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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 September 30, 2023
or
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.:
Delaware75-0279735

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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock
(par value $.01 per share)
TPLNew 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 October 30, 2023, the Registrant had 7,674,867 shares of Common Stock, $0.01 par value, outstanding.




TEXAS PACIFIC LAND CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2023
Table of Contents
Page No.
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022


Table of Contents
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)
 September 30,
2023
December 31,
2022
ASSETS  
Cash and cash equivalents$654,158 $510,834 
Accounts receivable and accrued receivables, net126,215 103,983 
Prepaid expenses and other current assets5,105 7,427 
Tax like-kind exchange escrow5,380 6,348 
Prepaid income taxes 4,809 
Total current assets790,858 633,401 
Real estate acquired130,024 109,704 
Property, plant and equipment, net86,600 85,478 
Royalty interests acquired, net 47,213 45,025 
Intangible assets, net21,308  
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   
Other assets3,315 3,819 
Total assets$1,079,318 $877,427 
LIABILITIES AND EQUITY  
Accounts payable and accrued expenses$29,027 $23,443 
Ad valorem and other taxes payable7,960 8,497 
Income taxes payable4,281 3,167 
Unearned revenue6,102 4,488 
Total current liabilities47,370 39,595 
Deferred taxes payable40,117 41,151 
Unearned revenue - noncurrent25,664 21,708 
Accrued liabilities - noncurrent1,609 2,086 
Total liabilities114,760 104,540 
Commitments and contingencies  
Equity:  
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none outstanding as of September 30, 2023 and December 31, 2022
  
Common stock, $0.01 par value; 7,756,156 shares authorized and 7,675,994 and 7,695,679 outstanding as of September 30, 2023 and December 31, 2022, respectively
78 78 
Treasury stock, at cost; 80,162 and 60,477 shares as of September 30, 2023 and December 31, 2022, respectively
(133,852)(104,139)
Additional paid-in capital12,382 8,293 
Accumulated other comprehensive income2,439 2,516 
Retained earnings1,083,511 866,139 
Total equity964,558 772,887 
Total liabilities and equity$1,079,318 $877,427 

See accompanying notes to condensed consolidated financial statements.
1

Table of Contents
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
September 30,
Nine Months Ended
September 30,
 2023202220232022
Revenues:   
Oil and gas royalties$87,102 $130,298 $258,644 $355,738 
Water sales26,422 24,426 85,799 65,518 
Produced water royalties20,849 19,129 61,824 52,668 
Easements and other surface-related income18,188 14,129 51,865 37,311 
Land sales and other operating revenue5,406 3,129 6,806 3,481 
Total revenues157,967 191,111 464,938 514,716 
Expenses:  
Salaries and related employee expenses11,499 10,697 32,688 29,670 
Water service-related expenses8,553 6,348 24,496 13,045 
General and administrative expenses3,903 3,120 10,787 9,761 
Legal and professional fees1,689 2,106 28,471 4,988 
Ad valorem and other taxes1,781 2,868 5,425 6,953 
Depreciation, depletion and amortization3,584 3,917 10,881 12,223 
Total operating expenses31,009 29,056 112,748 76,640 
Operating income126,958 162,055 352,190 438,076 
Other income, net7,979 1,920 20,239 2,626 
Income before income taxes134,937 163,975 372,429 440,702 
Income tax expense 29,363 34,138 79,894 94,071 
Net income$105,574 $129,837 $292,535 $346,631 
Other comprehensive (loss) income — periodic pension costs, net of income taxes for the three and nine months ended September 30, 2023 and 2022 of $7, $3, $21, and $8, respectively
(26)8 (77)24 
Total comprehensive income$105,548 $129,845 $292,458 $346,655 
Net income per share of common stock
Basic$13.75 $16.83 $38.07 $44.84 
Diluted$13.74 $16.82 $38.04 $44.82 
Weighted average number of shares of common stock outstanding
Basic7,675,521 7,714,796 7,684,691 7,729,866 
Diluted7,681,774 7,720,221 7,690,985 7,733,505 
Cash dividends per share of common stock$3.25 $3.00 $9.75 $29.00 

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)
 Nine Months Ended
September 30,
 20232022
Cash flows from operating activities:  
Net income$292,535 $346,631 
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes
(1,034)(840)
Depreciation, depletion and amortization10,881 12,223 
Share-based compensation8,112 5,616 
Changes in operating assets and liabilities:  
Operating assets, excluding income taxes(19,554)(45,065)
Operating liabilities, excluding income taxes9,995 16,901 
Income taxes payable
1,114 (20,821)
Prepaid income taxes4,809  
Cash provided by operating activities306,858 314,645 
Cash flows from investing activities:  
Acquisition of intangible assets(21,403) 
Acquisition of real estate(20,320)(12)
Acquisition of royalty interests
(3,566)(1,662)
Purchase of fixed assets
(10,630)(13,023)
Proceeds from sale of fixed assets5 106 
Cash used in investing activities
(55,914)(14,591)
Cash flows from financing activities:  
Dividends paid(74,979)(224,130)
Repurchases of common stock(32,325)(57,578)
Shares exchanged for tax withholdings(1,284) 
Cash used in financing activities
(108,588)(281,708)
Net increase in cash, cash equivalents and restricted cash142,356 18,346 
Cash, cash equivalents and restricted cash, beginning of period517,182 428,242 
Cash, cash equivalents and restricted cash, end of period$659,538 $446,588 
Supplemental disclosure of cash flow information:  
Income taxes paid$74,984 $115,609 
Supplemental non-cash investing and financing information:
Nonmonetary exchange of assets$ $4,174 
Increase in accounts payable related to capital expenditures$(243)$(868)
Share repurchases and associated excise taxes not settled at the end of the period$481 $1,090 
Operating lease right-of-use assets$ $1,364 

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 868,000 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 Company’s land.

