O'Reilly Automotive Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Landbridge Third Quarter 20 24 Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Jason Long, our CEO. You may begin.

Speaker 1

Good morning, everyone, and thank you for joining our Q3 earnings call. Our results demonstrate the strength and momentum of our business as we continue to benefit from a sustained level of activity in the Delaware Basin. During the quarter, we delivered 60% year over year revenue growth, 62% year over year adjusted EBITDA growth and 88% adjusted EBITDA margins. Notably, we continue to grow the percentage of revenues derived from fee based arrangements versus oil and gas royalties to further mitigate our direct exposure to commodity price fluctuations. In the Q3, non oil and gas royalty revenue streams, which include surface use royalties and revenues and resource sales and royalties accounted for 90% of overall revenues, up from 83% last quarter and 65% in the same quarter last year.

Speaker 1

And by actively managing our land and resources, we continue to position ourselves to capitalize on a broad array of commercial opportunities at the Texas New Mexico state line. As mentioned last quarter, West Texas is an increasingly popular area for renewable energy and digital infrastructure development and our acreage is ideally situated for data centers to support AI and cloud computing services, which require low cost fuel, water for cooling and fiber optic infrastructure. As a reminder, in July, we signed a non binding letter of intent for a long term ground lease for the development of a data center. This month in November, we executed a lease development agreement for the development of a data center and related facilities across approximately 2,000 acres of our land in Reeves County, Texas. The lease development agreement includes among other things, a non refundable $8,000,000 deposit due in December 2024 for a 2 year site selection period and construction of the data center within a subsequent 4 year period.

Speaker 1

Upon initiation of construction of the data center, the counterparty will make escalating annual lease payments along with additional payments based on the net revenue received with respect to the power generation facilities to be located on the leased property. We also continue to expand our land holdings. In November, we acquired an additional 1200 surface acres in Winkler County, Texas and are under contract to acquire an additional 5,800 acres in Lea County, New Mexico. The Winkler County acquisition is adjacent to East Stateline Ranch and includes water infrastructure that generates revenue under a long term contract with an active sand mine. The Lea County opportunity is strategically located just north of our Stateline assets.

Speaker 1

We are looking forward to continuing to identify opportunities to build out our surface acreage as well as new prospects to develop additional revenue generating infrastructure projects. In short, we believe our performance to date reflects our unique and promising business model, which is characterized by diversified revenue streams, industry leading margins and low capital intensity. We see no shortage of opportunities ahead to continue growing and creating substantial value for our shareholders. Now I'll turn it over to Scott to go through the numbers in more detail.

Speaker 2

Thank you, Jason, and welcome to everyone joining us this morning. As Jason mentioned, we continue to deliver strong results and we see this as evidence that our active land management strategy is working exactly as intended. Our 3rd quarter revenues increased to $28,500,000 up 9.8% sequentially and 60% year over year. This was driven by surface use royalties and revenue, which grew 14% sequentially and resources sales and royalties, which increased 29% sequentially. Revenue from oil and gas royalties declined 35% sequentially, which is attributable to a decrease in net royalty production as well as a sequentially, which is attributable to a decrease in net royalty production as well as a decrease in average realized pricing.

Speaker 2

Thanks to our highly efficient operating model, we delivered adjusted EBITDA of $25,000,000 which increased 6.8 percent sequentially and 62% year over year and which represents an 88% adjusted EBITDA margin. We generated free cash flow of approximately $7,100,000 and free cash flow margin of 25%. The sequential decrease in free cash flow is attributable to an $11,100,000 impact from non recurring IPO related expenses and lease termination costs. Longer term, we continue to expect substantial free cash flow and free cash flow margins around 70%. We ended the quarter with total liquidity of $74,400,000 including cash and cash equivalents of $14,400,000 $60,000,000 under our revolving credit facility.

Speaker 2

We continue to execute against our capital allocation priorities. As a reminder, these priorities are 3 fold. First, maintaining a strong balance sheet over time to maximize our financial flexibility. Deleveraging remains an accretive use of our cash flow and during the quarter we paid down approximately $120,000,000 in debt. We ended the quarter with $281,300,000 of debt outstanding under our term loan and revolving credit facility and a net leverage ratio of 2.8 times compared to 4.2 times at the end of the second quarter.

