Sunday, August 7, 2022

Earnings Roundup Q2 2022 ($TPL $RGLD $DMLP $MRO)

In the "What I Would Buy Instead of Tesla" post back in October 2020 (almost two years ago), we mentioned Texas Pacific Land Trust as one investment idea:

Texas Pacific Land Trust (TPL) for $3.6 billion. At $460, the market capitalization is $3.6 billion and the enterprise value is about $3.3 billion. (They have a net cash position.) They get a royalty from their land in the Permian and do not do any production themselves. No debt and royalty ownership protects against the risk of ruin in the scenario where there is "deflation first" before an inflation. In 2019, they did $318 million of net income. In the 1H of 2020, they did only $85 million (which annualizes to $170mm). It's a higher quality asset than companies that are more expensive. I think it's a better inflation hedge than precious metals. The big question to me would be whether we overpaid if there's an extended period of deflation. But at least it would be far more likely to survive than something like XOM which has 3x its EBITDA in debt.

Texas Pacific Land has subsequently converted from a trust to a corporation, and has also greatly increased in price (increased 3.6x). The market capitalization is now $12.8 billion and the enterprise value is $12.3 billion. Second quarter 2022 net income was $118.9 million, or $15.37 per share, and adjusted EBITDA was $158.3 million. First half of 2022 net income was $216.8 million, or $28.02 per share, and adjusted EBITDA was $288.1 million. So the FCF/EV yield is 4.7% (based on first half results).

From their investor presentation: only about 12% of royalty acreage is developed with 20,000 gross undeveloped locations remaining. On their acreage, operators have 2,883 wells currently on production, 207 completed (but not producing), 452 drilled but uncompleted, and 480 that have been permitted. The 1,139 additional wells will drive quite a bit of cash flow when they come online. The company estimates that their acreage has 25 billion barrels of oil equivalent (gross). At a 4.4% average royalty, that would be 1.1 billion net barrels, an enterprise value of around $11 per barrel.

Another idea that we mentioned in that post was Royal Gold:

Royal Gold (RGLD) for $7.9 billion. A great business model - streaming/royalty interests on gold mines with no debt. Net income of $200 million for the past year is expensive, but it could/should grow as more mines come into production. (They have interests in 41 producing mines and 16 in development, plus more in the pipeline.) They do about 1 transaction a year but it's lumpy - they did none from 2006-2008 or from 2016-2018.

The market capitalization has actually fallen and is now $6.7 billion. They are debt free with cash of $280 million so the enterprise value is $6.4 billion. For the second quarter of 2022 they reported revenue of $146.4 million, operating cash flow of $120.2 million, and earnings of $71.1 million. On an annualized basis, the company is trading for 23x earnings (of $284 million) and an OCF/EV yield of 7.5%.

We mentioned Dorchester Minerals in that post too:

Dorchester Minerals LP (DMLP) for $358 million. They own producing and non-producing mineral, royalty, overriding royalty, net profits and leasehold interests. They have no debt. Net income for 1H 2020 of $10 million vs $28 million for 1H 2019. Prices were obviously down during the covid crash, and operators also curtailed production. They bought back some of their own units during April.

The market capitalization is now $1 billion. For the year to date 2022, they have earned $68 million and over the past two quarters (i.e. not counting January) they have distributed $65 million to unit holders. That is a distribution yield of 13% on the current market capitalization. See our past posts, "Is Dorchester Minerals LP Just a Depleting Asset?" and "Dorchester Minerals LP Retrospective".

We mentioned Marathon Oil Corp in a blog post in May of this year:

Marathon is an independent E&P company, based in Houston, with operations in the Eagle Ford, Bakken, STACK/SCOOP and Permian. It's a bit smaller than our Canadian oil majors - the market capitalization (at $27) is $18 billion and the enterprise value is $21 billion. [T]hey repurchased 3% of outstanding shares in one quarter. They're trading at 6 times annualized, adjusted net income, and the FCF/EV yield based on guidance for 2022 is 21%.

The market capitalization is down to $15 billion now and the enterprise value is $18.3 billion. They reported second quarter 2022 net income of $966 million, operating cash flow of $1,678 million, and free cash flow of $1,323 million. Their projection is $4.5 billion of 2022 free cash flow, assuming $100/bbl WTI and $6/MMBtu Henry Hub. (A $1/bbl change in WTI is ~$60MM of annual CFO, which would imply $3.9 billion at $90 WTI.) 

So they are now trading for less than 4 times annualized net income, and the annualized FCF/EV yield is currently 29%, and is likely still north of 20% at $90 oil based on their projections.

They have returned over $1.7 billion of capital to shareholders year-to-date. Over the past 10 months (since October 2021) they have reduced share count by 15%, and year-to-date they have reduced it by 7.3%. 

A great comment from the conference call:

We're trading at a free cash flow yield more than 25%, one of the lowest trading multiples in the entire S&P 500. We continue to believe that our equity is fundamentally mispriced. And as long as that's the case, we'll aggressively repurchase our stock. As I've said before, it's the best acquisition we can make.

We notice that their sales volumes are down 1% year over year from 348k boe/d to 343k. In general, oil companies are responding to their distressed valuations by using their cash flows to buy back stock and pay dividends, not grow production.

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