Greetings and welcome to Texas Pacific Land Corporation Second Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shawn Amini, Investor Relations. Thank you, sir. You may begin.

Thank you for joining us today for Texas Pacific Land Corporation's second quarter 2024 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 website. As a reminder, remarks 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 will 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, Tyler Glover and TPL's Chief Financial Officer, Chris Steddum. Management will make some prepared comments, after which we will open the call for questions. Now I will turn the call over to Ty.

Thanks, Shawn. Good morning, everyone and thank you for joining us today. Our second quarter 2024 results demonstrate the overall strength of our business as TPL has positioned itself at the forefront of the Permian Basin's emergence as a world-class resource. Performance was led by another outstanding quarter from our Water Services and Operations segment. We set corporate records across virtually every major water performance indicator, water sales revenues, water sales volumes, produced water royalties revenues, produced water royalties volumes, total water segment revenues, total water segment free cash flow and total water segment net income. Our prior investments in the people and commercial development continue to provide a substantial windfall for the company. Honing in on water sales, our team has successfully captured opportunities both on and off TPL acreage with sales volumes averaging 800,000 barrels per day during this quarter. Upstream operators utilizing simul-frac, trimul-frac and co-completions as part of their development strategies are driving robust demand for TPL water as our strategically located infrastructure network has the size and reach to reliably accommodate ever-increasing demand for both brackish and recycled water. Our top 5 customers for water sales this quarter were Exxon, Conoco, Occidental, EOG and BP. Customer quality doesn't get much better than that. On the produced water side, we are reaping the benefits of our prior and ongoing commercial and contracting efforts as upstream and midstream operators drive produced water volumes into TPL's surface acreage. We collected a royalty on over 300 million barrels of produced water this quarter, which represents a 43% increase versus the same quarter last year. Our top customers here again represent some of the highest quality operators in the Permian, names like Conoco, BP, Coterra, and Occidental. For our produced water desalination and beneficial reuse endeavors, procurement and process and equipment testing continues on our 10,000 barrel per day test facility, which we refer to as Phase IIb. We still expect completion of this facility in the middle of next year. CapEx related to these efforts is approximately $4 million year-to-date. On the beneficial reuse side, our alfalfa plot is currently operational and going very well, and we continue to make good progress on various permitting processes with regulatory agencies. As we discussed last quarter, we believe produced water desalination and beneficial reuse will potentially play a critical role in providing sustainable produced water solutions that will allow the Permian to maintain robust development activity. Oil and gas royalty production of approximately 24,900 barrels of oil equivalent per day was up slightly from the previous sequential quarter. Encouragingly, our line of sight inventory has expanded to 19.8 net wells, comprised of 6.3 net permits, 9.5 net drilled uncompleted wells, and 4 net completed but not producing wells. Furthermore, we saw a large ramp in new permit activity during second quarter with 344 gross and 5 net new permits. Permitting activity was especially strong in our Loving Northern Reeves and Central Midland subregions. This level of near-term inventory and new activity gives us a lot of confidence our royalty production can sustain an attractive growth trajectory. For the second quarter 2024, oil and gas royalties comprised 52% of TPL's total consolidated revenues, which makes it the single largest revenue source TPL has. Although commodity price volatility over the last year or so has dampened top line revenue growth versus recent prior years, we still very much consider oil and gas royalties to be one of the highest quality cash flow streams, not just within the energy industry, but in the market more broadly. As many of you know, oil and gas royalties provide owners a fixed percentage of revenues and production from oil and gas wells, but without being burdened by any capital costs and almost none of the operating costs. Although they do bear exposure to fluctuating commodity prices, their high-margin capital-light attributes, meaning that even during periods of depressed commodity prices, royalties can still generate significant positive free cash flow. This is especially pertinent during periods of high and persistent inflation like we've experienced over the last few years. Rising development expenditures and labor expenses effectively raises the global oil supply cost curve. Thus, for operators to hit the same pre-inflationary return targets, they would need higher commodity prices. In other words, operators are constantly fighting a battle where cost inflation diminishes their returns and less commodity prices eventually rise commensurately. However, from the royalty owners' perspective, higher upstream development costs do not directly impact our economics. Over the long term, as commodity prices potentially reset higher in response to a structurally higher global supply cost curve, then royalty owners capture the incremental revenue upside without bearing the burden of higher expenses. As we've discussed many times before, over the years, we've actively searched for external assets that look like TPL across surface water and royalties. On the royalty side specifically, TPL is well positioned to consolidate a vast opportunity set of Permian Minerals and Royalties. Our current royalty position of 500,000 gross royalty acres provides unique advantages spanning across both the Midland and Delaware portions of the Permian Basin. With our industry-leading actively managed surface and water business, we have developed deep relationships with virtually every upstream, midstream, and water operator as well as land and mineral estate owners across the basin, giving TPL unique access to off-market packages and extensive intel on