On January 11, 2021, we completed our reorganization from a business trust, Texas Pacific Land Trust, organized under a Declaration of Trust dated February 1, 1888 (the “Declaration of Trust”), into Texas Pacific Land Corporation, a corporation formed and existing under the laws of the state of Delaware (the “Corporate Reorganization”).

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, 2022. 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 September 30, 2023 and the results of its operations for the three and nine months ended September 30, 2023 and 2022, respectively, and its cash flows for the nine months ended September 30, 2023 and 2022, 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, 2022. 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 12, “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 condensed 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.

Cash, Cash Equivalents and Restricted Cash
 
We consider investments in bank deposits, money market funds, and other highly-liquid cash investments, such as U.S. Treasury bills and commercial paper, with original maturities of three months or less to be cash equivalents. Our cash equivalents are considered Level 1 assets in the fair value hierarchy.

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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows as of September 30, 2023 and December 31, 2022 (in thousands):
September 30,
2023
December 31,
2022
Cash and cash equivalents$654,158 $510,834 
Tax like-kind exchange escrow5,380 6,348 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$659,538 $517,182 

Intangible Assets, Net

Intangible assets include a saltwater disposal easement and acquired groundwater rights. When the Company acquires intangible assets that are attached to real estate and/or other tangible assets, an allocation of the total purchase price, including any direct costs of the acquisition, is made at the date of acquisition based on the estimated relative fair values of the assets acquired.

Intangible assets are amortized on a straight-line basis over their estimated useful lives, with remaining useful lives from 15 to 20 years. Intangible assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In such event, the fair value of the asset is determined using an undiscounted cash flow analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, a loss for the difference between the carrying value and the estimated fair value of the intangible asset is recognized in the statement of income.

Reclassifications

Certain financial information on the condensed consolidated balance sheet as of December 31, 2022 and condensed consolidated statement of income and total comprehensive income for the three and nine months ended September 30, 2022 has been revised to conform to the current year presentation. These revisions include a balance sheet reclassification of $454,000 of other taxes payable previously included in accounts payable and accrued expenses to ad valorem and other taxes payable and an income statement reclassification of $33,000 and $97,000 of property taxes previously included in general and administrative expenses to ad valorem and other taxes for the three and nine months ended September 30, 2022, respectively.

3.    Real Estate Activity

As of September 30, 2023 and December 31, 2022, TPL owned the following land and real estate (in thousands, except number of acres):
September 30,
2023
December 31,
2022
Number of AcresNet Book ValueNumber of AcresNet Book Value
Land (surface rights) (1)
798,999 $ 817,060 $ 
Real estate acquired69,447 130,024 57,306 109,704 
Total real estate situated in Texas868,446 $130,024 874,366 $109,704 
(1)Real estate assigned through the Declaration of Trust.

Land Sales

For the nine months ended September 30, 2023, we sold 18,061 acres of land in Texas for an aggregate sales price of $6.8 million. For the nine months ended September 30, 2022, we sold 129 acres of land in Texas for an aggregate sales price of $3.3 million. There was no carrying value in the land associated with these sales.

Land Acquisitions

For the nine months ended September 30, 2023, we acquired 12,141 acres of land in Texas for an aggregate purchase price of $20.0 million. There were no significant land acquisitions for the nine months ended September 30, 2022.

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4.    Property, Plant and Equipment
 
Property, plant and equipment, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
 September 30,
2023
December 31,
2022
Property, plant and equipment, at cost:  
Water service-related assets$135,293 $125,166 
Furniture, fixtures and equipment9,907 9,718 
Other598 598 
Total property, plant and equipment, at cost145,798 135,482 
Less: accumulated depreciation(59,198)(50,004)
Property, plant and equipment, net$86,600 $85,478 

Depreciation expense was $3.0 million and $3.6 million for the three months ended September 30, 2023 and 2022, respectively. Depreciation expense was $9.3 million and $11.4 million for the nine months ended September 30, 2023 and 2022, respectively.

5.    Oil and Gas Royalty Interests

As of September 30, 2023 and December 31, 2022, we owned the following oil and gas royalty interests (in thousands):
September 30,
2023
December 31,
2022
Oil and gas royalty interests:
1/16th nonparticipating perpetual royalty interests (1)
$ $ 
1/128th nonparticipating perpetual royalty interests (1)
  
Royalty interests acquired, at cost51,494 47,928 
Total royalty interests51,494 47,928 
Less: accumulated depletion(4,281)(2,903)
Royalty interests, net$47,213 $45,025 
(1)Royalty interests assigned through the Declaration of Trust.

Acquisitions

For the nine months ended September 30, 2023, we acquired oil and gas royalty interests in 119 net royalty acres (normalized to 1/8th) for an aggregate purchase price of approximately $3.6 million. For the nine months ended September 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.

