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 September 30, 2019March 31, 2020
or
☐ 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: 1-737
Exact name of registrant as specified in its charter:
Texas Pacific Land Trust
State or other jurisdiction of incorporation or organization:
NOT APPLICABLE
IRS Employer Identification No.:
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
Former name, former address and former fiscal year, if changed since last report:
Not Applicable
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. ☐
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Sub-shares in Certificates of Proprietary Interest (par value $0.03-1/3 per share) | TPL | New York Stock Exchange |
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 October 31, 2019,April 30, 2020, the Registrant had 7,756,156 Sub-share Certificates outstanding.
TEXAS PACIFIC LAND TRUST
Form 10-Q
Quarter Ended September 30, 2019March 31, 2020
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (Unaudited) | | |
ASSETS | | | |
| | | |
Cash and cash equivalents | $ | 249,881 | | | $ | 119,647 | |
Accrued receivables | 62,803 | | | 48,750 | |
Tax like-kind exchange escrow | — | | | 3,799 | |
Other assets | 4,766 | | | 3,884 | |
| | | |
Prepaid income taxes | — | | | 9,398 | |
Property, plant and equipment, net of accumulated depreciation of $8,006 and $3,012 as of September 30, 2019 and December 31, 2018, respectively | 87,072 | | | 64,802 | |
Real estate acquired | 84,902 | | | 10,492 | |
Royalty interests acquired | 29,320 | | | 24,303 | |
Operating lease right-of-use assets | 3,250 | | | — | |
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned: | | | |
Land (surface rights) | — | | | — | |
1/16th nonparticipating perpetual royalty interest | — | | | — | |
1/128th nonparticipating perpetual royalty interest | — | | | — | |
Total assets | $ | 521,994 | | | $ | 285,075 | |
| | | |
LIABILITIES AND CAPITAL | | | |
| | | |
Accounts payable and accrued expenses | $ | 19,553 | | | $ | 10,505 | |
Income taxes payable | 4,364 | | | 1,607 | |
Deferred taxes payable | 34,996 | | | 14,903 | |
Unearned revenue | 16,184 | | | 13,369 | |
Operating lease liabilities | 3,471 | | | — | |
Total liabilities | 78,568 | | | 40,384 | |
| | | |
Commitments and contingencies | — | | | — | |
| | | |
Capital: | | | |
Certificates of Proprietary Interest, par value $100 each; NaN outstanding | — | | | — | |
Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 and 7,762,414 Sub-share Certificates as of September 30, 2019 and December 31, 2018, respectively | — | | | — | |
Accumulated other comprehensive loss | (1,051) | | | (1,078) | |
Net proceeds from all sources | 444,477 | | | 245,769 | |
Total capital | 443,426 | | | 244,691 | |
Total liabilities and capital | $ | 521,994 | | | $ | 285,075 | |
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | (Unaudited) | | |
ASSETS | | | | |
| | | | |
Cash and cash equivalents | | $ | 223,743 | | | $ | 303,645 | |
Accrued receivables, net | | 68,679 | | | 62,995 | |
| | | | |
Other assets | | 3,676 | | | 3,980 | |
| | | | |
Property, plant and equipment, net of accumulated depreciation of $14,544 and $11,313 as of March 31, 2020 and December 31, 2019, respectively | | 88,709 | | | 88,323 | |
Real estate acquired | | 110,965 | | | 107,075 | |
Royalty interests acquired, net of accumulated depletion of $318 and $260 as of March 31, 2020 and December 31, 2019, respectively | | 45,938 | | | 29,060 | |
Operating lease right-of-use assets | | 2,939 | | | 3,098 | |
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned: | | | | |
Land (surface rights) | | — | | | — | |
1/16th nonparticipating perpetual royalty interest | | — | | | — | |
1/128th nonparticipating perpetual royalty interest | | — | | | — | |
Total assets | | $ | 544,649 | | | $ | 598,176 | |
| | | | |
LIABILITIES AND CAPITAL | | | | |
| | | | |
Accounts payable and accrued expenses | | $ | 21,139 | | | $ | 19,193 | |
Income taxes payable | | 14,697 | | | 5,271 | |
Deferred taxes payable | | 40,772 | | | 40,827 | |
Unearned revenue | | 19,448 | | | 17,381 | |
Operating lease liabilities | | 3,250 | | | 3,367 | |
Total liabilities | | 99,306 | | | 86,039 | |
| | | | |
Commitments and contingencies | | — | | | — | |
| | | | |
Capital: | | | | |
Certificates of Proprietary Interest, par value $100 each; NaN outstanding | | — | | | — | |
Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 Sub-share Certificates as of March 31, 2020 and December 31, 2019 | | — | | | — | |
Accumulated other comprehensive loss | | (1,447) | | | (1,461) | |
Net proceeds from all sources | | 446,790 | | | 513,598 | |
Total capital | | 445,343 | | | 512,137 | |
Total liabilities and capital | | $ | 544,649 | | | $ | 598,176 | |
See accompanying notes to condensed consolidated financial statements.
TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | |
Oil and gas royalties | Oil and gas royalties | | $ | 38,259 | | | $ | 31,253 | | | $ | 111,113 | | | $ | 88,078 | | Oil and gas royalties | | $ | 42,360 | | | $ | 33,213 | | |
Easements and other surface-related income | Easements and other surface-related income | | 33,911 | | | 22,068 | | | 87,635 | | | 66,845 | | Easements and other surface-related income | | 26,267 | | | 31,367 | | |
Water sales and royalties | Water sales and royalties | | 21,654 | | | 18,178 | | | 65,067 | | | 47,428 | | Water sales and royalties | | 26,967 | | | 22,983 | | |
Land sales | Land sales | | 4,621 | | | 1,543 | | | 113,020 | | | 4,293 | | Land sales | | 900 | | | 103,625 | | |
Other operating revenue | Other operating revenue | | 85 | | | 126 | | | 329 | | | 375 | | Other operating revenue | | 100 | | | 136 | | |
Total revenues | Total revenues | | 98,530 | | | 73,168 | | | 377,164 | | | 207,019 | | Total revenues | | 96,594 | | | 191,324 | | |
| Expenses: | Expenses: | | | | | | | | | | | | | Expenses: | | | | | | | |
Salaries and related employee expenses | Salaries and related employee expenses | | 8,537 | | | 4,050 | | | 22,742 | | | 10,449 | | Salaries and related employee expenses | | 10,620 | | | 6,464 | | |
Water service-related expenses | Water service-related expenses | | 5,122 | | | 3,707 | | | 15,423 | | | 7,601 | | Water service-related expenses | | 6,780 | | | 4,578 | | |
General and administrative expenses | General and administrative expenses | | 2,864 | | | 1,190 | | | 7,102 | | | 2,882 | | General and administrative expenses | | 2,959 | | | 2,142 | | |
Legal and professional fees | Legal and professional fees | | 5,558 | | | 556 | | | 15,198 | | | 1,623 | | Legal and professional fees | | 2,358 | | | 1,783 | | |
Depreciation and amortization | | 2,631 | | | 706 | | | 5,286 | | | 1,519 | | |
Depreciation, depletion and amortization | | Depreciation, depletion and amortization | | 3,335 | | | 1,204 | | |
Total operating expenses | Total operating expenses | | 24,712 | | | 10,209 | | | 65,751 | | | 24,074 | | Total operating expenses | | 26,052 | | | 16,171 | | |
| | | | | | | | | | | | | |
Operating income | Operating income | | 73,818 | | | 62,959 | | | 311,413 | | | 182,945 | | Operating income | | 70,542 | | | 175,153 | | |
| Other income | Other income | | 941 | | | 236 | | | 1,771 | | | 526 | | Other income | | 826 | | | 393 | | |
Income before income taxes | Income before income taxes | | 74,759 | | | 63,195 | | | 313,184 | | | 183,471 | | Income before income taxes | | 71,368 | | | 175,546 | | |
Income tax expense (benefit): | Income tax expense (benefit): | | Income tax expense (benefit): | | |
Current | Current | | 9,918 | | | 12,433 | | | 43,485 | | | 36,415 | | Current | | 14,022 | | | 14,548 | | |
Deferred | Deferred | | 4,819 | | | — | | | 20,093 | | | — | | Deferred | | (55) | | | 21,000 | | |
Total income tax expense | Total income tax expense | | 14,737 | | | 12,433 | | | 63,578 | | | 36,415 | | Total income tax expense | | 13,967 | | | 35,548 | | |
Net income | Net income | | $ | 60,022 | | | $ | 50,762 | | | $ | 249,606 | | | $ | 147,056 | | Net income | | $ | 57,401 | | | $ | 139,998 | | |
| Other comprehensive income — periodic pension costs, net of income taxes of $2, $3, $7 and $10, respectively | | 9 | | | 13 | | | 27 | | | 39 | | |
Other comprehensive income — periodic pension costs, net of income taxes of $4 and $2, respectively | | Other comprehensive income — periodic pension costs, net of income taxes of $4 and $2, respectively | | 13 | | | 9 | | |
Total comprehensive income | Total comprehensive income | | $ | 60,031 | | | $ | 50,775 | | | $ | 249,633 | | | $ | 147,095 | | Total comprehensive income | | $ | 57,414 | | | $ | 140,007 | | |
| Weighted average number of Sub-share Certificates outstanding | Weighted average number of Sub-share Certificates outstanding | | 7,756,156 | | | 7,786,692 | | | 7,756,643 | | | 7,797,262 | | Weighted average number of Sub-share Certificates outstanding | | 7,756,156 | | | 7,759,808 | | |
| Net income per Sub-share Certificate — basic and diluted | Net income per Sub-share Certificate — basic and diluted | | $ | 7.74 | | | $ | 6.52 | | | $ | 32.18 | | | $ | 18.86 | | Net income per Sub-share Certificate — basic and diluted | | $ | 7.40 | | | $ | 18.04 | | |
| Cash dividends per Sub-share Certificate | Cash dividends per Sub-share Certificate | | $ | — | | | $ | — | | | $ | 6.00 | | | $ | 4.05 | | Cash dividends per Sub-share Certificate | | $ | 16.00 | | | $ | 6.00 | | |
See accompanying notes to condensed consolidated financial statements.
TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2019 | | 2018 | | | 2020 | | 2019 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | | |
Net income | Net income | $ | 249,606 | | | $ | 147,056 | | Net income | | $ | 57,401 | | | $ | 139,998 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Deferred taxes | Deferred taxes | 20,093 | | | — | | Deferred taxes | | (55) | | | 21,000 | |
Depreciation and amortization | 5,286 | | | 1,519 | | |
Depreciation, depletion and amortization | | Depreciation, depletion and amortization | | 3,335 | | | 1,204 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Operating assets, excluding income taxes | Operating assets, excluding income taxes | (18,278) | | | (28,706) | | Operating assets, excluding income taxes | | (5,377) | | | (19,331) | |
Prepaid income taxes | Prepaid income taxes | 9,398 | | | 1,202 | | Prepaid income taxes | | — | | | 9,398 | |
| Operating liabilities, excluding income taxes | Operating liabilities, excluding income taxes | 15,361 | | | 7,555 | | Operating liabilities, excluding income taxes | | 3,909 | | | 4,579 | |
Income taxes payable | Income taxes payable | 2,757 | | | 2,208 | | Income taxes payable | | 9,426 | | | 5,153 | |
Cash provided by operating activities | Cash provided by operating activities | 284,223 | | | 130,834 | | Cash provided by operating activities | | 68,639 | | | 162,001 | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | | | Cash flows from investing activities: | | | | | | |
Proceeds from sale of fixed assets | Proceeds from sale of fixed assets | 117 | | | 25 | | Proceeds from sale of fixed assets | | — | | | 30 | |
Acquisition of land | Acquisition of land | (74,410) | | | (2,663) | | Acquisition of land | | (3,890) | | | (47,189) | |
Acquisition of royalty interests | Acquisition of royalty interests | (5,017) | | | — | | Acquisition of royalty interests | | (16,936) | | | (3,418) | |
Purchase of fixed assets | Purchase of fixed assets | (27,579) | | | (40,006) | | Purchase of fixed assets | | (3,617) | | | (9,247) | |
Cash used in investing activities | Cash used in investing activities | (106,889) | | | (42,644) | | Cash used in investing activities | | (24,443) | | | (59,824) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | | | Cash flows from financing activities: | | | | | | |
Purchase of Sub-share Certificates in Certificates of Proprietary Interest | Purchase of Sub-share Certificates in Certificates of Proprietary Interest | (4,353) | | | (25,501) | | Purchase of Sub-share Certificates in Certificates of Proprietary Interest | | — | | | (4,353) | |
Dividends paid | Dividends paid | (46,546) | | | (31,652) | | Dividends paid | | (124,098) | | | (46,546) | |
Cash used in financing activities | Cash used in financing activities | (50,899) | | | (57,153) | | Cash used in financing activities | | (124,098) | | | (50,899) | |
| Net increase in cash, cash equivalents, and restricted cash | 126,435 | | | 31,037 | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | | (79,902) | | | 51,278 | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 123,446 | | | 79,580 | | Cash, cash equivalents and restricted cash, beginning of period | | 303,645 | | | 123,446 | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | $ | 249,881 | | | $ | 110,617 | | Cash, cash equivalents, and restricted cash, end of period | | $ | 223,743 | | | $ | 174,724 | |
| Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
Income taxes paid | Income taxes paid | $ | 31,337 | | | $ | 34,251 | | Income taxes paid | | $ | 4,600 | | | $ | — | |
Supplemental non-cash investing information: | | Supplemental non-cash investing information: | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | | $ | — | | | $ | 3,712 | |
See accompanying notes to condensed consolidated financial statements.
TEXAS PACIFIC LAND TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Description of Business Segments
Texas Pacific Land Trust (which, together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. Texas Pacific was organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company, and to issue transferable Certificates of Proprietary Interest pro rata to the original holders of certain debt securities of the Texas and Pacific Railway Company.
The Trust is organized to manage land, including royalty interests, for the benefit of its owners. The Trust’s income is derived primarily from oil and gas royalties, sales of water and land, easements and commercial leases of the land.
We operate our business in 2 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 the Trust and provide a framework for timely and rational allocation of resources within businesses. See Note 9,9. “Business Segment Reporting” for further information regarding our segments.
Corporate Reorganization
On March 23, 2020, we announced that our Trustees approved a plan for reorganizing the Trust from its current structure to a corporation formed under the laws of the State of Delaware. The Trustees made their determination following careful consideration of the recommendation of the Conversion Exploration Committee of the Trust. The Trust presently intends that the corporate reorganization will be effected by the end of the third quarter of 2020, but the Trust recognizes that unforeseen impacts of COVID-19 or other developments could extend this timeframe despite the Trust’s efforts. Barring any unforeseen disruptions, further information regarding the corporate reorganization will be included in a registration statement on Form 10 to be filed by the corporation with the SEC as well as in other communications and disclosures anticipated to be made by the Trust and the corporation.
2. Summary of Significant Accounting Policies
Interim Unaudited Financial Information
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position of the Trust as of September 30, 2019March 31, 2020 and the results of its operations for the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and its cash flows for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. Such adjustments are of a normal recurring nature.
Principles of Consolidation and 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 include our consolidated accounts and the accounts of our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, which was filed with the SEC on February 28, 2019.27, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report.
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 and disclosure of contingent asset 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.
Change in Accounting Estimate
Management evaluates its estimates on a routine basis. Effective July 1, 2019, the Trust revised the estimated useful lives of certain water service-related assets after its disaggregation of water service-related projects into sub classifications. The Trust purchased these water service-related assets from July 1, 2017 through June 30, 2019. Based on information gained from operations over this time period, management believes that these water service-related assets will benefit periods ranging from four to 15 years, beginning at the point the water service-related assets were originally placed in service.
The net book value of these water service-related assets at June 30, 2019, was not modified and is depreciated over the revised estimated useful lives of these assets. The effect of the change in estimated useful lives to depreciation expense, net
income and earnings per share for the three and nine months ended September 30, 2019 is presented in the table below (in thousands, except earnings per share):
| | | | | | | | | | | | | | |
Effect on income statement line items due to change in estimated useful lives | | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Increase in depreciation and amortization expense | | $ | 916 | | | | $ | 916 | |
Decrease in net income | | $ | (723) | | | | $ | (723) | |
Decrease in net income per Sub-share Certificate — basic and diluted | | $ | (0.09) | | | | $ | (0.09) | |
Reclassifications
Certain financial information on the condensed consolidated balance sheets as of December 31, 2018 and condensed consolidated statements of income for the three and nine months ended September 30, 2018 has been revised to conform to the current year presentation. These revisions include, but are not limited to, the classification of the tax like-kind exchange escrow from other assets to a separate balance sheet line item and certain expense items from one expense line item to another expense line item. Total assets and expenses were not affected by these reclassifications.
