LandBridge Co LLC Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for being here. My name is Desiree, and I will be your conference operator today. I would like to welcome everyone to the LandBridge First Quarter 2025 Results. All lines have been muted to prevent background noise. After the speaker’s remarks, there will be a question-and-answer session. I now turn the conference over to Jake Robichaux, Vice President of Finance. You may begin.

Good morning, everyone, and thank you for joining the LandBridge First Quarter 2025 Earnings Call. I'm joined today by our CEO, Jason Long; and our CFO, Scott McNeely. Before we begin, I'd like to remind you that in this call and related presentation, we will make forward-looking statements regarding our current beliefs, plans and expectations, which are not guarantees of future performance and which are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from results and events contemplated by such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements. Please refer to the risk factors and other cautionary statements included in our filings with the SEC. I would also like to point out that in our investor presentation and today's conference call will contain discussions on non-GAAP financial measures, which we believe are useful in evaluating our performance. These supplemental measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. Reconciliations to the most directly comparable GAAP measures are included in our earnings release in the appendix of today's accompanying presentation. I'll now turn over the call to our Chief Executive Officer, Jason Long.

Thank you, Jake. We had a strong start to the year, delivering triple-digit revenue and adjusted EBITDA growth year-over-year of 131% and 129%, respectively, while maintaining an adjusted EBITDA margin of 88%. Since we last reported results, the broader economy has experienced growing macroeconomic volatility. Against that backdrop, I want to begin today by reiterating the core elements of our business model that give us confidence in our ability to continue delivering strong revenue growth and profitability across economic cycles and market variability. First, we benefit from diversified revenue streams, the majority of which are not directly tied to oil and gas prices. We believe this dynamic greatly insulates our exposure to periodic market and macro volatility. In fact, non-oil and gas royalty revenue streams, including surface use royalties and revenues and resource sales and royalties accounted for approximately 92% of overall revenue during the first quarter, up from approximately 88% last quarter. As we have highlighted before, our surface acreage is strategically located for a broad range of critical land uses, and this allows us to be somewhat agnostic to the quarter-to-quarter volatility that is common with crude and gas prices. Second, a key attribute of our business model is entering into agreements under which our customers bear responsibility for substantially all operating and capital expenditures related to their operations and development projects on our land. With limited OpEx and CapEx, we are well positioned to continue generating strong EBITDA margins and robust cash flow. Finally, the need for water handling infrastructure in the Delaware Basin continues to be an important driver of business for us through our affiliate company, WaterBridge, and we have seen near- to medium-term demand for those services to continue to grow. In April, WaterBridge announced an open season process for a new large diameter gathering and transportation pipeline, the Speedway Pipeline, which will connect Eddy and Lea Counties in New Mexico to our out-of-basin pore space in the Central Basin Platform. Speedway will provide operators in the Northern Delaware Basin access to our contiguous pore space, a key resource for the sustainable handling of produced water in the Northern Delaware Basin. Based on these factors, we are confident in the resilience of our business model, and we will continue to advance our active land management strategy in 2025. We are already seeing strong growth driven by the acquisition of the Wolf Bone Ranch in late 2024. In fact, the Wolf Bone Ranch contributed to a greater than 70% quarter-over-quarter increase in produced water royalty volumes. As a reminder, the Wolf Bone Ranch is underpinned by a minimum annual revenue commitment of $25 million for each of the next 5 years. In short, we are pleased with our momentum, and we look forward to continuing to deliver strong results based on the success of our active land management strategy. I'll now hand things over to Scott to walk through the financials in greater detail.

