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

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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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Words or phrases such as “expects,” “anticipates,” “could,” “will,” “intends,” “may,” “might,” “plan,” “potential,” “should,” “would,” 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 Quarterly Report are based on information available to us as of the date this Quarterly 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, 2023 (the “2023 Annual Report”), 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 2023 Annual Report filed with the SEC on February 21, 2024 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 873,000 surface acres of land, 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 8,000 additional net royalty acres (normalized to 1/8th) (“NRA”), for a collective total of approximately 199,000 NRA, principally concentrated in the Permian Basin.

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 that were 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, primarily in the Permian Basin. Our revenues are derived from oil and gas royalties, water sales, produced water royalties, easements and other surface-related income and land sales. 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 not only the owners and operators of 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 detailed overview of our business and business segments, see Part I, Item 1. “Business — General” in our 2023 Annual Report.

Market Conditions

While average oil prices for the nine months ended September 30, 2024 have increased slightly compared to average oil prices during the same period last year, average oil prices for the three months ended September 30, 2024 have decreased compared to the same period of 2023. Oil prices continue to be impacted by certain actions by OPEC+, geopolitics, and evolving global supply and demand trends, among other factors. Average natural gas prices during 2024 have decreased compared to average prior year natural gas prices. Global and domestic natural gas markets have experienced volatility due to macroeconomic conditions, infrastructure and logistical constraints, weather, and geopolitics, among other factors. 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 with 2024 having experienced negative Waha natural gas prices throughout much of the year. Midstream infrastructure is currently being developed 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. Changes in global and domestic macro-economic conditions 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 across southeastern New Mexico and western Texas. Exploration and production (“E&P”) companies operating in the Permian Basin continue to maintain robust drilling and development activity. Per the U.S. Energy Information Administration, Permian production is currently in excess of 6.0 million barrels per day, which is higher than the average daily production in this region for any year prior to 2024.

Due to 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, 2024 and 2023:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Oil and Gas Pricing Metrics:(1)
WTI Cushing average price per bbl	$	76.43	$	82.25	$	78.58	$	77.27
Henry Hub average price per mmbtu	$	2.11	$	2.59	$	2.11	$	2.46
Waha Hub natural gas average price per mmbtu	$	(0.50)	$	2.04	$	(0.02)	$	1.73

Activity Metrics specific to the Permian Basin:(1)(2)
Average monthly horizontal permits	683		640		655		641
Average monthly horizontal wells drilled	492		514		506		536
Average weekly horizontal rig count	294		314		299		330
DUCs as of September 30 for each applicable year	4,491		4,857		4,491		4,857

Total Average US weekly horizontal rig count (2)	521		578		560		642

(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. Waha Hub natural gas pricing data per Bloomberg. DUCs represent drilled but uncompleted wells. DUC classification is based on well data and date stamps provided by Enverus. DUCs are based on wells that have a drilled/spud date stamp but do not have a completed or first production date stamp. Excludes wells that have been labeled plugged and abandoned or permit expired and wells drilled/spud more than five years ago.

(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, 2024 and 2023. While average oil prices for the nine months ended September 30, 2024 have increased slightly compared to the same period in 2023, average oil prices for the three months ended September 30, 2024 have decreased compared to the same period of 2023. Natural gas prices for the three and nine months ended September 30, 2024 have declined compared to the same period last year. E&P companies broadly continue to deploy capital at a measured pace as drilling and development activities across the Permian Basin have remained strong overall. 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, both directly and indirectly, our oil and gas royalties, produced water royalties, water sales, and other 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 levels of liquidity and capital resources. If market conditions were to change and our revenues were to decline significantly or our 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 had no debt, credit facilities or any off-balance sheet arrangements, as of September 30, 2024.

As we evaluate our current capital structure, capital allocation priorities, business fundamentals, and investment opportunities, we have set a target cash and cash equivalents balance of approximately $700 million. Above this target, we will seek to deploy the majority of our free cash flow towards additional dividends and share repurchases. As of September 30, 2024, we had cash and cash equivalents of $533.9 million that we expect to utilize, along with cash flow from operations, to provide capital to support 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”), for potential acquisitions and for general corporate purposes. 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.