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):
| | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | | $ | 249,881 | | | $ | 119,647 | |
Tax like-kind exchange escrow | | — | | | 3,799 | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 249,881 | | | $ | 123,446 | |
Recently Adopted Accounting Guidance
Leases
In FebruaryJune 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”which amended the existing lease accounting guidance to require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms greater than twelve months. We adopted the new leasing standard and all related amendments on January 1, 2019. We elected the optional transition method provided by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and as a result, have not restated our condensed consolidated financial statements for prior periods presented. We also elected the practical expedients permitted under the transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, we have not reassessed the accounting treatment of contracts entered into prior to adoption of the new lease guidance.
As of September 30, 2019, we have recorded right-of-use assets of $3.3 million and lease liabilities for $3.5 million primarily related to operating leases in connection with our administrative offices located in Dallas and Midland, Texas. The office lease agreements require monthly rent payments and expire in December 2025 and August 2022, respectively. Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease cost for the three and nine months ended September 30, 2019 was $0.2 million and $0.4 million, respectively.
Future minimum lease payments under these operating leases are as follows as of September 30, 2019 (in thousands):
| | | | | | | | |
2019 (excluding the nine months ended September 30) | | $ | 144 | |
2020 | | 696 | |
2021 | | 796 | |
2022 | | 697 | |
2023 | | 537 | |
Thereafter | | 1,067 | |
Total lease payments | | 3,937 | |
Less: imputed interest | | (466) | |
Total operating lease liabilities | | $ | 3,471 | |
Implementation Costs Incurred in Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, 2016-13, ““IntangiblesFinancial Instruments — Goodwill and Other — Internal-Use Software (Subtopic 350-40)Credit Losses (Topic 326): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.Measurement of Credit Losses on Financial Instruments.”The ASU requiresamends the impairment model by requiring entities to use a customer in a cloud computing arrangement that is a service contractforward-looking approach based on expected losses to follow existing internal-use software guidance to determine which implementation costs to capitalize as an asset. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted, and may be applied retrospectively or asestimate credit losses on certain types of the beginning of the period of adoption.financial instruments, including trade receivables. The Trust adopted the guidance effective January 1, 2019. The2020. Due to the short-term nature of our trade accounts receivable, the adoption of thethis guidance did not havehad a significantminimal impact on our consolidated financial statements.
3. Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-14, “Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to Disclosure Requirements for Defined Benefit Plans.” The ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Trust is currently evaluating the impact that ASU 2018-14 will have on our consolidated financial statements and disclosures.
In December 2019, the FASB issued 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. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that interim period. The Trust is currently evaluating the impact that this guidance will have on our consolidated financial statements and disclosures.
4. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following as of September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Property, plant and equipment: | | | | |
Water service-related assets (1) | | $ | 88,625 | | | $ | 62,919 | |
Furniture, fixtures and equipment | | 5,855 | | | 4,297 | |
Other | | 598 | | | 598 | |
Property, plant and equipment at cost | | 95,078 | | | 67,814 | |
Less: accumulated depreciation | | (8,006) | | | (3,012) | |
Property, plant and equipment, net | | $ | 87,072 | | | $ | 64,802 | |
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Property, plant and equipment: | | | | |
Water service-related assets (1) | | $ | 96,600 | | | $ | 93,097 | |
Furniture, fixtures and equipment | | 6,055 | | | 5,941 | |
Other | | 598 | | | 598 | |
Property, plant and equipment at cost | | 103,253 | | | 99,636 | |
Less: accumulated depreciation | | (14,544) | | | (11,313) | |
Property, plant and equipment, net | | $ | 88,709 | | | $ | 88,323 | |
(1) Water service-related assets reflect assets related to water sourcing and water treatment projects.
Depreciation expense was $2.6$3.2 million and $0.7$1.2 million for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively. Depreciation expense was $5.2 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively.
5. Real Estate Activity
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Trust owned the following land and real estate (in thousands, except number of acres):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | | | December 31, 2018 | | |
| | Number of Acres | | Net Book Value | | Number of Acres | | Net Book Value |
Land (surface rights) | | 855,476 | | | $ | — | | | 877,462 | | | $ | — | |
Real estate acquired | | 46,386 | | | 84,902 | | | 24,715 | | | 10,492 | |
Total real estate situated in 19 counties in Texas | | 901,862 | | | $ | 84,902 | | | 902,177 | | | $ | 10,492 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | December 31, 2019 | | |
| | Number of Acres | | Net Book Value | | Number of Acres | | Net Book Value |
Land (surface rights) | | 849,826 | | | $ | — | | | 849,856 | | | $ | — | |
Real estate acquired | | 52,687 | | | 110,965 | | | 51,931 | | | 107,075 | |
Total real estate situated in 19 counties in Texas | | 902,513 | | | $ | 110,965 | | | 901,787 | | | $ | 107,075 | |
No valuation allowance was necessary at September 30, 2019March 31, 2020 and December 31, 2018.2019.
Land Sales
For the ninethree months ended September 30, 2019,March 31, 2020, the Trust sold approximately 21,98630 acres (13,180 acres in Loving County, 5,675 acres in Culberson County, 1,651 acres in Hudspeth County, 843 acres in Reeves County, 636 acres in Midland County and approximately 1 acre in Glasscock(Pecos County) of land in Texas for an aggregate sales price of approximately $113.0$0.9 million, with an average of approximately $5,141$30,000 per acre.
For the ninethree months ended September 30, 2018,March 31, 2019, the Trust sold approximately 16721,251 acres (80 acres in(Loving, Culberson, County, 40 acres in Loving County, 32 inHudspeth and Reeves County and 15 in El Paso County)Counties) of land in Texas for an aggregate sales price of approximately $4.3$103.6 million, with an average of approximately $25,734$4,876 per acre.
Land Acquisitions
For the ninethree months ended September 30, 2019,March 31, 2020, the Trust acquired approximately 21,671756 acres (Culberson Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $74.4$3.9 million, with an average of approximately $3,434$5,134 per acre.
For the ninethree months ended September 30, 2018,March 31, 2019, the Trust acquired approximately 2,88411,702 acres (Mitchell(Culberson and UptonReeves Counties) of land in Texas for an aggregate purchase price of approximately $2.7$47.2 million, with an average of approximately $924$4,033 per acre.
6. Royalty Interests
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Trust owned the following oil and gas royalty interests (in thousands, except number of interests):
| | | Net Book Value | | | Net Book Value | |
| | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
1/16th nonparticipating perpetual royalty interests | 1/16th nonparticipating perpetual royalty interests | | $ | — | | | $ | — | | 1/16th nonparticipating perpetual royalty interests | | $ | — | | | $ | — | |
1/128th nonparticipating perpetual royalty interests | 1/128th nonparticipating perpetual royalty interests | | — | | | — | | 1/128th nonparticipating perpetual royalty interests | | — | | | — | |
Royalty interests acquired | Royalty interests acquired | | 29,320 | | | 24,303 | | Royalty interests acquired | | 46,256 | | | 29,320 | |
Total royalty interests | | $ | 29,320 | | | $ | 24,303 | | |
Total royalty interests, gross | | Total royalty interests, gross | | 46,256 | | | 29,320 | |
Less: accumulated depletion | | Less: accumulated depletion | | (318) | | | (260) | |
Total royalty interests, net | | Total royalty interests, net | | $ | 45,938 | | | $ | 29,060 | |
No valuation allowance was necessary at September 30, 2019March 31, 2020 and December 31, 2018.2019.
For the ninethree months ended September 30, 2019,March 31, 2020, the Trust acquired oil and gas royalty interests in approximately 1,2471,017 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $4.7$16.9 million, an average price of approximately $3,800$16,659 per net royalty acre.
There were no oil and gas royalty interest transactions for the nine months ended September 30, 2018.
For the three months ended March 31, 2019, the Trust acquired oil and gas royalty interests in approximately 301 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $3.2 million, an average price of approximately $10,500 per net royalty acre.
