tpl-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 1-39804

Exact name of registrant as specified in its charter:

Texas Pacific Land Corporation


State or other jurisdiction of incorporation or organization:						IRS Employer Identification No.:
Delaware						75-0279735

Address of principal executive offices:

1700 Pacific Avenue, Suite 2900 Dallas, Texas 75201

Registrant’s telephone number, including area code:

(214) 969-5530

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock
(par value $.01 per share)

TPL

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

As of July 29, 2022, the Registrant had 7,722,371 shares of Common Stock, $0.01 par value, outstanding.

TEXAS PACIFIC LAND CORPORATION

Form 10-Q

For the Quarter Ended June 30, 2022

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Page No.

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

Condensed Consolidated Statements of Income and Total Comprehensive Income for the Three and Six Months ended June 30, 2022 and 2021

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2022 and 2021

Notes to Condensed Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share amounts)

(Unaudited)


	June 30, 2022		December 31, 2021
ASSETS
Cash and cash equivalents	$	389,794	$	428,242
Accounts receivable and accrued receivables, net	132,410		95,217
Prepaid expenses and other current assets	1,732		3,054

Total current assets	523,936		526,513

Real estate acquired	109,083		109,071
Property, plant and equipment, net	83,444		79,722
Royalty interests acquired, net	45,583		44,390

Other assets	2,662		4,368
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:
Land (surface rights)	—		—
1/16th nonparticipating perpetual royalty interest	—		—
1/128th nonparticipating perpetual royalty interest	—		—
Total assets	$	764,708	$	764,064
LIABILITIES AND EQUITY
Accounts payable and accrued expenses	$	29,284	$	18,008
Income taxes payable	22,650		29,083
Unearned revenue	5,139		3,809
Total current liabilities	57,073		50,900
Deferred taxes payable	37,995		38,948
Unearned revenue - noncurrent	21,196		20,449

Accrued liabilities	3,163		2,056
Total liabilities	119,427		112,353

Commitments and contingencies	—		—
Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none outstanding as of June 30, 2022 and December 31, 2021	—		—
Common stock, $0.01 par value; 7,756,156 shares authorized and 7,727,916 and 7,744,695 outstanding as of June 30, 2022 and December 31, 2021, respectively	78		78
Treasury stock, at cost; 28,240 and 11,461 shares as of June 30, 2022 and December 31, 2021, respectively	(40,011)		(15,417)
Additional paid-in capital	3,356		28
Accumulated other comprehensive loss	(991)		(1,007)
Retained earnings	682,849		668,029
Total equity	645,281		651,711
Total liabilities and equity	$	764,708	$	764,064

See accompanying notes to condensed consolidated financial statements.

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TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME

(in thousands, except shares and per share amounts)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Oil and gas royalties	$	121,268	$	58,204	$	225,440	$	107,737
Water sales	22,272		12,473		41,092		25,429
Produced water royalties	18,669		15,458		33,539		28,007
Easements and other surface-related income	13,990		8,977		23,182		18,024
Land sales and other operating revenue	71		820		352		890
Total revenues	176,270		95,932		323,605		180,087

Expenses:
Salaries and related employee expenses	9,588		13,271		18,973		23,250
Water service-related expenses	3,915		3,551		6,697		6,849
General and administrative expenses	3,705		2,841		6,705		5,647
Legal and professional fees	1,163		1,141		2,882		3,353
Ad valorem taxes	2,011		—		4,021		—

Depreciation, depletion and amortization	4,180		3,858		8,306		7,696
Total operating expenses	24,562		24,662		47,584		46,795

Operating income	151,708		71,270		276,021		133,292

Other income, net	630		406		706		411
Income before income taxes	152,338		71,676		276,727		133,703



Income tax expense	33,444		14,630		59,933		26,605
Net income	$	118,894	$	57,046	$	216,794	$	107,098




Other comprehensive income — periodic pension costs, net of income taxes for the three and six months ended June 30, 2022 and 2021 of $2, $8, $4, and $15, respectively	8		29		16		57
Total comprehensive income	$	118,902	$	57,075	$	216,810	$	107,155

Net income per share of common stock
Basic	$	15.37	$	7.36	$	28.02	$	13.81
Diluted	$	15.37	$	7.36	$	28.01	$	13.81

Weighted average number of shares of common stock outstanding
Basic	7,733,730		7,755,886		7,737,527		7,756,020
Diluted	7,737,112		7,755,886		7,739,859		7,756,020

Cash dividends per share of common stock	$	23.00	$	2.75	$	26.00	$	5.50

See accompanying notes to condensed consolidated financial statements.

