Texas Pacific Land Corporation (TPL)

[Enterprising Investor]

How a sleepy Texas trust turned into Permian oil proxy war (5/23/19)

Jordan Blum

The Texas Pacific Land Trust was formed in the late 19th century to hold and manage millions of acres left after a cross-country railroad went bust. A large amount of that land, it turned out, was in the heart of what we now know as the Permian Basin.

Those holdings in the fastest-growing oil and gas basin in the world has vaulted the value of the trust from $300 million in 2012 to nearly $7 billion today, ranking its shares among the best performing on Wall Street. They also have made Texas Pacific the focal point of what is arguably the fiercest shareholder battle in the energy sector.

The trust, headquartered in Dallas, has an unusual structure dating back to the 1880s, with a board operated by just three trustees who serve lifetime appointments. One of the three died in March, creating a rare opportunity for hedge fund investors to launch a proxy fight to pick the next trustee. Their stated goal: Transform the trust into a traditional corporation with a larger board and modern governance practices to run what has essentially become an oil company.

The trust’s leadership, however has balked, arguing that most shareholders have held the stock for generations, enjoying steady dividend checks, but now fearing that conversion to a corporation could lead to its sale. Both sides have accused each other of conflicts of interest and questioned motivations as the fight has become more heated and personal.

The 130-year-old Texas Pacific Land Trust is the result of a failed railroad that was planned to stretch from Texas to California. Construction was ceased just east of El Paso, leading to the formation of the trust to manage the railroad’s 3.5 million acres and slowly sell off the land. About 900,000 acres — mostly in the Permian — remain.

“If we were debating 900,000 acres on the surface of the moon, we wouldn’t be having these conversations,” said Eric Oliver, the opposition trustee candidate who runs the Abilene mineral royalties hedge fund SoftVest LP. “But we’re talking about 900,000 acres of arguably the lowest cost for barrel of oil in the world, so the stakes are much higher.”

The contest was expected to come to a head on June 6 with an already delayed shareholders’ vote for the next trustee. But that vote was put on hold indefinitely Tuesday when the trustees sued Oliver, accusing him and his allies of federal securities laws violations for making false and misleading statements to investors.

The opposition, in turn, has accused the trustees of tampering with the integrity of the corporate voting system through multiple delays. On Wednesday, the dissident shareholders met and declared Oliver the new trustee, although Texas Pacific said it adamantly disputes the claim.

Two sides of story

The companies operating on the trust’s land are some of the industry’s top oil producers, including the California energy major Chevron and Houston firms EOG Resources, Apache Corp., Anadarko Petroleum and Occidental Petroleum, which is now in the middle of acquiring Anadarko for $38 billion.

With the Permian accounting for about one-third of the nation’s crude oil production, the trust has made more land deals in recent years and, in 2017, started a business to provide water services to the oil sector, including sales, disposal and recycling.

The proxy fight is led by the New York investment firm Horizon Kinetics, which owns more than 23 percent of the trust after slowly building its stake over 25 years, and SoftVest, which holds nearly 2 percent. It began after longtime trustee Maurice Meyer III died in March at age 84. Both his father and grandfather had served as trustees as well.

After Oliver was picked as the nominee by the shareholder activists, Texas Pacific nominated Houston real estate executive Preston Young, but investors balked, citing Young’s inexperience in both oil and gas and corporate governance. Texas Pacific withdrew Young’s nomination and hired a search firm, eventually selecting Donald Cook, a retired Air Force four-star general who was a commander of Randolph Air Force Base near San Antonio. After his military retirement in 2005, he served on boards of major corporations such as Burlington Northern Sante Fe railroad and the USAA Federal Savings Bank.

The trust also hired a public relations firm and proxy contest lawyers, paid for advertisements in support of Cook, and launched a website, TrustTPL.com, to state the case for keeping the trust intact.

Kai Liekefett, Texas Pacific Land Trust’s attorney, blamed the proxy fight on the rise of investor activists — the hedge funds and other large investors who take large stakes in companies and pressure management to take steps to boost share prices. The hedge funds, he said, are interested in selling the water business or even the entire trust to reap a short-term financial windfall.

“It makes perfect sense for them. It may not make sense for the other 75 percent of shareholders who enjoy the out-performance and ongoing appreciation,” said Liekefett, who recently represented financially struggling Luby’s in the Houston restaurant operator’s fight against a hedge fund. “This is not mere luck. This is the result of very seasoned and strategic leadership.”

The opponents, however, argue that much of that “out-performance” is indeed luck, a matter of location and the drilling successes of the companies leasing the Permian acreage. “Being dealt a royal flush does not make one a good poker player,” they contend.

Horizon Kinetics general counsel Jay Kesslen emphasized his firm has invested in the trust for 25 years and isn’t looking for a quick buck.
“This is really an election about the best corporate governance,” Kesslen said. “There is no precedent anywhere in the world for a trust of this value to be led by trustees with lifetime appointments.”

Glass Lewis and Institutional Shareholders Services, the two leading shareholder advisory firms on proxy fights, recently concluded that Texas Pacific needs reform, but Cook represents the best choice because of his experience and his apparent willingness to push for change. Cook has agreed to stand for re-election in three years and advocate for quarterly investor calls and management meetings, as well as greater disclosures of the drilling and royalty activity, the advisory services said.

Which sounds a lot like the proposals made by dissident shareholders, Oliver said — except for his nomination.

“They agreed with us on pretty much every point,” Oliver said. “I just wasn’t cute enough to win the beauty contest.”

A storied history

Formed in 1888 — more than a decade decade before the Spindletop oil discovery in 1901 — the Texas Pacific Land Trust initially served as a self-liquidating real estate trust, generating steady cash through occasional land sales, leases, grazing fees and, eventually, oil royalties. The trust grew out of the Texas Pacific Railway Co., formed through a federal charter in 1871 to build a railroad system from East Texas to San Diego.

At the time, railroad companies received federal land grants in exchange for laying tracks.

The construction made it across Texas, but because of various construction delays and financing woes, the company went bankrupt. Bondholders who financed the railroad received 3.5 million acres granted to Texas Pacific. They created a trust and later in 1927 — after oil was discovered in the Permian — began listing its certificates of trust on the New York Stock Exchange in the form of shares.

In 1962, Texaco — now Chevron — bought the mineral rights to about 2 million of the acres, helping establish Chevron’s now-leading oil and gas position in the Permian. The trust kept most of the surface rights and still owns oil and gas royalty interests in nearly 500,000 other acres.

With the Permian booming again, Texas Pacific is more active, leasing land, making acreage swaps and even buying an occasional swatch of property. The creation of the water business meant hiring dozens of new employees. And the trustees finally had their pay increased from $2,000 per year — it hadn’t changed since 1888 — to $104,000 to account for inflation and a bit more.

“Times change,” Kesslen said. “It’s very clearly an operating company and no longer just a liquidating trust.”

https://www.houstonchronicle.com/business/energy/article/How-a-sleepy-Texas-trust-turned-into-Permian-oil-13877207.php?cmpid=gsa-chron-result

The article link provides a picture of T&P 638.

It's surviving 2-10-4 sibling can be seen at the Texas State Railroad in Palestine, Texas. The name Amon G. Carter has been added to its tender.

https://en.wikipedia.org/wiki/Texas_and_Pacific_610#/media/File:Texas_and_Pacific_Locomotive.jpg

I also know a thing or two about railroads, both real and in model, from around the world. My late-father left me an operating layout and hundreds of pieces of locomotives and rolling stock including 2-10-4s from US railroads.