Texas Pacific Land - Lumpy Growth

| About: Texas Pacific (TPL)
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Summary

The Company holds Permian Basin acreage where oil and gas production is increasing.

New drilling technology continually adds value to the Company's acreage.

New discoveries like Apache’s Alpine High can be game changers.

Introduction

Texas Pacific Land (NYSE:TPL) owns surface acreage, mineral interests and pipeline easements in West Texas. U.S. oil and gas production in recent years has been volatile as prices have fluctuated widely. The Company has interests in Texas counties with low break-evens such that the combination of oil and gas royalty revenue along with pipeline easement revenue has been growing steadily. The Company has interests in oil and gas districts 7B, 7C and 8. The RRC Oil and Gas Division District Boundaries Map shows the counties in each district and we will focus on District 8 and part of District 7C. Within the Permian Basin, we're looking extremely closely at three Delaware Basin counties and somewhat closely at two Midland Basin counties. Evidence from the last few years shows that Reeves County and Loving County have been important to the Company for both royalty revenue and pipeline easement revenue. Culberson County is producing more gas every year and it will be significant for both royalties and easements in the coming years. The company has a tremendous amount of surface and royalty acreage in these three counties. These are some of the reasons why we are paying special attention to these three Delaware Basin counties throughout the article. Midland County is second only to Karnes County in the entire state of Texas for oil production. Upton County comes in at number four in the state for oil. These two Midland Basin counties are consequential to the Company because of their high oil output and the considerable royalty acreage the Company has in them. Looking at the top 15 counties for Texas gas production, only five of them have higher production in September 2016 than September 2014 and they are the five in this paragraph.

It is an exciting time to own land in South Reeves County. Land values have been rising as Apache Corporation (NYSE:APA) made an important announcement about their "Alpine High" discovery in early September. Reeves County has about 2,642 square miles and there are about 640 acres per mile so the county has about 1.7 million acres. The Texas Pacific Land 2015 annual report shows that the Company has 185,529.85 surface acres in the county or about 11% but much of this acreage is north of the Alpine High area. Still, the Company has a tremendous amount of land just to the northwest of Alpine High in Reeves and Culberson counties. Apache controls 352,000 acres in Alpine High which comes to about 20% of the Reeves County acreage.

The 2015 10-K states that the Company received $7.6 million, or about 30.8% of its oil and gas royalty income, from Chevron and $4.9 million, or about 19.9%, from Anadarko. In terms of easements and sundry income, the Company received $3.7 million, or about 11.8%, from BHP Billiton Petroleum.

We discuss Anadarko Petroleum Corporation (NYSE:APC), Apache Corporation, BHP Billiton Limited (NYSE:BHP), Chevron (NYSE:CVX), Cimarex Energy (NYSE:XEC), Concho (NYSE:CXO), Occidental Petroleum (NYSE:OXY), PDC Energy (NASDAQ:PDCE), Pioneer Natural Resources (NYSE:PXD), Resolute Energy Corporation (NYSE:REN) and Shell (NYSE:RDS.A).

The USGS Wolfcamp announcement is fantastic for the Midland Basin:

This is the largest estimate of continuous oil that USGS has ever assessed in the United States.

The Wolfcamp shale in the Midland Basin portion of Texas' Permian Basin province contains an estimated mean of 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids, according to an assessment by the U.S. Geological Survey.

Midland and Upton counties have already produced many barrels of oil and this announcement means there should be many more to come. The USGS will be studying the Delaware Basin as well over the next few years.

The Company is dangerous for short sellers as it sits on top of some of the best oil and gas land in the world. New oil and gas assessments in this area are a recurring theme. Using horizontal drilling and hydraulic fracturing, producers are continually using new technology to extract resources from this land.

The Railroad Commission of Texas or RRC is a major resource for TPL investors.

TPL Land Maps

The bottom of the TPL 2015 annual report has a map showing Company acreage:

Here is a zoomed in view of the TPL land in the Delaware Basin including Culberson County, Reeves County and Loving County. The Company has the most royalties in these three counties:

TPL Land by County

The 2015 TPL annual report shows surface and nonparticipating perpetual royalty interest acreage by county as of December 31, 2015:

