Executive Summary / Key Takeaways

• Texas Pacific Land Corporation (TPL) delivered a strong start to 2025, setting quarterly records in oil and gas royalty production (31.1 MBoe/d) and water segment revenues ($69 million), driving overall revenue growth of 12.5% year-over-year in Q1 2025.
• The company's unique, high-margin business model, centered on extensive land and royalty ownership in the Permian Basin coupled with a growing water services segment, generated robust net income ($120.7 million in Q1 2025) and free cash flow ($126.6 million in Q1 2025), demonstrating resilience even amidst commodity price volatility.
• Strategic investments and acquisitions, including significant royalty and surface acreage purchases in 2024 and ongoing development of produced water desalination technology (Phase IIb test facility expected online later in 2025), are enhancing TPL's asset quality, extending its growth runway, and unlocking new revenue streams like high-spec water for industrial use.
• TPL maintains a fortress balance sheet with no debt and a substantial cash position ($460.4 million as of March 31, 2025), supporting a disciplined capital allocation strategy focused on opportunistic M&A and returning capital to shareholders through dividends ($1.60/share declared May 2025) and buybacks.
• A robust near-term well inventory (24.3 net wells as of Q1 2025) and anticipated revenue tailwinds from CPI-escalated easement renewals starting in 2026 (projected >$200 million over the next decade) provide visibility for continued production and revenue growth, positioning TPL to outperform the basin and its peers.

A Century of Land, A Decade of Transformation

Texas Pacific Land Corporation traces its origins back to 1888, initially established as a trust to manage vast land grants in Texas. For over a century, its model was largely passive, focused on liquidating these extensive land holdings. However, in recent years, and notably accelerating with its reorganization into a Delaware corporation on January 11, 2021, TPL has fundamentally transformed into an actively managed enterprise, leveraging its unique asset base – approximately 873,000 surface acres and 207,000 net royalty acres (normalized to 1/8th NRA), primarily concentrated in the prolific Permian Basin.

This strategic pivot has seen TPL evolve from a simple land trust into a diversified revenue generator across two core segments: Land and Resource Management (LRM) and Water Services and Operations (WSO). The LRM segment continues to derive income from its perpetual oil and gas royalty interests and surface-related activities like easements and leases. The WSO segment, a product of TPL's proactive investment over the past decade, provides critical water services and collects royalties on produced water, positioning TPL as an indispensable partner to energy operators in the region. This active management approach, coupled with a willingness to invest strategically, defines the modern TPL.

Competitive Positioning and Strategic Advantage

TPL operates within a competitive landscape that includes other mineral and royalty owners, as well as integrated oil and gas producers and water service providers in the Permian Basin. While pure-play royalty companies like Dorchester Minerals L.P. (DMLP) and San Juan Basin Royalty Trust (SJT) offer similar passive income streams, and large operators like EOG Resources, Inc. (EOG) compete for land access and control production, TPL distinguishes itself through its unique combination of vast surface ownership, perpetual royalty interests, and integrated water capabilities.

Compared to royalty peers like DMLP and SJT, TPL's diversified revenue streams from water services and surface activities provide a broader base and potentially greater resilience to fluctuations solely in commodity prices. TPL's extensive land footprint offers a competitive moat, enabling it to control access and command favorable terms for easements and leases, a strategic advantage not typically held by pure royalty players. The company's active management allows for strategic investments and M&A, contrasting with the more passive trust structures of some competitors. Quantitatively, TPL demonstrates superior profitability margins (TTM Gross Profit Margin 89.81%, Operating Margin 76.02%, Net Margin 63.24%, EBITDA Margin 80.59%) compared to DMLP (TTM Gross Margin 65%, Net Margin 57%) and EOG (TTM Gross Margin 76%, Net Margin 27%), reflecting its asset-light royalty income and high-margin water business. TPL also boasts a pristine balance sheet with zero debt, a significant advantage over leveraged producers like EOG (TTM Debt/Equity 0.17).

Against large integrated operators like EOG, TPL avoids the significant capital expenditures and operating risks associated with drilling and production. While EOG benefits from economies of scale in exploration and production, TPL's model focuses on capturing value from activity driven by others, maintaining a significantly lower operating cost structure per acre. TPL's deep relationships with virtually every operator in the basin, cultivated through its surface and water businesses, provide unique access to off-market M&A opportunities and valuable intelligence on development plans, giving it an edge in consolidating high-quality assets.

TPL's strategic surface acquisitions, such as the >50,000 acres in Andrews and Winkler counties acquired in 2023 for approximately $40 million, are critical for providing out-of-basin produced water disposal solutions. These locations, outside core development areas, prevent interference with drilling and completion activities on TPL's royalty acreage while generating incremental cash flow. This proactive approach to solving industry challenges enhances TPL's value proposition and competitive standing.

