LandBridge Co LLC Q2 FY2025 Earnings Call

Hello, and thank you for joining us today. My name is Regina, and I will be your conference operator. I would like to welcome everyone to the LandBridge Second Quarter 2025 Results Conference Call. I will now turn the conference over to Mae Harrington, Director of Investor Relations. Please proceed.

Good morning, everyone, and thank you for joining the LandBridge Second Quarter 2025 Earnings Call. I am 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 the 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 our investor presentation and today's conference call will contain discussions of 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 and the appendix of today's accompanying presentation. I'll now turn the call over to our Chief Executive Officer, Jason Long.

Thank you, Mae. We're pleased to report strong second-quarter results, which drove year-over-year revenue and adjusted EBITDA growth of 83% and 81%, respectively. As we pass the anniversary of our listing, it's a good time to reflect on four key factors that continue to differentiate our business model and position us to create sustainable value for shareholders. First, our business is capital-light, enabling us to benefit from continued growth in the Permian Basin without incurring meaningful operating and capital expenditures. This is reflected in our adjusted EBITDA margin of 89% during the second quarter. We remain excited about growth opportunities across the Permian and have increased our land holdings by more than 50,000 acres over the past 12 months to make sure we're in a position to capitalize on such opportunities. Second, owning surface acreage provides significant optionality. Over the past year, we have deepened and developed relationships with clients and blue-chip operators across key industries, including renewable energy and digital infrastructure. That includes our first development agreement for a data center, which was signed in November of 2024, as well as the solar energy project development agreements with affiliates of DESRI earlier this year. We look forward to continuing to explore opportunities to support the development of data centers and other digital infrastructure in the region. While digital infrastructure has not to date represented a meaningful contribution to revenues or related projections, we are actively working to identify additional projects that will add incremental revenue. Third, our diversified revenue streams reduce commodity risk and provide numerous growth opportunities between surface use royalties and revenues, resource sales and royalties, and oil and gas royalties. And finally, our symbiotic relationship with WaterBridge, as we have discussed regularly since the launch of our IPO process in 2024, we see this relationship as one of LandBridge's biggest strategic advantages, providing superior visibility into long-term trends and ultimately, revenue growth. We provide WaterBridge access to underutilized pore space in exchange for market-driven surface royalties from each barrel of produced water handled by WaterBridge on our land, as well as market-driven surface use payments for infrastructure constructed on our land. This relationship with the largest pure-play integrated water infrastructure company in the Delaware Basin helps to drive reliable recurring revenue for our business and compelling returns for our shareholders. Each agreement with WaterBridge is vetted and approved by an established, well-tested corporate governance process and fully disclosed via public filings. Turning to more recent developments. I'm pleased to share that our team has continued to make commercial progress, executing a number of new high-impact agreements this year. First, we recently executed a 10-year surface use and pore space reservation agreement with Devon Energy, securing 300,000 barrels a day of pore space capacity on our East Stateline and Speed Ranches to accommodate long-term water takeaway and disposal for developments concentrated in the core of the New Mexico Delaware Basin. This agreement will begin in the second quarter of 2027 and includes an obligation to deliver at least 175,000 barrels per day. We also executed an option agreement with a large public IPP for the development and construction of a natural gas-fired CCGT plant on our Reeves County acreage to service future prospective co-located data center load demand. This project marks a pivotal step in meeting West Texas' growing power needs, driving transformative in-basin power generation investments. Finally, we're excited to announce a strategic partnership with a leading vertically integrated power generation and solutions provider to accelerate the development of scalable, resilient, and sustainable energy infrastructure in West Texas. This collaboration strengthens our platform by aligning our assets with a trusted partner capable of delivering cost-effective long-term power through power purchase agreements. This initiative is expected to support energy-intensive customers, including data centers, while significantly enhancing the value of our asset portfolio. Turning to recent regulatory developments in Texas. We're pleased to note that recently announced changes governing produced water handling facilities are not only beneficial for our company but ones we fully support. These updates shine a spotlight on our responsible pore space management strategy, underscoring that pore space is not a simple commodity. Instead, our historical and current operating approach prioritizes sustainable use, resulting in superior asset longevity and flow assurance, which in turn delivers a truly differentiated value proposition for our stakeholders. Make no mistake, we are the solution to the issue these regulations aim to address, not part of the problem. Our approach is fundamentally different, and we believe essential for long-term success in this evolving landscape. We're looking forward to the second half of the year and continuing to identify new opportunities to increase revenues. I'll now turn the call over to Scott to walk through the numbers.

