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 March 31, 20212022
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: 1-39804
Exact name of registrant as specified in its charter:
Texas Pacific Land Corporation
| | | | | | | | |
State or other jurisdiction of incorporation or organization: | | IRS Employer Identification No.: |
Delaware | | 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
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock (par value $.01 per share) | | TPL | | New York Stock Exchange |
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. ☐
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 April 30, 2021,2022, the Registrant had 7,756,1567,741,720 shares of common stock,Common Stock, $0.01 par value, outstanding.
TEXAS PACIFIC LAND CORPORATION
Form 10-Q
For the Quarter Ended March 31, 20212022
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
TEXAS PACIFIC LAND CORPORATION
CONDENSED CONSOLIDATEDBALANCE SHEETS
(in thousands, except shares and per share amounts)
(Unaudited)
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | | ASSETS | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 310,655 | | | $ | 281,046 | | Cash and cash equivalents | $ | 507,356 | | | $ | 428,242 | |
Accrued receivables, net | | 61,392 | | | 48,216 | | |
Accounts receivable and accrued receivables, net | | Accounts receivable and accrued receivables, net | 108,950 | | | 95,217 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,822 | | | 2,778 | | Prepaid expenses and other current assets | 2,534 | | | 3,054 | |
Tax like-kind exchange escrow | | 1,978 | | | 1,978 | | |
| Total current assets | Total current assets | | 375,847 | | | 334,018 | | Total current assets | 618,840 | | | 526,513 | |
| Real estate acquired | | Real estate acquired | 109,083 | | | 109,071 | |
Property, plant and equipment, net | Property, plant and equipment, net | | 78,395 | | | 79,267 | | Property, plant and equipment, net | 79,996 | | | 79,722 | |
Real estate acquired | | 108,536 | | | 108,536 | | |
Royalty interests acquired, net | Royalty interests acquired, net | | 45,435 | | | 45,646 | | Royalty interests acquired, net | 45,795 | | | 44,390 | |
Operating lease right-of-use assets | | 2,314 | | | 2,473 | | |
| Other assets | Other assets | | 3,275 | | | 1,695 | | Other assets | 2,855 | | | 4,368 | |
Real estate and royalty interests assigned through the Declaration of Trust, no value assigned: | | |
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned: | | Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned: | | | |
Land (surface rights) | Land (surface rights) | | 0 | | | 0 | | Land (surface rights) | — | | | — | |
1/16th nonparticipating perpetual royalty interest | 1/16th nonparticipating perpetual royalty interest | | 0 | | | 0 | | 1/16th nonparticipating perpetual royalty interest | — | | | — | |
1/128th nonparticipating perpetual royalty interest | 1/128th nonparticipating perpetual royalty interest | | 0 | | | 0 | | 1/128th nonparticipating perpetual royalty interest | — | | | — | |
Total assets | Total assets | | $ | 613,802 | | | $ | 571,635 | | Total assets | $ | 856,569 | | | $ | 764,064 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | | | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | | $ | 12,367 | | | $ | 12,530 | | Accounts payable and accrued expenses | $ | 12,644 | | | $ | 18,008 | |
Income taxes payable | | Income taxes payable | 49,980 | | | 29,083 | |
Unearned revenue | Unearned revenue | | 5,298 | | | 3,997 | | Unearned revenue | 4,655 | | | 3,809 | |
Income taxes payable | | 16,183 | | | 4,054 | | |
Total current liabilities | Total current liabilities | | 33,848 | | | 20,581 | | Total current liabilities | 67,279 | | | 50,900 | |
Deferred taxes payable | Deferred taxes payable | | 38,581 | | | 38,728 | | Deferred taxes payable | 38,542 | | | 38,948 | |
Unearned revenue - non-current | | 21,891 | | | 22,171 | | |
Unearned revenue - noncurrent | | Unearned revenue - noncurrent | 20,300 | | | 20,449 | |
| Accrued liabilities | Accrued liabilities | | 2,893 | | | 2,150 | | Accrued liabilities | 2,572 | | | 2,056 | |
Operating lease liabilities | | 2,654 | | | 2,821 | | |
Total liabilities | Total liabilities | | 99,867 | | | 86,451 | | Total liabilities | 128,693 | | | 112,353 | |
| Commitments and contingencies | Commitments and contingencies | | 0 | | | 0 | | Commitments and contingencies | — | | | — | |
Equity: | Equity: | | Equity: | | | |
Preferred stock, $0.01 par value; 1,000,000 shares authorized, NaN outstanding as of March 31, 2021 | | 0 | | | — | | |
Common stock, $0.01 par value; 7,756,156 shares authorized and outstanding as of March 31, 2021 | | 78 | | | — | | |
Certificates of Proprietary Interest, par value $100 each; NaN outstanding as of December 31, 2020 | | — | | | 0 | | |
Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 Sub-share Certificates as of December 31, 2020 | | — | | | 0 | | |
Accumulated other comprehensive loss | | (2,665) | | | (2,693) | | |
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none outstanding as of March 31, 2022 and December 31, 2021 | | Preferred stock, $0.01 par value; 1,000,000 shares authorized, none outstanding as of March 31, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.01 par value; 7,756,156 shares authorized and 7,745,290 and 7,744,695 outstanding as of March 31, 2022 and December 31, 2021, respectively | | Common stock, $0.01 par value; 7,756,156 shares authorized and 7,745,290 and 7,744,695 outstanding as of March 31, 2022 and December 31, 2021, respectively | 78 | | | 78 | |
Treasury stock, at cost; 10,866 and 11,461 shares as of March 31, 2022 and December 31, 2021, respectively | | Treasury stock, at cost; 10,866 and 11,461 shares as of March 31, 2022 and December 31, 2021, respectively | (14,617) | | | (15,417) | |
Additional paid-in capital | | Additional paid-in capital | 1,505 | | | 28 | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | (999) | | | (1,007) | |
Retained earnings | Retained earnings | | 516,522 | | | — | | Retained earnings | 741,909 | | | 668,029 | |
Net proceeds from all sources | | — | | | 487,877 | | |
Total equity | Total equity | | 513,935 | | | 485,184 | | Total equity | 727,876 | | | 651,711 | |
Total liabilities and equity | Total liabilities and equity | | $ | 613,802 | | | $ | 571,635 | | Total liabilities and equity | $ | 856,569 | | | $ | 764,064 | |
See accompanying notes to condensed consolidated financial statements.
TEXAS PACIFIC LAND CORPORATION
CONDENSED CONSOLIDATEDSTATEMENTS OF INCOMEAND TOTAL COMPREHENSIVE INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | | | |
Revenues: | | | | | | | | |
Oil and gas royalties | | $ | 49,533 | | | $ | 42,360 | | | | | |
Water sales | | 12,956 | | | 26,967 | | | | | |
Produced water royalties | | 12,549 | | | 12,506 | | | | | |
Easements and other surface-related income | | 9,047 | | | 13,761 | | | | | |
Land sales | | 0 | | | 900 | | | | | |
Other operating revenue | | 70 | | | 100 | | | | | |
Total revenues | | 84,155 | | | 96,594 | | | | | |
| | | | | | | | |
Expenses: | | | | | | | | |
Salaries and related employee expenses | | 9,979 | | | 10,620 | | | | | |
Water service-related expenses | | 3,298 | | | 6,780 | | | | | |
General and administrative expenses | | 2,806 | | | 2,959 | | | | | |
Legal and professional fees | | 2,212 | | | 2,358 | | | | | |
| | | | | | | | |
Depreciation, depletion and amortization | | 3,838 | | | 3,335 | | | | | |
Total operating expenses | | 22,133 | | | 26,052 | | | | | |
| | | | | | | | |
Operating income | | 62,022 | | | 70,542 | | | | | |
| | | | | | | | |
Other income, net | | 5 | | | 826 | | | | | |
Income before income taxes | | 62,027 | | | 71,368 | | | | | |
Income tax expense (benefit): | | | | | | | | |
Current | | 12,122 | | | 14,022 | | | | | |
Deferred | | (147) | | | (55) | | | | | |
Total income tax expense | | 11,975 | | | 13,967 | | | | | |
Net income | | $ | 50,052 | | | $ | 57,401 | | | | | |
| | | | | | | | |
Other comprehensive income — periodic pension costs, net of income taxes of $8 and $4, respectively | | 28 | | | 13 | | | | | |
Total comprehensive income | | $ | 50,080 | | | $ | 57,414 | | | | | |
| | | | | | | | |
Weighted average number of common shares/Sub-share Certificates outstanding | | 7,756,156 | | | 7,756,156 | | | | | |
| | | | | | | | |
Net income per common share/Sub-share Certificate — basic and diluted | | $ | 6.45 | | | $ | 7.40 | | | | | |
| | | | | | | | |
Cash dividends per common share/Sub-share Certificate | | $ | 2.75 | | | $ | 16.00 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Revenues: | | | | | | | |
Oil and gas royalties | $ | 104,172 | | | $ | 49,533 | | | | | |
Water sales | 18,820 | | | 12,956 | | | | | |
Produced water royalties | 14,870 | | | 12,549 | | | | | |
Easements and other surface-related income | 9,192 | | | 9,047 | | | | | |
Land sales and other operating revenue | 281 | | | 70 | | | | | |
Total revenues | 147,335 | | | 84,155 | | | | | |
| | | | | | | |
Expenses: | | | | | | | |
Salaries and related employee expenses | 9,385 | | | 9,979 | | | | | |
Water service-related expenses | 2,782 | | | 3,298 | | | | | |
General and administrative expenses | 3,000 | | | 2,806 | | | | | |
Legal and professional fees | 1,719 | | | 2,212 | | | | | |
Ad valorem taxes | 2,010 | | | — | | | | | |
| | | | | | | |
Depreciation, depletion and amortization | 4,126 | | | 3,838 | | | | | |
Total operating expenses | 23,022 | | | 22,133 | | | | | |
| | | | | | | |
Operating income | 124,313 | | | 62,022 | | | | | |
| | | | | | | |
Other income, net | 76 | | | 5 | | | | | |
Income before income taxes | 124,389 | | | 62,027 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Income tax expense | 26,489 | | | 11,975 | | | | | |
Net income | $ | 97,900 | | | $ | 50,052 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other comprehensive income — periodic pension costs, net of income taxes of $2 and $8, respectively | 8 | | | 28 | | | | | |
Total comprehensive income | $ | 97,908 | | | $ | 50,080 | | | | | |
| | | | | | | |
Net income per share of common stock | | | | | | | |
Basic | $ | 12.65 | | | $ | 6.45 | | | | | |
Diluted | $ | 12.64 | | | $ | 6.45 | | | | | |
| | | | | | | |
Weighted average number of shares of common stock outstanding | | | | | | | |
Basic | 7,741,365 | | | 7,756,156 | | | | | |
Diluted | 7,742,710 | | | 7,756,156 | | | | | |
| | | | | | | |
Cash dividends per share of common stock | $ | 3.00 | | | $ | 2.75 | | | | | |
See accompanying notes to condensed consolidated financial statements.
