TEXAS PACIFIC LAND CORPORATION The following discussion and analysis should be read together with the factors discussed in Item 1A "Risk Factors" and with the Consolidated Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust's future performance. Words or phrases such as "does not believe" and "believes," or similar expressions, when used in this Form 10-K or other filings with theSEC , are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Overview The Trust was organized in 1888 and holds title to extensive tracts of land in numerous counties inWest Texas which were previously the property of theTexas andPacific Railway Company . We continue to manage those lands for the benefit of the holders of Certificates of Proprietary Interest in the Trust (and/or Sub-shares). Our revenues are derived primarily from oil and gas royalties, sales of water and land, easements and commercial leases. Due to the nature of our operations, our revenue is subject to substantial fluctuations from quarter to quarter and year to year. The demand for, and sale price of, particular tracts of land is influenced by many factors beyond our control, including general economic conditions, the rate of development in nearby areas and the suitability of the particular tract for commercial uses prevalent in westernTexas . We are not an oil and gas producer. Rather, our oil and gas revenue is derived from our oil and gas royalty interests. Thus, in addition to being subject to fluctuations in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject to decisions made by the owners and operators of the oil and gas wells to which our royalty interests relate as to investments in and production from those wells. We monitor reports from the operators, theTexas Railroad Commission , and other private data providers to assure that we are being paid the appropriate royalties. Our revenue from easements is primarily generated from pipelines transporting oil, gas and related hydrocarbons, power line and utility easements, and subsurface wellbore easements. The majority of our easements have a thirty-plus year term but subsequently renew every ten years with an additional payment. Commercial lease revenue is derived primarily from saltwater disposal royalties, processing, storage and compression facilities and roads. TPWR focuses on providing full-service water offerings to operators in thePermian Basin . These services include, but are not limited to, water sourcing, produced-water gathering/treatment, infrastructure development, disposal solutions, water tracking, analytics and well testing services. TPWR's revenue streams principally consist of revenue generated from sales of sourced and treated water as well as revenues from produced water royalties.
Results of Operations
We operate our business in two segments: Land andResource Management and Water Services and Operations. We eliminate any inter-segment revenues and expenses upon consolidation.
We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in
Note 10, "Business Segment Reporting" in Item 8. Financial Statements and Supplementary Data in this Annual Report on Form 10-K. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted inthe United States of America ("GAAP").
Year Ended
Revenues. Revenues increased$190.3 million , or 63.4% to$490.5 million for the year endedDecember 31, 2019 compared to$300.2 million for the year endedDecember 31, 2018 . Net income increased$109.0 million , or 52.0%, to$318.7 million for the year endedDecember 31, 2019 compared to$209.7 million for the year endedDecember 31, 2018 . 13
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The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Years Ended December 31,
2019 2018
Revenues:
Land and resource management:
Oil and gas royalties $ 154,729 31 % $ 123,834 41 %
Easements and other surface-related income 73,143 15 % 63,908 21 %
Sale of oil and gas royalty interests - - % 18,875 6 %
Land sales and other operating revenue 135,456 28 % 4,859 2 %
Total Land and resource management 363,328 74 % 211,476 70 %
Water services and operations: Water sales and royalties 84,949 17 % 63,913 21 % Easements and other surface-related income 42,219 9 % 24,831 9 % Total Water service and operations 127,168 26 % 88,744 30 % Total consolidated revenues$ 490,496 100 %$ 300,220 100 % Net income: Land and resource management$ 258,366 81 %$ 159,611 76 % Water services and operations 60,362 19 % 50,125 24 % Total consolidated net income$ 318,728 100 %$ 209,736 100 % Land andResource Management
Land and