County

Surface

Royalty 1/128

Royalty 1/16

District

Culberson

299,693.49

111,513.14

8

Reeves

185,529.85

3,013.34

116,690.98

8

Hudspeth

155,405.88

1,008.00

8

Loving

73,608.62

6,106.66

48,066.00

8

Pecos

43,407.12

320

16,895.31

8

Midland

29,007.55

13,425.00

15,360.00

8

Glasscock

20,712.70

3,600.00

11,110.91

8

Ector

19,887.46

33,633.45

11,792.88

8

El Paso

16,628.40

8

Jeff Davis

13,117.24

7,554.65

8

Winkler

7,803.69

1,181.75

3,040.00

8

Upton

6,020.22

6,903.00

9,100.60

7C

Sterling

5,212.46

640

2,080.00

8

Howard

4,788.04

3,098.54

2,320.00

8

Crane

3,621.36

264.65

5,198.15

8

Nolan

1,600.00

2,487.73

3,157.43

7B

Mitchell

1,599.00

1,760.00

585.91

8

Taylor

689.73

966

7B

Callahan

80

7B

Coke

1,183.50

7C

Fisher

320

7B

Martin

320

8

Palo Pinto

800

7B

Presidio

3,200.00

8

Reagan

6,162.15

1,273.63

7C

Stephens

2,817.33

160

7B

Total

888,332.81

85,413.60

373,777.09

The top 8 counties make up 93% of the surface acreage or 827,252.67 of 888,332.81. Hudspeth, Culberson, Reeves, Loving and Pecos counties touch the Delaware Basin while Ector, Midland and Glasscock counties touch the Midland Basin. Reeves County and Culberson County have more than 100,000 acres each in 1/16 Royalty. Upton is not one of the top counties for surface acreage but it is one of the top five counties in all of Texas for oil production and TPL has considerable royalty acreage in the county.

The TPL 10-K specifies some royalty details:

The Trust also owns a 1/128 nonparticipating perpetual oil and gas royalty interest under 85,414 acres of land and a 1/16 nonparticipating perpetual oil and gas royalty interest under 373,777 acres of land in the western part of Texas. Generally speaking, if the Trust sells the surface estate in real property with respect to which it holds a perpetual oil and gas royalty interest, that oil and gas royalty interest is excluded from the sale and retained by the Trust.

The part about royalty interests is key. If surface acreage is sold on land where the Company holds perpetual royalty interests then the Company keeps the royalties. Pipeline easement revenue can be lost but holding onto royalty revenue when selling surface land is huge. In other words, the company is slowly liquidating itself with respect to surface real estate but not so much with respect to royalties for the minerals below the surface.

Texas Oil Production by County

RRC tells us that Texas produced less oil in September 2016 than September 2014. Here are the totals: September 2014: 84.4 million barrels; September 2015: 87.7 million barrels; September 2016: 71.4 million barrels.

Based on RRC numbers, I made a monthly oil spreadsheet that shows the top 15 counties in the state for September 2016. We see that Loving, Midland and Reeves counties are doing well now compared to 2014:

County

District

Sep. 2014

BBL

Sep. 2015

BBL

Sep. 2016

BBL

Sep. '14 to '16

Change

KARNES

2

7,638,183

7,426,959

5,095,593

(33%)

MIDLAND

8

2,944,564

4,066,041

5,068,465

72%

MARTIN

8

2,853,152

3,693,323

3,700,401

30%

UPTON

7C

3,024,170

3,768,606

3,501,453

16%

LA SALLE

1

5,982,499

5,548,109

3,422,097

(43%)

DE WITT

2

4,658,443

6,054,797

3,246,232

(30%)

REEVES

8

2,268,245

3,587,900

3,178,649

40%

MCMULLEN

1

3,556,275

3,439,578

3,021,614

(15%)

GONZALES

1

3,841,800

3,038,043

2,949,145

(23%)

ANDREWS

8

3,065,342

3,176,104

2,865,602

(7%)

REAGAN

7C

2,090,131

2,663,151

2,223,491

6%

LOVING

8

1,097,578

1,929,567

2,188,440

99%

DIMMIT

1

2,923,332

2,835,401

2,179,844

(25%)

GLASSCOCK

8

2,153,115

2,245,803

1,960,877

(9%)

YOAKUM

8A

1,778,418

1,899,709

1,867,084

5%

Source: RRC General Production Data

BBL = barrel of oil.

Excludes condensate.

Texas Natural Gas Production by County

Here are the Texas casinghead and GW gas production numbers for the last three Septembers from RRC: September 2014: 720 million MCF; September 2015: 723 million MCF; September 2016: 561 million MCF.

