Pacific Land Corporation's Second Quarter 2022 Earnings Conference Call. This conference call is being recorded. I would now like to introduce your host for today's call, Shawn Amini, Vice President, Finance and Investor Relations. Please go ahead.

Good morning. Thank you for joining us today for Texas Pacific Land Corporation's Second Quarter 2022 Earnings Conference Call. Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission that's available on the Investors section of the company's website 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. Please also note, we may at times refer to our company by 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. Good morning, everyone, and thank you for joining us today. Second quarter 2022 results demonstrate a business operating at a high level. All of TPL's major revenue streams reported double-digit percentage growth on a sequential quarter-over-quarter basis, the total consolidated revenue growing 20%. Adjusted EBITDA of $158 million represents a new corporate record, and our adjusted EBITDA margin of 90% demonstrates our continued focus on maintaining a lean cost structure in generating high margins. During this most recent quarter alone, we returned over $200 million back to our shareholders in the form of dividends and share buybacks while still maintaining a balance sheet with 0 debt, retaining nearly $400 million of cash. Although our royalty production came in slightly lower sequentially, this quarter is a great example of the resiliency and the numerous high-quality revenue streams the company benefits from beyond just oil and gas royalties. Source water revenues were up 18%, reduced water royalty revenues were up 26% and revenues for surface leases, easements and materials, which we refer to as SLEM, were up 52%. SLEM and source water sales, in particular, are generally good leading indicators for royalty production with the increased business activity this quarter, providing confidence that we'll continue to see strong development on our royalty acreage. On the source water side, sales volumes increased 40% sequentially with increases across all the major channels, brackish, brokered and treatment. Due to high water demand, we have increased our CapEx budget to accommodate new frac ponds, tanks, pipes and pumps. We now expect full year CapEx of approximately $18 million to $20 million. In particular, demand from the Midland Basin and Reeves County is very strong. We're still observing some operator supply chain issues in the field, so they do seem to be easing slightly.…

Thanks, Ty. Total revenue for the second quarter of 2022 was $176 million, which was driven by double-digit percentage increases across all of our major revenue streams on a sequential quarter-over-quarter basis. Oil and gas royalty revenue was up 16% quarter-over-quarter primarily due to higher commodity prices but partially offset by lower royalty production. Second quarter royalty production of 19,800 barrels of oil equivalent per day did come in slightly lower compared to last quarter, though oil production was slightly higher at approximately 8,900 barrels of oil per day. Commodity price realizations continue to be excellent as each oil, natural gas and NGL price realizations increased by double-digit percentages sequential quarter-over-quarter, which we fully benefited from as we are still completely unhedged. As Ty alluded, the strong performance in water and SLEM are encouraging data points as we look ahead to the second half of the year. To elaborate a bit more on the outlook, our well inventory data is also aligned in what we consider to be a positive trajectory for the overall business. We've seen a meaningful uptick in new permits during the first half of the year with over 500 gross well permits through June compared to approximately 750 gross well permits for all of 2021. We averaged approximately 70 gross spuds per month year-to-date through June, which represents an approximate 37% increase compared to the 2021 average of approximately 55 gross spuds per month. Our data suggests a bit of a slowdown during the first quarter of 2022 for new completions compared to the pacings during the second half of 2021. However, we do maintain a higher-than-normal inventory of completed but unproductive wells, and we expect these to turn to sales once those wells are tied in. Our $100 million buyback authorization was active during the quarter, and we repurchased approximately 17,000 shares for approximately $26 million. We intend for the buyback program to remain active through the end of the year. We continue to evaluate our capital allocation priorities and with a large cash balance and a business that continues to generate robust free cash flow, we retain a tremendous amount of flexibility as we look to maximize shareholder value. With that, operator, we will now take questions.

Our first question comes from the line of Annis of Stifel.

Congrats on a strong update. Can you provide some additional detail on SLEM strength this quarter? As you mentioned in your prepared remarks, that business has been flat for a while. Is there anything you can share on the outlook?

Yes. Look, I would just say that's very promising usually when we see a ramp in SLEM, that operators getting prepared for additional development in those areas. I would also say that the additional revenue we saw this quarter in that business line was spread out kind of over surface -- wellbore easements, pipeline easements, electric easements, material sales. It kind of hits across the entire business segment. I think that's good news. That's kind of signals to us that maybe it's more of a durable trend than just spotty activity. But the land easement has been really busy lately working on a lot of projects. So I think we're going to continue to see some strength in that area of the business.

