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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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The Top Performing Stock Of The U.S. Shale Boom

Fracking rig

Energy stocks have struggled to break out over the past year, although oil prices have been rising. Only recently, in the past month, the S&P 500 energy sector started to see an upward trend, outperforming many other industries as Brent and WTI oil prices stabilized at around three-and-a-half-year highs.

Stocks in U.S. shale producers began to climb. Yet, one company stock has outperformed all those over the past eight years, since the shale boom began.

And it’s not even a company that pumps oil. It’s a listed land trust—Texas Pacific Land Trust—that owns vast swathes of land in the Permian and that was created 130 years ago after the bankruptcy of a railway company.

Since 2010, shares in Texas Pacific Land Trust have soared more than 2,200 percent, Bloomberg data shows. Currently, Texas Pacific Land Trust has a market capitalization of more than US$5 billion.

One share in TPL is currently worth more than $600.

Drillers pay the trust royalties for pumping oil from the land that it owns in the largest and fastest-growing U.S. shale play in West Texas.

Texas Pacific Land Trust was created in 1888 after the Texas and Pacific Railway Company went into receivership. The reorganization that followed saw holders of Texas and Pacific Railway Company bonds get 3.5 million acres of land in Texas which had been earned by the railroad and pledged as security against bonds. The Trust was created to manage and sell the land, and today it is one of the largest landowners in Texas with around 888,333 acres in 18 different counties. Texas Pacific Land Trust currently has an oil and gas royalty interests in some 459,200 acres in Texas. Related: U.S. Shale Oil Production Rises At Record-Breaking Rate

The trust was listed in 1927 with the mandate to buy back shares and pay dividends when it sells land, with the ultimate goal of liquidating itself.

Some analysts say that the stock has even more room to rise, although its price/earnings (P/E) ratio is very high at over 46.

“This stock has been flying way underneath the radar for years,” said Eric Marshall, a Dallas-based fund manager at Hodges Capital Management, in a statement made to Bloomberg. Hodges Capital Management holds 1.47 percent in the land trust.

“The real activity in the Permian is now in the areas where they have the most acreage,” Marshall says.

The booming Permian activity helped the land trust to post in 2017 the most successful year in its 130-year history. The level of activity in the Permian continued to rise, leading to US$132.4 million in gross income for the trust, a 120.9-percent surge compared to 2016. Oil and gas royalties more than doubled last year, and water sales and royalty revenues jumped by 214.3 percent, the trust said in its annual 2017 report. The other income for the trust consists mainly of grazing lease rentals.

In Q1 2018, the Trust also saw more than doubled oil and gas royalty revenues as crude oil production and oil prices rose compared to Q1 last year.

The land trust’s stock could continue to increase, according to Hodges Capital’s Marshall, because of its mandate to buy back shares.

“If they’re slowly liquidating this trust and buying back their stock, your amount of land per share increases every year,” Marshall told Bloomberg. “It’s the ultimate inflation hedge and at the same time you own oil and gas royalties in what is the Saudi Arabia of North America.”

The Texas land trust is not the only listed company that makes money from mineral lease rights instead of from pumping oil.

Just before the oil price crash, Diamondback Energy spun off Viper Energy Partners LP which listed in 2014. Viper Energy’s shares have risen 65 percent over the past year and 27 percent year to date. Related: OPEC: The Oil Glut Is Gone

Parsley Energy could also be studying the creation of some kind of a mineral lease company.

Parsley Energy’s CEO Bryan Sheffield said in the Q1 conference call earlier this month that the company was “definitely looking into” the possibility to extract value outside drilling with the mineral rights ownership.

“And there’s a competitor that has another similar company, a spin-off company, that has been trading really well. So it’s kind of a wake-up call for us. And as we drill these minerals in Pecos, it’s something to look into,” said Sheffield.

While oil stocks have been battered during the downturn and have yet to show a sustained upward trend with the higher oil prices, shares in listed trusts owning Permian land have been outperforming shale drillers’ stocks for years.

By Tsvetana Paraskova for Oilprice.com

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  • glenn dzidowski on May 16 2018 said:
    Texas Pacific Land Trust (TPL) has zero debt and record profits. Recently, TPL began a "full
    service water division" which not only sells its own water derived from water wells on its lands,
    but engage in recycling of "produced" water, hence, making money on water disposal as well.

    TPL should earn aroun $30 this year giving it a forward PE of around 21. Given its 2 largest
    revenue generating clients are Anadarko and Chevron both of whom plan to increase Permian
    production for years to come, it is no surprise that the stock of TPL has done so well.

    Ultimately, TPL is allowed to use profits for buybacks and dividends. It continues to do both.
    TPL is not allowed to create new shares (unless stock splits) so no stock options or grants.
    TPL is "unique" in that they are in the best land of the greatest oil & gas play ever. The companies operating in the Permian on TPL lands expect to be there for decades to come.
    This one is truely under the radar, and just at the cusp of what should be massive growth.

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