LandBridge Co LLC Q3 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the LandBridge Third Quarter 2024 Results. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. I would now like to turn the conference over to Jason Long, our CEO. You may begin.

Good morning, everyone, and thank you for joining our third quarter earnings call. Our results demonstrate the strength and momentum of our business as we continue to benefit from a sustained level of activity in the Delaware Basin. During the quarter, we delivered 60% year-over-year revenue growth, 62% year-over-year adjusted EBITDA growth, and 88% adjusted EBITDA margins. Notably, we continue to grow the percentage of revenues derived from fee-based arrangements versus oil and gas royalties to further mitigate our direct exposure to commodity price fluctuations. In the third quarter, non-oil and gas royalty revenue streams, which include surface use royalties and revenues and resource sales and royalties accounted for 90% of overall revenues, up from 83% last quarter and 65% in the same quarter last year. By actively managing our land and resources, we continue to position ourselves to capitalize on a broad array of commercial opportunities at the Texas, New Mexico Stateline. As mentioned last quarter, West Texas is an increasingly popular area for renewable energy and digital infrastructure development, and our acreage is ideally situated for data centers to support AI and cloud computing services, which require low-cost fuel, water for cooling, and fiber optic infrastructure. As a reminder, in July, we signed a nonbinding letter of intent for a long-term ground lease for the development of a data center. This month in November, we executed a lease development agreement for the development of a data center and related facilities across approximately 2,000 acres of our land in Reeves County, Texas. The lease development agreement includes among other things, a nonrefundable $8 million deposit due in December 2024 for a two-year site selection period and construction of the data center within a subsequent four-year period. Upon initiation of construction of the data center, the counterparty will make escalating annual lease payments along with additional payments based on the net revenue received with respect to the power generation facilities to be located on the lease property. We also continue to expand our land holdings. In November, we acquired an additional 1,200 surface acres in Winkler County, Texas, and are under contract to acquire an additional 5,800 acres in Lea County, New Mexico. The Winkler County acquisition is adjacent to East Stateline Ranch and includes water infrastructure that generates revenue under a long-term contract with an active sand mine. The Lea County opportunity is strategically located just north of our Stateline assets. We are looking forward to continuing to identify opportunities to build out our surface acreage as well as new prospects to develop additional revenue-generating infrastructure projects. In short, we believe our performance to date reflects our unique and promising business model, which is characterized by diversified revenue streams, industry-leading margins, and low capital intensity. We see no shortage of opportunities ahead to continue growing and creating substantial value for our shareholders. Now I'll turn it over to Scott to go through the numbers in more detail.