Thank you, Jason, and thanks, and welcome to everyone joining us on the call today. As Jason already stated, we're pleased with the quarter and performance throughout the first half of 2025. Our second quarter revenues increased to $47.5 million, up 8% sequentially and 83% year-over-year. Sequential revenue growth for the quarter was driven by surface use royalties and revenue, which increased 31% sequentially. This growth was driven by an increase in easements and other service-related revenue, including several large renewal payments, multiple new projects, and an overall increase in commercial activity on our acreage. Overall revenue growth was partially offset by sequential declines across our two other revenue categories. Resource sales royalties experienced a 26% sequential decline, driven by lower brackish water sales and royalty volumes, and oil and gas royalties declined 19% sequentially, driven by a decrease in net royalty production with volumes falling from 923 BOE a day in Q1 2025 to 814 BOE a day in Q2 '25. Overall, we have successfully shifted our revenue mix in favor of fee-based arrangements versus royalties that fluctuate with commodity prices. Today, such arrangements account for a record 94% of total revenues. The efficiency of our capital model continues to deliver strong adjusted EBITDA, $42.5 million, representing a sequential increase of 9% and 81% year-over-year with an 89% adjusted EBITDA margin. We generated free cash flow of approximately $36.1 million and a free cash flow margin of 76%, which is in line with our previously discussed long-term free cash flow margin expectations of about 70%. We ended the quarter with total liquidity of $95.3 million, including cash and cash equivalents of $20.3 million and approximately $75 million under our revolving credit facility. Our capital allocation priorities remain the same for 2025, and we continue to execute these priorities, which, as a reminder, include maintaining a strong balance sheet to maximize financial flexibility over time. We ended the quarter with $374.3 million of debt outstanding under our term loan and revolving credit facility, which is down from $379.3 million at the end of Q1 2025. Our net leverage ratio was 2.4x compared to the 2.5x at the end of the first quarter. We remain committed to returning capital to shareholders and have declared a quarterly dividend to shareholders of $0.10 per share. Our dividend provides shareholders with the opportunity to share in our successes. Finally, we will continue to evaluate a host of value-enhancing land acquisitions in the second half of the year, which will further solidify our standing in the marketplace. In anticipation of the execution of the DBR Solar opportunity with a large public renewable energy developer and operator, we are adjusting our adjusted EBITDA guidance range for the full year 2025 to between $160 million and $180 million. This adjustment is primarily driven by an expectation that the majority of the revenue associated with the DBR Solar opportunity will be recognized following year-end 2025, later than initial revenue expectations based on an earlier execution of this opportunity. And now we'd like to open up the line for questions.

Our first question will come from Charles Meade with Johnson Rice.

Scott, I would like to continue from where you just left off regarding the DBR Solar project. Can you provide more details about the history of this project and its timeline? You mentioned the $10 million of EBITDA revenue expected in 2025, but could you clarify what led to this change? It seems like there has been a shift, but can you confirm that the project is still ongoing?

Yes, Charles, I’m happy to elaborate. This solar project has been in the works for several years. We completed all the necessary preparatory tasks, including handling tax abatement and coordinating with mineral owners, which were part of our surface rights from the acquisition we finalized in 2021. We initially planned to market the project to developers last year since it's located right next to the primary site linked to the data center opportunity we explored last year. However, we decided to wait on marketing until we finished that project. We secured an option agreement with the data center at the end of 2024, and we will now move forward with marketing the solar facility in early 2025. We anticipated generating about $10 million based on our consultants' insights regarding typical projects but, as I’ve mentioned previously, these figures depend on our commercial discussions. Fortunately, we have made solid progress with several reputable developers and have chosen a great partner. We are eager to share more information soon. With the current timing of expected payments and revenue recognition extending into the next year, we are excited to finalize this project. It demonstrates our capability to pursue a diverse range of opportunities while maintaining our focus on long-term value creation rather than just quick cash flows, especially when they are not the most beneficial for the company. This project exemplifies that approach.

Got it. That's helpful. I appreciate it. And then as a follow-up, I wanted to ask about the deal that you guys signed with Devon to bring produced water to East Stateline and Speed Ranch. And really, my understanding is that Speedway Pipeline, which I guess secondly isn't LandBridge, but you guys are building capacity on that line. So can you just put that Devon deal in the context of the Speedway line that is going to be coming to your Speed Ranch?