Depletion expense was $0.5 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively. Depletion expense was $1.4 million and $0.7 million for the nine months ended September 30, 2023 and 2022, respectively.

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6.    Intangible Assets

Intangible assets, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

 September 30,
2023
December 31,
2022
Intangible assets, at cost:  
Saltwater disposal easement$17,557 $ 
Groundwater rights acquired3,846  
Total intangible assets, at cost (1)
21,403  
Less: accumulated amortization(95) 
Intangible assets, net$21,308 $ 
(1)The remaining weighted average amortization period for total intangible assets was 19.0 years as of September 30, 2023.

Acquisitions

For the nine months ended September 30, 2023, we acquired a saltwater disposal easement and groundwater rights in separate transactions for an aggregate cost of approximately $21.4 million. We had no intangible assets as of December 31, 2022.

Amortization of intangible assets was $0.1 million for the three and nine months ended September 30, 2023. The estimated future annual amortization expense of intangible assets is $0.4 million for the remainder of 2023, $1.1 million for 2024, $1.1 million for 2025, $1.1 million for 2026, $1.1 million for 2027, $1.1 million for 2028 and $15.4 million thereafter.

7.    Share-Based Compensation

The Company grants share-based compensation to employees under the Texas Pacific Land Corporation 2021 Incentive Plan (the “2021 Plan”) and to its directors under the 2021 Non-Employee Director Stock and Deferred Compensation Plan (the “2021 Directors Plan”). Share-based compensation granted to date under the plans has included restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based units (“PSUs”). Currently, all awards granted under the plans are entitled to receive dividends (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. RSUs granted under the 2021 Plan vest in one-third increments and PSUs granted under the 2021 Plan cliff vest at the end of three years if the performance metrics are achieved (as discussed further below). RSAs granted under the 2021 Directors Plan vest on the first anniversary of the award.

On October 31, 2023,the 2021 Plan was amended to revise the definitions of Cause, Change in Control, and Good Reason to align these definitions with the definitions provided in an employee’s employment agreement and any severance plan maintained by the Company. In addition, the related forms of Restricted Stock Unit Award Agreement, RTSR performance Unit Award Agreement and FCF/Share Performance Unit Award Agreement were adjusted.

On October 31, 2023, the 2021 Directors Plan was amended to (i) eliminate the one year vesting provision for annual grants and (ii) provide that certain plan administrative functions will be responsibility of the Compensation Committee of the Company’s board of directors, including determining grant recipients, establishing grant terms and conditions, and adopting certain amendments to the plan.

Incentive Plan for 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, 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 September 30, 2023, 54,718 shares of Common Stock remained available under the 2021 Plan for future grants.

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The following table summarizes activity related to RSAs and RSUs under the 2021 Plan for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
20232022
Restricted Stock AwardsRestricted Stock UnitsRestricted Stock AwardsRestricted Stock Units
Number of RSAsWeighted-Average Grant-Date Fair Value per ShareNumber of RSUsWeighted-Average Grant-Date Fair Value per ShareNumber of RSAsWeighted-Average Grant-Date Fair Value per ShareNumber of RSUsWeighted-Average Grant-Date Fair Value per Share
Nonvested at beginning of period (1)
1,337 $1,252 5,612 $1,323 3,330 $1,252  $ 
Granted (2)
  2,848 1,924   5,612 1,323 
Vested (3)
  (1,864)1,324     
Cancelled and forfeited        
Nonvested at end of period1,337 $1,252 6,596 $1,583 3,330 $1,252 5,612 $1,323 
(1)RSAs were granted on December 29, 2021: 1,993 shares vested on December 29, 2022 and 1,337 shares will vest on December 29, 2023.
(2)RSUs vest in one-third increments over a three-year period.
(3)Of the 1,864 shares that vested during the nine months ended September 30, 2023, 669 shares were surrendered upon vesting by employees to the Company to settle tax withholdings.

The following table summarizes activity related to PSUs for the nine months ended September 30, 2023 and 2022:

Nine Months Ended September 30,
20232022
Number of Target PSUsWeighted-Average Grant-Date Fair Value per ShareNumber of Target PSUsWeighted-Average Grant-Date Fair Value per Share
Nonvested at beginning of period (1)
2,394 $1,355  $ 
Granted (2)
1,852 2,342 2,394 1,355 
Vested    
Cancelled and forfeited    
Nonvested at end of period4,246 $1,786 2,394 $1,355 
(1)The PSUs were granted on February 11, 2022 and include 1,197 RTSR (as defined below) PSUs (based on target) with a grant date fair value of $1,605 per share and 1,197 FCF (as defined below) PSUs (based on target) with a grant date fair value of $1,105 per share. If the maximum performance potential metrics described in the PSU agreements are achieved, the actual number of units that will ultimately be awarded under the PSU agreements will exceed target units by 100% (i.e., a collective 2,394 additional units would be issued).
(2)The PSUs were granted on February 10, 2023 and include 926 RTSR PSUs (based on target) with a grant date fair value of $2,761 per share and 926 FCF PSUs (based on target) with a grant date fair value of $1,924 per share. If the maximum performance potential metrics described in the PSU agreements are achieved, the actual number of units that will ultimately be awarded under the PSU agreements will exceed target units by 100% (i.e., a collective 1,852 additional units would be issued).

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”) over the applicable three-year measurement period 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.
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Equity Plan for Non-Employee Directors

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 September 30, 2023, 8,815 shares of Common Stock remained available under the 2021 Directors Plan for future grants.