Technological Edge in Water Management

A key differentiator and strategic focus for TPL is its investment in water management technology, particularly in addressing the growing challenge of produced water. As operators drill longer laterals and target deeper, more water-wet formations, produced water volumes are increasing significantly, projected to reach 18-20 million barrels per day in the Delaware Basin by 2028-2030. Effective and sustainable produced water handling is becoming essential to prevent bottlenecks in oil and gas development.

TPL is developing a patented energy-efficient freeze desalination and treatment process designed to recycle produced water into high-spec freshwater suitable for beneficial reuse. This technology aims to provide an alternative to traditional saltwater disposal (SWD). The company is constructing a 10,000 barrel per day R&D test facility, referred to as Phase IIb, which is expected to be completed later in 2025. The stated goals for this technology include substantially lowering the operating cost of desalination, with management expressing confidence in achieving a target of $0.75 per barrel for treatment at commercial scale, largely by reducing energy consumption, potentially through co-location with natural gas power generation.

The 'so what' for investors is significant. This technological initiative not only supports the core LRM business by providing solutions that enable continued development on TPL's royalty acreage but also has the potential to unlock entirely new, high-value revenue streams. High-spec freshwater is a critical resource for various industrial uses, including data centers and power plants, industries increasingly looking at the Permian Basin due to its energy resources and transmission infrastructure development (like the recently approved extra-high-voltage transmission lines in ERCOT). By leveraging its extensive land holdings and desalination technology, TPL aims to provide a crucial input for these energy-intensive "next-generation opportunities," participating in their value chain and capturing commensurate value. This technological pursuit represents a forward-looking strategic pillar that could diversify TPL's revenue base further and enhance its long-term growth potential beyond traditional oil and gas cycles.

Performance Reflecting Strategy and Opportunity

TPL's recent financial performance underscores the effectiveness of its active management strategy and the strength of its asset base. The first quarter of 2025 marked a strong start to the year, with total revenues increasing by $21.8 million, or 12.5%, to $196.0 million compared to $174.1 million in Q1 2024. This growth was fueled by record performance in key operational drivers.

Oil and gas royalty production averaged approximately 31.1 thousand Boe per day in Q1 2025, a 25% increase year-over-year and 7% sequentially, setting a new quarterly record. This volume growth more than offset a slight decrease in the average realized price per Boe ($41.58 in Q1 2025 vs. $42.71 in Q1 2024), driving oil and gas royalty revenue to $111.2 million, up $19.1 million from the prior year quarter. The increase in production volumes was attributed to strong development activity by major operators on TPL's acreage.

The Water Services and Operations segment also achieved record revenues of $69.4 million in Q1 2025, an 11% increase from $62.7 million in Q1 2024. This growth was driven by robust volume gains in both water sales (up 14% year-over-year) and produced water royalties (up $4.7 million year-over-year to $27.7 million). The increase in produced water royalties was principally due to increased volumes, benefiting from commercial efforts and strategic acquisitions that provide access to new disposal capacity.

Total operating expenses increased by $7.8 million to $45.9 million in Q1 2025, primarily due to higher salaries, water service-related expenses (tied to increased volumes), and depreciation, depletion, and amortization (principally depletion associated with royalty interests acquired in the second half of 2024). Despite the increase in expenses, the high-margin nature of TPL's revenue streams resulted in a strong operating income of $150.1 million and net income of $120.7 million for the quarter, up from $136.0 million and $114.4 million, respectively, in Q1 2024.

Cash flow generation remains a core strength. Net cash provided by operating activities was $156.7 million in Q1 2025, up from $147.2 million in Q1 2024, driven by the increase in operating income and favorable working capital changes. Free cash flow, calculated as Adjusted EBITDA less current income tax expense and capital expenditures, was $126.6 million in Q1 2025, an 11% increase year-over-year. This robust cash generation supports TPL's capital allocation priorities.

Financial Strength and Capital Allocation

TPL's balance sheet is exceptionally strong, characterized by zero debt and a significant cash and cash equivalents balance of $460.4 million as of March 31, 2025. This financial strength provides substantial flexibility to pursue strategic initiatives and return capital to shareholders.

The company has established a target cash and cash equivalents balance of approximately $700 million. Above this level, TPL aims to deploy the majority of its free cash flow towards returning capital to stockholders through special dividends and share repurchases. While below this target in Q1 2025, management retains the flexibility to accelerate shareholder returns opportunistically. In Q1 2025, TPL paid $37.4 million in dividends. On May 6, 2025, the Board declared a quarterly cash dividend of $1.60 per share, reflecting confidence in future cash flow generation. No shares were repurchased in Q1 2025.

Capital expenditures for Q1 2025 totaled $12.5 million, primarily related to investments in water sourcing assets ($9.9 million) and the acquisition of royalty interests ($3.5 million). For fiscal year 2025, total capital expenditures are guided to be approximately $65 million to $75 million. This includes approximately $28 million allocated to the produced water desalination project and potential co-located gas generation, with the balance directed towards the brackish source and treated water business. CapEx towards the higher end of the range would be contingent on growth opportunities arising from increased upstream activity.