Oil and gas royalties. Oil and gas royalty revenue was$154.7 million for the year endedDecember 31, 2019 compared to$123.8 million for the year endedDecember 31, 2018 , an increase of 24.9%. Oil royalty revenue was$128.7 million for the year endedDecember 31, 2019 compared to$94.6 million for the comparable period of 2018. This increase in oil royalty revenue is principally due to the effect of a 48.3% increase in crude oil production subject to the Trust's royalty interest partially offset by a 8.0% decrease in the average price per royalty barrel of crude oil received during the year endedDecember 31, 2019 compared to the same period in 2018. Gas royalty revenue was$26.0 million for the year endedDecember 31, 2019 , a decrease of 10.9% over the year endedDecember 31, 2018 when gas royalty revenue was$29.2 million . This decrease in gas royalty revenue resulted from a 49.3% decrease in the average price received for the year endedDecember 31, 2019 as compared to the same period of 2018, partially offset by a volume increase of 89.3% over the same time period. Easements and other surface-related income. Easements and other surface-related income was$73.1 million for the year endedDecember 31, 2019 , an increase of 14.5% compared to$63.9 million for the year endedDecember 31, 2018 . Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales and seismic and temporary permits. The increase in easements and other surface-related income is principally related to increases of$4.6 million in pipeline easement income and$3.5 million in commercial lease revenue for the year endedDecember 31, 2019 compared to the same period of 2018. Easements and other surface-related income is unpredictable and may vary significantly from period to period. Sale of oil and gas royalty interests. There were no sales of oil and gas royalty interests for the year endedDecember 31, 2019 . Revenue from the sale of oil and gas royalty interests was$18.9 million for the year endedDecember 31, 2018 , when the Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately$23,234 per net royalty acre. 14 -------------------------------------------------------------------------------- Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the year endedDecember 31, 2019 , we sold approximately 21,986 acres of land for total consideration of$113.0 million , or approximately$5,141 per acre. Additionally, the Trust conveyed approximately 5,620 acres of land in exchange for approximately 5,545 acres of land, all inCulberson County . As we had no cost basis in the land conveyed, we recognized land sales revenue of$22.0 million for the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , land sales generated$4.4 million of income for selling approximately 171 acres at an average price of$25,464 per acre. Net income. Net income for the Land andResource Management segment was$258.4 million for the year endedDecember 31, 2019 compared to$159.6 million for the year endedDecember 31, 2018 . As discussed above, revenues for the Land andResource Management segment increased$151.9 million for the year endedDecember 31, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Land andResource Management segment were$105.0 million and$51.9 million for the years endedDecember 31, 2019 and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with the$130.7 million increase in land sales revenue, resulting in additional income tax expense of approximately$27.4 million for the year endedDecember 31, 2019 compared to the same period of 2018. Through §1031 exchanges, income tax expense of approximately$19.8 million was eligible for deferral for the year endedDecember 31, 2019 . The remaining increase was principally related to increased legal and professional fees and salaries and related employee expenses. See further discussion of these expenses below under "Other Financial Data - Consolidated."
Water Services and Operations
Water Services and Operations segment revenues increased
Water sales and royalties. Water sales and royalty revenue was$85.0 million for the year endedDecember 31, 2019 , an increase of 32.9% compared with the year endedDecember 31, 2018 when water sales and royalty revenue was$63.9 million . This increase was principally due to a 44.0% increase in the number of barrels of sourced and treated water sold during the year endedDecember 31, 2019 over the same period in 2018, partially offset by decreased water royalties. Easements and other surface-related income. Easements and other surface-related income for the Water Services and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For the year endedDecember 31, 2019 , the combined revenue from these revenue streams was$42.2 million as compared to$24.8 million for the year endedDecember 31, 2018 . The increase in easements and other surface-related income was principally related to an increase of$21.5 million in produced water royalties for the year endedDecember 31, 2019 compared to the same period of 2018, partially offset by a$4.1 million decrease in temporary permit income over the same time period. Net income. Net income for the Water Services and Operations segment was$60.4 million for the year endedDecember 31, 2019 compared to$50.1 million for the year endedDecember 31, 2018 . As discussed above, revenues for the Water Services and Operations segment increased$38.4 million for the year endedDecember 31, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Water Services and Operations segment were$66.8 million for the year endedDecember 31, 2019 as compared to$38.6 million for the year endedDecember 31, 2018 . The increase in expenses during 2019 is primarily related to increased water service-related operating expenses, principally fuel, repairs and maintenance and equipment rental related to sourcing and transfer of water. The remaining increase was principally related to increased salaries and related employee expenses as discussed further below under "Other Financial Data - Consolidated."
