Greetings, and welcome to Texas Pacific Land Corporation First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Shawn Amini, Vice President, Finance and Investor Relations. Thank you, Mr. Amini. You may begin.

Thank you for joining us today for Texas Pacific Land Corporation's First Quarter 2024 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. In addition, the company has posted an investor presentation that we will be referencing today. That presentation related to produce water desalination and beneficial reuse can be found in the Investors section of our website under Presentations. It is also posted under the Events section on our website, which can be accessed through the News & Media tab and then IR calendar. 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; Executive Vice President of Texas Pacific Water Resources, Robert Crain and TPL's 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. Driven by the continued strength of our surface-derived cash flows, our first quarter 2024 results are an excellent start to the year. “Water Sales, Produced Water Royalties, and Easements and Other Surface-Related Income and aggregate had revenue growth of 19% sequential quarter-over-quarter, which totaled approximately $81 million and accounted for nearly 50% of total consolidated revenues. This was another especially great quarter for water sales as it generated $37 million of revenues, which was nearly a company record. Our source water asset footprint, combined with our excellent staff were able to push volumes throughout the Permian Basin with 72% of volumes occurring outside of TPL's surface acreage. Oil and gas royalty production of approximately 24,800 barrels of oil equivalent per day also represents strong performance. Our near-term inventory of permits and drilled but uncompleted wells remain at robust levels, which combined high activity levels on our water and surface assets indicates royalty production will continue to perform well. On capital allocation, the company and our board continue to evaluate all of our options as the business continues to generate considerable free cash flow and maintains a net cash position of $837 million. This affords us tremendous ability to drive value throughout the energy cycle. I do want to spend the majority of my time this morning talking about some exciting news for TPL. As Shawn mentioned, we posted a presentation relating to produced water desalination and beneficial reuse, and I will be referencing those slides. Our remarks today will serve 2 purposes. First, to give an update on our technology efforts related to produced water and second, to give an understanding of the state of the produced water market in the Permian today, the latter of which has been getting…

Thanks, Ty. For those of you that don't know me, I run TPWR. I joined TPL in 2017 and Ty recruited me to help build out TPL's nascent water business. Prior to TPL, I led water resource development efforts for EOG Resources across multiple basins, including the Permian and Eagle Ford, excited to be here today and talk about water. Turning to Slide 5, I'll provide an overview of our technology, our targets for desalinization and results to date. As Ty described, we teamed up with a top-tier technology and manufacturing partner that specializes in industrial refrigeration and freezing, where they serve clients across food services, industrial temperature control and nuclear power plants. TPL collaborated with this technology partner to develop a thermal system specifically designed for produced water desalination. While our partner retains the patents on the equipment, TPL has the exclusive rights for the equipment used towards produced water applications. In addition, TPL has filed for a process patent, utilizing fractional freeze desalination to treat produced water for beneficial reuse. There are a couple of other competing desalinization technologies on the market today, with many of them focused on heat distillation. Heat distillation can require a temperature change of 120 to 140 degrees Fahrenheit and additional energy to condense the vapor back into liquid form. However, our freeze technology uses less energy, as it recovers heat from the incoming produced water and requires temperature change at a fraction of what is required for heat distillation. With our current R&D test unit, we've been running extensive optimization testing, as we closely monitor time spent and pull down in freezing, the progression of ice formation, salinity reduction, anion and cation reduction and energy efficiency among other factors. We had power meters installed at basically every step, so we knew how…

Thanks, Robert. Consolidated revenues during the first quarter of 2024 were approximately $174 million, representing 4% sequential quarter-over-quarter growth. Adjusted EBITDA was $152 million and free cash flow was $115 million for the first quarter. Free cash flow for the quarter grew 30% on a year-over-year basis, driven by higher royalty production, source water sales, produced water royalties and easements and other surface related income and partially offset by lower natural gas and NGL prices. Weak Waha natural gas prices have negatively impacted the natural gas realizations in March and April of this year. We do expect low Waha prices in second quarter 2024 to continue putting downward pressure on gas realizations, though we expect this to be somewhat mitigated by the stronger realizations that super major and large independent operators generally receive. Our realizations on oil continue to be very strong, generally at 100% of WTI Cushing. Our near-term well inventory remains elevated relative to historical levels. At the end of the quarter, we had 5.1 net permitted wells, 10.3 net drilled but uncompleted wells and 2.2 net completed, not yet producing wells. This near-term inventory gives us confidence that our royalty production remains on a growth trend. To conclude, TPL is in an enviable position today. Our balance sheet is the strongest it's ever been. We still maintain top-tier cash flow and profitability margins. Today's disclosure of our efforts with produced water desalination is a great testament to the team and to the multiple elements of upside the business has with its unique surface ownership. TPL continues to generate substantial free cash flow, and we are in the excellent position to drive value. And with that, operator, we will now take questions.

[Operator Instructions] The first question comes to the line of Hamed Khorsand with BWS Financial.

First off, I just wanted to ask about your water desalination. What is the reason to highlight it now? Is it the scientific breakthrough or do you think you're at a point where you can get revenue soon? Or is it really just to let investors know about the CapEx that's required going forward?

This is Robert. Thank you for the question. I think it's a combination of everything you just said. It is a capital investment, and we felt it prudent to let investors know and shareholders know that it is -- for now, it's a $20 million investment. While we're looking to offset that, TPL will have some capital burden in the near term. Additionally, the talk of water in the Permian is another reason and the press that we've been getting on our technology. We've played a very heavy focus on the regulatory front and also on the institutional research front, and we thought it prudent at this time to announce.

