 30, 2019. The increase in easements and other
surface-related income was principally related to an increase in produced water
royalties for the three months ended September 30, 2020 compared to the same
period of 2019.

Net income. Net income for the Water Services and Operations segment was $11.9
million for the three months ended September 30, 2020 compared to $16.1 million
for the three months ended September 30, 2019. As discussed above, revenues
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for the Water Services and Operations segment decreased 26.8% for the three
months ended September 30, 2020 compared to the same period of 2019. Expenses,
including income tax expense, for the Water Services and Operations segment were
$12.6 million for the three months ended September 30, 2020 as compared to $17.4
million for the three months ended September 30, 2019. The decrease in expenses
during 2020 is principally related to decreased 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 $7.7 million for the three months ended September 30, 2020 compared to $8.5
million for the comparable period of 2019. The decrease in salaries and related
employee expenses during 2020 as compared to the same period of 2019 is
principally due to decreased usage of contract labor.

Water service-related expenses. Water service-related expenses were $2.3 million
for the three months ended September 30, 2020 compared to $5.1 million for the
comparable period of 2019. The decrease in expenses during 2020 is principally
related to decreased fuel, equipment rental and repairs and maintenance related
to the 27.6% decrease in the number of barrels of sourced and treated water sold
as previously discussed and cost saving measures implemented during 2020.

General and administrative expenses. General and administrative expenses
decreased $1.0 million to $1.9 million for the three months ended September 30,
2020 from $2.9 million for the same period of 2019. The decrease in general and
administrative expenses is primarily related to a decrease associated with
independent contractor service providers and travel expenses during the three
months ended September 30, 2020 compared to the same period of 2019.

Legal and professional expenses. Legal and professional fees were $2.0 million
for the three months ended September 30, 2020 compared to $5.6 million for the
comparable period of 2019. Legal and professional fees for the three months
ended September 30, 2020 principally related to our anticipated corporate
reorganization. See further information regarding the anticipated corporate
reorganization in   Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Corporate Reorganization"  . Legal and
professional fees for the three months ended September 30, 2019 principally
related to the proxy contest to elect a new Trustee, the entry into and payments
made under the settlement agreement dated July 30, 2019 and the conversion
exploration committee.

Depreciation, depletion and amortization. Depreciation, depletion and
amortization was $3.8 million for the three months ended September 30, 2020
compared to $2.6 million for the three months ended September 30, 2019. The
increase in depreciation, depletion and amortization is principally related to
the Trust's investment in water service-related assets placed in service in 2020
and 2019.

Other income, net. Other income, net was $1.3 million and $0.9 million for the
three months ended September 30, 2020 and 2019, 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 September 30, 2020 as compared to the nine months ended September 30, 2019


Revenues. Revenues decreased $148.9 million, or 39.5%, to $228.3 million for the
nine months ended September 30, 2020 compared to $377.2 million for the nine
months ended September 30, 2019. Net income decreased $118.3 million, or 47.4%,
to $131.3 million for the nine months ended September 30, 2020 compared to
$249.6 million for the nine months ended September 30, 2019. Revenues and net
income for the nine months ended September 30, 2019 included a $100 million land
sale. Excluding the impact of the 2019 land sale, revenues and net income (net
of income tax) for the nine months ended September 30, 2019 were $277.2 million
and $170.6 million, respectively.

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The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):

Nine Months Ended September 30,

                                                                      2020                                    2019

Revenues:

Land and resource management:
Oil and gas royalties                                 $        94,631                41  %       $ 111,113                29  %
Easements and other surface-related income                     31,385                14  %          59,761                16  %
Land sales and other operating revenue                         16,124                 7  %         113,349                30  %
                                                              142,140                62  %         284,223                75  %
Water services and operations:
Water sales and royalties                                      47,525                21  %          65,067                17  %
Easements and other surface-related income                     38,585                17  %          27,874                 8  %
                                                               86,110                38  %          92,941                25  %
Total consolidated revenues                           $       228,250               100  %       $ 377,164               100  %

Net income:
Land and resource management                          $        92,197                70  %       $ 204,222                82  %
Water services and operations                                  39,061                30  %          45,384                18  %
Total consolidated net income                         $       131,258               100  %       $ 249,606               100  %



Land and Resource Management


Land and Resource Management segment revenues decreased $142.1 million, or
50.0%, to $142.1 million for the nine months ended September 30, 2020 as
compared with $284.2 million for the comparable period of 2019. Segment revenues
for the nine months ended September 30, 2019 include a $100 million land sale.
Excluding the $100 million land sale, segment revenues for the nine months ended
September 30, 2019 were $184.2 million. The decrease in Land and Resource
Management segment revenues is due to decreases in oil and gas royalty revenue,
easements and other surface-related income and land sales and other operating
revenue, which are discussed below.

