Reading this article and thinking back on the one you wrote on NRP a few weeks ago, the main question I find asking myself is why as an investor I should prefer PBT over NRP.
Consider:
1. Assuming NRP's warrants are retired, NRP trades at about 3 times LTM earnings (and 3 times FCF), compared to 7 times earnings in the scenario you present for PBT.
2. There is an optionality in NRP's CO2 sequestration business that is hard to evaluate but potentially massive.
3. If production costs continue to increase, PBT's earnings will suffer due to the net overriding royalty scheme (thanks for the explanation!), but NRP's won't.
I understand that an investor bullish on oil & gas but bearish on met and thermal coal would prefer PBT, but I don't see many other reasons.
You pose a great question. A couple quick possible reasons an investor might consider PBT over NRP: 1) as you mentioned, a more bullish view of oil over coal, 2) some investors can own oil-related but not coal-related securities, 3) some investors can't own master limited partnerships. There's probably more. But we share you thoughts on the merits of NRP.
A more nuanced answer, for us, has to do with how we are investing in a thesis more so than any individual company. We have high conviction that the niche of companies with hard asset, asset-light business models stand to outperform over the next decade or so. We have much less conviction that we (with our lower than average brains) will be able to select the one or two winners within that niche. So we are comfortable holding a couple handfuls of these great businesses. There are not that many anyhow.
One last thing, as described in this piece, we believe PBT has a near-term catalyst that could increase the stock price dramatically. It will likely be a jump we don't want to miss.
> A more nuanced answer, for us, has to do with how we are investing in a thesis more so than any individual company.
That’s a great point and I need to learn to do that more! In 2021 I correctly identified that US steelmakers were undervalued but I bet on the wrong one (CLF). Psychologically it’s easier for me to spread my bets if there’s an ETF that tracks a subsector.
What is the "near-term catalyst" for $PBT that you expect to manifest? Would it be some confirmation that from Blackbeard is reducing capex for 2024? When do you expect we hear about this? Thanks and very interesting idea!
Great writeup! Very interesting situation. Just one question: why did $PBT decline so much in Jul/Aug? Was it due to bad 2Q23 results or something else? Thanks
How would you compare between PBT and TPL (Texas Pacific Land)? Same play or one's better than the other? (TPL's current corporate governance fiasco, which is likely temporary, aside)
Hey VC! Good question. In our view the situations are different. Both are long-term plays for us but we see a very specific catalyst for PBT in the near future. But overall we have much higher conviction in the long-term prospects of TPL. The fee ownership of its land (not just the rights) is a unique advantage.
I start getting interested to PBT few months ago and after some digging I make up my mind about the stock and decided to buy it now that is worth-ed about $14/share. With respect this analysis that you have done I would like you to consider two additional points:
(i) First and foremost Waddell Ranch is a very mature field. I have looked up and, at the current extraction rate, only 12 years remain for exploitation. If someone want to be conservative, I believe that only other 7 years can sustain current production with, necessary, a decrease after that point. This means that the return on the price you pay should be recovered in no less than 7 years, which imply a required an annualised net divided yield of at least 14%. When the price hit ~ 15$ per share this was the case.
(ii) you considered the capex but not the leasing operating expenses which increased dramatically in the past years, most likely due the amount of new infrastructure to maintain in the field. While the capex will surely drop dramatically, the leasing operating expenses will not (at least not at the same rate). It implies that still ~6 millions every month will be used as operating expenses. At a modest price of oil and gas ($70 and $1 mcf) I have estimated a net 7.7 millions on royalties every month, once the capex is decreased which is about 15% annualised yield.
To conclude, your analysis was very good but the limited life span of the trust imply that the ROI for the following years must be enormous to cover the depreciation of the royalties. As such, I would not pay anything more that 15-16$ for PBT at the current oil and gas prices. Clearly, if Brent goes at 100$ new consideration has to be made.
That's very insightful. Thank you for the additional information. What sources did you find to be the most useful in digging deeper into the leasing costs and Waddell Ranch? As you know, it's a challenge to find high fidelity information on these small companies.
What I don't know is the amount of operating expenses that the field will have once the capex is reduced but I guess it should be somewhat proportional to the number of wells active in the field.
I love your coverage of resource companies SB!
Reading this article and thinking back on the one you wrote on NRP a few weeks ago, the main question I find asking myself is why as an investor I should prefer PBT over NRP.
Consider:
1. Assuming NRP's warrants are retired, NRP trades at about 3 times LTM earnings (and 3 times FCF), compared to 7 times earnings in the scenario you present for PBT.
