February 24, 2009 - 5:42pm EST by
2009 2010
Price: 22.20 EPS $1.06 $0.40
Shares Out. (in M): 10 P/E 21.0x 55.0x
Market Cap (in $M): 229 P/FCF n/a n/a
Net Debt (in $M): 0 EBIT 14 6
TEV ($): 229 TEV/EBIT 16.0x 38.0x
Borrow Cost: NA

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Texas Pacific Land Trust

Texas Pacific Land Trust is a passively managed liquidating trust.  It generates income through three ways:  selling parcels of its 950,000-acre portfolio of West Texas real estate (scrub ranch land), collecting oil/gas royalties on its mineral rights, and leasing its land for grazing.  For more a more detailed background on the trust, please see mark778's excellent previous write-up on the company from 2005. 

This is a fairly straightforward short idea driven by two points.  One, in 2008, the company's earnings were artificially boosted by crude prices in the $100-$150 range.  With crude prices now below $40, the company's oil and gas business will generate much less cash this year.  Two, the company sold very little land in 2008 (and none in Q4) due to the tight credit markets and collapsing real estate environment generally.  I would expect this trend to continue in 2009.  With falling oil prices and limited ability to sell land, the trust's earnings will likely collpase in the near term.  I expect earnings to come down significantly in '09 and believe the trust's fair value is closer to $10. 

Land Sales
                    2000        2001        2002        2003        2004*      2005        2006        2007        2008
Acres Sold      19,592     13,579      9,295       7,841      12,023      14,606     37,121      1,554       2,218
Sales ($000)   1,443       6,709       3,051       1,629       20,277     3,700       8,201       1,932        823
$/Acre           74           494          328          208         1,687       253         221          1,244        371

*2004 results include the sale of 1,400 acres outside of El Paso for $19.2MM.  Excluding this unique sale the company sold 10,594 acres for $1.0MM ($98/acre).

Land sales can be lumpy, but as evidenced by the past two years, the trust has struggled to duplicate the peak real estate market of 2004-2006.  It is difficult to imagine the company finding many buyers in this market, and I would expect 2009 to look very much like 2008.  It is also very possible the trust sells even less land or no land at all.

Oil and Gas

With limited contribution from land sales this past year, what really drove earnings growth in 2008 was the tremendous rise in the price of oil and natural gas.  This is evident below:

                                         Q1:07       Q2:07       Q3:07        Q4:07        Q1:08        Q2:08       Q3:08        Q4:08
Oil and gas royalty ($000)      2,079        2,585        2,190        3,169         3,271        4,097        4,656         *
EPS                                    .15            .19          .24           .21            .28            .31           .35            .12

*This number will be in the 10K, which has not been released yet.  In Q4, the entire "rentals, royalties and other income" segment (which is mostly made up of the oil and gas royalty) was $3,019 vs. $4,129 a year ago. 

In Q4, oil prices began to come down significantly (with crude averaging approximately $60).  Correspondingly, the trust's earnings fell to 12 cents.

Adjusting Q4's run rate to current oil/natural gas pricing gives you an annual eps power of about 32 cents from the energy side of the business.  Even with some land sales (which I deem unlikely), it's hard to imagine a scenario where eps is more than 40 cents (55x multiple).  

What's a fair multiple for this business?  That's difficult to say, but given limited growth potential going forward, it is hard to see why the stock deserves anything more than a 10x.  Seeing that this could be trough eps, however, we could accord it a 25x, but that still only yields a $10 target.  In addition, the trust traded in a $7-$12 range for much of '00 to '04, where earnings were in the 50 cent range. 


-  With oil prices close to $40, TPL's oil and gas revenue and profit will fall significantly
-  With few available buyers, it will be difficult for TPL to sell land
-  2009 eps will be depressed compared to 2008 (and Q1 should be worse than Q4)

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