Return of Capital to Shareholders

During the nine months ended September 30, 2024, we paid total dividends to our stockholders of $310.6 million, consisting of special cash dividends of $10.00 per share of Common Stock and regular quarterly cash dividends of $1.17 per share of Common Stock. In addition, during the nine months ended September 30, 2024, we repurchased $22.7 million of our Common Stock (including share repurchases not settled at the end of the period).

Acquisition Activity

We completed two separate acquisitions in August 2024, each in an all-cash transaction. We acquired mineral interests across approximately 4,106 NRA located in Culberson County, Texas for a purchase price of $120.3 million, net of post-close adjustments. The acquisition was completed in conjunction with Brigham Royalties Fund I Holdco, L.L.C., a subsidiary of Brigham Royalties, in an arms-length transaction with an unaffiliated seller. See further discussion of this acquisition in Note 6, “Oil and Gas Royalty Interests.” The acquired mineral interests overlap with existing TPL royalty acreage. Additionally, we acquired 4,120 surface acres in Martin County, Texas along with other surface-related tangible and intangible assets in a business combination for total consideration of $45.0 million. See further discussion of this acquisition in Note 3, “Assets Acquired in a Business Combination.”

On October 2, 2024, we acquired approximately 7,490 NRA located primarily in the Midland Basin in Martin, Midland and other counties, with over 80% of the acquired interests adjacent to or overlapping existing TPL surface and royalty acreage for cash consideration of $276.4 million, $43.0 million of which was held in escrow as of September 30, 2024.

Development of Innovative Solutions for Produced Water and Capital Expenditures

In May 2024, we announced our progress towards developing innovative solutions for produced water in the Permian Basin. Over the last few years, we have been working with a leading industrial technology and manufacturing firm to develop an energy-efficient desalination and treatment process and associated equipment that can recycle produced water into fresh water with quality standards appropriate for surface discharge and beneficial reuse. With the Permian Basin generating approximately 18 million barrels of produced water per day, we believe this technology would provide an attractive and critical alternative to subsurface injection. We have successfully tested a pilot program in our research and development lab, and we are now working towards the next phase of constructing a facility with an initial capacity of 10,000 barrels of water per day. We filed a patent application for the desalination and treatment process and have secured exclusive use-rights for the equipment towards produced water applications. We are also in commercial discussions with the some of the largest, most active oil and gas upstream operators as we look to provide critical, technology-driven solutions while also optimizing our economic interests and limiting capital expense. During the nine months ended September 30, 2024, we have spent $5.3 million on this new energy-efficient desalination and treatment process and equipment, of which $3.4 million was capitalized.

Additionally, during the nine months ended September 30, 2024, we invested approximately $18.4 million to maintain and/or enhance our water sourcing assets.

Cash Flows from Operating Activities

For the nine months ended September 30, 2024 and 2023, net cash provided by operating activities was $364.1 million and $306.9 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 flows used in operations generally consist of operating expenses associated with our revenue streams, general and administrative expenses and income taxes.

The increase in cash flows provided by operating activities for the nine months ended September 30, 2024 compared to the same period of 2023 was primarily driven by an increase in operating income and changes in working capital requirements during 2024 as compared to 2023.

Cash Flows Used in Investing Activities

For the nine months ended September 30, 2024 and 2023, net cash used in investing activities was $225.8 million and $55.9 million, respectively. Our cash flows used in investing activities are primarily related to acquisitions and capital expenditures related to our water services and operations segment. Our acquisitions may include land, royalty interests and other similar tangible and intangible assets.

For the nine months ended September 30, 2024 and 2023, the cash flows used for acquisitions, including a deposit for an acquisition, totaled $209.3 million and $45.3 million, respectively. For further information regarding acquisitions during the three months ended September 30, 2024 and thereafter, see “Acquisition Activity” above. Capital expenditures for the nine months ended September 30, 2024 and 2023 were $22.0 million and $10.4 million, respectively.

Cash Flows Used in Financing Activities

For the nine months ended September 30, 2024 and 2023, net cash used in financing activities was $335.0 million and $108.6 million, respectively. Our cash flows used in financing activities primarily consist of activities that return capital to our stockholders, such as payments of dividends and repurchases of our Common Stock.