development patterns. For potential mineral and royalty acquisitions, we evaluate each package with a bottoms-up intrinsic value approach. The goal with any acquisition is to generate at least double-digit IRRs on invested capital and to generate increased long-term free cash flow per share. Because TPL already owns great assets, we have no interest in diluting down our asset quality, our growth prospects, or our unique business model. Any asset acquisition has to enhance the quality of our overall asset portfolio. It has to augment our growth runway. It has to support our high-margin capital light business model and ultimately, it has to increase TPL's intrinsic value per share. To this end, we employ an excellent team across M&A, reservoir engineering, GIS, and minerals and royalties management, all with extensive industry experience. We have internally developed robust technology-driven data management systems that allow us to efficiently process, monitor, and manage our mineral and royalty assets, which means we can roll out mineral and royalty assets in a very efficient manner without a proportionate increase in costs. The opportunity set for minerals and royalties is quite large. Although TPL's royalty acreage overlaps with some of the highest quality subregions in the Permian, there is still plenty of opportunity to consolidate royalties, both within our existing acreage footprint and also within other Permian subregions that also contain excellent resource quality. Just within our existing asset footprint, we can buy royalties that are literally identical to what we already own. For example, in our core Texas Northern Delaware acreage, our typical royalty interest for a 1 mile by 1 mile section is generally 1/16th or 6.25%. With well laterals today typically extending out to 2 miles, a common drilling section unit or DSU is generally comprised of 2 adjacent sections. Thus, for a 2-mile well lateral, our section would be one half of that DSU. So our net revenue interest in that would be one half of 6.25%, resulting in a net revenue interest of 3.125%. In the state of Texas, where the vast majority of mineral and royalty rights are privately owned, the total aggregate mineral and royalty interest is generally 25%. TPL's average net revenue interest across our entire portfolio is likely between 1% and 2%, which means that the other 23 or so percent are held by third parties. In other words, just on the DSUs that overlap with existing TPL royalty acreage, third-party ownership of those minerals and royalties is approximately 10 times TPL's net ownership. Looking beyond our current royalty footprint on the Midland side of the Permian, TPL's royalty position is much more fragmented with much smaller net revenue interest compared to our Texas Northern Delaware footprint. There are numerous subregions within the Midland that contain superb shale reserves where TPL does not have a meaningful position, and adding resources here could be just as lucrative and high quality as our current portfolio. On the Delaware side, TPL's core Texas Northern Delaware royalty position stopped at the state line of Texas and New Mexico. Arguably the biggest and most lucrative wells in TPL's portfolio reside in this region. However, the excellent geology that lies under our Texas position extends well into New Mexico, where TPL does not currently own royalties. The resource quality on the New Mexico side is every bit as good as the Texas side, and the rock there is widely considered some of the absolute best shale reserves found anywhere in North America, potentially adding mineral and royalty resources there would further high-grade our current royalty position. One last way to contemplate the sheer size of the overall consolidation opportunities is to consider that the Permian currently produces north of 6 million barrels of crude oil per day. Assuming that the aggregate mineral and royalty interest held by third parties is around 20% across Texas and New Mexico, excluding production on federal and state lands, would imply that roughly 1 million barrels per day of crude oil production is held by private mineral and royalty owners. Contrast that with TPL's current net crude oil royalty production of approximately 11,000 barrels per day. In other words, TPL's royalty production, ourselves one of the largest royalty owners in the country still only represents a minuscule fraction of the total production accruing to mineral and royalty owners in the Permian. In summary, we believe Permian oil and gas royalties are some of the most attractive assets investors can own. The opportunity set to acquire high-quality mineral and royalty assets is immense. And with TPL's extensive network and deep relationships from our legacy royalty and surface ownership, we have a unique combination of off-market deal access, technical wherewithal, and a fortress balance sheet to roll out Permian minerals and royalties that public equity investors would not otherwise have access to. As our current royalty and surface footprint is already a free cash flow machine and with plenty of runway for future growth, we can remain selective. We don't need to acquire anything to grow. Any M&A pursuits can be purely opportunistic. We can discerningly consolidate assets that will enhance the company's intrinsic value per share, and we can and will remain disciplined. This has been the same strategy we've deployed for years now, and it's one that has served TPL and our shareholders well. And now as the Permian has emerged as an unequivocally world-class resource basin, TPL has never been in a better position to beneficially exploit this tailwind in our own backyard. Finally, I want to give shareholders a heads up that TPL will be ringing the opening bell at the New York Stock Exchange next Monday, August 12. TPL common stock and its predecessor subshares from our trustees have been listed on the NYSE since June 27, 1888, making this our 136-year anniversary. We're told by the NYSE that TPL is their seventh longest listed company. This also comes off our recent inclusion into the S&P 400, which is another great milestone. There are not many companies that have had a history as long-standing or colorful as TPL. And even though TPL may be one of the oldest public companies in existence, there's still a lot to be excited about for our future. The enterprise today is as strong and as profitable as it's ever been. The opportunity set has never been greater, and the company is primed to last another 100-plus years.