Other Financial Data - Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were$35.0 million for the year endedDecember 31, 2019 compared to$18.4 million for the comparable period of 2018. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 64 employees as ofDecember 31, 2018 to 94 as ofDecember 31, 2019 as well as additional contract labor expenses over the same time period. Water service-related expenses. Water service-related expenses were$20.8 million for the year endedDecember 31, 2019 compared to$11.2 million for the same period of 2018. This increase in expenses was principally the result of an increase in fuel and repairs and maintenance expenses to source and transfer water and is directly related to the 44.0% sales increase in the number of barrels of sourced and treated water sold as previously discussed. 15 -------------------------------------------------------------------------------- General and administrative expenses. General and administrative expenses increased$5.1 million to$9.8 million for the year endedDecember 31, 2019 from$4.7 million for the same period of 2018. The increase in general and administrative expenses is principally related to increased expenses associated with our independent contractor service providers, computer-related software and services, and additional liability insurance. Legal and professional expenses. Legal and professional fees increased$13.9 million to$16.4 million for the year endedDecember 31, 2019 from$2.5 million for the comparable period of 2018. The increase in legal and professional fees for the year endedDecember 31, 2019 compared to 2018 is principally due to approximately$13.0 million of legal and professional fees related to the proxy contest to elect a new Trustee, the entry into and payments made under the settlement agreement datedJuly 30, 2019 and the conversion exploration committee as disclosed in the Trust's Current Report on Form 8-K filed with theSEC onJuly 30, 2019 . We anticipate receiving a partial reimbursement of these legal and professional fees under coverage provided by our director and officer insurance policy. The amount of the reimbursement has not yet been determined. Depreciation, depletion and amortization. Depreciation, depletion and amortization was$8.9 million for the year endedDecember 31, 2019 compared to$2.6 million for the year endedDecember 31, 2018 . The increase in depreciation, depletion and amortization is principally related to the Trust's investment in water service-related assets placed in service in 2019 and the latter half of 2018 and to a lesser extent, additional depreciation expense related to the change in estimated useful lives of certain water service-related assets as discussed in Note 2, " Summary of Significant Accounting Policies - Change i n Accounting Estimate. "
Year Ended
Revenues. Revenues increased$145.6 million , or 94.1%, to$300.2 million for the year endedDecember 31, 2018 compared to$154.6 million for the year endedDecember 31, 2017 . Net income increased$112.5 million , or 115.7% to$209.7 million for the year endedDecember 31, 2018 compared to$97.2 million for the year endedDecember 31, 2017 .
The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Years Ended December 31,
2018 2017
Revenues:
Land and resource management:
Oil and gas royalties $ 123,834 41 % $ 58,418 38 %
Easements and other surface-related income 63,908 21 % 64,199 42 %
Sale of oil and gas royalty interests 18,875 6 % - - %
Land sales and other operating revenue 4,859 2 % 723 - %
211,476 70 % 123,340 80 %
Water services and operations:
Water sales and royalties 63,913 21 % 25,536 16 %
Easements and other surface-related income 24,831 9 % 5,758 4 %
88,744 30 % 31,294 20 %
Total consolidated revenues $ 300,220 100 % $ 154,634 100 %
Net income:
Land and resource management $ 159,611 76 % $ 78,468 81 %
Water services and operations 50,125 24 % 18,763 19 %
Total consolidated net income $ 209,736 100 % $ 97,231 100 %
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Land and
Land andResource Management segment revenues increased$88.1 million , or 71.5%, to$211.5 million for the year endedDecember 31, 2018 as compared with revenues of$123.3 million for the comparable period of 2017. Oil and gas royalties. Oil and gas royalty revenue was$123.8 million for the year endedDecember 31, 2018 compared to$58.4 million for the year endedDecember 31, 2017 , an increase of 112.0%. Oil royalty revenue was$94.6 million for the year endedDecember 31, 2018 compared to$36.9 million for the comparable period of 2017. This increase in oil royalty revenue is principally due to the combined effect of a 110.0% increase in crude oil production, subject to the Trust's royalty interest, and a 21.6% increase in the average price per royalty barrel of crude oil received during the year endedDecember 31, 2018 compared to the same period in 2017. Gas royalty revenue was$29.2 million for the year endedDecember 31, 2018 , an increase of 111.4% over the year endedDecember 31, 2017 when gas royalty revenue was$13.8 million . This increase in gas royalty revenue resulted from a volume increase of 178.5% for the year endedDecember 31, 2018 as compared to the same period of 2017, partially offset by a 24.2% decrease in the average price received. Additionally, oil and gas royalties for the year endedDecember 31, 2017 included$7.7 million related to the settlement of an arbitration withChevron U.S.A., Inc. inSeptember 2017 . No such settlement was received for the year endedDecember 31, 2018 . Easements and other surface-related income. Easements and other surface-related income was$63.9 million for the year endedDecember 31, 2018 , a slight decrease compared to$64.2 million for the year endedDecember 31, 2017 . Easements and other surface-related income includes pipeline easement income, seismic and temporary permit