Thanks, Jason, and welcome to everyone on the call this morning. As Jason mentioned, we had a great start to 2025. Our first quarter revenues increased to approximately $44 million, up 20% sequentially and 131% year-over-year. Sequential revenue growth for the quarter was driven by resource sales and royalties, which increased 118% attributable to increased frac head water sales and royalty volumes from our newly acquired acreage. Revenue from surface use royalties and revenues increased 3% sequentially, driven by a 72% sequential increase in surface use royalty volumes across both legacy and newly acquired acreage. As a reminder, in the fourth quarter of 2024, we received an $8 million payment related to the lease development agreement for a data center on our land that drove a significant increase in our surface use revenues. Oil and gas royalties declined 24% sequentially, which was driven by a decrease in net royalty production with volumes falling from 1,199 BOE a day in Q4 2024 to 923 BOE a day in Q1 2025. We delivered strong adjusted EBITDA with $38.8 million in Q1, representing a sequential increase of 22% and 129% year-over-year with an 88% adjusted EBITDA margin. We generated free cash flow of approximately $15.8 million and free cash flow margin of 36%. The quarter-over-quarter compression in free cash flow and free cash flow margin was a result of higher accounts receivable. This was directly attributable to significantly increased surface use royalties, resource sales and resource royalties that collectively increased $14.6 million or approximately 85% in the first quarter 2025 as compared to the fourth quarter 2024. Timing of collection of those revenues resulted in a short-term impact to free cash flow and free cash flow margin. We ended the quarter with total liquidity of $84.9 million, including cash and cash equivalents of $14.9 million and $70 million available under our revolving credit facility. Our capital allocation priorities remain the same for 2025, and we continue to execute on these priorities, which, as a reminder, include maintaining a strong balance sheet to maximize financial flexibility over time and identifying and pursuing value-enhancing land acquisitions. Alongside our first quarter results, we are pleased to announce that our Board has declared a dividend of $0.10 per Class A share payable on June 19 to shareholders of record as of June 5. To conclude, we're excited by the strong quarter and start to the year, and we remain confident in our growth as we continue to benefit from our diversified, highly resilient revenue streams. And now we'd like to open up the line for questions.

Our first question comes from Jackie Koletas with Goldman Sachs.

So you touched on it a little bit, but just wanted to talk, we're starting to see Permian activity levels start to change. How do you think about the broader macro? And more specifically, how a slowdown in production could impact your produced water handling growth across your acreage?

Yes, Jackie, thank you for your question. To reiterate what Jason mentioned earlier, we are lucky that a significant portion of our business is unaffected by direct commodity price fluctuations. With 92% of our business now coming from non-mineral royalties, we are in a strong position. Furthermore, looking at producer activity through our co-management with WaterBridge, along with public statements from major customers like Devon, ConocoPhillips, and EOG, there has been no change in production expectations at this moment. The focus remains on managing the current environment through capital and cost efficiencies. We have not received any updates regarding changes to development plans. Demand for services on the WaterBridge side remains robust, which will benefit LandBridge as well. This trend is expected to continue in the near to medium term, with no changes in expectations for our operations this year, particularly in the highly profitable regions of the Lower 48. We feel confident in our ability to navigate the current situation and, like others, are monitoring developments. However, based on our strong producer customer base, our strategic location, and our business model, we believe we are well-positioned for continued growth moving forward.

Got it. That makes sense. And then pivoting, you also touched on the open season and the Speedway Pipeline with WaterBridge. I believe that recently closed. Could you provide us with any details on specifically what the demand for that pipeline looks like and how you expect the project to drive growth for that, be timing or specifically, again, like the produced water handling royalty growth we could see?

Yes, the contracts are being finalized now. We expect to announce the formal outcome in the coming weeks. Generally, there is a positive outlook for LandBridge. The pipeline stretching from Eddy to Lea County and over to the Speed Ranch in the northeastern part of our area could provide up to approximately 500,000 barrels a day of additional water handling capacity, generating around $30 million or more annually in cash flow once operational. This will be rolled out over time, with the initial phase expected to come online around the end of the year, specifically in the fourth quarter. From LandBridge's standpoint, we anticipate some initial surface damage payments will be made in the latter half of this year, with volume royalties starting in the fourth quarter and increasing through the first half of next year.

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

A large E&P company recently came out and said they thought oil production in the Permian was rolling over. I guess my question is, if Permian oil production across the whole basin is rolling over, what do you think that means for both oil production and then water production in your part of the world in the Northern Delaware?

