Texas Pacific Land 10-Q 2023-09-30

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

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:

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.

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

PART I. FINANCIAL INFORMATION

TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TEXAS PACIFIC LAND CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME

(in thousands, except shares and per share amounts)

(Unaudited)

Showing the first 8K of 63K characters. Open the full section

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

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:

(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.

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

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):

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.

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%

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.

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):

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.

The financial and operational data by royalty stream is presented in the table below for the three months ended September 30, 2023 and 2022:

*(1)*Commonly used definitions in the oil and gas industry not previously defined: Boe represents barrels of oil equivalent. MBbls represents one thousand barrels of crude oil, condensate or NGLs. Mcf represents one thousand cubic feet of natural gas. MMcf represents one million cubic feet of natural gas. MBoe represents one thousand Boe. MBoe/d represents one thousand Boe per day.

Easements and other surface-related income. Easements and other surface-related income was $17.4 million for the three months ended September 30, 2023, an increase of 26.4% compared to $13.8 million for the three months ended September 30, 2022. Easements and other surface-related income includes revenue related to the use and crossing of our land for oil and gas exploration and production, renewable energy, and agricultural operations. The increase in easements and other surface-related income is principally related to increases of $3.3 million in pipeline easements and $1.0 million in material sales for the three months ended September 30, 2023 compared to the same period of 2022. The amount of income derived from pipeline easements is a function of the term of the easement, the size of the easement, and the number of easements entered into for any given period. Easements and other surface-related income is dependent on development decisions made by companies that operate in the areas where we own land and is, therefore, unpredictable and may vary significantly from period to period. See “Market Conditions” above for additional discussion of development activity in the Permian Basin during the three months ended September 30, 2023.

Land sales and other operating revenue. Land sales and other operating revenue was $5.4 million and $3.1 million for the three months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, we sold 18,019 acres of land for an aggregate sales price of $5.4 million. For the three months ended September 30, 2022, we sold approximately 122 acres of land for an aggregate sales price of approximately $3.1 million.

Net income. Net income for the Land and Resource Management segment was $82.9 million for the three months ended September 30, 2023 compared to $108.2 million for the three months ended September 30, 2022. Segment operating income decreased $36.8 million for the three months ended September 30, 2023 compared to the same period of 2022, largely driven by the $43.2 million decrease in oil and gas royalty revenue. These changes were partially offset by a $5.5 million decrease in income tax expense over the same time periods. Expenses are discussed further above under “Results of Operations.”

Water Services and Operations

Water Services and Operations segment revenues increased 9.4% to $48.0 million for the three months ended September 30, 2023 as compared with revenues of $43.9 million for the same period of 2022. The increase in Water Services and Operations segment revenues is due to increases in water sales revenue and produced water royalties, which are discussed below. As discussed in “Market Conditions” above, our segment revenues are directly influenced by development decisions made by our customers and the overall activity level in the Permian Basin. Accordingly, our segment revenues and sales volumes, as further discussed below, will fluctuate from period to period based upon those decisions and activity levels.

Water sales. Water sales revenue increased $2.0 million to $26.4 million for the three months ended September 30, 2023, compared to the same period of 2022. The growth in water sales is principally due to an increase in treated water sales volumes, which was partially offset by a decrease in sourced water sales volumes, for the three months ended September 30, 2023, compared to the same period of 2022. The sales mix between sourced and treated water will vary period to period as customer demand changes.

Produced water royalties. Produced water royalties are received from the transfer or disposal of produced water on our land. Produced water royalties are contractual and not paid as a matter of right. We do not operate any saltwater disposal wells. Produced water royalties were $20.8 million for the three months ended September 30, 2023 compared to $19.1 million for the same period in 2022. This increase is principally due to increased produced water volumes for the three months ended September 30, 2023 compared to the same period of 2022.

Net income. Net income for the Water Services and Operations segment was $22.7 million for the three months ended September 30, 2023 compared to $21.6 million for the three months ended September 30, 2022. Segment operating income increased $1.7 million for the three months ended September 30, 2023 compared to the same period of 2022. The increase is principally due to the $4.1 million increase in segment revenues and was partially offset by the $2.2 million increase in water service-related expenses. Expenses are discussed further above under “Results of Operations.”

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

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

Land and Resource Management

Land and Resource Management segment revenues decreased 20.0% to $315.3 million for the nine months ended September 30, 2023 as compared with $393.9 million for the comparable period of 2022. The decrease in Land and Resource Management segment revenues is principally due to the $97.1 million decrease in oil and gas royalty revenue, as discussed further below.