TEXAS PACIFIC LAND CORPORATION
CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(in (in thousands)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 97,900 | | | $ | 50,052 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Deferred taxes | (406) | | | (147) | |
Depreciation, depletion and amortization | 4,126 | | | 3,838 | |
Share-based compensation | 1,505 | | | — | |
| | | |
Changes in operating assets and liabilities: | | | |
Operating assets, excluding income taxes | (12,959) | | | (13,657) | |
Operating liabilities, excluding income taxes | (3,328) | | | 172 | |
Income taxes payable | 20,897 | | | 12,129 | |
Cash provided by operating activities | 107,735 | | | 52,387 | |
| | | |
Cash flows from investing activities: | | | |
Proceeds from sale of fixed assets | 96 | | | — | |
Acquisition of real estate | (13) | | | — | |
Acquisition of royalty interests | (1,637) | | | — | |
Purchase of fixed assets | (3,624) | | | (1,449) | |
Cash used in investing activities | (5,178) | | | (1,449) | |
| | | |
Cash flows from financing activities: | | | |
Repurchases of common stock | (219) | | | — | |
Dividends paid | (23,224) | | | (21,329) | |
Cash used in financing activities | (23,443) | | | (21,329) | |
| | | |
Net increase in cash, cash equivalents and restricted cash | 79,114 | | | 29,609 | |
Cash, cash equivalents and restricted cash, beginning of period | 428,242 | | | 283,024 | |
Cash, cash equivalents and restricted cash, end of period | $ | 507,356 | | | $ | 312,633 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Income taxes paid | $ | 6,000 | | | $ | — | |
Supplemental non-cash investing and financing information: | | | |
Nonmonetary exchange of assets | $ | 4,174 | | | $ | — | |
(Decrease) increase in accounts payable related to capital expenditures | $ | (619) | | | $ | 1,289 | |
| | | |
Issuance of common stock | $ | — | | | $ | 78 | |
| | | |
| | | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Cash flows from operating activities: | | | | |
Net income | | $ | 50,052 | | | $ | 57,401 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Deferred taxes | | (147) | | | (55) | |
Depreciation, depletion and amortization | | 3,838 | | | 3,335 | |
| | | | |
Changes in operating assets and liabilities: | | | | |
Operating assets, excluding income taxes | | (13,657) | | | (5,377) | |
| | | | |
| | | | |
Operating liabilities, excluding income taxes | | 172 | | | 3,909 | |
Income taxes payable | | 12,129 | | | 9,426 | |
Cash provided by operating activities | | 52,387 | | | 68,639 | |
| | | | |
Cash flows from investing activities: | | | | |
| | | | |
Acquisition of real estate | | 0 | | | (3,890) | |
Acquisition of royalty interests | | 0 | | | (16,936) | |
Purchase of fixed assets | | (1,449) | | | (3,617) | |
Cash used in investing activities | | (1,449) | | | (24,443) | |
| | | | |
Cash flows from financing activities: | | | | |
| | | | |
Dividends paid | | (21,329) | | | (124,098) | |
Cash used in financing activities | | (21,329) | | | (124,098) | |
| | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 29,609 | | | (79,902) | |
Cash, cash equivalents and restricted cash, beginning of period | | 283,024 | | | 303,645 | |
Cash, cash equivalents, and restricted cash, end of period | | $ | 312,633 | | | $ | 223,743 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Income taxes paid | | $ | 0 | | | $ | 4,600 | |
Supplemental non-cash investing and financing information: | | | | |
Capital expenditure additions | | $ | 1,289 | | | $ | 0 | |
Issuance of common stock | | $ | 78 | | | $ | 0 | |
| | | | |
| | | | |
See accompanying notes to condensed consolidated financial statements.
TEXAS PACIFIC LAND CORPORATION
NOTES TO CONDENSEDCONSOLIDATEDFINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and BasisDescription of PresentationBusiness Segments
Organization
Texas Pacific Land Corporation (which, together with its subsidiaries as the context requires, may be referred to as “TPL”, the “Company”, “our”, “we” or “us”) is a Delaware corporation and one of the largest landowners in the State of Texas with approximately 880,000 surface acres of land in West Texas, with the majority of our ownership concentrated in the Permian Basin. Additionally, we own a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 85,000 acres of land, a 1/16th NPRI under approximately 371,000 acres of land, and approximately 4,000 additional net royalty acres (normalized to 1/8th) in the western part of Texas.
TPL’s income is derived primarily from oil, gas and produced water royalties, sales of water and land, easements and commercial leases of the land.
On January 11, 2021, we completed our reorganization from a business trust, organized under a Declaration of Trust dated February 1, 1888 (the “Declaration of Trust”), to a corporation (the “Corporate Reorganization”) and changed our name from Texas Pacific Land Trust (the “Trust”) to Texas Pacific Land Corporation. See further discussion of the Corporate Reorganization and its impact on our equity structure in Note 7, “Changes10, “Changes in Equity.” Any references in these condensed consolidated financial statements and notes to the Company, TPL, our, we, or us with respect to periods prior to January 11, 2021 will beare in reference to the Trust, and references to periods on or after that date and thereafter will beare in reference to Texas Pacific Land Corporation or TPL Corporation.
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 on the same basis as the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. The condensed consolidated financial statements herein include all adjustments which are, in the opinion of management, necessary to fairly state the financial position of the Company as of March 31, 20212022 and the results of its operations for the three months ended March 31, 20212022 and 2020,2021, respectively, and its cash flows for the three months ended March 31, 20212022 and 2020,2021, respectively. Such adjustments are of a normal nature and all intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, and accordingly these interim financial statements and footnotes should be read in conjunction with the audited financial statements and footnotes included in our Form 10-K for the year ended December 31, 2020.2021. The results for the interim periods shown in this report are not necessarily indicative of future financial results.
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 TPL and provide a framework for timely and rational allocation of resources within businesses. See Note 8.11, “Business Segment Reporting” for further information regarding our segments.
2. Summary of Significant Accounting Policies
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, disclosure of contingent assetassets 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. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.
Cash, Cash Equivalents and Restricted CashShare-based Compensation
The following table providesCompany utilizes the closing stock price on the date of grant to determine the fair value of service-vesting awards, which for the Company includes restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance stock units (“PSUs”) with a reconciliation of cash, cashperformance condition. For PSUs with a market condition, grant date fair value is determined using an advanced option-pricing model. Unvested awards are entitled to dividends or dividend equivalents which are accrued and restricted cash reported withindistributed to award recipients at the condensed consolidated balance sheets that sum totime such awards vest. Dividends are forfeitable if the total of the same such amounts shownrelated award is forfeited. For RSAs, RSUs and PSUs with performance conditions, forfeitures are recognized in the condensed consolidated statements of cash flows (in thousands):period in which they occur. For PSU awards with market conditions, forfeitures are only recognized if the award recipient does not render the required service during the measurement period.
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Cash and cash equivalents | | $ | 310,655 | | | $ | 281,046 | |
Tax like-kind exchange escrow | | 1,978 | | | 1,978 | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 312,633 | | | $ | 283,024 | |
Reclassifications
CertainFor share-based compensation awards, the Company recognizes compensation expense in the financial informationstatements over the awards’ vesting periods using the graded-vesting method for RSUs and RSAs. For PSU awards with performance conditions, the Company recognizes compensation expense ratably over the measurement period at such time as the awards are probable and estimable. For PSU awards with market conditions, the Company recognizes compensation expenses ratably over the measurement period whether the market condition is satisfied or not if the service for the award is rendered. Share-based compensation is reported on the condensed consolidated statements of income and total comprehensive income as a component of salaries and related employee expenses for the three months ended March 31, 2020 have been revised to conform to the current year presentation. These revisions include a reclassification of $12.5 million of produced water royalties revenueemployee awards and in general and administrative expenses for the three months ended March 31, 2020 previously included in easements and other surface-related income to a separate financial statement line item within revenues.director awards.
Recently Adopted Accounting Guidance
In December 2019,July 2021, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASU 2019-12,Accounting Standards Update (“ASU”) 2021-05, “Income TaxesLeases (Topic 740) — Simplifying842) Lessors – Certain Leases with Variable Lease Payments.” Under the Accounting for Income Taxes.” The ASU, simplifiesa lessor classifies a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if 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 taxeslease would have been classified as a sales-type lease or direct financing lease under ASC 842 classification criteria and the recognitionlessor would have otherwise recognized a day one loss. The adoption of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted thethis guidance effective January 1, 2021. The adoption2022, had minimalno impact on the Company’sour condensed consolidated financial statements and disclosures.
3. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following as of March 31, 20212022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Property, plant and equipment, at cost: | | | |
Water service-related assets | $ | 110,866 | | | $ | 108,732 | |
Furniture, fixtures and equipment | 9,147 | | | 9,071 | |
Other | 598 | | | 598 | |
Total property, plant and equipment, at cost | 120,611 | | | 118,401 | |
Less: accumulated depreciation | (40,615) | | | (38,679) | |
Property, plant and equipment, net | $ | 79,996 | | | $ | 79,722 | |
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Property, plant and equipment, at cost: | | | | |
Water service-related assets (1) | | $ | 100,399 | | | $ | 97,699 | |
Furniture, fixtures and equipment | | 6,122 | | | 6,125 | |
Other | | 598 | | | 598 | |
Property, plant and equipment at cost | | 107,119 | | | 104,422 | |
Less: accumulated depreciation | | (28,724) | | | (25,155) | |
Property, plant and equipment, net | | $ | 78,395 | | | $ | 79,267 | |
(1) Water service-related assets reflect assets related to water sourcing and water treatment projects.
Depreciation expense was $3.6$3.8 million and $3.2$3.6 million for the three months ended March 31, 20212022 and 2020,2021, respectively.