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TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	216,794	$	107,098
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	(953)		(382)
Depreciation, depletion and amortization	8,306		7,696
Share-based compensation	3,495		—

Changes in operating assets and liabilities:
Operating assets, excluding income taxes	(35,472)		(18,126)
Operating liabilities, excluding income taxes	9,668		814
Income taxes payable	(6,433)		(611)
Cash provided by operating activities	195,405		96,489

Cash flows from investing activities:
Proceeds from sale of fixed assets	96		—
Acquisition of real estate	(12)		(10)
Acquisition of royalty interests	(1,662)		—
Purchase of fixed assets	(6,685)		(4,461)
Cash used in investing activities	(8,263)		(4,471)

Cash flows from financing activities:
Repurchases of common stock	(24,592)		(2,504)
Dividends paid	(200,998)		(42,658)
Cash used in financing activities	(225,590)		(45,162)

Net (decrease) increase in cash, cash equivalents and restricted cash	(38,448)		46,856
Cash, cash equivalents and restricted cash, beginning of period	428,242		283,024
Cash, cash equivalents and restricted cash, end of period	$	389,794	$	329,880

Supplemental disclosure of cash flow information:
Income taxes paid	$	67,324	$	27,613
Supplemental non-cash investing and financing information:
Nonmonetary exchange of assets	$	4,174	$	—
Increase in accounts payable related to capital expenditures	$	3,662	$	451
Share repurchases not yet settled	$	1,161	$	—
Issuance of common stock	$	—	$	78

See accompanying notes to condensed consolidated financial statements.

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TEXAS PACIFIC LAND CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Description of Business Segments

Organization

Texas Pacific Land Corporation (which, together with its subsidiaries as the context requires, may be referred to as “TPL”, the “Company”, “our”, “we” or “us”) is a Delaware corporation and one of the largest landowners in the State of Texas with approximately 880,000 surface acres of land in West Texas, with the majority of our ownership concentrated in the Permian Basin. Additionally, we own a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 85,000 acres of land, a 1/16th NPRI under approximately 371,000 acres of land, and approximately 4,000 additional net royalty acres (normalized to 1/8th) in the western part of Texas.

TPL’s income is derived primarily from oil, gas and produced water royalties, sales of water and land, easements and commercial leases of the land.

On January 11, 2021, we completed our reorganization from a business trust, organized under a Declaration of Trust dated February 1, 1888 (the “Declaration of Trust”), to a corporation (the “Corporate Reorganization”) and changed our name from Texas Pacific Land Trust (the “Trust”) to Texas Pacific Land Corporation. See further discussion of the Corporate Reorganization and its impact on our equity structure in Note 10, “Changes in Equity.” Any references in these condensed consolidated financial statements and notes to the Company, TPL, our, we, or us with respect to periods prior to January 11, 2021 are in reference to the Trust, and references to periods on or after that date are in reference to Texas Pacific Land Corporation or TPL Corporation.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated financial statements herein include all adjustments which are, in the opinion of management, necessary to fairly state the financial position of the Company as of June 30, 2022 and the results of its operations for the three and six months ended June 30, 2022 and 2021, respectively, and its cash flows for the six months ended June 30, 2022 and 2021, respectively. Such adjustments are of a normal nature and all intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, and accordingly these interim financial statements and footnotes should be read in conjunction with the audited financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2021. The results for the interim periods shown in this report are not necessarily indicative of future financial results.

We operate our business in two segments: Land and Resource Management and Water Services and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of TPL and provide a framework for timely and rational allocation of resources within businesses. See Note 11, “Business Segment Reporting” for further information regarding our segments.

2. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.

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Compensation

The Company utilizes the closing stock price on the date of grant to determine the fair value of service-vesting awards, which for the Company includes restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance stock units (“PSUs”) with a performance condition. For PSUs with a market condition, grant date fair value is determined using an advanced option-pricing model. Unvested awards are entitled to dividends or dividend equivalents which are accrued and distributed to award recipients at the time such awards vest. Dividends are forfeitable if the related award is forfeited. For RSAs, RSUs and PSUs with performance conditions, forfeitures are recognized in the period in which they occur. For PSU awards with market conditions, forfeitures are only recognized if the award recipient does not render the required service during the measurement period.

Compensation expense for RSUs and RSAs is recognized in the financial statements over the awards’ vesting periods using the graded-vesting method. Compensation expense for PSU awards with performance conditions is recognized ratably over the measurement period at such time as the awards are probable and estimable. Compensation expense for PSU awards with market conditions is recognized ratably over the measurement period whether the market condition is satisfied or not if the service for the award is rendered. Share-based compensation is reported on the condensed consolidated statements of income and total comprehensive income as a component of salaries and related employee expenses for employee awards and in general and administrative expenses for director awards.

Recently Adopted Accounting Guidance

In July 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-05, “Leases (Topic 842) Lessors – Certain Leases with Variable Lease Payments.” Under the ASU, a lessor classifies a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if the lease would have been classified as a sales-type lease or direct financing lease under ASC 842 classification criteria and the lessor would have otherwise recognized a day one loss. The adoption of this guidance effective January 1, 2022, had no impact on our condensed consolidated financial statements and disclosures.

