Business Breakdowns
· Matt Reustle, James Davolos
[00:00:00] S0: Yeah, I certainly get the offtake. I can understand the land side as well. And just to go back to what you were mentioning earlier, in this case WaterBridge, I know they're getting easements from LandBridge. If they're moving over that land, are they also leasing the land or using LandBridge's land? In the case of the wells themselves. [00:00:00] S1: It tends to be an all-in contract. So let's say I'm using, I don't know, a couple dozen of your acres and then I have a couple of SWDs on your acreage. It tends to be priced on a per-barrel basis, which is better than an easement because term easements tend to not be as lucrative. But we can get into the contract structures later. But you want to have that optionality around volume and pricing. And in this sense the landowners that are astute retain that.
· James Davolos, Matt Reustle
[00:00:00] S1: It tends to be an all-in contract. So let's say I'm using, I don't know, a couple dozen of your acres and then I have a couple of SWDs on your acreage. It tends to be priced on a per-barrel basis, which is better than an easement because term easements tend to not be as lucrative. But we can get into the contract structures later. But you want to have that optionality around volume and pricing. And in this sense the landowners that are astute retain that. [00:00:00] S0: Got it. I think you've given a pretty good rundown of the Permian, its importance to the overall industry, how it captures this idea of fracking in the US and how that unlocked so much resource that had previously been left behind before we really dialed in on the technology. In regards to thinking about that basin and the future dynamics there. I mean, I'll just lead off with a simple question, is it's very unique when it relates to shale oil, where you have very rapid decline curves. There's an incredible amount of oil produced from these wells. A lot of that is seen up front. From a time value money standpoint, that could be a good thing. But that means you need to drill more to maintain that production. Do any of these things as it relates to shale, and the unique dynamics of shale oil have an impact on WaterBridge when you think about the opportunity both medium term and then obviously longer term as well.
· James Davolos
[00:00:00] S1: Absolutely. And I think this is one of the biggest misperceptions around the business today is around that dynamic you mentioned is that decline rates on a traditional shale well might be 30% or more in your first couple of years and then pretty high thereafter. And then you kind of flatline into a much slower, more traditional decline rate. But that dynamic that people have cited is you the treadmill, where you have to keep drilling at an ever higher rate just to maintain production, let alone grow. It's different with water because maybe we'll introduce this concept of water cuts. And so a water cut is how much water comes out with the oil and gas. And when you first start producing a well, the water cut is actually at its lowest because you have a lot of that oil and gas going into the wellbore. But then after those really steep declines, your water cut gets higher and higher and higher as that well ages. And so despite the overall decline in volume of oil and gas of that well, what's actually coming out of the ground is very similar amounts of volume. It's just more and more water. There's almost a very stable rate to the water over the decades that that well produces. As the well ages, the water cut goes up. And so you don't have to have this treadmill just to maintain production. It's a much more long, stable, contracted stream of water. And that's why it's such a big deal. You drill one of these big wells, you're going to have a couple million dollar estimated ultimate recovery or EUR. You've got decades, maybe 30 years of water liabilities that you need to figure out. The other concept that's really important is people have been hypothesizing the end of the Permian based on this concept of high-grading tier one locations. So nobody's really defined tier one other than it's the lowest cost to drill. So once you go into Tier 2, it tends to be these deeper formations in the Wolfcamp. And why is it tier two? Well, maybe there's a little bit less oil in place, but it's also more expensive to extract. And it's not more expensive because you're going deeper per se. It's generally more expensive because there's more water. So as you see operators drilling into lower tier, lower quality, you're going to start seeing that 4-to-1 inch up to 5-to-1 to 6-to-1.
· James Davolos, Matt Reustle
There's even areas where if you believe that the Permian is going to be producing for decades like we do, you could be in scenarios where some of these wells are over 10-to-1. But so those are the two really important dynamics, which is A, the water cut increasing as the well ages and then B the water cuts increasing as you go into lower tiers. So this basically creates a much more stable even organic growth rate to water. If the Permian produces flat oil for the next 20 years, water volumes will grow almost certainly mid to high single digits, if not higher. I don't think very many people appreciate that. [00:00:00] S0: I can tell you. I definitely did not appreciate that. And it's a very important detail. So perhaps I buried the lede with that question and waiting to get there. But yeah, that's an incredibly interesting dynamic, but both on the difference in decline curve for water versus oil from any traditional well, but then also what it means when you're moving theoretically down in quality. I guess when you think about the Permian, obviously I think that is the basin within the U.S.—would this theoretically translate into other basins like the Eagle Ford up in Williston in the Bakken? Is that something that could happen? I don't stay too close to the basin production anymore, but I'd be curious to know.
· Matt Reustle, James Davolos
[00:00:00] S0: I can tell you. I definitely did not appreciate that. And it's a very important detail. So perhaps I buried the lede with that question and waiting to get there. But yeah, that's an incredibly interesting dynamic, but both on the difference in decline curve for water versus oil from any traditional well, but then also what it means when you're moving theoretically down in quality. I guess when you think about the Permian, obviously I think that is the basin within the U.S.—would this theoretically translate into other basins like the Eagle Ford up in Williston in the Bakken? Is that something that could happen? I don't stay too close to the basin production anymore, but I'd be curious to know. [00:00:00] S1: Short answer is no. They don't have nearly as high of water cuts, but they also don't have nearly the amount of oil and gas produced. And so maybe in many decades out if we really need to exploit different reservoirs. But for the time being, the opportunity is very acute and the largest in the Permian, specifically the Delaware. [00:00:00] S0: Got it. I have to bring up Five Point Infrastructure because you can't read about WaterBridge or LandBridge without reading Five Point Infrastructure. They seem to be the sponsors behind this company, but I think you have a much better appreciation for who they are and what they've done. Can you give us a snapshot of Five Point?
· James Davolos
[00:00:00] S1: Yeah, absolutely. And one of the things that I've loved about guests on your podcast is how much they stress the people, and in this case the people. It really starts with David Capobianco. David's history is really interesting. He was your traditional banker. Midstream experience. He went to go work for Vulcan, which was Paul Allen of Microsoft fame and Fortune's family office. He took Plains All American, which is one of the larger oil and gas pipeline systems in the U.S. Private based on the filings and legal analysis that was done by my trusty AI assistants, David was terminated and then replaced by his team in an effort for Vulcan to not pay him what was ultimately disclosed as a $120 million settlement. David and his partner won when litigating that in court. But the genesis of his dismissal at Vulcan and familiarity with midstream was ultimately what started WaterBridge. So that gave him the opportunity to go out and create Five Point in 2012. And really he did that with the intention of what he learned from being in the midstream space was, I want to be in water because this is only going to get bigger and bigger and eventually you're going to need third parties to be involved there. So one of his initial transactions was he acquired a water company run by Jason Long, who's now the CEO of WaterBridge and LandBridge, and basically built WaterBridge from the ground up as the premier water disposal infrastructure company. Really fragmented industry. They did a lot of organic things, but they also did a lot of bolt-on acquisitions. So eventually, I should say, they came to the realization that it's going to be really difficult to scale this into the aspirations that we have if we're constantly having to call up these ranchers and get access to their land. And so one of the really unique deals that they were able to structure, and I don't think many people could have pulled this off other than David and Jason, is they agreed to an area of mutual interest, essentially a joint venture with Texas Pacific Land Corporation to really exploit that state line area in northern Loving County. It's a really symbiotic relationship. TPL doesn't operate water systems. They're more of a royalty taker on these saltwater disposal wells. But then also in the wake of COVID they were able to buy the Hanging H Ranch. And so when I say they, I mean Five Point.