Yes. I mean you could see in the map, there are certainly some capital synergies for WaterBridge as it relates to this Devon project and the broader Speedway project. I think from LandBridge's perspective, it just is an incredibly exciting opportunity. I mean this was one where I think we clearly have a close relationship with the Devon team via WaterBridge and their interest in WaterBridge. But I think this is just a real reflection from a very smart, prudent operator who's looking out at kind of the realities of what's needed from a pore space perspective to accommodate future growth. From our view, this is somewhat of an inflection point, certainly in new contract structure where you've got an operator going directly to a landowner saying, I need to lock up large amounts of pore space over an extended period of time, and I'm willing to give you a meaningful guarantee to backstop that because that's how critical pore space is going to be to my development program going forward. And so that was ultimately what kind of catalyzed the discussion between LandBridge and Devon directly and led to this. Now how it relates to Speedway, this is, again, from WaterBridge's perspective, they complement each other, but not necessarily the same. I think this is great momentum both from the WaterBridge side and clearly from the LandBridge side.

Yes. The only thing I would add, Charles, is that there are definitely volumes and pore space being reserved up on Speed Ranch, but also on our East Stateline. So it's a combination of both.

Yes, I think it's right. I mean it gets back to the redundancy that we're able to offer producers is unmatched. And again, it gets back to that differentiated approach, that differentiated value proposition, and that was ultimately what got Devon excited about the opportunity here directly with LandBridge.

Congrats on your operational accomplishments over the last quarter. With my first question, I wanted to ask for your thoughts on the Aris acquisition by WES. While we question it from a value recognition perspective, it seems to support your thesis for the value of pore space. So I'd love to hear your thoughts on that.

Yes, I’d like to address this from LandBridge's perspective. The main takeaway from our viewpoint is the importance of pore space. The initial slide shared by Western highlighted the McNeill Ranch and its pore space as a significant aspect of the overall value. Broadly speaking, while there’s more to discuss regarding valuation, it’s clear that Western is prioritizing pore space. This emphasis has been evident not just in this deal but also in our earlier agreement with them regarding the Pathfinder pipeline. Responsible water management going forward hinges on the significance of pore space and surface access. We’ve seen this reflected in agreements with companies like Devon and our previous dealings with Western. Additionally, savvy Midstream operators are placing considerable value on the pore space they control, as demonstrated in their M&A activities with firms like Aris. All of this strengthens the message we’ve been conveying to the market over time.

Great. And for my follow-up, I wanted to shift the focus to your power announcement for the quarter. Are we safe to assume the IPP reference would be a new development for the Delaware, i.e., not CPV Basin Energy or Basin Ranch Energy, and that IPP has a line of sight to a combined cycle gas turbine given the tightness we're seeing right now among the OEMs.

Yes, I am hesitant to provide too many details at this time because the larger public IPP plans to release a joint press announcement in the coming weeks that will address many of those specifics. I can share that it is a well-known brand, and when the announcement is made, we will discuss the offering in detail. While I regret the need to hold off on that information, we look forward to sharing more details in the upcoming weeks.

Our next question comes from the line of John Mackay with Goldman Sachs.

I wanted to start with the Devon deal. Could you update us on how much pore space is currently allocated? Additionally, how are you approaching the land acquisition market to expand on that?

Yes. I mean as you think about what we've identified from a pore space standpoint, we've identified way more than 5 million barrels a day of potential access to capacity, and that's the underutilized pore space. As you think to answer your second question, we continue with our geological teams to look for additional pore space and underutilized access to land as we expand our position. So that's definitely top of mind.

That's fair. And then maybe just looking at the quarter, easements were stronger. You guys kind of touched on that. Were any of these renewal payments kind of one-offs in there? Or is this kind of a new good run rate? And then similarly, resource sales being a little softer, I think, makes sense given activity levels, but also just wondering if there's any kind of more one-offs in there.

