Shares of the largest landowner in the Permian Basin, Texas Pacific Land Corp. (TPL -8.53%), are down 8% as of 1 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
Texas Pacific Land (TPL) grew sales and free cash flow by 9% and 12% during the second quarter, despite average oil prices sinking to a level not seen since 2021.
Regardless of these steady results, the market sent the company's shares lower as it worried about the implications of Texas Pacific's water sales declining by 34% in Q2.
Texas Pacific: A different kind of oil and gas company
Home to nearly 900,000 acres across the Permian Basin, Texas Pacific generates sales through four high-margin business segments:
- Oil and gas royalties
- Water sales
- Produced water royalties
- Easements and other surface-related income
Image source: Getty Images.
In simplest terms, TPL generates income from the Exxons and Chevrons of the world as they drill and operate wells on its property. TPL leases the land, sells materials for construction, provides water for fracking, disposes of the produced water afterward, and earns royalties from oil and gas produced, creating revenue throughout the lifecycle of a well.
Back to Q2, and it is the water sales portion of this process that spooked the market, as this segment's sales declined 34%. This drop stems from reduced activity from many of the company's operator customers who are more sensitive to these lower oil prices.
However, Chief Financial Officer Chris Steddum explained that most of its customers have already resumed more typical activity early in the second half of the year.
Ultimately, as the company explores next-generation ideas like carbon capture, solar, wind, grid-connected batteries, and water desalination, I'm happy to keep adding to my shares and watching TPL's story evolve.