The following table summarizes activity related to the RSAs under the 2021 Directors Plan for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
20232022
Number of RSAsWeighted-Average Grant-Date Fair Value per ShareNumber of RSAsWeighted-Average Grant-Date Fair Value per Share
Nonvested at beginning of period699 $1,281  $ 
Granted (1)
486 2,344 784 1,277 
Vested(699)1,281   
Cancelled and forfeited  (85)1,249 
Nonvested at end of period
486 $2,344 699 $1,281 
(1)RSAs vest on the first anniversary of the grant date.

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
September 30,
Nine Months Ended
September 30,
2023202220232022
Salaries and related employee expenses (employee awards)$2,502 $1,910 $7,217 $4,989 
General and administrative expenses (director awards)287 211 895 627 
Total share-based compensation expense (1)
$2,789 $2,121 $8,112 $5,616 
(1)The Company recognized a tax benefit of $0.6 million and $0.4 million related to share-based compensation for the three months ended September 30, 2023 and 2022, respectively. The Company recognized a tax benefit of $1.7 million and $1.2 million related to share-based compensation for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, there was $11.4 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 1.3 years.

8.    Income Taxes

The calculation of our effective tax rate is as follows for the three and nine months ended September 30, 2023 and 2022 (in thousands, except percentages):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Income before income taxes$134,937 $163,975 $372,429 $440,702 
Income tax expense$29,363 $34,138 $79,894 $94,071 
Effective tax rate21.8 %20.8 %21.5 %21.3 %
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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.

9.    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 nine months ended September 30, 2023 and 2022 (in thousands, except number of shares and per share data):
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2023202220232022
Net income$105,574 $129,837 $292,535 $346,631 
Basic earnings per share:
Weighted average shares outstanding for basic earnings per share7,675,521 7,714,796 7,684,691 7,729,866 
Basic earnings per share$13.75 $16.83 $38.07 $44.84 
Diluted earnings per share:
Weighted average shares outstanding for basic earnings per share7,675,521 7,714,796 7,684,691 7,729,866 
Effect of dilutive securities:
Incentive and equity compensation plans6,253 5,425 6,294 3,639 
Weighted average shares outstanding for diluted earnings per share7,681,774 7,720,221 7,690,985 7,733,505 
Diluted earnings per share$13.74 $16.82 $38.04 $44.82 

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. Certain stock awards granted are not included in the dilutive securities in the table above as they are anti-dilutive for the three and nine months ended September 30, 2023.

10.    Commitments and Contingencies

Litigation

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 September 30, 2023.

Prior to January 1, 2022, ad valorem taxes with respect to our historical royalty interests were paid directly by third parties pursuant to an existing arrangement. Since the completion of our Corporate Reorganization, we have received notice from a third party that they no longer intend to pay the ad valorem taxes related to such historical royalty interests. In order to protect the historical royalty interests from any potential tax liens for non-payment of ad valorem taxes, we have accrued and/or paid such ad valorem taxes since January 1, 2022. While we intend to seek reimbursement from the third party for such taxes, we are unable to estimate the amount and/or likelihood of such reimbursement, and accordingly, no loss recovery receivable has been recorded as of September 30, 2023.

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Ongoing Arbitration with an Operator

As part of an ongoing arbitration between TPL and an operator with respect to underpayment of oil and gas royalties resulting from improper deductions of post-production costs for periods before and through April 2022, the operator has agreed to pay $8.7 million to TPL. This amount has been recorded as a receivable and included in oil and gas royalty revenue in the condensed consolidated income statement for the nine months ended September 30, 2023.

11.    Changes in Equity

The following tables present changes in our equity for the nine months ended September 30, 2023 and 2022 (in thousands, except shares and per share amounts):
Common StockTreasury StockAdditional Paid-in CapitalAccum.
Other
Comp.
Income (Loss)
Retained EarningsTotal
Equity
SharesAmountSharesAmount
For the nine months ended September 30, 2023:
Balances as of December 31, 2022
7,695,679 $78 60,477 $(104,139)$8,293 $2,516 $866,139 $772,887 
Net income— — — — — — 86,568 86,568 
Dividends paid — $3.25 per share of common stock
— — — — — — (25,061)(25,061)
Share-based compensation, net of forfeitures1,756 — (1,756)3,033 (560)— (103)2,370 
Repurchases of common stock, including excise taxes of $67
(3,627)— 3,627 (6,749)— — — (6,749)
Shares exchanged for tax withholdings(488)— 488 (939)— — — (939)
Periodic pension costs, net of income taxes of $6
— — — — — (25)— (25)
Balances as of March 31, 2023
7,693,320 78 62,836 (108,794)7,733 2,491 927,543 829,051 
Net income— — — — — — 100,393 100,393 
Dividends paid — $3.25 per share of common stock
— — — — — — (24,966)(24,966)
Share-based compensation, net of forfeitures— — — — 2,849 — (43)2,806 
Repurchases of common stock, including excise taxes of $165
(14,175)— 14,175 (19,708)— — — (19,708)
Periodic pension costs, net of income taxes of $8
— — — — — (26)— (26)
Balances as of June 30, 2023
7,679,145 78 77,011 (128,502)10,582 2,465 1,002,927 887,550 
Net income— — — — — — 105,574 105,574 
Dividends paid — $3.25 per share of common stock
— — — — — — (24,952)(24,952)
Share-based compensation, net of forfeitures594 — (594)990 1,800 — (38)2,752 
Repurchases of common stock, including excise taxes of $50
(3,564)— 3,564 (5,995)— — — (5,995)
Shares exchanged for tax withholdings(181)— 181 (345)— — — (345)
Periodic pension costs, net of income taxes of $7
— — — — — (26)— (26)
Balances as of September 30, 2023
7,675,994 $78 80,162 $(133,852)$12,382 $2,439 $1,083,511 $964,558 
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Common StockTreasury StockAdditional Paid-in CapitalAccum.
Other
Comp.
Income (Loss)
Retained EarningsTotal
Equity
SharesAmountSharesAmount
For the nine months ended September 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 forfeitures595 — (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 forfeitures104 — (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 
Net income— — — — — — 129,837 129,837 
Dividends paid — $3.00 per share of common stock
— — — — — — (23,132)(23,132)
Share-based compensation, net of forfeitures— — — — 2,121 — (30)2,091 
Repurchases of common stock(19,071)— 19,071 (32,915)— — — (32,915)
Periodic pension costs, net of income taxes of $3
— — — — — 8 — 8 
Balances as of September 30, 2022
7,708,845 $78 47,311 $(72,926)$5,477 $(983)$789,524 $721,170 

