$ AAPL

$ ABBV

$ ABNB

$ ACGL

$ ADI

$ ADM

$ ADP

$ ADSK

$ AEE

$ AEP

$ AES

$ AFL

$ AIG

$ AIZ

$ AJG

$ AKAM

$ ALB

$ ALGN

$ ALL

$ AMAT

$ AMCR

$ AMD

$ AME

$ AMGN

$ AMP

$ AMT

$ AMZN

$ ANET

$ AOS

$ APA

$ APD

$ APO

$ APTV

$ ARE

$ ATO

$ AVB

$ AWK

$ AXON

$ BA

$ BALL

$ BAX

$ BBY

$ BDX

$ BEN

$ BG

$ BIIB

$ BKNG

$ BLDR

$ BMY

$ BR

$ BRO

$ BXP

$ CAG

$ CAH

$ CARR

$ CAT

$ CBOE

$ CBRE

$ CCL

$ CDNS

$ CDW

$ CEG

$ CF

$ CHD

$ CHRW

$ CI

$ CINF

$ CL

$ CLX

$ CMCSA

$ CMG

$ CMI

$ CMS

$ COIN

$ COO

$ COP

$ COR

$ CPAY

$ CPT

$ CRL

$ CRWD

$ CSCO

$ CTRA

$ CTSH

$ CTVA

$ CVS

$ CVX

$ CZR

$ DAL

$ DASH

$ DAY

$ DD

$ DDOG

$ DE

$ DELL

$ DG

$ DGX

$ DIS

$ DOC

Texas Pacific Land (TPL) delivered strong margin and cash flow growth in Q2 FY2025, offsetting a revenue miss, with recurring royalties and cost discipline driving resilience amid water sales volatility.

# Margin Resilience Outshines Revenue Miss in Texas Pacific Land Q2 FY2025 Earnings

---

## Executive Summary

- **Texas Pacific Land (TPL) reported Q2 FY2025 revenue of $187.54M, up 8.8% YoY but missing consensus by 4.3%.** Despite the top-line shortfall, **EPS rose to $5.05** (up 1.41% YoY), reflecting robust earnings quality and effective cost management.
- **Margin performance was a standout:** Adjusted EBITDA margin expanded to **89%** (up 3pp QoQ), and free cash flow margin reached **69%**, both supported by disciplined cost controls, especially in SG&A and water service-related expenses.
- **Management struck a cautiously bullish tone,** highlighting record produced water royalties and surface income, while acknowledging temporary softness in water sales. Strategic investments, including a new desalination facility, underscore a focus on long-term growth and diversification.
- **Key risks** include continued weakness in water sales and exposure to commodity price volatility. However, **opportunities** are emerging in recurring royalty streams and surface income, as well as in the Permian Basin’s long-term potential.
- **Catalyst watch:** Q3 guidance and the ramp-up of deferred operator activity will be critical for confirming a rebound in water sales and validating the bullish margin and diversification narrative.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise   | YoY Change   |
|-----------------------|------------|-----------|------------|-------------|
| Revenue               | $187.54M   | $196.00M  | -4.3%      | +8.8%       |
| EPS                   | $5.05      | —         | —          | +1.41%      |
| Produced Water Royalties | $30.7M  | —         | —          | +21.3%      |
| Easements/Other Surface Income | $36.2M | — | — | +118.1%    |
| Water Sales Revenue   | $25.6M     | —         | —          | -37.1%      |
| Adjusted EBITDA Margin| 89%        | —         | +3pp QoQ   | —           |
| Free Cash Flow Margin | 69%        | —         | —          | —           |

---

## Earnings Quality

Texas Pacific Land’s Q2 earnings quality was underpinned by a **favorable revenue mix shift** toward high-margin, recurring income streams—namely, produced water royalties and surface income. The company’s **margin expansion** was driven by both top-line growth in these segments and **rigorous cost discipline**, particularly in SG&A and water service-related costs. While water sales revenue declined sharply, the impact was offset by the structural strength of royalty and easement income, resulting in **strong free cash flow generation** and improved profitability.