Management views opportunistic M&A as a key lever for enhancing shareholder value. The M&A landscape for 2025 is described as favorable, with ample opportunity to consolidate high-quality Permian minerals, royalties, water, and surface assets. Recent acquisitions in 2024, totaling nearly $0.5 billion, are expected to be highly accretive, adding upwards of 3,000 Boe per day in near-term royalty production and generating a double-digit cash flow yield at a flat $70 oil price. TPL's financial strength and market position enable it to be selective and pursue deals that enhance its portfolio quality and intrinsic value per share.

Outlook and Growth Catalysts

The outlook for TPL is underpinned by several distinct growth catalysts, positioning the company for continued strong performance despite potential volatility in commodity markets.

Near-term royalty production is supported by a robust inventory of wells in various stages of development on TPL's acreage. As of March 31, 2025, the total near-term inventory of permitted wells, drilled but uncompleted wells (DUCs), and completed but not producing wells (CUPs) stood at 24.3 net wells, an all-time high for TPL. Based on historical trends, a significant portion of this inventory is expected to be turned to sales over the next 12-18 months, providing a strong foundation for production growth. Management expects TPL's net production to outperform the overall Permian basin, citing the resilience of its operator base (primarily super majors and large independents) and the high conversion rates of DUCs and CUPs.

Beyond near-term production, TPL anticipates a significant revenue tailwind beginning in 2026 from the renewal of 10-year easement contracts. These contracts, first implemented with renewal clauses in 2016, are subject to CPI escalators upon renewal. Given the cumulative increase in CPI over the past decade, the escalator is anticipated to be approximately 35%. TPL expects approximately $10 million in renewal payments in 2026 from easements signed in 2016, ramping up to upwards of $35 million per year in the following three years, totaling an estimated >$200 million over the next decade, incremental to revenue from new easement activity.

The Water Services segment is poised for continued growth driven by increasing produced water volumes in the Permian and the need for sustainable handling solutions. TPL's strategic pore space acquisitions and commercial agreements position it to capture a growing share of the produced water disposal market. Furthermore, the successful development and commercialization of its desalination technology could unlock substantial new revenue streams from selling high-spec freshwater for industrial uses, particularly as demand from data centers and power generation facilities in the Permian increases.

While the outlook for oil and gas activity is sensitive to commodity prices (with potential for more meaningful declines if oil stays below $60 for a sustained period in the latter half of 2025), TPL's diversified, high-margin model, strong balance sheet, and multiple growth levers position it to withstand potential downturns and capitalize on opportunities.

Risks and Considerations

Despite its strengths, TPL is not without risks. The most significant is its concentration in the Permian Basin, making its financial performance susceptible to regional factors, including drilling activity levels, infrastructure constraints (though the Matterhorn pipeline is expected to help natural gas differentials), and regulatory changes specific to Texas and New Mexico.

Commodity price volatility directly impacts oil and gas royalty revenues. While TPL's asset-light model means it is not burdened by CapEx or OpEx for this stream, sustained low prices would reduce this revenue component. Water sales volumes are indirectly sensitive to drilling and completion activity, which could decrease in a downturn.

Regulatory risks exist, particularly concerning permits for beneficial reuse of treated produced water, such as the application to discharge into the Pecos River. While TPL is making progress, the outcome and timeline remain uncertain. Litigation risk related to ad valorem taxes on historical royalty interests also persists.

While TPL's operator base is resilient, decisions by these third parties ultimately drive activity on TPL's acreage, which is outside of TPL's direct control. Competition for land access and water services, though mitigated by TPL's scale and relationships, remains a factor.

Conclusion

Texas Pacific Land Corporation has successfully transformed from a passive land trust into a dynamic, actively managed enterprise uniquely positioned within the Permian Basin. Its core strength lies in its vast, high-quality land and royalty asset base, complemented by a rapidly growing and technologically innovative water services segment. This combination yields industry-leading margins and robust free cash flow generation, providing significant resilience against commodity price volatility compared to traditional E&P companies.

The company's strategic focus on opportunistic M&A, coupled with a fortress balance sheet, allows it to consolidate high-quality assets that enhance its portfolio and extend its growth runway. Investments in produced water desalination technology and the pursuit of next-generation opportunities like providing high-spec water for industrial users demonstrate a forward-looking strategy aimed at diversifying revenue and capturing value beyond traditional energy activities. With a record near-term well inventory and anticipated tailwinds from easement renewals, TPL is well-positioned for continued production and revenue growth. While exposed to Permian-specific and commodity risks, TPL's unique business model, financial strength, and strategic initiatives present a compelling investment thesis for discerning investors seeking exposure to the Permian Basin through a differentiated, high-margin platform.