Thank you, Jason, and welcome to everyone joining us this morning. As Jason mentioned, we continue to deliver strong results and we see this as evidence that our active land management strategy is working exactly as intended. Our third quarter revenues increased to $28.5 million, up 9.8% sequentially and 60% year-over-year. This was driven by surface use royalties and revenue, which grew 14% sequentially, and resource sales and royalties, which increased 29% sequentially. Revenue from oil and gas royalties declined 35% sequentially, which is attributable to a decrease in net royalty production as well as a decrease in average realized pricing. Thanks to our highly efficient operating model, we delivered adjusted EBITDA of $25 million, which increased 6.8% sequentially and 62% year-over-year, and which represents an 88% adjusted EBITDA margin. We generated free cash flow of approximately $7.1 million and free cash flow margin of 25%. The sequential decrease in free cash flow is attributable to an $11.1 million impact from nonrecurring IPO-related expenses and lease termination costs. Longer term, we continue to expect substantial free cash flow and free cash flow margins around 70%. We ended the quarter with total liquidity of $74.4 million, including cash and cash equivalents of $14.4 million and $60 million under our revolving credit facility. We continue to execute against our capital allocation priorities. As a reminder, these priorities are threefold. First, maintaining a strong balance sheet over time to maximize our financial flexibility; deleveraging remains an accretive use of our cash flow. During the quarter, we paid down approximately $120 million in debt. We ended the quarter with $281.3 million of debt outstanding under our term loan and revolving credit facility and a net leverage ratio of 2.8 times compared to 4.2 times at the end of the second quarter. Additionally, subsequent to the end of the quarter, we amended our debt facilities, increasing the maximum available under our revolving credit facility by $25 million to $100 million and increasing our term loan to $300 million with an additional $75 million uncommitted accordion term loan. Under the term loan amendment, we are no longer required to make amortization payments. Second, we are committed to returning capital to shareholders, and we have declared our inaugural quarterly dividend to shareholders of $0.10 per share. This quarterly dividend provides shareholders another important way to share in our successes. Finally, we continue to pursue value-enhancing land acquisitions with a focus on underutilized and under-commercialized land, as Jason mentioned, our most recent acquisitions in Texas adjacent to the East Stateline Ranch, as well as in Lea County. Looking ahead, we will continue to prioritize growing our revenues through commercial efforts on our existing surface, as well as strategic acquisitions of land as we identify new development opportunities, and we expect our strong growth trajectory to continue. Before closing, we are also introducing annual guidance today now that we've completed a full quarter as a public company. For the full year 2024, we expect $95 million to $100 million of EBITDA. In our earnings press release, we've detailed several assumptions underpinning this guidance range, including higher-than-expected surface use royalties and the lease development agreement deposit payment related to the data center development mentioned earlier. For the full year 2025, we expect $140 million to $160 million of EBITDA, driven primarily by the incremental contributions of our new acquisitions, initial contribution of the 250-megawatt solar facility to surface use revenues, and the growth of surface use royalties through higher produced water volumes. In conclusion, we delivered another strong quarter and are confident in our growth prospects as we continue to capitalize on the development opportunities in the basin to deliver value creation for our shareholders. At this point, we'd like to open up the line to questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Charles Meade with Johnson Rice. Your line is open.

I want to ask a question about your two acquisitions you did. Both of them seem to come with revenue streams. I just wondered if you could give us an idea of what kind of multiple you paid for them or if you don't want to talk about that, perhaps discuss the trajectory of those EBITDA streams. Also, Jason, you mentioned the Lea County acquisition being right adjacent to Stateline. Can you talk about any synergies that you might be unlocking with these acquisitions?

Good morning, Charles, Scott here. Very good question. The two acquisitions in aggregate were roughly $47 million, generating about $9 million of EBITDA today, tracking to just over a 5 times multiple, which is attractive financially. The locations of the assets one being contiguous with the East Stateline Ranch and the second being in New Mexico present opportunities for synergies with our existing operations on the East Stateline Ranch, as well as synergies with the WaterBridge platform in New Mexico as it looks to extend its reach from the Stateline into New Mexico. Finding the right surface at the right price and right location to exercise those synergies is rare. We’re excited to tackle this opportunity and believe it's going to serve us well from a growth perspective going forward.

Thanks for that detail, Scott. I would also like to ask about the strength of your '25 guidance. It seems that it’s really based on surface use royalties and resource sales. With many E&P companies discussing decreasing activity levels, could you comment on if you're seeing that from your operators who are active with your assets? What explains you going counter to that trend?

Really good question. We considered that while developing our guidance for 2025. What we're seeing from producers along the state line is a continued focus on drilling efficiencies. This is evidenced by the DUC inventory along the state line being the highest it's been as folks focus on completion efficiencies. Our growth is driven by opportunities we have to expand beyond traditional oil and gas. We mentioned our solar project is going out for development along with the lease development agreement we executed with the data center. So we're pursuing options that diversify our business away from traditional oil and gas, which is an important element as you think about our growth trajectory.

Great detail. Thank you, Scott.

Thank you, Charles.

Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Your line is open.

Good morning! I'm guessing you guys are happy with the pending changes in energy policy following Tuesday. I have two questions here. First, it's encouraging to see the data center deal signed and appreciate the outline of the terms regarding the two-year predevelopment phase and the four-year construction. Given the timeline for commercial projects, I'm curious about the trajectory of growth now that you've been public for a few quarters. Your stock seems to be pricing in significant growth. What does your project pipeline look like?