income, lease rental income and income from material sales. Easements and other surface-related income is unpredictable and may vary significantly from period to period. The slight decrease in easements and other surface-related income is principally related to a decrease in material sales, partially offset by an increase in pipeline easement income. Material sales decreased 22.3% to$5.6 million for the year endedDecember 31, 2018 compared to the same period of 2017. Pipeline easement income increased 3.7% to$43.1 million for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 . EffectiveJanuary 1, 2018 , upon the Trust's adoption of the new revenue recognition accounting standard, we no longer defer revenue on our term easements. Sale of oil and gas royalty interests. Revenue from the sale of oil and gas royalty interests was$18.9 million for the year endedDecember 31, 2018 . The Trust sold nonparticipating perpetual royalty interests in approximately 812 net royalty acres for an average price of approximately$23,234 per net royalty acre. Land sales and other operating revenue. Land sales and other operating income includes revenue generated from land sales and grazing leases. For the year endedDecember 31, 2018 , we sold approximately 171 acres of land for total consideration of$4.4 million , or approximately$25,464 per acre. For the year endedDecember 31, 2017 , land sales generated$0.2 million of income for selling approximately 11 acres at an average price of$20,000 per acre. Grazing lease income was approximately$0.5 million for both years endedDecember 31, 2018 and 2017. Net income. Net income for the Land andResource Management segment was$159.6 million for the year endedDecember 31, 2018 compared to$78.5 million for the year endedDecember 31, 2017 . As discussed above, revenues for the Land andResource Management segment increased$88.1 million for the year endedDecember 31, 2018 compared to the same period of 2017. Expenses for the Land andResource Management segment were$51.9 million and$44.9 million for the years endedDecember 31, 2018 and 2017, respectively. The increase in expenses was principally related to increased salary expense and general and administrative expenses. See further discussion of these expenses below under "Other Financial Data - Consolidated."
Water Services and Operations
Water Services and Operations segment revenues increased
Water sales and royalties. Water sales and royalty revenue for the year endedDecember 31, 2018 of$63.9 million was more than double the amount of revenue for the comparable period of 2017. This increase is due primarily to the Trust commencing the development of water sourcing, partially offset by a decrease in the royalties received from existing legacy agreements. Easements and other surface-related income. Easements and other surface-related income for the Water Services and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For 17 --------------------------------------------------------------------------------
the year ended
Net income. Net income for the Water Services and Operations segment was$50.1 million for the year endedDecember 31, 2018 compared to$18.8 million for the year endedDecember 31, 2017 . As discussed above, revenues for the Water Services and Operations segment increased$57.4 million for the year endedDecember 31, 2018 compared to the same period of 2017. Expenses for the Water Services and Operations segment were$38.6 million for the year endedDecember 31, 2018 as compared to$12.5 million for the year endedDecember 31, 2017 . The increase in expenses during 2018 is directly related to the formation and commencement of operations of TPWR during the second quarter of 2017 and operating expenses related to the water sourcing and water re-use projects placed in service in 2018 and late 2017. See further discussion of these expenses below under "Other Financial Data - Consolidated."
Other Financial Data - Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were$18.4 million for the year endedDecember 31, 2018 compared to$3.8 million for the comparable period of 2017. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 26 employees as ofDecember 31, 2017 to 64 as ofDecember 31, 2018 as well as an increase in contract labor expenses over the same time period. Water service-related expenses. Water service-related expenses of$11.2 million for the year endedDecember 31, 2018 , include expenses for equipment rental, propane and fuel and other equipment-related expenses associated with water sourcing and water re-use projects placed in service in 2018 and late 2017. The Trust incurred only minimal water service-related expenses during the year endedDecember 31, 2017 . General and administrative expenses. General and administrative expenses increased$3.2 million to$4.7 million for the year endedDecember 31, 2018 from$1.5 million for the same period of 2017. The increase in general and administrative expenses is primarily due to additional liability insurance and equipment costs as a result of the formation and commencement of operations of TPWR during the second quarter of 2017. Legal and professional expenses. Legal and professional fees decreased$1.0 million to$2.5 million for the year endedDecember 31, 2018 from$3.5 million for the comparable period of 2017. Legal and professional fees for the year endedDecember 31, 2017 included consulting fees related to a strategic review of the Trust. Depreciation and amortization. Depreciation and amortization was$2.6 million for the year endedDecember 31, 2018 compared to$0.4 million for the year endedDecember 31, 2017 . The increase in depreciation and amortization is principally related to the Trust's investment in water service-related assets during 2017 and 2018. Cash Flow Analysis
Year Ended
