Texas Pacific Land Corp. (NYSE: TPL) stock performance, since I wrote about it last year, has been very disappointing as energy prices have skyrocketed. The transformation of a trust into a corporation has not really benefited investors much. I sold my remaining shares recently after doing more detailed research on its major shareholder – Horizon Kinetics.
Performance of TPL shares compared to energy prices
In my March 16, 2021 article on TPL, I stated that I had just sold almost all of my TPL shares because the current price did not offer a safety margin. The stock price has risen sharply in anticipation of the number of potential benefits of becoming a trust corporation. The TPL was, in theory, an excellent vehicle for taking advantage of possible higher energy prices because the new corporation had no coverage. Although the stock price has risen sharply in the last months of 2022 as energy prices have risen, it has been performing poorly since May 2021 as the problems associated with the company have had a negative impact on investors ’previous enthusiasm for the company’s future. .
Variation in% of the price from 15/03/21 TPL, WTI, Gas Natural
As a corporation they can now cover their positions, whereas when they were a trust, they were not allowed to cover. So far, they have not announced any coverage, but it might be prudent to cover at least part of their future projected oil and natural gas royalties given the current very high prices, in my opinion.
Change of trust to corporation
Investors expected a large number of potential benefits from moving from a trust to a corporation in early 2021. The change from a trust to a corporation allowed TPL to become part of the Russell 3000 because trusts are not included in the indices, but that was . really the only positive development. They did not have a stock division, which I expected because it would probably increase commercial liquidity.
He also hoped that having a board of directors would add depth to the management of the corporation. He was wrong. The directive, in my opinion, was negative. A board member, Dana McGinnis, was actually excluded from the board at its last annual shareholder meeting because it did not get enough votes from shareholders (49.09%) and there was not even a proxy fight. Several of the directors did not even own a share of TPL’s shares when they were elected to the board. What? They are on the board without investing their own money in TPL, but they were paying more than $ 200,000 in annual withholding fees. Now each owns at least a symbolic number of shares.
They have not yet borrowed money, which is allowed to them as a corporation but not as a trust. It is debatable whether it is a plus or a minus for shareholders to increase financial leverage. TPL also did not make any major acquisitions as a corporation.
The dividend, which was recently raised to $ 3 per quarter, has not been affected by the transformation into a corporation. They are also paying a special $ 20 dividend. Personally, I would like them to pay a higher special dividend instead of authorizing $ 100 million in share repurchases earlier this year, which would have resulted in an additional $ 12.90 per share dividend.
TPL’s accounting firm was replaced in 2021. It appears that for several years before the counters changed, there were exhaustion calculation errors, which are currently under review for impact on income tax returns filed in previous years. The new accounting firm, Deloitte & Touche, is a much larger and much more reputable accounting firm.
Impact of horizon kinetics
Previously, when TPL was a trust, there were only three trustees and they did not have their typical annual vote on these individuals, which happens with corporations and a board of directors. Administrators served for life. Now Horizon Kinetics can have a significant influence on who is on the board and in company policy in general because Horizon owns a total of 1,798,184 shares (23.2%). (Note: The last attorney has the lowest ownership, but that number excluded “shares held by other portfolio managers and other Horizon employees personally.”) Using the total number of TPL shares actually voted at the last shareholder meeting of the 59.43%, or Horizon 59.43%. the effective voting power was 39% and was enough to vote out a director. Another big holder, Soft Vest LP, owns 4.8% and also has a seat on the board. Indeed, these two groups collectively “control” TPL. (They also worked together on the 2019 proxy fight).
Therefore, it is critical that TPL shareholders understand Horizon. Interestingly, Horizon frequently writes its own TPL reports, such as fund managers, which are posted on the Seeking Alpha website. Therefore, we can get information about your TPL investment analysis from these published reports.
When I spoke to Horizon, they did not consider their position to be a “controlling” position. When I use the word “control” I do not use the exact legal definition. They acknowledged, however, that they could affect any important issue, such as acquisitions. (Horizon TPL operations for 2017-19 are available here).
