In the past two months, the weak global oil demand, combined with excessive oil inventory, has significantly driven down the oil price. We believe that oil prices will recover sooner or later, although it is impossible to predict the timing. One of the safe bets, which will benefit from the oil price recovery, is Texas Pacific Land Trust (NYSE:TPL). Being a land bank with substantial cash on hand and little debt, TPL is considered a safe stock for investors to get exposure to a potential upcoming oil price recovery.
Benefit from the entire oil & gas development value chain
Texas Pacific Land Trust, formed in 1888, is one of the biggest landowners in Texas state, with more than 900,000 acres in the West Texas area. It does not produce oil itself but owns oil & gas royalties, water royalties, and surface rights through its land holdings in the Permian Basin. The Trust earns steady revenue streams from the entire oil & gas development value chain. Throughout the lifecycle of a well, the Trust receives oil & gas royalties and fixed-fee payments for land use from oil producers. Moreover, in different phases of oil & gas development, the Trust produces additional revenue streams such as caliche sales during the oil & gas infrastructure construction, water supply during the drilling and completion phase, and saltwater disposal on its land during the production phase.
Excluding land sales, most of the Trust’s revenue came from oil & gas royalties, accounting for approximately 40% of the total revenue. Land and resource management has always been the significant operating income generator, accounting for more than two-thirds of its operating profits. In 2019, TPL had two main major customers, WPX Energy Permian and Anadarko E&P Onshore. WPX Energy Permian brought $11.3 million in royalties and $100 million in land sales to the Trust. Anadarko E&P Onshore paid to the Trust $33.7 million