7. Income Taxes
Effective January 1, 2018,For the statutory Federalthree months ended March 31, 2020 and 2019, income tax expense was $14.0 million and $35.5 million, respectively. The difference between the U.S. statutory tax rate forof 21% and the Trust decreased from 35% to 21%. The Trust’scurrent effective Federal income tax rate is less than the 21%primarily related to statutory rate because taxable income is reduced by statutory percentage depletion allowed on mineral royalty income.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Trust structuredCoronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the $100.0 million land sale consummated in January 2019 as a §1031 exchange for federalU.S., includes measures to assist companies, including temporary changes to income and non-income-based tax purposes and recognized temporary tax basis differences related to acquisition of property, plant and equipment forlaws. For the three and nine months ended September 30, 2019. As a result, the current federal incomeMarch 31, 2020, there were no material tax liability and expense were each reduced by approximately $20.1 million during the nine months ended September 30, 2019, while the deferred federal income tax liability and expense increasedimpacts to our condensed consolidated financial statements as it relates to COVID-19 measures. We continue to monitor additional guidance issued by the same amount.U.S. Treasury Department, the Internal Revenue Service and others.
8. Capital
The Sub-share Certificates (“Sub-shares”) and the Certificates of Proprietary Interest are freely interchangeable in the ratio of one Certificate of Proprietary Interest for 3,000 Sub-shares or 3,000 Sub-shares for one Certificate of Proprietary Interest.
Dividends
On March 16, 2020, we paid $124.1 million in dividends representing a regular cash dividend of $10.00 per Sub-share and a special dividend of $6.00 per Sub-share for sub-shareholders of record at the close of business on March 9, 2020.
On March 15, 2019, we paid $46.5 million in dividends representing a regular cash dividend of $1.75 per Sub-share and a special dividend of $4.25 per Sub-share for sub-shareholders of record at the close of business on March 8, 2019.
On March 16, 2018, we paid $31.7 million in dividends representing a regular cash dividend of $1.05 per Sub-share and a special dividend of $3.00 per Sub-share for sub-shareholders of record at the close of business on March 9, 2018.
Repurchases of Sub-shares
For the three months ended March 31, 2020, there were 0 Sub-shares repurchased. During the ninethree months ended September 30,March 31, 2019, we purchased and retired 6,258 Sub-shares. During the nine months ended September 30, 2018, we purchased and retired 39,768 Sub-shares.
9. Business Segment Reporting
During the periods presented, we reported our financial performance based on the following 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 the Trust and provide a framework for timely and rational allocation of resources within businesses. We eliminate any inter-segment revenues and expenses upon consolidation.
The Land and Resource Management segment encompasses the business of managing approximately 900,000 acres of land and related resources in West Texas owned by the Trust. The revenue streams of this segment consist primarily of royalties from oil and gas, revenues from easements and commercial leases and land and material sales.
The Water Services and Operations segment encompasses the business of providing a full-service water offering to operators in the Permian Basin. The revenue streams of this segment consist of revenue generated from direct sales of sourced and treated water as well as revenuesrevenue from royalties on water service-related activity.
Segment financial results were as follows for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 (in thousands):
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2019 | | 2018 | | | 2019 | | 2018 | | 2020 | | 2019 | |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | |
Land and resource management | Land and resource management | | $ | 65,076 | | | $ | 47,513 | | | $ | 284,223 | | | $ | 142,642 | | Land and resource management | | $ | 56,658 | | | $ | 160,459 | | |
Water services and operations | Water services and operations | | 33,454 | | | 25,655 | | | 92,941 | | | 64,377 | | Water services and operations | | 39,936 | | | 30,865 | | |
Total consolidated revenues | Total consolidated revenues | | $ | 98,530 | | | $ | 73,168 | | | $ | 377,164 | | | $ | 207,019 | | Total consolidated revenues | | $ | 96,594 | | | $ | 191,324 | | |
| Net income: | Net income: | | Net income: | | |
Land and resource management | Land and resource management | | $ | 43,911 | | | $ | 36,385 | | | $ | 204,222 | | | $ | 109,700 | | Land and resource management | | $ | 39,118 | | | $ | 123,117 | | |
Water services and operations | Water services and operations | | 16,111 | | | 14,377 | | | 45,384 | | | 37,356 | | Water services and operations | | 18,283 | | | 16,881 | | |
Total consolidated net income | Total consolidated net income | | $ | 60,022 | | | $ | 50,762 | | | $ | 249,606 | | | $ | 147,056 | | Total consolidated net income | | $ | 57,401 | | | $ | 139,998 | | |
| Capital expenditures: | Capital expenditures: | | Capital expenditures: | | |
Land and resource management | Land and resource management | | $ | 29 | | | $ | 909 | | | $ | 1,445 | | | $ | 2,464 | | Land and resource management | | $ | 88 | | | $ | 534 | | |
Water services and operations | Water services and operations | | 4,949 | | | 7,533 | | | 26,134 | | | 37,542 | | Water services and operations | | 3,529 | | | 8,713 | | |
Total capital expenditures | Total capital expenditures | | $ | 4,978 | | | $ | 8,442 | | | $ | 27,579 | | | $ | 40,006 | | Total capital expenditures | | $ | 3,617 | | | $ | 9,247 | | |
| Depreciation and amortization: | | |
Depreciation, depletion and amortization: | | Depreciation, depletion and amortization: | | |
Land and resource management | Land and resource management | | $ | 257 | | | $ | 160 | | | $ | 695 | | | $ | 330 | | Land and resource management | | $ | 337 | | | $ | 177 | | |
Water services and operations | Water services and operations | | 2,374 | | | 546 | | | 4,591 | | | 1,189 | | Water services and operations | | 2,998 | | | 1,027 | | |
Total depreciation and amortization | | $ | 2,631 | | | $ | 706 | | | $ | 5,286 | | | $ | 1,519 | | |
Total depreciation, depletion and amortization | | Total depreciation, depletion and amortization | | $ | 3,335 | | | $ | 1,204 | | |
The following table presents total assets and property, plant and equipment, net by segment as of September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):
| | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
Assets: | Assets: | | | | | Assets: | | | | |
Land and resource management | Land and resource management | | $ | 398,120 | | | $ | 198,922 | | Land and resource management | | $ | 396,004 | | | $ | 467,758 | |
Water services and operations | Water services and operations | | 123,874 | | | 86,153 | | Water services and operations | | 148,645 | | | 130,418 | |
Total consolidated assets | Total consolidated assets | | $ | 521,994 | | | $ | 285,075 | | Total consolidated assets | | $ | 544,649 | | | $ | 598,176 | |
| Property, plant and equipment, net: | Property, plant and equipment, net: | | Property, plant and equipment, net: | |
Land and resource management | Land and resource management | | $ | 4,470 | | | $ | 3,720 | | Land and resource management | | $ | 4,211 | | | $ | 4,359 | |
Water services and operations | Water services and operations | | 82,602 | | | 61,082 | | Water services and operations | | 84,498 | | | 83,964 | |
Total consolidated property, plant and equipment, net | Total consolidated property, plant and equipment, net | | $ | 87,072 | | | $ | 64,802 | | Total consolidated property, plant and equipment, net | | $ | 88,709 | | | $ | 88,323 | |
10. Oil and Gas Producing Activities
We measure the Trust’s share of oil and gas produced in barrels of equivalency (“BOEs”). One BOE equals one barrel of crude oil, condensate, NGLs (natural gas liquids) or approximately 6,000 cubic feet of gas. As of March 31, 2020 and December 31, 2019, the Trust’s share of oil and gas produced was approximately 16.5 and 13.7 thousand BOEs per day, respectively. Reserves related to the Trust’s royalty interests are not presented because the information is unavailable.
There are a number of oil and gas wells that have been drilled but are not yet completed (“DUC”) where the Trust has a royalty interest. As of September 30, 2019, the Trust has identified 424 DUC wells subject to our royalty interest. Beginning in the third quarter of 2019, we implemented a new methodology to quantify theThe number of DUC wells. We changed the measurement period for determining a DUC well from waiting a minimum of 120 days to all wells awaiting completion. Additionally, we beganare determined using uniform drilling spacing units with pooled interests which yields a higher number offor all wells awaiting completion. The Trust has identified 597 and 486 DUC wells at a lower netsubject to our royalty interest. For comparative purposes, the table below presents the numberinterest as of DUC wells by quarter for currentMarch 31, 2020 and prior periods utilizing the new methodology discussed above:
| | | | | | | | |
| | Number of DUC wells |
September 30, 2019 | | 424 |
June 30, 2019 | | 369 |
March 31, 2019 | | 376 |
December 31, 2018 | | 362 |
September 30, 2018 | | 341 |
June 30, 2018 | | 364 |
March 31, 2018 | | 347 |
December 31, 2017 | | 319 |
December 31, 2019, respectively.
