During the lightning round of the September 10 episode of Mad Money, a caller inquired about Texas Pacific Land Corporation (NYSE:TPL), and Jim Cramer commented:
[Buy, buy, buy] It’s going higher. It’s in the right industry, and it’s a very inexpensive stock, and we profiled it. Ben Stoto introduced it to me. It’s a fantastic stock.
Land Dominance and High-Margin Royalties
Texas Pacific Land Corporation stands as one of the largest private landowners in the State of Texas, deriving its unique economic strength from vast surface and royalty acreage concentrated primarily in the Permian Basin. Rather than operating as a conventional upstream exploration and production company, which is usually burdened by heavy capital expenditures for drilling, it primarily collects royalties, surface easements, water sales, and commercial leases from active operators working its land.
Financial results for the second quarter highlighted the fundamental power of the company’s asset-light model. The company reported quarterly revenues of $246.1 million, representing a robust 31.2% year-over-year increase. Profitability remained healthy, with an adjusted EBITDA of $215.6 million translating into an 88% margin. Furthermore, Texas Pacific Land Corporation generated $155.5 million in free cash flow.
Revenue Softness and Cyclical Vulnerability
Despite exceptional operating margins, potential downside risks stem from Texas Pacific Land Corporation’s sensitivity to broader commodity cycles and valuation friction. During the second-quarter reporting period, TPL’s top-line revenue figure of $246.1 million slightly missed consensus expectations. While GAAP earnings per share of $2.23 managed to beat consensus estimates, even modest revenue misses can amplify volatility for a stock trading at premium valuation multiples compared to its traditional peers.
A critical structural vulnerability involves Texas Pacific Land Corporation’s direct reliance on drilling activity within the Permian Basin. Any macroeconomic cooling, regulatory headwinds, or deceleration in domestic oil and gas production velocity would directly impact water sales and royalty revenues. Additionally, the company’s elevated price-to-earnings multiple leave little margin for error, exposing the stock to broader shifts in market sentiment toward the energy sector.
Institutional Accumulation and Short Interest Friction
According to Insider Monkey’s database tracking over 1,000 hedge funds, 34 hedge funds had a stake in the company during Q2 compared to 30 in Q1. Horizon Asset Management was the top shareholder among those hedge funds with around 9.8 million shares. It is also worth noting that AQR Capital Management increased its holdings in the company by 331% to 282,585 shares. Meanwhile, the short % of float sits at 9.80%, showing noticeable bearish positions.
Texas Pacific Land Corporation remains exposed to Permian drilling velocity and lofty valuation multiples. However, its unmatched land asset base, elite free cash flow generation, and deep-pocketed institutional sponsorship provide support for Cramer’s bullish outlook.
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