TPL - Horizon Kinetics - Texas Pacific Land: A Quintessential Land Company

2023-05-10 04:45:00 ET

Summary

• Texas Pacific Land Corp. is a land company that has been publicly traded for well over a century, making it the 4th longest-listed company on the NY Stock Exchange.
• It’s easy to categorize TPL as an oil sector company; it is difficult to refute that it is a land company.
• In TPL's case, because of the royalty interest in the spun-off mineral rights, it even captures oil price inflation.

The following segment was excerpted from this fund letter.

Texas Pacific Land Corp. ( TPL )

There is, though, a land company that has been publicly traded for well over a century, making it the 4th longest-listed company on the NY Stock Exchange. Evidencing how invisible land companies are, two different websites list the renowned companies that have been trading the longest. The five oldest are reported to be, in order, BNY/Mellon, Consolidated Edison, Procter & Gamble, IBM, and Coca-Cola. The problem is that No. 4, IBM, went public in 1916, some decades after this land company did. This is a lesson in the survivor bias challenge in analyzing or relying on index returns.

In any case, this land company has the added benefit of not having undergone any recapitalization, acquisitions or ownership changes that would overly complicate the return calculations. The result is quite extraordinary. There are a few complexities, as always occur, but here are the preliminary, conservatively calculated figures.

• The initial stock price was $20 per share. It was Jay Gould, the infamous robber baron, who was "to undertake to find a market for it at that price," according to a newspaper article of that time.
• In 1927, almost 40 years later, at $2,000, it was the highest priced company on the Exchange.
• Today's share price is 286,857 times greater than the initial $20. Let me repeat that, a 286,857tis return. It would be equivalent, had there been no stock splits, to a current share price of $5.7 million.
• Simply astounding. And yet, here's the real point: that remarkable figure is merely the product of what would be a completely uninteresting rate of appreciation to any self-respecting Wall Street analyst or portfolio manager: 9.63% per year. You really can't sell that. For those immersed in the day-to-day flow of the markets, every sort of stock and index can rise 9% or 10% in a given year, even in a week or a day; heck 15% ain't nothin'.

Yet, we've seen how starkly impressive 9.6% is, because of how extraordinarily rare it is for 1) a business to sustain that rate of return, and 2) for an investor to hold it long enough to realize the compounding.

As soon as a security is sold, the compounding chain is broken. That stock might one day become a very large portion of a portfolio; it is at that point that the next year's 10% return, and the next, begins to truly dominate the portfolio's return and create true wealth. But it is a rare investor who can avoid breaking the compounding chain.

Obviously, there is no $5.7 million share price on the NYSE. To compute the annualized appreciation to today's share actual price, the initial price has to be adjusted downward for periodic share splits. These cumulated to 3,000:1, so that the original $20 figure would be $0.0067. The share today is within a 'normal' range price. Moreover, the 9.63% annual return is only a preliminary figure. It excludes dividends and it excludes the return from a valuable asset that was spun off to shareholders over 50 years ago.

Before we add those additional elements of return, it's worth pausing again on just what an elite, Olympics level of discipline is required for an investor to avoid transacting. Even if only out of sheer boredom, of having to endure an absence of visible catalyst for value recognition, of not seeing an end in sight.

• For instance, on September 14, 1899, a decade after someone might have purchased the shares for $20, they were still quoted at $20/$20 ¼. One couldn't be blamed for selling it in favor of something more interesting. There were many such periods in the ensuing century.
• Then there's the impatient public. As early as six years into its life, in 1894, the company was harried by shareholders to operate more aggressively. The complaint was that they were selling only sufficient land to pay expenses, and that good investment performance necessitated selling the asset in bulk. It was the company's " retort that the land can not be sold in bulk," per a newspaper article of the time. Shareholders were in a hurry.

If not the best performing stock on the NY Stock exchange over the past century-plus, this index-forgotten land company is certainly one of an exceedingly small, most august group.

At this point, for those who haven't penetrated the conceit of the exercise, this land company is Texas Pacific Land Corp. It's natural to protest that TPL is an energy sector company; it is certainly categorized that way. But it was originally categorized in the quotation section of financial newspapers under "Real Estate Trust & Land Stocks."

Operating and financial data make clear that it is a land company that gets a large, but not necessarily majority, of its revenues from oil and gas. Though it might surprise some, those revenues are often exceeded by revenues from its water rights and leasing activities, both of which derive from its land, as will also be the case if any of the land is ever developed into real estate.

Here is some abridged commentary about the oil prices from TPL management from the Feb '21 annual report. It's a bit out of date, so you have to recall the oil market then.

There is quite a lull in the oil situation in all the fields in Texas, which has continued now for some weeks. Crude oil is now selling at from 50% to 60% lower, per barrel, than sixty days ago and general retrenchment seems to be the plans of all the principal oil producers, and little or no work is being started at the present time.

This was not written in 2021. It was written 100 years ago, on February 14, 1921. The 1919 income statement showed that lease income accounted for over 90% of revenue, but in 1920, oil accounted for 44% of revenue. The note was intended to alert shareholders that the oil income would probably be a lot lower in 1921.

The original valuation of the property transferred to the Trust from the railroad bankruptcy was all about the land. Indeed, the land was described in extraordinary detail by the Trustees' agent and included data from the Report of the State Comptroller for 1887. This was on a county-by-county basis, including descriptions of the character of the land by elevation, rainfall, population, recent immigration statistics and, along with market value assessments, descriptions and valuation of machinery, crops, mineral deposits and silver, copper and iron mining activity, and on and on.

