Good morning. Thank you for joining us today for Texas Pacific Land Corporation’s third quarter 2021 earnings conference call.

Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission. These documents are available on the Investors section of the company’s Web site at www.texaspacific.com.

As a reminder, remarks made on today’s conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company’s results, please refer to our earnings release for this quarter and to our most recent SEC filings.

During this call, we will also be discussing certain non-GAAP financial measures. More information and reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings.

We may at times refer to our company by its stock ticker TPL. This morning’s conference call is hosted by TPL’s Chief Executive Officer, Ty Glover; and Chief Financial Officer, Chris Steddum.

Management will make some prepared comments, after which we will open the call for questions. Now, I will turn the call over to Ty.

Thank you, Shawn, and good morning, everyone. Third quarter 2021 was a tremendous quarter.

TPL set quarterly records for consolidated adjusted EBITDA and royalty production. This was our second best quarter for revenues in our water business and what a difference a year makes.

Compared to the same quarter last year, our total consolidated revenues are up 66%, royalty daily production is up 24%, total water revenues are up 51% and total consolidated free cash flow is up 60%. Although the past 18 months have been among the toughest we’ve seen in the industry, TPL’s vertically integrated business model, high margin cash flows and strong balance sheet allowed us to successfully navigate through the downturn.

One metric we focus on and prioritize and I think demonstrates the resiliency and quality of our overall business is our consolidated adjusted EBITDA margin. For the first half of 2021, our adjusted EBITDA margin was 83%.

Amongst members of the S&P Oil and Gas Exploration & Production Index, which includes TPL, our first half 2021 adjusted EBITDA margin was the highest of the group. If TPL were a member of the S&P 500, our adjusted EBITDA margin would have been in the Top 10 for the same period.

For this most recent quarter, our adjusted EBITDA margin has improved even further to 87%. Today, with higher commodity prices and continued growth in the Permian Basin, combined with years of hard work by the TPL team in developing and executing our vertically integrated business model, we’re pleased to be in a position to fully capture the value from our asset base.

Our active management approach has taken our legacy asset base, which was both ideally situated yet raw and undeveloped and created multiple high quality cash flow streams. To this point, today, I want to highlight and elaborate on our water business.

Our water business is a clear example of the benefits of our active management approach. Prior to active management, TPL had minimal revenues outside of its legacy production royalty interest despite owning close to 1 million surface acres in the Permian.

As drilling and completion techniques continued to improve over the last decade, the vast resource potential underlying our royalty assets became increasingly viable. However, development here is not without challenges, especially in the Western part of the Permian, generally known as the Delaware Basin, where majority of our high interest royalties reside.

On the Delaware side of the Permian, the geography tends to be much more arid and just generally inhospitable compared to the Eastern flank of the basin. In fact, Loving County in Texas, which is considered to be part of the core of the Delaware Basin, is the least populated county in the contiguous United States.

Reeves and Covington counties sits to the West of Loving and these counties are no less desolate and arguably even more arid than Loving. These geographical features are relevant because water is scarce in this part of the Delaware.

A well development would be impossible without tremendous amounts of water. Completing a horizontal well otherwise known as fracking requires approximately 0.5 million barrels of water.

This lack of water availability was a major reason development in the Delaware Basin initially lagged behind the development in the Midland Basin. That's why in 2017, we formed Texas Pacific Water Resources.

This represented a departure from the legacy way of doing business at TPL, which up to that point was mostly passively run with just a handful of employees. We went out and hired talented and experienced team of professionals from some of the best companies in the industry to execute our plan.

From there, we developed two general sides to our new water business, the first being source water and the second being produced water. Starting with source water, this is where we provide brackish groundwater and to a lesser extent treated produced water to oil and gas operators for use in their well development activities.

As surface owners, TPL has the unique right to water aquifers on our land and across our 880,000 surface acres. We have a handful of locations with productive aquifers.

Over the last few years, we've invested approximately 105 million in developing aquifer wells, laying transfer pipelines and pumps, constructing frac water storage ponds. We strategically selected and developed this water infrastructure throughout our acreage footprint to efficiently service the greatest number of oil and gas wells across the Permian Basin.