Speaker 2

In addition, subsequent to the end of the quarter, we amended our debt facilities, increasing the maximum available under our revolving credit facility by $25,000,000 to $100,000,000 and increasing our term loan to $300,000,000 with an additional $75,000,000 uncommitted accordion term loan. Under the term loan amendment, we are no longer required to make amortization payments. 2nd, we are committed to returning capital to shareholders and we've declared our inaugural quarterly dividend to shareholders of $0.10 per share. This quarterly dividend provides shareholders another important way to share in our successes. And finally, we continue to pursue value enhancing land acquisitions with a focus on underutilized and under commercialized land.

Speaker 2

And Jason mentioned our most recent acquisitions in Texas adjacent to the East Stateline Ranch as well as in Lea County. Looking ahead, we will continue to prioritize growing our revenues through commercial efforts on our existing surface as well as strategic acquisitions of land as we identify new development opportunities and we expect our strong growth trajectory to continue. Before closing, as promised, we are also introducing annual guidance today now that we've completed a whole quarter as a public company. For the full year 2024, we expect $95,000,000 to $100,000,000 of EBITDA. In our earnings press release, we've detailed several assumptions underpinning this guidance range, including higher than expected surface use royalties and the lease development agreement deposit payment related to the data center development mentioned earlier.

Speaker 2

For the full year 2025, we expect $140,000,000 to 100 $60,000,000 of EBITDA, driven primarily by the incremental contributions of our new acquisitions, initial contribution of the 2 50 megawatt solar facility to surface use revenues and the growth of surface use royalties through higher produced water volumes. In conclusion, we delivered another strong quarter and are confident in our growth prospects as we continue to capitalize on the development opportunities in the basin to deliver value creation for our shareholders. At this point, we'd like to open up the line to questions. Operator?

Operator

Thank you. We will now begin the question and answer session. First question comes from the line of Charles Meade with Johnson Rice. Your line is open.

Speaker 3

I want to ask a question about your these 2 acquisitions you did. And I note that it looks like both of them come with revenue streams. And I just wondered if you could maybe I recognize some of this may be sensitive, but if you could just give us an idea of what kind of multiple you paid for them or if you don't want to talk about that, talk about perhaps the trajectory of those EBITDA streams. And Jason, I think you mentioned in your comments on the Lea County acquisition being right adjacent to Stateline. Talk about perhaps any synergies that you might be unlocking with these acquisitions that wouldn't be obvious to someone from the outside looking in?

Speaker 2

Hey, good morning, Charles. Scott here. No, very good question. Yes, just to give you all some quantitative information to work with, the 2 acquisitions in aggregate were roughly $47,000,000 They're generating about $9,000,000 of EBITDA today. And so tracking to just over a 5 times multiple, which is something that we find obviously very attractive financially.

Speaker 2

And I think equally as important, the locations of the assets, one being contiguous with the East Stateline Ranch, the second being in New Mexico, just presenting a lot of opportunities for 1 synergies with our existing operations on the East Stateline Ranch as well as synergies with the Water Bridge platform in New Mexico, as it looks to extend its reach from the Stateline into New Mexico. And so when you think through the ability for us to leverage that Water Bridge relationship, this is just a great example of that. The fee surface in New Mexico is just less abundant than what you get in Texas. And so opportunities to find the right surface at the right price and the right location to be able to exercise on those synergies is rare. And so this was one that we were excited to tackle here and I think one that's going to serve us very well from a growth prospect going forward.

Speaker 3

Got it. Thanks for that detail, Scott. And then I could also I also would like to ask about the it looks like the really the strength of your 25 guide is really on the really based on those 2 core pieces of your the 2 largest pieces of your revenue and EBITDA, the surface use royalties and resource sales and royalties. When in this kind of 3Q reporting season for E and P companies, there's been a lot of people saying we're going to decrease activity levels or maybe keep the same footage drilled and do it with fewer assets and there's just a lot of people kind of there's been more people looking to turn the dial down on activity than turn up the activity. And so I'm wondering if you can comment on if you're seeing that as you kind of look at your operators who are active with your assets?

Speaker 3

And what might explain that you guys are going counter trend to that?