During the nine months ended September 30, 2024 and 2023, we paid total dividends of $310.6 million and $75.0 million, respectively. During the nine months ended September 30, 2024 and 2023, we repurchased $22.7 million and $32.2 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, 2024 and 2023 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Revenues:
Oil and gas royalties	$	94,444	$	87,102	$	276,377	$	258,644
Water sales	36,211		26,422		113,987		85,799
Produced water royalties	27,727		20,849		76,034		61,824
Easements and other surface-related income	14,280		18,188		51,496		51,865
Land sales	901		5,406		2,145		6,806
Total revenues	173,563		157,967		520,039		464,938

Expenses:
Salaries and related employee expenses	14,030		11,499		39,262		32,688
Water service-related expenses	11,731		8,553		36,767		24,496
General and administrative expenses	4,029		3,859		12,626		10,738
Legal and professional fees	8,316		1,689		14,680		28,471
Ad valorem and other taxes	2,189		1,781		5,990		5,425
Land sales expenses	175		44		425		49
Depreciation, depletion and amortization	5,762		3,584		13,695		10,881
Total operating expenses	46,232		31,009		123,445		112,748

Operating income	127,331		126,958		396,594		352,190

Other income, net	8,086		7,979		31,249		20,239
Income before income taxes	135,417		134,937		427,843		372,429



Income tax expense	28,823		29,363		92,243		79,894
Net income	$	106,594	$	105,574	$	335,600	$	292,535

For the Three Months Ended September 30, 2024 as Compared to the Three Months Ended September 30, 2023

Consolidated Revenues and Net Income:

Total revenues increased 9.9%, to $173.6 million for the three months ended September 30, 2024 compared to $158.0 million for the three months ended September 30, 2023. This increase in total revenues was principally related to a $9.8 million increase in water sales, a $7.3 million increase in oil and gas royalty revenue, and a $6.9 million increase in produced water royalties, partially offset by a decrease in easements and other surface-related income and land sales over the same period. Individual revenue line items are discussed below under “Segment Results of Operations.” Net income of $106.6 million for the three months ended September 30, 2024 was slightly higher than the comparable period of 2023 as a result of an increase in total revenues, partially offset by an increase in operating expenses, as discussed below.

Consolidated Expenses:

Salaries and related employee expenses. Salaries and related employee expenses were $14.0 million for the three months ended September 30, 2024 compared to $11.5 million for the comparable period of 2023. The number of employees increased from 101 as of September 30, 2023 to 110 as of September 30, 2024, which, when coupled with market compensation adjustments effective at the beginning of 2024, resulted in increased salary and related employee expenses for the three months ended September 30, 2024 compared to the same period of 2023. Additionally, contract labor expense for the three months ended September 30, 2024 increased over the same period of 2023, principally as a result of the 37.0% increase in water sales over the same respective periods.

Water service-related expenses. Water service-related expenses increased $3.2 million to $11.7 million for the three months ended September 30, 2024 compared to the same period of 2023. Certain types of water-related expenses, including, but not limited to, treatment, transfer, water purchases, repairs and maintenance, equipment rental, and fuel costs, vary from period to period as our customers’ needs and requirements change. Right of way and other expenses also vary from period to period depending upon location of customer delivery. The increase in water service-related expenses for the three months ended September 30, 2024 compared to the same period of 2023 was principally related to a 37.0% increase in water sales due to increased volumes.

Legal and professional fees. Legal and professional fees were $8.3 million for the three months ended September 30, 2024 compared to $1.7 million for the comparable period of 2023. During the three months ended September 30, 2024, the Company incurred additional consulting and legal fees related to the Company’s 2024 annual meeting of stockholders, including fees incurred in connection with the preparation of the related proxy statement and addressing stockholder proposals and director nominations from unaffiliated stockholders who ultimately determined to withdraw their director nominations shortly before the filing of the Company’s proxy statement for the Company’s 2024 annual meeting of stockholders.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $5.8 million for the three months ended September 30, 2024 compared to $3.6 million for the comparable period of 2023. The increase was principally due to depletion expense associated with royalty interests acquired in August 2024, as discussed further above under “Liquidity and Capital Resources — Acquisition Activity.”