I made a monthly casinghead & GW gas spreadsheet based on RRC numbers that shows the top 15 counties for September 2016. We see that Culberson County is exciting, having more than doubled its production since 2014. Like we saw in the oil spreadsheet, Reeves, Midland and Loving counties are looking good as well:

County

District

Sep 2014

MCF

Sep 2015

MCF

Sep 2016

MCF

Sep. '14 to '16

Change

WEBB

4

58,545,060

71,759,857

55,387,471

(5%)

TARRANT

5

54,387,676

48,443,182

35,487,204

(35%)

DIMMIT

1

24,203,622

25,637,075

21,963,351

(9%)

KARNES

2

22,688,777

25,530,591

19,877,341

(12%)

PANOLA

6

31,536,250

28,510,499

19,046,575

(40%)

JOHNSON

5

25,703,428

21,140,905

18,091,421

(30%)

DE WITT

2

23,197,830

29,588,399

17,928,345

(23%)

LA SALLE

1

21,031,364

21,888,761

17,073,641

(19%)

WISE

9

22,330,337

19,924,196

15,597,579

(30%)

DENTON

9

18,915,328

17,658,336

13,386,327

(29%)

REEVES

8

7,831,578

14,517,760

12,862,172

64%

MIDLAND

8

8,137,409

10,135,997

11,943,247

47%

CULBERSON

8

5,625,236

10,768,978

11,924,769

112%

UPTON

7C

11,079,176

12,136,456

11,384,714

3%

LOVING

8

7,491,443

10,495,378

10,368,214

38%

Source: RRC General Production Data

MCF = thousand cubic feet.

Key Producers in Culberson, Reeves, Loving, Midland and Upton Counties

These RRC numbers are for September 2016:

County

Operator Name

Operator No.

Oil BBL

Gas MCF

Culberson

CIMAREX ENERGY CO.

153438

1,546

6,168,566

Loving

ANADARKO E&P ONSHORE LLC

20528

697,374

3,986,719

Midland

PIONEER NATURAL RES. USA, INC.

665748

1,899,426

3,907,146

Upton

COG OPERATING LLC

166150

552,049

2,503,269

Upton

PIONEER NATURAL RES. USA, INC.

665748

1,176,156

2,244,434

Culberson

CAPITAN ENERGY, INCORPORATED

130061

0

1,878,399

Culberson

COG OPERATING LLC

166150

4,612

1,867,947

Reeves

CIMAREX ENERGY CO.

153438

287,905

1,726,402

Loving

EOG RESOURCES, INC.

253162

346,648

1,548,395

Reeves

OXY USA WTP LP

630555

536,469

1,545,456

Midland

XTO ENERGY INC.

945936

636,712

1,443,719

Upton

PARSLEY ENERGY OPERATIONS, LLC

642652

438,764

1,350,230

Reeves

ANADARKO E&P ONSHORE LLC

20528

179,162

1,307,747

Loving

SHELL WESTERN E&P

774719

327,077

1,192,242

Reeves

COG OPERATING LLC

166150

422,203

1,015,647

Reeves

RESOLUTE NATURAL RES. CO., LLC

703352

215,883

827,453

Midland

ENCANA OIL & GAS(NYSE:USA) INC.

251691

262,730

803,804

Midland

CHEVRON U. S. A. INC.

148113

327,996

782,947

Upton

SUMMIT PETROLEUM LLC

829221

147,430

761,955

Upton

APACHE CORPORATION

27200

208,213

760,480

Culberson

CONOCOPHILLIPS COMPANY

172232

0

740,054

Upton

XTO ENERGY INC.

945936

110,366

711,613

Reeves

EOG RESOURCES, INC.

253162

93,847

699,979

Loving

APACHE CORPORATION

27200

211,787

673,300

Midland

FASKEN OIL AND RANCH, LTD.

263696

148,751

607,910

Loving

MATADOR PRODUCTION COMPANY

532993

66,852

604,428

Loving

RKI EXPLORATION & PRODUCTION LLC

714221

95,425

588,843

Midland

ENDEAVOR ENERGY RESOURCES L.P.

251726

254,456

586,177

Culberson

CHEVRON U. S. A. INC.

148113

200

580,305

Midland

COG OPERATING LLC

166150

151,483

550,513

Reeves

THOMPSON, J. CLEO

855610

152,110

517,379

Reeves

ROSETTA RESOURCES OPERATING LP

728883

185,880

514,569

Upton

SM ENERGY COMPANY

788997

176,079

497,020

Midland

CALLON PETROLEUM OPERATING CO

124828

264,277

446,532

Midland

RSP PERMIAN, LLC

732224

363,487

431,655

Loving

SILVER HILL ENERGY PARTNERS, LLC

781871

208,475

395,360

*OXY USA WTP LP isn't the only Oxy interest in Reeves County.