3. Real Estate Activity

As of June 30, 2022 and December 31, 2021, TPL owned the following land and real estate (in thousands, except number of acres):


	June 30, 2022			December 31, 2021
	Number of Acres	Net Book Value		Number of Acres	Net Book Value
Land (surface rights) (1)	823,445	$	—	823,452	$	—
Real estate acquired	57,146	109,083		57,129	109,071
Total real estate situated in Texas	880,591	$	109,083	880,581	$	109,071

(1)Real estate assigned through the Declaration of Trust.

There were no significant land sales or acquisitions for the six months ended June 30, 2022.

4. Property, Plant and Equipment

Property, plant and equipment, net consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):

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	June 30, 2022		December 31, 2021
Property, plant and equipment, at cost:
Water service-related assets	$	117,967	$	108,732
Furniture, fixtures and equipment	9,384		9,071
Other	598		598
Total property, plant and equipment, at cost	127,949		118,401
Less: accumulated depreciation	(44,505)		(38,679)
Property, plant and equipment, net	$	83,444	$	79,722

Depreciation expense was $3.9 million and $3.7 million for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense was $7.7 million and $7.2 million for the six months ended June 30, 2022 and 2021, respectively.

5. Oil and Gas Royalty Interests

As of June 30, 2022 and December 31, 2021, we owned the following oil and gas royalty interests (in thousands):


	Net Book Value
	June 30, 2022		December 31, 2021
1/16th nonparticipating perpetual royalty interests	$	—	$	—
1/128th nonparticipating perpetual royalty interests	—		—
Royalty interests acquired	47,928		46,266
Total royalty interests, gross	47,928		46,266
Less: accumulated depletion	(2,345)		(1,876)
Total royalty interests, net	$	45,583	$	44,390

Acquisition

For the six months ended June 30, 2022, we acquired oil and gas royalty interests in 92 net royalty acres (normalized to 1/8th) for an aggregate purchase price of approximately $1.7 million. There were no oil and gas royalty interest transactions for the six months ended June 30, 2021.

Depletion expense was $0.2 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively. Depletion expense was $0.5 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively.

6. Share-Based Compensation

Incentive Plan for Employees

As of June 30, 2022, the Company has issued RSAs, RSUs and PSUs under the Texas Pacific Land Corporation 2021 Incentive Plan (the “2021 Plan”) to certain employees. The maximum aggregate number of shares of the Company’s common stock, par value $0.01 per share (“Common Stock”) that may be issued under the 2021 Plan is 75,000 shares and, as of June 30, 2022, 65,452 shares of Common Stock remained available under the 2021 Plan for future grants. Currently, all RSAs, RSUs, and PSUs granted under the 2021 Plan are entitled to receive dividends (for RSAs and RSUs, which are accrued and distributed to award recipients upon vesting) or have dividend equivalent rights. Dividends and dividend equivalent rights are subject to the same vesting conditions as the awards to which they relate and are forfeitable if the related awards are forfeited. The Company utilizes the closing stock price on the date of grant to determine the fair value of RSAs, RSUs and PSUs with a performance condition. For PSUs with a market condition, the Company utilizes a Monte Carlo simulation model to determine grant date fair value per share.

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The following table summarizes activity related to RSAs and RSUs for the six months ended June 30, 2022:


	Restricted Stock Awards			Restricted Stock Units
	Number of RSAs	Grant-Date Fair Value per Share		Number of RSUs	Grant-Date Fair Value per Share
Outstanding at December 31, 2021 (1)	3,330	$	1,252	—	$	—
Granted (2)	—	—		3,824	1,105
Vested	—	—		—	—
Cancelled and forfeited	—	—		—	—
Outstanding at June 30, 2022	3,330	$	1,252	3,824	$	1,105

(1)RSAs were granted on December 29, 2021 with 1,993 shares vesting on December 29, 2022 and 1,337 shares vesting on December 29, 2023.

(2)These time-based awards were granted on February 11, 2022, to certain employees and vest in one-third increments over a three-year period.

The following table summarizes activity related to PSUs for the six months ended June 30, 2022:


	Performance Stock Units
	Number of PSUs	Weighted-Average Grant-Date Fair Value per Share
Outstanding at December 31, 2021	—	$	—
Granted (1)	2,394	1,355
Vested	—	—
Cancelled and forfeited	—	—
Outstanding at June 30, 2022	2,394	$	1,355

(1)Includes 1,197 RTSR (as defined below) PSUs with a grant date fair value of $1,605 per share and 1,197 FCF (as defined below) PSUs with a grant date fair value of $1,105 per share.

