Texas Pacific Land Trust – A Tontine!

A Tontine – is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases.

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It sounds gruesome, but essentially, it is a liquidating trust with no-or-few expenses. See a 1995 report on the Texas Pacific Land Trust that turned out to be prescient.

Texas Pacific Land Trust - How to Buy 1 Million Acres of Fine Texas Grazing Land for $20.00

Texas Pacific Land Trust is a publicly traded enterprise that is slowly but steadily buying itself out of public ownership. It is accomplishing this by consistently applying its cash flow to the repurchase and retirement of its own shares. Although this process has been ongoing for over a century, it may now have reached a point at which this dynamic begins to naturally accelerate versus the experience of recent decades. It is quite conceivable that, over the next decade or so, the company’s assets could become concentrated in the hands of a few share owners. As the shares in question represent some 1 million acres of rural Texas, the magnitude of this accumulation of per-share value could be extraordinary.

Texas Pacific Land Trust - A Tontine

Description

Texas Pacific Land Trust owns the surface estate in over 1.1 million acres of land in 21 counties in western Texas, as well as perpetual oil and gas royalty interests under 472,000 acres of land. Shares of the Trust actually represent Certificates of Proprietary Interest in a Declaration of Trust, dated February 1, 1888, which established this unique entity.

Trust income derives from grazing fees, easement income, oil and gas royalty revenues, interest on cash reserves, and land sales. All of these categories represent significant sources of income.

  • Grazing: The land inventory is almost exclusively rural, with grazing leases in effect on 98% of the acreage. Due to normal inflation, easement and grazing revenues have risen over time despite land sales. (For example, grazing revenues have risen 63% since 1980.)
  • Oil and Gas: Over the same period, energy revenues have declined in concert with oil prices, which averaged $26 per barrel in 1980 and only $15 per barrel sold in 1994. Yet, a greater volume of oil and gas is being produced today than in 1980, and no oil producing interests have been sold.
  • Land: Outstanding shares have been reduced by 34% since 1980, or by about 3% per year. However, total land sales amounted to merely 8% of the acreage then held, reducing the land inventory to 1.1 million acres from 1.2 million acres. In essence, the Trust repurchased 16.9 shares for each acre sold, increasing the number of acres represented by each share from 0.26 to 0.37. Shares have been repurchased in all but four of the Trust’s 106 years.

The market value of the outstanding shares, at the current $20 share price, is $62 million. By extension, investors are valuing the company at $54 per acre. The Trust’s land sale volume and prices vary considerably from year to year. Sales prices in 1994 ranged from $45/acre to $7,500/acre and averaged $192 (versus 1981 sales averaging $239/acre, within a range of $35/acre to $4,000/acre). The highest prices relate to sales to El Paso developers as that city expands eastward near Trust acreage.

Confidence in the relative safety of this investment resides in the capacity and predilection for share repurchases by a debt-free company selling very near the value of its tangible assets. Relative to the average industrial or service company, Texas Pacific is not subject to typical competitive forces nor to marginal changes in consumer and industrial demand. It has very stable base rents and, unlike most energy companies, which must support high fixed costs, its royalty revenues are purely additive, regardless of volume. Its basic business, land and oil, are classic inflation hedges.

The Final Stage?

The Trustees have not raised the $0.40/ share dividend since 1984 (and their annual salaries have been fixed at $2,000 since 1988). This tantalizing departure from the practice of most dividend-paying companies, which strive to raise dividends, has significant implications. Given a fixed dividend and a constantly decreasing share count, total dividends paid per year have declined
during this time from approximately $1,630,000 to $1,267,000. At this juncture, income from grazing, easements and cash reserves -- the smallest sources of income -- are approximately sufficient to support the dividend. One can presume that with each passing year of share repurchases, the total dollars paid out as dividends will continue to decline, freeing yet more cash flow for incrementally more share repurchases. The Trust will effectively be able to retire shares and further concentrate the acreage per share at an increasing rate.

Of course, one must include the oil revenues and land sales, which are the most significant sources1 of revenue. Though volatile, energy revenues exceed the combined revenue of the other operating segments. Land sales, though uneven, add further revenue; in recent decades, land sales have raised between $400,000 and $10,000,000 per year.

Engaging in a very simplistic exercise to anticipate how the next fifteen-year period might differ from the one just examined yields startling possibilities. By projecting the last five years’ average operating revenues and expenses forward, assuming no earnings growth, and applying profits to share repurchases (at constant prices), the outstanding share base would be reduced by 45%. Were one to assume 3% annual earnings growth, the share base would be reduced by 96%, leaving the remaining acreage and royalty interests of the Trust concentrated in a mere 100,000 or so shares and, the following year, no shares whatsoever.

The following exercises attempt to gauge potential outcomes for Texas Pacific Land Trust in the coming years. Any number of scenarios are possible and, clearly, events will not unfold in the patterns suggested below (which assume no stock price appreciation, for instance). The purpose of these two simple iterations is merely to provide a sense of the direction and magnitude which are theoretically possible based on the current financial characteristics and policies of the Trust.

Exercise 1.

Assumes no income growth. Applies the average income level of the prior five years toward share repurchases at current prices. Also assumes continuity of the current dividend policy.

Texas Pacific Land Trust - A Tontine

Exercise 2.

Same as Exercise 1, except assumes 3% annual revenue growth. This reflects both the current and recent U.S. inflation experience as well as the average rate of rental and land price increases for Trust property during this century.

Texas Pacific Land Trust - A Tontine

Trust revenues and related expenses vary significantly from year to year. In order to not give undue weight to unusually high 1994 revenues, the average results of the prior five years have been used as a starting point for both exercises.

Though such extended exercises cannot hope to be accurate, they are thought provoking. Indeed, a Certificate worth approximately $350 in 1907, lost and not recovered until 1979, was restored to an heir of the original owner and liquidated in 1986 for an amount in excess of $5,700,000. Is it possible that there will remain, in the indeterminate future, a final 100 shares representing some 1 million acres of productive real estate? If so, substantial rewards accrue to those with the most patience.

Texas Pacific Land Trust - A Tontine

Texas Pacific Land Trust - A Tontine

Texas Pacific Land Trust TPL CRR May95

TPL Annual Report 2016 - Go to last page to see acreage map. Use Google Earth to go view the terrain, then search for oil and gas activity in the area(s)

More annual reports: http://www.tpltrust.com/annual-reports.html

Texas Pacific Land Trust - Discussion

MAP: http://www.tpltrust.com/fullmap.html

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In my peripatetic life I have been a ruby smuggler, commodity trader, securities analyst, investment banker, and entrepreneur. Each role taught me more about value investing. - John Chew - The Editor