Stock Repurchase Program

On November 1, 2022, our board of directors approved a stock repurchase program, which became effective January 1, 2023, to purchase up to an aggregate of $250 million of our outstanding Common Stock.

The Company intends to purchase stock under the repurchase program opportunistically with funds generated by cash from operations. This repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. Purchases under the stock repurchase program may be made through a combination of open market repurchases in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, privately negotiated transactions, and/or other transactions at the Company’s discretion, including under a Rule 10b5-1 trading plan implemented by the Company, and will be subject to market conditions, applicable legal requirements and other factors.

12.    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 868,000 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.
 
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The following table presents segment financial results for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Revenues:
Land and resource management$109,933 $147,215 $315,276 $393,947 
Water services and operations48,034 43,896 149,662 120,769 
Total consolidated revenues$157,967 $191,111 $464,938 $514,716 
Net income:
Land and resource management$82,884 $108,188 $217,860 $285,418 
Water services and operations22,690 21,649 74,675 61,213 
Total consolidated net income$105,574 $129,837 $292,535 $346,631 
Capital expenditures:
Land and resource management$47 $114 $191 $339 
Water services and operations5,196 1,694 10,196 11,816 
Total capital expenditures$5,243 $1,808 $10,387 $12,155 
Depreciation, depletion and amortization:
Land and resource management$703 $567 $2,233 $1,632 
Water services and operations2,881 3,350 8,648 10,591 
Total depreciation, depletion and amortization$3,584 $3,917 $10,881 $12,223 

The following table presents total assets and property, plant and equipment, net by segment as of September 30, 2023 and December 31, 2022 (in thousands):
 September 30,
2023
December 31,
2022
Assets:  
Land and resource management$900,508 $735,193 
Water services and operations178,810 142,234 
Total consolidated assets$1,079,318 $877,427 
Property, plant and equipment, net:  
Land and resource management$5,464 $5,998 
Water services and operations81,136 79,480 
Total consolidated property, plant and equipment, net$86,600 $85,478 

13.    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 the three months ended September 30, 2023 and 2022, our share of oil and gas produced was approximately 21.8 and 23.4 thousand Boe per day, respectively. For the nine months ended September 30, 2023 and 2022, our share of oil and gas produced was approximately 22.6 and 21.3 thousand Boe per day, respectively. Reserves related to our royalty interests are not presented because the information is unavailable.

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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 596 and 584 DUC wells subject to our royalty interest as of September 30, 2023 and December 31, 2022, respectively.

14.    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 October 31, 2023, our board of directors declared a quarterly cash dividend of $3.25 per share, payable on December 15, 2023 to stockholders of record at the close of business on December 1, 2023.




*****
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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 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, 2022, 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, 2022 filed with the SEC on February 22, 2023 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 868,000 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. The Company was originally organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company. We completed our reorganization on January 11, 2021 from a business trust, Texas Pacific Land Trust, into Texas Pacific Land Corporation, a corporation formed and existing under the laws of the state of Delaware.

We are not an oil and gas producer. Our business activity is generated from surface and royalty interest ownership in West Texas, primarily in the Permian Basin. Our revenues are primarily 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, produced water royalties, 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, 2022.

Market Conditions

Average oil and gas prices during the third quarter of 2023 have declined compared to quarterly average prices during 2022. Oil prices continue to be impacted by certain actions by OPEC+, geopolitical factors, and evolving global supply and demand trends, among other factors. Global and domestic natural gas markets have experienced volatility due to
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macroeconomic conditions, infrastructure and logistical constraints, weather, and geopolitical issues, among other factors. In 2023, domestic natural gas prices have declined in part to growing supply. Since mid-2022, the Waha Hub located in Pecos County, Texas has at times experienced significant negative price differentials relative to Henry Hub, located in Erath, Louisiana, due in part to growing local Permian natural gas production and limited natural gas pipeline takeaway capacity. Midstream infrastructure is currently under construction by operators to provide additional takeaway capacity, though the impact on future basis differentials will be dependent on future natural gas production and other factors. Industry supply chains and labor supply remain constrained, which has contributed to elevated inflation, among other factors. Changes in macro-economic conditions, including rising interest rates and lower global economic activity, could result in additional shifts in oil and gas supply and demand in future periods. Although our revenues are directly and indirectly impacted by changes in oil and natural gas 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 commodity price volatility.