4. Real Estate Activity
As of March 31, 20212022 and December 31, 2020, the Company2021, TPL owned the following land and real estate (in thousands, except number of acres):
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Number of Acres | | Net Book Value | | Number of Acres | | Net Book Value | | Number of Acres | | Net Book Value | | Number of Acres | | Net Book Value |
Land (surface rights) (1) | Land (surface rights) (1) | | 823,482 | | | $ | 0 | | | 823,482 | | | $ | 0 | | Land (surface rights) (1) | | 823,445 | | | $ | — | | | 823,452 | | | $ | — | |
Real estate acquired | Real estate acquired | | 57,041 | | | 108,536 | | | 57,041 | | | 108,536 | | Real estate acquired | | 57,146 | | | 109,083 | | | 57,129 | | | 109,071 | |
Total real estate situated in Texas | Total real estate situated in Texas | | 880,523 | | | $ | 108,536 | | | 880,523 | | | $ | 108,536 | | Total real estate situated in Texas | | 880,591 | | | $ | 109,083 | | | 880,581 | | | $ | 109,071 | |
(1)Real estate originally assigned through the 1888 Declaration of Trust.
Land Sales
There were 0no significant land sales duringor acquisitions for the three months ended March 31, 2021. For the three months ended March 31, 2020, we sold 30 acres of land in Texas for an aggregate sales price of $0.9 million, an average of approximately $30,000 per acre.
Land Acquisitions
There were 0 land acquisitions during the three months ended March 31, 2021. For the three months ended March 31, 2020, we acquired 756 acres of land in Texas for an aggregate purchase price of approximately $3.9 million, an average of approximately $5,134 per acre.2022.
5. Oil and Gas Royalty Interests
As of March 31, 20212022 and December 31, 2020,2021, we owned the following oil and gas royalty interests (in thousands): | | | | | | | | | | | | | | |
| | Net Book Value |
| | March 31, 2022 | | December 31, 2021 |
1/16th nonparticipating perpetual royalty interests | | $ | — | | | $ | — | |
1/128th nonparticipating perpetual royalty interests | | — | | | — | |
Royalty interests acquired | | 47,903 | | | 46,266 | |
Total royalty interests, gross | | $ | 47,903 | | | $ | 46,266 | |
Less: accumulated depletion | | (2,108) | | | (1,876) | |
Total royalty interests, net | | $ | 45,795 | | | $ | 44,390 | |
| | | | |
| | | | | | | | | | | | | | |
| | Net Book Value |
| | March 31, 2021 | | December 31, 2020 |
1/16th nonparticipating perpetual royalty interests | | $ | 0 | | | $ | 0 | |
1/128th nonparticipating perpetual royalty interests | | 0 | | | 0 | |
Royalty interests acquired | | 46,266 | | | 46,266 | |
Total royalty interests, gross | | 46,266 | | | 46,266 | |
Less: accumulated depletion | | (831) | | | (620) | |
Total royalty interests, net | | $ | 45,435 | | | $ | 45,646 | |
Acquisition
For the three months ended March 31, 2022, we acquired oil and gas royalty interests in 92 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $1.6 million, an average price of approximately $17,750 per net royalty acre. There were no oil and gas royalty interest transactions for the three months ended March 31, 2021.
6. Share-Based Compensation
Incentive Plan for Employees
As of March 31, 2022, the Company has issued RSAs, RSUs and PSUs under the Texas Pacific Land Corporation 2021 Incentive Plan (the “2021 Plan”) to certain employees. The maximum aggregate number of shares of the Company’s common stock that may be issued under the 2021 Plan is 75,000 shares. As of March 31, 2022, 65,452 shares of the Company’s common stock remained available for future grants. Currently, all RSAs, RSUs, and PSUs granted under the 2021 Plan are entitled to receive dividends (for RSAs and RSUs, which are accrued and distributed to award recipients upon vesting) or have dividend equivalent rights. Dividends and dividend equivalent rights are subject to the same vesting conditions as the awards to which they relate and are forfeitable if the related awards are forfeited. The Company utilizes the closing stock price on the date of grant to determine the fair value of RSAs, RSUs and PSUs with a performance condition. For PSUs with a market condition, the Company utilizes a Monte Carlo simulation model to determine grant date fair value per share.
The following table summarizes activity related to RSAs for the three months ended March 31, 2020, we acquired oil2022:
| | | | | | | | | | | | | | |
| | Restricted Stock Awards |
| | Number of RSAs | | Grant-Date Fair Value per Share |
Outstanding at December 31, 2021 | | 3,330 | | | $ | 1,252 | |
Granted | | — | | | — | |
Vested | | — | | | — | |
Cancelled and forfeited | | — | | | — | |
Outstanding at March 31, 2022 | | 3,330 | | | $ | 1,252 | |
RSAs were granted on December 29, 2021 with 1,993 shares vesting on December 29, 2022 and gas royalty interests1,337 shares vesting on December 29, 2023.
The following table summarizes activity related to RSUs for the three months ended March 31, 2022:
| | | | | | | | | | | | | | |
| | Restricted Stock Units |
| | Number of RSUs | | Grant-Date Fair Value per Share |
Outstanding at December 31, 2021 | | — | | | $ | — | |
Granted | | 3,824 | | | 1,105 | |
Vested | | — | | | — | |
Cancelled and forfeited | | — | | | — | |
Outstanding at March 31, 2022 | | 3,824 | | | $ | 1,105 | |
On February 11, 2022, the Company granted awards totaling 3,824 RSUs to certain employees. The grant date fair value was $1,105 per share. These time-based awards vest in 1,017 net royalty acres (normalizedone-third increments over a three-year period.
The following table summarizes activity related to 1/8th)PSUs for anthe three months ended March 31, 2022:
| | | | | | | | | | | | | | |
| | Performance Stock Units |
| | Number of PSUs | | Weighted-Average Grant-Date Fair Value per Share |
Outstanding at December 31, 2021 | | — | | | $ | — | |
Granted (1) | | 2,394 | | | 1,355 | |
Vested | | — | | | — | |
Cancelled and forfeited | | — | | | — | |
Outstanding at March 31, 2022 | | 2,394 | | | $ | 1,355 | |
(1)Includes 1,197 RTSR (as defined below) PSUs with a grant date fair value of $1,605 per share and 1,197 FCF (as defined below) PSUs with a grant date fair value of $1,105 per share.
On February 11, 2022, the Company granted PSUs to certain employees. Each PSU has a value equal to 1 share of common stock. The PSUs will vest three years after grant if certain performance metrics are met, as follows: 50% of the PSUs may be earned based on the Company’s relative total stockholder return (“RTSR”) for the three-year period from January 2022 to January 2025 compared to the XOP Index, and 50% of the PSUs may be earned based on the cumulative free cash flow per share (“FCF”) over the three-year vesting period. As the RTSR PSU is a market-based award, its grant date fair value was determined using a Monte Carlo simulation model that uses the same input assumptions as the Black-Scholes model to determine the expected potential ranking of the Company against the XOP Index, i.e. the probability of satisfying the market condition defined in the award. Expected volatility in the model was estimated based on the volatility of historical stock prices over a period matching the expected term of the award. The risk-free interest rate was based on U.S. Treasury yield constant maturities for a term matching the expected term of the award.
Equity Plan for Non-Employee Directors
As of March 31, 2022, the Company had granted 595 RSAs to directors of the Company under the 2021 Non-Employee Director and Deferred Compensation Plan (the “2021 Directors Plan”). The maximum aggregate purchasenumber of shares of common stock that may be issued under the 2021 Directors Plan is 10,000 shares, which may consist, in whole or in part, of authorized and unissued shares (if any), treasury shares, or shares reacquired by the Company in any manner. As of March 31, 2022, 9,405 shares of the Company’s common stock remained available for future grants. Currently, all RSAs granted under the 2021 Directors Plan are entitled to receive dividends, which are accrued and distributed to award recipients upon vesting. Dividends are subject to the same vesting conditions as the awards to which they relate and are forfeitable if the related awards are forfeited. The Company utilizes the closing stock price on the date of $16.9grant to determine the fair value of the RSAs.
The following table summarizes activity related to the RSAs under the 2021 Directors Plan for the three months ended March 31, 2022:
| | | | | | | | | | | | | | |
| | Restricted Stock Awards |
| | Number of RSAs | | Grant-Date Fair Value per Share |
Outstanding at December 31, 2021 | | — | | | $ | — | |
Granted | | 680 | | | 1,249 | |
Vested | | — | | | — | |
Cancelled and forfeited | | (85) | | | 1,249 | |
Outstanding at March 31, 2022 | | 595 | | | $ | 1,249 | |
On January 1, 2022, the Company granted 680 shares of restricted stock to our directors. During the three months ended March 31, 2022, 85 shares were forfeited resulting from the departure of a director. The shares will vest on the first anniversary of the award. The fair value as of the date of grant was $1,249 per share.
Share-Based Compensation Expense
The following table summarizes our share-based compensation expense by line item in the condensed consolidated statements of income (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Salaries and related employee expenses (employee awards) | $ | 1,319 | | | $ | — | | | | | |
General and administrative expenses (director awards) | 186 | | | — | | | | | |
Total share-based compensation expense (1) | $ | 1,505 | | | $ | — | | | | | |
(1)The Company recognized a tax benefit of $0.3 million anrelated to share-based compensation for the three months ended March 31, 2022.
As of March 31, 2022, there was $10.8 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under existing share-based plans expected to be recognized over a weighted average priceperiod of approximately $16,659 per net royalty acre.1.8 years.
6.7. Income Taxes
The calculation of our effective tax rate is as follows for the three months ended March 31, 20212022 and 20202021 (in thousands, except percentages):
| | | Three Months Ended March 31, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2022 | | 2021 | |
Income before income taxes | Income before income taxes | $ | 62,027 | | | $ | 71,368 | | Income before income taxes | $ | 124,389 | | | $ | 62,027 | | |
Income tax expense | Income tax expense | $ | 11,975 | | | $ | 13,967 | | Income tax expense | $ | 26,489 | | | $ | 11,975 | | |
Effective tax rate | Effective tax rate | 19.3 | % | | 19.6 | % | Effective tax rate | 21.3 | % | | 19.3 | % | |
The effective tax rates were lower than the U.S. federal statutory rate of 21% due primarily to statutory depletion allowed on mineral royalty income.
For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items.