For the Nine Months Ended September 30, 2024 as Compared to the Nine Months Ended September 30, 2023

Consolidated Revenues and Net Income:

Total revenues increased to $520.0 million for the nine months ended September 30, 2024 compared to $464.9 million for the nine months ended September 30, 2023. This increase in total revenues was principally due to a $28.2 million increase in water sales, a $17.7 million increase in oil and gas royalty revenue, and a $14.2 million increase in produced water royalties compared to the same period of 2023. These revenue increases were partially offset by a decrease of $4.7 million in land sales. Individual revenue line items are discussed below under “Segment Results of Operations.” Net income of $335.6 million for the nine months ended September 30, 2024 was 14.7% higher than the comparable period of 2023, principally as a result of the increase in revenues discussed above.

Consolidated Expenses:

Salaries and related employee expenses. Salaries and related employee expenses were $39.3 million for the nine months ended September 30, 2024 compared to $32.7 million for the same period of 2023. The number of employees increased from 101 as of September 30, 2023 to 110 as of September 30, 2024, which, when coupled with market compensation adjustments effective at the beginning of 2024, resulted in increased salary and related employee expenses for the nine months ended September 30, 2024 compared to the same period of 2023. Additionally, contract labor expenses for the nine months ended September 30, 2024 increased over the same period of 2023, principally as a result of the 32.9% increase in water sales over the same respective periods.

Water service-related expenses. Water service-related expenses increased $12.3 million to $36.8 million for the nine months ended September 30, 2024 compared to the same period of 2023. Certain types of water-related expenses, including, but not limited to, treatment, transfer, water purchases, repairs and maintenance, equipment rental, and fuel costs, vary from period to period as our customers’ needs and requirements change. Right of way and other expenses also vary from period to period depending upon location of customer delivery. The increase in water service-related expenses for the nine months ended September 30, 2024 was principally related to a 32.9% increase in water sales over the same period of 2023, primarily as a result of increased customer volumes. Research and development expenses related to development of a new energy-efficient method of produced water desalination and treatment were $1.9 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively. For further discussion of this new treatment method, see “Liquidity and Capital Resources — Development of Innovative Solutions for Produced Water and Capital Expenditures.”

General and administrative expenses. General and administrative expenses increased $1.9 million to $12.6 million for the nine months ended September 30, 2024 compared to the same period of 2023. During the nine months ended September 30, 2024, stock awards that were vested in full on the grant date were granted to members of the Board which resulted in immediate recognition of the fair value of the awards on the date of grant. See further discussion of this change in Note 8, “Share-Based Compensation” in the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. The increased Board compensation expense for the nine months ended September 30, 2024 resulting from this policy change is a

one-time event. Additionally, expenses for corporate insurance, resulting from increased coverages and insurance rates, and technology applications for the nine months ended September 30, 2024 increased over the same period of 2023.

Legal and professional fees. Legal and professional fees were $14.7 million for the nine months ended September 30, 2024 compared to $28.5 million for the same period of 2023. The decrease in legal and professional fees was principally related to a reduction in legal expenses associated with stockholder matters that occurred during the prior year.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $13.7 million for the nine months ended September 30, 2024 compared to $10.9 million for the nine months ended September 30, 2023. The increase is principally due to additional depletion expense associated with royalty interests acquired in August 2024 and additional amortization expense associated with intangible assets acquired in August 2023 and August 2024.

Other income, net. Other income, net was $31.2 million and $20.2 million for the nine months ended September 30, 2024 and 2023, respectively. The increase in other income, net was primarily related to increased interest income earned on our cash balances during the nine months ended September 30, 2024 resulting from higher cash balances and interest rates during the period. Additionally, during the nine months ended September 30, 2024, we received $1.9 million of proceeds from a settlement with a title company regarding a defect in title to property acquired in a prior year.

Total income tax expense. Total income tax expense was $92.2 million and $79.9 million for the nine months ended September 30, 2024 and 2023, respectively. The increase in income tax expense was primarily related to increased operating income resulting from increased consolidated revenues.