Note that BHP was a leading producer in Reeves County through July 2016. In that month they had 2.2 million MCF of gas. As we said earlier, BHP made up 11.8% of the 2015 TPL easement revenue.

Apache Announcement

A September 7th press release by Apache notes that a world class resource named Alpine High has been discovered in an area that is mainly comprised of South Reeves County. The area is estimated to have 75 trillion cubic feet [Tcf] of rich gas and 3 billion barrels of oil in the Barnett and Woodford formations. Leasing acreage over the last few years, the average cost for Apache came to about $1,300 per acre.

The Apache September 7, 2016 Barclays Presentation has a map of the Alpine High acreage and most of it is in or near South Reeves County. The gray dots represent acreage that Apache acquired in previous years and the yellow dots represent acreage that Apache acquired in 2016:

In addition to owning some land in South Reeves County, TPL owns a great deal of land on the other side of the Culberson County border. There is speculation that this Culberson County land to the northwest of Alpine High could have sizable resources.

Overview of Producers in Reeves and Culberson Counties

PDC Energy isn't one of the top producers in Reeves and Culberson counties over the last few months but they have a useful map that shows the location of important producers in the area. On August 24th they announced a Transformative Core Delaware Basin Acquisition involving about 23,500 acres in West Reeves County, about 17,500 in Central Reeves County and about 16,000 in Culberson County. Their map from the above announcement shows PDC acreage in yellow along with an overview of other producers in the area:

The above announcement notes that the price works out to about $22,000 per acre.

Chevron and Cimarex

Accounting for almost 31% of TPL's oil and gas royalties in 2015, Chevron is very important to the Company. Chevron has a long history with TPL and they are consistently mentioned as a contributor of more than 10% of the oil and gas royalty revenues.

The Chevron September 2015 Barclays Presentation shows key acreage:

The Culberson County acreage stands out as it looks very similar to the Culberson County acreage on the TPL map. The same is true of much of the land in Reeves, Midland and Upton counties.

Reeves County has been getting a large share of headlines recently but TPL has even more land next door in Culberson County. The Cimarex September 2016 Barclays Presentation by Thomas Jorden lists Delaware Basin Wolfcamp as their biggest opportunity. It shows over 100,000 acres in the northeast corner of Culberson County and the south part of Eddy County in a joint development agreement with Chevron. It also shows 80,000 acres in Reeves County.

Anadarko and Shell

Almost 20% of TPL's oil and gas royalty revenue came from Anadarko in 2015. In addition, Anadarko made up 10.2% of the TPL easement revenues in 2014. Anadarko created Western Gas Partners as a master limited partnership and an Oil & Gas 360 article from March 2015 shows assets belonging to Western Gas Partners and other Anadarko interests in Reeves and Loving counties:

Shell acquired a vast amount of Delaware Basin acreage from Chesapeake in 2012. They now have 300,000 net acres in the Delaware through their joint venture with Anadarko. Shell subsidiary Shell Western E&P shows impressive oil and gas production numbers for Loving County.

BHP

BHP made up almost 12% of TPL's easement revenue in 2015. BHP's December 2013 presentation shows their Delaware focus area as mainly Reeves and Loving counties and it is a solid assumption that much of this pipeline easement revenue came from Reeves County:

Per RRC, BHP had strong gas production numbers in Reeves County over the last several years that verify this focus area as follows: 2013: 3,929,821 MCF; 2014: 12,460,882 MCF; 2015: 26,814,906 MCF.

Other Permian Basin Producers

Oxy is the largest Permian producer and their May 2016 UBS Global Oil and Gas Conference Presentation shows the eastern part of Reeves County as a 2016 focus area. It appears TPL has land in and around this area.

Resolute has impressive production numbers in Reeves County. In September they showed a presentation detailing their acquisition of Firewheel interests in Reeves County. Much of the acreage acquired is in the "Mustang" part of Reeves County which appears to be just south of some TPL acreage. The October 5, 2016 Resolute Switches to Buy Mode Article by Emily Moser notes that this acquisition comes to over $26,000 per acre.

Tim Leach of Concho Resources has a September 6th Barclays Presentation where he notes that 40% of the rigs running in the country today are in the Permian Basin. He notes that everybody is trying to get a foothold in the Permian but that Concho has drilled the most horizontal wells and Concho has the most rig activity.

The COG Operating subsidiary has impressive numbers in Culberson and Reeves counties on the Delaware side of the Permian and Midland and Upton counties on the Midland side.

