Texas Pacific Land Corporation: Wide Moat, Strong Cash

If you like unique businesses that stand out for wide-moat competitive advantages, strong cash flows and secular tailwinds, then you may want to consider Texas Pacific Land Corp (TPL). This unique “oil & gas” company blends real estate (Permian basin land), energy royalties and water resources, and the shares have pulled back despite ongoing strong fundamentals. This report reviews the business, growth, valuation, risks and competitive advantages, and then concludes with a strong opinion about investing.

About The Business

Texas Pacific Land Corporation traces its origins to 1888, when it was established as a land trust following the bankruptcy of the Texas and Pacific Railway Company. Today, TPL is a publicly traded corporation (TPL) headquartered in Dallas, Texas, and is one of the largest landowners in Texas, managing approximately 873,000 acres, predominantly in West Texas. The company operates through two primary segments: Land and Resource Management and Water Services and Operations.

The Land and Resource Management segment oversees the company’s vast surface acres and subsurface royalty interests, primarily in the Permian Basin. Revenue streams include oil and gas royalties, easements (e.g. for pipelines and utilities), commercial leases, and land sales.

The Water Services and Operations segment, conducted through its subsidiary Texas Pacific Water Resources LLC, focuses on providing water solutions to oil and gas operators, including sourcing, treatment, and disposal of water used in hydraulic fracturing. This segment also generates income from produced water royalties. TPL’s strategic position in the Permian Basin ties its fortunes closely to the energy sector, yet its diversified revenue sources provide a buffer against commodity price volatility.

Growth

TPL has demonstrated robust growth in recent years, driven by the shale boom in the Permian Basin and increasing demand for water services. In its Q4 and full-year 2024 earnings (reported in February 2025), TPL posted an 11.8% increase in revenue to $705.82 million and a similar rise in net income to $453.96 million, translating to earnings per share of $19.72. The Water Services segment was a standout, with a 33% revenue increase, reflecting the critical role water plays in oil extraction. Additionally, TPL expanded its footprint by acquiring 7,490 net acres of mineral and royalty interests in 2024, enhancing its royalty revenue potential.

Historically, TPL’s revenue has grown at a compound annual growth rate (CAGR) of approximately 15% over the past five years, fueled by rising oil production and infrastructure development in the Permian. The company’s stock price has mirrored this growth, surging 159.67% over the past 52 weeks as of March 2025, reaching levels around $1,350 per share (post a 3:1 stock split in March 2024).

Valuation

Valuing TPL is a bit of a balancing act between its high multiples and its asset-driven cash flows. As of March 27, 2025, TPL trades at a trailing price-to-earnings (P/E) ratio of 68.5x, significantly above the S&P 500 average of around 25x. Its enterprise value-to-EBITDA (EV/EBITDA) ratio stands at 53.9x, and its price-to-free cash flow (P/FCF) ratio is 66.5x, both indicating a premium valuation. However, TPL’s financial health is exceptional, with $369.8 million in cash, negligible debt ($1.2 million), and a current ratio of 10.8x (reflecting a strong liquidity position).

Additionally, on a relative valuation basis, TPL trades at a premium to peers, such as Permian Basin Royalty Trust (PBT) and Black Stone Minerals (BSM). However the businesses are different (e.g. TPL generates revenue from both oil and gas royalties and a diversified portfolio including water services and surface-related activities across its extensive Permian Basin land holdings; whereas PBT solely earns income from net royalty interests in specific oil and gas properties without operational involvement; and BSM—like TPL—derives revenue from mineral and royalty interests, but focuses primarily on leasing its mineral rights to operators across multiple U.S. regions, and without TPL’s significant water services or surface revenue streams). Nonetheless, TPL’s high valuation reflects the market’s confidence in its long-term cash generation potential.

Competitive Advantages

Important to recognize, TPL’s significant competitive moat is rooted in its irreplaceable asset (i.e. nearly 873,000 acres of contiguous land in the Permian Basin, a region responsible for over 40% of U.S. oil production). This vast, strategically located land bank provides a structural advantage, as competitors cannot replicate its scale or proximity to high-output wells. The company’s royalty model ensures it benefits from energy production without incurring extraction costs, offering high margins (operating margin exceeds 75%) and resilience to operational risks faced by producers.

Also, the Water Services segment further strengthens TPL’s moat. Specifically, by controlling water resources that are critical to fracking, TPL has become an indispensable partner to Permian operators, locking in long-term contracts and royalties. Its early mover advantage in water management, combined with proprietary infrastructure, creates barriers to entry for potential rivals.

Additionally, TPL’s virtually debt-free balance sheet and substantial cash reserves provide flexibility to pursue accretive acquisitions, as seen in its 2024 mineral interest purchases, reinforcing its economic moat.

Risks

Important to note, TPL does face significant risks that could impact its share price:

Oil & Gas Prices: The most significant risk is TPL’s exposure to oil and gas price volatility (as royalties constitute a substantial portion of revenue). A downturn in energy prices could reduce production activity in the Permian, directly affecting TPL’s income.

Regulatory risks also loom, particularly concerning water usage and environmental restrictions in Texas, which could constrain its Water Services segment.

Geographic Concentration: TPL’s concentrated land holdings (in the lucrative Permian Basin) mean it lacks geographic diversification, making it vulnerable to regional economic or climatic shocks.

Operational risks include potential inefficiencies in capital allocation, a concern raised by some investors critical of TPL’s “dry powder” strategy (i.e. holding substantial cash rather than aggressively repurchasing shares or expanding further). Arguably, there is a lot of unrealized revenue potential from natural gas due to pipeline constraints, suggesting growth could stall if infrastructure development lags.

Valuation Risks: The 800-pound gorilla in the room is TPL’s high valuation by traditional metrics (even if it is a unique business model). This suggest volatility risk (i.e. a price correction) if growth expectations fall. Its elevated multiples and high beta of 1.7 (an indication of higher volatility) may be unappealing to some investors.

Limited Wall Street coverage: Due to its unique business model (e.g. royalties and water services in the Permian Basin—which doesn’t fit typical energy or real estate categories), and its complex valuation (high P/E ratio and volatility), many analysts seem deterred from covering the company. Also, TPL’s low float (high share price, recently over $1,300) and lean structure reduce liquidity and visibility. With a $31 billion market cap but sparse analyst attention (1-4 firms), its premium pricing and niche focus seem to lack broad appeal. This under coverage may also signal (to some) an overlooked opportunity, although with risks (as discussed).

Dividend Considerations

TPL’s pristine balance sheet and consistent free cash flow generation (over $464 million in 2024) support a sustainable dividend (although currently modest, yielding 1.15%), with the potential for special dividends (like the $10 per share payout in June 2024). While this may be a sign of financial stability to some, the yield may be too low for more yield-focused investors.

Bottom Line

Despite the risks and (arguably) rich valuation, TPL stands out for its wide-moat, cash-generative businesses and secular tailwinds—such as energy infrastructure and resource management (particularly in the attractive Permian Basin). And if you have a long-term focus, there are plenty of reasons to believe TPL can continue to grow significantly and thereby also provide significant gains to shareholders.

Texas Pacific Land Corporation is absolutely worth considering for investment, as part of a prudently-diversified, long-term, growth-focused portfolio.