Speaker 2

Really good question. I would say, as we thought through guidance for 2025, we took what you just outlined certainly in mind. What we're seeing right now from producers along the state line is a continued focus or maybe more of a focus on drilling efficiencies. And we're seeing that evidenced by the DUC inventory right now along the state line being the highest it's been as folks think through completion efficiencies and making sure they're getting the most return for their buck. And so that's something that we are in close communications with producers with both in the Landbridge and the Waterbridge side.

Speaker 2

So we're tracking it pretty meaningfully. I think what's really driving our growth outside of the broader oil and gas industry, I would say, still having the tailwinds that you just mentioned, particularly in the Delaware, are just a lot of these opportunities we have to also expand beyond that. And we mentioned in our earnings release, for example, that the solar project that we've been working through is going out for development. Now that we've got this lease development agreement with the data center executed, it just makes that project that much more valuable given it's adjacent to the data center site. So we're really chasing a lot of these opportunities that are quite valuable and diversify away from the traditional oil and gas space.

Speaker 2

So I think it's an important element to remember as you think through our growth trajectory is while oil and gas is a big piece of the story today, there's certainly more than that at the moment and that's going to continue to be a piece of our business that's growing meaningfully here over the near term.

Speaker 4

Great detail. Thank you, Scott.

Speaker 2

Yes. Thank you, Charles.

Speaker 1

Thanks, Charles.

Operator

Our next question comes from the line of John McKay with Goldman Sachs. Your line is open.

Speaker 2

Hey, good morning, John.

Operator

John, maybe your microphone is on mute.

Speaker 2

Operator, maybe we move to the next question, yes, and let John dial back in here.

Operator

Absolutely. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Your line is open.

Speaker 5

Hey, good morning down there. And when I'm guessing you guys are happy with the pending changes in energy policy following Tuesday. So two questions here. The first one is good to see the data center deal signed and appreciate the outline of the terms, the 2 year pre development phase and 4 year construction as part of the agreement as far as hurdles that need to be achieved. But in thinking about the timeline that the data center takes and other commercial projects, you bought acquisition land in the quarter at 5 times EBITDA.

Speaker 5

And I think your stock is trading somewhere around 30x on my math or our math. So just trying to get a sense for what the trajectory of the growth is now that you've been public for a few quarters and it seems like more commercial ventures are starting to form. Just trying to understand what obviously the stock is pricing in a tremendous amount of growth. Just trying to see what's on your plate and what types of projects we could see announced in the next few quarters because clearly it takes time for these projects to come to fruition. But curious what you guys are seeing because the stock is certainly pricing in a lot of good stuff and I'm just trying to get a better sense of how that's looking from your perspective.

Speaker 2

Yes, great question. Yes, I mentioned on the last earnings call that commercial traction out of the gate was even stronger than we had hoped for. And that certainly holds true. And I think what your question alludes to is a lot of these projects that utilize our surface are not short term, call it quick win kind of projects. These are long term, oftentimes capital intensive from the operator and the developer standpoint type of projects, but ones that just generate meaningful long term value for Landbridge.

Speaker 2

And so, all of those discussions I kind of referenced on the last call are still very much ongoing and are making progress. And I think there are a lot of wins that we expect to have and share with you all over the coming quarters. It's tough to quantify exactly this is the growth trajectory we're going to see. But I'll say with the amount of surface that we have, our ability to grow our position accretively as we can, and the commercial landscape that's out there, our ability to generate meaningful double digit kind of growth profile over the near to medium term seems very, very likely. It's tough to say that the answer is X, but I think ultimately the ability to grow returns here, grow our cash flow base and be able to return that growth has value to investors, I think is going to be very, very achievable given what we see in the pipeline at the moment.

Speaker 5

But just given the timeline to roll out, sign the deals, do the predevelopment and build, I mean, not everything is as complex as the data center. It still seems like it's probably 3 to 4 years at least before we start seeing commercial NOI start to really expand and grow. Is that a reasonable timeline or do you think it could be sooner than let's say 4 years before we really start to see a meaningful contribution?

Speaker 2

Yes. We would start seeing the cash flow impact ahead of that. I mean I think this data center opportunity is a good reference point. The $8,000,000 deposit payment that we're receiving, we will also be generating revenue throughout the construction phase. So we will be receiving rent through the construction phase of the project.

