Ladies and gentlemen, good morning, and welcome to the Texas Pacific Land Corporation Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. Please go ahead.

Thank you for joining us today for Texas Pacific Land Corporation's fourth quarter 2023 earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10-K 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'll open the call for questions. Now, I'll turn the call over to Ty.

Good morning, everyone, and thank you for joining us today. TPL ended 2023 with the best quarter we had all year. Performance was led by oil and gas royalty production of approximately 26,300 barrels of oil equivalent per day, which represents 20% sequential quarter-over-quarter growth and a new company record. We also received excellent contributions from our surface and water related businesses, as they accounted for over 40% of quarterly consolidated revenues. For produced water, we generated a royalty fee on 2.7 million barrels per day during the quarter, also a record. On sourced water, we recorded 517,000 barrels per day of sales volumes, of which 62% were off of our footprint, as demand for both brackish and treated water remain elevated. Our surface leases, easements and materials segment, which we refer to by its acronym SLEM, generated $19 million of revenues, representing 5% growth sequential quarter-over-quarter. Performance for full year 2023 highlights the virtues of TPL's unique business model, especially during periods of volatile commodity prices. Despite oil prices falling by 18% year-over-year and natural gas prices declining by 64%, our water and SLEM businesses collectively grew revenues by 30%. For fiscal year 2023, our sourced water revenues grew by 32% year-over-year, produced water royalties grew by 17% and SLEM grew by 48%. This strong performance from our water and surface endeavors helped to substantially offset the negative impact from lower commodity prices. Overall, TPL's business continues to operate efficiently, with fiscal year 2023 adjusted EBITDA and free cash flow margins of 86% and 66%, respectively. As we look ahead to 2024, TPL is well positioned to benefit from ongoing activity in the Permian Basin. Our land and water teams remain busy, and thus far, customers have indicated intentions to maintain strong levels of development on our royalty and…

Thanks, Ty. Consolidated revenues during the fourth quarter of 2023 were approximately $167 million, representing 6% sequential quarter-over-quarter growth. Adjusted EBITDA was $151 million, and free cash flow was $116 million. Free cash flow for the quarter grew 15% on a year-over-year basis, driven by higher royalty production, sourced water sales, produced water royalties and SLEM revenues, and partially offset by lower oil, natural gas and NGL prices. Since Ty has already reviewed some of our other highlights for the quarter and full year 2023, I'll spend some time now on how we're thinking about things for 2024. As it relates to development in the overall Permian, our general view is that if oil prices stay around or above $75 per barrel, that is generally constructive for continued growth. If oil prices weakened to $70 or less for an extended period of time, we would expect overall Permian activity levels to slow and overall production volume to flatten. Specific to TPL, our business overall tends to be dominated by supermajors and large independents, which tend to maintain development plans even during times of sideways commodity prices. Over 50% of our current drilled but uncompleted wells, otherwise known as DUCs, are held by supermajor Chevron, Exxon, Conoco, BP and Occidental. 80% of our current DUCs are held by operators with an enterprise value of at least $15 billion. Although rig counts have fallen in the overall Permian compared to a year ago, we have seen rig counts on our acreage remains stable. New spud activity on a net basis in the fourth quarter was a company record and our overall near-term well inventory remains robust. We are seeing persistent strong activity in Loving in Northern Culberson and in the Central Midland subregion. In addition, continued operator efficiencies have condensed permit to production pacing even despite wells with increasingly longer lateral lengths. Our water team today is just as busy as last year and indications that they've received from operators is that development activity will remain at high levels. Our land agents also remain active as demand for pipeline easements, surface leases, wellbore easements, and caliche is strong. As we previously indicated, we believe that TPL royalty production can grow at a level that exceeds overall Permian growth, although like we've experienced over the past year or so, short-term quarter-to-quarter performance, can be somewhat volatile due to greater co-completion developments, operator short-term development patterns, specific net revenue interest for various tracks and check spud timing. To conclude, TPL is in a great spot today. Our balance sheet arguably has never been stronger. The business still maintains strong cash flow and profitability margins. TPL still remains unhedged on commodity prices, so we capture the full upside as commodity prices improve. And if commodity prices weaken, then we have ample means and multiple ways to take advantage. And with that, operator, we will now take questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Hamed Khorsand with BWS Financial. Please go ahead.

Hey, good morning. So first off, could you just talk a little bit more about the water business and what you're doing there as far as the cost structure goes? I noticed that if I combine both water line items on the sales side and then look at your cost basis, the cost has more than outpaced the sales growth. So, if you could just comment there on what your expectations are?

Yeah. Hi, Hamed. This is Chris. I think as Ty had said in his prepared remarks, at the end of the day, what we are trying to do is grow our free cash flow. And last year was a bit unique. There was a few times where depending on where that water was moving and some of the contracts, it was a little bit more expensive. As we continue to reach out further into the basin, some of the expenses to get water to the further reaches of the Permian have increased. On the flip side, we continue to electrify a lot of the operations, which helps regulate and even bring down some of the costs through the ability to automate systems, have less personnel required to run them. But at the end of the day, the cost to deliver some of that water as we expand has come down. But I think the good news is that still leads to increased cash flow for the business.