7.8. Earnings Per Share
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares outstanding during the period. Diluted EPS is computed based upon the weighted average number of shares outstanding during the period plus unvested restricted stock and other unvested awards granted pursuant to our incentive and equity compensation plans. The computation of diluted EPS reflects the potential dilution that could occur if all outstanding awards under the incentive and equity compensation plans were converted into shares of common stock or resulted in the issuance of shares of common stock that would then share in the earnings of the Company. The number of dilutive securities is computed using the treasury stock method.
The following table sets forth the computation of EPS for three months ended March 31, 2022 and 2021 (in thousands, except number of shares and per share data):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Net income | $ | 97,900 | | | $ | 50,052 | | | | | |
| | | | | | | |
Basic EPS: | | | | | | | |
Weighted average shares outstanding for basic EPS | 7,741,365 | | | 7,756,156 | | | | | |
Basic EPS | $ | 12.65 | | | $ | 6.45 | | | | | |
| | | | | | | |
Diluted EPS: | | | | | | | |
Weighted average shares outstanding for basic EPS | 7,741,365 | | | 7,756,156 | | | | | |
Effect of Dilutive securities: | | | | | | | |
Incentive and equity compensation plans | 1,345 | | | — | | | | | |
Weighted average shares outstanding for diluted EPS | 7,742,710 | | | 7,756,156 | | | | | |
Diluted EPS | $ | 12.64 | | | $ | 6.45 | | | | | |
Restricted stock is included in the number of shares of common stock issued and outstanding, but omitted from the basic earnings per share calculation until such time as the shares of restricted stock vest. The RTSR PSUs are not included in the dilutive securities in the table above as they are anti-dilutive for the three months ended March 31, 2022.
9. Commitments
Litigation
Management is not aware of any legal, environmental or other commitments or contingencies that would have a material effect on the Company’s financial condition, results of operations or liquidity as of March 31, 2022.
10. Changes in Equity
The following tables present changes in our equity for the three months ended March 31, 20212022 and 20202021 (in thousands, except shares and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accum. Other Comp. Inc/(Loss) | | Retained Earnings | | Total Equity |
| Shares | | Amount | | | Shares | | Amount | | | |
For the three months ended March 31, 2022: | | | | | | | | | | | | |
Balances as of December 31, 2021 | 7,744,695 | | | $ | 78 | | | $ | 28 | | | 11,461 | | | $ | (15,417) | | | $ | (1,007) | | | $ | 668,029 | | | $ | 651,711 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 97,900 | | | 97,900 | |
Dividends paid — $3.00 per share of common stock | — | | | — | | | — | | | — | | | — | | | — | | | (23,224) | | | (23,224) | |
Share-based compensation, net of forfeitures | 595 | | | — | | | 1,477 | | | (595) | | | 800 | | | — | | | (796) | | | 1,481 | |
Periodic pension costs, net of income taxes of $2 | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | 8 | |
Balances as of March 31, 2022 | 7,745,290 | | | $ | 78 | | | $ | 1,505 | | | 10,866 | | | $ | (14,617) | | | $ | (999) | | | $ | 741,909 | | | $ | 727,876 | |
| | | Sub-share Certificates | | Common Stock | | | Sub-share Certificates | | Common Stock | | | Accum. Other Comp. Inc/(Loss) | | Retained Earnings | | Net Proceeds From All Sources | | Total Equity |
| | Number of shares | | Number of shares | | Par Value | | | Accum. Other Comp. Loss | | Retained Earnings | | Net Proceeds from All Sources | | Total Equity | | Shares | | Shares | | Amount | | | | Total Equity | |
For the three months ended March 31, 2021: | For the three months ended March 31, 2021: | | | | | | | | | | | | | | | For the three months ended March 31, 2021: | | | | | | | | | |
Balances as of December 31, 2020 | Balances as of December 31, 2020 | 7,756,156 | | | 0 | | | $ | 0 | | | | $ | (2,693) | | | $ | 0 | | | $ | 487,877 | | | $ | 485,184 | | Balances as of December 31, 2020 | 7,756,156 | | | — | | | $ | — | | | | $ | (2,693) | | | $ | — | | | $ | 487,877 | | | $ | 485,184 | |
Net income | Net income | — | | | — | | | — | | | | — | | | 50,052 | | | — | | | 50,052 | | Net income | — | | | — | | | — | | | | — | | | 50,052 | | | — | | | 50,052 | |
Dividends paid ($2.75 per common share) | — | | | — | | | — | | | | — | | | (21,329) | | | — | | | (21,329) | | |
Dividends paid — $2.75 per share of common stock | | Dividends paid — $2.75 per share of common stock | — | | | — | | | — | | | | — | | | (21,329) | | | — | | | (21,329) | |
Conversion of Sub-shares into shares of common stock | Conversion of Sub-shares into shares of common stock | (7,756,156) | | | 7,756,156 | | | 78 | | | | — | | | 487,799 | | | (487,877) | | | 0 | | Conversion of Sub-shares into shares of common stock | (7,756,156) | | | 7,756,156 | | | 78 | | | | — | | | 487,799 | | | (487,877) | | | — | |
Other comprehensive income | — | | | — | | | — | | | | 28 | | | — | | | — | | | 28 | | |
Periodic pension costs, net of income taxes of $8 | | Periodic pension costs, net of income taxes of $8 | — | | | — | | | — | | | | 28 | | | — | | | — | | | 28 | |
Balances as of March 31, 2021 | Balances as of March 31, 2021 | 0 | | | 7,756,156 | | | $ | 78 | | | | $ | (2,665) | | | $ | 516,522 | | | $ | 0 | | | $ | 513,935 | | Balances as of March 31, 2021 | — | | | 7,756,156 | | | $ | 78 | | | | $ | (2,665) | | | $ | 516,522 | | | $ | — | | | $ | 513,935 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Sub-share Certificates | | | | Accum. Other Comp. Loss | | Net Proceeds from All Sources | | Total Capital |
For the three months ended March 31, 2020: | | | | | | | | | | | |
Balances as of December 31, 2019 | | | 7,756,156 | | | | | $ | (1,461) | | | $ | 513,598 | | | $ | 512,137 | |
Net income | | | — | | | | | — | | | 57,401 | | | 57,401 | |
Dividends paid ($16.00 per Sub-share) | | | — | | | | | — | | | (124,098) | | | (124,098) | |
| | | | | | | | | | | |
Cumulative effect of accounting change | | | — | | | | | — | | | (110) | | | (110) | |
Other comprehensive income | | | — | | | | | 13 | | | — | | | 13 | |
Balances as of March 31, 2020 | | | 7,756,156 | | | | | $ | (1,448) | | | $ | 446,791 | | | $ | 445,343 | |
Corporate Reorganization
On January 11, 2021, TPL completed its Corporate Reorganization, officially changing its name to Texas Pacific Land Corporation. To implement the Corporate Reorganization, the Trust and TPL Corporation entered into agreements and undertook and caused to be undertaken a series of transactions to effect the transfer to TPL Corporation of all of the Trust’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the Corporate Reorganization. The agreements entered into include a contribution agreement between the Trust and TPL Corporation. The Corporate Reorganization is a tax-free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended.
Prior to the market opening on January 11, 2021, the Trust distributed all of the shares of common stock par value $0.01, of TPL Corporation (the “Common Stock”) to holders of sub-share certificates (“Sub-shares”), par value of $0.03-1/3, of the Trust, on a pro rata, one-for-one, basis in accordance with their interests in the Trust (the “Distribution”). As a result of the Distribution, TPL Corporation is now an independent public company anda corporation with its Common Stock iscommon stock listed under the symbol “TPL” on the New York Stock Exchange.
The Corporate Reorganization only affectedStock Repurchase Program
As our equity structure in that Sub-sharesprior share repurchase program expired on December 31, 2021, there were replaced with sharesno stock repurchases for the three months ended March 31, 2022. Repurchases of Common Stock and net proceeds from all sources were replaced with retained earningscommon stock of $0.2 million reported on the condensed consolidated balance sheet.statements of cash flows for the three months ended March 31, 2022 represent share repurchases executed and recorded during December 2021 but not settled until January 2022.
On March 11, 2022, our board of directors approved a stock repurchase program to purchase up to an aggregate of $100 million of shares of our outstanding common stock. In connection with the stock repurchase program, the Company entered into a Rule 10b5-1 trading plan (the “Trading Plan”) that generally permits the Company to repurchase shares at times when it might otherwise be prevented from doing so under securities laws. Stock repurchases under the Trading Plan began April 18, 2022. The stock repurchase program expires on December 31, 2022.
8.
11. 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 our strategies and objectives 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 our approximately 880,000 surface acres of land and our oil and gas royalty interests in West Texas, principally concentrated in the Permian Basin. 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 primarily consist of revenue generated from sales of sourced and treated water as well as revenue from produced water royalties.
Segment financial results were as follows for the three months ended March 31, 20212022 and 20202021 (in thousands):
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
Revenues: | Revenues: | | | | | | Revenues: | | | | | |
Land and resource management | Land and resource management | | $ | 57,790 | | | $ | 56,658 | | | Land and resource management | | $ | 113,347 | | | $ | 57,790 | | |
Water services and operations | Water services and operations | | 26,365 | | | 39,936 | | | Water services and operations | | 33,988 | | | 26,365 | | |
Total consolidated revenues | Total consolidated revenues | | $ | 84,155 | | | $ | 96,594 | | | Total consolidated revenues | | $ | 147,335 | | | $ | 84,155 | | |
| Net income: | Net income: | | | Net income: | | |
Land and resource management | Land and resource management | | $ | 39,513 | | | $ | 39,118 | | | Land and resource management | | $ | 81,156 | | | $ | 39,513 | | |
Water services and operations | Water services and operations | | 10,539 | | | 18,283 | | | Water services and operations | | 16,744 | | | 10,539 | | |
Total consolidated net income | Total consolidated net income | | $ | 50,052 | | | $ | 57,401 | | | Total consolidated net income | | $ | 97,900 | | | $ | 50,052 | | |
| Capital expenditures: | Capital expenditures: | | | Capital expenditures: | | |
Land and resource management | Land and resource management | | $ | 0 | | | $ | 88 | | | Land and resource management | | $ | 122 | | | $ | — | | |
Water services and operations | Water services and operations | | 2,738 | | | 3,529 | | | Water services and operations | | 2,883 | | | 2,738 | | |
Total capital expenditures | Total capital expenditures | | $ | 2,738 | | | $ | 3,617 | | | Total capital expenditures | | $ | 3,005 | | | $ | 2,738 | | |
| Depreciation, depletion and amortization: | Depreciation, depletion and amortization: | | | Depreciation, depletion and amortization: | | |
Land and resource management | Land and resource management | | $ | 494 | | | $ | 337 | | | Land and resource management | | $ | 536 | | | $ | 494 | | |
Water services and operations | Water services and operations | | 3,344 | | | 2,998 | | | Water services and operations | | 3,590 | | | 3,344 | | |
Total depreciation, depletion and amortization | Total depreciation, depletion and amortization | | $ | 3,838 | | | $ | 3,335 | | | Total depreciation, depletion and amortization | | $ | 4,126 | | | $ | 3,838 | | |
The following table presents total assets and property, plant and equipment, net by segment as of March 31, 20212022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Assets: | | | | |
Land and resource management | | $ | 501,516 | | | $ | 460,053 | |
Water services and operations | | 112,286 | | | 111,582 | |
Total consolidated assets | | $ | 613,802 | | | $ | 571,635 | |
| | | | |
Property, plant and equipment, net: | | | | |
Land and resource management | | $ | 3,287 | | | $ | 3,527 | |
Water services and operations | | 75,108 | | | 75,740 | |
Total consolidated property, plant and equipment, net | | $ | 78,395 | | | $ | 79,267 | |
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Assets: | | | |
Land and resource management | $ | 728,354 | | | $ | 635,338 | |
Water services and operations | 128,215 | | | 128,726 | |
Total consolidated assets | $ | 856,569 | | | $ | 764,064 | |
| | | |
Property, plant and equipment, net: | | | |
Land and resource management | $ | 6,499 | | | $ | 6,639 | |
Water services and operations | 73,497 | | | 73,083 | |
Total consolidated property, plant and equipment, net | $ | 79,996 | | | $ | 79,722 | |
9.