Thanks, Ty. Consolidated revenues during the second quarter of 2024 were approximately $172 million. Consolidated adjusted EBITDA was $153 million, and adjusted EBITDA margin was 89%. Diluted earnings per share was $4.98, which represents 14% year-over-year growth. Performance year-over-year was driven by high royalty production, water sales, and produced water royalties. As discussed last quarter, weak natural gas prices at the Waha hub, which is the local pricing hub in West Texas, led to low realized natural gas prices. Average benchmark Waha prices during the second quarter of 2024 were negative, and that negative pricing has persisted into early third quarter so far. Weak pricing is in large part due to insufficient natural gas pipeline capacity out of the Permian Basin. However, the Matterhorn natural gas pipeline is expected in service later this year and once in service, we would expect to see reduced locational basis differentials. Last June, we announced that we had set a target cash and cash equivalents balance of approximately $700 million. Above this targeted level, TPL will seek to deploy the majority of its free cash flow towards share repurchases and dividends. In conjunction with this announcement, we also declared a $10 per share special dividend. Our cash and cash equivalents balance at the end of the second quarter 2024 as of June 30 was approximately $895 million, though the $10 per share special dividend was paid in July with a total outlay of approximately $230 million. The target cash balance is intended to provide a framework and some predictability on how the company will allocate cash. The company continues to generate substantial free cash flow while maintaining a pristine balance sheet. Even beyond this most recent special dividend, the company still retains tremendous optionality to return additional capital to stockholders and to invest in attractive growth opportunities. We're very much in a position of strength to maximize shareholder value, and we're excited about the opportunities and option value our business can generate. And with that, operator, we will now take questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Nate Pendleton with Texas Capital. Please proceed with your question.

Good morning. Thanks for taking my questions. Starting on the quarter, you posted really strong revenue and volume numbers for both water sales and produced water. Can you speak to the drivers of the sequential increases we are seeing there? And can you touch on the sustainability of those results given the couple of quarters of increases?

Yes, Nate, thanks for the question. I think on the source water side, 73% of our sales this quarter were off of our footprint outside of TPL's acreage. So that number continues to grow. We were over 70% last quarter as well. So the team has done a really good job of just expanding our reach, selling water further and further outside of our footprint. The team has also done a really good job of building additional storage and infrastructure that's allowing us to sell more barrels per day. And then I think just with simul-frac and trimul-frac, the volumes needed delivered to location are continuing to grow. And that's a real advantage for us because we're one of the few water service operators that have the ability to actually supply those kinds of volumes. I think on the produced water side, we've had a few new tie-ins this quarter that brought some water in. But a lot of that additional volume is in areas where we have existing contracts. And so we're seeing some really robust activity in those areas where we've got some of those larger AMI-style agreements that we've talked about in the past. And then with co-completions, you're just seeing some lumpier volumes as well, and we're very well positioned to take those volumes. We've got a lot of active capacity, a lot of permitted capacity. And so there's definitely some room to grow from an infrastructure standpoint. And even though we don't operate that infrastructure, our BD and water teams do a great job of making sure we're working with our water midstream partners to make sure that additional capacity is available for operators in those areas to meet their needs and make sure we don't bottleneck. So I think it is sustainable. We've had a really strong first half of the year. I think we'll continue to see good pace of development. The back half of the year could be a little softer than the first half, but I think overall, we're setting up to have a really nice 2024, both on the source water and the produced water side.

Definitely. Thanks for all that detail. And regarding the increasing net well inventory you referenced in your prepared remarks, how do you view the outlook for activity in the near term? And can you speak to how you expect the oil cut to trend over time?

Hey, Nate. This is Chris. When we examine the near-term inventory, it's clearly promising and positions us for significant growth shortly. Of course, many of the DUCs and permits need to be converted, but the positive aspect is that we have four cups, and those usually come on quickly, leading to checks being issued a few months later. This indicates a strong position for the rest of the year, and if the permits and DUCs are converted, it should create a solid foundation for early 2025. Regarding the oil cut, I believe a figure around the mid-40% range is realistic. It can fluctuate, as new wells typically yield higher oil cuts initially, which taper off over time. Nevertheless, we've consistently been within that mid-40% oil cut range, and I expect it to remain stable in the near future.

