Greetings, and welcome to Texas Pacific Land Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shawn Amini, Finance and Investor Relations. Thank you, Mr. Amini, you may begin.

Thank you for joining us today for Texas Pacific Land Corporation’s Third 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, 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.

Good morning, everyone, and thank you for joining us today. TPL delivered another strong quarter, driven by improving commodity prices and continued performance of our surface and water assets. Starting with oil and gas royalties, revenues increased 6% sequential quarter-over-quarter as lower royalty production was more than offset by higher oil, natural gas and NGL prices. This past quarter, we’ve heard from operators that development activities were negatively impacted by infrastructure downtime and electricity challenges during the summer heat waves. With those issues having subsided and with some additional natural gas takeaway capacity coming online, we think infrastructure and logistics will be less of a constraint for development in the near term. For our surface leases, easements and materials segment, which we refer to as SLEM, we continue to benefit from broad strength across our various endeavors there. In particular, pipeline easements have been robust, driven by expanding infrastructure development in the Permian. For source water, year-to-date revenues have already eclipsed what we did in all of 2022. Though down from our record sales volumes off the prior sequential quarter, third quarter 2023 source water sales volumes of approximately 545,000 barrels per day represent high utilization across our system. In particular, demand for treated water remains elevated, with this past quarter representing record revenues and volumes. On the produced water side, volumes have grown steadily and quarterly revenues are up 9% year-over-year. Produced water volumes continue to grow across the Permian, of which TPL continues to capture a significant portion through our large AMI agreements across our surface. To give some additional visibility on TPL’s production outlook, I wanted to take some time this morning to provide recent well development trends on our royalty acreage. Starting with our near-term well inventory, at the end of the third quarter 2023, TPL…

Thanks, Ty. Third quarter 2023 total consolidated revenue and net income were $158 million and $106 million, respectively. Total adjusted EBITDA was $141 million, which is 6% higher compared to the prior sequential quarter, and adjusted EBITDA margin was approximately 89%. During the quarter, the company benefited from higher commodity prices and lower operating expenses, though partially offset by lower royalty production and lower source water sales. Free cash flow was approximately $106 million, and we exited the quarter with approximately $660 million of cash on the balance sheet. Royalty production of approximately 21,800 barrels of oil equivalent per day represented a 12% decrease on a sequential quarter basis. Our realized price per barrel of oil equivalent increased 19% to approximately $45. Benchmark prices for each oil, gas and NGLs, each rose over the prior sequential quarter, and our realizations relative to the benchmark prices also improved. For this quarter, we have maintained our $3.25 per share dividend. We also spent approximately $6 million to repurchase approximately 3,600 shares of our common stock. And with that, operator, we will now take questions.

[Operator Instructions] The first question comes from the line of Derrick Whitfield with Stifel.

For my first question, I wanted to focus on your Q3 production and your 6- to 12-month production trajectory. Regarding the quarter, Ty, do you have a sense on the production impact split between elevated temperatures and brownouts versus delayed TILs due to larger pad development? And secondarily, with the record amount of completion on line-of-sight inventory as well as you have exiting the quarter, how should we think about the trajectory as we exit this year and into next?

Derrick, will you repeat the first part of your question?

Sure. Just on the production impact for the quarter, you talked about in your prepared remarks, there were elevated temperatures and brownouts, and then you also talked about some delayed TILs due to larger pad development. So I wanted to get a sense from you if you have a view on the split between those 2 categories.

I don’t have the exact split, but I think we were probably more heavily impacted by the delay in TILs just because we had a lot of mega pads this last quarter, where we had quite a few wells being drilled from the same pad. And so like I mentioned in my prepared remarks, what happens there is they wait until all of those wells are completed to bring them online. And so that makes the near-term production a little bit lumpier, and that’s what we saw this quarter. We did see some effects of the heat waves with some problems with electricity and some compressor stations going down. And I think you’ll see some midstream operators talk about those issues as well this quarter. For the second part of that question, Chris, do you want to take that?

