Texas Pacific Land Corporation (TPL)

[Enterprising Investor]

Dallas company trying to go out of business since 1888 is one of world's hottest stocks (10/11/16)

Will Deener

My timing was slightly off two years ago when I sang the praises of a bizarre little Dallas company.

I was smitten by Texas Pacific Land Trust in September 2014. Its stock price had taken flight, jumping from $40 a share to $200 — not bad for a company with just eight employees and some scruffy land in a remote area of West Texas. But almost from the day my column appeared, the stock price began a wicked descent and didn't stop dropping for four months until 50 percent of its market capitalization had vaporized.

I guess my timing was more than slightly off, but in my defense the stock has since recovered that loss and then some. In fact, Texas Pacific is one of the hottest stocks on the planet with a gain of 98 percent this year. Its shares began the year priced at $130 and closed Friday at about $258 — yowzer.

Since first learning about Texas Pacific more than a decade ago, I've remained enthralled. For starters, it has been trading on the New York Stock Exchange for more than 100 years, but few people have ever heard of it. It languishes in obscurity with no analysts' coverage, few shareholders and little trading volume.

And that's not even the weirdest part of this story. Texas Pacific has been trying to go out of business since its formation. The company was created in 1888 after the bankruptcy of the Texas Pacific Railway Co.

The railroad had previously sold bonds to finance construction of a westward line to connect with the Southern Pacific at Sierra Blanca in far West Texas. The railroad secured those bonds with land — about 3 million acres — that the state of Texas granted it as an inducement for the railroad to build the line.

After the railroad was built, floods in Louisiana and crop failures in Texas forced the railroad into bankruptcy. The land was placed into a trust — the Texas Pacific Land Trust — and three trustees were appointed to manage it. When the trust was formed, the bondholders exchanged their bonds for shares in the trust, and those shares have been trading on the Big Board ever since.

128 years

The mandate of the trustees is to sell the land, repay the shareholders and liquidate the trust, but there is no timetable attached to that mandate. Today the trust owns about 909,000 acres in the oil-rich Permian Basin of West Texas.

The current general agent for Texas Pacific, David Peterson, was unavailable for comment, but he previously explained to me that while the company is continually selling land, it also has a fiduciary duty to shareholders to do it in a way that is most beneficial to them.

This means when crude oil and natural gas prices are rising, land values also increase, and the trust might sell more land. Conversely, when energy prices decline, the trust sells fewer acres. This has been going on for 128 years and will probably continue for another 128.

Last year, Texas Pacific reported revenue of $79.4 million and net income of $50 million, a 44 percent increase from the previous year. Land sales accounted for about a third of the revenue with the remainder coming from oil and gas royalties and easements.

Earlier this year, when I noticed the company's stock price recovering, I presumed that it was because crude oil prices had rebounded in recent months from about $30 a barrel to almost $50. While that accounted for some stock price appreciation, the biggest spike has come in the last month.

The catalyst was the Sept. 7 announcement by Houston-based Apache Corp. of a significant discovery of oil and gas reserves in the southern portion of the Delaware Basin in Reeves County in West Texas. This is smack dab in the wheelhouse of Texas Pacific Land Trust.

If the reserves are as significant as Apache believes, it should bring renewed drilling activity and infrastructure to this remote area, said Eric Marshall, head of research for Dallas-based Hodges Capital Management, one of the largest shareholders of Texas Pacific stock.

"This area was drilled out in the late 1990s and none of the wells came in very good," Marshall said. "But with new directional drilling technology, supposedly it is going to unlock tremendous reserves."

A stock to hold on to

This makes Texas Pacific land more valuable and also increases revenue from royalties. Marshall said investor speculation that these reserves will bring a windfall of royalties for Texas Pacific is driving the stock now.

The company also uses some of its cash each year to buy back shares, which makes the remaining shares more valuable. A few years ago, there were 10 million shares outstanding, but that has declined to 7.9 million.

I asked Marshall if his company will take profits and reduce its stake in Texas Pacific in the wake of such a huge runup. He expects Hodges Capital to continue to hold a sizable slug of the shares for years to come.

"It's like owning ranch land and sitting back and participating in the royalties, easement income and potential increase in the value of the land," Marshall said. "Don Hodges [the founder of Hodges Capital] always said this was a stock you hold for your grandchildren."

http://www.dallasnews.com/business/personal-finance/2016/10/11/texas-pacific-land-trust-trying-go-business-since-1888