Greetings, and welcome to the Texas Pacific Land Corporation Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce Shawn Amini, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good morning. Thank you for joining us today for Texas Pacific Land Corporation’s third quarter 2021 earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission. These documents are available on the Investors section of the company’s Web site at www.texaspacific.com. 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 most 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. 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, Ty Glover; and 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.

Thank you, Shawn, and good morning, everyone. Third quarter 2021 was a tremendous quarter. TPL set quarterly records for consolidated adjusted EBITDA and royalty production. This was our second best quarter for revenues in our water business and what a difference a year makes. Compared to the same quarter last year, our total consolidated revenues are up 66%, royalty daily production is up 24%, total water revenues are up 51% and total consolidated free cash flow is up 60%. Although the past 18 months have been among the toughest we’ve seen in the industry, TPL’s vertically integrated business model, high margin cash flows and strong balance sheet allowed us to successfully navigate through the downturn. One metric we focus on and prioritize and I think demonstrates the resiliency and quality of our overall business is our consolidated adjusted EBITDA margin. For the first half of 2021, our adjusted EBITDA margin was 83%. Amongst members of the S&P Oil and Gas Exploration & Production Index, which includes TPL, our first half 2021 adjusted EBITDA margin was the highest of the group. If TPL were a member of the S&P 500, our adjusted EBITDA margin would have been in the Top 10 for the same period. For this most recent quarter, our adjusted EBITDA margin has improved even further to 87%. Today, with higher commodity prices and continued growth in the Permian Basin, combined with years of hard work by the TPL team in developing and executing our vertically integrated business model, we’re pleased to be in a position to fully capture the value from our asset base. Our active management approach has taken our legacy asset base, which was both ideally situated yet raw and undeveloped and created multiple high quality cash flow streams. To this point, today, I want to…

Beginning with our operating results, for the third quarter of 2021, we had net income of $83.8 million or $10.82 per share. This compares to 46.3 million of net income or $5.97 per share in the same quarter of the prior year. The increase in net income and earnings per share in the third quarter is primarily due to an increase in royalty and source water revenues compared to the third quarter of 2020. Total revenue for the third quarter of 2021 was $123.7 million compared to $74.4 million for the same quarter last year, a 66% year-over-year increase. Adjusted EBITDA was $107.6 million compared to $62.3 million for the same period last year. Oil and gas royalty production volumes were approximately 19.5 thousand barrels of oil equivalent per day in the third quarter of 2021 compared to 15.7 thousand barrels of oil equivalent per day for the third quarter of 2020. Production this quarter benefited from the increased activity on our royalty acreage and from production associated with periods prior to the beginning of the most recent quarter. We were able to fully benefit from rising oil, natural gas and NGL prices as we were completely unhedged during the quarter, and we currently remain unhedged today. At the end of the third quarter 2021, TPL’s royalty acreage had 7.3 net well permits, 7.8 net drilled but uncompleted wells, 1.9 net completed wells, and 45.5 net producing wells. Water revenue was $36.9 million in the third quarter of 2021, up from 24.5 million in the prior year. This increase was primarily due to year-over-year increases in both source water sales volumes and produced water royalty volumes. Moving to the expense side, operating expenses were $20.5 million for the third quarter of 2021, up from $17.6 million in the third quarter…

Thank you. We will now be conducting a question-and-answer session. . Our first question is come from the line of John Annis with Stifel. Please proceed with your questions.

Good morning all, and congrats on a strong update.

Good morning.

My first question is around that – good morning. Based on Q3 commentary from Chevron regarding increase in activity in the Permian and the rig adds from privates, can you frame up how you see activity trending in Q4 and into 2022 based on your latest permit scrapes?

Yes, sure, John. Hi, this is Chris. Thanks for the question. So yes, we've definitely have seen and continue to see strong permitting activity. As just as reference, in the first quarter that probably on a net permanent basis remain the best quarter that we saw so far this year. Second quarter was a little bit slower, but then we saw another big uptick in the third quarter. And Chevron, for instance, was one of the companies who filed quite a few permits in 3Q and was definitely up from their level of permitting activity on TPL during the first half of the year. And so with the backlog of permits that we see today, I think we view that as a very positive indication for fourth quarter and continuing on into 2022.

Great. And then for my follow up, perhaps for Ty, given the increase in commodity prices, could you speak to the A&D market and the current opportunity set? And then perhaps touching on your appetite to pursue potential opportunities?

Yes, sure. Thanks for the question. We've looked at quite a few deals lately. As we've said, our bar, just for TPL, is pretty high. And the bid-ask spread on those high quality deals has been a little wider in the past, but we're starting to see that narrow with commodity prices where they're at. We see a lot more deals start to come on, hit the market last couple of months. So that's a big positive for us. We've seen a lot of competition on the smaller deals, but starting to see some bigger deals at the market. So we feel really good about it.

