Good day, and welcome to the Texas Pacific Land Corporation Second Quarter 2023 Earnings Call. All participants are in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shawn Amini, Vice President of Finance and Investor Relations. Please go ahead.

Thank you for joining us today for Texas Pacific Land Corporation Second Quarter 2023 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 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 that 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.

Good morning, everyone. Thank you for joining us today. TPL delivered an impressive quarter, capturing opportunities underpinned by robust Permian activity. We set new company records for quarterly oil and gas royalty production, source water revenues and produced water revenues. Easements and surface-related income, which we refer to as SLEM, had its best quarterly revenue performance since 2019. Unlike our oil and gas royalty revenues, which are predominantly derived from our perpetual royalty interest carved from a mineral state, water and SLEM revenues originate from our ownership of the surface estate. That surface ownership is unique compared to other public oil and gas, mineral royalty and lease interest companies. Combining our surface ownership with active management, TPL extracts multiple incremental cash flow streams. These surface-derived opportunities have been thoughtfully commercialized to maintain our capital light, high margin business philosophy which ultimately contributes substantial free cash flow to the overall entity while also accelerating development of our oil and gas royalty interest. This most recent quarter is a great example of the built-in hedges that protect TPL during periods of volatile commodity prices. Although oil and gas royalty production this quarter increased 26% year-over-year, our oil and gas royalty revenues were still down 32% due to WTI crude oil and Henry Hub natural gas prices that declined approximately 32% and 71% respectively. However, for that same quarterly year-over-year comparison, our source water revenues were up 69%, produced water revenues up 12% and SLEM revenues were up 34%. During this last quarter, these surface-derived revenue streams in aggregate comprise 48% of TPL's overall consolidated revenue and helped maintain strong consolidated earnings and free cash flow despite much lower commodity prices. For SLEM, specifically, we're seeing broad strength across each subcategory. Pipeline easements, electric line easements and caliche sales have been especially good…

Thanks, Ty. Total revenues for the second quarter of 2023 were $161 million, representing a 10% increase from the first quarter 2023 revenues. As previously discussed, revenues benefited from higher royalty production, source water sales, produced water royalties and SLEM revenues, though partially offset by lower oil and gas prices. Adjusted EBITDA and free cash flow for the quarter were $134 million and $105 million, respectively. Consolidated CapEx was $1.4 million, with most of the spend related to the water business. We ended the quarter with $609 million of cash on the balance sheet. Royalty production of approximately 24,900 barrels of oil equivalent per day represents a 19% increase on a sequential quarter basis. Although we continue to maintain that individual quarterly production figures can be lumpy, the underlying production on our royalty acreage continues to trend upward. This is further supported by new well data as recent permits, spuds and completions remain high across both our Midland and Delaware footprints. In particular, activity in Central Midland, Loving, Reeves and Culberson Counties are especially strong. Our oil price realizations remain high with second quarter 2023 average realized oil price of $73 per barrel, which represents an approximate 100% realization relative to WTI Cushing price per barrel. However, our natural gas and natural gas liquids realizations weakened this quarter relative to prior quarter realizations. Infrastructure constraints and downtime, among other factors, continued to suppress local West Texas price realizations for many operators. For TPL, this is somewhat mitigated as we benefit from additional infrastructure build-out through our SLEM business as new pipelines, processing facilities and other logistics assets generate easement and lease opportunities. In addition, our royalty acreage is dominated by super majors and large independent E&Ps that tend to own and/or commit to new infrastructure, which generally provides them better netbacks compared to smaller public and private operators. As more infrastructure is developed and completed, we would expect our realizations to improve. For this quarter, we have maintained our $3.25 per share dividend. We also spent approximately $20 million to repurchase approximately 14,000 shares. And with that, operator, we will now take questions.

We will now begin the question-and-answer session. [Operator Instructions]. At this time, I will announce the first questioner, which is Derrick Whitfield from Stifel. Please go ahead.

Good morning all and congrats on a strong quarter.

Thanks, Derrick. Good morning.

Thanks, Derrick.

For my first question, I wanted to focus on the substantial strength in water resources this quarter with the understanding that source water is activity driven, and this is the best quarter you posted in the history of the business. So I wanted to ask if you could elaborate on some of the drivers underpinning the strength to allow us to better assess sustainability post Q2?

