An Update on Texas Pacific Landtrust

Disclaimer: I am not your financial advisor, and this is not financial advice. Do your own research.

Speaking of skin in the game, on February 15th, I wrote a case study on Texas Pacific Landtrust. At that point, it was trading at roughly $770 per share. I was long, and remain long, and have continued to purchase shares as they have declined to current levels at $379 per share. At current prices, the company is trading at around 9x trailing earnings (which will most likely be impacted by the precipitous decline in oil prices). 

The shares of TPL have been absolutely hammered with the rest of the energy sector as demand has dried up for oil and the rest of the oil-producing oil has refused to cut production. I probably couldn't have timed this piece any better.

This is always the risk of publishing pieces on companies that you own and like. But, if you like a business at a certain price, as long as the thesis doesn't fundamentally change, you should like the business even more at lower prices.

So what was my thesis and did it fundamentally change?

Texas Pacific Landtrust owns roughly 900,000 acres in and around the Permian Basin in West Texas. It derives substantially all of its revenues from land leases, oil and gas royalties, and water services and rights that are all based on the use of its wholly owned acreage. The thesis was (and remains) that this business will continue to be a capital-light, high return avenue to access one of the most productive oil and gas fields in the world. 

Questions, asked and answered:

1) Will oil and gas demand pick up eventually once the virus outbreak is contained and people begin to travel/move about?

- I believe it may take a few quarters if we enter into a fairly big recession, but yes, demand will pick back up. 

2) Where is the most prolific oil production region in the USA?

- The Permian Basin, with over 11 billion barrels of proven reserves.

3) Will this company survive an economic downturn?

- Even as oil/gas demand dries up, their land leases will continue to generate revenues, albeit reduced due to defaults, and oil and gas producers will eventually return to production, generating oil and gas royalties for the trust. Their balance sheet includes no debt and their net income margins are extremely high. They will certainly be impacted by the steep decline in oil prices, but again, they have other sources of revenue, their balance sheet is a fortress, and they have over $300MM in cash. If your time horizon is 5+ years, this, in my opinion, may be a great opportunity to own shares in a company that possesses some of the best oil and gas land in the world. 

4) Anything else worth knowing?

- Horizon Kinetics owns 22.5% of the company, has been buying shares all the way down, and has pushed to convert the company from a trust structure to a Corporation structure in a similar manner to how the private equity giants converted to Corporation structures from Limited Partnerships in 2018 and 2019.

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