Got it. Thank you. And going back to the prepared remarks regarding the minerals M&A market. Can you provide some perspective on what the ideal deal sizes your team is looking at and some of the key criteria that your team is using to assess potential deals across the portfolio?

Yes. I mean, I would say we're definitely more focused on deal quality than deal size. I mean, some deals are small enough. They're not worth the brain damage and your larger deals have less competition. But again, just to reinforce, we're focused more on deal quality than deal size.

Okay. Got it. Thank you. Regarding recent earthquakes in the Permian, can we get your perspective on what you're hearing from the industry and any potential impacts on your acreage that you can speak to?

Yes. There was recently a 5.0 in Scurry County, which is a good way is probably 100 miles from many of our closest operations. So we haven't been affected by that one. Robert Crain is on the call. I'll kick that over to you, Robert, just to talk about some of the others that we've had and kind of how you view that in relation to our operations.

Yes. Thanks, Ty. Real quick on the Scurry County, as I mentioned, good distance away from any of our operational areas. The road commission is investigating. And I think it's in nature, it's going to be a little bit different from some of the seismic activity that you see more in our acreage mainly due to the lower water injection rates over there and a possible contribution from EOR activities that are occurring in that area. But when we go back to the historic seismic activity that we've seen in the Delaware and the Midland Basin, on a significant decline. The operators and regulators worked very well together to identify the cause of those being deep disposal, and you've seen significant curtailments and shut-ins of the majority of deep disposal wells and all of the contributing deep-disposal wells; it's been a benefit to us. As you've seen now, those deep disposal volumes need to go into more shallow formations, a good deal of which are located on our properties.

That's really encouraging. Thanks for all that color. And then last one for me. Regarding your prior announcement to target cash position of $700 million on the balance sheet. Can you provide some perspective on how you arrived at that level and how the team makes the decision between using that cash for share buybacks or dividends for a given period?

Yes. Nate, this is Chris. I think the way that we've kind of targeted the absolute number is just thinking about opportunistically how much cash would you want to have to kind of be effective in the market. And that could be both for potential buybacks as well as potential M&A. And we felt like that level of cash gave us a significant advantage in the market that if there were great opportunities out there, we would be in a position to act quickly on them. And then as far as like how it gets deployed, I think we've spent a lot of time talking about it, but it's really just fundamentally return-driven. We're looking to see where we can get the best risk-adjusted returns. And if that's buybacks, we're going to put more of that money toward buybacks if that's potentially adding third-party acreage, whether it's surface, royalties, water related, we're going to try to put more of that money there. And if we think that neither of those two opportunities are sufficiently attractive, then a lot of times that gets moved toward a dividend. So that's kind of the framework that we've tried to always use is try to put it towards the best risk-adjusted returns. And again, like we said, once we feel like we kind of have that sufficient capital to be competitive and effective, then at that point, it just makes sense to return all the remaining excess cash flow, which continues to be very robust to our shareholders.

Makes sense. Appreciate your time.

Thanks, Nate.

Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Hey, good morning. So my first question was regarding your intention or evaluation of acquiring more royalty interest. Is it feasible to actually acquire anything in the Permian, just given what you've said, it is a premier asset area? Or are you trying to leverage the lower nat gas prices at the moment to find deals out there?

Good morning, Hamed. Thanks for the question. The Permian is a premier basin, but we're still seeing a lot of opportunity to acquire high-quality assets, like I talked about a little bit in the prepared remarks. A lot of those assets are within the same footprint that we already own a lot of times in the same DSU. And so that market is still very fragmented, and there are a lot of interests trading hands. So I think we'll continue to see a lot of opportunity on that front. And with the intelligence that we gained through our surface and water business and access to off-market deals, I think we've got an advantage on a lot of other buyers in the basin as well.

Okay. And then on the water segment side, what is the issue? Is it competition? Is it other sources as far as not being able to sell as much water to the people on your land that you have to go outside of the area that you cover?

Well, I think if I understand your question correctly, is there competition for wells being completed on our land? I think to answer that, the reason that we're selling more and more water off of our footprint is just to expand the business, capture more of the overall Permian market. So we're still sourcing a ton of completions and providing volumes on our land. We just continue to expand our infrastructure and network to sell more water off of our land, and that's how we've been able to capture more of the overall market to increase our overall daily production and sales, and that's why you're seeing the increase in revenue. And a big shout out to the team, the water team and the BD team, I think we started last year at roughly 50% of our sales were off of our footprint, and they've been able to grow that to 73% this quarter. So they've done a tremendous job there.

Great. Thank you.

Thanks, Hamed.

Thank you. We have reached the end of the question-and-answer session. And with that, the conclusion of today's call. Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.