Texas Pacific Land (NYSE:TPL) Q3 2025 Earnings Call November 06, 2025 10:30 AM ET Speaker1Thanks. Welcome to Texas Pacific Land Corporation's third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conferenc ...

Core Insights - Texas Pacific Land Corp. (TPL) has shown resilience with a 9% increase in sales and a 12% increase in free cash flow in Q2, despite a significant drop in average oil prices [1][2] - The market reacted negatively to a 34% decline in water sales, which raised concerns about the company's future performance [2][6] - TPL operates in the Permian Basin, generating income through various high-margin business segments, including leasing land and providing water for fracking [3][5] Financial Performance - TPL's sales grew by 9% and free cash flow increased by 12% in Q2 [1] - The decline in water sales by 34% was attributed to reduced activity from operator customers due to lower oil prices [2][6] Business Model - TPL generates revenue from multiple segments: oil and gas royalties, water sales, produced water royalties, and easements [8] - The company leases land to major oil companies and earns royalties from the oil and gas produced, creating a diversified income stream [5] Future Prospects - TPL is exploring next-generation ideas such as carbon capture, solar, wind, grid-connected batteries, and water desalination, indicating potential for future growth [7]

Financial Data and Key Metrics Changes - For the second quarter of 2025, consolidated total revenue was $188 million, with consolidated adjusted EBITDA at $166 million, resulting in an adjusted EBITDA margin of 89% [28] - Free cash flow increased by 12% year over year to $130 million, driven by higher oil and gas royalty production and increased produced water royalties [28][29] - Oil price realizations declined by 21% year over year, impacting overall performance despite record revenues in other areas [28] Business Line Data and Key Metrics Changes - Oil and gas royalty production reached approximately 33,200 barrels of oil equivalent per day, marking a 33% increase year over year and a 7% increase sequentially [29] - Produced water royalty revenues set a company record at $31 million, while slim revenues also reached a record of $36 million, benefiting from $20 million in pipeline easements [29] - Water sales decreased by $13 million sequentially to $26 million due to lower oil prices leading to reduced activity [30] Market Data and Key Metrics Changes - The average WTI Cushing oil price during the quarter was $64 per barrel, the lowest since 2021, contributing to a decline in operator activity [5][28] - Permian horizontal oil directed rig counts have declined over 20% from the peak in 2023, indicating a broader slowdown in the market [6] Company Strategy and Development Direction - The company remains focused on its desalination efforts, with a 10,000 barrel per day facility expected to begin operations by year-end, which will convert produced water into high-quality freshwater [22][25] - TPL is strategically positioned to capture growth in produced water volumes, with proactive measures in out-of-basin pore space acquisitions and new contracting [30][24] - The company emphasizes the long-term potential of the Permian Basin, asserting that it retains significant undeveloped inventory and will benefit from technological advancements in drilling and completion practices [11][12][21] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the Permian's resource potential despite current commodity price volatility, indicating that the company is well-positioned to capitalize on future upturns in the market [26][27] - The management highlighted that the current oil prices are below longer-term mid-cycle expectations, suggesting a favorable outlook for the future [26] Other Important Information - The company has maintained a debt-free balance sheet while returning significant capital to shareholders, demonstrating financial resilience [31] - TPL's royalty acreage has expanded to include 48 horseshoe wells, showcasing innovation in well development techniques [19] Q&A Session Summary Question: Outlook for water resources in the second half - Management noted that Q2's water sales decline was driven by commodity prices and spatial variations in completion activities, but they expect Q3 to be strong [35][36] Question: Thoughts on the ARRIS acquisition by Western - Management agreed that the acquisition supports the Delaware water thesis and creates opportunities for land and resource owners [38][39] Question: Cost objectives for the desalination facility and its importance - The desalination project is crucial for attracting power generation and data center opportunities, with significant synergies expected [40][42] Question: Expectations for additional power generation announcements - Management indicated ongoing discussions and accelerating talks regarding power generation in the Permian, anticipating more announcements in the near future [44][45]

Financial Data and Key Metrics Changes - For Q1 2025, consolidated revenues reached $196 million, with an adjusted EBITDA of $169 million, resulting in an adjusted EBITDA margin of 86.4% [14] - Free cash flow was reported at $127 million, reflecting an 11% year-over-year increase [14] - Oil and gas royalty production averaged approximately 31,100 barrels of oil equivalent per day, marking a 25% increase year-over-year [5][14] Business Line Data and Key Metrics Changes - Oil and gas royalty production saw a 7% growth quarter-over-quarter and a 25% growth year-over-year, driven by strong development in specific subregions [5] - Water segment revenues totaled $69 million, representing a 3% sequential growth and an 11% year-over-year growth [5] Market Data and Key Metrics Changes - The company noted that while oil prices have weakened, there has not yet been a widespread downturn in activity, although some operators have announced plans to reduce rigs [6] - The company expects that if oil prices remain below $60 for an extended period, more significant activity declines may occur in the latter half of the year [6] Company Strategy and Development Direction - The company aims to maximize shareholder value and is positioned to take advantage of opportunities that may arise, including acquiring high-quality royalties and ramping up buybacks [13] - TPL's royalty acreage is primarily operated by supermajors and large independents, which tend to exhibit more inertia in their development plans compared to mid-cap independents [7] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in TPL's ability to withstand potential downturns in oil prices due to its strong financial position and high-margin cash flow streams [12] - The company anticipates that renewal payments from easements will significantly increase, with estimates exceeding $200 million over the next decade [11] Other Important Information - TPL maintains a net cash position with zero debt and $460 million in cash and cash equivalents as of March 31 [12] - The company is advancing its desalination and beneficial reuse initiatives, with a new desalination unit expected to come online by the end of the year [17] Q&A Session Summary Question: Thoughts on macro oil and gas activity and impacts on business segments - Management noted that there is significant demand for water handling in the Delaware Basin, with expectations for produced water volumes to grow rapidly over the next decade [23][24] Question: Impact of pipeline projects on TPL - Management indicated that new pipeline projects would benefit the basin and TPL's mineral development, with compensation expected from barrels moved through these projects [25] Question: Perspective on the M&A landscape in the basin - Management stated that there are still opportunities in the M&A front, with no significant pullback from sellers observed, although a decrease in commodity prices could widen the bid-ask spread [29]