Oil and gas royalties. Oil and gas royalty revenue was $258.6 million for the nine months ended September 30, 2023 compared to $355.7 million for the nine months ended September 30, 2022, a decrease of $97.1 million. Oil and gas royalties for the nine months ended September 30, 2023 included an $8.7 million recovery, discussed further in the following paragraph. Excluding the $8.7 million recovery, oil and gas royalties decreased $105.8 million due to lower average commodity prices in the nine months ended September 30, 2023 compared to the same period of 2022. The average realized prices declined 33.5% to $42.49 per Boe for the nine months ended September 30, 2023 from $63.93 per Boe for the same period of 2022. Our share of crude oil, natural gas and NGL production volumes was 22.6 thousand Boe per day for the nine months ended September 30, 2023 compared to 21.3 thousand Boe per day for the same period of 2022.

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 by the operator for periods before and through April 2022, the operator has agreed to pay $8.7 million to TPL (the “$8.7 Million Stipulation”). This amount has been recorded as a receivable and included in oil and gas royalty revenue in the condensed consolidated income statement and in the table above for the nine months ended September 30, 2023.

The table below provides financial and operational data by royalty stream for the nine months ended September 30, 2023 and 2022 and excludes the $8.7 Million Stipulation discussed above:

*(1)*The metrics provided exclude the impact of the $8.7 Million Stipulation discussed above.

Easements and other surface-related income. Easements and other surface-related income was $49.8 million for the nine months ended September 30, 2023, an increase of 43.5% compared to $34.7 million for the nine months ended September 30, 2022. Easements and other surface-related income includes revenue related to the use and crossing of our land for oil and gas exploration and production, renewable energy, and agricultural operations. The increase in easements and other surface-related income is principally related to increases of $7.4 million in pipeline easement income, $5.0 million in material sales, and $1.2 million in commercial leases for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The amount of income derived from pipeline easements is a function of the term of the easement, the size of the easement and the number of easements entered into for any given period. Easements and other surface-related income is dependent on development decisions made by companies that operate in the areas where we own land and is therefore, unpredictable and may vary significantly from period to period. See “Market Conditions” above for additional discussion of development activity in the Permian Basin during the nine months ended September 30, 2023 relative to the same time period of 2022.

Land sales and other operating revenue. Land sales and other operating revenue was $6.8 million and $3.5 million for the nine months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023, we sold 18,061 acres of land for an aggregate sales price of approximately $6.8 million. For the nine months ended September 30, 2022, we sold 129 acres of land for an aggregate sales price of approximately $3.3 million.

Net income. Net income for the Land and Resource Management segment decreased 23.7% to $217.9 million for the nine months ended September 30, 2023 compared to $285.4 million for the comparable period in 2022. Segment operating income decreased $103.0 million for the nine months ended September 30, 2023 compared to the same period of 2022, largely driven by the $97.1 million decrease in oil and gas royalty revenue and the $23.7 million increase in legal and professional fees. Expenses are discussed further above under “Results of Operations — Consolidated.”

Water Services and Operations

Water Services and Operations segment revenues increased 23.9% to $149.7 million for the nine months ended September 30, 2023 as compared with $120.8 million for the comparable period of 2022. The increase in Water Services and Operations segment revenues is principally due to increases in water sales revenue and produced water royalties, which are discussed below. As discussed in “Market Conditions” above, our segment revenues are directly influenced by development decisions made by our customers and the overall activity level in the Permian Basin. Accordingly, our segment revenues and sales volumes, as further discussed below, will fluctuate from period to period based upon those decisions and activity levels.

Water sales. Water sales revenue increased $20.3 million to $85.8 million for the nine months ended September 30, 2023 compared to the same period of 2022. The growth in water sales is principally due to an increase of 22.9% in water sales volumes for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Produced water royalties. Produced water royalties are royalties received from the transfer or disposal of produced water on our land. Produced water royalties are contractual and not paid as a matter of right. We do not operate any salt water disposal wells. Produced water royalties were $61.8 million for the nine months ended September 30, 2023 compared to $52.7 million compared to the same period in 2022. This increase is principally due to increased produced water volumes for the nine months ended September 30, 2023 compared to the same period of 2022.