12. Oil and Gas Producing Activities
We measure our 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, 20212022 and March 31, 2020,2021, our share of oil and gas produced was approximately 16.420.8 and 16.516.4 thousand BOEs per day, respectively. Reserves related to our 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 we have a royalty interest. The number of DUC wells is determined using uniform drilling spacing units with pooled interests for all wells awaiting completion. We have identified 541556 and 531452 DUC wells subject to our royalty interest as of March 31, 20212022 and December 31, 2020,2021, respectively.
10.13. Subsequent Events
We evaluated events that occurred after the balance sheet date through the date these financial statements were issued, and the following events that met recognition or disclosure criteria were identified:
DividendDividends Declared
On May 3, 2021,2022, the board of directors declared a quarterly cash dividend of $2.75$3.00 per share and a special dividend of $20.00 per share, both payable on June 15, 20212022 to stockholders of record at the close of business on June 8, 2021.
Stock Repurchase Program
On May 3, 2021, our board of directors approved a stock repurchase program to purchase up to an aggregate of $20.0 million of shares of our outstanding common stock. Acquisitions pursuant to the stock repurchase program may be made through a combination of open market repurchases in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, privately negotiated transactions, and/or other transactions at the Company’s discretion. In connection with the stock repurchase program, the Company intends to enter into a Rule 10b5-1 trading plan that would generally permit the Company to repurchase shares at times when it might otherwise be prevented from doing so under securities laws. The stock repurchase program will expire on December 31, 2021 unless otherwise modified or earlier terminated by our board of directors at any time in its sole discretion. Repurchased shares will be held in treasury.2022.
*****
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
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. Words or phrases such as “expects” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the Securities and Exchange Commission (the “SEC”), are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the Company’s future operations and prospects, the severity and durationpotential future impact of the COVID-19, pandemic and related economic repercussions, the markets for real estate in the areas in which the Company owns real estate, applicable zoning regulations, the markets for oil and gas including actions of other oil and gas producers or consortiums worldwide such as OPEC+the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively referred to as “OPEC+”), expected competition, management’s intent, beliefs or current expectations with respect to the Company’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”),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, 2020,2021, 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 togetherin conjunction 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, 2020, (ii)2021 filed with the factors discussedSEC on February 23, 2022 and the condensed consolidated financial statements and accompanying notes included, in Part II,I, Item 1A. “Risk Factors,” if any,1 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.10-Q. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Company’s future performance.
Overview
Texas Pacific Land Corporation (which, together with its subsidiaries as the context requires, may be referred to as “TPL”, the “Company”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 880,000 surface acres of land comprised of a number of separate tracts, located in 19 counties in West Texas, with the majority of our ownership concentrated in the Permian Basin. Additionally, we own a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 85,000 acres of land and a 1/16th NPRI under approximately 371,000 acres of land, in the western part of Texas, as well as approximately 4,000 additional net royalty acres (normalized to 1/8th)., all located in the western part of Texas.
We completed our reorganization from a business trust to a corporation (the “Corporate Reorganization”) on January 11, 2021, changing our name from Texas Pacific Land Trust (the “Trust”) to Texas Pacific Land Corporation. Any references in this Quarterly Report on Form 10-Q to the Company, TPL, our, we, or us with respect to periods prior to January 11, 2021 will beare in reference to the Trust, and references to periods on or after that date and thereafter will beare in reference to Texas Pacific Land Corporation or TPL Corporation. For further information on the Corporate Reorganization, see Note 7, “Changes10, “Changes in Equity” in the notes to the condensed consolidated financial statements.
Our business activity is generated from surface and royalty interest 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 revenues related to saltwater disposal on our land. In addition, we generate revenue from pipeline, power line and utility easements, commercial leases, material sales and seismic and temporary permits principally related to a variety of land uses, including midstream infrastructure projects and processing facilities as hydrocarbons are processed and transported to market.
A significant portion of our revenues is generated from our business activityWest Texas, primarily in the Permian Basin andBasin. Our revenues are derived primarily from oil, gas and produced water royalties, sales of water and land, easements and commercial leases. Due to the nature of our operations and concentration of our ownership in one geographic location, our revenue isand net income are subject to substantial fluctuations from quarter to quarter and year to year. The demandIn addition to fluctuations in response to changes in the market price for oil and gas, our financial results are also subject to decisions by the owners and operators of not only the oil and gas wells to which our oil and gas royalty interests relate, but also to other owners and operators in the Permian Basin as it relates to our other revenue streams, principally water sales, easements and other surface-related revenue.
For a further overview of our business and business segments, see Item 1. “Business — General” in our Annual Report on Form 10-K for the year ended December 31, 2021.
for, and sale price of, particular tracts of land are 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.
As our oil and gas revenue is derived from our oil and gas royalty interests, in addition to fluctuating 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.
Our revenue from easements is primarily generated from pipelines transporting oil, gas and related hydrocarbons, power line and utility easements and subsurface wellbore easements. The majority of our easements have a thirty-plus year term but subsequently renew every ten years with an additional payment. Commercial lease revenue is derived primarily from processing, storage and compression facilities and roads.
Texas Pacific Water Resources LLC (“TPWR”), a single member Texas limited liability company owned by the Company, provides 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. We are committed to sustainable water development. Our significant surface ownership in the Permian Basin provides TPWR with a unique opportunity to provide multiple full-service water offerings to operators.
During the three months ended March 31, 2021, we invested approximately $2.7 million in TPWR projects to maintain and/or enhance water sourcing assets.
Market Conditions
COVID-19 Pandemic andGlobal Oil Market Impact of Increased Supply by OPEC+in 2022
The uncertainty caused by the global spread of COVID-19, together with the increased supply ofAverage oil and gas by member nations of OPEC+, led to declines in crude oil prices and a reduction in global demand for oil and gas beginning induring the first quarter of 2020. These events led2022 were meaningfully higher compared to production curtailments and/or conservation of capital by the owners and operatorsaverage prices during most of the previous quarterly periods over the last decade. In 2021, oil prices were supported by oil supply cuts by OPEC+. Oil demand in 2021 broadly trended higher throughout the year, which also helped support strengthening oil prices. Beginning in March 2022, Russia’s incursion into Ukraine created volatility in global supply of numerous commodities, including oil. In response, the US has implemented numerous measures to help mitigate potential supply shortfalls and gas wellshigh oil prices, most notably by releasing millions of barrels of crude oil from its Strategic Petroleum Reserve. The confluence of these major events have contributed to which the Company’sincreased fluctuations in oil prices during 2022. Although our revenues are directly and indirectly impacted by changes in oil prices, we believe our royalty interests relate. These events negatively affected the Company’s business(which require no capital expenditures or operating expense burden from us for well development), strong balance sheet, and operations for 2020. The lingering impact of these events continues to reduce the demand forliquidity position will help us navigate through potential oil in 2021, and we expect that these events will continue to affect our financial results in 2021.price volatility.
In response to these events, we implemented certain cost reduction measures during 2020 and continue to identify additional cost reduction opportunities in 2021, thus reducing our operating expenses. Our immediate focus was negotiating price reductions and discounts with certain vendors and reducing our usage of independent contract service providers. As part of our longer-term water business strategy, we have invested in electrifying our water sourcing infrastructure. The use of electricity instead of fuel-powered generators to source and transport water translates into reduced fuel, equipment rental and repairs and maintenance costs. This strategy not only reduces our current expenses but affords us the ability to continue cost savings in the future. Additionally, our investment in automation has allowed us to curtail our reliance on independent contract service providers to support our field operations.COVID-19 Pandemic
Our primary focus has always been,We continue to monitor the COVID-19 pandemic as cases and hospitalizations have dropped significantly in 2022. We are following local government mandates, where applicable, and will continue to be, on maintaining a saferevise and healthyrefine our on-site work environment forto ensure business continuity and the safety and wellbeing of our employees. OurThe full extent to which the Pandemic impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information technology infrastructure has afforded usthat may emerge concerning the opportunity to allow our corporate employees to work remotelyseverity and we have deployed additional safety and sanitation measures for our field employees.new variants of the virus.
Despite the uncertainty caused by these events, we believe our longevity in the industry, strong financial position and our capital resource allocation discipline have equipped us with the tools necessary to continue navigating through the uncertainty.
Permian Basin Activity
The Permian Basin is one of the oldest and most well-known hydrocarbon-producing areas and currently accounts for a substantial portion of oil and gas production in the United States, covering approximately 86,000 square miles andin 52 counties across southeastern New Mexico and western Texas. AllExploration and production (“E&P”) firms active in the Permian have generally guided towards increased drilling and development activity in 2022 compared to prior year activity levels. Per the U.S. Energy Information Administration (“EIA”), Permian production is currently in excess of our assets are located in West Texas.five million barrels per day, which is higher than the average daily production of every year prior to 2022. Despite record Permian production volumes, E&P companies continue to experience challenges with labor and supply chains related to drilling and completion activities, which could negatively impact overall production.
