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Operator: Greetings and welcome to Texas Pacific Land Corporation First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Shawn Amini of Investor Relations. Thank you and you may proceed sir.

Shawn Amini: Thank you for joining us today for Texas Pacific Land Corporation’s first quarter 2023 earnings conference call. Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission, which is available on the Investors section of the company’s website at www.texaspacific.com. As a reminder, remarks made on today’s conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company’s results, please refer to our earnings release for this quarter and to our most recent SEC filings.

During this call, we will also be discussing certain non-GAAP financial measures. More information and reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings. Please also note, we may at times refer to our company by its stock ticker, TPL. This morning’s conference call is hosted by TPL’s Chief Executive Officer, Ty Glover; and Chief Financial Officer, Chris Steddum. Management will make some prepared comments, after which, we will open the call for questions. Now, I will turn the call over to Ty.

Ty Glover: Good morning everyone and thank you for joining us today. TPL delivered another strong quarter as our non-oil and gas royalty businesses helped to mitigate the impact of lower oil and gas prices. During first quarter 2023 WTI Cushing Oil and Henry Hub natural gas prices were down 19% and 43%, respectively, compared to the same time period last year, and as a result of that direct exposure to prices, our oil and gas royalty revenues were down 14%. However, on a year-over-year basis, for first quarter 2023, our sourced water sales were up 15%. Produced water royalties were up 35%, and our easement and other surface-related income was up 63%. When commodity prices come under pressure, these non-oil and gas royalty revenue streams are especially valuable as they provide the company built-in hedges and countercyclical revenues.

This quarter, nearly 40% of our revenues were outside of oil and gas royalties. As many of you know, TPL has not historically hedged our commodity price exposure related to royalties. For us, the non-oil and gas royalty cash flow streams and our debt-free balance sheet are the hedge. Even during a long period of severely depressed prices, TPL has shown it can generate substantial positive free cash flow. 2020 was a great example of that. And when the cycle inevitably turns, as it did last year, our hedge-free position ensures that we capture maximum upside. Despite some recent turbulence with oil and gas prices, the long-term outlook for TPL remains strong, underpinned by the Permian is arguably the best resource play in North America. We remain optimistic based on our conversations with our customers across surface and water.

From our internal data, leading indicators, such as new permitting and drilling activity remain at historically strong levels. As we’ve said in the past, quarter-to-quarter performance may fluctuate, but we continue to expect royalty production and overall activity to trend upwards over the long-term. As previously disclosed on November 22, 2022, the company filed a complaint and Delaware Chancery Court to resolve a disagreement with Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors LLC, and SoftVest, L.P. over their voting commitments pursuant to a stockholders’ agreement with the company. The Delaware Court of Chancery held a one-day trial on April 17th, 2023. Following post-trial briefing, the company anticipates the court to issue a decision.

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

Chris Steddum: Thanks Ty. Total revenues for the quarter of 2023 were $146 million, representing a 4% decline sequentially from fourth quarter 2022 revenues. Revenues were impacted by lower oil and gas prices and royalty production, though offset by higher sourced water sales, produced water volumes and easements and other surface-related income. Adjusted EBITDA and free cash flow for the quarter were $116 million and $88 million respectively. We ended the quarter with $591 million of cash on the balance sheet. TPL’s near-term inventory outlook remains strong with approximately five net permits, 7.8 net DUCs, and 3.3 net completed wells at the end of the quarter. As Ty referenced earlier, our preliminary data shows first quarter 2023 as the second best quarter ever for new permits on a net lateral feet basis.

For new spuds, first quarter 2023 would be a record on a net lateral feet drilled basis, which is driven by both higher gross new spuds and also longer lateral lengths now approaching nearly 11,000 feet on average. We continue to evaluate our capital allocation priorities as company and industry fundamentals evolve. For this quarter, we have maintained our $3.25 per share dividend. Our previously announced $250 million buyback authorization began on January 1st of this year, and as we move out of a blackout period, we have room to lean more heavily on that program. With a large cash balance, zero debt and a business that continues to generate ample free cash flow, we retain tremendous amount of flexibility to be opportunistic as we look to maximize shareholder value.

And with that, operator, we will now take questions.

Operator: Thank you very much. We will now be conducting a question-and-answer session. The first question comes from Derrick Whitfield from Stifel. Please proceed with your question Derrick.

Derrick Whitfield: Good morning Ty and Chris.

Ty Glover: Good morning Derrick.

Chris Steddum : Good morning.

Derrick Whitfield: My first question, I wanted to focus on the growth outlook of your oil and gas royalty segment. With the understanding that you don’t provide quarterly guidance in Q1 was negatively impacted by less spills. How should we think about the near-term production trajectory in light of your line of sight activity, which increased sequentially? And separately, could you comment on the degree you guys were impacted by the issues Chevron experienced during Q4 earnings and outlined further at its Analyst Day. It does appear there was a higher-than-expected depletion effects after long-sitting DUCs, but that appears to be one-time in nature. But again, any color you could offer would be greatly appreciated.

Chris Steddum: Hey Derrick. I might tackle the first part of the question. So, when we think about our production outlook, I think what we’ve said in the past is that we still expect TPL to outperform the basin over kind of the near and medium term. And so I think we still feel that, that will be the case. And to your point, when we look at kind of the net normalized DUCs permits, all of those numbers are effectively at all-time highs right now. And so certainly, from a near-term inventory perspective, we feel like TPL is in a great spot right now. And so there’s certainly plenty of near-term inventory to give a positive production outlook for the rest of the year. Now, look, the pace at which the operators are going to take down that inventory, that’s always the difficult part to predict.

