Texas Pacific Land Corporation 2026 Q2 Earnings Call

Please go ahead. Thank you for joining us today for Texas Pacific Land Corporation second quarter 2026 earnings conference call.

Yesterday afternoon, the company released its financial results and filed its Form 10-Q with the Securities and Exchange Commission, which is available on the investor section of the company's website at www.texaspacific.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our recent SEC filings. During this call, we'll also be discussing certain non-GAAP financial measures.

More information and reconciliations about these non-GAAP financial measures are contained in our earnings release and SEC filings. Please also note, we may at times refer to our company by its stock ticker, TPL. This morning's conference call is hosted by TPL's Chief Executive Officer, Ty Glover, TPL's Chief Financial Officer, Chris Steddum, and Executive Vice President of Texas Pacific Water Resources, Robert Crain. Management will make some prepared comments, after which we'll open the call for questions. I will turn the call over to Ty.

Good morning, everyone, thank you for joining us today. This quarter, we delivered exceptional results across major financial and operating metrics and achieved significant milestones towards key growth initiatives. TPL generated record quarterly total revenue, net income, and free cash flow. These results were supported by record oil and gas royalty production and produced water royalty volumes. Oil and gas royalty production averaged approximately 39,700 barrels of oil equivalent per day, up 7% sequentially and 20% year-over-year. In addition, our unhedged royalty position allowed us to benefit fully from the strong oil price environment. Produced water royalty volumes were 4.9 million barrels per day during the quarter, which represents growth of 6% sequentially and 15% year-over-year, driven by strong demand for TPL's in-basin and out-of-basin pore space.

Water sales volumes of 663,000 barrels per day represents a 19% decline sequentially and a 38% increase year-over-year. Second quarter water sales volumes have been impacted by weak in-basin natural gas prices as operators have shifted some development away from the Delaware Basin. Substantial new gas pipeline capacity enters service over the next few quarters, and we would expect some mix shift towards the Delaware as local in-basin gas price differentials improve. For SLEM, revenues of $24 million, which represents a 37% sequential increase, were driven by strong performance for pipeline and wellbore easements. With respect to our data center and power generation efforts, we disclosed that a previously announced land sale and water supply agreement was related to Project Kilby, which is a large-scale power generation facility Chevron is developing to support a customer data center in Reeves County, Texas.

This multi-gigawatt power and data center development represents a substantial commitment by some of the largest energy and technology companies in the world, this validates the Permian as an attractive data center infrastructure hub capable of accommodating hyperscale facilities. In addition, during the quarter, we acquired over 10,000 acres of land in Shackelford and Jones County, Texas, for approximately $100 million. This region is amongst the fastest-growing data center regions in the country, this acquisition further expands our strategic data center and power generation efforts beyond the immediate Permian Basin. This land was attractive due to its contiguousness, land and water resources, access to natural gas and grid infrastructure, established fiber, proximity to a mid-size city. We are also progressing on a number of projects with various high-quality hyperscalers and AI labs, which also includes our joint effort alongside Bolt Data and Energy.

Deal execution requires extensive work involving many counterparties and thorough, wide-ranging diligence, our conversations revolve around multiple verticals such as land, water, aggregates, and other aspects. West Texas is rapidly becoming a dominant global hub for power and compute, it's apparent that developers and customers remain keenly motivated to expand their power and compute footholds in the regions. We will be able to provide more specific details as our commercial efforts turn into executed agreements. Turning to our produced water desalination efforts, we have completed construction and commenced commissioning on our desalination facility located in Orla, Texas, which we refer to as Phase 2B. Eventually ramping the facility to its 10,000-barrel-a-day capacity will allow us to demonstrate that produced water desalination can work at scale.

Our desalination effort leverages our patented freeze desalination process, where we also have equipment exclusivity for oil and gas applications with one of the country's leading providers of industrial-scale process cooling solutions. In addition, this year, we will be implementing various desalination co-location studies. Our freeze desalination process will generate large volumes of ice and chilled water, which then could potentially be used by data centers for chip cooling. We are also investigating the utilization of waste heat recovery equipment to enhance our desalination process and reduce our energy consumption. There's also additional optionality to monetize both the high spec freshwater and concentrated brine output streams from the facility.

Desalinated produced water represents an interesting opportunity as it is not part of the hydrologic cycle, and thus, high spec desalinated fresh water could meet standards for irrigation, industrial cooling, rangeland rehabilitation, stream flow augmentation, and data center cooling, thereby reducing demands on existing local water resources. The concentrated brine may also enhance economics of produced water valorization by extracting valuable minerals such as lithium. We are excited to finally have completed construction on our Phase 2 facility as produced water desalination at scale could help significantly reduce traditional injection demands. In addition, energy supermajors and large independents, hyperscalers and AI labs have shown strong interest related to the commercial and operational opportunities related to co-location and output water streams.

Our Orla Phase 2 facility will provide interested parties with a tangible real-world exhibit of how we can turn an oil field waste product into something with highly positive commercial and environmental attributes. We look forward to providing more updates in the coming quarters as we operate the facility and as business discussions advance. With that, I will hand the call over to Chris.

Thanks, Ty. Consolidated revenues during the second quarter 2026 were approximately $246 million. This represents a quarterly all-time high, as well as a 4% sequential increase and a 31% increase year-over-year. Consolidated adjusted EBITDA was $216 million, which was up 19% sequentially and 30% year-over-year. Our adjusted EBITDA margin for the quarter was 88%. Free cash flow was $156 million, which was up 14% sequentially and up 20% year-over-year. Moving to our well inventory, as of quarter end, TPL had 5.6 net permitted wells, 9.5 net drilled but uncompleted wells, or commonly referred to as DUCs, and 3.4 net completed but not producing wells. That amounts to 18.4 net line of sight wells. Year to date, capital expenditures were $29 million.

As Ty discussed, in the second half of this year, we will be spending capital to investigate co-location cooling and waste heat capture opportunities at our Orla Phase 2B desalination facility. This spend was embedded in our original CapEx guidance at the beginning of the year, and we reaffirm the fiscal year guide of $65 million-$75 million. With that operator, we will now take questions.