TPL: Energy-Real Estate Fusion & Growth Potential

Introduction:

Name: Texas Pacific Land Corporation

Ticker: TPL

Sector: Energy

Industry: Oil, Gas & Consumable Fuels

Market Cap: Large b $ 13.31

Eyestock Rating: 135%

Background and Overview:

Texas Pacific Land Corporation (TPL) is a unique entity primarily engaged in land and resource management. Headquartered in Dallas, Texas, it operates as a land management company that owns extensive land holdings primarily in West Texas.

TPL’s origins date back to the mid-19th century when it was initially formed to manage the land grants received by the Texas and Pacific Railway Company. Over time, as railroad land grants diminished, TPL evolved into a modern land management company with a focus on managing its vast land holdings and maximizing their value.

The company’s land assets encompass approximately 870,000 acres of surface area and 2.4 million acres of mineral interests located in various counties in West Texas. These assets include significant oil and gas resources, as well as agricultural and water rights.

TPL’s business model involves generating revenue through various means, including leasing its land for oil and gas production, agricultural activities, surface leases, easements, and water sales. The company also actively monitors its mineral interests and seeks to capitalize on opportunities in the energy sector.

In recent years, TPL has gained attention from investors due to its unique business model and the potential for significant value creation from its land and mineral assets. The company has historically focused on returning value to shareholders through dividends and share buybacks.

The business model of Texas Pacific Land Corporation (TPL) revolves around the management and monetization of its extensive land and mineral assets, primarily located in West Texas. Here’s a breakdown of TPL’s business model:

• Land Ownership and Management:
  • TPL owns approximately 870,000 acres of surface land and 2.4 million acres of mineral interests in various counties in West Texas. This land includes diverse landscapes ranging from agricultural to oil-rich regions.
  • The company focuses on managing these lands efficiently to maximize their value. This involves activities such as maintaining the land, negotiating leases, granting easements, and ensuring compliance with regulations.
• Mineral Rights and Royalties:
  • A significant portion of TPL’s revenue comes from its ownership of mineral rights, particularly oil and gas interests.
  • The company leases its mineral rights to energy companies for exploration and production activities. In return, TPL receives royalties based on the production of oil, gas, and other minerals from its land.
  • TPL actively monitors drilling activity on its land and negotiates favorable lease agreements to maximize its royalty income.
• Agriculture and Surface Leases:
  • TPL generates revenue from leasing its surface land for agricultural purposes, such as farming and ranching.
  • Additionally, the company leases its land for various surface uses, including commercial and residential development, renewable energy projects, and recreational activities.
  • Surface leases provide a steady stream of income for TPL and diversify its revenue sources beyond mineral royalties.
• Water Rights:
  • Water rights are another valuable asset held by TPL, particularly in arid regions like West Texas.
  • The company may lease water rights to agricultural, industrial, or municipal entities for irrigation, fracking operations, or other purposes, generating additional revenue.
• Capital Allocation and Shareholder Returns:
  • TPL prioritizes efficient capital allocation to maximize shareholder value. This includes strategic investments in land development, acquisitions, and infrastructure improvements.
  • The company returns value to shareholders through dividends and share buybacks, utilizing its cash flow generated from land and mineral lease revenues.

Overall, Texas Pacific Land Corporation stands out as a distinctive player not only in energy sectors but also in real estate,  leveraging its extensive land holdings in West Texas to generate value for its shareholders.

Let`s conduct a Porter`s five forces analysis for TPL

• Threat of New Entrants:
  • Low: The barrier to entry in the land and mineral rights management industry can be high due to the significant capital required to acquire land holdings and establish relationships with energy companies. TPL’s extensive land holdings and established presence in West Texas act as a deterrent for new entrants. Additionally, the complexity of managing mineral leases and navigating regulatory requirements further increases barriers.
• Bargaining Power of Buyers (Oil and Gas Companies):
  • Moderate: Oil and gas companies are the primary buyers of mineral leases from TPL. The bargaining power of buyers depends on factors such as the availability of alternative land options, the level of competition among landowners, and the demand for oil and gas resources. TPL’s strategic location and the quality of its land holdings can give it some leverage in negotiations, but buyers may still have options, especially in regions with abundant resources.
• Bargaining Power of Suppliers (Landowners):
  • Low: As a land management company, TPL acts as both a supplier and a competitor to other landowners in the region. However, given the size and quality of its land portfolio, TPL has significant bargaining power when negotiating with oil and gas companies. Additionally, the company’s long-term approach to land management and its ability to offer diverse opportunities for development or exploration may further strengthen its bargaining position.
• Threat of Substitutes:
  • Low to Moderate: While there are alternatives to acquiring mineral leases and land rights, such as purchasing from other landowners or exploring in different regions, TPL’s extensive land holdings in West Texas, coupled with its valuable mineral rights, make it a desirable choice for energy companies. The uniqueness and strategic importance of TPL’s assets mitigate the threat of substitutes to some extent.
• Competitive Rivalry within the Industry:
  • Low to Moderate: TPL operates in a relatively niche industry, with few direct competitors that own comparable land and mineral assets in West Texas. However, there may be indirect competition from other land management companies or landowners in the region. TPL’s competitive advantage lies in the scale and quality of its land portfolio, its expertise in land and mineral management, and its ability to provide value-added services to energy companies.