In order to maximize capital efficiency and margins, we generally required producers to come to our frac water ponds to take delivery of our water. From there, the operators take responsibility for developing the infrastructure and managing the logistics, transferring water from our frac ponds to their well beds.

It's worth noting that today, operators generally develop multiple wells simultaneously on a single development pad. Operators have also become more efficient in completing multiple frac stages for multiple wells in an increasingly condensed amount of time.

Laterals are also getting much longer. Thus, operators often need millions of barrels of water delivered over a course of just a few days, which is no easy task if you're trying to source water from multiple small sources.

At TPL, we've sized and developed our source water infrastructure to accommodate the needs of the most demanding producers. The outcome of this very deliberate effort that our source water business was instrumental in enabling and incentivizing production on our royalty acreage in the Delaware.

Although development in the overall Delaware has grown tremendously over the last five years, production on our acreage has grown even more. Additionally, we often sell water for wells that may not be located on our acreage.

So our water has been vital for well development in the Delaware even outside of our footprint. And this also drives additional surface revenue for TPL.

During this most recent quarter, over 70% of our source water sales were for wells that were located off of TPL surface, which is directly attributable to the industry relationships our team has. Historically, we estimate that our market share has been approximately 30% of Northern Delaware source water volumes.

We have capability to deliver over 800,000 barrels of water per day without meaningful additional capital expenditures. This past quarter, we delivered 42 million barrels of water to our customers.

I'm confident that without our source water business, oil and gas production in the Delaware overall and production on TPL’s royalties specifically would be meaningfully less than what it is today. Our water is vital for Permian producers to develop their acreage and we actively leverage our source water and our surface rights to drive more production onto TPL’s royalty acreage.

Today, we have an extremely talented group of people that focus exclusively on serving our customers to encourage production on our land, and to make sure that we are a reliable partner in delivering water. That's worth noting, because our source water is an operated business, and as such, our cash flow margins are understandably lower than our oil and gas royalties business.

Our source water assets still generate strong cash flow margins and profitability. And our investment in the water business has generated meaningful free cash flow.

Layer on the additional impact of using our water to incentivize development onto TPL’s royalty acreage, and our source water business has generated tremendous value for our shareholders. The other side of the water business is referred to as produced water royalties or also referred to as saltwater disposal royalties.

This is where we charge a fee for water from a producing oil and gas well that is disposed of on or crosses our land. As many are already aware, oil and gas wells in the Delaware are unique and that these wells produce a disproportionately high amount of water along with the oil and natural gas volumes compared to other basins.

This associated water is referred to as produced water, and generally the water must either be injected into a saltwater disposal well or treated for reuse elsewhere. Unlike our source water business, our produced water business requires no capital investment from us.

Whereas we operate our source water assets so that we can control our own destiny towards incentivizing development. Our produced water royalties leverage our expansive checkerboard surface footprint to create value.

Our customers are generally either operators that own their own infrastructure, or water midstream companies that specialize in handling produced water on behalf of operators. Because we don't develop, own or operate saltwater disposal wells or the logistics pipelines, our produced water royalties are high margin fee-based cash flows that require no capital expenditures.

And because producing wells are almost never shut in outside of rare circumstances, the volumes are very stable. 2020 was a great example of the resiliency of this business.

Despite one of the worst down cycles this industry has ever seen and with severely depressed commodity prices, our produced water revenues in 2020 were 30% higher than in 2019. Again, our produced water business is a testament to our active management approach.

Prior to active management, our produced water royalty cash flows were minimal and little time and effort was spent on maximizing its value. Today, TPL’s management and water teams dedicated tremendous amount of time and effort enforcing our surface rights, negotiating fees at fair value and monitoring compliance.

In summary, over the last 12 months alone, our water business has generated approximately 113 million in revenues and 50 million in net income. Since 2017, when we started the business, we've generated over $445 million in revenues and 210 million of net income.

The water business generates robust free cash flow and requires relatively modest amounts of maintenance capital, approximately $10 million annually. Our investment in people and capital has been a highly profitable endeavor, and we expect our investment to continue generating strong free cash flow and value for our shareholders.

We're extremely proud of the business we have built. We're focused on making it better and more profitable every day, and we're glad that our shareholders can reap those rewards.

With that, I'll turn the call over to Chris.

