Energy Prospectus

One of the best kept secrets in today's energy market is buried in the Permian Basin. No investment firms or focus groups follow this company. All its revenues are generated from the Permian Basin, primarily from Loving , Culberson and Reeves Counties. Despite the unknown nature of this company it outperformed all of the Sweet 16 companies in 2017 and continues to outperform this year thanks to strong first quarter earnings.
For those in our group who like studying and analyzing oil and gas companies, Texas Pacific Land is for you. The market cap is approaching five billion which should qualify it for the Sweet 16. TPL owns 877,000 surface acres and 370,000 oil and gas royalty acres in the Permian Basin.
Last year the value of its royalties on oil production rose by 44% compared to 48% in 2016. Gas production royalties rose 60% in 2017 compared to 37% in 2016. Royalties earned are a function of volume and price, both of which continue to trend higher. Oil and gas royalties are only a portion of revenue and income drivers. TPL receives revenue easements and related items on the surface rights of their large land holdings.This income is directly related to the amount of drilling on or around these surface acres. Pipelines sign 10 year contracts to bury a line on TPL land. Their is an infrastructure shortage in the Permian Basin and trucking oil is far more expensive than the pipe alternative. Companies are now burying three pipes side-by-side in the Permian.
The third pipe is for water. Last June TPL created a separate water company. Water has explosive potential for TPL. Employees jumped from 10 to 32 to support the water company. Water sales and royalties increased 214% last year. This company produces brackish water to be used to frac a horizontal well. This company gathers, treats and recycles water after the well is drilled. As companies move toward longer laterals, greater quantities of water are necessary. In some wells 800,000 barrels of waters needed to frac a well. Water treatment costs can exceed 25% of total costs. Controlling water costs is critical to profitable execution.
At yearend there were 206 DUCs on TPL royalty acreage. Whether this is a function of a lack of infrastructure,water shortage or low prices, TPL will benefit as each of these problems is solved. This may be happening as US Oil Production has increased from 9.9 million barrels on January 26 to 10.6 million barrels on April 27. Chevron just added a 15th rig to its fleet. Chevron has a major development project with XEC in Culberson County. Chevron is TPL second largest customer behind APC at number one.
Other important considerations are TPL 's use of funds. TPL regularly repurchases its shares. Last year $34 million was spent on this program. Easement revenue in 2018 will be recorded when a contract is signed rather than being spread over the previous ten year term. To get a handle on the costs for easements look to the University of Texas fee schedule. TPL has historically paid a 29% tax rate. This year it's tax rate will drop to 21%. On May13, 2016 rigs drilling in the Permian Basin made a low of 134. The April 27, 2018 BH Rig Count was 461 or a 237% two year increase. This compares to a 150% in the total US rig count during the same time frame.
This week TPL announced its first quarter results. Net income per share increased 130.5%. Revenues almost doubled. Water sales and royally revenue increased 181.8%. Oil and gas royalty revenue increased 150.7%.
Hope you enjoy study this interesting investment.

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The hottest oil stock from the U.S. shale boom has never pumped a single barrel of crude.

Texas Pacific Land Trust, a listed land bank created out of a railroad bankruptcy more than a century ago, has climbed more than 2,200 percent since 2010, outperforming the stocks of shale oil producers, service companies and prospectors alike. It’s now worth more than $5 billion.

Its secret: vast tracts of mineral rights in the Permian Basin, the world’s hottest major oil region, earning revenues from the likes of Chevron Corp., which have to pay the trust when they produce from its land.

“This stock has been flying way underneath the radar for years,” said Eric Marshall, a Dallas-based fund manager at Hodges Capital Management Inc., an early investor and a top five shareholder, according to data compiled by Bloomberg. “The real activity in the Permian is now in the areas where they have the most acreage.”

read the whole article
https://www.bloomberg.com/news/articles ... -oil-giant

The May issue of the Oil and Gas Investor featured four articles on Permian Basin water issues and solutions. Water is the hottest topic in the US oil and gas markets today. The water challenge is becoming more urgent while being the fastest growing and most misunderstood. According to Ross Craft, CEO of Approach Resources, if the Permian Basin ultimately produces 5 million barrels a day and the average well produces 5 barrels of water for each barrel of oil produced, 25 million barrels of water per day will need to be recycled or disposed of.

Water can account for 20 to 30% of the costs of drilling and completing a well and up to 50% of the operating costs. Water pipelines will reduce the cost of water handling, but like oil and gas pipeline capacity is not able to keep up with production growth. Price differentials of $13 to $16 per barrel versus WTI are caused by the lack of pipeline infrastructure. Every Permian Basin producer fielded questions about takeaway capacity and water handling during their first quarter conference calls.

While everyone has a solution to these problems such as PSX, ETP, OKE, or OXY, Texas Pacific Land ($700.86) benefits from the growth of pipelines on their land through the cost of easements. TPL also benefits from the huge opportunity from water sourcing, recycling and reuse. Like University Lands TPL is a prime beneficiary of the Permian Basin problems which are ongoing and increasingly more important to oil and gas producers. TPL is a longterm solution to a growing Permian Basin problem.

Water hauling and waste water disposal is a big business. Good news for West Texas surface owners. Also good news is that West Texas and SE New Mexico have lot of shallow sandstone formations that can take a lot of water without causing earthquakes like SWD's do in Central Oklahoma.

LOTS OF SAND and LOTS OF WATER are needed to complete each well.

Highlights from the July issue of the Oil and Gas Investor

*IHS Markit expects Permian oil production to double by 2025
*IHS also expectsPermian gas production to double by late 2019
*Bernstein expects Permian gas production to triple by 2025
*Bernstein says 6 new gas pipelines will be needed by 2025
*Status Advisors has no fewer than 12 pipeline projects in their database
*Exxon and Plains AA have proposed a one million per day pipeline

Most of these pipeline projects will create easement revenues and income for TPL ($786). once a pipeline project is completed royalty income should increase and water demand and recycling issues will also expand. Every E&P will be doing everything it can to reduce the Permian differentials. Core Labs is now predicting $100 oil which is beneficial to the royalty portion of TPL's income.

In conclusion the wind continues to be at Texas Pacific's back.