On February 11, 2022, the Company granted PSUs to certain employees. Each PSU has a value equal to one share of Common Stock. The PSUs will vest three years after grant if certain performance metrics are met, as follows: 50% of the PSUs may be earned based on the Company’s relative total stockholder return (“RTSR”) for the three-year period from January 2022 to January 2025 compared to the XOP Index, and 50% of the PSUs may be earned based on the cumulative free cash flow per share (“FCF”) over the three-year vesting period. As the RTSR PSU is a market-based award, its grant date fair value was determined using a Monte Carlo simulation model that uses the same input assumptions as the Black-Scholes model to determine the expected potential ranking of the Company against the XOP Index, i.e. the probability of satisfying the market condition defined in the award. Expected volatility in the model was estimated based on the volatility of historical stock prices over a period matching the expected term of the award. The risk-free interest rate was based on U.S. Treasury yield constant maturities for a term matching the expected term of the award.

Equity Plan for Non-Employee Directors

As of June 30, 2022, the Company had granted 699 RSAs to directors of the Company under the 2021 Non-Employee Director and Deferred Compensation Plan (the “2021 Directors Plan”). The maximum aggregate number of shares of Common Stock that may be issued under the 2021 Directors Plan is 10,000 shares, which may consist, in whole or in part, of authorized and unissued shares (if any), treasury shares, or shares reacquired by the Company in any manner. As of June 30, 2022, 9,301 shares of Common Stock remained available under the 2021 Directors Plan for future grants. Currently, all RSAs granted under the 2021 Directors Plan are entitled to receive dividends, which are accrued and distributed to award recipients upon vesting. Dividends are subject to the same vesting conditions as the awards to which they relate and are forfeitable if the related awards are forfeited. The Company utilizes the closing stock price on the date of grant to determine the fair value of the RSAs.

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The following table summarizes activity related to the RSAs under the 2021 Directors Plan for the six months ended June 30, 2022:


	Restricted Stock Awards
	Number of RSAs	Grant-Date Fair Value per Share
Outstanding at December 31, 2021	—	$	—
Granted	784	1,277
Vested	—	—
Cancelled and forfeited	(85)	1,249
Outstanding at June 30, 2022 (1)	699	$	1,281

(1)On January 1, 2022, the Company granted 680 shares of restricted stock to directors. During the six months ended June 30, 2022, 85 shares were forfeited resulting from the departure of a director in March 2022, and an additional 104 shares of restricted stock were granted to new directors on April 15, 2022. The shares will vest on the first anniversary of the award.

Share-Based Compensation Expense

The following table summarizes our share-based compensation expense by line item in the condensed consolidated statements of income (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Salaries and related employee expenses (employee awards)	$	1,760	$	—	$	3,079	$	—
General and administrative expenses (director awards)	230		—		416		—
Total share-based compensation expense (1)	$	1,990	$	—	$	3,495	$	—

(1)The Company recognized a tax benefit of $0.4 million and $0.7 million related to share-based compensation for the three and six months ended June 30, 2022, respectively.

As of June 30, 2022, there was $9.0 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under existing share-based plans expected to be recognized over a weighted average period of 1.5 years.

7. Income Taxes

The calculation of our effective tax rate is as follows for the three and six months ended June 30, 2022 and 2021 (in thousands, except percentages):


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Income before income taxes	$	152,338		$	71,676		$	276,727		$	133,703
Income tax expense	$	33,444		$	14,630		$	59,933		$	26,605
Effective tax rate	22.0		%	20.4		%	21.7		%	19.9		%

For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items.

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8. Earnings Per Share

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares outstanding during the period. Diluted EPS is computed based upon the weighted average number of shares outstanding during the period plus unvested restricted stock and other unvested awards granted pursuant to our incentive and equity compensation plans. The computation of diluted EPS reflects the potential dilution that could occur if all outstanding awards under the incentive and equity compensation plans were converted into shares of Common Stock or resulted in the issuance of shares of Common Stock that would then share in the earnings of the Company. The number of dilutive securities is computed using the treasury stock method.

The following table sets forth the computation of EPS for the three and six months ended June 30, 2022 and 2021 (in thousands, except number of shares and per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income	$	118,894	$	57,046	$	216,794	$	107,098

Basic EPS:
Weighted average shares outstanding for basic EPS	7,733,730		7,755,886		7,737,527		7,756,020
Basic EPS	$	15.37	$	7.36	$	28.02	$	13.81

Diluted EPS:
Weighted average shares outstanding for basic EPS	7,733,730		7,755,886		7,737,527		7,756,020
Effect of dilutive securities:
Incentive and equity compensation plans	3,382		—		2,333		—
Weighted average shares outstanding for diluted EPS	7,737,112		7,755,886		7,739,859		7,756,020
Diluted EPS	$	15.37	$	7.36	$	28.01	$	13.81

Restricted stock is included in the number of shares of Common Stock issued and outstanding, but omitted from the basic EPS calculation until such time as the shares of restricted stock vest. The RTSR PSUs are not included in the dilutive securities in the table above as they are anti-dilutive for the three and six months ended June 30, 2022.