Beginning with our operating results, for the third quarter of 2021, we had net income of $83.8 million or $10.82 per share. This compares to 46.3 million of net income or $5.97 per share in the same quarter of the prior year.

The increase in net income and earnings per share in the third quarter is primarily due to an increase in royalty and source water revenues compared to the third quarter of 2020. Total revenue for the third quarter of 2021 was $123.7 million compared to $74.4 million for the same quarter last year, a 66% year-over-year increase.

Adjusted EBITDA was $107.6 million compared to $62.3 million for the same period last year. Oil and gas royalty production volumes were approximately 19.5 thousand barrels of oil equivalent per day in the third quarter of 2021 compared to 15.7 thousand barrels of oil equivalent per day for the third quarter of 2020.

Production this quarter benefited from the increased activity on our royalty acreage and from production associated with periods prior to the beginning of the most recent quarter. We were able to fully benefit from rising oil, natural gas and NGL prices as we were completely unhedged during the quarter, and we currently remain unhedged today.

At the end of the third quarter 2021, TPL’s royalty acreage had 7.3 net well permits, 7.8 net drilled but uncompleted wells, 1.9 net completed wells, and 45.5 net producing wells. Water revenue was $36.9 million in the third quarter of 2021, up from 24.5 million in the prior year.

This increase was primarily due to year-over-year increases in both source water sales volumes and produced water royalty volumes. Moving to the expense side, operating expenses were $20.5 million for the third quarter of 2021, up from $17.6 million in the third quarter of 2020.

Turning to our balance sheet. At the end of the third quarter, we had $373 million of cash and cash equivalents and we continue to carry no debt.

In the third quarter of 2021, capital expenditures were $6.6 million which was spent on electrifying our sourcing infrastructure and investments in corporate assets. Looking to the balance of 2021, we anticipate spending an additional $3 million to $5 million of capital on our water sourcing infrastructure.

On October 28, our Board declared a cash dividend of $2.75 per common share payable on December 15 to shareholders of record as of December 8. Through September 30, our year-to-date dividends totaled $8.25 per share.

Under our recently authorized share repurchase program, we bought back 6,179 shares of stock at an average price per share of $1,406 during the current quarter. As of September 30, we have completed $11.2 million of share repurchases and have $8.8 million remaining on the current repurchase authorization.

In August, TPL released its inaugural ESG disclosure. We believe this is a reflection of our existing commitments and priorities surrounding sustainability, social responsibility and governance.

We look forward to building upon these objectives, and we believe TPL is uniquely positioned to provide collaborative opportunities with customers and companies that operate on our land to drive sustainability and ensure that our industry benefits all stakeholders. With that, operator, we will now take questions.

Good morning all, and congrats on a strong update.

Good morning.

My first question is around that – good morning. Based on Q3 commentary from Chevron regarding increase in activity in the Permian and the rig adds from privates, can you frame up how you see activity trending in Q4 and into 2022 based on your latest permit scrapes?

Yes, sure, John. Hi, this is Chris.

Thanks for the question. So yes, we've definitely have seen and continue to see strong permitting activity.

As just as reference, in the first quarter that probably on a net permanent basis remain the best quarter that we saw so far this year. Second quarter was a little bit slower, but then we saw another big uptick in the third quarter.

And Chevron, for instance, was one of the companies who filed quite a few permits in 3Q and was definitely up from their level of permitting activity on TPL during the first half of the year. And so with the backlog of permits that we see today, I think we view that as a very positive indication for fourth quarter and continuing on into 2022.

Great. And then for my follow up, perhaps for Ty, given the increase in commodity prices, could you speak to the A&D market and the current opportunity set?

And then perhaps touching on your appetite to pursue potential opportunities?

Yes, sure. Thanks for the question.

We've looked at quite a few deals lately. As we've said, our bar, just for TPL, is pretty high.

And the bid-ask spread on those high quality deals has been a little wider in the past, but we're starting to see that narrow with commodity prices where they're at. We see a lot more deals start to come on, hit the market last couple of months.

So that's a big positive for us. We've seen a lot of competition on the smaller deals, but starting to see some bigger deals at the market.

So we feel really good about it.

Perfect. Thanks for the color.