Speaker 2

From Landbridge's perspective, we're able to start realizing that uplift well in advance of some of these projects which can be multi year, the data center being the obvious example, before those become operational. And so we would certainly see the most uplift once these sites are operational, once we start seeing the benefits of not just the full lease payment, but also a part of the economics being a profits interest on the power generation. But that said, it's not a hair trigger where we go from 0 to call it full uplift. There's going to be a phasing in of cash flow for us as these projects come online. And I think that's going to be a part of the growth story here over the next couple of years.

Speaker 5

Okay. And then just second question is on windmills. The VP elect was recently on a podcast and was talking about he's not a real big fan of the tax incentives for windmills. Just curious, on your alternative energy rollout, what percentage are windmills? I know you guys do a lot of solar, but just curious on the windmills, if that's a big contributor or if that's sort of a smaller part and more of the alternative energy is on the solar front?

Speaker 2

Great question. No revenue from windmills today. I mean, we have some of those commercial opportunities in the pipeline. So obviously, there could be some discussion points there, but no impact to the business as of today. And then I think more generally speaking, we would see this administration stance to being called status quo to very constructive relative to the bulk of our business here.

Speaker 2

And so yes, I appreciate there are a little nuance things like wind worth talking about. But I think generally speaking from Lambert's perspective, more tailwinds coming out of this recent election cycle.

Speaker 1

Thank you. Thanks, Alex.

Operator

Our next question comes from the line of Kevin McCarthy with Pickering Energy Partners. Your line is open.

Speaker 6

Hey, good morning. We appreciate the color on 2025. It looks like produced water is really the driver of higher EBITDA next year than we expected. I wonder if you could talk about the outperformance of that business a little bit and what is driving the higher volumes there?

Speaker 3

So

Speaker 2

I would say there's a few things just out of the gate that have really worked in our favor. I mean first, we spoke to the relationship Waterbridge has with Devon. That's been a fantastic partnership on the Waterbridge side and Devon is very focused on ensuring that their water volumes are handled responsibly and a big piece of that solution is sending water to Waterbridge assets on Landbridge surface. And so there's been a focus from their side to really move as much of their water as possible onto our surface given the Waterbridge operating methodology of ensuring proper spacing between sites, as an example, really provide the longevity to operations that they're looking for. I think second, on the Water Bridge side as well, just the commercial traction that we've seen on that front has been incredibly positive.

Speaker 2

We've got a number of blue chip operators looking for solutions at scale And a lot of those projects are starting to come online next year. And so we on the Waterbridge side continue to see good commercial traction. I think that's largely because of the land and the pore space access that we have via Landbridge. And I think conversely to Landbridge's benefit here, we're seeing the synergies of that Waterbridge relationship given the fact that all of this commercial wins or these commercial wins WaterBridge is achieving are just working in the benefit of Landbridge in the form of those royalties. And so part of the thesis from the get go out of the gate was the water company and the land company really serve each other well.

Speaker 2

And I think it's just that proving itself out here in the eyes of a lot of these larger producers.

Speaker 1

Yes. The only thing I would add to that is we obviously strategically located all of these acquisitions from a surface standpoint, but also from a geological standpoint. And to Scott's point on the pour space, we've been very successful thinking through we're not only in basin solutions for operators, but also out of basin solutions. And we've been from a Waterbridge standpoint and from other third parties have been very successful in bringing that stuff to fruition.

Speaker 6

Got it. I appreciate that answer. And as a follow-up, it seems that all the Delaware operators are talking up efficiency gains and raising their production forecast. And I know your team keeps a pretty detailed macro outlook on the basin. And just curious if anything if you're seeing any changes to your outlook based on these efficiency gains or anything changing in terms of water cuts?

Speaker 2

I would say there's certainly a focus on the efficiency side. I mean, honestly, that plays out more for WaterBridge as it thinks through its capital planning and infrastructure build out. I mean from Landbridge's perspective, we continue to be, I would say, the beneficiaries of increasing development in the Permian. And that's kind of the takeaway there. I think the fortunate thing about our business is there's no capital required to kind of keep up with those, call it, evolving methodologies that upstream producers are seeing at the moment.