Yes. So Derrick, to your point, I think we have had a little bit of lumpiness in our production over the last couple of quarters. Really strong last quarter, down a little bit this quarter. And I think as we always say, I mean, our view is we want to look toward the long-term trend. Because as Ty has mentioned, I think, especially as you see some of these operators move these large pads, it’s going to introduce a little more volatility in the production quarter-to-quarter. But I think in our view, nothing has really changed and how we think about long-term or let’s say, medium-term production. Everything still looks good. I think we still expect overall to see production growth in the coming year. Again, like we said, that really high amount of permits, the quicker turnaround of permits and DUCs, all of those things continue to be positive indicators. And I think as some of these big pads get brought online and we get through some of those temperature issues and pipeline constraint issues, we’re going to see that production come to market to the benefit of TPL.

Terrific. And then maybe shifting over to capital. Could you comment on the surface acreage you sold and the importance of the disposal and groundwater rights purchase?

Yes. I’ll take that one. The surface that we sold, so that acreage was in Culberson County. So this is way out, like oil and gas fairway, rangeland that -- one big issue that it had was it had a conservation easement on it. So this is acreage that wasn’t part of the original land grant, but that the company has owned for a while. And so because of that conservation easement and because of the remoteness, we just didn’t see any commercial opportunities. And so we had the opportunity to sell it to a local rancher. And so that’s kind of where we were at on that. So moving on to the pore space that we purchased. We feel like pore space is just becoming more and more valuable as we see produced water volumes continue to grow in the basin, and then also looking at other uses of pore space, carbon sequestration, things like that. We just feel like any time that we can add to our pore space inventory at attractive prices, then that’s a really good opportunity and really good use for our capital.

That makes sense. And one last, if I could. During Q2, that was really a banner quarter for you guys in the water business based on the amount of off-lease activity you experienced. Could you offer any perspective on how much -- or how off-lease performed this quarter?

So really, I mean, right there, in line with last quarter, definitely over half of our sales were off of our footprint. We also continue to see increases in our treatment. And so third quarter was no different. I think as far as volumes on the treatment side, it was a record quarter for us. And I would just mention too, that -- I talked about this a little bit in the past, but most of the produced water gathering infrastructure on our land, we have the exclusive right to take water off of that system, treat it and resell it. So through good contract structure, we’re very well positioned to keep providing brackish water and/or ramp up our treatment based on each operator’s needs. And we continue to grow further and further outside of our footprint. The water team has done a really good job of contracting additional sales and expanding our footprint, so...

Next question comes from the line of Hamed Khorsand with BWS Financial.

Just a follow-up on this water topic. Given production having declined this past quarter and how your customers or the land leasers are operating, would that imply that water sales could actually ramp up as you see these wells come online, it was just a delay factor?

So water sales is typically paralleled with completions activity. But I think, like Chris mentioned earlier, when you look at the wells that have been recently spud in this last quarter and our permit count being up so high, I think that is definitely an indicator that there will be a lot of completions activity in the coming quarters, which is really good for water sales, both on the brackish and treatment side as well as the produced water side of the business because once you get that flow back, that water has got to go somewhere. And so to answer your question, the things that we’ve talked about on the call here are good indicators for future water revenue.

Okay. And then what’s been the big contributor to the easement revenue line this year? And how tangible is it that it will continue to stay with the business?

So probably the biggest contributors this year, especially over the last couple of quarters have been pipeline easements and material sales. So we’re seeing a lot of infrastructure build out, a lot of gas gathering lines. We’ve had a nice ramp in transmission lines as well as new gas connects and facilities, compressor stations, things like that. And I think that’s going to continue. We’re seeing operators move further away from existing infrastructure into new areas where there are requirements for new roads and gathering infrastructure and facilities. And that was one thing that we saw a little bit of a bottleneck on last quarter, was there were some areas where wells were not turned in line because of a lack of infrastructure. And so the same operators that we talk to that gave us that feedback were the same operators that had a big ramp in easements for say, like gas takeaway. And then on the material sales side, we’ve expanded caliche sales up into New Mexico, which has been a really nice bump for us. We’ve also got 2 of the sand mines that we signed towards the end of the last year that are actually active now, and we’ve seen a nice bump in sand royalties. I think we were just under $1 million for sand royalties this last quarter. So that’s progressing well. We’ve got a couple of other sand leases that should be operational soon. And as we continue to expand our rock crushing activities and things like that, I think we’ll continue to see strong SLEM activity in the future.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.