Great study - thanks. I'm very bullish long term on gas and SMRs, so this was especially interesting to me. I'm a little puzzled about one thing though - I think of West Texas as very dry, and data centers need a lot of water for cooling - are they figuring getting enough water as a byproduct of drilling for oil and gas? If so, I wonder how long the water table will hold up...
Water as a byproduct of drilling is exactly right. Highly suggest checking out Landbridge (and their affiliate Waterbridge) to look into the opportunities there.
Al, good to hear from you again! Yes, as Spencer alluded to, the available water is largely produced water (produced as a by product of fracking). Four to six barrels of water come up for every one barrel of oil. Currently, over one billion gallons of produced water are produced per day in the Permian. Given the number of large aquifers under the Permian, it’s likely this will continue for the foreseeable future but we don’t know how to judge that exactly.
Thanks for the reply. 4-1 barrels water to oil - interesting. I mentioned in my “7 predictions” posted on Nov.5th that I think we’re going to need more desalination plants in the future. Not sure how much more we can draw down the existing water table. For Texas, desalination from salt water in the Gulf might be feasible as the transportation or piping wouldn’t be over excessive distance. Israel probably has the most experience with this - piping desalinated water from the Med. Coast to replenish the water level in the Sea of Galilee during droughts.
Firstly, it is quite speculative that there would be any meaningful effort in the Permian for data centers. The assumption is that we suddenly discover Permian has a huge comparative advantage among all locations where data centers have located. This was somehow discovered not by hyperscalers who have been operating data centers for decades, but by some asset managers.
Secondly, you guys are way too early. What does two years of 'selection' period tell you? Developing a data center off-the-grid with its own power and water source is a gargantuan task.
I think LB's stock price has benefited from speculation but it is not worth the risk at current price given the low likelihood of return from such efforts in a reasonable amount of time.
also, why is it clear the 'capital-light' landowners are the dominant financial beneficiaries?
wouldn't they need an experienced company like argan to do the actual work of constructing a facility on schedule? or is it assumed all of these players in the value chain are not really in it for the money and pass on most of the profits?
Anon, thanks for joining the conversation! You are very correct. There could be many other entities that benefit greatly from data centers built in the Permian. Other investors could make loads of money. We like the asset light land owners as a bet with low downside and unlimited upside.
Mirac, you raise great points. Thank you for commenting. Whether or not a lot of data centers are built in the Permian and when are two huge questions and some might say risks. Well, from LB signing agreements about a prospective data center, I would believe more people than just asset managers have found this opportunity. As far as being too early…our thesis about LB is only partly about data centers. There are so many other revenue sources, the primary one is water. LB has a sister company Waterbridge that transports produced and source water. LB’s chairman (also involved with Waterbridge) says the water coming from New Mexico alone over the next 2-5 years could add $200 to $300 million of FCF. And that’s just one of many such optionalities.
Interesting post overall but I was under the impression that large data centers need to be located closer to largemetro areas to avoid latency issues, i.e. slow bandwidth speed between the millions of people doing inquiries on their personal devices and the data centers during the processing.
Seems like the stranded energy out in the Permian is a great idea but may not work out due to distance from large populations of people demanding compute power.
Not all data center projects will need to prioritize low latency as highly. Consider centers dedicated to training large language models as one option.
Whether data centers locate in the Permian or elsewhere, and as someone who has holdings in real estate (several million SF in NYC) as well as an O&G royalty business (5 fund track record), I think the real play here is copper - the “metal of electrification,” which unlike nat gas is critically undersupplied for 5+ years, and unlike data centers (the hype) is not well capitalized (for exploration).
Thanks for this. Agreed. Quick question - do you have an easy source for LB earnings transcripts? I can't find them in the usual places. Thanks!
Try the Quartr app
I used roic.ai
https://www.roic.ai/quote/LB/transcripts
Great study - thanks. I'm very bullish long term on gas and SMRs, so this was especially interesting to me. I'm a little puzzled about one thing though - I think of West Texas as very dry, and data centers need a lot of water for cooling - are they figuring getting enough water as a byproduct of drilling for oil and gas? If so, I wonder how long the water table will hold up...
Your thoughts?
Water as a byproduct of drilling is exactly right. Highly suggest checking out Landbridge (and their affiliate Waterbridge) to look into the opportunities there.
Thanks!
Al, good to hear from you again! Yes, as Spencer alluded to, the available water is largely produced water (produced as a by product of fracking). Four to six barrels of water come up for every one barrel of oil. Currently, over one billion gallons of produced water are produced per day in the Permian. Given the number of large aquifers under the Permian, it’s likely this will continue for the foreseeable future but we don’t know how to judge that exactly.
Thanks for the reply. 4-1 barrels water to oil - interesting. I mentioned in my “7 predictions” posted on Nov.5th that I think we’re going to need more desalination plants in the future. Not sure how much more we can draw down the existing water table. For Texas, desalination from salt water in the Gulf might be feasible as the transportation or piping wouldn’t be over excessive distance. Israel probably has the most experience with this - piping desalinated water from the Med. Coast to replenish the water level in the Sea of Galilee during droughts.
Firstly, it is quite speculative that there would be any meaningful effort in the Permian for data centers. The assumption is that we suddenly discover Permian has a huge comparative advantage among all locations where data centers have located. This was somehow discovered not by hyperscalers who have been operating data centers for decades, but by some asset managers.
Secondly, you guys are way too early. What does two years of 'selection' period tell you? Developing a data center off-the-grid with its own power and water source is a gargantuan task.
I think LB's stock price has benefited from speculation but it is not worth the risk at current price given the low likelihood of return from such efforts in a reasonable amount of time.
had same thoughts.
also, why is it clear the 'capital-light' landowners are the dominant financial beneficiaries?
wouldn't they need an experienced company like argan to do the actual work of constructing a facility on schedule? or is it assumed all of these players in the value chain are not really in it for the money and pass on most of the profits?
Anon, thanks for joining the conversation! You are very correct. There could be many other entities that benefit greatly from data centers built in the Permian. Other investors could make loads of money. We like the asset light land owners as a bet with low downside and unlimited upside.
Mirac, you raise great points. Thank you for commenting. Whether or not a lot of data centers are built in the Permian and when are two huge questions and some might say risks. Well, from LB signing agreements about a prospective data center, I would believe more people than just asset managers have found this opportunity. As far as being too early…our thesis about LB is only partly about data centers. There are so many other revenue sources, the primary one is water. LB has a sister company Waterbridge that transports produced and source water. LB’s chairman (also involved with Waterbridge) says the water coming from New Mexico alone over the next 2-5 years could add $200 to $300 million of FCF. And that’s just one of many such optionalities.
But we could be totally wrong.
Thanks again!
Interesting post overall but I was under the impression that large data centers need to be located closer to largemetro areas to avoid latency issues, i.e. slow bandwidth speed between the millions of people doing inquiries on their personal devices and the data centers during the processing.
Seems like the stranded energy out in the Permian is a great idea but may not work out due to distance from large populations of people demanding compute power.
Not all data center projects will need to prioritize low latency as highly. Consider centers dedicated to training large language models as one option.
Whether data centers locate in the Permian or elsewhere, and as someone who has holdings in real estate (several million SF in NYC) as well as an O&G royalty business (5 fund track record), I think the real play here is copper - the “metal of electrification,” which unlike nat gas is critically undersupplied for 5+ years, and unlike data centers (the hype) is not well capitalized (for exploration).