Earnings call transcript: Texas Pacific misses Q1 2025 revenue forecast

Texas Pacific Land Corporation (TPL) reported its first-quarter earnings for 2025, revealing a slight miss on revenue expectations. The company posted earnings per share (EPS) of $5.24, narrowly missing the forecasted $5.27. The revenue came in at $196 million, falling short of the anticipated $228 million. Following the announcement, TPL’s stock price declined by 1.08% in after-hours trading, reflecting a $14.50 drop to $1,328.90 from the last close of $1,343.40. According to InvestingPro analysis, TPL is currently trading above its Fair Value, with a P/E ratio of 68.5x and an EV/EBITDA multiple of 52.3x, suggesting rich valuations relative to peers.

Key Takeaways

• Texas Pacific Land Corporation’s Q1 2025 revenue missed expectations by approximately $32 million.
• The company’s EPS was close to forecasts, with a minor shortfall of $0.03.
• Despite revenue misses, the company maintained a strong adjusted EBITDA margin of 86.4%.
• TPL’s stock experienced a modest decline in response to the earnings report.
• The company continues to focus on strategic innovations, including desalination projects.

Company Performance

Texas Pacific Land Corporation demonstrated robust operational performance despite missing revenue forecasts. The company achieved a 25% year-over-year growth in oil and gas royalty production, reaching 31,100 barrels of oil equivalent per day. This growth underscores the company’s strong position in the energy sector, particularly within the Delaware Basin. TPL’s strategic focus on water management and innovative desalination solutions positions it for long-term success. InvestingPro data reveals an impressive gross profit margin of 93.5% and zero debt on its balance sheet, highlighting the company’s operational efficiency and strong financial position.

Financial Highlights

• Revenue: $196 million
• Adjusted EBITDA: $169 million
• Adjusted EBITDA margin: 86.4%
• Free cash flow: $127 million, an 11% increase year-over-year
• Net cash position: $460 million with zero debt

Earnings vs. Forecast

Texas Pacific Land Corporation’s actual EPS of $5.24 was slightly below the forecasted $5.27, representing a 0.57% miss. Revenue was significantly lower than expected, at $196 million compared to the $228 million forecast, marking a 13.9% shortfall. This divergence from expectations may have contributed to the stock’s decline in after-hours trading.

Market Reaction

Following the earnings release, TPL’s stock price dropped by 1.08% in after-hours trading. The stock’s movement reflects investor concerns over the revenue miss, despite the company’s strong operational metrics and strategic initiatives. While the stock remains within its 52-week range, with a high of $1,769.10 and a low of $570.70, InvestingPro data shows an impressive year-to-date return of 21.6% and a remarkable one-year return of 143%. The platform offers 15 additional valuable insights about TPL’s performance and valuation metrics through its comprehensive Pro Research Report.

Outlook & Guidance

Looking ahead, TPL maintains a positive outlook with strategic plans to enhance its water management capabilities and capitalize on potential market downturns. The company anticipates significant easement renewal payments starting in 2026, with projected annual renewals of $35 million over the following three years. TPL is also exploring opportunities for stock buybacks and the acquisition of high-quality royalty assets.

Executive Commentary

CEO Ty Glover emphasized the company’s resilience, stating, "TPL is built to withstand [a commodity price downturn]." Meanwhile, Robert Crane, EVP of Water Resources, highlighted the growth potential in water management, noting, "We expect produced water to continue to grow at a pretty rapid pace over the next ten years." CFO Chris Steadham assured stakeholders of the company’s robust financial health, asserting, "Our balance sheet remains exceptionally strong."

Risks and Challenges

• Revenue volatility due to fluctuating commodity prices.
• Potential delays in desalination projects impacting future growth.
• Increased competition in the energy sector, particularly within the Permian Basin.
• Regulatory changes affecting water management and environmental compliance.
• Dependency on market conditions for successful execution of strategic initiatives.

Texas Pacific Land Corporation remains committed to leveraging its strong financial position and innovative strategies to navigate market challenges and capitalize on growth opportunities. InvestingPro assigns TPL a "GREAT" Financial Health Score of 3.28, supported by a robust current ratio of 10.8x and strong cash flow generation. Investors seeking deeper insights into TPL’s financial metrics, peer comparisons, and expert analysis can access the complete Pro Research Report, available exclusively to InvestingPro subscribers.

Full transcript - Texas Pacific Land Corp (TPL) Q1 2025:

Conference Operator: Greetings, and welcome to the Texas Pacific Land Corporation First Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Amini, Investor Relations.

Thank you. You may begin.