9. Commitments

Management is not aware of any legal, environmental or other commitments or contingencies that would have a material effect on the Company’s financial condition, results of operations or liquidity as of June 30, 2022.

Prior to January 1, 2022, ad valorem taxes with respect to our historical royalty interests were paid directly by certain third parties pursuant to an existing arrangement. Since the completion of our Corporate Reorganization, we have received notice from one such third party that they no longer intend to pay the ad valorem taxes related to such historical royalty interests. As of June 30, 2022, the Company has recorded an accrual of approximately $4.0 million for ad valorem taxes and intends to pay such taxes when they become due. While we intend to seek reimbursement from the third party following payment of such taxes, we are unable to determine the likelihood of such reimbursement, and accordingly, no loss recovery receivable has been recorded as of June 30, 2022.

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10. Changes in Equity

The following tables present changes in our equity for the six months ended June 30, 2022 and 2021 (in thousands, except shares and per share amounts):


	Common Stock			Treasury Stock			Additional Paid-in Capital		Accum. Other Comp. Inc/(Loss)		Retained Earnings		Total Equity
	Shares	Amount		Shares	Amount
For the six months ended June 30, 2022:
Balances as of December 31, 2021	7,744,695	$	78	11,461	$	(15,417)	$	28	$	(1,007)	$	668,029	$	651,711
Net income	—	—		—	—		—		—		97,900		97,900
Dividends paid — $3.00 per share of common stock	—	—		—	—		—		—		(23,224)		(23,224)
Share-based compensation, net of forfeitures	595	—		(595)	800		1,477		—		(796)		1,481
Periodic pension costs, net of income taxes of $2	—	—		—	—		—		8		—		8
Balances as of March 31, 2022	7,745,290	78		10,866	(14,617)		1,505		(999)		741,909		727,876
Net income	—	—		—	—		—		—		118,894		118,894
Dividends paid — $3.00 per share of common stock	—	—		—	—		—		—		(23,188)		(23,188)
Special dividends paid — $20.00 per share of common stock	—	—		—	—		—		—		(154,586)		(154,586)
Share-based compensation, net of forfeitures	104	—		(104)	140		1,851		—		(180)		1,811
Repurchases of common stock	(17,478)	—		17,478	(25,534)		—		—		—		(25,534)
Periodic pension costs, net of income taxes of $2	—	—		—	—		—		8		—		8
Balances as of June 30, 2022	7,727,916	$	78	28,240	$	(40,011)	$	3,356	$	(991)	$	682,849	$	645,281


	Sub-share Certificates	Common Stock				Treasury Stock					Accum. Other Comp. Inc/(Loss)		Retained Earnings		Net Proceeds From All Sources		Total Equity
	Shares	Shares	Amount		Shares			Amount
For the six months ended June 30, 2021:
Balances as of December 31, 2020	7,756,156	—	$	—		$	—		$	—	$	(2,693)	$	—	$	487,877	$	485,184
Net income	—	—	—			—			—		—		50,052		—		50,052
Dividends paid — $2.75 per share of common stock	—	—	—			—			—		—		(21,329)		—		(21,329)
Conversion of Sub-shares into shares of common stock	(7,756,156)	7,756,156	78			—			—		—		487,799		(487,877)		—
Periodic pension costs, net of income taxes of $8	—	—	—			—			—		28		—		—		28
Balances as of March 31, 2021	—	7,756,156	78			—			—		(2,665)		516,522		—		513,935
Net income	—	—	—			—			—		—		57,046		—		57,046
Dividends paid — $2.75 per share of common stock	—	—	—			—			—		—		(21,329)		—		(21,329)
Repurchases of common stock	—	(1,633)	—			1,633			(2,504)		—		—		—		(2,504)
Periodic pension costs, net of income taxes of $8	—	—	—			—			—		29		—		—		29
Balances as of June 30, 2021	—	7,754,523	$	78		1,633			$	(2,504)	$	(2,636)	$	552,239	$	—	$	547,177

Corporate Reorganization

On January 11, 2021, TPL completed its Corporate Reorganization, officially changing its name to Texas Pacific Land Corporation. To implement the Corporate Reorganization, the Trust and TPL Corporation entered into agreements and undertook and caused to be undertaken a series of transactions to effect the transfer to TPL Corporation of all of the Trust’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the Corporate Reorganization.

Prior to the market opening on January 11, 2021, the Trust distributed all of the shares of Common Stock of TPL Corporation to holders of sub-share certificates (“Sub-shares”) of the Trust, on a pro rata, one-for-one, basis in accordance with their interests in the Trust (the “Distribution”). As a result of the Distribution, TPL Corporation is now a corporation with its Common Stock listed under the symbol “TPL” on the New York Stock Exchange.