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 Basin have generally increased their drilling and development activity in 2023 and 2022 compared to recent prior year activity levels. Per the U.S. Energy Information Administration (“EIA”), Permian production is currently in excess of 5.8 million barrels per day, which is higher than the average daily production of any year prior to 2023.

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 nine months ended September 30, 2023 and 2022:

Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Oil and Gas Pricing Metrics:(1)
WTI Cushing average price per bbl$82.25 $93.06 $77.27 $98.96 
Henry Hub average price per mmbtu$2.59 $8.03 $2.46 $6.74 
Activity Metrics specific to the Permian Basin:(1)(2)
Average monthly horizontal permits640634641627
Average monthly horizontal wells drilled514524536498
Average weekly horizontal rig count314353330313
DUCs as of September 30 for each applicable year
4,8574,6514,8574,651
Total Average US weekly horizontal rig count (2)
578692642643
(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. Statistics for similar data are also available from other sources. The comparability between these other sources and the sources used by the Company may differ.

The metrics above show selected domestic benchmark oil and natural gas prices and approximate activity levels in the Permian Basin for the three and nine months ended September 30, 2023 and 2022. Oil and gas prices in 2023 to date have decreased compared to the same period in 2022. Although E&P companies broadly continue to deploy capital at a measured pace, drilling and development activities across the Permian Basin have remained robust. 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 water sales and surface-related income.

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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 September 30, 2023.
 
As of September 30, 2023, we had cash and cash equivalents of $654.2 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 (the “Board”) and for general corporate purposes. For the nine months ended September 30, 2023, we paid $75.0 million in dividends to our stockholders and we repurchased $32.2 million of our Common Stock (including share repurchases not settled at the end of the period).

During the nine months ended September 30, 2023, we invested approximately $10.2 million in Texas Pacific Water Resources LLC (“TPWR”) projects to maintain and/or enhance our water sourcing assets. Additionally, we acquired intangible assets of $21.4 million during the nine months ended September 30, 2023, consisting of a saltwater disposal (“SWD”) easement and groundwater rights. The SWD easement covers approximately 49,000 acres and provides us future disposal opportunities to service injection customers seeking solutions for out-of-basin disposal. The groundwater rights provide us access to additional water volumes outside of our existing surface footprint to assist in managing fluctuations in customer demand.

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.

Cash Flows from Operating Activities

For the nine months ended September 30, 2023 and 2022, net cash provided by operating activities was $306.9 million and $314.6 million, respectively. Our cash flow provided by operating activities is primarily from oil, gas and produced water royalties, water and land sales, 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 decrease in cash flows provided by operating activities for the nine months ended September 30, 2023 compared to the same period of 2022 primarily related to the decrease in operating income which was partially offset by changes in working capital requirements during 2023 as compared to 2022.
 
Cash Flows Used in Investing Activities

For the nine months ended September 30, 2023 and 2022, net cash used in investing activities was $55.9 million and $14.6 million, respectively. Our cash flows used in investing activities are primarily related to land acquisitions, intangible assets such as subsurface easements, and capital expenditures related to our water services and operations segment.

Acquisitions of intangible assets and land increased $21.4 million and $20.3 million, respectively, for the nine months ended September 30, 2023 compared to the same period of 2022 and were partially offset by a decrease of $2.4 million in capital expenditures during the same time period.

Cash Flows Used in Financing Activities

For the nine months ended September 30, 2023 and 2022, net cash used in financing activities was $108.6 million and $281.7 million, respectively. Our cash flows used in financing activities primarily consist of activities which return capital to our stockholders such as payment of dividends and repurchases of our Common Stock.

During the nine months ended September 30, 2023, we paid total dividends of $75.0 million consisting of cumulative paid cash dividends of $9.75 per share. During the nine months ended September 30, 2022, we paid total dividends of $224.1
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million consisting of cumulative paid cash dividends of $9.00 per share and special dividends of $20.00 per share. During the nine months ended September 30, 2023 and 2022, we repurchased $32.2 million and $58.4 million of our Common Stock, respectively (including share repurchases not settled at the end of the period).

Results of Operations - Consolidated

The following table shows our consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2023202220232022
Revenues:   
Oil and gas royalties$87,102 $130,298 $258,644 $355,738 
Water sales26,422 24,426 85,799 65,518 
Produced water royalties20,849 19,129 61,824 52,668 
Easements and other surface-related income18,188 14,129 51,865 37,311 
Land sales and other operating revenue5,406 3,129 6,806 3,481 
Total revenues157,967 191,111 464,938 514,716 
Expenses:  
Salaries and related employee expenses11,499 10,697 32,688 29,670 
Water service-related expenses8,553 6,348 24,496 13,045 
General and administrative expenses3,903 3,120 10,787 9,761 
Legal and professional fees1,689 2,106 28,471 4,988 
Ad valorem and other taxes1,781 2,868 5,425 6,953 
Depreciation, depletion and amortization3,584 3,917 10,881 12,223 
Total operating expenses31,009 29,056 112,748 76,640 
Operating income126,958 162,055 352,190 438,076 
Other income, net7,979 1,920 20,239 2,626 
Income before income taxes134,937 163,975 372,429 440,702 
Income tax expense 29,363 34,138 79,894 94,071 
Net income$105,574 $129,837 $292,535 $346,631 

