Texas Pacific Land Corporation (TPL) Earnings Call Transcript & Summary

Greetings, and welcome to the Texas Pacific Land Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Shawn Amini, Vice President of Finance and Investor Relations. Please go ahead.

Thank you for joining us today for Texas Pacific Land Corporation's Second Quarter 2026 Earnings Conference Call. Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission, which is available on the Investors section of the company's website at www.texaspacific.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our recent SEC filings. During this call, we will also be discussing certain non-GAAP financial measures. More information and reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings. Please also note, we may at times refer to our company by its stock ticker, TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Ty Glover; TPL's Chief Financial Officer, Chris Steddum; and Executive Vice President of Texas Pacific Water Resources, Robert Crain. Management will make some prepared comments, after which we will open the call for questions. Now I will turn the call over to Ty.

Good morning, everyone, and thank you for joining us today. This quarter, we delivered exceptional results across major financial and operating metrics and achieved significant milestones towards key growth initiatives. TPL generated record quarterly total revenue, net income and free cash flow. These results were supported by record oil and gas royalty production and produced water royalty volumes. Oil and gas royalty production averaged approximately 39,700 barrels of oil equivalent per day, up 7% sequentially and 20% year-over-year. In addition, our unhedged royalty position allowed us to benefit fully from the strong oil price environment. Produced water royalty volumes were 4.9 million barrels per day during the quarter, which represents growth of 6% sequentially and 15% year-over-year, driven by strong demand for TPL's in-basin and out-of-basin pore space. Water sales volumes of 663,000 barrels per day represents a 19% decline sequentially and a 38% increase year-over-year. Second quarter water sales volumes have been impacted by weak in-basin natural gas prices as operators have shifted some development away from the Delaware Basin. However, substantial new gas pipeline capacity enters service over the next few quarters, and we would expect some mix shift towards the Delaware as local in-basin gas price differentials improve. For SLEM, revenues of $24 million, which represents a 37% sequential increase, were driven by strong performance for pipeline and wellbore easements. With respect to our data center and power generation efforts, we disclosed that a previously announced land sale and water supply agreement was related to Project Kilby, which is a large-scale power generation facility Chevron is developing to support a customer data center in Reeves County, Texas. This multi-gigawatt power and data center development represents a substantial commitment by some of the largest energy and technology companies in the world, and this validates the Permian as an attractive data center infrastructure hub capable of accommodating hyperscale facilities. In addition, during the quarter, we acquired over 10,000 acres of land in Shackelford and Jones County, Texas, for approximately $100 million. This region is amongst the fastest-growing data center regions in the country, and this acquisition further expands our strategic data center and power generation efforts beyond the immediate Permian Basin. This land was attractive due to its contiguousness, land and water resources, access to natural gas and grid infrastructure, established fiber and proximity to a midsized city. We are also progressing on a number of projects with various high-quality hyperscalers and AI labs, which also includes our joint effort alongside Bolt Data & Energy. Deal execution requires extensive work involving many counterparties and thorough wide-ranging diligence and our conversations revolve around multiple verticals such as land, water, aggregates and other aspects. West Texas is rapidly becoming a dominant global hub for power and compute, and it's apparent that developers and customers remain keenly motivated to expand their power and compute footholds in the regions. We will be able to provide more specific details as our commercial efforts turn into executed agreements. Turning to our produced water desalination efforts. We have completed construction and commenced commissioning on our desalination facility located in Orla, Texas, which we refer to as Phase 2b. Eventually ramping the facility to its 10,000 barrel a day capacity will allow us to demonstrate that produced water desalination can work at scale. Our desalination effort leverages our patented freeze desalination process where we also have equipment exclusivity for oil and gas applications with one of the country's leading providers of industrial scale process cooling solutions. In addition, this year, we will be implementing various desalination colocation studies. Our freeze desalination process will generate large volumes of ice and chilled water, which then could potentially be used by data centers for chip cooling. Furthermore, we are also investigating the utilization of waste heat recovery equipment to enhance our desalination process and reduce our energy consumption. There is also additional optionality to monetize both the high-spec freshwater and concentrated brine output streams from the facility. Desalinated produced water represents an interesting opportunity as it is not part of the hydrologic cycle and thus high-spec desalinated freshwater could meet standards for irrigation, industrial cooling, rangeland rehabilitation, streamflow augmentation and data center cooling, thereby reducing demands on existing local water resources. The concentrated brine may also enhance economics of produced water valorization by extracting valuable minerals such as lithium. We're excited to finally have completed construction on our Phase 2 facility as produced water desalination at scale could help significantly reduce traditional injection demand. In addition, energy supermajors and large independent hyperscalers and AI labs have shown strong interest related to the commercial and operational opportunities related to colocation and output water streams. Our Orla Phase 2 facility will provide interested parties with a tangible real-world exhibit of how we can turn an oilfield waste product into something with highly positive commercial and environmental attributes. We look forward to providing more updates in the coming quarters as we operate the facility and as business discussions advance. With that, I'll hand the call over to Chris.