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Stock Repurchase Program

On March 11, 2022, our board of directors approved a stock repurchase program to purchase up to an aggregate of $100 million of shares of our outstanding Common Stock during 2022. In connection with the stock repurchase program, the Company entered into a Rule 10b5-1 trading plan (the “Trading Plan”) that generally permits the Company to repurchase shares at times when it might otherwise be prevented from doing so under securities laws. Stock repurchases under the Trading Plan began April 18, 2022. The stock repurchase program expires on December 31, 2022. For the six months ended June 30, 2022, we repurchased 17,478 shares at an average per share amount of $1,461.

11. Business Segment Reporting

During the periods presented, we reported our financial performance based on the following segments: Land and Resource Management and Water Services and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of our strategies and objectives and provide a framework for timely and rational allocation of resources within businesses. We eliminate any inter-segment revenues and expenses upon consolidation.

The Land and Resource Management segment encompasses the business of managing our approximately 880,000 surface acres of land and our oil and gas royalty interests in West Texas, principally concentrated in the Permian Basin. The revenue streams of this segment consist primarily of royalties from oil and gas, revenues from easements and commercial leases and land and material sales.

The Water Services and Operations segment encompasses the business of providing a full-service water offering to operators in the Permian Basin. The revenue streams of this segment primarily consist of revenue generated from sales of sourced and treated water as well as revenue from produced water royalties.

Segment financial results were as follows for the three and six months ended June 30, 2022 and 2021 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Land and resource management	$	133,385	$	67,241	$	246,732	$	125,031
Water services and operations	42,885		28,691		76,873		55,056
Total consolidated revenues	$	176,270	$	95,932	$	323,605	$	180,087

Net income:
Land and resource management	$	96,074	$	45,443	$	177,230	$	84,956
Water services and operations	22,820		11,603		39,564		22,142
Total consolidated net income	$	118,894	$	57,046	$	216,794	$	107,098

Capital expenditures:
Land and resource management	$	103	$	13	$	225	$	13
Water services and operations	7,239		2,161		10,122		4,899
Total capital expenditures	$	7,342	$	2,174	$	10,347	$	4,912

Depreciation, depletion and amortization:
Land and resource management	$	529	$	442	$	1,065	$	936
Water services and operations	3,651		3,416		7,241		6,760
Total depreciation, depletion and amortization	$	4,180	$	3,858	$	8,306	$	7,696

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The following table presents total assets and property, plant and equipment, net by segment as of June 30, 2022 and December 31, 2021 (in thousands):


	June 30, 2022		December 31, 2021
Assets:
Land and resource management	$	618,716	$	635,338
Water services and operations	145,992		128,726
Total consolidated assets	$	764,708	$	764,064

Property, plant and equipment, net:
Land and resource management	$	6,355	$	6,639
Water services and operations	77,089		73,083
Total consolidated property, plant and equipment, net	$	83,444	$	79,722

12. Oil and Gas Producing Activities

We measure our share of oil and gas produced in barrels of oil equivalent (“Boe”). One Boe equals one barrel of crude oil, condensate, NGLs (natural gas liquids) or approximately 6,000 cubic feet of gas. For three months ended June 30, 2022 and 2021, our share of oil and gas produced was approximately 19.8 and 16.4 thousand Boe per day, respectively. For the six months ended June 30, 2022 and June 30, 2021, our share of oil and gas produced was approximately 20.3 and 16.4 thousand Boe per day, respectively. Reserves related to our royalty interests are not presented because the information is unavailable.

There are a number of oil and gas wells that have been drilled but are not yet completed (“DUC”) where we have a royalty interest. The number of DUC wells is determined using uniform drilling spacing units with pooled interests for all wells awaiting completion. We have identified 574 and 452 DUC wells subject to our royalty interest as of June 30, 2022 and December 31, 2021, respectively.

13. Subsequent Events

We evaluated events that occurred after the balance sheet date through the date these financial statements were issued, and the following events that met recognition or disclosure criteria were identified:

Dividends Declared

On August 2, 2022, the board of directors declared a quarterly cash dividend of $3.00 per share, payable on September 15, 2022 to stockholders of record at the close of business on September 8, 2022.

*****

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Words or phrases such as “expects” and “believes”, or similar expressions, when used in this Quarterly Report on Form 10-Q or other filings with the Securities and Exchange Commission (the “SEC”), are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the Company’s future operations and prospects, the potential future impact of COVID-19, the markets for real estate in the areas in which the Company owns real estate, applicable zoning regulations, the markets for oil and gas including actions of other oil and gas producers or consortiums worldwide such as the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively referred to as “OPEC+”), expected competition, management’s intent, beliefs or current expectations with respect to the Company’s future financial performance and other matters. All forward-looking statements in this Report are based on information available to us as of the date this Report is filed with the SEC, and we assume no responsibility to update any such forward-looking statements, except as required by law. All forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the factors discussed in Item 1A. “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q.