---

## Management Commentary & Guidance

Management’s tone on the earnings call was **cautiously bullish**. They acknowledged the softness in water sales as a temporary headwind, attributing it to deferred operator activity, and expressed confidence in a rebound as these activities resume in Q3. The company also highlighted **record results in produced water royalties and surface income**, and pointed to strategic investments—most notably, the construction of a **10,000 bbl/d desalination facility**—as evidence of a long-term growth agenda. While explicit forward guidance was not provided, management’s commentary suggests a **measured optimism** and a focus on margin resilience and diversification.

---

## Key Risks

- **Water sales revenue volatility** remains a near-term risk, especially if deferred operator activity does not recover as anticipated.
- **Commodity price headwinds** could impact both royalty and water-related income streams.
- **Regulatory and environmental risks** associated with water management and surface operations in the Permian Basin.

---

## Expected Market Reaction

The initial market response may be **muted or slightly negative** due to the revenue miss versus consensus. However, **analysts and investors are likely to re-evaluate TPL’s valuation** as the company’s margin strength, cost discipline, and recurring income streams become more apparent. The strategic focus on desalination and surface income diversification could drive a more constructive outlook as these initiatives progress.

---

## Final Takeaway

**Texas Pacific Land delivered a fundamentally strong quarter,** with margin expansion and cash flow resilience offsetting a headline revenue miss. The market may be underappreciating the company’s shift toward high-quality, recurring income streams and its ability to control costs in a volatile environment. **Key upcoming catalysts** include Q3 guidance—particularly around water sales recovery—and progress on the desalination facility. Investors should watch for confirmation of a rebound in water sales and continued execution on strategic growth initiatives.

---

TPL Margin Strength Offsets Revenue Miss

Texas Pacific Land (TPL) shows strong revenue growth from Permian activity and water sales, but rising capex is compressing margins and could limit near-term EPS upside despite potential easement escalator benefits.

# Texas Pacific Land Corporation: Navigating Margin Pressures and Permian Upside – Q2 2025 Earnings Outlook

## Executive Summary

We maintain a **Neutral** outlook on Texas Pacific Land Corporation (TPL) for the upcoming quarter. While **Q1 2025 revenue of $195.98M** reflected a robust **20.7% YoY increase in oil & gas royalties** and a **10.8% YoY rise in water segment sales**, operating margins have slipped to **~76.6%** amid sharply higher capex. The market may be underestimating the near-term impact of **CPI-linked escalators on easement renewals**, which could provide an incremental revenue buffer. However, persistent margin pressure from capex and the risk of oil price volatility temper our enthusiasm for a near-term beat.

## Recent Trends Signal What’s Next

TPL’s last two quarters have been defined by strong top-line growth but emerging cost headwinds. **Q1 2025 revenue reached $195.98M**, up from $162.4M in Q3 2024, with gross margin holding above 80% but operating margin declining from **~80% to ~76.6%**. EPS has grown, but at a slower pace than revenue, reflecting margin compression. The table below summarizes the last four quarters:

### Revenue, Margin, and EPS Trends

| Quarter   | Revenue ($M) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS   |
|-----------|--------------|------------------|----------------------|---------------|-------|
| Q2 2024   | 170.2        | 81.5             | 80.2                 | 62.1          | 4.85  |
| Q3 2024   | 162.4        | 80.8             | 80.0                 | 61.7          | 4.97  |
| Q4 2024   | 182.7        | 81.2             | 78.5                 | 60.9          | 5.10  |
| Q1 2025   | 195.98       | 80.7             | 76.6                 | 59.8          | 5.24  |

**Trend:** Revenue is rising sequentially, but operating and net margins are trending lower, signaling cost pressures that could persist into Q2 2025.

## Management’s Forward Tone and Positioning

Management’s recent commentary strikes a balance between confidence and caution. On the Q1 2025 call, leadership highlighted “**record performance in royalty production and industry-leading margins**,” but also noted, “**We are prepared for a downturn if oil prices remain below $60**.” This is a subtle shift from the prior quarter’s more bullish tone, which focused on “**unprecedented demand for water and land services**.” The current messaging suggests management is bracing for potential volatility, especially in commodity pricing, while still expecting operational strength from new water infrastructure and Permian activity.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q2 2025 are:

- **Oil & Gas Royalty Production:** Up **7% sequentially** in Q1 2025, supporting further revenue growth if Permian activity holds.
- **Water Segment Sales Volume:** Up **14% YoY**, with new infrastructure (desalination facility) expected to ramp by year-end.
- **Capex:** Up **75% YoY** (from $5.66M to $9.91M), which could pressure margins if not offset by revenue gains.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Oil & Gas Royalty Volume   | 100     | 108     | 115     | +15%       | +7%        |
| Water Sales Volume         | 80      | 88      | 91      | +14%       | +3%        |
| Capex ($M)                 | 5.66    | 8.20    | 9.91    | +75%       | +21%       |

**Implication:** Sustained production and water sales growth are likely to drive revenue, but capex escalation could limit EPS upside.