Sean Amini, Investor Relations, Texas Pacific Land Corporation: Thank Thank you for joining us today for Texas Pacific Land Corporation’s first quarter twenty twenty five earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10 Q with the Securities and Exchange Commission, which is available on the Investors section of the company’s Web site at www.texaspecific.com. As a reminder, made on today’s conference call may include forward looking statements. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward looking statements in light of new information or future events.

For a more detailed discussion of the factors that may affect the company’s results, please refer to our earnings release for this quarter and to our recent SEC filings. During this call, we’ll also be discussing certain non GAAP financial measures. More information and reconciliations about these non GAAP financial measures are contained in our earnings release and SEC filings. Please also note, we may at times refer to our company by its stock ticker TPL. This morning’s conference call is hosted by TPL’s chief executive officer, Ty Glover, and TPL’s chief financial officer, Chris Steadham, and executive vice president of Texas Pacific Water Resources, Robert Crane.

Management will make some prepared comments, after which we’ll open the call for questions. Now I will turn the call over to Ty.

Ty Glover, Chief Executive Officer, Texas Pacific Land Corporation: Good morning, everyone, and thank you for joining us today. TPL’s first quarter twenty twenty five marked a strong start to the year with quarterly records set in both oil and gas royalty production and water segment revenues. Oil and gas royalty production averaged approximately 31,100 barrels of oil equivalent per day, representing 7% growth sequential quarter over quarter and 25% growth year over year. This performance was driven by strong development activity in our Northern Culberson, Northern Reeves, and Central Midland subregions led by operators including Chevron, BP, Devon, and Kotera. Water segment revenues totaled $69,000,000 representing 3% sequential quarter over quarter growth and 11% growth year over year as our commercial efforts continue to yield robust volume gains in both water sales and produced water royalties.

Given the evolving macroeconomic landscape and volatility in commodity markets, my prepared remarks today will focus on what we’re seeing and hearing from our operator customers, the natural business hedges, and the built in growth TPL retains to withstand a potential oil price downturn. Beginning with our outlook on near term activity. We have not yet seen a widespread downturn in activity as oil prices have weakened this year, although a few operators have recently announced intentions to drop rigs and frac spreads. Feedback from other operators is they are cautiously evaluating activity plans. If oil were to stay below $60 for a sustained period of time, then we would expect more meaningful activity declines to emerge in the back half of the year.

Specific to TPL, our royalty acreage is predominantly operated by supermajors and large independents whose development plans, while not completely impervious to price declines, tend to exhibit more inertia than those of mid cap independents and privates. We would expect overall Permian activity and production declines to be slower relative to other U. S. Oil basins, and we believe TPL’s net production will continue to outperform the basin overall given our near term well inventory and the broad resilience of our operators’ activity plans. Our near term well inventory remains robust with net permitted wells, net drilled but uncompleted wells, and net completed but not producing wells at levels above our historical averages.

The total of these well categories represents the highest TPL is ever recorded. Of this specific set of wells, a total of approximately 18 net wells comes from an operator group consisting of Exxon, Chevron, Conoco, BP, Occidental, EOG, and Cutera. Turning to the impact of commodity prices affecting TPL’s various revenue streams. Although our oil and gas royalties are directly exposed to commodity prices, it’s important to note that we are not burdened by well capital expenditures or operating expenses. As a result, this revenue stream generates positive free cash flow even in severely depressed pricing environment.

For water sales, while there is indirect sensitivity to operator drilling plans, since completion activity reduces demand for brackish and recycled water volumes, the business retains operational and financial flexibility to reduce capital expenditures and variable costs. For produced water royalties, the revenues are fixed fee based, thus mitigating the direct impact of lower commodity prices. Indirectly, however, volumes could potentially increase during a downturn in drilling activity. We estimate that basin wide approximately 30 to 50% of water used for completion activity comes from recycled produced water. If new completion activity were to slow down, produced water that would otherwise have been recycled for fracking would instead need to be transported and injected for disposal.

We saw this dynamic play out in 2020 when basin wide drilling and completion activity declined and our produced water volumes increased by over 30% year over year. Our surface leases, easements, and material sales revenue, which we refer to by its acronym SLIM, is generally a fixed fee based revenue model that is largely tied to oil and gas activities such as pipeline, easements, commercial leases, wellbore easements, and caliche sales, among other items. SLIM revenues will generally flex up or down with the broader Permian activity levels. Many of the easement contracts contain ten year renewal payments that are subject to CPI escalators upon renewal. In 2016, we began implementing these renewal payment features into our easement contracts.