Yes. Look, the water team did a phenomenal job this past quarter. We saw strength across brackish water sales, treatment volumes as well as produced water. The team really pushed the limits of our system delivering over 700,000 barrels a day. And there's a couple of reasons for that increase in volume this quarter. One is increased activity in contracted areas of mutual interest. So we've talked about those types of agreements in the past, where we contract a big area of mutual interest with our operators and they're obligated to purchase water from us. The team also did a fantastic job of selling water outside of our footprint. So this quarter, over 60% of our water sales were off of TPL acreage. And that's purely from our business development team and water team expanding our reach beyond our footprint. So I think we'll continue to see strong activity levels throughout the year. This quarter may be a high watermark for the year. But when we look at our backlog of sales, we continue to see some strength in the near-term.

That's great. And maybe along the same lines, how should we think about your production trajectory, given the strength of Q2 production and your line of sight activity?

Derrick, I'll take that one. When we look at the underlying production data on kind of a production day basis. It supports what we're seeing. And like we said, any given quarter can always be a little bit lumpy. But when we kind of look at the average of the first half of '23, we think that's probably a pretty good reflection of where the business is at. And as we've kind of stated when we look at some of the near-term inventory DUCs completions that are occurring we feel good that the trajectory for the rest of the year should include some continued growth. So that's how we're kind of thinking about it right now.

Chris, maybe asked slightly differently from my side. When we look at your line of sight activity, how many of those net wells would be required to maintain production?

Yes. Derrick, it's a good question. And those numbers always move around as production grows. But when we think about it, I think something probably in the neighborhood of like eight net wells, give or take, that's probably about the level we would need for flat production and maintenance.

All right. That's very helpful. And maybe just one final follow-up from my side. Regarding the surface acquisition you announced in Q2, could you briefly touch on the strategic importance of that area? And perhaps more broadly also just touch on the competitive landscape for surface and royalty opportunities across the basin?

Yes, that particular acquisition is a little over 12,000 acres in Andrews County along the state line, so non-marketed deal that we sourced through internal relationships here in the team. But really, when we buy a surface, we're thinking about how does that potential acquisition fit into our current footprint, and then also just our broader asset portfolio. And then really, what are the commercial opportunities that we see to take a raw piece of land like that and commercialize it. So what kind of surface opportunities, source water, produced water, other next-gen opportunities, we think we could commercialize both in near-term and long-term. But we really like the optionality that that state line acreage gives us. If you look at some of our past surface acquisitions, they've been along the state line. Those have been great investments. And with all of the activity that crosses the state line from New Mexico into Texas, we just feel like that's a really good option for us. I think the -- as far as the overall market, it's very competitive on the royalty side right now. On the surface side, probably a little less competitive, maybe fewer opportunities out there to take an asset that's been underutilized and realize some additional value through commercialization. But we do think there's still a lot of opportunity left.

That's great. Terrific color. Thanks for your time.

Thanks, Derrick.

The next question comes from Hamed Khorsand from BWS Financial. Please go ahead.

Good morning. So my first question was on the water side. What would the hindrance be to grow further? I mean, if you're doing record pace now, you obviously have a greater capacity than you first thought. So why do you think Q2 was the high watermark?

Well, look, I don't know that it necessarily will be the high watermark. But when you have a quarter like this, looking at the back half of the year, our water sales usually taper off towards the end of the year just because there's less activity in the fourth quarter. To have a quarter like this, deliver these kind of volumes is fantastic. The team continues to work hard to source additional barrels off of our footprint. We're also seeing increased activity on our footprint. So I think sales will continue to be strong.

And on the easement side of the business, I saw in the Q that you had an increase related to pipeline easement. Will that be recurring, that $2.4 million?

So most of our pipeline easements are on term agreements that will recur. I assume that's what you're asking, if those are recurring agreements. The majority of those are, yes.

Yes. Okay. And then what's the appetite to do more of these land acquisitions? And what's the attractiveness that you need to do something like this again?

Well, our appetite is strong. We're always looking. Like I said earlier, we're looking for assets that have maybe yet to be commercialized or maybe that's just been unrealized. Looking for something that we feel like the expertise that we have here on our team can add some additional value through commercialization, whether that's on the water side of the business, the SLEM side of the business, just anything that we feel like the knowledge that we have in-house could create some additional value or the relationships that we have throughout the industry could create some additional value. That's what we're looking for.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.