Cash flows provided by operating activities for the years endedDecember 31, 2019 and 2018 were$342.8 million and$195.4 million , respectively. This increase in operating cash flows is principally due to increases in proceeds from land sales, oil and gas royalties, easements and other surface-related payments received and water sales and royalties during the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Cash flows used in investing activities were$111.7 million compared to$81.5 million for the years endedDecember 31, 2019 and 2018, respectively. The increased use of investing cash flows is principally due to our acquisition of approximately 21,671 acres of land inCulberson , Glassock, Loving and Reeves Counties,Texas for approximately$74.4 million during the year endedDecember 31, 2019 . This increase was partially offset by a$19.3 million decrease in acquisitions of royalty interests and a$15.7 million reduction in capital expenditures during the year endedDecember 31, 2019 as compared to the same period of 2018. Cash flows used in financing activities were$50.9 million compared to$70.0 million for the years endedDecember 31, 2019 and 2018, respectively. During the year endedDecember 31, 2019 , the Trust paid total dividends of$46.5 million consisting of a regular cash dividend of$1.75 per Sub-share and a special dividend of$4.25 per Sub-share. During the year endedDecember 31, 2018 , the Trust paid total dividends of$31.7 million consisting of a regular cash dividend of$1.05 per Sub-share and a special dividend of$3.00 per Sub-share. During the years endedDecember 31, 2019 and 2018, the Trust paid$4.4 million and$38.4 million , respectively, to repurchase Sub-shares. 18 --------------------------------------------------------------------------------
Year Ended
Cash flows provided by operating activities for the years endedDecember 31, 2018 and 2017 were$195.4 million and$93.8 million , respectively. This increase in operating cash flows is principally due to increases in oil and gas royalties collected, easements and other surface-related payments received and water sales and royalties collected during the year endedDecember 31, 2018 over the year endedDecember 31, 2017 . Cash flows used in investing activities were$81.5 million compared to$18.7 million for the years endedDecember 31, 2018 and 2017, respectively. The increased use of investing cash flows is principally due to our investment of$44.7 million in water service-related assets during 2018, an increase of$27.0 million over our investment during 2017. Additionally, for the year endedDecember 31, 2018 we acquired$24.3 million of royalty interests and$9.4 million of land acquisitions. There were no such acquisitions of royalty interests and land for the year endedDecember 31, 2017 . Cash flows used in financing activities were$70.0 million compared to$44.9 million for the years endedDecember 31, 2018 and 2017, respectively. During the year endedDecember 31, 2018 , the Trust paid total dividends of$4.05 per Sub-share totaling$31.7 million . During the year endedDecember 31, 2017 , the Trust paid total dividends of$1.35 per Sub-share totaling$10.7 million .
Liquidity and Capital Resources
The Trust's principal sources of liquidity are its revenues from oil and gas royalties, easements and other surface-related income, and water and land sales.
Our primary liquidity and capital requirements are for capital expenditures related to our water services and operations segment, working capital and general corporate needs. As ofDecember 31, 2019 , we had a cash and cash equivalents balance of$303.6 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business, particularly the growth of TPWR, to repurchase additional Sub-shares subject to market conditions, and for general corporate purposes. We believe that cash from operations, together with our cash and cash equivalents balances, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.
Off-Balance Sheet Arrangements
The Trust has not engaged in any off-balance sheet arrangements.
Contractual Obligations
As of
Payment Due by Period
Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
Long-term debt obligations $ - $ - $ - $ - $ -
Capital lease obligations - - - - -
Operating lease obligations (1) 3,793 696 1,493 1,088 516
Purchase obligations - - - - -
Other long-term liabilities reflected on
the Trust's balance sheet under GAAP - - - - -
Total $ 3,793 $ 696 $ 1,493 $ 1,088 $ 516 (1)Includes office leases for our corporate office in
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--------------------------------------------------------------------------------Effects of Inflation
We do not believe that inflation has had a material impact on our operating results. We cannot assure you, however, that future increases in our costs will not occur or that any such increases that may occur will not adversely affect our results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. It is our opinion that we fully disclose our significant accounting policies in the Notes to the Consolidated Financial Statements. Consistent with our disclosure policies, we include the following discussion related to what we believe to be our most critical accounting policies that require our most difficult, subjective or complex judgment.
Accrual of Oil and Gas Royalties
The Trust accrues oil and gas royalties. An accrual is necessary due to the time lag between the production of oil and gas and generation of the actual payment by operators. The oil and gas royalty accrual is based upon historical payments, estimates of the timing of future payments and recent market prices for oil and gas. New Accounting Pronouncements
For further information regarding recently issued accounting pronouncements, see
Note 2, "Summary of Significant Accounting Policies" in Item 8. Financial Statements and Supplementary Data .
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