As a result, beginning next year, TPL will begin benefiting from this built in revenue tailwind, regardless of the price of oil. Given the significant cumulative increase in CPI levels over the last decade, we anticipate that the renewal payment escalators will be approximately 35%. In 2026, we anticipate approximately $10,000,000 in renewal payments derived from easements signed in 2016. The payment renewals will then ramp up in the three years following 2026 as we anticipate upwards of $35,000,000 per year in renewals. In total, we estimate that the easement renewals over the next decade will exceed $200,000,000 And to be clear, these renewal payments will then reoccur in another ten years with CPI escalation.

This will be incremental to the cash flow generated from new ongoing SWIM activities as Permian development is likely to continue for decades. In summary, while we’re certainly not hoping for a protracted downturn in commodity prices, TPL is built to withstand it. Whereas many oil and gas upstream operators might experience negative free cash flow under a depressed commodity price environment, TPL’s industry leading margins could allow the company to still maintain positive free cash flow. In addition to our high margin resilient cash flow streams, our balance sheet is equally strong. We continue to maintain a net cash position with zero debt and $460,000,000 of cash and cash equivalents at March 31.

We understand that commodity businesses are inherently cyclical, and we’ve intentionally managed and structured our business to perform well during difficult periods. With PPL operating from arguably the strongest financial position it has ever been in, we look to take advantage of any opportunities that might materialize. That could mean adding high quality and strategic royalties, surface, and water assets, substantially ramping up buybacks, or a combination thereof. Our goal is to maximize stockholder value over the long term, and we retain the flexibility and possess the wherewithal to execute throughout commodity cycles. With that, I’ll hand the call over to Chris.

Chris Steadham, Chief Financial Officer, Texas Pacific Land Corporation: Thanks, Ty. For the first quarter of twenty twenty five, consolidated revenues were $196,000,000 Consolidated adjusted EBITDA was $169,000,000 with an adjusted EBITDA margin of 86.4%. Free cash flow was $127,000,000 representing an 11% increase year over year. As Ty mentioned earlier, royalty production this past quarter was approximately 31,100 barrels of oil equivalent per day, representing a 25% increase year over year. As of quarter end, we had 5.9 net permitted wells, 12.9 net drilled but uncompleted wells, otherwise known as DUCs, and 5.4 net completed but not producing wells, otherwise known as CUPS.

The sum of permitted wells, DUCs, CUPS totals 24.3 net wells of near term inventory. This number reflects an all time high and a 7% higher sequential quarter over quarter and 38% higher on a year over year basis. We estimate that it would take approximately 12 net wells turned to sales per year to maintain TPL’s current production. Based on recent historical trends, approximately 93% of permitted wells are drilled within a year, approximately 90% of DUCs are completed within a year, and approximately 96 of cups are turned to cells within one month. Of course, development timing may change depending on commodity price environment, but we expect our operator group to maintain steadier levels of development relative to the overall industry.

Specifically for DUCs and CUPs, these types of wells have already had substantial capital invested in them, and thus we would expect these wells to still be turned to sales along a relatively typical cadence even if commodity prices were to weaken. With respect to our desalination and beneficial reuse initiatives, we now expect our phase two b desalination unit to come online by the end of the year. Recall, this is a 10,000 barrel per day r and d test facility where we are processing oil and gas produced water and treating it to produce a high spec fresh water that could potentially be used for beneficial reuse endeavors such as grassland restoration, aquifer recharge, data center and power plant cooling, and other potential environmental and industrial uses. The desalination unit is currently being constructed and tested at our technology and manufacturer partners facility located in The US. We are encouraged by our progress and we believe we have identified multiple new avenues to substantially lower the operating cost of a potential commercial scale desalination facility.

Once the phase 2b unit meets our various technical specifications, the unit will then be moved and assembled on TPL’s property in Orla, Texas. Our CapEx estimates related to the desalination remain unchanged. As it relates to our efforts with power and data centers, we continue to advance discussions and have not seen a material downshift in development opportunities. Recently, the Public Utility Commission of Texas approved the first extra high voltage transmission lines in ERCOT geared toward enhancing electric reliability in the Permian Basin. Portions of the proposed high voltage transmission lines and substations will likely overlap TPL property, which we believe will drive substantial local load growth to support the oil and gas industry while unlocking solar, wind, and gas generation capacity.

In addition, we are actively educating developers and pursuing opportunities where we can potentially leverage TPL desalination efforts to provide substantial supplies of high spec fresh water for industrial use. Now approved, we look forward to this grid infrastructure progressing towards development, and ultimately, upon completion, we think this enhances the commercial potential of the Permian overall and for the TPL land to all sorts of opportunities. In conclusion, TPL continues to set new records across major KPIs and business segments despite oil and gas prices remaining well below the highs of the past few years. Our balance sheet remains exceptionally strong, which affords us our ability to execute on a strategy toward maximizing shareholder value. And with that, operator, we will now take questions.