Texas Pacific Land Corporation faces relatively low to moderate competitive forces in its industry, with its extensive land and mineral holdings, strategic positioning, and expertise in land management providing a competitive advantage. However, the company must continue to adapt to changes in the energy sector, regulatory environment, and market dynamics to maintain its competitive edge.

Financial Performance:

TPL diversifies its revenue streams as follows: 57% Oil and Gas Non-Participating Royalty interests; 11% Surface Leases, Easements and Material; 18% Water Sales, and 13% Water Royalties.

The revenue of TPL in the fourth quarter of 2023 amounted to $167 million, and for the year it was $632 million.

Let’s have a look at the cost structure in Q4, with revenue of $167 million, costs are just $9.07 million, with an incredible gross profit margin of 94.60%. According to Eyestock rating, TPL stock is the top 1 large capitalization stock in the US, being an attractive investment with a high rating and the highest Gross Profit Margin of 94.60%. 

But what is actually this number signaling to the investors: significant economies of scale or something else? To understand this we need to dive deeper into the TPL Investor Presentation document, Revenue Mechanics. “Oil and Gas royalties are real property interests entitling to a portion of the proceeds derived from the production of oil and gas. Royalties are not burdened by capital costs or operating expenses. TPL receives a percentage of gross revenues from oil and gas wells drilled on TPL royalty acreage“

If an oil company decides to increase the oil extraction capacity in the Permian Basin on TPL land, TPL will get more royalties. TPL does not share the commodities price risks or any commercial risk of an oil company, because the base for royalties calculation is gross revenues.

So 94,60% of TPL`s gross margin actually reflects the ultimate version of economies of scale and unique, favorable conditions.

In Q4 the Net income reached $113.11 million, resulting in a Net Profit Margin of 67.90%, showing a significant competitive advantage. All Net income is proved by cash flow from operations, showing high quality of earnings.

The TPL`s Financial Performance is outstanding:

Net profit margin is 64%. It is 44% above the Eyestock benchmark.

Earnings quality is 103%. It is 3% above the  Eyestock benchmark.

Gross margin is 95%. It is 55% above the  Eyestock benchmark.

Financial Position:

In order to evaluate the TPL’s financial position, we need to study its balance sheet. The situation in the balance sheet is nearly a perfect picture any investor could imagine growing assets (Q4 $ 1156,40 million), and growing Equity (Q4 $ 1043,20 million) with zero debt.

We can say that TPL is liquid and solvent both in short term and long-term:

Cash flow to debt is N\A (because debt is zero)

Current ratio is 15.077. It is 13.577 above the Eyestock benchmark.

Debt to equity is zero

Efficiency analysis:

TPL demonstrates a very solid Return on equity of 45%. It is 25% above Eyestock benchmark.

Return on invested capital is 101%. It is 81% above the benchmark. We can say that management of TPL is highly efficient.

TPL is a company that is focused on a return of capital via dividends and repurchases.

Dividends key metrics: Payout ratio 10,42%, Dividend yield 1.07%, Annual dividend $ 5,50.

Additionally, TPL conducts a substantial stock repurchase program.

The value to shareholders is generated on three key TPL principals: Return, Protect and Invest Capital-we like this approach.

Valuation:

We believe that the stock is greatly undervalued, with a market price of $ 578.51 it is trading 15% lower than its minimal P/E over the last 5 years. We estimate the fair value at $ 1597. The upside is more than 176%. TPL with Beta 1.7 is suitable for growth-oriented investors.

Risks:

In essence, you are purchasing a kind of landlordship of the Permian Basin in Texas. If reserves for any reason become inaccessible to oil extractors, regulated by the state, depleted, or subject to environmental restrictions, royalties payments will decrease.

Opinion:

At the moment, we are seeing a potential issue with the US national debt. One possible scenario is the monetization of the national debt, leading to inflation growth and a new super cycle in commodities, including oil. In these conditions, the green agenda will take a back seat TPL will become the main beneficiary of oil price growth, an excellent asset for inflation protection and the rise in oil prices.

Conclusion:

TPL stock is a unique blend of the energy sector and real estate, dividend paing stock, with a high Eyestock rating of 135%, greatly undervalued, with the potential catalyst of raising inflation and new commodities super cycle.