I have several issues with Horizon. First, TPL is the largest stake, even over 50%, or a very large stake in its various funds they manage. What happens if many investors decide to withdraw money from the funds for whatever reason, even if that specific fund has a large cash position? Will Horizon sell shares in all funds of the respective funds or will it primarily reduce its shareholding: TPL? This could have a major negative impact on TPL’s share price.
Second, there seem to be some inconsistencies with Horizon. A Horizon fund is called an “Internet Fund”. The second largest stake in this internet fund is TPL, which accounts for 14.2% of the fund’s assets. How is TPL an internet company? Although TPL was technically allowed to buy in that fund, why was it bought in an internet fund? I also have issues with Horizon having TPL in its “Small Cap” background. TPL’s capitalization exceeds $ 12 billion, which it would not consider “small.”
Third and most importantly, I am very uncomfortable with Horizon stating its strong support for the recently announced cryptocurrency mining alliance with Marathon Digital Holdings (MARA) in its June 6 Seeking Alpha report. If they think this is the right direction for TPL to go, I don’t want anything to do with TPL because they are strongly anti-cryptocurrency. Horizon, for example, also has a large stake in Grayscale Bitcoin Trust (OTC: GBTC). Many investors own TPLs for oil and gas reasons, not because they want to trade with a cryptocurrency company. Although the current impact may be very modest, it indicates a mindset in Horizon that I am not comfortable putting my money into, so I sold my remaining TPL shares.
Oil and gas results
Often, investors in oil and gas companies can get a lot of data and metrics on reserves and future drilling plans, but TPL is not a production company – it only has copyright interests. (It also has other business segments, such as water, that are beyond the scope of this article.) I was hoping to get at least a modest increase in the number of metrics reported after it became a more actively managed corporation, but I was disappointed. Your data included in your submission to the SEC was still general to the Permian Basin and not specific to your copyright interests.
First quarter results
I like to use approved drilling permits as a general indicator of future drilling and potential production. Since TPL does not include this in its applications, investors should consider using the Texas Railroad Commission website. You can get approved drilling permits for each month for each county. These data are further broken down by specific energy companies. The problem, of course, is that we cannot determine whether the permits were for specific areas of the county where TPL has a royalty interest. The numbers give a general feeling of potential piercing, but I mostly use the numbers on the downside. If permit numbers are low and the trend is negative, it indicates limited future drilling across the county, including the TPL area. The opposite may not be true because we cannot accurately determine whether the high number of permissions is in areas where TPL has copyright interests.
2022 numbers for Culberson County are still disappointing. This county is very important because it accounts for 30% of 1/16 acre of TPL royalty interest. Only 64 drilling permits have been approved for the county so far this year compared to a total of 124 in 2021. (Culberson County is primarily gas and only oil limited). This contrasts with Midland County, which had 365 passes, but Midland only accounts for 3.5. % of interest on royalties 1/16 of TPL and 15% of interest on royalties 1/128. We do not know, however, how many permits in Midland would actually affect TPL. Reeves County had 286 permits, and this is also a very important county for TPL because it accounts for 31% of 1/16 of interest rights and 3.5% of rights interest of 1/128. (Reeves County is more gas than oil). Reeves County’s numbers are especially encouraging because of the 286 permits so far in 2022 compared to a total of 334 in all of 2021. Again, we’re not sure if these approvals in Reeves County really affect you. TPL.
Because the TPL had already skyrocketed in February and March 2021, it was not the right horse to be after May 2021 as energy prices have risen sharply. Its transformation from a trust to a corporation has not been as beneficial to shareholders as many investors had hoped.
Because I have some issues, especially its strong support for cryptocurrency mining, with its largest shareholder, Horizon Kinetics, I sold my remaining TPL shares. While I believe there is still a chance of increasing revenues from oil and natural gas royalties, there are very strong headwinds against fossil fuels. Therefore, I am keeping my recommendation neutral / hold for TPL.
(This article was not an attempt to be a full coverage of Texas Pacific Land Corp., I just covered a few important topics, which is how I almost always write in Seeking Alpha.)