Texas Pacific Land (NYSE: TPL), a large landowner holding around 900k acres in oil-rich West Texas, has seen its stock rally by about 5x from around $310 on March 23, 2020 (when the broader markets made a bottom due to the spread of Covid-19) to about $1,580 currently. After a share price collapse in March 2020, TPL stock regained ground and largely recovered to pre-Covid levels of around $700 by the end of 2020. The stock more than doubled this year, on account of rising oil prices, which should drive up exploration and production activity, and TPL, being one of the largest holders of oil and gas royalty rights and leases, stands to benefit. The stock is also up by about 3.5x since the end of 2017. There seems to be still more upside for TPL stock in the near-to-medium term, given the favorable outlook for the global economy which should help oil and gas drilling and its move to convert from a trust into a corporation. Our dashboard ’Why Texas Pacific Land Stock Is Up 3.5x Since The End Of 2017?’ provides the key numbers behind our thinking, and we explain more below.
Texas Pacific Land’s stock has risen from around $445 at the end of 2017 to about $1,580 currently – an increase of 3.5x. Texas Pacific Land ’s revenues come from royalties it receives from oil and gas companies that drill on their land, revenues from its water services operations and fees from pipelines, and electrical transmission lines that pass through its land. The company also records revenue from land sales, although this is typically much more volatile. Between 2018 and 2020, TPL’s revenue remained almost flat, rising from around $300 million to about $303 million, as weak oil prices in 2018 and 2019 and the oil price war of 2020 limited growth. However, sales spiked to about $490 million in 2019 due to about $135 million in land sales. But, net income declined from around $210 million in 2018 to about $176 million in 2020, as margins fell from 69% to 58% on account of higher employee-related costs and administrative expenses. The company’s EPS also declined from $26.93 to about $22.71 between 2018 and 2020. However, investors are valuing TPL much more richly, with its P/E multiple rising from around 20x in 2018 to about 70x currently, due to a more promising outlook for its business amid higher commodity prices.
Why TPL Stock Still Looks Like A Buy
So is Texas Pacific Land Trust stock a buy at current levels? While the stock’s solid run over the last few quarters has taken the company’s valuation multiple to multi-year highs, there are a couple of trends that could give the stock upside in the near-to-medium term. Oil prices are expected to remain strong, on account of a rebounding global economy and limited production increases by OPEC. WTI crude is up from around $45 per barrel earlier this year to about $60 per barrel currently. This should, in turn, increase oil drilling activity, boding well for TPL’s land holdings. For perspective, the company’s revenues are likely to grow by around 19% in 2021 and 28% in 2022, per consensus estimates. Separately, TPL has been converted from a trust into a corporation and this move is also being seen positively by investors, as the company can now take on debt, hedge its oil price exposure, and potentially be included in stock indices.
While TPL stock is likely to continue to grow further, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for American Electric Power Company Inc vs. Atlas Air Worldwide Holdings shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.
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