With the broader indexes hitting all-time highs, 2024 has been a phenomenal year in the stock market. While the energy sector is only up 11.2%, Texas Pacific Land Corporation (NYSE: TPL) has soared 87.2% and just hit a new all-time high on Oct. 4.
Here's why Texas Pacific has an elite business model and could still be a dividend stock worth buying now despite its meteoric rise.
Drilling for oil and gas. Image source: Getty Images.
A primer on Texas Pacific
The company is one of the largest landowners in Texas, with 869,000 surface acres and 23,700 net royalty acres. The majority of its land is in the Permian Basin, the largest onshore oil and gas field in the U.S.
But Texas Pacific doesn't produce oil and gas. Instead, it collects fees. Oil and gas royalties make up the bulk of its revenue, followed by water sales, produced water royalties, land sales, easements, other surface-related income, commercial leases, and permits.
Texas Pacific's main expenses are its payroll and water costs, making it a highly profitable business. For the six months that ended June 30, the company had $346.8 million in revenue and just $77.2 million in operating expenses -- resulting in an operating margin of 77%. After income taxes, it converted 66% of sales into net income.
Texas Pacific will occasionally use excess cash to add to its asset portfolio. On Oct. 2, it announced the closing of a $286 million cash transaction for Permian oil and gas minerals and royalty interests. Over time, these assets will produce even more cash flow and help the business compound returns for investors.
The company pays a rather small quarterly ordinary dividend but will distribute special dividends once its cash balance exceeds its targeted level.
In June, Texas Pacific paid a $10 per share special dividend because its cash had exceeded its target level of $700 million. In its August investor presentation, management said it had no debt on its balance sheet and a cash balance of $895 million. But given the recent acquisition, it might not issue another special dividend until 2026.
Over the last five years, Texas Pacific has issued special dividends in 2020, 2022, and 2024, so there's reason to believe the even-year pattern should continue.
A Permian powerhouse
According to the Federal Reserve Bank of Dallas, the Permian Basin provides around 40% of the country's oil output and 15% of its natural gas production. The Permian's low cost of production, existing infrastructure, access to resources, and proximity to Gulf Coast export terminals position it for sustained production growth well into the future -- which would benefit Texas Pacific.
Producers like ExxonMobil (NYSE: XOM) have centered their growth strategies around the Permian. Exxon's merger with Pioneer Natural Resources boosted its Permian output to 1.3 million barrels of oil equivalent per day (boe/d). It expects to leverage its asset base to grow production to 2 million boe/d by 2027.
In sum, the Texas Pacific's land is in a great location, and the company has an effective business model to capitalize on sustained investment in the region.
A quality company at a premium price
The simplest reason an investor might prefer Texas Pacific over alternatives is its low risk. The business is set up to make money no matter what oil and gas prices are doing, although its stock price might fluctuate based on investors' outlooks on the Permian and the energy sector in general.
As you can see in the following chart, Texas Pacific earns a profit every year, but its performance has taken off over the last 10 years as the Permian has developed thanks to technological advancements and investment.
TPL revenue (annual) data by YCharts.
As for its valuation, it has a price-to-earnings ratio (P/E) of 50.5, which seems very expensive at first glance, especially compared to companies like ExxonMobil and Chevron , with P/Es under 15. But the quality of Texas Pacific's earnings is much higher than any company that depends on the capital-intensive extraction and processing of fossil fuels.
A better approach is to look at Texas Pacific's valuation compared to its historical average. The company's 10-year median P/E is 34.4, which is noticeably lower than its current P/E.
A stock worth following
Texas Pacific isn't as cheap as it used to be, but it could still be a good buy for risk-averse investors. But the surge in the stock price has pushed its ordinary dividend yield down to a paltry 0.5%. And with the stock price hovering around $1,000 a share, a $10 special dividend is just a 1% yield.
Investors looking for higher yield and a potentially better value might want to go with an upstream player like ConocoPhillips or majors like ExxonMobil and Chevron . But Texas Pacific is a business unlike any other and should, at the very least, be added to a watch list for energy stocks.
Should you invest $1,000 in Texas Pacific Land right now?
Before you buy stock in Texas Pacific Land, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Texas Pacific Land wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $826,130 !*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns as of October 7, 2024
Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy .
Local News
Comments / 0