For the Three Months Ended September 30, 2023 as Compared to the Three Months Ended September 30, 2022

Consolidated Revenues and Net Income:

Total revenues decreased $33.1 million, or 17.3%, to $158.0 million for the three months ended September 30, 2023 compared to $191.1 million for the three months ended September 30, 2022. This decrease was principally due to the $43.2 million decrease in oil and gas royalty revenue and was partially offset by the $4.1 million increase in easements and other surface-related income, and the combined increase of $3.7 million in water sales and produced water royalties over the same period. Individual revenue line items are discussed below under “Segment Results of Operations.” Net income of $105.6 million for the three months ended September 30, 2023 was 18.7% lower than the comparable period of 2022 principally as a result of the decrease in revenues discussed above.

Consolidated Expenses:

Salaries and related employee expenses. Salaries and related employee expenses were $11.5 million for the three months ended September 30, 2023 compared to $10.7 million for the comparable period of 2022. The increase in salaries and related employee expenses is principally related to an increase in the number of employees and market compensation adjustments.

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Water service-related expenses. Water service-related expenses increased $2.2 million to $8.6 million for the three months ended September 30, 2023 compared to the same period of 2022. Certain types of water-related expenses, including, but not limited to, transfer, treatment, and water purchases, will vary from period to period as our customers’ needs and requirements change. Water purchase, transfer, and treatment costs for the three months ended September 30, 2023 increased primarily due to increased water sales compared to the same period of 2022. These increases were partially offset by a decrease in fuel expenses resulting from lower average fuel costs over the same time period.

General and administrative expenses. General and administrative expenses were $3.9 million for the three months ended September 30, 2023 compared to $3.1 million for the same period of 2022. The increase in general and administrative expenses during the three months ended September 30, 2023 compared to the same period of 2022 was principally related to increases in expenses for technology applications and managed IT services and corporate insurance expenses, resulting from increased coverages and insurance rates.

Ad valorem and other taxes. Ad valorem and other taxes were $1.8 million for the three months ended September 30, 2023, compared to $2.9 million for the three months ended September 30, 2022. Ad valorem taxes for the three months ended September 30, 2022 included payments for prior year ad valorem tax liabilities which had not been paid by the third party responsible for those ad valorem taxes. Prior to January 1, 2022, the ad valorem taxes with respect to our historical royalty interests were paid directly by third parties pursuant to an existing arrangement. Since the completion of our Corporate Reorganization on January 11, 2021, we have received notice from a third party that it no longer intends to pay the ad valorem taxes related to such historical royalty interests. While we continue to believe the obligation to pay these ad valorem taxes should belong to the third party, we have accrued and/or paid an estimate of such taxes in order to protect the royalty interests from any potential tax liens for nonpayment of ad valorem taxes. While we intend to seek reimbursement from the third party following payment of such taxes, we are unable to determine the amount and/or likelihood of such reimbursement, and accordingly, have not recorded a loss recovery receivable as of September 30, 2022.

Other income, net. Other income, net was $8.0 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively. The increase in other income, net is primarily related to increased interest income earned on our cash balances for the three months ended September 30, 2023 compared to the same period of 2022. Higher cash balances and interest yields during this period contributed to the increase in interest income.

Total income tax expense. Total income tax expense was $29.4 million and $34.1 million for the three months ended September 30, 2023 and 2022, respectively. The decrease in income tax expense is primarily related to decreased operating income resulting from decreased oil and gas royalty revenue.

For the Nine Months Ended September 30, 2023 as Compared to the Nine Months Ended September 30, 2022

Consolidated Revenues and Net Income:

Total revenues decreased $49.8 million, or 9.7%, to $464.9 million for the nine months ended September 30, 2023 compared to $514.7 million for the nine months ended September 30, 2022. This decrease was principally due to the $97.1 million decrease in oil and gas royalty revenue and was partially offset by the combined increase of $29.4 million in water sales and produced water royalties and the $14.6 million increase in easements and other surface-related income over the same period. Individual revenue line items are discussed below under “Segment Results of Operations.” Net income of $292.5 million for the nine months ended September 30, 2023 was 15.6% lower than the comparable period of 2022, principally as a result of both the decrease in revenues discussed above and the increase in operating expenses discussed further below under “Consolidated Expenses.”

Consolidated Expenses:
 
Salaries and related employee expenses. Salaries and related employee expenses were $32.7 million for the nine months ended September 30, 2023 compared to $29.7 million for the comparable period of 2022. This increase in salaries and related employee expenses is primarily related to an increase in the number of employees and market compensation adjustments.

Water service related expenses. Water service-related expenses were $24.5 million for the nine months ended September 30, 2023 compared to $13.0 million for the same period of 2022. Certain types of water-related expenses, including, but not limited to, transfer, treatment, and water purchases, will vary from period to period as our customers’ needs and requirements change. Water purchase, transfer, and treatment expenses increased for the nine months ended September 30, 2023 compared to the same period of 2022 principally as a result of heightened sales activity in 2023. Additionally, the 31.0%
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increase in water sales combined with higher demand for water within shorter time commitments and increases in cost due to inflation resulted in an increase in equipment rental and fuel expenses over the same time period.