Speaker 2

So we are just ultimately again the beneficiaries of the free cash flow that's coming out of these call it new production cycles. But yes, I mean from a general macro outlook on average, I mean we continue to see growth in the Delaware next year, meaningful growth. I think that comes as no surprise. I mean, I guess the only thing I would flag that we haven't spoken to is as producers are looking to develop out one section of surface or acreage rather in a more concentrated period of time that typically lends itself to developing out deeper benches and there's inherently higher water cuts that we see in those deeper benches. And so these more concentrated development approaches kind of coupled with the transition from shallower development to deeper development is just going to lend itself to on average a higher water to oil ratio across all production along the state line and in New Mexico.

Speaker 2

And so Water Bridge will be obviously the beneficiary of those water cuts and in turn so will Land Bridge given it will be receiving a higher royalty on average per barrel of oil than it has historically.

Speaker 6

I appreciate the answers. Thank you.

Speaker 2

Yes. Thanks, Kevin.

Operator

Our next question comes from the line of Lauren Goldstein with Investor. Your line is open.

Speaker 4

Thank you. Good morning. A couple of questions. Good morning, Lars. Thank you, fine.

Speaker 4

When you talk data centers and others talk data centers, I have now seen 300,000 square foot centers. I've seen years ago, 10000, 5000 and I've recently seen over 7,000,000 square foot data centers. What do you mean by data centers? What are you negotiating? The first 101s we will see.

Speaker 4

What's the size of them?

Speaker 2

Great question. So this initial lease is for 2,000 acres for a 1 gigawatt data center. The infrastructure itself will clearly not take up that full 2,000 acres. It is going to be a mix of the buildings themselves that house the data centers, the power infrastructure needed to power the data centers and then just the associated infrastructure that's needed to support the data centers.

Speaker 1

Yes. Laurence, the one thing I'd add to that is once the infrastructure is in place, it's a lot easier to grow these campuses, as we say, in scale, right? So the infrastructure being in place, we could see these 1 gigawatt data center growing to 5 or 6 gigawatts over time.

Speaker 2

Okay.

Speaker 4

So you're not willing to respond in terms of square feet of the complex of the quote data center unquote?

Speaker 2

Yes. It's in terms of the actual square footage of the buildings themselves, I can't speak to that offhand. What's been given to us or voiced over to us by the developers are rather this 2,000 square foot lease initially is going to be for 1 gigawatt data center initially. But to Jason's point, it's that site is not limited to 1 gigawatt. They've got the ability to scale up to 5 to 6 gigawatts on that 2,000 acre plot.

Speaker 2

So there's ample runway and benefits of scale to having those co located. But no, I don't know the exact square footage of the buildings themselves.

Speaker 4

Okay. Thank you.

Speaker 1

Yes. Thank you, Lawrence. Thank you, Lawrence.

Operator

Our next question comes from the line of Janice Roton with Landbridge. Your line is open.

Speaker 7

Hi. My question is just real short. Where are you posting your earnings reports? Because I've been online and I can't find them.

Speaker 2

Yes. We should have them posted in the IR portal on our website, on the landbridgeco.com website.

Speaker 7

Okay. But where on the website? IR?

Speaker 2

Yes. There should be an investors portal on the website.

Speaker 7

Okay. Go ahead and take another question. I'll see if I can for some reason, I missed that. I'll see if I can do it. Go ahead and take a minute.

Speaker 2

Yes. There's an Investor Relations link up top. Yes, no problem. And if you've got issues hunting it down, feel free to shoot me a note at scott.mcnealy@lamberidgeco.com and I can I can actually hop on the phone with you afterwards and walk through?

Speaker 7

But I didn't get an answer. But that's okay. I'll look for it. Okay.

Speaker 4

Okay. Go ahead

Speaker 7

and take another call and I'll see if I can find it. Okay. Bye.

Operator

There are no further questions at this time. Mr. Scott McNealy, I turn the call back over to you.

Speaker 2

Thanks again for everyone joining today. Please feel free to reach out to us if we can be helpful. But again, we appreciate your support. We hope everyone enjoys the rest of the week.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

Powered by Quartr
Earnings Conference Call
O'Reilly Automotive Q3 2024
00:00 / 00:00