Thanks, Ty. Consolidated revenues during the second quarter 2026 were approximately $246 million. This represents a quarterly all-time high as well as a 4% sequential increase and a 31% increase year-over-year. Consolidated adjusted EBITDA was $216 million, which was up 19% sequentially and 30% year-over-year. Our adjusted EBITDA margin for the quarter was 88%. Free cash flow was $156 million, which was up 14% sequentially and up 20% year-over-year. Moving to our well inventory. As of quarter end, TPL had 5.6 net permitted wells, 9.5 net drilled but uncompleted wells or commonly referred to as DUCs and 3.4 net completed but not producing wells. That amounts to 18.4 net line-of-sight wells. Year-to-date, capital expenditures were $29 million. As Ty discussed, in the second half of this year, we will be spending capital to investigate colocation cooling and waste heat capture opportunities at our Orla Phase 2b desalination facility. This spend was embedded in our original CapEx guidance at the beginning of the year, and we reaffirm the fiscal year guide of $65 million to $75 million. And with that, operator, we will now take questions.

[Operator Instructions] First question comes from Derrick Whitfield with Texas Capital.

My first question, I wanted to start with the surface acquisitions you made in Shackelford and Jones Counties. While a bit of a step out, it's clear to us that it was bought on more than a hunch. How would you guys frame the opportunity with this kind of build-out in this project potential and the amount of revenue streams it could involve?

Yes. That's a good question, Derrick. I mean it is a little bit of a step out, but I mean, we think the power and compute opportunity in West Texas is enormous and broader than just the Permian and our legacy footprint. And so we've been doing diligence on that property for over a year now to make sure that it specs out. That area was interesting to a compute user that we've been working with for a while now. And so I think we've demonstrated to the tech community that our team has the expertise to locate land, water, gas resources even if it's outside of our legacy footprint. And so I think it just adds some flexibility to the value proposition of TPL. We're excited about it. We think we can replicate it. And I think the question about the value chain, it's very similar to our other properties and how we look at the oil and gas business. We want to be as involved in the project as we can while still being really capital light. And so land use, water, aggregates, just clipping coupons to the kind of the entire life cycle of that project so that we capture as much of the value chain as we possibly can.

Great. And then as my follow-up, I wanted to focus on the water desal, but specifically water desal for chip cooling. How would you frame the depth of interest you're seeing in your conversations with hyperscalers and AI labs, given the fact that it is water additive to the hydrologic cycle. I think it's a huge selling point that you guys have in your process.

Yes. I mean the interest in produced water and data center use is huge. And I think it's not just one stream. When you look at it, just -- let's start with just the consumptive piece. I think there still is some evaporative cooling and adding adiabatic assist that is water consumption that goes into data center, not just chip cooling, but building cooling. Obviously, that's your first one that everybody hits on because it is water that's not in the hydrologic cycle. Next, you move into something that's more specific to our technology that we're in a lot of discussions with a couple of hyperscalers and AI labs on, and that's using our freeze technology for direct chip cooling. If you look at the heat transfer that a hyperscaler uses for direct chip, it's a fraction of the heat transfer that we look at when we're getting this water down to sub-15 degrees Fahrenheit to be able to remove the salts from the water. So that's another fit. All of it goes towards a water positivity or water neutrality goal, a couple of other aspects that we're chasing just to reduce that consumption on any municipal or type of traditional water sourcing that they typically use today.

Next question, Tim Rezvan with KeyBanc Capital Markets.

Derrick touched on the topics of interest to me, but I thought I'd follow up a little more on this acreage acquisition. I think a little bit of a surprise is that you all have almost 1 million surface acres already. I know the opportunity set is vast on power and compute. But should we be expecting potential like sizable acquisitions like this in the future? I guess the idea is how much of the opportunity can you leverage off your existing footprint versus needing to buy more?

Yes. Look, we're looking at it the same way we did when we started the water business, right? The primary objective is to develop the existing resource that we already have, but we're simultaneously looking for other opportunities. Like I mentioned, I think the opportunity set here is beyond our legacy footprint. And so why let someone else capture that value. And so very similar to how we've built the water business, like I said, we are looking at both options simultaneously. And I would just say like we're in advanced conversations with multiple hyperscalers, AI labs and power generators on 25 gigawatts of projects right now. I would be disappointed if we don't announce at least one or more major definitive agreements in the near term. So with an opportunity set like that, that's growing by the week, we feel like we owe it to our shareholders to look outside of our existing footprint.

Okay. Okay. That's good context, especially on the scale, 25 gigawatts is a big number. If I could switch gears a little bit. Produced water royalty volumes, you touched on it. It was a record in the second quarter. And looking at sort of the revenue per barrel, it was at the high end, about over $0.08 a barrel. Should we be modeling that to continue to kind of ramp? I mean we know the broader trends in the business, but just kind of curious how you see that trending over the next year or 2.

Well, we've got price escalators built in our existing contracts. And I think pore space will become more valuable over time. I would say the one caveat is transportation royalties are typically a little less than an actual pore space injection royalty. And so as that mix changes, you should see that royalty kind of stay steady to increasing over time.