Texas Pacific Land Corporation Third Quarter 2026 Earnings Conference Call - TEXAS PACIFIC LAND CORP

Financial Performance:

• Third quarter 2026 consolidated revenue reached a record $273 million, up 11% sequentially and 35% year-over-year.
• Adjusted EBITDA hit $238 million, representing an 11% sequential increase and 37% year-over-year growth, with an 87% margin.
• Free cash flow was $170 million, rising 10% sequentially and 39% year-over-year.
• Net income totaled $167 million ($2.42 per diluted share), a 38% increase year-over-year.
• The company maintains a pristine balance sheet with $370 million in cash equivalents, zero debt, and an undrawn $500 million credit facility.
• Record production metrics included 17.1 thousand barrels of oil per day and 42.3 thousand barrels of oil equivalent (BOE) per day.
• Produced water royalties generated record revenue with volumes reaching 5.5 million barrels per day (14% sequential growth, 27% YoY growth).
• The Surface Leases, Easements, and Materials (SLIM) segment reported $36 million in revenue, a 53% sequential increase.

Guidance and Future Outlook:

• Management anticipates the Permian Basin will set a new oil production record in 2026, with high certainty for another record year in 2027.
• Rig counts and new horizontal well permits have inflected upward, signaling strengthening near-term growth and a shift from drilling to completions.
• Water business outlook is constructive; 4Q completion schedules are robust, and a pivot toward beneficial reuse and desalination is expected to accommodate intra-basin shifts.
• Capital allocation plans for 2026 include spending on water distribution and treatment infrastructure to support initial power and data center project in-service.
• Long-term growth drivers include the expansion of natural gas pipeline capacity to alleviate in-basin gluts and support improved gas realizations.

Business Segments and Product Lines:

• Oil & Gas Royalties: Benefited from sustained high oil prices and record production; company remains completely unhedged to capture full upside.
• SLIM (Surface, Leases, Easements, Materials): Driven by infrastructure growth in natural gas, NGLs, electricity, and utilities across a massive land footprint.
• Water Business (TPL): Vertically integrated with capabilities in non-potable, potable, and demineralized water; volumes flat sequentially but record royalty volumes due to injection needs during tepid completion activity.
• Produced Water Desalination (OILA Phase 2b): Commissioning is underway with synthetic brine; transition to actual produced water is targeted by year-end; adjacent land rehabilitation is complete.
• Data Centers & Power: Significant due diligence and site work are progressing; commercial agreements are in negotiation with hyperscalers, focusing on "behind-the-meter" rural projects to mitigate grid complexity.

Market and Competitive Landscape:

• Permian Basin activity is accelerating, with operators shifting focus from Delaware to Midland and from Texas to New Mexico due to water handling and gas price dynamics.
• Natural gas price realizations improved significantly to $2.40/mcf (from $0.40/mcf in Q2) as new pipeline capacity de-bottled local gas gluts.
• The data center sector shows robust demand from hyperscalers seeking to minimize environmental externalities and utilize West Texas resources (cheap power, brackish water).
• The company views the shift to Midland and New Mexico as an opportunity to leverage third-party disposal systems and expand produced water capture.

Risks and Challenges:

• Regulatory Uncertainty: Recent Texas governor election results and associated moratoriums on grid-connected data center permits and TCEQ reviews create short-term timing delays, though not a blanket ban.
• Well Inventory Drawdown: Ducts and cups inventory has declined as operators draw down inventory to meet high production rates, though expected to replenish as rig counts rise.
• Intra-basin Dynamics: Weak gas pricing and water handling challenges have caused shifts in completion activity, requiring strategic adaptation to New Mexico and Midland basins.
• Political Environment: Changes in state leadership may increase regulatory scrutiny on permitting, environmental impact, and community engagement for data center projects.

Management Commentary and Tone:

• Management tone remains highly confident and bullish, characterizing the record quarter as the third consecutive period of record revenue, net income, and free cash flow.
• CEO Ty Glover and CFO Chris Stedham expressed optimism regarding the "Permian oil machine" not slowing down, despite entering 2026 with low oil prices.
• Management views political changes in Texas as a net positive long-term, reinforcing the West Texas thesis for compute and power generation due to its inherent advantages.
• The tone regarding the data center and desalination initiatives is cautious but optimistic, emphasizing the need to navigate new regulatory frameworks while leveraging existing infrastructure.

Analyst Questions and Answers:

• Derek Whitefield (Texas Capital): Questioned the impact of the "blue wave" election and new governor on the business. Management responded that while it adds short-term permitting complexity, it reinforces the long-term value proposition for West Texas as a hub for compute due to its resources and community acceptance.
• Tim Resvin (KeyBank): Asked for specifics on the new governor's stance and next steps for desalination. Management stated no specific regulatory changes are anticipated beyond existing reviews, and desalination will pivot from synthetic to actual produced water by year-end, followed by commercial scale-up discussions.

Other Key Points:

• The company acquired approximately 9,700 surface acres and 238 net royalty acres in the Midland and Glasscock counties, augmenting a high-quality sub-region with existing TPL sections.
• Well inventory declined due to a basin-wide drawdown of "ducts" and "cups," but this is viewed as a temporary phase before new spuds replenish the inventory.
• The produced water business benefits from a natural hedge: periods of low completion activity increase the volume of water requiring injection across PPL land.
• OILA Phase 2b facility grand opening occurred in August with significant industry and government attendance; commissioning involves data collection for efficiency optimization.
• Management reaffirmed a disciplined approach to capital allocation, utilizing excess free cash flow for M&A, buybacks, and organic growth given the undrawn credit facility and strong cash position.