Yes. No, there's always going to be a mix of renewals versus upfront payments. And so kind of important to note that. I think the bulk of the upfront payments we get, though, typically manifest themselves down the road as some type of renewal. Very rarely do we get like a one-off and then it’s done, but certainly not never. As you look through the rest, obviously, surface use royalties saw a great quarter there, I think, largely in line with our expectation. Yes, ultimately, I think the way you need to think about it is it's not going to be like a run rate going forward, so to speak, where that will be repeated, but I think you'll start to see it just compound over time. And there'll be a little bit of lumpiness kind of quarter-over-quarter. But as we've seen historically and kind of continue to progress today, the slope is up to the right, and that will continue.

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

I wanted to ask for a little bit more color on the new Texas Railroad Commission guidelines on injection pressure. Can you maybe summarize the new rules and compare that to your internal view of water disposal and competitive position in the basin?

Yes, absolutely. When considering both the WaterBridge and LandBridge aspects, what sets us apart is our access to a large, connected area of land. This allows us to distribute the injection more evenly, which is crucial given the new rules and regulations aimed at preventing concentrated injection in specific locations. This capability not only helps us manage injection pressure but also enhances our strategic advantage. Our continuous footprint is unique, especially near the state line in New Mexico, positioning us well to take advantage of the increased volumes emerging from that region.

Yes. I mean I would just add, on the WaterBridge side, we put out a press release endorsing the new regulations. We think it's great for the industry. We think there's a real healthy focus now on how do we add longevity to the industry and how do we be more thoughtful about these longer-term approaches. I think we're really proud in the sense that both from the WaterBridge and the LandBridge side, it mirrors our operating philosophy and the kind of the philosophy we've always deployed when we think through building out our assets in our company. And it was the recognition of the problems from these differing approaches, this overconcentration of assets, that ultimately led us to start LandBridge back in 2020, 2021. We knew large contiguous pore space that had been unutilized or underutilized historically would be immensely valuable for WaterBridge, but again, for the broader industry. And so we think it's great. It's great to see, call it, the spotlight shine on this now because we do think it's important. And again, we do think it highlights what it is we bring to the table.

And I think those are important details. definitely important for the LandBridge story. For my follow-up, any thoughts on the long-term potential EBITDA impact of the Devon deal or even some high-level thoughts on the royalty rates compared to your current rates? I realize you may be hesitant to give too many details.

Yes. So we can't provide the exact royalty rate. I'll say that the rates we're getting today for deals, this one included, certainly align with our view of the prevailing market rate at the moment. And so we feel very confident that how we think through rate structure versus our differentiated value proposition is very much aligned to the commercial success that we would hope to see. And I think the market is kind of proving out our view. I'll leave it at that. But I mean, as you would imagine, great impact for us, obviously, from a financial perspective, as this comes online here in early '27.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

I have two questions. The first concerns the power generation deal you announced. Is there any connection to Five Point? Is this specifically related to that particular data center project, or is it a more general power generation deal that could apply to any data center project there?

No, good question. So the agreement that we're talking through here is directly between LandBridge and the IPP. There is the potential for Five Point's PowerBridge platform to step in, in some capacity, but that's by no means firm either way. I would say this was one where the IPP saw the value that LandBridge brought to the table, was happy to do a deal with us. I think that said, as we've said in the past, the beauty of the Five Point ecosystem is they've got these different enabling entities to ensure that deals can get across the finish line to the benefit of all companies. And so when we think through what PowerBridge could bring to the table here, it's really a question of is there a gap between LandBridge and the IPP where maybe PowerBridge stepping in could fill that gap to ensure this project gets brought online. Uncertain whether or not that's needed at this point in time. But again, it's a valuable tool, I think, that we have available to us.

Yes. One thing I would add is that the IPP recognized the demand for power in the region, not just in relation to data center opportunities. We view this as a significant opportunity across the board.

And did you say the entity is called PowerBridge or you were just using that term...

That is no. So that is the Five Point's entity that was announced earlier this year that is run by Alex that is in IPP. No, this is a totally independent public IPP that is not in any way associated with Five Point outside of, again, the potential that PowerBridge, which is a separate Five Point entity, could step in if there is a need.

Okay. The second question is about the Devon deal that you announced. It’s not clear if you’ve shared all the financial details yet, but it won’t take effect until 2027. The data center initiative has been announced as well, but that will also require several years. You clearly aim to grow EBITDA. Considering the announcements made so far, it seems there is generally a lead time of about 12 to 24 months before we start seeing EBITDA benefits, likely leaning more toward 24 months. Should we view it this way? When modeling your growth over the next few years, if a deal hasn’t been announced by a certain date, should we assume that revenue growth will be delayed by two years? We’re trying to get a clearer picture of your activity. It’s evident these initiatives take time to materialize and impact the bottom line, so we’re looking to understand how the EBITDA ramp aligns with the timing of project announcements.