Net income. Net income for the Water Services and Operations segment was $74.7 million for the nine months ended September 30, 2023 compared to $61.2 million for the same period in 2022. Segment operating income increased $17.1 million for the nine months ended September 30, 2023 compared to the same period of 2022. The increase is principally due to the $28.9 million increase in segment revenues and was partially offset by the $11.5 million increase in water service-related expenses and the $3.8 million increase in income tax expense. Expenses are discussed further above under “Results of Operations — Consolidated.”

Non-GAAP Performance Measures

In addition to amounts presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”), we also present certain supplemental non-GAAP performance measurements. These measurements are not to be considered more relevant or accurate than the measurements presented in accordance with GAAP. In compliance with the requirements of the SEC, our non-GAAP measurements are reconciled to net income, the most directly comparable GAAP performance measure. For all non-GAAP measurements, neither the SEC nor any other regulatory body has passed judgment on these non-GAAP measurements.

EBITDA, Adjusted EBITDA and Free Cash Flow

EBITDA is a non-GAAP financial measurement of earnings before interest, taxes, depreciation, depletion and amortization. Its purpose is to highlight earnings without finance, taxes, and depreciation, depletion and amortization expense, and its use is limited to specialized analysis. We calculate Adjusted EBITDA as EBITDA excluding employee share-based compensation. Its purpose is to highlight earnings without non-cash activity such as share-based compensation and/or other non-recurring or unusual items. We calculate Free Cash Flow as Adjusted EBITDA less current income tax expense and capital expenditures. Its purpose is to provide an additional measure of operating performance. We have presented EBITDA, Adjusted EBITDA and Free Cash Flow because we believe that these metrics are useful supplements to net income in analyzing the Company's operating performance. Our definitions of Adjusted EBITDA and Free Cash Flow may differ from computations of similarly titled measures of other companies.

The following table presents a reconciliation of net income to EBITDA, Adjusted EBITDA and Free Cash Flow for the three and nine months ended September 30, 2023 and 2022 (in thousands):

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 2 to the Consolidated Financial Statements included in our 2022 Annual Report on Form 10-K filed with the SEC on February 22, 2023.

There have been no material changes to our critical accounting policies or in the estimates and assumptions underlying those policies, from those provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Annual Report on Form 10-K.

New Accounting Pronouncements

For further information regarding recently issued accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies” in the notes to the condensed consolidated financial statements included in Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q.

There have been no material changes in the information related to market risk of the Company since December 31, 2022.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023.

There have been no changes during the quarter ended September 30, 2023 in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

TPL is not involved in any material pending legal proceedings other than the item disclosed below.

On November 23, 2022, TPL filed a complaint in Delaware Chancery Court (“the Court”) against Horizon Kinetics, LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors LLC, and SoftVest, L.P. (collectively, the “Stockholder Defendants”) under the caption Texas Pacific Land Corporation v. Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors, LLC, and SoftVest L.P. (C.A. No. 2022-1066-JTL) (the “Action”). Horizon Kinetics LLC and Horizon Kinetics Asset Management LLC are affiliated with Murray Stahl, a member of the Board, and Softvest Advisors, LLC and SoftVest L.P. are affiliated with Eric Oliver, a member of the Board. TPL filed the Action to resolve a disagreement with the Stockholder Defendants over their voting commitments pursuant to the Stockholders’ Agreement with the Company. A trial was held on April 17, 2023, and post-trial oral arguments occurred on June 30, 2023. No ruling has been issued as of this date.

There have been no material changes in the risk factors previously disclosed in response to Part I, Item 1A. “Risk Factors” set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 22, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2023, the Company repurchased shares as follows:

*(1)*On November 1, 2022, our Board approved a stock repurchase program to purchase up to an aggregate of $250 million of our outstanding Common Stock effective beginning January 1, 2023. 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 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.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures.

Not applicable.

(c) Rule 10b5-1 Trading Arrangements

On September 14, 2023, Murray Stahl, a member of our Board of Directors, on behalf of himself and accounts managed by Horizon Kinetics Asset Management LLC over which Mr. Stahl has a controlling interest, adopted a “10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K that is intended to satisfy the affirmative defense of Rule 10b5-1(c) promulgated under the Exchange Act, for the purchase of up to 738 shares of Common Stock. This 10b5-1 trading arrangement is scheduled to expire on the earlier of (i) April 15, 2024 and (ii) the acquisition of 738 shares of Common Stock.

EXHIBIT INDEX

• Filed or furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.