One of my favorite stocks is also one of the luckiest companies ever founded. They turned miles and miles of desert into one of the most profitable companies ever. They have twice the margins of Apple (AAPL).
The company, which goes by the name The Texas Pacific Land Holdings (TPL), was founded in 1888 after the Texas and Pacific Railway went bankrupt.
The T&P Office building in Fort Worth, Texas:
T&P railroad was meant to go from Texas to San Diego. The company bought up huge tracts of scrubland in order to get the right-of-way for its tracks. Over 3.5 million acres were put into the trust and bondholders exchanged their bonds for shares. The idea was that the trustees would sell the land and return the money to shareholders.
However, there were no time limits on when this should happen. According to Wikipedia: The certificates were later divided into “sub-share” certificates which were then traded on the NYSE. One such bond, No. 390, was not exchanged for stocks. In 1979 a bank officer at Wells Fargo tracked down the owner, a Dutch sailor Joseph De Lamar. He was happy to discover that the bond was worth $3.2 million in 1979.
Over the years TPL sold its land and bought back shares until in the late 1990s they had 1.1 million acres and a third fewer shares.
Serendipity, Baby
Then a miracle happened. In 2010 the oil industry discovered hydraulic fracturing and horizontal drilling, which turned that scrubland into one of the most profitable oil patches in history. You may know it as the Permian Basin. TPL just happened to own 909,000 acres of land in the Permian.
And then in 2016, they found oil in the Delaware Basin where the company owned more land. Annual revenue jumped from $66 million in 2016 to $659 million in 2023.
The stock has performed as you would expect. A $10,000 investment in TPL in 2016 would have turned into $110,000 today. That’s a 35% annual return. And there is no end in sight.
The Permian and Delaware basins are continuing to expand and companies like ExxonMobile (XOM) and Chevron (CVX) pay TPL money to set up shop. The company makes money from royalties on every barrel that is pumped out of what is now some of the most valuable land in the country.
The company also gets royalties from water and surface rights including drilling, production, pipelines, water sales, and solar/wind installations. And because costs are low the company has 64% margins and zero debt. They are a cash cow.
The company is also expanding into water treatment. In the Permian basin around four barrels of water are pulled out of the ground for every barrel of oil. All of this water has to be treated. TPL has produced several desalination plants and has started irrigating alfalfa fields in the desert as well as finding other uses for this now clean water.
The water treatment side of the business is in the regulatory stage but it seems like it could be a large future revenue source and is even getting interest from oil companies that aren’t located in the Permian.
As for value, the company is fairly valued and there is very little risk – though there aren’t any comparable companies. They trade at 12 x book value and have a trailing p/e of 30. Earnings growth was 32.02% for the last 12 months – which puts your price-to-earnings growth (PEG) ratio at 0.93. Anything below 1.0 is considered a good value as the company will grow into its p/e ratio.
And remember the company doesn’t care about the price of oil just that other companies are drilling it.
Today, the stock is up 22% as TPL joined the S&P Mid Cap 400 Index. This means that mid-cap stock ETFs and mutual funds have to buy it. There is a good chance that this move is overdone. That said, if you are looking for five to ten-year stocks with strong growth, excellent cash flow, and an ironclad balance sheet, you could do a lot worse than Texas Pacific Land Corporation. You just might want to wait for a pullback.
All the best,
Christian DeHaemer
Outsider Club
Full disclosure: I own ExxonMobil.
Info on the Permian: https://en.wikipedia.org/wiki/Permian_Basin_(North_America)
They need energy: https://www.outsiderclub.com/buy-power-stocks-now/
May 8 TPL investor presentation: https://d1io3yog0oux5.cloudfront.net/_2c9bc22e1304f6270c904c746fb52b3c/texaspacific/db/706/6417/pdf/1Q+2024+TPL+Investor+Presentation.pdf