Oil and gas royalties. Oil and gas royalty revenue was $94.6 million for the
nine months ended September 30, 2020 compared to $111.1 million for the nine
months ended September 30, 2019. Oil royalty revenue was $76.8 million for the
nine months ended September 30, 2020, a decrease of 17.1% compared to the nine
months ended September 30, 2019 when oil royalty revenue was $92.6 million. This
decrease in oil royalty revenue is principally due to a 23.8% decrease in the
average price per royalty barrel of crude oil received, partially offset by a
9.3% increase in crude oil production subject to the Trust's royalty interests
during the nine months ended September 30, 2020 compared to the same period in
2019. Gas royalty revenue was $17.8 million for the nine months ended September
30, 2020, a decrease of 3.6% compared to the nine months ended September 30,
2019 when gas royalty revenue was $18.5 million. The decrease in gas royalty
revenue was principally due to a 9.0% decrease in the average price received for
gas production, partially offset by a 16.4% increase in gas production subject
to the Trust's royalty interests during the nine months ended September 30, 2020
compared to the same period of 2019.

Easements and other surface-related income. Easements and other surface-related
income was $31.4 million for the nine months ended September 30, 2020, a
decrease of 47.5% compared to $59.8 million for the nine months ended September
30, 2019. Easements and other surface-related income includes pipeline, power
line and utility easements, commercial leases, material sales, and seismic and
temporary permits. The decrease in easements and other surface-related income is
principally related to a 61.0% decrease in pipeline easement income to $15.3
million for the nine months ended September 30, 2020 from $39.2 million for the
nine months ended September 30, 2019. 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. The demand for
pipeline easements is determined by capital decisions made by companies that
operate in the areas where we own land. As such, easements and other
surface-related income is unpredictable and may vary significantly from period
to period.

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Land sales and other operating revenue. Land sales and other operating revenue
includes revenue generated from land sales and grazing leases. Land sales were
$15.9 million and $113.0 million for the nine months ended September 30, 2020
and 2019, respectively. 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, the Trust
recognized land sales revenue of $1.4 million for the nine months ended
September 30, 2020 related to land exchanges where the Trust had no cost basis
in the land conveyed. For the nine months ended September 30, 2019, we sold
approximately 21,986 acres of land for an aggregate sales price of approximately
$113.0 million, or approximately $5,141 per acre.

Net income. Net income for the Land and Resource Management segment was $92.2
million for the nine months ended September 30, 2020 compared to $204.2 million
for the nine months ended September 30, 2019. As discussed above, 2019 revenues
for the Land and Resource Management segment included a $100 million land sale.
Excluding the impact of the 2019 land sale (net of income tax), net income for
the first nine months ended September 30, 2019 was $125.2 million. Expenses,
including income tax expense, for the Land and Resource Management segment were
$49.9 million and $80.0 million, respectively. The decrease in expenses during
2020 is principally related to the approximately $21.0 million in income tax
expense associated with the $100 million land sale that occurred during the nine
months ended September 30, 2019 and no comparable sale of assets having occurred
during the same period of 2020. Expenses are discussed further below under
"Other Financial Data - Consolidated."

Water Services and Operations


Water Services and Operations segment revenues decreased 7.3% to $86.1 million
for the nine months ended September 30, 2020 as compared with $92.9 million for
the comparable period of 2019. The decrease in Water Services and Operations
segment revenues is due to a decrease in water sales and royalty revenue,
partially offset by an increase in easements and other surface-related income,
which are discussed below.

Water sales and royalties. Water sales and royalty revenue was $47.5 million for
the nine months ended September 30, 2020, a decrease of $17.5 million or 27.0%,
compared with the nine months ended September 30, 2019 when water sales and
royalty revenue was $65.1 million. This decrease was principally due to a 10.5%
decrease in the number of barrels of sourced and treated water sold and a $5.8
million decrease in water royalties for the nine months ended September 30, 2020
compared to the same period in 2019.

Easements and other surface-related income. Easements and other surface-related
income for the Water Services and Operations segment includes pipeline easement
royalties, commercial lease royalties and income from temporary permits. For the
nine months ended September 30, 2020, the combined income from these revenue
streams was $38.6 million, an increase of 38.4%, as compared to $27.9 million
for the nine months ended September 30, 2019. The increase in easements and
other surface-related income was principally related to an increase in produced
water royalties for the nine months ended September 30, 2020 compared to the
same period of 2019.

Net income. Net income for the Water Services and Operations segment was $39.1
million for the nine months ended September 30, 2020 compared to $45.4 million
for the nine months ended September 30, 2019. As discussed above, revenues for
the Water Services and Operations segment decreased 7.3% for the nine months
ended September 30, 2020 compared to the same period of 2019. Expenses,
including income tax expense, for the Water Services and Operations segment were
$47.0 million for the nine months ended September 30, 2020 as compared to $47.5
million for the nine months ended September 30, 2019. 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 $27.2 million for the nine months ended September 30, 2020 compared to
$22.7 million for the comparable period of 2019. The increase in salaries and
related employee expenses is principally related to the increase in the number
of employees from 89 employees as of September 30, 2019 to 102 as of September
30, 2020.