There were 467,216 head of livestock valued at $3,983,216. There was timber, cotton, fruit, salt deposits.

It was noted that in an 11-county grouping, which should be familiar to followers of TPL's currently active oil producing areas (Loving, Ector, Upton, Winkler and Midland counties), "There are but few running streams in this portion of the State, but at depths of from 20 to 90 feet, water of excellent quality is found in inexhaustible quantity." That water, today, is a major revenue producing asset of TPL.

It's easy to categorize TPL as an oil sector company; it is difficult to refute that it is a land company. After all, recalling the previous listing of the largest landowners in the U.S., even the very largest were distributed across many states. TPL's 874,000 surface acres qualify it not only it for that list, but also as one of the top few in Texas. As a final note on the challenge of relying on the historical validity of indexes, also recall that TPL was not on that annual listing of largest landholders, just as it wasn't on the listing of longest-traded NY Stock Exchange companies.

The following century of statistics describe the elements of the land value development in the TPL shares. This occurred almost entirely before the 're-discovery' of western Permian Basin oil in 2011-ish.

• Price/acre performance One return element for TPL is the price of the land, some 95% of which is grazing land, and which is substantially all under lease, as has been the case since 1888.
  • In 1888, TPL's first year of land sales averaged $2.36/acre, about identical to the average sales price over a decade later in 1900.
  • In 2022, some of the most active drilling on or near TPL land is in the 12,900 square miles comprising Crane, Loving, Pecos, Reeves, Terrell, Ward and Winkler counties. Rangeland-Agriculture land there is valued at $283 to $420/acre, and Rangeland special purpose sales, as for industrial use but not energy, was $715 to $1,500. ¹⁵
  • If, from these prices, TPL surface land is valued at a generic, non-energy-related $700/acre, the annualized appreciation of undeveloped rangeland is about 4.3%/year over the $2.36/acre price of 1888. ¹⁶
  • For a future time-capsule contrast, here are a couple of asking prices for undeveloped lots in/near Midland City, Texas. Midland City was once as sparsely populated as the above-named counties. But, with ever-more dense drilling activity it developed into a small city. One might recall the Summerlin development in Las Vegas. The asking price for a 6-acre undeveloped commercial-zoned lot on I-20, about 3 miles from the center of downtown Midland, is $650,000 per acre. ¹⁷ Also for sale, a 538-acre scrub-land lot 14 miles from Midland. It is developed only to the degree that it has electric service and water wells. It is part of a tract that had the first produning oil well in Midland County, which would have been exactly 100 years ago, but now conveys without minerals or mineral interests. It's priced at $21,000/acre. ¹⁸ It looks a bit like this:

• • In 2022, TPL sold land for about $1,515/acre, and in 2021 for a $25,000/acre price.

• Acres/share performance Then there is the increasing land content within each share.
  • In February 1888, TPL commenced with 1.109 acres per 100 shares.
  • As of December 2022, there were 11.357 acres per 100 shares.
  • That's an annualized increase of per-share land content of 1.75%.
  • On that basis, you could say that about 6% of TPL's annual return came just from the appreciation of the generalized land value and the anti-dilutive land-sale/share-repurchase program. Part of funding for share repurchases was revenue from leasing activities, oil and gas royalties, and water and minerals sales.

Not yet counted in the historical return was the spin-off or any dividends paid out.

• In 1954, TPL created a new company, TXL Oil Corp., into which it transferred the mineral rights of its then 1,973,099 surface acres. TPL shareholders received those TXL Oil shares.
• In 1962, Texaco acquired TXL for $202 million, paid in Texaco shares.
• In 2001, Texaco agreed to be acquired by Chevron.
• Adjusted for stock splits at Texaco and Chevron, the original 5.574 million TXL Oil shares that TPL shareholders received in 1954 would now, at the recent Chevron share price of $170, be worth $3.902 billion.
• The TPL market cap is now $13.852 billion. Adding the $3.902 billion spin-off shares adds another 0.18% annualized appreciation, so we're at 9.78%. That estimated historical return still does not include any dividends received. We have yet to unearth the full historical record. There are illuminating portions of the historical record though. While there were periods when TPL paid no or limited dividends, there were some when it paid very high dividends. But even relatively brief periods of high payouts can significantly impact long-term returns.
• During the 10 years from 1945 to 1954, shareholders received $17.55/share of dividends, recoverin125% of the 1945 share price of $14. The average yield of 12.5%, not captured in the price return, was important, since the 1954 price was unchanged from 1945.
• A similar 10-year period for Texaco was 1984 through 1993, when $34.75/share of dividends were received on a starting share price of about $35. That was just under a 10% average yield.

This is NOT, it should be said, a valuation of TPL. It is simply an attempt to trace the long-term inflation capture value of land as an investable publicly traded asset. TPL is not the only such, but it is one of the longest. In this case, because of the royalty interest in the spun-off mineral rights, it even captures oil price inflation. In TPL's 1920 Annual Report, the Trust's General Agent wrote that the crude oil price dropped from $3.00/barrel in December 1920 to as low as $1.25 in February 1921. Today's $80 oil price reflects a 102-year inflation rate of between 3.3% and 4.2%, depending which starting price you choose. That inflation is manifested beneficially in the TPL cash flow.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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