And then as far as water sales is concerned, do you think this is a sustainable level? I mean last year, you had a record number, but it sounded like it was onetime related. Is this more sustainable?

Well, I think second quarter of last year was a record quarter for water sales, and we were right there close this quarter. And looking at the sales schedule for second quarter this year, we've got some really strong numbers on the schedule, a lot of wells to be completed. So I think we will continue to put up strong numbers on that front.

Okay. And last question here is that could you just talk about what your expectations here are with the capital you're adding on to the balance sheet? Is it just focused on the water business that you're now expanding into the technology. There was a Reuters article this past week about OXY looking to sell some land. What are your intentions here?

I think our general capital allocation thoughts are really still kind of unchanged from what we talked about during the last earnings call. Certainly, we continue to look and different opportunities are available. It's a constant topic of discussion between management and the board. And right now, we're happy with kind of the direction and where that cash is. But it's certainly something that is always a topic. And we're always looking for the best way to deploy that capital when the opportunity arises.

Next question comes from the line of John Annis with Stifel.

I wanted to focus in on the announcement of your desalination and beneficial reuse efforts, which is really exciting stuff and timely given the growing sensitivities around impacts of oil and gas development in the Permian. To start -- and I apologize in advance for a dense question, but I wanted to try to get a better understanding of the beneficial reuse market and how the value chain works? With the freshwater that's produced from your process, can you talk more about the potential end markets, the size of those markets? Any green incentives that you would be eligible for and any potential applications for your process outside of the oil and gas industry?

Sure. This is Robert. I'll take that. There's been a lot of discussion on the beneficial analytes, and any downstream revenues that could come from the distillate water of beneficial reuse technologies. I think they're still emerging. There's a lot of discussion on hydrogen beneficial analytes such as lithium, water rights retention once this water is reintroduced. As those develop, our kind of marching orders was develop a technology and structure a commercial model that stand on its own legs. Anything that comes from a downstream revenue perspective will be great, and it will further help the economics of beneficial reuse. But when we look at it right now, we had to develop a treatment technology and a commercial model that fits within the upstream economics.

Got it. And then with the $0.75 per barrel treatment costs you provided in the presentation, you mentioned that it becomes competitive with subsurface injection, is that expectation based on the ongoing discussions you're having with customers? And then more broadly, how do you envision those commercial agreements for monetizing the water working?

We don't have a firm commercial structure in place. I think this is a new concept for the industry in general. And beneficial reuse is going to be at a higher price per barrel than traditional injection. But it still has to be economic in the sense that it incentivizes the drill bit to continue to turn. The commercial model and the structure of it is still being developed. We're in talks right now with operators what that looks like. I think it's going to be a blend at least for TPL. It will be a blend of the traditional water midstream pricing and how we structure TPR from the get-go. TPW and our capital-light [indiscernible] business, we were able to leverage our surface acreage to not have to take the traditional role of water midstream. So our role in that commercial model, I think, is going to be a blend of the two.

Makes sense. Then I wanted to understand more about the operational complexities as you scale. What, in your view, are the biggest hurdles or technical challenges as you move from a larger pilot and then ultimately to a commercial scale facility?

I think the regulatory piece is initially presenting some hurdles that we've tackled. And I think we're getting over. As we look at any beneficial reuse technology, energy consumption is 75% to 80% of the OpEx of any piece of it. And it's what we mentioned in the talk earlier, continuing to drive down cost on the energy perspective. It's why we went with this technology, but that's what -- that's the most work and complexity that we still have to do is be in that energy does take up so much of that OpEx cost is ensuring that we can find an alternative energy source to come in line with those projected OpEx costs.

Great. And then shifting back to your core businesses. You were able to achieve significant quarter-over-quarter revenue growth in water. Can you talk more about what drove that growth? And are you seeing any tailwinds on source water demand just with the increase of simul frac development across industry that are generally more water-intensive.

Yes. We definitely are seeing some tailwind from simul fracs. Just the volume of water needed delivered to pad per day for those fracs is enormous. And I think the scale that we've built our business to is a huge competitive advantage for us. There's just not a lot of water providers that can provide those kind of volumes, with as far a reach as we have across the basin, especially on the Delaware side. So I think there's a lot of factors that are giving strength to that part of the business. Obviously, our BaaS surface footprint and the ability to move water further than other competitors is 1 of those as well. But I think we're going to continue to see strength in that business. And just -- I think the important thing to remember about our water business as well as is we're involved in source water sales for completions. We're involved in reuse and treatment. We've got pore space or produced water disposal and now with this beneficial reuse technology that we're working on. We're really setting the company up to be a leader across the water industry as a whole. So no matter which way that aspect of the industry moves, I think TPL is well positioned to continue to gain market share across the board.

Terrific. And for my last one, on the governance front, you recently announced the formation of a strategic acquisition committee as a standing committee of the Board. Would this mean that M&A will be a board-led rather than management-led decision? I'm just trying to understand how that dynamic will work.

Yes. We've had an ad hoc acquisition committee in the past just to kind of bet projects that management is working on before we take it to the full Board and make sure that we've got buy-in from that committee. So this is just kind of formalizing that with a standing committee. So it gives management the opportunity to vet new projects, get some feedback before we take it to the full Board. So that's the purpose of the committee.

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