Texas Pacific Land Trust, A Good Value

| About: Texas Pacific (TPL)

Summary

TPL is an interesting way to play oil and natural gas.

If current growth continues then TPL appears very undervalued.

TPL boasts an impressive and effective buyback program.

Brief Overview of the Business

Texas Pacific Land Trust (NYSE:TPL) is a trust organized in 1888 to hold land from the Texas and Pacific Railway Company. The trust owns and manages a large amount of mostly rural acreage in West Texas.

TPL land map from TPL 2015 10K Click to enlarge

The Trust's income is derived primarily from land sales, oil and gas royalties, easements, grazing and sundry leases, interest on notes receivable, and interest on investments. (TPL 10k, Dated Dec. 31, 2015)

The Fundamentals

All data sourced from Gurufocus unless otherwise specified.

Annual Revenues have gone from $22.46 million in 2006 to $79.42 million in 2015 for a 10-year annualized growth rate of 13.46%. Over the last five years, revenues went from $34.30 million to $79.42 million in 2015 for a 5-year annualized growth rate of 18.28%. TTM revenue was $56.57 million.

Please note, that while the years from 2009 and on show fairly consistent revenue growth, earlier years (2006-2009) were very inconsistent.

Also, as many readers are no doubt familiar, 2015 was a rough year for oil companies. The price of oil fell sharply throughout the second half of 2015, and 2016 has thus far brought new lows. Now TPL is not an oil company but does, as a result of royalty income, have substantial interest in the price of oil. With oil and gas royalties making up 43.7% of 2015 revenues excluding land sales.

"At the end of the year, the Trust's royalty wells totaled 3,509 consisting of 1,167 oil wells and 60 gas wells, each subject to a 1/16 royalty interest, and 2,214 oil wells and 68 gas wells, each subject to a 1/128 royalty interest." (TPL 10k, Dated Dec. 31, 2015)

TPL Oil and Gas royalties from 2015 TPL 10k Click to enlarge

In addition, land sales or lack thereof can severely affect revenue from year to year. For example, in 2015 revenues were only 56.83 million if land sales are excluded versus 79.42 million with inclusion. This is simply something that an investor needs to be aware of, and will vary in effect from year to year.

Annual Net Income has moved from $11.57 million in 2006 to $50.04 million in 2015, a 10-year annualized growth rate of 15.77%. The most recent five years have net income moving from $20.60 million in 2011 to $50.04 million in 2015, a five-year annualized growth rate of 19.42%. TTM net income is $35.15 million.

TPL Revenue (Annual) Chart

Diluted Annual Earnings Per Share were $1.08 in 2006 versus $6.10 in 2015, a ten-year annualized growth rate of 18.90%. The previous five years have diluted annual EPS going from $2.21 in 2011 to $6.10 in 2015, a five-year annualized growth rate of 22.51%. Diluted EPS TTM is $4.31.

TPL Chart

Annual Long-term Debt

TPL has reported zero annual long-term debt over the last 10 years.

Cash & Cash Equivalents

Cash & Cash Equivalents have been growing for the last four years reaching $46.72 million in the MRQ (March 2016.)

Gross Margin

TPL's gross margin has been consistently in the high 90s since 2008.

Net Margin

The company's net margin has shown fairly steady growth for the whole ten-year period going from a net margin of 51.51% in 2006 to 63.01% in 2015. This includes some years with large swings in revenue and demonstrates that the business is very scalable.

SG&A

SG&A expense as a percent of gross profit has only exceeded 10% three times (2008, 2009, 2010) in the last ten years. In 2015, SG&A was less than 4% of gross profit.

CapEx

CapEx spend had its ten-year peak at 0.22 million in 2010. TPL is not capital intensive.

R&D

It should come as no great shock to readers that there has been no R&D spending at TPL for the last 10 years.

Diluted Shares Outstanding

TPL has been retiring shares aggressively and consistently. Diluted shares outstanding have gone from 10.73 million in 2006 to 8.20 million in 2015.

TPL Average Diluted Shares Outstanding (Annual) Chart

I believe that for the most part this program has been highly successful, generating more than a dollar in shareholder value for every dollar spent, and that management has not been buying shares at unreasonable valuations. Many if not most buyback programs can't say the same.

Dividend Yield

The current forward yield is 0.19%.

While TPL does pay a small dividend, the bulk of its shareholder value strategy seems geared towards buybacks. There is much room for future growth in the dividend if needed. Management has raised the dividend for thirteen consecutive years.

Competitive Advantage

TPL's competitive advantage comes in the form of its land and low overhead structure. As its main income is derived from the land it holds, no competitors are likely to be able to emerge.

Technological advances and other factors may erode the revenue generated through royalties.

Valuation

P/E Ratio

With a P/E ratio at 38.94, TPL is trading for slightly above its thirteen-year median of 34.52.

Earnings Yield

Earnings yield sits at 2.57%.

Intrinsic Value Estimates

Now for the tough part… estimating the value.

I'll make a good faith effort here to give a high, medium and low end estimate of current intrinsic value. These estimates are not to be taken as gospel and rely heavily on assumptions that may or may not play out.

I estimate out 10 years. Meaning assumed EPS growth and interest rates have to stay stable over that period for these estimates to play out. Also, please remember that share prices can move independently of the underlying business performance for extended periods. In short, buyer beware.

Now with the disclaimer out of the way…

  • (High End) Assumptions: A safe bond rate of 3.14% (the current AAA corporate bond yield) and a constant annual EPS growth rate of 18.9% (the current ten year average). Using these, I arrive at a current per share intrinsic value of $724.22. This is well above the current price. Personally, I think this is too good to be true, and that EPS growth will likely decline over the next ten years somewhat. This depends on the fate of Texas oil and gas over the next ten years.
  • (Medium) Assumptions: A safe bond rate of 3.14% (the current AAA corporate bond yield) and a constant annual EPS growth rate of 12% (a guess at what deterioration might look like). Using these, I arrive at a current per share intrinsic value of $398.24. Still a substantial margin of safety at current prices.
  • (Low End) Assumptions: A safe bond rate of 3.14% (the current AAA corporate bond yield) and a constant annual EPS growth rate of 3% (Just a bit higher than the current GDP rate). Using these, I arrive at a current per share intrinsic value of $173.34. Which implies that the market is currently pricing TPL for very low growth.

Which is most likely? The honest truth is I'm not certain. If oil and gas continue to contribute we could very well see at least the medium scenario play out. I think somewhere around the medium assumption is a reasonable expectation of the current intrinsic value.

Risks

"Two customers represented 18.8%, 29.1% and 20.5% of the Trust's total revenues for the year ended December 31, 2015, 2014 and 2013, respectively."(TPL 10k, Dated Dec. 31, 2015)

  • TPL has a large reliance on two customers.
  • Oil and Gas Prices influence royalty income, and unfortunately the future is still murky for oil in particular.
  • TPL is not reliant on technology for its continued success. However, it could lose material revenue if eventual technological advances lessen reliance on gas and oil.

As always read TPL's 10K for a much more complete listing of risks.

Conclusion

TPL seems to me to be a very interesting investment, one with a good looking track record, small though growing dividend and no debt. If I were currently looking for exposure to oil and gas, TPL would probably have a home in my portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.