Nathan Worden's avatar
$332.5m follower assets
Compound Collaboration, Month #21 — Texas Pacific Land
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

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Performance from the first 20 months:
‌‌Month #1 Aug 2020: $ARKK -42%
Month #2 Sep 2020: $ARKG -44%
Month #3 Oct 2020: $BTC.X +223%
Month #4 Nov 2020: $BTC.X +105%
Month #5 Dec 2020: $NVDA +42%
Month #6 Jan 2021: $VT +2%
Month #7 Feb 2021: $PACB -78%
Month #8 Mar 2021: $TSM -15%
Month #9 Apr 2021: $KLIC -9%
Month #10 May 2021: $TTD -15%
Month #11 Jun 2021: $ETH.X +34%
Month #12 Jul 2021: $ETH.X +25%
Month #13 Aug 2021: $ROKU -74%
Month #14 Sept 2021: $ETH.X -4%
Month #15 Oct. 2021: $RBLX -59%
Month #16 Nov. 2021: $APPS -51%
Month #17 Dec. 2021: $VMEO -43%
Month #18 Jan. 2022: Cash 0%
Month #19 Feb. 2022: $OPEN -15%
Month #20 Mar 2022: $RRC +11%

Total portfolio return: -1.02%

Return if every month I had just bought the S&P 500: +2.69%

Well this is humbling

For the first time, the total value of the portfolio has now gone negative— meaning if I needed to withdraw the money today, I would have been better off saving.

Fortunately, my kids aren't even born yet so I don't need the money today. Hopefully this memo will be a humorous stop along the journey. We shall see.

Many years from now, I hope my kids will get the chance to read this and take away the following lessons:

  • After 20 months of building this portfolio, all the work that has gone into it has cost me 1.02%. This illustrates the argument for putting your money into an S&P 500 index and calling it a day. It's way less work, and you may just come out ahead in the long run.
  • In the short term, you never know where the stock market is going to go, especially individual stocks.
  • 1-2 years is considered "short term." Investing really is played on long time-horizons.
  • Expect to be wrong a lot in investing. So far 12 of the 20 picks I've made have lost money. My hit rate at the moment is 35%.

Things may keep getting worse before they get better. The extremely long time horizon intended for this portfolio allows me to sit tight. It's not fun to be down vs. the S&P 500 or in general, but for now, it's one stop along the way.

This month's addition:

Texas Pacific Land
Ticker: $TPL
Market Cap: 10.66B
Should tip the hat to Horizon Kinetics who have been big believers in $TPL for a long time (decades).

Texas Pacific land started out as a railroad 1871. The idea for the railroad was to connect West Texas with the coast of California. A federal charter granted land to the company for every mile of railroad it built. The company earned three and a half million acres of West Texas land from building the railroad. But guess how many people lived in West Texas in 1871? Pretty much no one! So the railroad went out of business— but the company still owned all that sweet land. So the Texas Pacific Land Trust was formed to manage the land, which it would sell and then return the money to owners of the trust certificates. In 1920, they stopped selling the land because, you guessed it: they discovered oil. Texas Pacific sold over 75% of its original landholdings. But even after all that, it is still the largest landowner in Texas. The remaining land is in the Permian basin of west Texas, the most productive oil field in the world right now. Texas Pacific now leases its land to oil companies and collects royalties from them.

Investable Attributes
  • The Dividend payout ratio is about 65%. Part of the thesis is that this will increase.
  • The company doesn't have any debt. It doesn't need to take in capital to grow.
  • It's all about the royalties. They are the biggest catalyst going forward for dividend growth. They don't have to drill the traditional oil. Companies lease land from Texas Pacific and pay them about a one 16th of royalty on the oil they extract, not to mention any water, right usage and other usages.
  • Texas Pacific's gross margin is always close to 100% EBIT and EBITDA margins are usually around mid 90%.
  • Free cashflow margins can run the high sixties, but in recent years this has dipped down into the low forties.
  • Texas Pacific has great operational leverage to rising oil prices and with no need to retain cash, the company returns the bulk of it to us, the shareholders.

Another part of the thesis is that in January 2021 Texas Pacific Land went from being a Trust to a Corporation. The reason this is important is that as a trust, $TPL was not part of the 'investable universe' for a lot of funds and ETFs. Now that it's a corporation, many more entities have access to invest in it.

The Main Thesis:
Texas Pacific Land is a way to get exposure to the price of oil without all the operational execution risk of an oil company. If the price of oil goes up, more oil companies will want to drill on $TPL's land, and the more royalties they will be able to collect.

I think oil demand will stay strong for years, and even in a world where we move primarily to renewables, there will still be a lot of uses for oil in the making of solar and renewable energy infrastructure. Even if oil prices stay where they are now, Texas Pacific is going to be highly profitable and flush with a ton of cash to return to shareholders.

Texas Pacific's estimates that the breakeven oil price for the bulk of their reserves is about $40 per barrel. If the price of oil stays above $40, Texas Pacific should see increased drilling activity on their land and increased revenue growth.

Now, oil reserves are a declining asset. One day Texas Pacific's oil reserves will be gone, or at least only economically viable with a really high price of oil. Right now, Texas Pacific projects that they have 19 years of reserves at a $40 per barrel breakeven price.

  • Oil Prices decline below $40 a barrel.
  • $TPL's reserves are depleted quicker than the expected 19 years

Things that aren't as big of a risk as people think
  • A fracking ban — fracking bans usually only apply to public land owned by the government. Texas Pacific land is private land. They own it and they can do what they want with it. And with their mineral rights, they would not be effected by a fracking ban. They'd actually be affected positively because other sites going offline means $TPL's resources are more valuable.
  • Electric vehicles — The expectation is the electric vehicle will cause oil demand to fall off a cliff. Today EVs are an expensive niche product. They are a small percentage of total auto sells. If EV sales were to double, they'll still only account for less than 10% of all automobile cells. We need a step change in battery technology to bring the cost per vehicle down and to increase our range, to make it a daily driver for the average person. Personally, I hope this happens, but I think it will take longer than most people anticipate. I'm assuming that in the medium term oil demand will go up, and in the longer term (30 years) oil demand will remain relatively flat.

Here's my trade— bought at $1,390. Currently at $1,366.

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Nathan Worden's avatar
Noticing some other Commonstock users who hold Texas Pacific Land. Nick Rasmussen @nras00 has been holding for 564 days and Ram V @sirthroedness for 409 days, impressive! Would love to hear ya'lls thesis as well.

Same with @joryko — how long have you been holding $TPL and what's your main motivation for holding?
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Josh Kohn-Lindquist's avatar
@nathanworden I think I’ve been holding $TPL for about 2 years.

As for my thesis, you pretty much nailed it already. Unique oil play based on royalties and barely any operating costs. Wanted some oil exposure and this felt the safest, with tangible land being owned.

As management continues to buy back shares each quarter, it feels like the last person standing (holding shares and collecting increasing dividend payments over the next decade) will see those shares appreciate tremendously.

Rarely can you look at past price performance as an indicator for a stocks future, but I think in TPL’s case you can — and it’s 10-year total return is 2,400%.
Rick Gurner's avatar
Texas Pacific Land is slowly, but very profitably, going out of business.

Until the day they run out of reserves, pretty much all their cash will go towards buybacks and dividends. Management is not interested in any crazy acquisitions or sudden moves. Slow and steady.

Main risk is oil prices. Other than that, this one should do fine for the next 19 years.
Conor's avatar
@rick_gurner I’ve never read such a dire positive outlook on a company before lol
Nathan Worden's avatar
@conorvalue same 😅 Such a poetic way to put it!