Conference Operator: Thank you. We will now conduct a question and answer session. The first question comes from Derrick Whitfield with Texas Capital. Please proceed.

Derrick Whitfield, Analyst, Texas Capital: Good morning all and congrats on a record quarter.

Ty Glover, Chief Executive Officer, Texas Pacific Land Corporation: Thanks, Derrick. Good morning.

Derrick Whitfield, Analyst, Texas Capital: Ty, maybe starting with you. Certainly, for your thoughts, macro thoughts on the oil and gas activity and the impacts across your business segments. With the first question, I really want to lean in on the water side and specifically the fundamentals, water fundamentals within Delaware Basin. Given the recent flurry of midterm announcements we’ve seen, it’s quite clear there’s significant demand for water handling. Do you have a sense on the underlying growth and produced water volumes across the basin before activity adjustments are considered?

And where I’m going with this is kinda setting aside the water oil ratio increase in a well over time. We are broadly seeing a shift to deeper intervals which are more water wet and that’s seemingly driving water growth to levels elevated to that of oil growth. Any perspective you could offer on that would be greatly appreciated.

Ty Glover, Chief Executive Officer, Texas Pacific Land Corporation: Yeah, we’re definitely seeing higher water cuts as operators move to second and third tier formations. I think we’ve seen as high as 10 to one on some pads. And so we expect produced water to continue to grow at a pretty rapid pace over the next ten years, which is why we think it’s to take out of bits and disposal, it’s going to take beneficial reuse, it’s going to take continuing to treat and reuse more and more water to be able to effectively handle the volumes that produce water that we’re going to need to so that development of minerals doesn’t bottleneck.

Derrick Whitfield, Analyst, Texas Capital: And then kind of along the same lines, Ty, with those three larger pipeline projects that appear to be moving forward with Waterbridge, Western and Arris, how does that impact you guys?

Ty Glover, Chief Executive Officer, Texas Pacific Land Corporation: Well, we think I mean, it’s a benefit to the basin, benefit to the development of our minerals. Know, operators need more pore space to head off potential bottlenecks on having to shut in wells or forego development in certain areas because of water cuts. So from that standpoint, it really is a benefit. And then I would just add too that on the Western Pathfinder Pipeline, we will be paid because of our relationship with Western and where our assets sit, we’ll be paid for those barrels that are going to move through that first phase of that project. And then the second phase of that project is a pipeline that actually goes to out of basin surface that we’ve acquired.

So we’ll receive payment on existing barrels that are moved to the East and then payment on new barrels as well. So that project is a pretty fantastic benefit for TPL. And Robert, I know if you have anything to add to any of those questions.

Robert Crane, Executive Vice President of Texas Pacific Water Resources, Texas Pacific Land Corporation: Yeah, I’ll add on the first one really quick. You know, from a just strictly volume standpoint, you know, varying numbers on how it’s calculated on where we are today on total Delaware produced water production, probably somewhere in the 12,000,000 to 15,000,000 I think if you look at most forecast Derek, as you see the proliferation of those secondary benches start to development start to occur, you’re probably getting into the 18,000,000 to 20,000,000 barrels a day 2028 through 02/1930. As Todd mentioned, secondary out of basin disposal beneficial reuse has to occur. You know, just our stance on out of basin, I’ll say we truly led the charge on it from the beginning, you know, and saw this trend coming, you know, many years ago, as we knew it was going to take a little bit of time for beneficial reuse to get there from a technology and the regulatory standpoint, led the charge on that and continued to help facilitate the development and the redistribution of volumes, because as Ty has mentioned, a lot of our legacy contracts, we still take part and will be compensated on those volumes moving even if perhaps in the early phases, certain projects are not moving directly to our acreage, there’s still compensation as we help redistribute those volumes.

Derrick Whitfield, Analyst, Texas Capital: That’s great color. And then lastly, could you guys offer some perspective on the M and A landscape in the basin at present? I realize volatility tends to create challenges with deal flow. Having said that, we are seeing some transactions clear on the E and P side. So any perspective you guys could offer on kind of framing up the competitive landscape for both minerals and surface would be greatly appreciated.

Ty Glover, Chief Executive Officer, Texas Pacific Land Corporation: Yeah, I mean, I think on the M and A front, there’s still a lot of opportunity. We haven’t seen a big pullback from sellers. If commodity prices continue to decrease, bid ask spread may widen. But right now, it still seems like a pretty friendly environment. A lot of opportunity in the pipeline.

Derrick Whitfield, Analyst, Texas Capital: All right. Very helpful. I’ll turn it back to the operator. Thanks.

Conference Operator: Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.

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