Looking at the Concho maps, much of their Reeves County acreage is in parts of the county not owned by TPL. However, some of Concho's Culberson acreage is in the northeast corner of the county where TPL has a presence.

Pioneer is the leading operator in the Spraberry shale. Being a powerful force on the Midland side of the Delaware, their production numbers in Midland County and Upton County are very impressive.

Valuation and Ownership

The TPL valuation is tricky. Among other complications, much of the land in the portfolio is not related to energy at this time. Still, the Apache announcement changes things - land that was passed over by the industry in previous years is now being re-evaluated. If Alpine High or anything like it ends up including land farther northwest in Culberson County then it will be a nice blessing for TPL.

Pipeline easements are a big part of the Company's overall revenue, we see easement revenue has been growing much faster than royalty revenue over the last 10 years:

Year

Easements

& Sundry

Oil

Royalties

Gas

Royalties

Oil

Barrels

Gas

MCF

Avg.

Barrel

2006

$3,651,571

$5,947,643

$2,825,869

94,557

477,343

$62.90

2007

$1,565,581

$7,056,858

$2,965,851

107,969

387,693

$65.36

2008

$2,934,426

$10,206,759

$3,488,084

99,287

434,382

$102.80

2009

$2,166,381

$6,823,871

$1,862,316

123,935

419,440

$55.06

2010

$4,166,102

$8,815,689

$2,757,874

118,220

499,615

$74.57

2011

$6,362,745

$11,434,640

$3,250,862

128,170

572,506

$89.21

2012

$10,911,848

$11,870,354

$2,800,561

135,561

721,560

$87.56

2013

$12,220,187

$19,930,212

$4,566,639

217,682

1,065,458

$91.56

2014

$21,517,232

$22,766,264

$6,579,839

260,829

1,370,377

$87.28

2015

$31,413,158

$18,607,031

$6,253,174

383,961

1,910,389

$48.46

9 mo.

2016

down 13.6%

up 10.8%

up 26.0%

up 52.3%

up 38.6%

*The above numbers come from 10-K filings and the 2016 q3 10-Q filing except the 2015 price per barrel of $48.46 which is from the annual report.

2015 oil and gas revenue was down relative to 2014 but easements were up dramatically such that the sum of royalties and easements was up.

The 2016 q3 10-Q filing says the following about pipeline easements:

The Trust is currently moving toward the use of term easements (in lieu of perpetual) which will require us to gradually recognize the income for easements over the life of the agreement, in lieu of recognizing it all at the beginning of the term of the easement. As a result, $3,240,403 of easement income received in the third quarter of 2016 was deferred and therefore not reflected in the statements of income and total comprehensive income.

The good news is that some pipeline easement revenue starting in 2016 can now be recurring every 10 years or so but the accounting might be confusing.

The 2016 Q3 10-Q shows 877,606 surface acres and 7,950,961 shares through September 30, 2016. The share price was $178.04 on September 6th which was the day before the Apache Alpine High press release. This implies a September 6 equity market cap of about $1.4 billion. I bought shares on September 8th and 9th at prices between $178 and $197. The stock reached $304.50 on October 25th implying an equity market cap of about $2.4 billion. I've sold just over half of the shares that were purchased in early September. It's hard to say how much longer I'll hold shares. That said, it would be very dangerous to short the company in my opinion as more Alpine High type announcements could come at any time.

The 2015 10-K shows 74,750 Sub-shares owned by Chairman Maurice Meyer III and another 11,500 owned by his wife.

Risks

Even great companies can make bad investments if the price isn't right. It seems nearly impossible to figure out the present value of future pipeline easement revenue. It is hard to say whether current stock prices make sense.

There is no guarantee that the Apache Alpine High discovery will pan out.

The Company audits are done by Lane Gorman Trubitt as opposed to a big name accounting firm.

The CEO resigned in November per the 10-27-16 8-K filing.

The Company doesn't have many options with respect to capital allocation. The Company is basically buying back shares regardless of the cost as opposed to being opportunistic.

Closing Thoughts

The Company has valuable acreage in some of the best areas in the world for oil and gas production. That said, the stock has gone up dramatically since early September and it isn't clear whether the market has gotten ahead of itself.

Special thanks to Craig and Steph.

Sources

Barclays September 6-8, 2016 Global CEO Energy-Power Conference Webcasts

RRC General Production Data

RRC GIS Viewer

TPL 10-Q/10-K Filings and 2015 Annual Report

Disclosure: I am/we are long TPL, VOO.

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.

Additional disclosure: Any material in this article should not be relied on as a formal investment recommendation.