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 23, 2022 and the condensed consolidated financial statements and accompanying notes included, in Part I, Item 1 of this Quarterly Report on Form 10-Q. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Company’s future performance.

Overview

Texas Pacific Land Corporation (which, together with its subsidiaries as the context requires, may be referred to as “TPL”, the “Company”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 880,000 surface acres of land in West Texas, with the majority of our ownership concentrated in the Permian Basin. Additionally, we own a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 85,000 acres of land and a 1/16th NPRI under approximately 371,000 acres of land, as well as approximately 4,000 additional net royalty acres (normalized to 1/8th), all located in the western part of Texas.

We completed our reorganization from a business trust to a corporation (the “Corporate Reorganization”) on January 11, 2021, changing our name from Texas Pacific Land Trust (the “Trust”) to Texas Pacific Land Corporation. Any references in this Quarterly Report on Form 10-Q to the Company, TPL, our, we, or us with respect to periods prior to January 11, 2021 are in reference to the Trust, and references to periods on or after that date are in reference to Texas Pacific Land Corporation or TPL Corporation. For further information on the Corporate Reorganization, see Note 10, “Changes in Equity” in the notes to the condensed consolidated financial statements.

Our business activity is generated from surface and royalty interest ownership in West Texas, primarily in the Permian Basin. Our revenues are derived from oil, gas and produced water royalties, sales of water and land, easements and commercial leases. Due to the nature of our operations and concentration of our ownership in one geographic location, our revenue and net income are subject to substantial fluctuations from quarter to quarter and year to year. In addition to fluctuations in response to changes in the market price for oil and gas, our financial results are also subject to decisions by the owners and operators of not only the oil and gas wells to which our oil and gas royalty interests relate, but also to other owners and operators in the Permian Basin as it relates to our other revenue streams, principally water sales, easements and other surface-related revenue.

For a further overview of our business and business segments, see Item 1. “Business — General” in our Annual Report on Form 10-K for the year ended December 31, 2021.

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Market Conditions

Global Oil Market Impact in 2022

Average oil and gas prices during the second quarter of 2022 continued to increase over the average oil and gas prices during the first quarter of 2022 and were meaningfully higher compared to average prices during most of the previous quarterly periods over the last decade. In 2021, oil prices were supported by oil supply cuts by OPEC+. Oil demand in 2021 broadly trended higher throughout the year, which also helped support strengthening oil prices. Beginning in March 2022, Russia’s incursion into Ukraine created volatility in global supply of numerous commodities, including oil. In response, the US has implemented various measures to help mitigate potential supply shortfalls and high oil prices, most notably by releasing millions of barrels of crude oil from its Strategic Petroleum Reserve. The confluence of these major events have contributed to increased fluctuations in oil prices during 2022. Inflation is at its highest level in decades and continues to significantly impact labor costs and supplies. The potential worsening of macro-economic conditions, including rising interest rates, could result in additional shifts in demand and supply in future periods. Although our revenues are directly and indirectly impacted by changes in oil prices, we believe our royalty interests (which require no capital expenditures or operating expense burden from us for well development), strong balance sheet, and liquidity position will help us navigate through potential oil price volatility.

COVID-19 Pandemic

We continue to monitor the COVID-19 pandemic. We are following local government mandates, where applicable, and will continue to revise and refine our on-site work to ensure business continuity and the safety and wellbeing of our employees. The full extent to which the pandemic impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity, and new variants, of the virus.

Permian Basin Activity

The Permian Basin is one of the oldest and most well-known hydrocarbon-producing areas and currently accounts for a substantial portion of oil and gas production in the United States, covering approximately 86,000 square miles in 52 counties across southeastern New Mexico and western Texas. Exploration and production (“E&P”) companies active in the Permian have generally increased their drilling and development activity to-date in 2022 compared to recent prior year activity levels. Per the U.S. Energy Information Administration (“EIA”), Permian production is currently in excess of five million barrels per day, which is higher than the average daily production of any year prior to 2022. Despite record Permian production volumes, E&P companies continue to experience challenges with labor and supply chains related to drilling and completion activities, which could negatively impact overall production.

With our ownership concentration in the Permian Basin, our revenues are directly impacted by oil and gas pricing and drilling activity in the Permian Basin. Below are metrics for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Oil and Gas Pricing Metrics:(1)
WTI Cushing average price per bbl	$	108.83	$	66.19	$	102.01	$	62.21
Henry Hub average price per mmbtu	$	7.53	$	2.95	$	6.08	$	3.22

Activity Metrics specific to the Permian Basin:(1)(2)
Average monthly horizontal permits	621		665		606		558
Average monthly horizontal wells drilled	504		386		483		365
Average weekly horizontal rig count	321		220		293		205
DUCs as of June 30 for each applicable year	4,380		5,080		4,380		5,080

Total Average US weekly horizontal rig count (2)	656		408		615		382

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(1) Commonly used definitions in the oil and gas industry provided in the table above are defined as follows: WTI Cushing represents West Texas Intermediate. Bbl represents one barrel of 42 U.S. gallons of oil. Mmbtu represents one million British thermal units, a measurement used for natural gas. DUCs represent drilled but uncompleted wells.