And if I could squeeze one last question and thinking about your strong cash position, could you speak to your view on the progression of your return to capital strategy as we look forward in time?

Yes. Again, I think like Ty said, when you think about TPL’s capitalization for one, because we carry no debt and no RBL , maintaining a healthy cash balance has always been, and to the extent that remains the case, will always be a big part of our strategy.

And so as Ty has alluded, I think when we think about that cash and balance, from our perspective, it provides a lot of optionality and value to us to be able to utilize that in the near term. And so when we think about it, we think that with the opportunity set in front of us, we like having that large cash balance to be able to utilize, if the right opportunity comes along.

Good morning. I just wanted to see -- given that the dynamics of the players involved in the Permian is changing, how does that change your business in any way, as far as elongating negotiations for royalties?

Maybe the new players aren't well versed in how the industry works in the Permian?

Hi. This is Ty.

I would say, most of the consolidation that we've seen has been between like legacy Permian operators, most of whom we have existing relationships with. We have gained a couple of new additional strong relationships through some of the consolidation.

But I think, overall, for us, it's been positive across all of our business lines. Just with where our acreage sits, the relationships we have prioritizes some of our acreage that may not have been previous to some of this consolidation.

So I would say, overall, it’s been very positive for TPL.

And my other question was, do you expect increasing your Delaware Basin acreage use in '22? And how much -- if you can talk about how much that would look like?

Yes. As Chris alluded to earlier, we saw strong permitting from our top three with Chevron, EOG and Cimarex in third quarter.

That's all Delaware Basin. Occi, Shell and Exxon were four, five and six.

A vast majority of that’s Delaware Basin as well. So, yes, I think everything that we're seeing indicates stronger activity in the Delaware going forward.

Okay, great. Thank you.

Thanks, Hamed.

Thanks, Hamed.

Hi. Good morning, guys.

Thanks for taking the questions. I just wanted to follow up on the strategic outlook.

You talked about wanting to retain cash for the right opportunity, which makes some sense. If I think about the inventory depth today, it's already well ahead of peers and clearly between now and the robust growth this quarter.

Could you maybe just talk about the kind of opportunities and what’s sort of at the top of your punch list when it comes to potentially deploying that excess cash?

Yes. Like I stated before, our bar’s pretty high.

So we're looking for very similar quality to what we already own. We like the vertically integrated nature of our assets.

So always interested in integrated assets going forward, something -- or we can buy the surface, the minerals got a water component. I don't think our focus has changed any from what we've talked about in the past.

Like I said, on those really high quality assets, the bid-ask spread has been a bit wider in the past, but we're starting to see that narrow. So we feel really good about the opportunity set and our ability to transact in the near term.

And that's -- as Chris alluded to, that's why we're going to hold on to some dry powder.

Great. And then just in terms of -- in the sort of potential for that bid-ask spread to remain wider than you'd like, could you maybe talk about the potential for either a special dividend or perhaps an expanded buyback authorization as a way to return cash that you're not able to deploy?

Yes. Hi, Chris.

Look, certainly, at some point, if it becomes clear the opportunity set for whatever reason bid-ask spread or other isn't materializing, then I think both of those are on the table. And our Board would certainly take a look and see of those two, which makes the most sense, or it could be an increase in both of those as a way to return the capital to shareholders.

And so -- but in the near term, we see a lot of opportunity. And so I think we'd like to continue to retain some of the cash.

But certainly, at some point, the right thing to do would be to return it to the shareholder base.

Okay, great. And then just as a follow up, you guys have talked a bit today about the value of active management, which is great to hear.

Just hoping if you could kind of frame up the next-gen wind and solar opportunity, just in terms of extrapolating what looks like a small wind power gen exposure today to say 20% or 30% of the unused surface position? Is it possible just to get some rough goalposts around how large a cash flow stream that could grow to over time?

Yes. I don't know if we can give you goalposts today.

But what I can say is we've got a team dedicated to renewable and next-gen opportunities. They're having some really good conversations right now regarding things like solar, wind, Bitcoin mining, carbon capture, micro-grids.

So a lot of conversations with our operators right now around working together on some of these opportunities. So it just again reinforces the importance of the relationships our team has with our operators in the broader industry.

So thanks for the question.