11. Subsequent Events
We evaluate events that occur after the balance sheet date but before consolidated financial statements are, or are available to be issued to determine if a material event requires our amending the consolidated financial statements or disclosing the event. We evaluated subsequent events through the filing date we issued these consolidated financial statements and did not identify any subsequent events requiring disclosure.
*****
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include statements regarding the Trust’s future operations and prospects, the severity and duration of the COVID-19 pandemic and related economic repercussions, the markets for real estate in the areas in which the Trust owns real estate, applicable zoning regulations, the markets for oil and gas production limits on proratedincluding actions of other oil and gas wells authorized byproducers or consortiums worldwide such as OPEC+, the Railroad Commission of Texas, expected competition, the impacts thereof and other possible changes in compositionproposed reorganization of the Trustees,Trust into a corporation, expected competition, management’s intent, beliefs or current expectations with respect to the Trust’s future financial performance and other matters. All forward-looking statements in this Report are based on information available to us as of the date this Report is filed with the Securities and Exchange Commission (the “SEC”), and we assume no responsibility to update any such forward-looking statements, except as required by law. All forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the factors discussed in Item 1A. “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q.
The following discussion and analysis should be read together with (i) the factors discussed in Item 1A. “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, (ii) the factors discussed in Part II, Item 1A. “Risk Factors”Factors,” if any, of this Quarterly Report on Form 10-Q and (iii) the 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 “expects” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the SEC, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Overview
Texas Pacific Land Trust (which together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. We were organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company. Our Trustees are empowered under the Declaration of Trust to manage the lands with all the powers of an absolute owner.
Our surface and royalty ownership allow steady revenue generation through the entire value chain of oil and gas development. While we are not an oil and gas producer, we benefit from various revenue sources throughout the life cycle of a well. During the initial development phase where infrastructure for oil and gas development is constructed, we receive fixed fee payments for use of our land and revenue for sales of materials (caliche) used in the construction of the infrastructure. During the drilling and completion phase, we generate revenue for providing sourced water and/or treated produced water in addition to fixed fee payments for use of our land. During the production phase, we receive revenue from our oil and gas royalty interests and also revenue related to saltwater disposal on our land. In addition, we generate revenue from a variety of land uses including midstream infrastructure projects and processing facilities as hydrocarbons are processed and transported to market.
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 western Texas.
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 production reports from the operators, the Texas 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. Since the second quarterThe majority of 2016, our easements typically have a ten-year term.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.
In prior years, we entered into agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct water-related infrastructure and purchase water sourced from land that we own. Energy businesses use water for their oil and gas projects while non-energy businesses (i.e., water management
service companies) operate water facilities to produce and sell water to energy businesses. We collect revenue from royalties under these legacy agreements.
Demand for water solutions is expected to grow as drilling and completion activity in the Permian Basin continues to increase. In response to that anticipated demand, the Trust formed Texas Pacific Water Resources LLC (“TPWR”) in June 2017. TPWR,, a single member LLC and wholly owned subsidiary of the Trust, focuses on providingprovides full-service water offerings to operators in the Permian 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.
During the ninethree months ended September 30, 2019,March 31, 2020, the Trust invested approximately $25.8$3.5 million in TPWR projects to develop water sourcing and water treatmentre-use assets.
Corporate Reorganization
On March 23, 2020, we announced that our Trustees approved a plan for reorganizing the Trust from its current structure to a corporation formed under the laws of the State of Delaware. The Trustees made their determination following careful consideration of the recommendation of the Conversion Exploration Committee of the Trust. The Trust presently intends that the corporate reorganization will be effected by the end of the third quarter of 2020, but the Trust recognizes that unforeseen impacts of COVID-19 or other developments could extend this timeframe despite the Trust’s efforts. Barring any unforeseen disruptions, further information regarding the corporate reorganization will be included in a registration statement on Form 10 to be filed with the SEC as well as in other communications and disclosures anticipated to be made by the Trust and the corporation.
COVID-19 Pandemic and Market Conditions Update
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and gas industry. Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. In the midst of the ongoing COVID-19 pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations (OPEC+) were unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase their production.Although certain OPEC+ nations have reached a tentative agreement on production cuts since such time, there is an excess supply of oil on the market and constraints on storage capacity. The convergence of these events is expected to result in the downward pressure on certain commodity prices continuing for the foreseeable future.
These events have negatively affected, and are expected to continue to negatively affect, the Trust’s business and results of operations.Should oil and gas wells be shut in, production curtailed or the owners and operators of the oil and gas wells to which the Trust’s royalty interests relate decrease investment in response to lower commodity prices and conservation of capital, we would expect the Trust’s royalty income and demand for our water services to decline.
Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist, or the extent of the impact they will have on the Trust’s business or results of operations and financial condition.
During these uncertain times, we have continued to meet the operational needs of our customers while maintaining a safe and healthy work environment for our employees. Our existing information technology infrastructure gave us the ability to respond rapidly to the recommended measures of closing our corporate offices and allowing our corporate employees to work remotely. We employed additional safety measures and personal protective equipment for our field employees, including quarantine facilities, if needed, and implementation of a medical hotline for access by all employees should they experience symptoms or seek additional medical information.
In an effort to decrease ongoing operational costs, we have implemented certain cost reduction measures which include, but are not limited to, negotiated price reductions and discounts with certain vendors. We are closely monitoring our customer base and outstanding accounts receivable balances as a means of minimizing any potential collection issues. As a royalty owner, we have no capital expenditure or operating expense burden for development of wells. Furthermore, our water
operations currently have limited capital expenditure requirements, the amount and timing of which is entirely within our control.
Despite the uncertainty the record low oil prices and the COVID-19 pandemic have had on both the global and U.S. oil & gas industry as a whole, we believe our longevity in the industry and strong financial position provide us with the tools necessary to navigate these unprecedented times. We have no debt and a strong cash position. Our cash and cash equivalents balance as of March 31, 2020 was $223.7 million.
Results of Operations
We operate our business in two segments: Land and Resource 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 9,9. “Business Segment Reporting” in Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
For the three months ended September 30, 2019March 31, 2020 as compared to the three months ended September 30, 2018March 31, 2019
Revenues. Revenues increased $25.3decreased $94.7 million, or 34.7%49.5%, to $98.5$96.6 million for the three months ended September 30, 2019March 31, 2020 compared to $73.2$191.3 million for the three months ended September 30, 2018.March 31, 2019. Net income increased $9.2decreased $82.6 million, or 18.2%59.0%, to $60.0$57.4 million for the three months ended September 30, 2019March 31, 2020 compared to $50.8$140.0 million for the three months ended September 30, 2018.March 31, 2019. Revenues and net income for the three months ended March 31, 2019 included a $100 million land sale. Excluding the impact of the 2019 land sale, revenues and net income (net of income tax) for the three months ended March 31, 2019 were $91.3 million and $61.0 million, respectively.
Due to the economic impacts related to the severe drop in oil prices in late March 2020 and continuing into the second quarter of 2020 and the COVID-19 pandemic, we anticipate our future oil and gas royalties, future easements and other surface-related income and future water sales will be impacted. The extent of those impacts is unknown at this time.
