Texas Pacific Land Company (BPD) Investors have had a very difficult 2023. It was difficult to see broader market power growing through technology. However, a land investor playing on the oil and gas theme can look beyond that. We did it expect TPL to suddenly announce that it has found an AI-themed play on its exploration lands. What was really painful was seeing TPL underperform the Energy Select Sector SPDR ETF (XLE) by a whopping 32%.
Our own coverage of BPD has been fairly straightforward. It started with a sell/short rating at $1,550 in June 2021. We then suggested investors go neutral at $1,250 and even had the temerity to suggest a buy at $1,050 in January 2022.
In general, over these periods, these trades have performed much better than buying and holding. the stock has remained stable over the past 30 months. We take a look at the valuation today and tell you why we think TPL will struggle in 2024, at least relative to other opportunities out there.
What is TPL worth today
The crowd is probably looking at this from an EV/EBITDA perspective, and based on the last decade, TPL doesn’t look expensive.
Some nuance is lost when we simply graph the TPL against its current state. The first being that most of this story took place during ZIRP (zero interest rate policy). Even then, the stock traded much lower based on EV/EBITDA in 2016. Let’s not forget that 2016 marked a low for crude oil and TPL’s EBITDA was quite depressed. Even with these low numbers, the market has priced him quite low compared to where he is today. So there is potential to trade at 16X EV to EBITDA today, and it will be a painful journey. Even that 16X will represent a premium to the S&P which trades at 14X EV to EBITDA. Let’s add here that the S&P 500 itself peaked at 14X EV to EBITDA in 2000 and didn’t exceed those index levels until over 15 years later.
TPL therefore remains expensive by any conventional measure.
But the real reason TPL is so expensive today is that the growth story is more or less over. You could justify paying 25X EV to EBITDA during ZIRP when TPL was a small company and its land was still being explored. There was growth to be had. This growth is now at a standstill. The latest quarter showed that all three energy product categories declined year over year.
Yes, you can use the mantra “buy land, they don’t build anymore”, but it’s not as simple as that. As Permian oil, natural gas and natural gas liquids production reached new highs in 2023, the TPL basis showed a 7% decline.
Here’s a quick overview of freehold royalties (MADAM: APPROXIMATELY) production data for the same quarter. A small increase of 3%. Nothing revolutionary, but solid nonetheless.
What about Viper Energy, Inc. (IN HER) ? So far they have done better in 2023 and production has increased nicely.
We see things from a global perspective. We are not going to quibble over whether the TPL will generate a drop of 7% or 2%. We won’t bother predicting whether VNOM’s acquisitions will be accretive or not. But we just want to draw your attention to this. What rational reason is there to pay 3x EV multiple to EBITDA for declining royalty production relative to growing production?
Do us a favor, please.
If these arguments sound exactly like the ones we made when we first wrote about why you shouldn’t buy TPL, back in 2021, consider us guilty of the accusations made. There were 75 comments on this one and most didn’t understand the giant hurdle of relative valuation. In fact, here’s a snippet of what we wrote at the time as we stared in disbelief at TPL’s relative valuation. Also note the two companies we identified at the time.
The absurdity of the multiple can also be seen against certain similar companies holding royalties.
Keep in mind that TPL itself identifies 21 years of drilling inventories. Paying 41 times sales for a company with 21 years of drilling inventory is definitely at the top of the list of absurdities we’ve seen in this market.
Source: Drilling permit
30 months later, investors have proof that valuation matters and that the past is not always the future. TPL was scrapped by the other two royalty sets.
So that brings us to the recent drama surrounding TPL, where the company had a standoff with its largest shareholder, Horizon Kinetics. This lawsuit focused on whether or not TPL could find a way around the issuance of new shares. TPL won this.
Texas Pacific Land Corporation announced today that the Delaware Court of Chancery (the “Court”) has ruled in favor of TPL in the Company’s litigation against Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors , LLC and SoftVest, LP (collectively, the “Investors Group”), in Texas Pacific Land Corp., (CA No. 2022-1066-JTL) (Del. Ch.). On December 1, 2023, the court ruled that the investor group should have voted in favor of the board’s recommendation on Proposition 4, the company’s proposal to increase the number of authorized shares of common stock (the “proposal for authorization of shares”) at the 2022 annual meeting. , under the terms of the June 2020 shareholders’ agreement with the Company (the “Shareholders’ agreement”). The court considered that the shares of the investor group had been voted in favor of the share authorization proposal, which was deemed approved by the shareholders.
As previously stated, once a final order has been issued and an amended charter has been filed, the Company intends to use a portion of the newly authorized shares to effect a stock split of the Company’s common stock under the form of a stock dividend, and the court conditioned the proposed stock authorization on such a stock split. Additionally, the stock authorization proposal increases the number of authorized and unissued shares of common stock.
Today we have seen many investors complaining and complaining about this, which is a bit confusing. From our perspective, TPL is ridiculously overvalued compared to the alternatives. A similar royalty trades at a third of its valuation. Suitable E&P companies are trading at a fifth of their valuation. TPL should therefore issue shares to possibly purchase other assets or companies. If we were in charge of TPL, we would issue shares every day. We might even hire someone to do it in case we miss an opportunity while napping. In fact, this might be a typical case of “you sleep, you lose.” At 22X EV to EBITDA, there is no reason not to issue shares. Management knows this, and investors who favor math over storytelling will favor them as well. We rate the stock as a “Hold” only because we believe in a much higher oil and gas price environment in the years to come. On a relative basis, the last 30 months have been just a snapshot of the returns you’ll get compared to anything in the royalty or E&P space.
Please note that this is not financial advice. It may seem like it, but surprisingly, it’s not. Investors should do their due diligence and consult a professional who understands their objectives and constraints.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these actions.