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 14, “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 results of operations for the three and nine months ended September 30, 2024 continued to benefit from activity in the Permian Basin. Our oil and gas royalty revenues increased for the three and nine months ended September 30, 2024 due to increased royalty production. Additionally, revenues derived from water sales and produced water royalties for the three and nine months ended September 30, 2024 were also positively impacted by our active management of our surface and royalty interests in recent years.

For the Three Months Ended September 30, 2024 as Compared to the Three Months Ended September 30, 2023

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


	Three Months Ended September 30,
	2024				2023
Revenues:
Land and resource management:




Oil and gas royalties	$	94,444	54	%	$	87,102	56	%
Easements and other surface-related income	11,303		7	%	17,425		11	%
Land sales	901		—	%	5,406		3	%
Total land and resource management revenue	106,648		61	%	109,933		70	%

Water services and operations:
Water sales	36,211		21	%	26,422		17	%
Produced water royalties	27,727		16	%	20,849		13	%
Easements and other surface-related income	2,977		2	%	763		—	%
Total water services and operations revenue	66,915		39	%	48,034		30	%
Total consolidated revenues	$	173,563	100	%	$	157,967	100	%

Net income:
Land and resource management	$	71,870	67	%	$	82,884	79	%
Water services and operations	34,724		33	%	22,690		21	%
Total consolidated net income	$	106,594	100	%	$	105,574	100	%

Land and Resource Management

Land and Resource Management segment revenues decreased $3.3 million to $106.6 million for the three months ended September 30, 2024 as compared to the same period of 2023. The decrease in Land and Resource Management segment revenues was related to a $6.1 million decrease in easements and other surface-related income and a $4.5 million decrease in land sales, partially offset by a $7.3 million increase in oil and gas royalty revenue for the three months ended September 30, 2024 compared to the same period of 2023.

Oil and gas royalties. Oil and gas royalty revenue was $94.4 million for the three months ended September 30, 2024 compared to $87.1 million for the three months ended September 30, 2023, an increase of $7.3 million. Our share of production increased to 28.3 thousand barrels of oil equivalent (“Boe”) per day for the three months ended September 30, 2024 compared to 21.8 thousand Boe per day for the same period of 2023. The average realized price decreased 16.2% to $38.04 per Boe for the three months ended September 30, 2024 from $45.41 per Boe for the three months ended September 30, 2023.

The financial and operational data by royalty stream is presented in the table below for the three months ended September 30, 2024 and 2023:


	Three Months Ended September 30,
	2024		2023
Our share of production volumes (1):
Oil (MBbls)	1,046		850
Natural gas (MMcf)	4,654		3,316
NGL (MBbls)	779		606
Equivalents (MBoe)	2,600		2,009
Equivalents per day (MBoe/d)	28.3		21.8

Oil and gas royalty revenue (in thousands):
Oil royalties	$	75,427	$	66,892
Natural gas royalties	4,201		8,479
NGL royalties	14,816		11,731
Total oil and gas royalties	$	94,444	$	87,102

Realized prices:
Oil ($/Bbl)	$	75.53	$	82.45
Natural gas ($/Mcf)	$	0.98	$	2.76
NGL ($/Bbl)	$	20.57	$	20.91
Equivalents ($/Boe)	$	38.04	$	45.41

*(1)*Commonly used definitions in the oil and gas industry not previously defined: 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 $11.3 million for the three months ended September 30, 2024, a decrease of $6.1 million compared to $17.4 million for the three months ended September 30, 2023. 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 decrease in easements and other surface-related income was principally related to decreases of $3.4 million in pipeline easements and $2.3 million in wellbore easements for the three months ended September 30, 2024 compared to the same period of 2023. 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, 2024.

Net income. Net income for the Land and Resource Management segment decreased 13.3% to $71.9 million for the three months ended September 30, 2024 compared to $82.9 million for the three months ended September 30, 2023. Segment operating income decreased $13.1 million for the three months ended September 30, 2024 compared to the same period of 2023, driven by a $6.6 million increase in legal and professional fees and a $3.3 million decrease in segment revenues. Expenses are discussed further above under “Results of Operations - Consolidated.”