Great question. Commercial traction has been even stronger than we hoped for. Many projects that utilize our surface are long-term and capital intensive, but they generate meaningful long-term value for LandBridge. These discussions are ongoing, making progress, and we expect to have many wins to share in the coming quarters. While I can't quantify our growth trajectory precisely, our ability to grow returns and cash flow based on the commercial landscape we see seems likely. We anticipate a meaningful double-digit growth profile over the near to medium term.

Given the timeline for the rollout of projects, it seems we'll start seeing meaningful contributions around three to four years at least, is that reasonable?

Yes, we would start seeing the cash flow impact ahead of that. The $8 million deposit payment will be generated throughout the construction phase. We won't go from zero to the full uplift instantly; there will be a gradual increase in cash flow as these projects come online, which will be part of our growth story over the next couple of years.

My second question is on windmills. With the new administration's stance, what percentage of your alternative energy is from windmills versus solar?

We currently have no revenue from windmills. We have some commercial opportunities in the pipeline, but none impacting our business today. Overall, we see the administration’s stance as beneficial to the bulk of our operations, resulting in more tailwinds for LandBridge.

Thank you.

Thanks, Alex.

Our next question comes from the line of Kevin MacCurdy with Pickering Energy Partners. Your line is open.

Hi. Good morning. We appreciate the color on 2025. It looks like produced water is really the driver of higher EBITDA next year than expected. Could you talk about the outperformance of that business and what's driving the higher volumes?

Several factors have worked in our favor. Our partnership with Devon has been fantastic. They are focused on responsibly handling water volumes, and a significant piece of their solution involves directing water to our assets. Our commercial traction has also been positive, with blue-chip operators seeking solutions at scale, leading to new projects coming online next year. Moreover, the land and pore space access we have greatly benefits LandBridge.

We've strategically located our acquisitions from both a surface and geological standpoint, which has been successful in finding in-basin and out-of-basin solutions for operators.

I appreciate that answer. It seems that all Delaware operators are discussing efficiency gains and raising production forecasts. What changes to your macro outlook do you foresee based on these factors?

Yes, there’s a strong focus on efficiency. This reflects in our capital planning and infrastructure build-out on the WaterBridge side. From LandBridge's perspective, we benefit from increased development in the Permian without needing to invest capital to keep up with changing methodologies. We expect continued growth in the Delaware next year. However, higher concentrations of surface or acreage development typically lead to increased water cuts, which means WaterBridge will benefit from these changes, subsequently benefiting LandBridge.

I appreciate these answers. Thank you.

Yes. Thanks, Kevin.

Our next question comes from the line of Lawrence Goldstein with Investor. Your line is open.

Thank you. Good morning. Regarding data centers, I've seen various sizes from 5,000 square feet to over seven million square feet. What do you mean by data centers? What size are you negotiating?

Great question. The initial lease is for 2,000 acres for a one-gigawatt data center. The site infrastructure will not fully occupy that 2,000 acres; it includes the buildings, power infrastructure, and associated facilities.

Once the infrastructure is in place, expanding these campuses is easier, allowing us to grow from a one-gigawatt center to potentially five or six gigawatts over time.

Are you willing to discuss the square footage of the data center?

I can't provide the exact square footage of the buildings. The initial lease is for one gigawatt, with potential to scale up significantly on that 2,000 acres as needed.

Thank you.

Thank you, Lawrence.

Thank you, Lawrence.

Where are you posting your earnings reports? I can't find them online.

They should be posted in the Investor Relations portal on our website, landbridgeco.com.

Where on the website?

There should be an Investor Relations link at the top of the website.

Okay. I'll look for it. Go ahead and take another question.

If you need help, feel free to shoot me a note, and I can guide you through it.

I didn't get an answer.

Okay.

Okay. Thanks.

There are no further questions at this time. Mr. Scott McNeely, I turn the call back over to you.

Thanks again for joining today. Please feel free to reach out if we can be of assistance. We appreciate your support, and we hope everyone enjoys the rest of the week.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.