Got it. Then under the next-gen opportunities, can you share how those came about? And any initial thoughts on revenue potential and timing for those things?

Yes. So look, we've got a team -- part of our BD team internally is dedicated to just seeking out next-gen opportunities. And so those opportunities came through. The team just reaching out within the different industries and kind of trying to track down different opportunities for us to expand the use of our surface. So with the bitcoin mining deal with Mawson and JAI, I think Mawson recently put out a press release back in May that, that facility would be operational by Q4 of '22. So that's very promising. On the carbon capture side, we're having some really good conversations there. We announced the deal, so letter of intent we signed with Milestone. So they're going to do some studies on some of our properties to see if it's viable for carbon sequestration. So I think we'll continue to see some promising conversations regarding that area of the business.

Our next question comes from the line of Khorsand of BWS Financial.

First off, I just want to ask about the easement revenue bumping up. Were there any onetime revenue in that number? Or was this purely because of increased activity?

Yes. So what we saw was it was really just increased activity. I mean, obviously, like a material sale is a onetime event, but we continue to see strong material sales. As far as the pipeline easement itself, most of those return easement a lot of well connects, gathering lines being put in place. So rather than like a big onetime long-haul perpetual easement like we've seen in the past, most of this has been recurrent revenue.

And the commentary around the increase in CapEx to support the water business. Is that because you have clarity as far as how much demand you're expecting over the next year?

Yes. So if you look at like our original budget, it was kind of in that $12 million to $14 million range. So we continue to see a lot of demand in the water business. The water team has done a fantastic job of signing additional contracts this year. And so we're going to have to spend some additional capital on infrastructure to kind of support those new contracts as well as additional demand from existing customers. So that additional capital is going to go towards things like frac ponds, treatment tanks, some additional pipe to accommodate that demand and not just 2022 demand, but also just kind of in preparation for 2023 demand. And we're also seeing some supply chain issues like pumps that used to take 6 to 8 weeks are now taking 10 to 12 months to procure. So we're trying to stay ahead of those bottlenecks and just make sure that we're ready to support the ramp development from our operators.

And my last question was on that topic of the supply chain. Is there any kind of time line or estimates when these bottlenecks could smooth out for you and the operators on your land?

No, I mean it's -- I don't know exactly what that time line looks like. It seems like things are starting to ease a little bit. But as far as what that time line looks like, I don't have a good answer for you there.

Our next question comes from the line of Baker of Credit Suisse.

Congrats on the strong water services results. Great to see those investments in electrification start to pay off in the margin profile. My question was just around whether or not you still see the company as a natural consolidator of minerals longer term, just given the recent Reuters report around bringing minerals potentially pursuing a sale of the company?

I would say we continue to look at ways to add value for our shareholders. Part of that strategy is evaluating potential acquisitions, not only on the mineral, but things to look at potential surface and water acquisitions as well.

Great. It makes sense. And then just could you remind us -- obviously, there's no debt today, but any guidelines in terms of doing a larger scale deal just around sort of net debt leverage you would be comfortable with for the company?

Yes, Chris, I mean, a lot of that depends on the nature of the assets that you're buying. But I think we've been pretty clear in the past that very low to 0 leverage is what we think is appropriate for this type of business. And so that's likely what you should expect where we do so.

Okay. And by low -- sorry, just to clarify sort of like sub-1x or 1.5x? Is there like a ballpark number that you talked about in the past, perhaps?

Yes. I don't think we've specifically talked about a number, but -- and I'm not sure I'd be comfortable giving exact guidance on that because when you're talking about theoretical things, it's always difficult. But I think we would be on the lowest end of what you would see out there, which is kind of where we sit today anyway, so.

Sure, sure. And just if I could squeeze in one more. Obviously, some great announcements in terms of CCS study and bitcoin mining, et cetera. As you think about these alternative surface uses, any guideposts -- or goalposts, I guess, you could share in terms of what the aggregate cash flows could be from those efforts over the next few years?

I mean, Chris, that's a difficult thing to say. I mean as we said, like even just on the carbon capture, they're evaluating the viability right now. And so until some of those studies are completed, I think that's a very difficult thing to project. But look, I would say stay tuned, we'll give more information as it becomes available. But the team is working very hard to procure new revenue streams on the surface, and we think they're going to bear fruit.

And there are no further questions in the queue. That does conclude today's question-and-answer session as well as today's presentation. We do thank you for your participation. That does conclude today's call. Have a great rest of the day, everyone.