Black Bear Value Fund LP – Texas Pacific Land Trust (NYSE:TPL)

The following segment was excerpted from this fund letter.

Texas Pacific Land Trust (NYSE:TPL) is a publicly traded land trust that is one of the largest landowners in Texas and one of the oldest listings on the NYSE, having been formed in 1888 and listed in 1927. Most have not heard about TPL as it is not in passive indices due to its corporate structure (it is a trust with unique corporate governance).

TPL is a royalty company with 100% of its acreage located in the Texas Permian Basin. In a nutshell, it makes money when drilling activity occurs, but DO NOT have the capital needs as it simply provides access to land. Think of it as a franchisor of fast-food energy and the drillers and/or midstream as the actual restaurants.

If you drill oil on its royalty-land, you pay a portion to TPL. Need a road to drive to the site? You pay a fee/easement. Need water? Need a pipeline? Need electricity transmission lines? I think you get the picture. If you want access to the assets underneath the ground or to travel on top (oil/natural gas/water), you must pay TPL.

The incremental amount of work on TPL’s part is minimal as the extraction and movement of the oil/natural gas is undertaken by others. It is merely a toll collector with Returns on Capital of 80+%.

TPL is undergoing a corporate structure change as the result of constructive activism from Horizon Kinetics. It will be converting to a corporation with modern corporate governance over the coming months. This could result in index inclusion which could provide a non-fundamental catalyst for the stock price to rise.

Longer term, some of the cheapest to deliver hydrocarbons are in the Permian basin. Some are concerned that the long-term push towards renewable energy will harm them. I see it a bit differently. First, change takes time, and while there are increasing amounts of electric vehicle (EV) or solar power discussions, it is going to take a while for it to become a large part of our everyday lives. Secondly, and probably more importantly, renewable products require commodities and/or compounds that need to be extracted and/or heated (Silicon, silver, copper, lithium, etc.). Their production requires hydrocarbons. In order to get to a lower hydrocarbon long-term future, we will need hydrocarbons. The cheapest place to get these are in the land owned by TPL.

In an inflationary environment, businesses that have lower capital intensity both in capital assets and people stand to benefit. In other words, if oil goes up a lot, the incremental cost to TPL is close to 0, so it’s all incremental profit. This is a business that should benefit in a massive way if we were to see energy inflation. In the meantime, we likely own it at a 5-7% free cash flow yield with massive upside.

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

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