With our ownership concentration in the Permian Basin, our revenues are directly impacted by oil and gas pricing and drilling activity in the Permian Basin. Below are metrics for the three months ended March 31, 20212022 and 2020:2021:
| | | Three Months Ended March 31, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2022 | | 2021 | |
Oil and Gas Pricing Metrics:(1) | Oil and Gas Pricing Metrics:(1) | | | | | Oil and Gas Pricing Metrics:(1) | | | | | |
WTI average price per bbl | | $ | 58.09 | | | $ | 45.34 | | |
WTI Cushing average price per bbl | | WTI Cushing average price per bbl | | $ | 95.18 | | | $ | 58.09 | | |
Henry Hub average price per mmbtu | Henry Hub average price per mmbtu | | $ | 3.50 | | | $ | 1.90 | | Henry Hub average price per mmbtu | | $ | 4.67 | | | $ | 3.50 | | |
| Activity Metrics specific to the Permian Basin:(1)(2) | Activity Metrics specific to the Permian Basin:(1)(2) | | Activity Metrics specific to the Permian Basin:(1)(2) | | |
Average monthly horizontal permits | Average monthly horizontal permits | | 446 | | 721 | Average monthly horizontal permits | | 572 | | 446 | |
Average monthly horizontal wells drilled | Average monthly horizontal wells drilled | | 343 | | 575 | Average monthly horizontal wells drilled | | 465 | | 343 | |
Average monthly horizontal rig count | | 189 | | 384 | |
Average weekly horizontal rig count | | Average weekly horizontal rig count | | 265 | | 189 | |
DUCs as of March 31 for each applicable year | DUCs as of March 31 for each applicable year | | 4,617 | | | 4,921 | | DUCs as of March 31 for each applicable year | | 3,924 | | 4,617 | |
| Total Average US weekly horizontal rig count (2) | Total Average US weekly horizontal rig count (2) | | 350 | | 703 | Total Average US weekly horizontal rig count (2) | | 575 | | 350 | |
(1) Commonly used definitions in the oil and gas industry provided in the table above are defined as follows: WTI Cushing represents West Texas Intermediate. Bbl represents one barrel of 42 U.S. gallons of oil. Mmbtu represents one million British thermal units, a measurement used for natural gas. DUCs representsrepresent drilled but uncompleted wells.
(2) Permian Basin specific information per Enverus analytics. US weekly horizontal rig counts per Baker Hughes United States Rotary Rig Count for horizontal rigs.
The metrics above demonstrate the shifts in activity in the Permian Basin fromfor the first quarter of 2020 to the first quarter ofthree months ended March 31, 2022 and 2021. While oilOil and gas prices which began declining in the first quarter of 2020 (prior2022 have rebounded strongly compared to oil reaching record lowsthe comparable period in 2021. Development, drilling, completion, and production activities across the second quarter of 2020),Permian broadly have reboundedalso significantly improved in the first quarter of 2021, development, drilling and completion and production activities have not returned2022 compared to their previous levels. Operators are cautiously managing theirthe prior year, although operators currently continue to deploy capital allocations by deploying at a decreased pace of development while oil demand begins to recover.measured, albeit increased, pace. As we are a significant landowner in the Permian Basin and not an oil and gas producer, our revenue is affected by the development decisions made by companies that operate in the areas where we own royalty interests and land. Accordingly, these decisions made by others affect not only our production and produced water disposal volumes but also directly impact our surface-related income and water sales.
Winter Storm Uri, in February 2021, created operational issues in the Permian Basin which impacted not only production from existing wells, but development
Liquidityand completion of new wells. As discussed above, we generate revenue through each phase of the life cycle of a well. While Winter Storm Uri directly impacted production and produced water disposal volumes, the effects on our results were tempered by increased oil and gas prices during the first quarter of 2021.Capital Resources
Overview
Liquidity and Capital Resources
Our principal sources of liquidity are revenuescash and cash flows generated from oil, gas and produced water royalties, easements and other surface-related income and water and land sales.our operations. Our primary liquidity and capital requirements are for capital expenditures related to our Water Services and Operations segment (the extent and timing of which are under our control), working capital and general corporate needs.
We continuously review our liquidity and capital resources. If market conditions were to change and our revenue wasrevenues were to decline 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.funding. We have no debt or credit facilities, nor any off-balance sheet arrangements as of March 31, 2021 and have no immediate plans to enter into such arrangements.2022.
As of March 31, 2021,2022, we had cash and cash equivalents of $310.7$507.4 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business, particularly the growth of TPWR, to repurchase our Common Stockcommon stock subject to market conditions, to pay dividends subject to the discretion of theour board of directors and for
general corporate purposes. For the three months ended March 31, 2022, we paid $23.2 million in dividends to our stockholders. We believe that cash from operations, together with our cash and cash equivalents balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.
During the three months ended March 31, 2022, we invested approximately $2.9 million in TPWR projects to maintain and/or enhance water sourcing assets, of which $0.9 million related to electrifying our water sourcing infrastructure.
Cash Flows from Operating Activities
For the three months ended March 31, 2022 and 2021, net cash provided by operating activities was $107.7 million and $52.4 million, respectively. Our cash flow provided by operating activities is primarily from oil, gas and produced water royalties, water and land sales, and easements and other surface-related income. Cash flow used in operations generally consists of operating expenses associated with our revenue streams, general and administrative expenses and income taxes.
The increase in cash flows provided by operating activities for the three months ended March 31, 2022 compared to the same period of 2021, was primarily related to increased prices and volumes of oil and gas production and was partially offset by increased working capital requirements.
Cash Flows Used in Investing Activities
For the three months ended March 31, 2022 and 2021, net cash used in investing activities was $5.2 million and $1.4 million, respectively. Our cash flows used in investing activities are primarily related to capital expenditures related to our water services and operations segment and acquisitions of royalty interests.
Capital expenditures increased $2.2 million for the three months ended March 31, 2022 compared to the same period of 2021. Acquisitions of royalty interests increased approximately $1.6 million for the three months ended March 31, 2022 compared to the same period 2021.
Cash Flows Used in Financing Activities
For the three months ended March 31, 2022 and 2021, net cash used in financing activities was $23.4 million and $21.3 million, respectively. Our cash flows used in financing primarily consist of activities which return capital to our stockholders such as payment of dividends.
During the three months ended March 31, 2022, we paid total dividends of $23.2 million consisting of cumulative paid cash dividends of $3.00 per share. During the three months ended March 31, 2021, we paid total dividends of $21.3 million consisting of cumulative cash dividends of $2.75 per share.
Results of Operations
The following table shows our consolidated results of operations for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Revenues: | | | | | | | |
Oil and gas royalties | $ | 104,172 | | | $ | 49,533 | | | | | |
Water sales | 18,820 | | | 12,956 | | | | | |
Produced water royalties | 14,870 | | | 12,549 | | | | | |
Easements and other surface-related income | 9,192 | | | 9,047 | | | | | |
Land sales and other operating revenue | 281 | | | 70 | | | | | |
Total revenues | 147,335 | | | 84,155 | | | | | |
| | | | | | | |
Expenses: | | | | | | | |
Salaries and related employee expenses | 9,385 | | | 9,979 | | | | | |
Water service-related expenses | 2,782 | | | 3,298 | | | | | |
General and administrative expenses | 3,000 | | | 2,806 | | | | | |
Legal and professional fees | 1,719 | | | 2,212 | | | | | |
Ad valorem taxes | 2,010 | | | — | | | | | |
| | | | | | | |
Depreciation, depletion and amortization | 4,126 | | | 3,838 | | | | | |
Total operating expenses | 23,022 | | | 22,133 | | | | | |
| | | | | | | |
Operating income | 124,313 | | | 62,022 | | | | | |
| | | | | | | |
Other income, net | 76 | | | 5 | | | | | |
Income before income taxes | 124,389 | | | 62,027 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Income tax expense | 26,489 | | | 11,975 | | | | | |
Net income | $ | 97,900 | | | $ | 50,052 | | | | | |
For the Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021
Consolidated Revenues and Net Income:
Total revenues and net income increased $63.2 million and $47.8 million, respectively, for the three months ended March 31, 2022 compared to the same period for the three months ended March 31, 2021. These increases were principally due to the $54.6 million increase in oil and gas royalty revenue and the $5.9 million increase in water sales over the same period. Individual revenue line items are discussed below under “Segment Results of Operations.”
Consolidated Expenses:
Salaries and related employee expenses. Salaries and related employee expenses were $9.4 million for the three months ended March 31, 2022 compared to $10.0 million for the comparable period of 2021. Salaries and related employee
expenses for the three months ended March 31, 2021 included a $2.0 million severance accrual. Salaries and related employee expenses for the three months ended March 31, 2022 include $1.3 million of share-based compensation expense.
Water service-related expenses. Water service-related expenses decreased to $2.8 million for the three months ended March 31, 2022 from $3.3 million for the same period of 2021. This decrease in expenses was principally the result of a decrease in fuel and equipment rental expenses due to our investment in electrifying our water sourcing infrastructure.
Legal and professional fees. Legal and professional fees decreased $0.5 million to $1.7 million for the three months ended March 31, 2022 from $2.2 million for the comparable period of 2021. Legal and professional fees for the three months ended March 31, 2021 were higher principally due to legal expenses associated with our Corporate Reorganization which was completed on January 11, 2021.
Ad valorem taxes. For the three months ended March 31, 2022, the Company recorded an accrual of approximately $2.0 million for ad valorem taxes. Prior to January 1, 2022, the ad valorem taxes with respect to our historical royalty interests were paid directly by certain third parties pursuant to an existing arrangement. Since the completion of our Corporate Reorganization on January 11, 2021, we have received notice from one such third party that they no longer intend to pay the ad valorem taxes related to such historical royalty interests. While we continue to believe the obligation to pay these ad valorem taxes should belong to the third party, we are accruing an estimate of such taxes and intend to pay the taxes when they become due in order to protect the royalty interests from any potential tax liens for nonpayment of future ad valorem taxes.
Total income tax expense. Total income tax expense was $26.5 million and $12.0 million for the three months ended March 31, 2022 and 2021, respectively. The increase in income tax expense is primarily related to increased operating income resulting from increased revenues from oil and gas royalties and water sales.