The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | | |
| | 2019 | | | | 2018 | | | |
Revenues: | | | | | | | | |
Land and resource management: | | | | | | | | |
Oil and gas royalties | | $ | 38,259 | | | 39 | % | | $ | 31,253 | | | 43 | % |
Easements and other surface-related income | | 22,111 | | | 22 | % | | 14,591 | | | 20 | % |
Land sales and other operating revenue | | 4,706 | | | 5 | % | | 1,669 | | | 2 | % |
| | 65,076 | | | 66 | % | | 47,513 | | | 65 | % |
Water services and operations: | | | | | | | | |
Water sales and royalties | | 21,654 | | | 22 | % | | 18,178 | | | 25 | % |
Easements and other surface-related income | | 11,800 | | | 12 | % | | 7,477 | | | 10 | % |
| | 33,454 | | | 34 | % | | 25,655 | | | 35 | % |
Total consolidated revenues | | $ | 98,530 | | | 100 | % | | $ | 73,168 | | | 100 | % |
| | | | | | | | |
Net income: | | | | | | | | |
Land and resource management | | $ | 43,911 | | | 73 | % | | $ | 36,385 | | | 72 | % |
Water services and operations | | 16,111 | | | 27 | % | | 14,377 | | | 28 | % |
Total consolidated net income | | $ | 60,022 | | | 100 | % | | $ | 50,762 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
| | 2020 | | | | 2019 | | |
Revenues: | | | | | | | | |
Land and resource management: | | | | | | | | |
Oil and gas royalties | | $ | 42,360 | | | 44 | % | | $ | 33,213 | | | 18 | % |
Easements and other surface-related income | | 13,298 | | | 14 | % | | 23,485 | | | 12 | % |
Land sales and other operating revenue | | 1,000 | | | 1 | % | | 103,761 | | | 54 | % |
| | 56,658 | | | 59 | % | | 160,459 | | | 84 | % |
Water services and operations: | | | | | | | | |
Water sales and royalties | | 26,967 | | | 28 | % | | 22,983 | | | 12 | % |
Easements and other surface-related income | | 12,969 | | | 13 | % | | 7,882 | | | 4 | % |
| | 39,936 | | | 41 | % | | 30,865 | | | 16 | % |
Total consolidated revenues | | $ | 96,594 | | | 100 | % | | $ | 191,324 | | | 100 | % |
| | | | | | | | |
Net income: | | | | | | | | |
Land and resource management | | $ | 39,118 | | | 68 | % | | $ | 123,117 | | | 88 | % |
Water services and operations | | 18,283 | | | 32 | % | | 16,881 | | | 12 | % |
Total consolidated net income | | $ | 57,401 | | | 100 | % | | $ | 139,998 | | | 100 | % |
Land and Resource Management
Land and Resource Management segment revenues increased $17.6decreased $103.8 million, or 37.0%64.7%, to $65.1$56.7 million for the three months ended September 30, 2019March 31, 2020 as compared with $47.5$160.5 million for the comparable period of 2018.2019. Segment revenues for the three months ended March 31, 2019 include a $100 million land sale.Excluding the $100 million land sale, segment revenues for the three months ended March 31, 2019 were $60.5 million.
Oil and gas royalties. Oil and gas royalty revenue was $38.3$42.4 million for the three months ended September 30, 2019March 31, 2020 compared to $31.3$33.2 million for the three months ended September 30, 2018.March 31, 2019. Oil royalty revenue was $33.1$35.9 million for the three months ended September 30, 2019,March 31, 2020, an increase of 37.2%36.0% over the three months ended September 30, 2018March 31, 2019 when oil royalty revenue was $24.1$26.4 million. This increase in oil royalty revenue is principally due to the combined effect of a 50.4%11.9% increase in crude oil production subject to the Trust’s royalty interest partially offset byand a 8.8% decrease21.9% increase in the average price per royalty barrel of crude oil received during the three months ended September 30, 2019March 31, 2020 compared to the same period in 2018.2019. Gas royalty revenue was $5.2$6.5 million for the three months ended September 30, 2019,March 31, 2020, a decrease of 27.6% over5.2% compared to the three months ended September 30, 2018March 31, 2019 when gas royalty revenue was $7.1$6.8 million. While gas production increased 125.9%31.4% in the three months ended September 30, 2019March 31, 2020 compared to September 30, 2018,March 31, 2019, the 64.6% decrease in pricesaverage price received for gas productiondecreased 23.1% over the same time period had a more significant impact on gas royalty revenue.period.
Easements and other surface-related income. Easements and other surface-related income was $22.1$13.3 million for the three months ended September 30, 2019, an increaseMarch 31, 2020, a decrease of 51.5%43.4% compared to $14.6$23.5 million for the three months ended September 30, 2018.March 31, 2019. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales, and seismic and temporary permits. The increasedecrease in easements and other surface-related income is principally related to a 39.6% increase63.4% decrease in pipeline easement income to $12.8$6.1 million for the three months ended September 30, 2019March 31, 2020 from $9.1$16.6 million for the three months ended September 30, 2018. Additionally, commercial lease revenue was $3.0 million for the three months ended September 30, 2019, more than double the $1.2 million for the three months ended September 30, 2018.March 31, 2019. Easements and other surface-related income is unpredictable and may vary significantly from period to period.
Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the three months ended September 30, 2019,March 31, 2020, we sold approximately 7730 acres of land for total consideration of $4.6approximately $0.9 million, or approximately $59,960$30,000 per acre. Land sales revenue was $1.5 million forFor the three months ended September 30, 2018, when the TrustMarch 31, 2019, we sold approximately 4721,251 acres of land for an average pricetotal consideration of approximately $32,953$103.6 million, or approximately $4,876 per acre.
Net income. Net income for the Land and Resource Management segment was $43.9$39.1 million for the three months ended September 30, 2019March 31, 2020 compared to $36.4$123.1 million for the three months ended September 30, 2018.March 31, 2019. As discussed above, 2019 revenues for the Land and Resource Management segment increased $17.6included a $100 million land sale. Excluding the impact of the 2019 land sale (net of income tax), net income for the first three months ended September 30,March 31, 2019 compared to the same period of 2018.was $44.1 million. Expenses, including income tax expense, for the Land and Resource Management segment were $21.2$17.6 million and $11.1$37.4 million ($16.4 million excluding the income tax expense associated with the $100 million land sale) for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively. The increase in expenses was principally related to approximately $4.9 million of legal and professional fees as discussed further below under “Other Financial Data — Consolidated.” No such expenses were incurred for the three months ended September 30, 2018. The remaining increase was principally related to salaries and related employee expenses asExpenses are discussed further below under “Other Financial Data — Consolidated.”
Water Services and Operations
Water Services and Operations segment revenues increased 30.4%29.4% to $33.5$39.9 million for the three months ended September 30, 2019March 31, 2020 as compared with $25.7$30.9 million for the comparable period of 2018.2019.
Water sales and royalties. Water sales and royaltiesroyalty revenue was $21.7$27.0 million for the three months ended September 30, 2019,March 31, 2020, an increase of $3.5$4.0 million or 19.1%17.3%, compared with the three months ended September 30, 2018March 31, 2019 when water sales and royalty revenue was $18.2$23.0 million. This increase was principally due to a 34.0% sales50.5% increase in the number of barrels of sourced and treated water sold in the three months ended September 30, 2019March 31, 2020 as compared to the same period in 2018.2019, 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 three months ended September 30, 2019,March 31, 2020, the combined income from these revenue streams was $11.8$13.0 million, an increase of 57.8%64.5%, as compared to $7.5$7.9 million for the three months ended September 30, 2018. Pipeline easementMarch 31, 2019. The increase in easements and other surface-related income was principally related to an increase in produced water royalties increased $4.0 million to $6.5 million for the three months ended September 30, 2019 from $2.5 million forMarch 31, 2020 compared to the three months ended September 30, 2018.same period of 2019.
Net income. Net income for the Water Services and Operations segment was $16.1$18.3 million for the three months ended September 30, 2019March 31, 2020 compared to $14.4$16.9 million for the three months ended September 30, 2018.March 31, 2019. As discussed above, revenues for the
Water Services and Operations segment increased 30.4%29.4% for the three months ended September 30, 2019March 31, 2020 compared to the same period of 2018.2019. Expenses, including income tax expense, for the Water Services and Operations segment were $17.4$21.6 million for the three months ended September 30, 2019March 31, 2020 as compared to $11.3$14.0 million for the three months ended September 30, 2018.March 31, 2019. The increase in expenses during 2020 is principally related to the $1.8 million increase in depreciation and amortization expense for the three months ended September 30, 2019 compared to the same period of 2018. Additionally,increased water serviceservice-related operating expenses, primarily fuel and repairs and maintenance, equipment rental and fuel related to increased sourcing and transfer of water, increased $1.4 million for the three months ended September 30, 2019 compared to the same period of 2018.water. The remaining increase was principally related to increased salaries and related employee expenses and depreciation expense as discussed further below under “Other Financial Data — Consolidated.”
Other Financial Data — Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were $8.5$10.6 million for the three months ended September 30, 2019March 31, 2020 compared to $4.1$6.5 million for the comparable period of 2018.2019. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 5875 employees as of September 30, 2018March 31, 2019 to 89102 as of September 30, 2019March 31, 2020 and additional contract labor expenses for the three months ended September 30, 2019March 31, 2020 compared to the same period of 2018.2019.
Water service-related expenses. Water service-related expenses were $5.1$6.8 million for the three months ended September 30, 2019March 31, 2020 compared to $3.7$4.6 million for the comparable period of 2018.2019. This increase in expenses was principally the result of an increase in fuel and repairs and maintenance, expensesequipment rental and fuel to source and transfer water. The increase in expenseswater and is directly related to the 34.0% sales50.5% increase in the number of barrels of sourced and treated water sold as previously discussed.