2. There is an optionality in NRP's CO2 sequestration business that is hard to evaluate but potentially massive.
3. If production costs continue to increase, PBT's earnings will suffer due to the net overriding royalty scheme (thanks for the explanation!), but NRP's won't.
I understand that an investor bullish on oil & gas but bearish on met and thermal coal would prefer PBT, but I don't see many other reasons.
Tian, good to hear from you as always!
You pose a great question. A couple quick possible reasons an investor might consider PBT over NRP: 1) as you mentioned, a more bullish view of oil over coal, 2) some investors can own oil-related but not coal-related securities, 3) some investors can't own master limited partnerships. There's probably more. But we share you thoughts on the merits of NRP.
A more nuanced answer, for us, has to do with how we are investing in a thesis more so than any individual company. We have high conviction that the niche of companies with hard asset, asset-light business models stand to outperform over the next decade or so. We have much less conviction that we (with our lower than average brains) will be able to select the one or two winners within that niche. So we are comfortable holding a couple handfuls of these great businesses. There are not that many anyhow.
One last thing, as described in this piece, we believe PBT has a near-term catalyst that could increase the stock price dramatically. It will likely be a jump we don't want to miss.
> A more nuanced answer, for us, has to do with how we are investing in a thesis more so than any individual company.
That’s a great point and I need to learn to do that more! In 2021 I correctly identified that US steelmakers were undervalued but I bet on the wrong one (CLF). Psychologically it’s easier for me to spread my bets if there’s an ETF that tracks a subsector.
Beating the psychology is half the fun.
What is the "near-term catalyst" for $PBT that you expect to manifest? Would it be some confirmation that from Blackbeard is reducing capex for 2024? When do you expect we hear about this? Thanks and very interesting idea!
Yes, a decrease/end to Blackbeard's capex. Honestly it's just guessing at this point. Estimate is mid to late '24.
Great writeup! Very interesting situation. Just one question: why did $PBT decline so much in Jul/Aug? Was it due to bad 2Q23 results or something else? Thanks
We don't know.
Great write-up.
How would you compare between PBT and TPL (Texas Pacific Land)? Same play or one's better than the other? (TPL's current corporate governance fiasco, which is likely temporary, aside)
Hey VC! Good question. In our view the situations are different. Both are long-term plays for us but we see a very specific catalyst for PBT in the near future. But overall we have much higher conviction in the long-term prospects of TPL. The fee ownership of its land (not just the rights) is a unique advantage.
Dear, sorry for the very late comment.
I start getting interested to PBT few months ago and after some digging I make up my mind about the stock and decided to buy it now that is worth-ed about $14/share. With respect this analysis that you have done I would like you to consider two additional points:
(i) First and foremost Waddell Ranch is a very mature field. I have looked up and, at the current extraction rate, only 12 years remain for exploitation. If someone want to be conservative, I believe that only other 7 years can sustain current production with, necessary, a decrease after that point. This means that the return on the price you pay should be recovered in no less than 7 years, which imply a required an annualised net divided yield of at least 14%. When the price hit ~ 15$ per share this was the case.
(ii) you considered the capex but not the leasing operating expenses which increased dramatically in the past years, most likely due the amount of new infrastructure to maintain in the field. While the capex will surely drop dramatically, the leasing operating expenses will not (at least not at the same rate). It implies that still ~6 millions every month will be used as operating expenses. At a modest price of oil and gas ($70 and $1 mcf) I have estimated a net 7.7 millions on royalties every month, once the capex is decreased which is about 15% annualised yield.
To conclude, your analysis was very good but the limited life span of the trust imply that the ROI for the following years must be enormous to cover the depreciation of the royalties. As such, I would not pay anything more that 15-16$ for PBT at the current oil and gas prices. Clearly, if Brent goes at 100$ new consideration has to be made.
That's very insightful. Thank you for the additional information. What sources did you find to be the most useful in digging deeper into the leasing costs and Waddell Ranch? As you know, it's a challenge to find high fidelity information on these small companies.
https://www.prnewswire.com/news/permian-basin-royalty-trust/
Here you can find some useful information. Check the article dated at FEB 16, 2024, 07:00 ET looking at the current Lease Operating Expenses.
These number are in line with the Q3 reported in the official quarterly report (http://www.pbt-permian.com/annual_quarterly/Permian3Q2023.pdf): $20.2 million (taxes + operating expenses) for Q3 corresponding to 6.7million per month.
What I don't know is the amount of operating expenses that the field will have once the capex is reduced but I guess it should be somewhat proportional to the number of wells active in the field.