Perfect. Thanks for the color. And if I could squeeze one last question and thinking about your strong cash position, could you speak to your view on the progression of your return to capital strategy as we look forward in time?

Yes. Again, I think like Ty said, when you think about TPL’s capitalization for one, because we carry no debt and no RBL , maintaining a healthy cash balance has always been, and to the extent that remains the case, will always be a big part of our strategy. And so as Ty has alluded, I think when we think about that cash and balance, from our perspective, it provides a lot of optionality and value to us to be able to utilize that in the near term. And so when we think about it, we think that with the opportunity set in front of us, we like having that large cash balance to be able to utilize, if the right opportunity comes along.

Thank you. Our next question is come from the line of Hamed Khorsand with BWS Financial. Please proceed with your questions.

Good morning. I just wanted to see -- given that the dynamics of the players involved in the Permian is changing, how does that change your business in any way, as far as elongating negotiations for royalties? Maybe the new players aren't well versed in how the industry works in the Permian?

Hi. This is Ty. I would say, most of the consolidation that we've seen has been between like legacy Permian operators, most of whom we have existing relationships with. We have gained a couple of new additional strong relationships through some of the consolidation. But I think, overall, for us, it's been positive across all of our business lines. Just with where our acreage sits, the relationships we have prioritizes some of our acreage that may not have been previous to some of this consolidation. So I would say, overall, it’s been very positive for TPL.

And my other question was, do you expect increasing your Delaware Basin acreage use in '22? And how much -- if you can talk about how much that would look like?

Yes. As Chris alluded to earlier, we saw strong permitting from our top three with Chevron, EOG and Cimarex in third quarter. That's all Delaware Basin. Occi, Shell and Exxon were four, five and six. A vast majority of that’s Delaware Basin as well. So, yes, I think everything that we're seeing indicates stronger activity in the Delaware going forward.

Okay, great. Thank you.

Thanks, Hamed.

Thanks, Hamed.

Thank you. Our next question is come from the line of Chris Baker with Credit Suisse. Please proceed with your questions.

Hi. Good morning, guys. Thanks for taking the questions. I just wanted to follow up on the strategic outlook. You talked about wanting to retain cash for the right opportunity, which makes some sense. If I think about the inventory depth today, it's already well ahead of peers and clearly between now and the robust growth this quarter. Could you maybe just talk about the kind of opportunities and what’s sort of at the top of your punch list when it comes to potentially deploying that excess cash?

Yes. Like I stated before, our bar’s pretty high. So we're looking for very similar quality to what we already own. We like the vertically integrated nature of our assets. So always interested in integrated assets going forward, something -- or we can buy the surface, the minerals got a water component. I don't think our focus has changed any from what we've talked about in the past. Like I said, on those really high quality assets, the bid-ask spread has been a bit wider in the past, but we're starting to see that narrow. So we feel really good about the opportunity set and our ability to transact in the near term. And that's -- as Chris alluded to, that's why we're going to hold on to some dry powder.

Great. And then just in terms of -- in the sort of potential for that bid-ask spread to remain wider than you'd like, could you maybe talk about the potential for either a special dividend or perhaps an expanded buyback authorization as a way to return cash that you're not able to deploy?

Yes. Hi, Chris. Look, certainly, at some point, if it becomes clear the opportunity set for whatever reason bid-ask spread or other isn't materializing, then I think both of those are on the table. And our Board would certainly take a look and see of those two, which makes the most sense, or it could be an increase in both of those as a way to return the capital to shareholders. And so -- but in the near term, we see a lot of opportunity. And so I think we'd like to continue to retain some of the cash. But certainly, at some point, the right thing to do would be to return it to the shareholder base.

Okay, great. And then just as a follow up, you guys have talked a bit today about the value of active management, which is great to hear. Just hoping if you could kind of frame up the next-gen wind and solar opportunity, just in terms of extrapolating what looks like a small wind power gen exposure today to say 20% or 30% of the unused surface position? Is it possible just to get some rough goalposts around how large a cash flow stream that could grow to over time?

Yes. I don't know if we can give you goalposts today. But what I can say is we've got a team dedicated to renewable and next-gen opportunities. They're having some really good conversations right now regarding things like solar, wind, Bitcoin mining, carbon capture, micro-grids. So a lot of conversations with our operators right now around working together on some of these opportunities. So it just again reinforces the importance of the relationships our team has with our operators in the broader industry. So thanks for the question.

Thank you. There are no further questions at this time. We appreciate your participation. And with that, that does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.