Water Services and Operations

Water Services and Operations segment revenues increased 39.3% to $66.9 million for the three months ended September 30, 2024 as compared to revenues of $48.0 million for the same period of 2023. The increase in Water Services and Operations segment revenues was principally due to an increase of $9.8 million in water sales revenue and $6.9 million in produced water royalties. 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, fluctuate from period to period based upon those decisions and activity levels.

Water sales. Water sales revenue increased $9.8 million to $36.2 million for the three months ended September 30, 2024, compared to the same period of 2023. The growth in water sales was principally due to an increase of 32.1% in water sales volumes for the three months ended September 30, 2024, compared to the same period of 2023.

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 salt water disposal wells. Produced water royalties were $27.7 million for the three months ended September 30, 2024 compared to $20.8 million for the same period in 2023. This increase was principally due to increased produced water volumes for the three months ended September 30, 2024 compared to the same period of 2023.

Net income. Net income for the Water Services and Operations segment was $34.7 million for the three months ended September 30, 2024 compared to $22.7 million for the three months ended September 30, 2023. Segment operating income increased $13.5 million for the three months ended September 30, 2024 compared to the same period of 2023. The increase was principally due to the $18.9 million increase in segment revenues, partially offset by the $3.2 million increase in water service-related expenses. Expenses are discussed further above under “Results of Operations - Consolidated.”

For the Nine Months Ended September 30, 2024 as Compared to the Nine Months Ended September 30, 2023

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


	Nine Months Ended September 30,
	2024				2023
Revenues:
Land and resource management:




Oil and gas royalties	$	276,377	54	%	$	258,644	56	%
Easements and other surface-related income	43,643		8	%	49,826		11	%
Land sales	2,145		—	%	6,806		1	%
Total land and resource management revenue	322,165		62	%	315,276		68	%

Water services and operations:
Water sales	113,987		22	%	85,799		19	%
Produced water royalties	76,034		15	%	61,824		13	%
Easements and other surface-related income	7,853		1	%	2,039		—	%
Total water services and operations revenue	197,874		38	%	149,662		32	%
Total consolidated revenues	$	520,039	100	%	$	464,938	100	%

Net income:
Land and resource management	$	232,970	69	%	$	217,860	74	%
Water services and operations	102,630		31	%	74,675		26	%
Total consolidated net income	$	335,600	100	%	$	292,535	100	%

Land and Resource Management

Land and Resource Management segment revenues were $322.2 million for the nine months ended September 30, 2024 compared to $315.3 million for the comparable period of 2023. The increase in Land and Resource Management segment revenues was principally due to the $17.7 million increase in oil and gas royalty revenue, partially offset by decreases of $6.2 million and $4.7 million in easements and other surface-related income and land sales, respectively, for the nine months ended September 30, 2024 compared to the same period of 2023.

Oil and gas royalties. Oil and gas royalty revenue was $276.4 million for the nine months ended September 30, 2024 compared to $258.6 million for the nine months ended September 30, 2023, an increase of $17.7 million. Oil and gas royalties

for the nine months ended September 30, 2023 included an $8.7 million recovery with an operator with respect to unpaid oil and gas royalties for older production periods. Excluding the impact of the $8.7 million recovery on 2023 revenue, oil and gas royalties for the nine months ended September 30, 2024 increased $26.4 million over the nine months ended September 30, 2023 due to higher production volumes and average oil and NGL realized prices over the same periods. Our share of production increased to 26.0 thousand Boe per day for the nine months ended September 30, 2024 compared to 22.6 thousand Boe per day for the same period of 2023. The average realized prices decreased to $40.60 per Boe for the nine months ended September 30, 2024 from $42.49 per Boe for the same period of 2023.

The table below provides financial and operational data by royalty stream for the nine months ended September 30, 2024 and 2023:


	Nine Months Ended September 30,
	2024		2023 (1)
Our share of production volumes:
Oil (MBbls)	3,003		2,642
Natural gas (MMcf)	12,312		10,405
NGL (MBbls)	2,073		1,784
Equivalents (MBoe)	7,128		6,160
Equivalents per day (MBoe/d)	26.0		22.6

Oil and gas royalty revenue (in thousands):
Oil royalties	$	222,788	$	193,969
Natural gas royalties	13,630		$	23,210
NGL royalties	39,959		$	32,800
Total oil and gas royalties	$	276,377	$	249,979

Realized prices:
Oil ($/Bbl)	$	77.68	$	76.88
Natural gas ($/Mcf)	$	1.20	$	2.41
NGL ($/Bbl)	$	20.84	$	19.88
Equivalents ($/Boe)	$	40.60	$	42.49

*(1)*The metrics and dollars provided for the nine months ended September 30, 2023 exclude the impact of the $8.7 million settlement of oil and gas royalties discussed above.