General and administrative expenses. General and administrative expenses increased $1.7$0.8 million to $2.9$3.0 million for the three months ended September 30, 2019March 31, 2020 from $1.2$2.1 million for the same period of 2018.2019. The increase in general and administrative expenses is principallyprimarily related to increased expenses associated with our independent contractor service providers, computer-related software and services and additional liability insurance.insurance during the three months ended March 31, 2020.
Depreciation, depletion and amortization. Depreciation, depletion and amortization was $2.6$3.3 million for the three months ended September 30, 2019March 31, 2020 compared to $0.7$1.2 million for the three months ended September 30, 2018.March 31, 2019. The increase in depreciation, depletion and amortization is principally related to the Trust’s investment in water service-related assets placed in service in 20192020 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 in Accounting Estimate.”
For the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018
Revenues. Revenues increased $170.2 million, or 82.2%, to $377.2 million for the nine months ended September 30, 2019 compared to $207.0 million for the nine months ended September 30, 2018. Net income increased $102.5 million, or 69.7%, to $249.6 million for the nine months ended September 30, 2019 compared to $147.1 million for the nine months ended September 30, 2018.
The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | | | |
| | 2019 | | | | 2018 | | | |
Revenues: | | | | | | | | |
Land and resource management: | | | | | | | | |
Oil and gas royalties | | $ | 111,113 | | | 29 | % | | $ | 88,078 | | | 43 | % |
Easements and other surface-related income | | 59,761 | | | 16 | % | | 49,896 | | | 24 | % |
Land sales and other operating revenue | | 113,349 | | | 30 | % | | 4,668 | | | 2 | % |
| | 284,223 | | | 75 | % | | 142,642 | | | 69 | % |
Water services and operations: | | | | | | | | |
Water sales and royalties | | 65,067 | | | 17 | % | | 47,428 | | | 23 | % |
Easements and other surface-related income | | 27,874 | | | 8 | % | | 16,949 | | | 8 | % |
| | 92,941 | | | 25 | % | | 64,377 | | | 31 | % |
Total consolidated revenues | | $ | 377,164 | | | 100 | % | | $ | 207,019 | | | 100 | % |
| | | | | | | | |
Net income: | | | | | | | | |
Land and resource management | | $ | 204,222 | | | 82 | % | | $ | 109,700 | | | 75 | % |
Water services and operations | | 45,384 | | | 18 | % | | 37,356 | | | 25 | % |
Total consolidated net income | | $ | 249,606 | | | 100 | % | | $ | 147,056 | | | 100 | % |
Land and Resource Management
Land and Resource Management segment revenues increased $141.6 million, or 99.3%, to $284.2 million for the nine months ended September 30, 2019 as compared with $142.6 million for the comparable period of 2018.
Oil and gas royalties. Oil and gas royalty revenue was $111.1 million for the nine months ended September 30, 2019 compared to $88.1 million for the nine months ended September 30, 2018. Oil royalty revenue was $92.6 million for the nine months ended September 30, 2019, an increase of 34.2% over the nine months ended September 30, 2018 when oil royalty revenue was $69.0 million. This increase in oil royalty revenue is principally due to a 49.4% increase in crude oil production subject to the Trust’s royalty interest, partially offset by a 9.8% decrease in the average price per royalty barrel of crude oil received during the nine months ended September 30, 2019 compared to the same period in 2018. Gas royalty revenue was $18.5 million for the nine months ended September 30, 2019, a decrease of 3.0%, over the nine months ended September 30, 2018 when gas royalty revenue was $19.1 million. While gas production increased 122.3% in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, the 52.6% decrease in prices received for gas production over the same time period had a more significant impact on gas royalty revenue.
Easements and other surface-related income. Easements and other surface-related income was $59.8 million for the nine months ended September 30, 2019, an increase of 19.8% compared to $49.9 million for the nine months ended September 30, 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 the increase in pipeline easement income which increased 16.1% to $39.2 million for the nine months ended September 30, 2019 from $33.8 million for the nine months ended September 30, 2018. Additionally, commercial lease revenue was $5.8 million for the nine months ended September 30, 2019, more than double the $2.1 million for the nine months ended September 30, 2018. Easements and other surface-related income is unpredictable and may vary significantly from period to period.
Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the nine months ended September 30, 2019, we sold approximately 21,986 acres of land for total consideration of $113.0 million, or approximately $5,141 per acre. For the nine months ended September 30, 2018, we sold approximately 167 acres of land for total consideration of $4.3 million, or approximately $25,734 per acre.
Net income. Net income for the Land and Resource Management segment was $204.2 million for the nine months ended September 30, 2019 compared to $109.7 million for the nine months ended September 30, 2018. As discussed above, revenues for the Land and Resource Management segment increased $141.6 million for the nine months ended September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Land and Resource Management segment were $80.0 million and $32.9 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with 2019 land sales totaling $113.0 million. Total consolidated income tax expense of $63.6 million for the nine months ended September 30, 2019 includes $20.1 million which is eligible for deferral as a result of our classification of a land sale in January 2019 as a §1031 tax exchange and recognized temporary tax basis differences related to acquisitions of property, plant and equipment. The remaining increase was principally related to increased legal and professional fees, salaries and related employee expenses and general and administrative expenses as discussed further below under “Other Financial Data — Consolidated.”
Water Services and Operations
Water Services and Operations segment revenues increased $28.5 million, or 44.4%, to $92.9 million for the nine months ended September 30, 2019 as compared with $64.4 million for the comparable period of 2018.
Water sales and royalties. Water sales and royalties revenue was $65.1 million for the nine months ended September 30, 2019, an increase of $17.7 million, or 37.2%, compared with the nine months ended September 30, 2018 when water sales and royalty revenue was $47.4 million. This increase was principally due to a 41.8% sales increase in the number of barrels of sourced and treated water sold in the nine months ended September 30, 2019 as compared to the same period in 2018.
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 nine months ended September 30, 2019, the combined income from these revenue streams was $27.9 million as compared to $16.9 million for the nine months ended September 30, 2018, an increase of 64.5%. This increase was principally related to pipeline easement royalties which increased $11.1 million to $14.4 million for the nine months ended September 30, 2019 from $3.3 million for the nine months ended September 30, 2018.
Net income. Net income for the Water Services and Operations segment was $45.4 million for the nine months ended September 30, 2019 compared to $37.4 million for the nine months ended September 30, 2018. As discussed above, revenues for the Water Services and Operations segment increased $28.5 million for the nine months ended September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Water Services and Operations segment were $47.5 million for the nine months ended September 30, 2019 as compared to $27.0 million for the nine months ended September 30, 2018. The increase in expenses during 2019 is principally 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 $22.7 million for the nine months ended September 30, 2019 compared to $10.4 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 58 employees as of September 30, 2018 to 89 as of September 30, 2019 and additional contract labor expenses for the nine months ended September 30, 2019 compared to the same period of 2018.
Water service-related expenses. Water service-related expenses were $15.4 million for the nine months ended September 30, 2019 compared to $7.6 million for the comparable period of 2018. This increase in expenses was principally related to an increase in fuel, repairs and maintenance and equipment rental to source and transfer water. The increase in expenses is directly related to the 41.8% sales increase in the number of barrels of sourced and treated water sold as previously discussed.
General and administrative expenses. General and administrative expenses increased $4.2 million to $7.1 million for the nine months ended September 30, 2019 from $2.9 million for the same period of 2018. The increase in general and administrative expenses is primarily due to increased expenses associated with our independent contractor service providers, computer-related software and services, and a contribution of $0.3 million to the Texas Parks and Wildlife Foundation to benefit the Balmorhea State Park in West Texas during the nine months ended September 30, 2019.
Legal and professional fees. Legal and professional fees were $15.2 million for the nine months ended September 30, 2019 compared to $1.6 million for the comparable period of 2018. The increase in legal and professional fees for the nine months ended September 30, 2019 compared to 2018 is principally due to approximately $12.2 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 dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust's Current Report on Form 8-K filed with the SEC on July 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 and amortization. Depreciation and amortization was $5.3 million for the nine months ended September 30, 2019 compared to $1.5 million for the nine months ended September 30, 2018. The increase in depreciation 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 in Accounting Estimate.”
