Texas Pacific Land: What I Learned Wintering In Florida - 'Sanibel Stoop,' 'Marco Midnight,' And 'Trustee For Life'
Apr. 25, 2019 5:43 AM•TPL
Summary
Only four shareholder meetings in 30 years? Really?
The three decision makers are elected 'until their death, resignation or disqualification.'
The current proxy fight will determine the future of the business and, in my opinion, the dissenters have the better plan.
One mammoth attribute of being “mostly” retired is the new-found availability to spend the winter months soaking up the sun in southern climes. As a proverbial “snowbird” just because beaching becomes a priority does not mean I stop learning new things about investments and this winter has been no different. Not only did I learn a few phrases, I learned of a new “company” oversight position.
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World’s Record for Most Simultaneous Sanibel Stoops
Some of the new things I learned over the past few months include the “Sanibel Stoop” and “Marco Island Midnight.” For those who may be as curious as I, the “Sanibel Stoop” is the physical position taken by beach walkers and shellers alike. It is the posture taken by bending at the waist and stooping over to collect shells from the sand. On Feb 17, 2012, Sanibel Island, Florida, set the Guinness Book of World Records for the most simultaneous Sanibel Stoopers. As described in the local paper at the time, over 700 “hovering hineys” set the record on that day. I also learned this winter that on Marco Island, Florida, 9:00 pm is also known as “Marco Island Midnight” as the place is as deserted at that hour as most areas are 3 hours later, at midnight.
In addition, I discovered while wintering that the three trustees who manage the $7.0-billion market capitalization Texas Pacific Land Trust (TPL) are elected by sub-shareholders for a term described as until retirement or for life. Wow – that is the longest term for “directors” or “trustees” I have ever seen and made me pause for a minute. Director for life? Is this really a legitimate position?
Texas Pacific Land Trust is already an odd bird in the equity world and is mainly a royalty and easement business. The business is structured as a trust, formed in the 1880s from the bankruptcy of a Texas railroad and its assets – currently about 900,000 acres of Texas land – and was a settlement to the then-bondholders. Publicly traded since the 1930s, TPL is the second oldest trading security on the NYSE and shares of the trust suddenly became interesting as most of its landholdings is in the shale-dominated Permian basin, a real hot spot for oil drilling. Running the trust are three trustees, each elected by shareholders, also known as “sub-shareholders.” From the 2018 10-K, pg 5, Risk Factors:
The Trustees are not subject to annual election and, as a result, the ability of the holders of Certificates of Proprietary Interest and Sub-shares to influence the policies of the Trust may be limited. Directors of a corporation are generally subject to election at each annual meeting of stockholders or, in the case of staggered boards, at regular intervals. Under the Declaration of Trust, however, the Trust is not required to hold annual meetings of holders of Certificates of Proprietary Interest and Sub-shares to elect Trustees and Trustees generally hold office until their death, resignation or disqualification. As a result, the ability of holders of Certificates of Proprietary Interest and Sub-shares to effect changes in the Board of Trustees, and the policies of the Trust, is significantly more limited than that of the stockholders of a corporation.
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I believe this is the first and only publicly traded security I have owned where: a) there is no/very little accountability to shareholders, ultimately leading to the potential of management replacement, and b) shareholders do not have the option of selecting directors/management on a regular basis. While my puny ownership in most companies doesn’t allow for any realistic shareholder input, there are usually other more influential parties with much higher stakes in specific companies and these parties can be insiders or large institutional owners and I am usually aligned with them.
Earlier this year, one of the three trustees, Mr. Maurice Meyer, announced his retirement, putting in motion a trustee election, and only the third since 1991. The previous two were in 2001 and 2017.
It seems TPL is not much of an institutional stock. Only 43% of outstanding shares are owned by mutual funds and institutional investors, of which 23% is owned by Horizon Kinetics LLC. Along with its trust structure and trustee issues, the purpose of the trust is to buy back shares with its profits, and the trust has been doing so for a number of years. Also from its annual report:
As provided in Article Seventh of the Declaration of Trust, dated February 1, 1888, establishing the Trust, it has been and will continue to be the practice of the Trustees to purchase and cancel outstanding certificates and sub-shares. The Trust purchased and retired 973,659 sub-shares at an average price of $148.21 in the five-year period beginning January 1, 2013 and ending December 31, 2017, which is 11.1% of the total number of sub-shares outstanding as of December 31, 2012. An additional 59,185 sub-shares were purchased in 2018 at a cost of $38.4 million, representing an average cost of $648.76 per sub-share.
As of December 2018, there were 7.787 million shares outstanding, down from 9.381 million as of June 2011, for a reduction of 17% over the previous 8 years.
However, with the advent of a new trustee election, TPL's largest shareholders are offering an alternative to the candidate put forth by "management" - the other two trustees. Horizon Kinetics LLC, SoftVest LP, and ART-FGT Family Partners are in a proxy fight that will determine the future of the Trust, and the possibility of taking the business in a very different direction. Also of interest is the fascinating fact that the upcoming shareholder meeting will be only the fourth shareholder meeting in over 30 years.
Why all the fuss? The answer is pretty simple. Earnings/revenue doubled in 2017 and doubled again in 2018. EPS has risen from $5.29 in 2016 to $26.93. With the rise in production on its acreage combined with a reduced share count, investors are betting on a continuation of its growth. Share prices have moved around over the years, and fluctuated between $4.50 in 1980 and $12.50 in 2003; climbing to $57 in 2006; falling to $22 in 2008; surpassing its previous high of $57 in 2012 on its way to $200 in 2013; falling again to $120 in 2015 only to rise above its previous high again in 2016 on its way to $835 in June of 2018; only to collapse again to $430 with the overall market demise in December 2018. Share prices did not stay down long as prices have climbed to new heights at $900. Just over the previous 4 months, TPL’s market cap has risen from under $3.5 billion to over $7 billion. Reviewing a long-term chart of share prices sure is a thing of beauty.
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The stakes are pretty high as the current proxy fight offers shareholders the opportunity to change the culture of the business with the ultimate potential of changing the structure from a trust to a “C” corporation, improving its governance and the stock’s attractiveness to investors. Below is a quick overview of the plan put forth by the dissenters, from their most recent presentation. In addition, Horizon Kinetics offers other videos and comments concerning the shareholder election found here.
Interestingly, Chevron (CVX) and Anadarko (APC) combined to provide 31% of 2018 revenue, up from 26% in 2017 and 23% in 2016. About evenly split, if CVX acquires APC, the combined company will have a substantial impact on future revenues for TPL. While speculation runs the gamut of end-plays for CVX and APC, payments of over $100 million and growing in annual royalties to TPL could be a catalyst for some future additional action.
All shareholders should read both the Horizon Kinetics proposals and current management’s media campaign against the proxy fight. I plan on voting against the trust’s nominee and for the dissenter’s candidate, Mr. Eric Oliver. I think Mr. Oliver will bring a much-needed transformation to an opportunity that is ripe and primed for positive change. The proxy voting is currently open and closes in late May.
After the election, I will re-evaluate my position as I really don’t like the manner in which trustees are elected, the controversial nature of their actions with the potential of conflicts of interest, and the stock’s 5-yr under-performance in relationship to underlying oil and gas production growth. Texas Pacific Land Trust is a great example of assets I like (oil and gas royalty) in a production area with great potential (Permian Basin), but with managers and governance in need of replacement.