Okay. And then, my other question was, as far as the oil side of the business goes, oil and gas, was there any supply chain issues that you can see that could hamper production, or are you just seeing that production can stay steady with weather as electricity is permitting?

I think most of the supply chain issues that we've seen over the last few years have been worked out. Obviously, there's still a lot of infrastructure buildout that needs to be done in the Permian. But talking to our operators and midstream operators as well, I think infrastructure planning is going well and companies seem to be making the right moves to prevent those bottlenecks in the future. So, I think most of those issues overall have been worked out.

And then last question is on your easement side. Is there anything of a one-time nature there this past quarter that won't repeat in Q1 or in 2024?

I mean, for the most part, big part of that is pipeline easements, material sales have increased as well, but those should be ongoing. Like I said, talking to our midstream operators, there's still a lot of infrastructure buildout that they have planned for 2024. Material sales continue to be strong. We're growing our sand royalties as well. So, I would anticipate that staying strong through 2024 and really over the next few years.

Great. Thank you.

Thanks, Hamed.

Thank you. Our next question is from Nate Pendleton with Stifel. Please go ahead.

Good morning, and congrats on the strong quarter. Starting with production. Coming off a strong Q4 and understanding that historically production has been lumpy, how should we think about the production trajectory heading into Q1 versus full year?

Yeah, hey. I think what you said is right. We still expect that production is going to kind of remain lumpy through time. Just the nature of how the wells get completed, the big co-completions, the way that operators are moving around and which pads they select can have a lot of impact quarter-to-quarter as to what our production looks like. But again, I think we would just reaffirm a couple of things that Ty had mentioned in the prepared remarks. One would be, we still think overall, over the long term, we've got a good chance to outperform the overall Permian in terms of production. And when we look at 2024 and we look at kind of our current backlog of net wells, it looks really strong. We've seen a big build of DUCs occurring. And so, all of those things would lead us to believe that, at least over the course of the year, there's going to be plenty of inventory to continue to deliver strong production results. But as to whether that happens each quarter like clockwork is always a more difficult thing to predict. And so, I think there is going to be some lumpiness when exactly that occurs. It's hard to know. But the overall trend we still feel really good about. And I think like we said, if we have a supportive commodity price environment this year, we would expect a continued strong production performance.

Got it. Thanks. And then, staying on the activity trends with your net well inventory that you mentioned, with that around 17 net wells in various stages of development entering 2024, can you provide a rule of thumb for the number of net wells that would need to be turned in line to hold production flat, all else equal?

Yeah. I think in the past, we probably said that, that number was something like eight net wells. But obviously, as your production base grows, that number is going to trend up. So, I think we would tell you now but something in the neighborhood of probably nine net wells is going to roughly be your hold flat number that you need. But as you stated, with 17 right now in the backlog, that certainly feels pretty good to us as far as having plenty of inventory available to again support strong production.

Got it. Thanks for that. And then, shifting over to the water business. Looking back at some of your acquisitions over the past year, can you provide any color on how you see the A&D market for additional SWD infrastructure? And what opportunities there are to further expand your leading position there?

Yeah. Most of our focus on the produced water side has been acquiring additional pore space. So, you saw a couple of surface acquisitions of pore space easement that we did last year. And so, we just want to make sure that we stay out in front of our operators' needs and have the appropriate amount of pore space available to meet those needs. So, that's kind of how we view our part in that business is just continuing with the same business model, being a pore space owner and using our network and relationships to put people together to make sure that water has a place to go and just support the overall development of the basin.

Got it. Thanks. And then, you mentioned pore space. So, staying on that for just a second and taking the CCS angle, now that the U.S. EPA has started approving Class VI permits, and there are some operators injecting CO2 for storage today in Class II wells that qualify for the same credits, can you provide any updates on how you are viewing that opportunity given your expansive ownership?

Yeah. I mean we've talked a little bit about it in the past. We think it's a great opportunity for us as well. We view it similar in business model to the produced water, where we'll continue to be a pore space owner. No real interest in building out any infrastructure in that space, but leasing on our pore space for royalty, I think it's a great opportunity for the company. And so, I think any time we can add pore space, whether it be for produced water or carbon sequestration, it just continues to add more runway to our business long term.

Got it. And the last one for me, is there any update you can provide regarding the status of the appeal related to the stockholders' agreement litigation?

Not too much other than oral arguments were yesterday. So, at this point, we're just waiting on a decision from the court.

Got it. Appreciate you taking my questions.

Thank you.

Thanks.

Thank you. Ladies and gentlemen, as there are no further questions, that concludes the conference of Texas Pacific Land Corporation. Thank you for your participation. You may now disconnect your lines.