Cash Flow Analysis
For the ninethree months ended September 30, 2019March 31, 2020 as compared to the ninethree months ended September 30, 2018March 31, 2019
Cash flows provided by operating activities for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 were $284.2$68.6 million and $130.8$162.0 million, respectively. This increaseCash flows provided by operating activities for the three months ended March 31, 2019 included proceeds from a $100 million land sale in operatingJanuary 2019. Excluding the impact of the 2019 land sale on cash flows is principally due to increases in 2019, cash flows provided by operating activities for the three months ended March 31, 2020 were positively impacted by increased proceeds from land sales, oil and gas royalties easements and other surface-related paymentscollected, and water sales and royalties collected during the ninethree months ended September 30, 2019 compared to the nine months ended September 30, 2018.March 31, 2020.
Cash flows used in investing activities were $106.9$24.4 million compared to $42.6$59.8 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. The increased use of investing cash flows is principally due to our acquisition of approximately 21,671 acresAcquisitions of land in Culberson, Glasscock, Loving and Reeves Counties, Texaspurchases of fixed assets decreased $48.9 million for approximately $74.4 million during the ninethree months ended September 30, 2019. This increase was partially offset by a $12.4 million reduction in capital expenditures during the nine months ended September 30, 2019 asMarch 31, 2020 compared to the same period of 2018.2019. This decrease was partially offset by the $13.5 million increase in the acquisition of royalty interests over the same periods.
Cash flows used in financing activities were $50.9$124.1 million compared to $57.2$50.9 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. During the ninethree months ended September 30,March 31, 2020, the Trust paid total dividends of $124.1 million consisting of a regular cash dividend of $10.00 per Sub-share Certificate (“Sub-share”) and a special dividend of $6.00 per Sub-share to each sub-shareholder of record at the close of business on March 9, 2020. During the three months ended March 31, 2019, the Trust paid total dividends of $46.5 million consisting of a regular cash dividend of $1.75 per Sub-share Certificate (“Sub-share”)Sub-
share and a special dividend of $4.25 per Sub-share to each sub-shareholder of record at the close of business on March 8, 2019. During the nine months ended September 30, 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 to each sub-shareholder of record at the close of business on March 9, 2018.
Liquidity and Capital Resources
We continuously review our 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. If market conditions were to change, for instance due to the uncertainty created by the COVID-19 pandemic or the significant decline in oil prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Should this occur, we could seek alternative sources of funding, including potential future borrowing under a credit facility or other financing options.
As of September 30, 2019,March 31, 2020, we had cash and cash equivalents of $249.9$223.7 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growthoperation of our business, particularly the growth of TPWR, to potentially repurchase additional Sub-shares subject to market conditions, and for general corporate purposes. We currently 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.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 2 to the Consolidated Financial Statements included in our 20182019 Annual Report on Form 10-K filed with the SEC on February 28, 2019.27, 2020. Our most critical accounting policies and estimates include:include our accrual of oil and gas royalties and gain recognition on land sales.royalties. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20182019 Annual Report on Form 10-K.
New Accounting Pronouncements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information related to market risk of the Trust since December 31, 2018.2019.
Item 4. Controls and Procedures
Pursuant to Rule 13a-15, management of the Trust under the supervision and with the participation of Tyler Glover, the Trust’s Chief Executive Officer, and Robert J. Packer, the Trust’s Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of the end of the Trust’s fiscal quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, Mr. Glover and Mr. Packer concluded that the Trust’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Trust required to be included in the Trust’s periodic SEC filings.
There have been no changes in the Trust’s internal control over financial reporting during the Trust’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Texas Pacific is not involved in any material pending legal proceedings.
Item 1A. Risk Factors
The following risk factor supplements the risk factors contained in Part I, Item 1A. “Risk Factors” set forth in the Trust’s Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on February 28, 2019.27, 2020.
Any governanceOur oil and gas royalty revenue is dependent upon the market prices of oil and gas, which fluctuate.
The oil and gas royalties that we receive are dependent upon the market prices for oil and gas. When lower market prices for oil and gas occur, they will have an adverse effect on our oil and gas royalty revenues. The market prices for oil and gas are subject to national and international economic and political conditions and, in the past, have been subject to significant price fluctuations. Price fluctuations for oil and gas have been particularly volatile in recent years and prices have recently experienced a severe decrease due to increased supply by member nations of the Organization of the Petroleum Exporting Countries (“OPEC”) and general economic downturn. At the same time, COVID-19 has spread to many nations of the world and has resulted in the implementation of numerous actions taken by governments and governmental agencies in an attempt to mitigate the spread of the virus. These measures have resulted in a significant reduction in global economic activity and extreme volatility in the global financial markets. The reduction of economic activity has significantly reduced the global demand for oil and gas. The scale and duration of the impact of these factors remain unknowable but could lead to an increase in our operating costs and have a material impact on our business segments and earnings, cash flow and financial condition.
Demand for TPWR’s products and services is substantially dependent on the levels of expenditures by our customers. The recent oil and gas industry downturn has (and current market conditions have) resulted in reduced demand for oilfield services and lower expenditures by our customers, which could adversely impact our earnings, cash flow and financial condition.
Demand for TPWR’s products and services depends substantially on expenditures by our customers for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on our customers’ views of future oil and natural gas prices and are sensitive to our customers’ views of future economic growth and the resulting impact on demand for oil and natural gas.
Declines, as well as anticipated declines, in oil and gas prices have in the past resulted in, and may in the future result in, lower capital expenditures, project modifications, delays or structural changescancellations, general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to us, which would adversely affect our earnings, cash flow and financial condition.
Global health threats, such as COVID-19, may adversely affect our business.
Our business could be adversely affected by the Trusteffects of a widespread outbreak of contagious disease, including the recent outbreak of COVID-19. A significant outbreak of contagious diseases in the human population and resulting widespread health crisis could adversely affect the trading price and/or formeconomies and financial markets of many countries, resulting in an economic downturn, reduced demand for oil and gas and interruption to supply chains related to oil and gas. The reduction of economic activity and reduced global demand for oil and gas related to COVID-19 and actions taken by governments to mitigate the spread of the virus could lead to an increase in our Certificates of Proprietary Interestoperating costs and Sub-shares.have a material impact on our business segments and earnings, cash flow and financial condition.
We may not be able to complete the corporate reorganization or achieve some or all of the expected benefits of the corporate reorganization, and the corporate reorganization may adversely affect our business.
Our
Although our Trustees formedapproved a conversion exploration committee (the "Committee") in June 2019 to evaluate, from a corporate, corporate governance, tax, accounting and business perspective, whetherplan for reorganizing the Trust should be converted intofrom its current structure to a C-corporation or, incorporation formed under the alternative, whetherlaws of the Trust should remain a business trust (with potential amendments to the Trust’s DeclarationState of Trust). The Committee has been tasked with making a non-binding recommendation to the Trustees regarding this matter. We cannot predict whether, or when, any structural or governance change may be made that would affect the securities held by our sub-shareholders, our governance and/or our Declaration of Trust and how our sub-shareholders and investors may view any structural or governance change, if any. ThereDelaware, there can be no assurance that we will be able to complete the corporate reorganization when expected or at all. The Trust presently intends that the corporate reorganization will be effected by the end of the termsthird quarter of 2020, but the Trust recognizes that unforeseen impacts of COVID-19 or other developments could extend this
timeframe despite the Trust’s efforts. Additionally, we may not be able to achieve the full strategic and financial benefits expected to result from the corporate reorganization, or such changes or their effect on our securities or trading price. The trading price of our securitiesbenefits may be adversely affected by any decisiondelayed or not occur at all.
We may not achieve the anticipated benefits for a variety of reasons, including, among others: (a) the corporate reorganization will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business; and (b) following the corporate reorganization, the reorganized corporation’s stock price may be susceptible to market fluctuations and other events. If some or all of the Trusteesbenefits expected to convertresult from the Trustcorporate reorganization are not achieved, or if such benefits are delayed or investors do not value changes to a C-corporation or to remain as a trust.corporate governance and business resulting from the corporate reorganization, the business, financial condition and results of operations of the reorganized corporation could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Trust did not repurchase any Sub-shares during the three months ended September 30, 2019.March 31, 2020.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
EXHIBIT INDEX
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EXHIBIT NUMBER | | DESCRIPTION |
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101* | | The following information from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income and Total Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements. |
104 | | The cover page from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL. |
* Filed or furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | TEXAS PACIFIC LAND TRUST | |
| | | (Registrant) | |
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Date: | November 7, 2019 | | By: | /s/ Tyler Glover |
| | | | Tyler Glover, General Agent and |
| | | | Chief Executive Officer |
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Date: | November 7, 2019 | | By: | /s/ Robert J. Packer |
| | | | Robert J. Packer, General Agent and |
| | | | Chief Financial Officer |