(2) Permian Basin specific information per Enverus analytics. US weekly horizontal rig counts per Baker Hughes United States Rotary Rig Count for horizontal rigs.

The metrics above show selected domestic benchmark oil and natural gas prices and approximate activity levels in the Permian Basin for the three and six months ended June 30, 2022 and 2021. Oil and gas prices in the first half of 2022 have significantly increased compared to the comparable period in 2021. Although E&P companies broadly continue to deploy capital at a measured pace, drilling and development activities across the Permian have generally improved in the second quarter of 2022 compared to the prior year. As we are a significant landowner in the Permian Basin and not an oil and gas producer, our revenue is affected by the development decisions made by companies that operate in the areas where we own royalty interests and land. Accordingly, these decisions made by others affect not only our production and produced water disposal volumes but also directly impact our surface-related income and water sales.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash and cash flows generated from our operations. Our primary liquidity and capital requirements are for capital expenditures related to our Water Services and Operations segment (the extent and timing of which are under our control), working capital and general corporate needs.

We continuously review our liquidity and capital resources. If market conditions were to change and our revenues were to decline significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Should this occur, we could seek alternative sources of funding. We have no debt or credit facilities, nor any off-balance sheet arrangements as of June 30, 2022.

As of June 30, 2022, we had cash and cash equivalents of $389.8 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business, to repurchase our common stock, par value $0.01 per share (the “Common Stock”) subject to market conditions, to pay dividends subject to the discretion of our board of directors and for general corporate purposes. For the six months ended June 30, 2022, we paid $201.0 million in dividends to our stockholders. We believe that cash from operations, together with our cash and cash equivalents balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.

During the six months ended June 30, 2022, we invested approximately $10.1 million in Texas Pacific Water Resources LLC (“TPWR”) projects to maintain and/or enhance water sourcing assets, of which $6.0 million related to electrifying our water sourcing infrastructure.

Cash Flows from Operating Activities

For the six months ended June 30, 2022 and 2021, net cash provided by operating activities was $195.4 million and $96.5 million, respectively. Our cash flow provided by operating activities is primarily from oil, gas and produced water royalties, water and land sales, and easements and other surface-related income. Cash flow used in operations generally consists of operating expenses associated with our revenue streams, general and administrative expenses and income taxes.

The increase in cash flows provided by operating activities for the six months ended June 30, 2022 compared to the same period of 2021, was primarily related to increased prices and volumes of oil and gas production and was partially offset by increased tax payments and working capital requirements.

Cash Flows Used in Investing Activities

For the six months ended June 30, 2022 and 2021, net cash used in investing activities was $8.3 million and $4.5 million, respectively. Our cash flows used in investing activities are primarily related to capital expenditures related to our water services and operations segment and acquisitions of royalty interests.

Capital expenditures increased $2.2 million for the six months ended June 30, 2022 compared to the same period of 2021. Acquisitions of royalty interests increased approximately $1.7 million for the six months ended June 30, 2022 compared to the same period 2021.

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Cash Flows Used in Financing Activities

For the six months ended June 30, 2022 and 2021, net cash used in financing activities was $225.6 million and $45.2 million, respectively. Our cash flows used in financing primarily consist of activities which return capital to our stockholders such as payment of dividends and repurchases of our Common Stock.

During the six months ended June 30, 2022, we paid total dividends of $201.0 million consisting of cumulative paid cash dividends of $6.00 per share and special dividends of $20.00 per share. During the six months ended June 30, 2021, we paid total dividends of $42.7 million consisting of cumulative cash dividends of $5.50 per share. During the six months ended June 30, 2022 and 2021, we repurchased $25.5 million and $2.5 million of our Common Stock, respectively.

Results of Operations - Consolidated

The following table shows our consolidated results of operations for the three and six months ended June 30, 2022 and 2021 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Oil and gas royalties	$	121,268	$	58,204	$	225,440	$	107,737
Water sales	22,272		12,473		41,092		25,429
Produced water royalties	18,669		15,458		33,539		28,007
Easements and other surface-related income	13,990		8,977		23,182		18,024
Land sales and other operating revenue	71		820		352		890
Total revenues	176,270		95,932		323,605		180,087

Expenses:
Salaries and related employee expenses	9,588		13,271		18,973		23,250
Water service-related expenses	3,915		3,551		6,697		6,849
General and administrative expenses	3,705		2,841		6,705		5,647
Legal and professional fees	1,163		1,141		2,882		3,353
Ad valorem taxes	2,011		—		4,021		—

Depreciation, depletion and amortization	4,180		3,858		8,306		7,696
Total operating expenses	24,562		24,662		47,584