General and administrative expenses. General and administrative expenses increased 10.5% to $10.8 million for the nine months ended September 30, 2023 from $9.8 million for the same period of 2022. The increase in general and administrative expenses during the nine months ended September 30, 2023 compared to the same period of 2022 was principally related to increased expenses for technology applications, board fees due to the expansion of our board to 10 directors in April 2022, and corporate insurance expenses, resulting from increased coverages and insurance rates.

Legal and professional fees. Legal and professional fees were $28.5 million for the nine months ended September 30, 2023 compared to $5.0 million for the comparable period of 2022. The increase is principally related to legal expenses associated with stockholder matters. See further discussion in Part II, Other Information — Item 1. Legal Proceedings.

Ad valorem and other taxes. Ad valorem and other taxes were $5.4 million for the nine months ended September 30, 2023, compared to $7.0 million for the nine months ended September 30, 2022. Ad valorem taxes for the nine months ended September 30, 2022 included payments for prior year ad valorem tax liabilities which had not been paid by the third party responsible for those ad valorem taxes. Prior to January 1, 2022, the ad valorem taxes with respect to our historical royalty interests were paid directly by third parties pursuant to an existing arrangement. Since the completion of our Corporate Reorganization on January 11, 2021, we have received notice from a third party that it no longer intends to pay the ad valorem taxes related to such historical royalty interests. While we continue to believe the obligation to pay these ad valorem taxes should belong to the third party, we have accrued and/or paid an estimate of such taxes in order to protect the royalty interests from any potential tax liens for nonpayment of ad valorem taxes. While we intend to seek reimbursement from the third party following payment of such taxes, we are unable to determine the amount and/or likelihood of such reimbursement, and accordingly, have not recorded a loss recovery receivable as of September 30, 2022.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $10.9 million for the nine months ended September 30, 2023 compared to $12.2 million for the nine months ended September 30, 2022. The decrease is principally due to decreased depreciation expense related to fully depreciated water service-related assets and is partially offset by increased depletion related to our oil and gas royalty interests.

Other income, net. Other income, net was $20.2 million and $2.6 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in other income, net is primarily related to increased interest income earned on our cash balances during 2023. Higher cash balances and interest yields during this period contributed to the increase in interest income.

Total income tax expense. Total income tax expense was $79.9 million and $94.1 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease in income tax expense is primarily related to decreased operating income resulting from decreased oil and gas royalty revenue and increased operating expenses.

Segment Results of Operations

We operate our business in two reportable segments: Land and Resource Management and Water Services and Operations. We eliminate any inter-segment revenues and expenses upon consolidation.

We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. The reportable segments presented are consistent with our reportable segments discussed in Note 12, “Business Segment Reporting” in the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Our oil and gas royalty revenue, and, in turn, our results of operations for the three and nine months ended September 30, 2023 have been impacted by lower average commodity prices compared to 2022. The decline in oil and gas royalty revenues has been partially offset by increases in revenues derived from water sales, easements and other surface-related income, and produced water royalties which have been positively impacted by ongoing development activity in the Permian Basin.

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For the Three Months Ended September 30, 2023 as Compared to the Three Months Ended September 30, 2022

The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):

Three Months Ended September 30,
20232022
Revenues:
Land and resource management:
Oil and gas royalties$87,102 56 %$130,298 68 %
Easements and other surface-related income17,425 11 %13,788 %
Land sales and other operating revenue5,406 %3,129 %
Total land and resource management revenue109,933 70 %147,215 77 %
Water services and operations:
Water sales26,422 17 %24,426 13 %
Produced water royalties20,849 13 %19,129 10 %
Easements and other surface-related income763 — %341 — %
Total water services and operations revenue48,034 30 %43,896 23 %
Total consolidated revenues$157,967 100 %$191,111 100 %
Net income:
Land and resource management$82,884 79 %$108,188 83 %
Water services and operations22,690 21 %21,649 17 %
Total consolidated net income$105,574 100 %$129,837 100 %

Land and Resource Management

Land and Resource Management segment revenues decreased $37.3 million, or 25.3%, to $109.9 million for the three months ended September 30, 2023 as compared to the same period of 2022. The decrease in Land and Resource Management segment revenues is due to a $43.2 million decrease in oil and gas royalty revenue for three months ended September 30, 2023 compared to the same period of 2022. The decrease in oil and gas royalty revenue was partially offset by an increase in easements and other surface-related income over the same time period.

Oil and gas royalties. Oil and gas royalty revenue was $87.1 million for the three months ended September 30, 2023 compared to $130.3 million for the three months ended September 30, 2022, a decrease of 33.2%. Oil and gas royalties decreased $43.2 million due to lower average commodity prices and lower production volume for the three months ended September 30, 2023 compared to the same period of 2022. The average realized price declined 28.4% to $45.41 per barrel of oil equivalent (“Boe”) for the three months ended September 30, 2023 from $63.42 per Boe for the three months ended September 30, 2022. Our share of production decreased to 21.8 thousand Boe per day for the three months ended September 30, 2023 compared to 23.4 thousand Boe per day for the same period of 2022.

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The financial and operational data by royalty stream is presented in the table below for the three months ended September 30, 2023 and 2022:
Three Months Ended
September 30,
20232022
Our share of production volumes (1):
Oil (MBbls)