It's a valid question. I would reiterate some points I shared with Jackie. We're fortunate that our surface overlays some of the best rock in the Lower 48, and current discussions suggest that much of the development is being focused in these more economically viable areas rather than the less productive ones. Therefore, we are well-positioned to navigate this year ahead. From the perspective of produced water, we continue to see strong demand in our core area for the near to medium term. Producers haven't scaled back their development plans for 2027 and 2028, so we expect to keep seeing growth. While some of the less productive areas may start to feel the impact, thankfully, we aren't located there, which gives us confidence in managing those dynamics if they arise.

Got you. And then second question is just any update on the data centers in West Texas? And maybe just can you talk about what you're working on there?

Yes. Yes. Like I mentioned in November when we signed that initial deal, it will be about 12 to 18 months from that point in time before we come back with an update. That hasn't changed. I would say traction remains as strong as it has been. I would say the sense that there is an arms race out there continues to be very real. As you would expect, given the scope of these projects, there's just a lot of scrutiny going into the underwriting of these locations. I mean we're talking $10-plus billion capital projects. And so they take a little time, but we continue to see just kind of great momentum in that space, continue to have a lot of discussions despite some of the macro chatter in the background. But I think taking a step back and what's probably just as attractive to us is a lot of the discussions around in-basin power at the moment. I mean there is this huge demand in West Texas right now for power generation. There's been a lot of talk about that and how it relates to data centers, but the need really transcends digital infrastructure and touches everywhere. And so we're having a lot of discussions just more generally on the power side. As you would imagine, those folks need land, those folks need water. We're well positioned to deliver both in a very sophisticated way. And again, despite how attractive and how enthusiastic we are about the digital infrastructure play, we continue to see more and more momentum more broadly on power and would expect to see some more positive updates on that here in the near term.

Our next question comes from the line of Derrick Whitfield with Texas Capital.

I wanted to revisit a previous macro question to better understand the direction of water management in the basin. Do you have insights into the growth of produced water volumes across the basin before considering any adjustments in activity? Specifically, if we disregard the water-to-oil ratio, we are observing a general trend in the industry towards deeper intervals, which tend to have higher water content. This suggests there is significant momentum regarding water growth before any activity changes are taken into account.

Yes, that's a great point, Derek. This dynamic is particularly evident in the core area of the Stateline, specifically Northern Loving County and Southwestern to Central Western Lea County. Over the past few years, we've observed an increase in water to oil ratios in that region, primarily due to flatter production decline rates. If you analyze the wells by their vintage, you can see this trend. Therefore, considering the shallower production decline rates in that core area along with the focus on deeper formations—which tend to have higher water content—you can expect water growth to significantly outpace oil growth. While we haven't committed to a specific growth percentage, as it largely hinges on how producers develop these deeper formations in terms of timing and mix, we are confident in stating that, in the core development area, water growth will surpass oil growth for the foreseeable future.

Terrific. And then as my follow-up, I wanted to ask how you guys are thinking about the desalination opportunities your peers are pursuing. I'm really thinking about this more from the standpoint of a WaterBridge perspective and the power opportunities you just referenced in an earlier question.

WaterBridge is the key player investigating desalination in collaboration with Five Point, their capital partner. We have several pilot projects in coordination with Five Point, which has a solid partnership with Bechtel, a major engineering firm recognized as a leader in this field. Together, LandBridge, WaterBridge, and Five Point are actively exploring solutions. Although we've discussed this in relation to our peers, the cost curve is improving, but there is still work to be done before these solutions can be implemented on a large scale. From LandBridge's viewpoint, we remain neutral but supportive of these initiatives. Ultimately, all these efforts will require land, and we would benefit from the royalty streams they generate. While this is primarily a WaterBridge initiative, LandBridge is willing to assist, as it would be economically advantageous for us and beneficial for the industry and the region overall.

That concludes the question-and-answer session. I would like to turn the call back over to Scott McNeely for closing remarks.

Yes. Thanks again for everyone joining us this morning. Again, another great quarter. Despite the macro noise, we feel really solid heading into the second quarter here and kind of through 2025. Great momentum commercially, great momentum on the M&A front. We look forward to sharing more news with you all here in a few months on second quarter earnings. But as always, if any incremental follow-up would be helpful, please feel free to reach out. We are happy to hop on the phone. But otherwise, thanks again, and have a good weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining, and you may now disconnect.