Segment Results of Operations
We operate our business in two reportable 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 eachevaluate the performance of our reportable segments.operating segments separately to monitor the different factors affecting financial results. The reportable segments presented are consistent with our reportable segments discussed in Note 8.11, “Business Segment Reporting” in the notes to the condensed consolidated 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”).
As previously discussed above under “Market Conditions,” ourOur results of operations for the three months ended March 31, 20212022 have been negativelybenefited from a rebound in oil and gas activity in the Permian Basin and commodity prices compared to 2021. While our oil and gas royalty revenues have benefited from increased royalty production and higher commodity prices during this time period, our surface-related income continues to be impacted by the lingering reductiondevelopment pace of operators in demand for oil and Winter Storm Uri. These combined circumstances have affected not only our production and produced water volumes, but also directly impacted our surface-related income and water sales as discussed further below.
For the three months ended March 31, 2021 as compared to the three months ended March 31, 2020Permian.
Revenues
For the three months endedThree Months Ended March 31, 2021 compared2022 as Compared to $96.6 million for the three months endedThree Months Ended March 31, 2020. Net income decreased $7.3 million, or 12.8%, to $50.1 million for the three months ended March 31, 2021 compared to $57.4 million for the three months ended March 31, 2020.
The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Revenues: | | | | | | | | |
Land and resource management: | | | | | | | | |
Oil and gas royalties | | $ | 49,533 | | | 59 | % | | $ | 42,360 | | | 44 | % |
Easements and other surface-related income | | 8,187 | | | 10 | % | | 13,298 | | | 14 | % |
Land sales and other operating revenue | | 70 | | | — | % | | 1,000 | | | 1 | % |
| | 57,790 | | | 69 | % | | 56,658 | | | 59 | % |
Water services and operations: | | | | | | | | |
Water sales | | 12,956 | | | 15 | % | | 26,967 | | | 28 | % |
Produced water royalties | | 12,549 | | | 15 | % | | 12,506 | | | 13 | % |
Easements and other surface-related income | | 860 | | | 1 | % | | 463 | | | — | % |
| | 26,365 | | | 31 | % | | 39,936 | | | 41 | % |
Total consolidated revenues | | $ | 84,155 | | | 100 | % | | $ | 96,594 | | | 100 | % |
| | | | | | | | |
Net income: | | | | | | | | |
Land and resource management | | $ | 39,513 | | | 79 | % | | $ | 39,118 | | | 68 | % |
Water services and operations | | 10,539 | | | 21 | % | | 18,283 | | | 32 | % |
Total consolidated net income | | $ | 50,052 | | | 100 | % | | $ | 57,401 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Revenues: | | | | | | | | |
Land and resource management: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Oil and gas royalty revenue | | $ | 104,172 | | | 71 | % | | $ | 49,533 | | | 59 | % |
Easements and other surface-related income | | 8,894 | | | 6 | % | | 8,187 | | | 10 | % |
Land sales and other operating revenue | | 281 | | | — | % | | 70 | | | — | % |
Total land and resource management revenue | | 113,347 | | | 77 | % | | 57,790 | | | 69 | % |
| | | | | | | | |
Water services and operations: | | | | | | | | |
Water sales | | 18,820 | | | 13 | % | | 12,956 | | | 15 | % |
Produced water royalties | | 14,870 | | | 10 | % | | 12,549 | | | 15 | % |
Easements and other surface-related income | | 298 | | | — | % | | 860 | | | 1 | % |
Total water services and operations revenue | | 33,988 | | | 23 | % | | 26,365 | | | 31 | % |
Total consolidated revenues | | $ | 147,335 | | | 100 | % | | $ | 84,155 | | | 100 | % |
| | | | | | | | |
Net income: | | | | | | | | |
Land and resource management | | $ | 81,156 | | | 83 | % | | $ | 39,513 | | | 79 | % |
Water services and operations | | 16,744 | | | 17 | % | | 10,539 | | | 21 | % |
Total consolidated net income | | $ | 97,900 | | | 100 | % | | $ | 50,052 | | | 100 | % |
Land and Resource Management
Land and Resource Management segment revenues increased $1.1$55.6 million, or 2.0%96.1%, to $57.8$113.3 million for the three months ended March 31, 20212022 as compared with $56.7 million forto the comparable period of 2020.2021. The increase in Land and Resource Management segment revenues is principally due to an increase in gas royalty revenue, partially offset by decreases in easementsoil and other surface-related income and, to a lesser extent, oilgas royalty revenue, as discussed further below.
Oil and gas royaltiesroyalties. . Oil and gas royalty revenue was $49.5$104.2 million for the three months ended March 31, 20212022 compared to $42.4 million for the three months ended March 31, 2020. Oil royalty revenue was $34.2 million for the three months ended March 31, 2021, a decrease of 4.6% compared to the three months ended March 31, 2020 when oil royalty revenue was $35.9 million. This decrease in oil royalty revenue is principally due to a 10.6% decrease in crude oil production subject to our royalty interests, partially offset by a 6.7% increase in our average realized price per royalty barrel during the three months ended March 31, 2021 compared to the same period in 2020. Gas royalty revenue was $15.3$49.5 million for the three months ended March 31, 2021, an increase of 136.8% compared to110.3%. The table below provides financial and operational data by royalty stream for the three months ended March 31, 2020 when2022 and 2021:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Our share of production volumes(1): | | | | |
Oil (MBbls) | | 796 | | | 646 | |
Natural gas (MMcf) | | 3,279 | | | 2,709 | |
NGL (MBbls) | | 528 | | | 383 | |
Equivalents (MBoe) | | 1,871 | | | 1,480 | |
Equivalents per day (MBoe/d) | | 20.8 | | | 16.4 | |
| | | | |
Oil and gas royalty revenue (in thousands): | | | | |
Oil royalties | | $ | 71,681 | | | $ | 34,249 | |
Natural gas royalties | | 16,175 | | | 7,360 | |
NGL royalties | | 16,316 | | | 7,924 | |
Total oil and gas royalties | | $ | 104,172 | | | $ | 49,533 | |
| | | | |
Realized prices: | | | | |
Oil ($/Bbl) | | $ | 94.24 | | | $ | 55.53 | |
Natural gas ($/Mcf) | | $ | 5.33 | | | $ | 2.94 | |
NGL ($/Bbl) | | $ | 33.42 | | | $ | 22.36 | |
Equivalents ($/Boe) | | $ | 58.31 | | | $ | 35.04 | |
(1) Commonly used definitions in the oil and gas royalty revenueindustry not previously defined: Boe represents barrels of oil equivalent. MBbls represents one thousand barrels of crude oil, condensate or NGLs. Mcf represents one thousand cubic feet of natural gas. MMcf represents one million cubic feet of natural gas. MBoe represents one thousand Boe. MBoe/d represents one thousand Boe per day.
Our share of crude oil, natural gas and NGL production volumes was $6.5 million. This increase in gas royalty revenue is principally due to a 121.1% increase in our average realized price20.8 thousand Boe per day for gas production and, to a lesser extent, a 7.1% increase in gas production subject to our royalty interests during the three months ended March 31, 20212022 compared to 16.4 thousand Boe per day for the same period of 2021. The average realized prices were $94.24 per barrel of oil, $5.33 per Mcf of natural gas, and $33.42 per barrel of NGL, for a total equivalent price of $58.31 per Boe for the three months ended March 31, 2022, an increase of $23.27 per Boe compared to the total equivalent price of $35.04 per Boe for the same period in 2020.of 2021.
Easements and other surface-related incomeincome.. Easements and other surface-related income was $8.9 million for the three months ended March 31, 2022, an increase of 8.6% compared to $8.2 million for the three months ended March 31, 2021, a decrease of 38.4% compared to $13.3 million for the three months ended March 31, 2020.2021. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases material sales and seismic and temporary permits. The decreaseincrease in easements and other surface-related income is principally related to a decreaseincreases of $4.9$1.5 million in pipeline easement income, to $1.2$0.9 million in power line and utility easements, and $0.6 million in material sales for the three months ended March 31, 2021 from $6.12022 compared to the same period of 2021. These increases were partially offset by a $2.4 million decrease in commercial lease revenue for the three months ended March 31, 2020. The amount of income derived from pipeline easements is a function of the term of the easement, the size of the easement and the number of easements entered into for any given period.2022. Easements and other surface-related income is dependent on development decisions made by companies that operate in the areas where we own land and is, therefore, unpredictable and may vary significantly from period to period. See “Market Conditions” above for additional discussion of decreased development activity in the Permian Basin during the three months ended March 31, 2021 relative to the same time period of 2020.2022.
Net income. Net income for the Land and Resource Management segment was $81.2 million for the three months ended March 31, 2022 compared to $39.5 million for the three months ended March 31, 2021 compared to $39.12021. Expenses, including income tax expense, for the Land and Resource Management segment were $32.2 million and $18.3 million for the three months ended March 31, 2020.2022 and 2021, respectively. The increase in net incomeexpenses during 2022 is principally duerelated to the $1.1a $12.9 million increase in income tax expense for the three months ended March 31, 2022 compared to the same period of 2021. Expenses are discussed further above under “Results of Operations.”
Water Services and Operations
Water Services and Operations segment revenues partially offset by a slight increase in segment expenses, including income tax expense. The increase in segment revenues is principally dueincreased 28.9%, to an increase in gas royalty revenue, partially offset by decreases in easements and other surface-related income and oil royalty revenues, as discussed above. Total segment expenses were $18.3 million and $17.6$34.0 million for the three months ended March 31, 2021 and 2020, respectively. The overall increase in segment expenses was principally related to increased income tax expense, depletion expense related to our royalty interests and increased board of director expenses associated with our Corporate Reorganization. Expenses are discussed further below under “Other Financial Data — Consolidated.”
Water Services and Operations
Water Services and Operations segment revenues decreased 34.0% to $26.4 million for the three months ended March 31, 20212022 as compared with $39.9revenues of $26.4 million for the comparable period of 2020.2021. The decreaseincrease in Water Services and Operations segment revenues is principally due to a decreaseincreases in water sales revenue, which is discussed below.and produced water royalty revenue. As discussed in “Market Conditions” above, our segment revenues are directly influenced by development decisions made by our customers and the overall activity level in the Permian Basin. Accordingly, our segment revenues and sales volumes, as further discussed below, will fluctuate from period to period based upon those decisions and activity levels.