It largely depends on the specific project. Power and renewable projects typically have longer timelines, while water and energy infrastructure projects can be completed much faster. The Devon project is a good example of a company wanting to proactively address future needs, which includes a minimum volume commitment. This isn't necessarily indicative of a build-out timeline but reflects Devon's strategy. Other projects, like the BPX Kraken deal announced earlier this year, are already operational and will progressively contribute not only quickly but significantly to EBITDA over the coming years. The Speedway project is also a strong example; we expect it to receive final investment decision approval in the next few weeks, with capital expenditures beginning by the end of this year or early next year. We anticipate seeing EBITDA contributions from that project as early as the end of this year or definitely in early next year. Therefore, the timing and sequence of these projects depend on their nature rather than being representative of all the commercial projects we are involved with.

But can you just give us a sense of the EBITDA contribution from Speedway, Devon, that we can think about what's going to come online in the next 12 to 24 months?

So we haven't spoken to that publicly yet. I think once we get the opportunity to have Speedway through FID, we can start giving the Street a little better idea in terms of the ratcheting of the cash flow there. I know previously, we've discussed the potential for Speedway to be a 500,000 barrel a day project when it's fully online, which would equate to roughly $30 million of cash flow in terms of royalties, plus obviously the related surface activity that goes on. Now there'll be a sequencing and timing of those step-ups. And once we get through FID, once we get that fully underwritten on the WaterBridge side, we can message that a bit more clearly.

Our final question will come from the line of Lawrence Goldstein with Santa Monica Partners L.P.

I wonder what you could say about the fact that every single major, let's call them, high-tech company announces data centers all over the country, but we hear of nothing in the Permian Basin. Nothing with you. I'm not asking about your company specifically. I'm asking generically, your neighbor, big landowner, TPL. It astounds me that we don't hear a word. We hear data center, data center, data center, billions here, billions there. Why do you suppose we don't hear a word about the Permian Basin?

That's a great question. We're looking at a situation where companies are exploring new areas outside of major cities, which is a change from what many data center companies have historically done. It's taken time for them to become familiar with the region, understand the risks, and recognize the opportunities. So far, we haven't faced any objections regarding the fundamentals of the region, which seem to be promising. The challenge lies in getting these large, cautious tech companies comfortable enough to invest in a place they haven't operated in before. However, we are optimistic about our conversations. There are likely others in the Permian Basin who share this sentiment as it takes time for these companies to adapt. Once the first major player decides to invest, we expect a fast follow-on effect from others. We've also seen increasing interest in West Texas, with several projects announced in cities like Abilene and Lubbock. People are starting to feel more at ease moving away from bigger urban centers to other populated areas in West Texas, although still not specifically in the Permian. Overall, we believe these trends are beneficial for us, and we think the strong fundamentals will eventually lead to progress in the region.

Yes. And those fundamentals are easy to speak to, right? It's access to large contiguous land, access to cheap power, both on grid and behind the grid as we talked through this opportunity with the new IPP and then access to Water for cooling. So it checks all the boxes 100%. To Scott's point, once the first domino falls, I think there'll be a lot more heading our way.

It seems logical, but personally, I find it illogical. One major issue is the absence of an asset population in the area. I’m sure you’re familiar with recent articles, particularly a lengthy one in the New York Times from about two weeks ago, addressing the situation where some towns are left without water for their faucets or toilets. Yet, you mentioned it takes time to understand the available assets and their lowest prices. In Oregon and the Pacific Northwest, they remain unaware of this situation as well. Your asset situation is quite apparent, yet no companies have acknowledged it. So when you say it takes time for them to learn about it, I must insist, they have not even heard of Texas.

But we feel great about where we're at in a lot of those talks right now and aim to bring the market some good news as it relates to that as quickly as we can here.

And that will conclude our question-and-answer session. I'll hand the call back over to Scott McNeely for any closing remarks.

Yes. Thanks again for everyone participating today. As always, we very much appreciate the support and the engagement. Please feel free to reach out to us with any questions. But otherwise, we hope you all enjoy the rest of your summer. Thanks.

Thanks.

This concludes today's call. Thank you all for joining. You may now disconnect.