Water service-related expenses. Water service-related expenses were $11.2
million for the nine months ended September 30, 2020 compared to $15.4 million
for the comparable period of 2019. This decrease in expenses was principally the
result of a decrease in fuel and equipment rental to source and transfer water
as previously discussed and cost saving measures implemented during 2020.


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Legal and professional expenses. Legal and professional fees were $7.0 million
for the nine months ended September 30, 2020 compared to $15.2 million for the
comparable period of 2019. Legal and professional fees for the nine months ended
September 30, 2020 principally related to our anticipated corporate
reorganization. See further information regarding the anticipated corporate
reorganization in   Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Corporate Reorganization"  . Legal and
professional fees for the nine months ended September 30, 2019 principally
related to the proxy contest to elect a new Trustee, the entry into and payments
made under the settlement agreement dated July 30, 2019 and the conversion
exploration committee.

Land sales expenses. Land sales expenses were $2.8 million for the nine months
ended September 30, 2020 compared to $0.2 million for the comparable period of
2019. 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 ended September 30, 2020 include $2.7 million of cost basis.

Depreciation, depletion and amortization. Depreciation, depletion and
amortization was $10.8 million for the nine months ended September 30, 2020
compared to $5.3 million for the nine months ended September 30, 2019. The
increase in depreciation, depletion and amortization is principally related to
the Trust's investment in water service-related assets placed in service in 2020
and 2019 and to a lesser extent, additional depreciation expense related to the
change in estimated useful lives of certain water service-related assets during
the third quarter of 2019.

Other income, net. Other income, net was $2.3 million and $1.8 million for the
nine months ended September 30, 2020 and 2019, respectively. Other income, net
for the nine 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.

Cash Flow Analysis

For the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019


Cash flows provided by operating activities for the nine months ended September
30, 2020 and 2019 were $161.4 million and $284.2 million, respectively. Cash
flows provided by operating activities for the nine months ended September 30,
2019 included proceeds from a $100 million land sale consummated in January
2019. The decrease in cash flows provided by operating activities was primarily
related to decreased proceeds from land sales, oil and gas royalties, easements
and other surface-related payments received and water sales and royalties
collected during the nine months ended September 30, 2020.

Cash flows used in investing activities were $25.2 million compared to $106.9
million for the nine months ended September 30, 2020 and 2019, respectively.
Acquisitions of land and purchases of fixed assets decreased a combined $93.7
million for the nine months ended September 30, 2020 compared to the same period
of 2019. This decrease was partially offset by the $11.9 million increase in the
acquisition of royalty interests compared to the same periods.

Cash flows used in financing activities were $124.1 million compared to $50.9
million for the nine months ended September 30, 2020 and 2019, respectively.
During the nine months ended September 30, 2020, the Trust paid total dividends
of $124.1 million consisting of a regular cash dividend of $10.00 per Sub-share
Certificate ("Sub-share") and a special dividend of $6.00 per Sub-share to each
sub-shareholder of record at the close of business on March 9, 2020. During the
nine months ended September 30, 2019, the Trust paid total dividends of $46.5
million consisting of a regular cash dividend of $1.75 per Sub-share and a
special dividend of $4.25 per Sub-share to each sub-shareholder of record at the
close of business on March 8, 2019.

Liquidity and Capital Resources


We continuously review our liquidity and capital resources. The Trust's
principal sources of liquidity are its revenues from oil and gas 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, working capital and general
corporate needs. If market conditions were to change, for instance due to the
uncertainty created by the COVID-19 pandemic and/or the significant decline in
oil prices, and our revenue was reduced 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, including potential
future borrowing under a credit facility or other financing options.

As of September 30, 2020, we had cash and cash equivalents of $315.8 million
that we expect to utilize, along with cash flow from operations, to provide
capital to support the operation of our business, particularly TPWR, to
potentially repurchase additional Sub-shares subject to market conditions, and
for general corporate purposes. We currently believe that
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cash from operations, together with our cash and cash equivalents balances, will
be enough to meet ongoing capital expenditures, working capital requirements and
other cash needs for the foreseeable future.

Off-Balance Sheet Arrangements

The Trust 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 2019 Annual Report on Form 10-K filed with the SEC on February
27, 2020. 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 2019 Annual Report on Form 10-K.

New Accounting Pronouncements

For further information regarding recently issued accounting pronouncements, see

Note 3, "Recent Accounting Pronouncements" in the notes to the consolidated financial statements included in Item 1. "Financial Statements" in this Quarterly Report on Form 10-Q.

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