Business Breakdowns
· 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.
· James Davolos
So Five Point, a lot of its business, they had some really interesting midstream assets. San Mateo, they had an acid injection company called Northwind, which we should talk about later. But they raised the capital to go out and say, look, we really want to get some surface acreage to facilitate the growth of WaterBridge. The Hanging H Ranch was actually under contract by a PE-backed sponsor and they were unable to close during COVID. David and Five Point fortunately stayed in the vicinity of the deal and were able to close that in 2021. It was about 70,000 acres, really, in that core of the core of the Permian Basin. So now you've got Five Point with your sponsor company, WaterBridge, and then you've got the land company with LandBridge with that first toehold of around 70,000 acres with the Hanging H Ranch. A lot has gone on since then, but I should also mention just I definitely want to stay on. The Five Point is that when you look at the development of the basin they've been very forward-thinking with sour gas with Northwind, which they just sold to MPLX. But then also they launched a new company called Powerbridge where if you're of the belief, which we are inclined to be, that you're going to see large-scale data centers and infrastructures coming to Texas. Powerbridge is now another portfolio company of Five Point run by the ex-Talen CEO to really facilitate that development. And so the commonality here is very forward-thinking, very aggressive but thoughtful deal making and really speaks volumes to what they've been able to achieve and then our willingness to partner with them.
· Matt Reustle
[00:00:00] S0: Yeah, it's very interesting to hear. I think so many people tried to be opportunistic, particularly post the fallout of the shale boom and that took many different routes to do it. But I don't think you saw too many successes. This one is quite interesting from an infrastructure perspective. I'm curious from your standpoint, when you think about the different vehicles, I guess the simple answer is you'd rather invest in a pure play than have these pieced together. But do you think there's anything else beyond that separating LandBridge and WaterBridge? I understand they're two different businesses, but from a scale standpoint, sometimes it helps to bunch things together. Any thoughts on just their approach to doing that?
· James Davolos, Matt Reustle
[00:00:00] S1: Yeah, I think you would never get the appropriate multiple of land within a broader portfolio. And we've seen this with gold royalties. Newmont Mining bought Franco-Nevada and then they spun it back out at the end of 2007 because they got frustrated that the market would never give them credit for their royalties. You also see oil and gas companies that don't get credit for their surface acreage and their royalties. And so I think that what Five Point recognized is land is a really unique asset with very high optionality and we need to keep that separate because it really should be capitalized at a different rate than an operated midstream asset. I think also it's important to keep water as a pure play. So there's a variety of companies out there that have water within a broader midstream business. NGL has a water business. Western has a business which is now Solaris, acquiring Aris and Aris probably never got the multiple that they deserved. But I think that it was really important if you want the market to appreciate and capitalize this business appropriately, you need to allow investors to isolate the water business for what it is. [00:00:00] S0: Does Kinder Morgan still have a water business? [00:00:00] S1: I believe they do, but I don't know how big of a market share. They don't really come across as having a big market share in the Permian at least.
· James Davolos, Matt Reustle
[00:00:00] S1: I believe they do, but I don't know how big of a market share. They don't really come across as having a big market share in the Permian at least. [00:00:00] S0: Yeah, okay, that makes sense. I guess it is helpful to touch on LandBridge just because you do have these two vehicles. LandBridge, you had this previous IPO process a year forward from where WaterBridge is at today. Can you talk through a little bit more of a snapshot of are they doing anything beyond what you've referenced, what they do with WaterBridge and then what has been the public market perception to LandBridge since that IPO?
· James Davolos
[00:00:00] S1: Yeah, it was actually not the greatest IPO. I mean, even though the stock has done really well, I think it was originally slated to price in the $19 to $22 range, which was around 15 times trailing our forward EBITDA. It ultimately broke price and traded at $17. And people can pull up a chart. It traded $80 by year end. It's I think mid-$50s today. But so there's a lot of different things going on there and I think that that creates the confusion. But if you just underwrite the core business, which is assembling ranches that are very complementary in Texas and New Mexico, which can facilitate water infrastructure development, it's a very compelling investment case. Five Point has been really forward-thinking and also developing these next-gen opportunities. And so they've identified six or eight facilities where basically they think it's essentially plug-and-play for multi-gigawatt data centers in West Texas. You've got your fiber to basically plug in your fiber optic. In some cases you can get some grid power. But I think a lot of this is going to be direct generation. You've got the ERCOT grid, you've got the substations, critically you've got the water, you've also got the gas which is really cheap for direct generation. And so they basically have it ready to go. And I think that once the hyperscalers and the other people involved here realize you can't co-locate a 3-gigawatt facility, let alone 500 megawatts anymore, all those things have basically been gobbled up. I think you're going to start seeing a lot more traction there. So I think with LandBridge a lot of the narrative has gotten taken over about these next-gen opportunities whereas great as they are and as much as we believe in them, people ignored how great the water opportunity is today. And I think one other thing that LandBridge has talked up is the beneficial reuse of this water. So to the extent that some is being quote recycled today, which is just being cleaned up enough to be used in refracs, which is a fairly low bar, the next iteration of beneficial reuse would be to desalinate. And then can you use it to replenish the Pecos River watershed? Can you use it for crops, can you use it for animals? And then ultimately could it be used for industrial, whether it's power plants or cooling, things like that. And so all these things are incredibly exciting.