## Missed by the Street

A key overlooked signal is the **CPI-linked escalators on easement renewals**, which management disclosed could add **$10M–$35M in annual revenue starting 2026**. Early renewals may already be influencing operator behavior and near-term order patterns, providing a subtle earnings cushion not yet reflected in consensus models. Additionally, the **9.79% short interest** signals skepticism that may be overdone if these contractual benefits materialize sooner.

## Scenarios for the Upcoming Quarter

### Bull / Base / Bear Case Table

| Scenario      | Revenue ($M) | EPS   | Operating Margin (%) | Key Assumptions                                      |
|---------------|--------------|-------|----------------------|------------------------------------------------------|
| Bull          | 210          | 5.80  | 78                   | Permian activity accelerates, water ramp, stable oil |
| Base          | 195          | 5.30  | 76                   | Steady production, moderate capex, oil $60–$65       |
| Bear          | 180          | 4.90  | 73                   | Oil < $60, capex overruns, water ramp delayed        |

**Most Likely:** The **Base scenario** is most probable, given current production trends, management’s cautious tone, and the likelihood that capex will continue to pressure margins even as revenue grows.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter   | Revenue ($M) | EPS   | Operating Margin (%) |
|-----------|--------------|-------|----------------------|
| Q2 2024   | 170.2        | 4.85  | 80.2                 |
| Q3 2024   | 162.4        | 4.97  | 80.0                 |
| Q4 2024   | 182.7        | 5.10  | 78.5                 |
| Q1 2025   | 195.98       | 5.24  | 76.6                 |

### KPI Movement (YoY and QoQ)

| KPI                        | Q1 2024 | Q1 2025 | YoY Change | Q4 2024 | Q1 2025 | QoQ Change |
|----------------------------|---------|---------|------------|---------|---------|------------|
| Oil & Gas Royalty Volume   | 100     | 115     | +15%       | 108     | 115     | +7%        |
| Water Sales Volume         | 80      | 91      | +14%       | 88      | 91      | +3%        |
| Capex ($M)                 | 5.66    | 9.91    | +75%       | 8.20    | 9.91    | +21%       |

### Key Management Quotes

1. **“We delivered record performance in royalty production and industry-leading margins.”**  
   – Q1 2025 Earnings Call  
   *Signals operational strength and confidence in core business.*

2. **“We are prepared for a downturn if oil prices remain below $60.”**  
   – Q1 2025 Earnings Call  
   *Highlights management’s caution regarding commodity price risk.*

3. **“Robust activity in the Permian Basin continues to drive our top line.”**  
   – Q1 2025 Earnings Call  
   *Points to ongoing demand tailwinds in the company’s core geography.*

4. **“The new desalination facility is expected to be operational by year-end 2025.”**  
   – Q1 2025 Earnings Call  
   *Indicates a future catalyst for water segment growth.*

5. **“CPI-linked escalators on easement renewals could add $10M–$35M in annual revenue starting 2026.”**  
   – Q1 2025 10-Q Filing  
   *Suggests a medium-term revenue buffer not yet in consensus.*

6. **“Capex on water sourcing assets increased 75% year-over-year.”**  
   – Q1 2025 Earnings Call  
   *Warns of near-term margin pressure from investment cycle.*

7. **“We see early signs of normalization in demand for water services.”**  
   – Q1 2025 Earnings Call  
   *Implies that water segment growth may moderate after recent surge.*

---

**In summary:** TPL’s Q2 2025 outlook is defined by strong production and water sales momentum, offset by rising capex and margin pressure. The market may be underestimating the near-term impact of contractual escalators, but oil price volatility and cost inflation remain key risks. The base case scenario is most likely, with upside if Permian activity and water infrastructure ramp faster than expected.

TPL: Margin Pressure Offsets Permian Growth