tpl-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 1-39804

Exact name of registrant as specified in its charter:

Texas Pacific Land Corporation


State or other jurisdiction of incorporation or organization:						IRS Employer Identification No.:
Delaware						75-0279735

Address of principal executive offices:

1700 Pacific Avenue, Suite 2900 Dallas, Texas 75201

Registrant’s telephone number, including area code:

(214) 969-5530

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock
(par value $.01 per share)

TPL

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

As of July 30, 2021, the Registrant had 7,752,464 shares of Common Stock, $0.01 par value, outstanding.

TEXAS PACIFIC LAND CORPORATION

Form 10-Q

Quarter Ended June 30, 2021

Page No.

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

Condensed Consolidated Statements of Income and Total Comprehensive Income for the three and six months ended June 30, 2021 and 2020

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020

Notes to Condensed Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share amounts)

(Unaudited)


	June 30, 2021		December 31, 2020
ASSETS
Cash and cash equivalents	$	329,134	$	281,046
Accrued receivables, net	67,038		48,216
Prepaid expenses and other current assets	1,312		2,778
Tax like-kind exchange escrow	746		1,978

Total current assets	398,230		334,018
Property, plant and equipment, net	76,917		79,267
Real estate acquired	108,546		108,536
Royalty interests acquired, net	45,278		45,646
Operating lease right-of-use assets	2,153		2,473
Other assets	2,719		1,695
Real estate and royalty interests assigned through the Declaration of Trust, no value assigned:
Land (surface rights)	—		—
1/16th nonparticipating perpetual royalty interest	—		—
1/128th nonparticipating perpetual royalty interest	—		—
Total assets	$	633,843	$	571,635

LIABILITIES AND EQUITY
Accounts payable and accrued expenses	$	13,979	$	12,530
Unearned revenue	4,388		3,997
Income taxes payable	3,443		4,054
Total current liabilities	21,810		20,581
Deferred taxes payable	38,346		38,728
Unearned revenue - noncurrent	20,411		22,171
Accrued liabilities	3,634		2,150
Operating lease liabilities	2,465		2,821
Total liabilities	86,666		86,451

Commitments and contingencies	—		—
Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none outstanding as of June 30, 2021	—		—
Common stock, $0.01 par value; 7,756,156 shares authorized and 7,754,523 outstanding as of June 30, 2021	78		—
Treasury stock, at cost; 1,633 shares as of June 30, 2021 and none outstanding as of December 31, 2020	(2,504)		—
Certificates of Proprietary Interest, par value $100 each; none outstanding as of December 31, 2020	—		—
Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 Sub-share Certificates as of December 31, 2020	—		—
Accumulated other comprehensive loss	(2,636)		(2,693)
Retained earnings	552,239		—
Net proceeds from all sources	—		487,877
Total equity	547,177		485,184
Total liabilities and equity	$	633,843	$	571,635

See accompanying notes to condensed consolidated financial statements.

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TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME

(in thousands, except shares and per share amounts)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Revenues:
Oil and gas royalties	$	58,204	$	20,513	$	107,737	$	62,873
Produced water royalties	15,458		13,111		28,007		25,617
Water sales	12,473		8,419		25,429		35,386
Easements and other surface-related income	8,977		11,656		18,024		25,417
Land sales	746		3,493		746		4,393
Other operating revenue	74		92		144		192
Total revenues	95,932		57,284		180,087		153,878

Expenses:
Salaries and related employee expenses	13,271		8,937		23,250		19,557
Water service-related expenses	3,551		2,165		6,849		8,945
General and administrative expenses	2,841		2,448		5,647		5,407
Legal and professional fees	1,141		2,610		3,353		4,968
Land sales expenses	—		2,706		—		2,706
Depreciation, depletion and amortization	3,858		3,678		7,696		7,013
Total operating expenses	24,662		22,544		46,795		48,596

Operating income	71,270		34,740		133,292		105,282

Other income, net	406		183		411		1,009
Income before income taxes	71,676		34,923		133,703		106,291



Income tax expense	14,630		7,340		26,605		21,307
Net income	$	57,046	$	27,583	$	107,098	$	84,984

Other comprehensive income — periodic pension costs, net of income taxes of $8, $3, $15 and $7, respectively	29		13		57		27
Total comprehensive income	$	57,075	$	27,596	$	107,155	$	85,011

Weighted average number of common shares/Sub-share Certificates outstanding	7,755,886		7,756,156		7,756,020		7,756,156

Net income per common share/Sub-share Certificate — basic and diluted	$	7.36	$	3.56	$	13.81	$	10.96

Cash dividends per common share/Sub-share Certificate	$	2.75	$	—	$	5.50	$	16.00

See accompanying notes to condensed consolidated financial statements.