Water sales. Water sales revenue was $13.0$18.8 million for the three months ended March 31, 2021, a decrease2022, an increase of $14.0$5.9 million or 52.0%45.3%, compared with the three months ended March 31, 20202021 when water sales revenue was $27.0$13.0 million. This decrease wasThe increase in water sales is principally due to a 40.7% decrease in the number of barrels of sourced and treated water sold and, to a lesser extent, a 20.4% decrease in theincreased average sales price per barrel of waterpricing for the three months ended March 31, 20212022, compared to the same period of 2021. Average pricing in 2020.2022 has generally returned to pre-pandemic levels, while pricing in 2021 continued to be impacted by the lows in 2020 brought on by COVID-19.
Produced water royalties.Produced water royalties are royalties received from the transportation or disposal of produced water on our land. We do not operate any salt watersaltwater disposal wells. Produced water royalties were $12.5$14.9 million for the three months ended March 31, 2021 and 2020.2022 compared to $12.5 million for the same period in 2021. This increase is principally due to increased produced water volumes for the three months ended March 31, 2022 compared to the same period of 2021.
Easements and other surface-related income. Easements and other surface-related income was $0.3 million for the three months ended March 31, 2022, a decrease of $0.6 million compared to $0.9 million for the three months ended March 31, 2021. The decrease in easements and other surface-related income relates to a decrease in temporary permits for sourced water lines for the three months ended March 31, 2022 compared to the same period in 2021.
Net income. Net income for the Water Services and Operations segment was $16.7 million for the three months ended March 31, 2022 compared to $10.5 million for the three months ended March 31, 20212021. As discussed above, revenues for the Water Services and Operations segment increased 28.9% for the three months ended March 31, 2022 compared to $18.3the same period of 2021. Expenses, including income tax expense, for the Water Services and Operations segment were $17.2 million for the three months ended March 31, 2020. As discussed above, segment revenues decreased 34.0% for the three months ended March 31, 20212022 as compared to the same period of 2020. Total segment expenses, including income tax expense, were $15.8 million for the three months ended March 31, 2021 as compared to $21.6 million for the three months ended March 31, 2020.2021. The overall decreaseincrease in segment expenses during 20212022 is principally related to decreased water service-related expenses, primarily equipment rental, fuel and repairs and maintenance andincreased income tax expense.expense as a result of increased segment operating income during the same time period. Expenses are discussed further belowabove under “Other Financial Data — Consolidated.“Results of Operations.”
Non-GAAP Performance Measures
In addition to amounts presented in accordance with GAAP, we also present certain supplemental non-GAAP measurements. These measurements are not to be considered more relevant or accurate than the measurements presented in accordance with GAAP. In compliance with the requirements of the SEC, our non-GAAP measurements are reconciled to net income, the most directly comparable GAAP performance measure. For all non-GAAP measurements, neither the SEC nor any other regulatory body has passed judgment on these non-GAAP measurements.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP financial measurement of earnings before interest, taxes, depreciation, depletion and amortization. Its purpose is to highlight earnings without finance, taxes, and depreciation, depletion and amortization expense, and its use is limited to specialized analysis. We calculate Adjusted EBITDA as EBITDA excluding the impact of certain non-cash, non-recurring and/or unusual, non-operating items, including, but not limited to: employee share-based compensation, conversion costs related to our Corporate Reorganization, and severance costs. We have presented EBITDA and Adjusted EBITDA because we believe that both are useful supplements to net income in analyzing operating performance.
Other Financial Data — Consolidated
SalariesThe following table presents a reconciliation of net income to EBITDA and related employee expenses. Salaries and related employee expenses were $10.0 millionAdjusted EBITDA for the three months ended March 31, 2022 and 2021 compared to $10.6 million for the comparable period of 2020. The decrease in salaries and related employee expenses during 2021 as compared to the same period of 2020 is principally due to decreased usage of contract labor by our Water Services and Operations segment.(in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Net income | | $ | 97,900 | | | $ | 50,052 | | | | | |
Add: | | | | | | | | |
Income tax expense | | 26,489 | | | 11,975 | | | | | |
Depreciation, depletion and amortization | | 4,126 | | | 3,838 | | | | | |
EBITDA | | 128,515 | | | 65,865 | | | | | |
Add: | | | | | | | | |
Employee share-based compensation | | 1,319 | | | — | | | | | |
Conversion costs related to corporate reorganization | | — | | | 1,973 | | | | | |
Severance costs | | — | | | 2,000 | | | | | |
| | | | | | | | |
Adjusted EBITDA | | $ | 129,834 | | | $ | 69,838 | | | | | |
Water service-related expenses. Water service-related expenses were $3.3 million for the three months ended March 31, 2021 compared to $6.8 million for the comparable period of 2020. The decrease in expenses during 2021 is primarily related to decreased equipment rental, fuel and repairs and maintenance expenses related to the 40.7% decrease in the number of barrels of sourced and treated water sold and ongoing cost saving measures as discussed above in “Market Conditions.”
General and administrative expenses. General and administrative expenses decreased $0.2 million to $2.8 million for the three months ended March 31, 2021 from $3.0 million for the same period of 2020. The decrease in general and administrative expenses during the three months ended March 31, 2021 compared to the same period of 2020 is primarily related to decreases associated with independent contract service providers and travel expenses, partially offset by increased board of director fees resulting from our Corporate Reorganization in January 2021.
Legal and professional expenses. Legal and professional fees were $2.2 million for the three months ended March 31, 2021 compared to $2.4 million for the comparable period of 2020. Legal and professional fees for the three months ended March 31, 2021 principally related to the completion of our Corporate Reorganization effective January 11, 2021. Legal and professional fees for the three months ended March 31, 2020 principally related to the conversion exploration committee and planning and preparation for the Corporate Reorganization.
Depreciation, depletion and amortization. Depreciation, depletion and amortization was $3.8 million for the three months ended March 31, 2021 compared to $3.3 million for the three months ended March 31, 2020. The increase in depreciation, depletion and amortization is principally related to our investment in water service-related assets placed in service in 2021 and 2020 and, to a lesser extent, increased depletion related to our oil and gas royalty interests.
Cash Flow Analysis
For the three months ended March 31, 2021 as compared to the three months ended March 31, 2020
Cash flows provided by operating activities for the three months ended March 31, 2021 and 2020 were $52.4 million and $68.6 million, respectively. The decrease in cash flows provided by operating activities was primarily related to decreased proceeds from water sales and easements and other surface-related payments received during the three months ended March 31, 2021.
Cash flows used in investing activities were $1.4 million compared to $24.4 million for the three months ended March 31, 2021 and 2020, respectively. Acquisitions of land and royalty interests were $20.8 million for the three months ended March 31, 2020. There were no acquisitions of land or royalty interests during the three months ended March 31, 2021.
Cash flows used in financing activities were $21.3 million compared to $124.1 million for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, we paid total dividends of $21.3 million consisting of a quarterly cash dividend of $2.75 per share. During the three months ended March 31, 2020, we paid total dividends of $124.1 million consisting of an annual cash dividend of $10.00 per Sub-share and a special dividend of $6.00 per Sub-share.
Off-Balance Sheet Arrangements
The Company 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 condensed 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 20202021 Annual Report on Form 10-K filed with the SEC on February 25, 2021. Our most critical accounting policies and estimates include our accrual of oil and gas 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. 23, 2022.
There have been no material changes to our critical accounting policies or in the estimates and estimatesassumptions underlying those policies, from the informationthose provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20202021 Annual Report on Form 10-K.
New Accounting Pronouncements
Item 3. Quantitative and Qualitative Disclosures AboutMarket RiskRisk.
There have been no material changes in the information related to market risk of the Company since December 31, 2020.2021.
Item 4. Controls and ProceduresProcedures.
Pursuant to Rule 13a-15 under the Exchange Act,
Our management, of the Company under the supervision and with the participation of Tyler Glover, the Company’s Chief Executive Officer (“CEO”) and Robert J. Packer, the Company’s Chief Financial Officer carried out(“CFO”), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 under the Exchange Act) as of the end of the Company’s fiscal quarterperiod covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, Mr. Gloverour CEO and Mr. PackerCFO have concluded that the Company’s disclosure controls and procedures arewere not effective, in timely alerting them to material information relatingdue solely to the material weakness in our internal control over financial reporting related to income taxes as described below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Plan for Remediation of Material Weakness
As of December 31, 2021, management determined that there was a design gap in our controls regarding the periodic evaluation of historical tax returns and tax positions for income taxes. As a result of this design gap, we did not timely identify the incorrect tax treatment of depletion related to our oil and gas royalty interests in our filed income tax returns related to prior periods until the fourth quarter of 2021. The material weakness did not result in any restatements of our consolidated financial statements or disclosures for any prior period.
We are committed to remediating the control deficiency that gave rise to the material weakness. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weakness.
We have developed a plan to remediate the material weakness in internal control over financial reporting related to our controls over income taxes, which consists of:
•Quarterly evaluation of tax positions taken by the Company requiredby our personnel and third-party tax professional; and
•Enhanced monitoring activities related to changes in tax laws and regulations which may impact the Company.
As of the end of the first quarter of 2022, management has effectively designed, implemented and tested the operating effectiveness of controls related to the periodic evaluation of historical tax returns and tax positions for income taxes. However, this material weakness will not be includedconsidered remediated until management has concluded, through testing, that the controls described above have operated effectively for a minimum of two quarters.
Changes in Internal Controls During the Company’s periodic SEC filings.First Quarter of 2022
ThereOther than the changes described above, there have been no other changes in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1.Legal Proceedings.
The Company
TPL is not involved in any material pending legal proceedings.
Item 1A.Risk FactorsFactors.
There have been no material changes in the risk factors previously disclosed in response to Part I, Item 1A. “Risk Factors” set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the SEC on February 25, 2021.23, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not repurchase any Sub-shares or any shares of Common Stockcommon stock during the three months ended March 31, 2021.2022.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4.Mine Safety DisclosuresDisclosures.
Not applicableapplicable.
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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 20212022 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021,2022, 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 CORPORATION |
| | | (Registrant) |
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Date: | May 6, 20214, 2022 | | By: | /s/ Tyler Glover |
| | | | Tyler Glover President, Chief Executive Officer and Director |
| | | | Chief Executive Officer |
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Date: | May 6, 20214, 2022 | | By: | /s/ Robert J. PackerChris Steddum |
| | | | Robert J. Packer, |
| | | | | Chris Steddum Chief Financial Officer |