Easements and other surface-related income. Easements and other surface-related income was $43.6 million for the nine months ended September 30, 2024, a decrease of $6.2 million compared to $49.8 million for the nine months ended September 30, 2023. 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 decrease in easements and other surface-related income is principally related to a decrease of $4.7 million in wellbore easements for the nine months ended September 30, 2024 compared to the same period of 2023. 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, 2024.

Land sales. Land sales were $2.1 million and $6.8 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, we sold 91 acres of land for an aggregate sales price of $2.1 million. For the nine months ended September 30, 2023, we sold 18,061 acres of land for an aggregate sales price of $6.8 million.

Net income. Net income for the Land and Resource Management segment increased $15.1 million to $233.0 million for the nine months ended September 30, 2024 compared to $217.9 million for the nine months ended September 30, 2023.

Segment operating income increased $14.3 million for the nine months ended September 30, 2024 compared to the same period of 2023, largely driven by a $13.7 million decrease 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 32.2% to $197.9 million for the nine months ended September 30, 2024 as compared to revenues of $149.7 million for the same period of 2023. The increase in Water Services and Operations segment revenues was 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, fluctuate from period to period based upon those decisions and activity levels.

Water sales. Water sales revenue increased $28.2 million, or 32.9% to $114.0 million for the nine months ended September 30, 2024 compared to the same period of 2023. The growth in water sales was principally due to an increase of 27.6% in water sales volumes for the nine months ended September 30, 2024 compared to the same period of 2023.

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 $76.0 million for the nine months ended September 30, 2024 compared to $61.8 million for the comparable period of 2023. This increase in produced water royalties was principally due to increased produced water volumes for the nine months ended September 30, 2024 compared to the same period of 2023.

Easements and other surface-related income. Easements and other surface-related income was $7.9 million for the nine months ended September 30, 2024, an increase of $5.8 million compared to $2.0 million for the nine months ended September 30, 2023. The increase in easements and other surface-related income primarily related to an increase in temporary permits for sourced water lines for the nine months ended September 30, 2024 compared to the same period in 2023.

Net income. Net income for the Water Services and Operations segment was $102.6 million for the nine months ended September 30, 2024 compared to $74.7 million for the nine months ended September 30, 2023. Segment operating income increased $30.1 million for the nine months ended September 30, 2024 compared to the same period of 2023. The increase was principally due to a $48.2 million increase in segment revenues, partially offset by a $12.3 million increase in water service-related expenses. Expenses are discussed further above under “Results of Operations - Consolidated.”

Non-GAAP Performance Measures

In addition to amounts presented in accordance with 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 expense, 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 plus employee share-based compensation. Its purpose is to highlight earnings without non-cash activity such as share-based compensation and other non-recurring or unusual items, if applicable. 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 EBITDA, 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, 2024 and 2023 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net income	$	106,594	$	105,574	$	335,600	$	292,535
Add:
Income tax expense	28,823		29,363		92,243		79,894
Depreciation, depletion and amortization	5,762		3,584		13,695		10,881
EBITDA	141,179		138,521		441,538		383,310
Add:
Employee share-based compensation	2,935		2,502		7,855		7,217



Adjusted EBITDA	144,114		141,023		449,393		390,527
Less:


Current income tax expense	(27,416)		(29,724)		(90,080)		(80,928)
Capital expenditures	(9,833)		(5,243)		(21,994)		(10,387)
Free Cash Flow	$	106,865	$	106,056	$	337,319	$	299,212

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 2023 Annual Report filed with the SEC on February 21, 2024.

There have been no material changes to our critical accounting policies or in the estimates and assumptions underlying those policies, from those provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2023 Annual Report.

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.

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