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TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities:
Net income	$	107,098	$	84,984
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	(382)		(700)
Depreciation, depletion and amortization	7,696		7,013
Land sales revenue recognized on land exchanges	—		(15)
Changes in operating assets and liabilities:
Operating assets, excluding income taxes	(18,126)		17,028


Operating liabilities, excluding income taxes	814		(896)
Income taxes payable	(611)		(3,286)
Cash provided by operating activities	96,489		104,128

Cash flows from investing activities:

Acquisition of real estate	(10)		(3,912)
Acquisition of royalty interests	—		(16,945)
Purchase of fixed assets	(4,461)		(4,454)
Cash used in investing activities	(4,471)		(25,311)

Cash flows from financing activities:
Repurchases of common stock	(2,504)		—
Dividends paid	(42,658)		(124,098)
Cash used in financing activities	(45,162)		(124,098)

Net increase (decrease) in cash, cash equivalents and restricted cash	46,856		(45,281)
Cash, cash equivalents and restricted cash, beginning of period	283,024		303,645
Cash, cash equivalents, and restricted cash, end of period	$	329,880	$	258,364

Supplemental disclosure of cash flow information:
Income taxes paid	$	27,613	$	25,300
Supplemental non-cash investing and financing information:
Fixed asset additions in accounts payable	$	451	$	471
Issuance of common stock	$	78	$	—

Land exchange	$	—	$	15

See accompanying notes to condensed consolidated financial statements.

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TEXAS PACIFIC LAND CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Basis of Presentation

Organization

Texas Pacific Land Corporation (which, together with its subsidiaries as the context requires, may be referred to as “TPL”, the “Company”, “our”, “we” or “us”) is a Delaware corporation and one of the largest landowners in the State of Texas with approximately 880,000 acres of land in West Texas, with the majority of our ownership concentrated in the Permian Basin. Additionally, we own a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 85,000 acres of land, a 1/16th NPRI under approximately 371,000 acres of land, and approximately 4,000 additional net royalty acres (normalized to 1/8th) in the western part of Texas.

TPL’s income is derived primarily from oil, gas and produced water royalties, sales of water and land, easements and commercial leases of the land.

On January 11, 2021, we completed our reorganization from a business trust, organized under a Declaration of Trust dated February 1, 1888 (the “Declaration of Trust”) to a corporation (the “Corporate Reorganization”) and changed our name from Texas Pacific Land Trust (the “Trust”) to Texas Pacific Land Corporation. See further discussion of the Corporate Reorganization and its impact on our equity structure in Note 7, “Changes in Equity.” Any references in these condensed consolidated financial statements and notes to the Company, TPL, our, we, or us with respect to periods prior to January 11, 2021 will be in reference to the Trust, and references to periods on that date and thereafter will be in reference to Texas Pacific Land Corporation or TPL Corporation.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. The condensed consolidated financial statements herein include all adjustments which are, in the opinion of management, necessary to fairly state the financial position of the Company as of June 30, 2021 and the results of its operations for the three and six months ended June 30, 2021 and 2020, respectively, and its cash flows for the six months ended June 30, 2021 and 2020, respectively. Such adjustments are of a normal nature and all intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, and accordingly these interim financial statements and footnotes should be read in conjunction with the audited financial statements and footnotes included in our Form 10-K for the year ended December 31, 2020. The results for the interim periods shown in this report are not necessarily indicative of future financial results.

We operate our business in two segments: Land and Resource Management and Water Services and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of TPL and provide a framework for timely and rational allocation of resources within businesses. See Note 8. “Business Segment Reporting” for further information regarding our segments.

2. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.

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Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):


	June 30, 2021		December 31, 2020
Cash and cash equivalents	$	329,134	$	281,046
Tax like-kind exchange escrow	746		1,978
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	329,880	$	283,024

Treasury Stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock and reported as a separate line item on our condensed consolidated balance sheets.

Reclassifications

Certain financial information on the condensed consolidated statements of income for the three and six months ended June 30, 2020 have been revised to conform to the current year presentation. These revisions include (i) a reclassification of $13.1 million and $25.6 million of produced water royalties revenue for the three and six months ended June 30, 2020, respectively, previously included in easements and other surface-related income to a separate financial statement line item within revenues and (ii) a reclassification of $2.7 million of land sales expenses for the three and six months ended June 30, 2020 previously included in land sales to a separate financial statement line item within operating expenses. Land sales expenses include cost basis and closing costs associated with land sales.

