Texas Pacific Land posts record Q3 as water royalties surge

By Grace Kim

Texas Pacific Land reported third-quarter revenue of $273 million, up 35% year over year, and free cash flow of $170 million, up 39%, as higher oil and gas production, elevated commodity prices and stronger water and infrastructure revenue drove results.

Net income rose 38% to $167 million, or $2.42 per diluted share; adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 37% to $238 million, CFO Chris Steddum said.

What drove the record quarter?

CEO Ty Glover said it was the third consecutive quarter in which Texas Pacific Land set records for revenue, net income and free cash flow. Drivers included development across the company’s royalty acreage, higher pipeline easement revenue and record produced-water royalty volumes.

Higher commodity-linked income and stronger land and water operations drove the quarter.

How did oil, gas and infrastructure perform?\n

• Royalty oil production reached a quarterly record of 17,100 barrels per day; total production set a record of 42,300 barrels of oil equivalent per day.
• Natural gas realizations rose to $2.40 per thousand cubic feet from $0.40 in the second quarter, despite relatively flat benchmark Henry Hub prices.
• Revenue from surface leases, easements and materials reached $36 million, up 53% from the preceding quarter.

Texas Pacific Land remained unhedged (without commodity-price hedges), allowing it to benefit from elevated oil prices associated with the continuing conflict in the Middle East, Glover said. New pipeline capacity eased Permian Basin transportation constraints, alleviated negative prices at the Waha Hub and narrowed local gas-price differentials.

Revenue from surface leases, easements and materials reached $36 million, up 53% sequentially, as natural gas, natural gas liquids, electric and utility infrastructure grew across the company’s land, Glover said.

Operators drew down drilled but uncompleted and completed but not yet producing wells. At quarter-end, the company had 16.8 net wells in those categories or permitted for development; management expects replenishment as operators add rigs and completion crews, Steddum said.

Output and infrastructure fees expanded, while management expects the reduced well inventory to refill.

Why did water royalties reach records?

Produced-water royalty volumes rose to a record 5.5 million barrels per day, up 14% from the second quarter and 27% from a year earlier. Water sales volumes were roughly flat sequentially at 672,000 barrels per day.

Slower first-half completion activity meant more produced water that might otherwise have been recycled for completions instead required injection into disposal formations. Glover called this a natural hedge within the water business.

Commissioning of the Orla phase II-B produced-water desalination facility continued with increasingly concentrated synthetic brine. Management hoped to begin processing field-produced water by year-end.

An adjacent grassland rehabilitation plot was ready to receive water under an approved land application permit. The company was still awaiting a final draft of a separate discharge permit.

Robert Crain, executive vice president of Texas Pacific Water Resources, said the pace and scale of further development would depend on commercial discussions with upstream operators and hyperscale data center customers.

Water royalties are scaling, while desalination growth still depends on permits and customer deals.

How could permitting affect data center plans?

Texas Pacific Land is negotiating commercial agreements for data center projects across its land, but Glover said there was no new major announcement. The company expects to spend capital next year on water distribution and treatment infrastructure for the initial operation of power and data center projects.

Regulatory actions and a change in Texas gubernatorial leadership could affect project timing. The outgoing governor directed regulators and the state’s grid operator to review grid-connected large-load projects, and directed the Texas Commission on Environmental Quality to pause data center permit issuance pending that review and additional environmental considerations.

Glover said the actions add to developers’ diligence but are not a blanket ban. Many proposed West Texas projects would be behind the meter (using on-site power) and in rural areas, reducing some complexity associated with grid-connected projects.

CEO Ty Glover said: “Does it affect the timing of some of these projects in the near term? Yes, but I think it is a net positive for the long-term value proposition for TPL and West Texas more broadly.” Asked about the incoming governor’s approach, he said the company had no clear insight into what might change.

The permit pause raises timing risk, but management does not treat it as a blanket ban.

What did the acquisition add, and what financial capacity remains?

After quarter-end, Texas Pacific Land bought about 9,700 surface acres and 238 net royalty acres in Midland and Glasscock counties, Steddum said. The properties generate cash flow from water, surface and mineral interests and expand the company’s Midland Basin footprint. Steddum did not disclose the purchase price.

At quarter-end, the company had $370 million in cash and cash equivalents, no debt and an undrawn $500 million credit facility. Steddum said that flexibility could fund investments, acquisitions or shareholder returns, including opportunistic buybacks.

Texas Pacific Land manages West Texas land and resources, particularly in the Permian Basin. Its holdings trace to the Texas and Pacific Railway and were historically managed through the Texas Pacific Land Trust before incorporation. It earns oil and natural gas royalties and revenue tied to surface and mineral interests.

The company leases land, grants easements and rights-of-way, supports energy development and other land uses, and provides water sourcing, handling, treatment, recycling and disposal.

The acquisition expands the asset base, and the cash balance preserves room to invest, acquire or return capital.