But as far as what we’ve got out there, it looks great. It looks strong. DUCs look great. And I think at the end of the day, what we kind of have seen as we’ve gotten the data in as the fourth quarter, right, the amount of wells turned in line was just a little bit lower and that happens quarter-to-quarter like we say, it is going to be somewhat volatile in the short-term. But in the long-term, I think our outlook still remains strong, and we think we’ll continue to outpace the basin. And I don’t know, Ty, if you wanted to talk any about some of the operator?

Ty Glover: Yes, I’ll take a stab at the second part of your question there. I think what you’re referring to is some of the well results that Chevron had I would say that while Chevron owns the minerals under a large portion of our position, most of that has been leased out or farmed out. And so we actually have a fairly small exposure to Chevron operations overall, if you look at what they operate as a percentage of our entire position. So, I’m not sure if that’s helpful.

Derrick Whitfield: It is. Thanks Ty. And then maybe shifting over to the SLEM business, you guys experienced one of the strongest quarters since 2019. In addition to record activity, are there other noticeable drivers that we should be thinking about?

Ty Glover: Yes, I would say the main drivers on the ramp in SLEM has been an increase in pipeline easements. As we’ve seen gas take away tighten, we’re starting to see more requests for gathering infrastructure. Our team has done a really good job in the field with rock sales. So, we’ve opened up some new caliche pits. We’re crushing rock now. We’ve expanded sales into New Mexico. And so we’ve seen a nice ramp in rock sales as well. We had a little bit of sand royalty towards the end of the quarter. So, expect that to ramp up as well here in the near future.

Derrick Whitfield: And perhaps one last if I could. Just with respect to your trial versus Horizon Kinetics, what should we expect from the post-trial briefing schedule, meaning I’m not asking you to project an outcome, but does a favorable outcome allow you to advance Proposal 4, assuming you have a shareholder approval?

Ty Glover: Say the last part of that question one more time, Derrick, sorry.

Derrick Whitfield: Sure. So, with respect to the decision that comes out of the post-trial briefing schedule with Horizon Kinetics, what should we expect from that? And by that, I mean, I’m not asking you to project an outcome of the trial, but does a favorable outcome allow you to advance Proposal 4, assuming you have shareholder approval?

Ty Glover: Yes, that’s correct.

Derrick Whitfield: Hey, terrific. That’s all for me guys. Thanks.

Ty Glover: Thanks Derrick.

Operator: Thank you. The next question comes from Hamed Khorsand from BWS Financial. Please proceed with your question Hamed.

Hamed Khorsand: Good morning. The first question I had was on just the legal expense line. Is that an accrued expense? What should we expect in Q2? And is that a normal number? I mean it seems quite excessive.

Chris Steddum: Hey Hamed, that is an accrued expense. And look, we really can’t comment on expectations of what the spend may be in the future. And so that’s kind of where it’s at right now.

Hamed Khorsand: Okay. And then on the revenue side, could you just talk about this one-time revenue that was disclosed in the Q, what sparked it and what your future revenue would be if there is any from this arbitration?

Chris Steddum: Yes. The — effectively, it was a stipulation that — based on what we felt that Chevron was, I guess, over deducting some expenses in the past. So, all of that revenue is associated with past period where they had probably overcharged on some of the expenses on the gas and NGL side. And so I think the right way to think about it is, it’s effectively a kind of a one-time payment to rectify that.

Hamed Khorsand: Okay. So, I assume that the oil revenue would have been down another $8 million on a normalized basis then?

Chris Steddum: Yes, that’s the right way to think about it. And again, it’s just — I guess, as we said in some of our prepared remarks compared to last year and even last quarter, across the board, we’ve seen quite a bit of commodity price weakness.

Hamed Khorsand: Okay. And then my last question was that also in the Q, you disclosed that there was a $3.6 million put into the Water Resource business. What was that for? And is the business itself generating positive free cash flow?

Chris Steddum: Yes. So the capital is basically in line with the capital we probably spend each quarter. Usually, it’s been about a $12 million capital spend for most years. The right way to think about that is some of it is the continued electrification of our operations. So, we are approaching the end of that electrification process. Some of that is purchasing different like lay-flat hoses and operating equipment that we need day-to-day. And you could think of that type of stuff is more like a maintenance capital, right? So, those would be dollars that we would probably continue to spend in the future to maintain the business and our equipment. And then some of it is, I think we’ve probably said in the past, the supply chains have slowed down for some of the key items that you need to operate.

And so we have also gone out and probably purchased in advance or at least further in advance than we normally would some of the key infrastructure items, tanks and hoses that we know we’re going to need in the future to fulfill customer orders. And so that’s kind of what that number is and the right way to think about it. And if you look at the financials, that business had $20 million of positive net income this quarter. And also free cash flow — positive free cash flow.

Hamed Khorsand: I appreciate it. Thank you.

Ty Glover: Thanks Hamed.

Chris Steddum: Thanks Hamed.

Operator: Thank you very much. That was our final question and that concludes the Q&A session as well as the teleconference for today. Ladies and gentlemen, thank you very much for your participation, and you may now disconnect your lines.