Recently Adopted Accounting Guidance

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted the guidance effective January 1, 2021. The adoption had minimal impact on the Company’s consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements

In July 2021, the FASB issued ASU 2021-05, “Leases (Topic 842) Lessors – Certain Leases with Variable Lease Payments.” Under the ASU, a lessor would classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if the lease would have been classified as a sales-type lease or direct financing lease under ASC 842 classification criteria and the lessor would have otherwise recognized a day one loss. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The ASU is anticipated to have minimal to no impact on our consolidated financial statements and disclosures upon adoption.

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3. Property, Plant and Equipment

Property, plant and equipment, net consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands):


	June 30, 2021		December 31, 2020
Property, plant and equipment, at cost:
Water service-related assets (1)	$	102,554	$	97,699
Furniture, fixtures and equipment	6,142		6,125
Other	598		598
Property, plant and equipment at cost	109,294		104,422
Less: accumulated depreciation	(32,377)		(25,155)
Property, plant and equipment, net	$	76,917	$	79,267

(1) Water service-related assets reflect assets related to water sourcing and water treatment projects.

Depreciation expense was $3.7 million and $3.6 million for the three months ended June 30, 2021 and 2020, respectively. Depreciation expense was $7.2 million and $6.8 million for the six months ended June 30, 2021 and 2020, respectively.

4. Real Estate Activity

As of June 30, 2021 and December 31, 2020, the Company owned the following land and real estate (in thousands, except number of acres):


	June 30, 2021			December 31, 2020
	Number of Acres	Net Book Value		Number of Acres	Net Book Value
Land (surface rights) (1)	823,452	$	—	823,482	$	—
Real estate acquired	57,049	108,546		57,041	108,536
Total real estate situated in Texas	880,501	$	108,546	880,523	$	108,536

(1) Real estate originally assigned through the Declaration of Trust.

Land Sales

For the six months ended June 30, 2021, we sold 30 acres of land in Texas for an aggregate sales price of $0.7 million, an average of approximately $25,000 per acre. For the six months ended June 30, 2020, we sold 527 acres of land in Texas for an aggregate sales price of $4.4 million, an average of approximately $8,305 per acre. The aggregate sales price excludes a reduction of $2.7 million in land basis.

Land Acquisitions

For the six months ended June 30, 2021, we acquired 8 acres of land in Texas for an aggregate purchase price of less than $0.1 million, an average of approximately $1,266 per acre. For the six months ended June 30, 2020, we acquired 756 acres of land in Texas for an aggregate purchase price of approximately $3.9 million, an average of approximately $5,134 per acre.

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5. Royalty Interests

As of June 30, 2021 and December 31, 2020, we owned the following oil and gas royalty interests (in thousands):


	Net Book Value
	June 30, 2021		December 31, 2020
1/16th nonparticipating perpetual royalty interests	$	—	$	—
1/128th nonparticipating perpetual royalty interests	—		—
Royalty interests acquired	46,266		46,266
Total royalty interests, gross	46,266		46,266
Less: accumulated depletion	(988)		(620)
Total royalty interests, net	$	45,278	$	45,646

There were no oil and gas royalty interest transactions for the six months ended June 30, 2021. For the six months ended June 30, 2020, we acquired oil and gas royalty interests in 1,017 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $16.9 million, an average price of approximately $16,668 per net royalty acre.

6. Income Taxes

The calculation of our effective tax rate is as follows for the three and six months ended June 30, 2021 and 2020 (in thousands, except percentages):


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Income before income taxes	$	71,676		$	34,923		$	133,703		$	106,291
Income tax expense	$	14,630		$	7,340		$	26,605		$	21,307
Effective tax rate	20.4		%	21.0		%	19.9		%	20.0		%

The effective tax rates were lower than the U.S. federal statutory rate of 21% primarily due to statutory depletion allowed on mineral royalty income.

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7. Changes in Equity

The following tables present changes in our equity for the six months ended June 30, 2021 and 2020 (in thousands, except shares and per share amounts):


	Sub-share Certificates	Common Stock			Treasury Stock			Accum. Other Comp. Loss		Retained Earnings		Net Proceeds from All Sources		Total Equity
	Shares	Shares	Amount		Shares	Amount
For the six months ended June 30, 2021:
Balances as of December 31, 2020	7,756,156	—	$	—	—	$	—	$	(2,693)	$	—	$	487,877	$	485,184
Net income	—	—	—		—	—		—		50,052		—		50,052
Dividends paid ($2.75 per common share)	—	—	—		—	—		—		(21,329)		—		(21,329)
Conversion of Sub-shares into shares of common stock	(7,756,156)	7,756,156	78		—	—		—		487,799		(487,877)		—
Other comprehensive income	—	—	—		—	—		28		—		—		28
Balances as of March 31, 2021	—

SEC Form 10-Q filed by Texas Pacific Land Trust