Business Breakdowns
· 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.
· James Davolos, Matt Reustle
They're call options. But I think the market maybe got a little too excited about them happening now versus T plus 1, T plus 2, T plus 3. But anything interesting going on in West Texas? Land and infrastructure, rest assured that they're involved at least looking into it. [00:00:00] S0: Yeah, certainly from all angles it seems like I know if someday, I guess they can't take the name Liquid Death, but if there's some questionable name about water that I'm drinking, I'll make sure to know if it's coming out of this space. That's a long... That's T plus 25, I suppose. But I guess moving to the WaterBridge IPO, I think you captured the opportunity and the trajectory of growth. Can you talk a bit about the contracts themselves? You mentioned some references to a cut of per barrel of oil, but how does it work with the E&P when they're contracting them? When does it happen? Is it flat rate per barrel? Anything you can get into around those contracts?
· James Davolos
[00:00:00] S1: So generally you are as an E&P, are not going to even start thinking about drilling a large development right now unless you know for a fact that your water is taken care of. In this case, they tend to be very long-term. So I believe WaterBridge is around 11 years weighted average contract. The two main types of these long-term fixed-fee contracts, there's what's an acreage dedication which is really the preferable term. So you have 30,000 acres that you are controlling the drill bit on. Give me an acreage dedication on that and basically I will guarantee your flow at X per barrel. They tend to have CPI-linked escalators. And so in a higher nominal growth world, you have that growth working in your favor. And then in our view, as this becomes more and more scarce, there's going to be pricing power as these contracts reset, although that's a decade out, there's also minimum volume commitments. So minimum volume commitments would say look, I'm going to guarantee you X amount of volume. These aren't as great because you really want them to know you can capture all of their water. But they can be used to basically... Look, I can de-risk a large project where, let me get it started, with a minimum volume commitment which again tends to be long-term fixed-fee, CPI escalators. It's just there's only a minimum guarantee. But if that can basically de-risk my project and then I can bring on new customers and quintuple the size de-risk, it's a home run. The smallest part is spot and you always want to leave a little bit of room for spot which is basically somebody's in a jam. They need 20,000 barrels a day handled for a month. You can have extract a lot of economics on those contracts but again they'll probably try to figure out a way to mitigate that on their own. And so it's not recurring or nearly as stable as the other types of contracts. So we think that as the market is reckoning with the fact that we're running out of easy pore space and nobody's denying it anymore, some people are downplaying how big of a deal it is, other people are downplaying is it an issue today versus 2027 or 2028. But everybody acknowledges there is not enough disposal capacity either from a transportation or a disposal well standpoint.
· James Davolos, Matt Reustle
As a testament to this, Devon Energy in a first-of-its-kind transaction has paid WaterBridge for the right to use pore space in the future. So that's them saying we might not get to this well pad for three or four years, but we're worried you're going to fill up your capacity around it between now and then. So we're going to pay you for you to reserve that pore space for us for if and when it comes around. So if that's any indication, we think that obviously there's going to be some pricing power as they add capacity and as these contracts renew. But even at the current state they're long-term fixed-fee, CPI escalator, almost utility-like types of contract strues. [00:00:00] S0: Yeah, that's a pretty remarkable deal for Devon to reserve that space. Just thinking that far in advance contradicts a lot of what the producers do in oil world. On the point about the minimum guarantees, should I just think about that as anything that is produced on that acreage is ultimately going to go to WaterBridge? From a water standpoint, it's just a matter of you might only be at the minimum levels for a period of time if the producer doesn't choose to produce more. It's just mostly about the timeline? It's not about somebody else coming in and doing some of that disposal?
· Matt Reustle, James Davolos
[00:00:00] S0: Yeah, that's a pretty remarkable deal for Devon to reserve that space. Just thinking that far in advance contradicts a lot of what the producers do in oil world. On the point about the minimum guarantees, should I just think about that as anything that is produced on that acreage is ultimately going to go to WaterBridge? From a water standpoint, it's just a matter of you might only be at the minimum levels for a period of time if the producer doesn't choose to produce more. It's just mostly about the timeline? It's not about somebody else coming in and doing some of that disposal? [00:00:00] S1: Minimum volume commitment, it's just what it sounds like. They might guarantee you 20,000 barrels a day, but to the extent that they could find a way to do it internally or cheaper or go around you, it doesn't guarantee you all that flow. And so that's why the acreage dedication, where there's actually penalties to not using them for some of your disposal on that acreage dedication is much more powerful. And so again, it does make sense to do minimum volume commitments, but acreage dedication is much more attractive long-term. [00:00:00] S0: Yeah, I mean the MVC saved some of the midstream companies, at least for periods of time, but that's an interesting dynamic. I was connecting that all of those were associated with acreage commitments, I guess. How easy is switching in this case? So using an alternative provider, if that were to be the case, is there low friction associated with substituting someone in? Whether it be in that example or at the end of 10 years?
· James Davolos
[00:00:00] S1: It's getting really, really hard to switch because again, this concept of porosity where a lot of these saltwater disposal wells, let's say in West Texas, the acreage tends to be in these 640-acre or square miles, which are sections. So even if you're being responsible with how you're injecting on your section, you have no ability to control what your neighbor's doing, which in some cases could be just a couple hundred meters away. And you're seeing these high increasing pressurization. And so now that you're seeing more discretion around permits for the wells and issues with porosity, it's getting harder and harder to change vendors. Once you add in these longer-haul pipelines that are going to be required, then it's going to be incredibly difficult because A, there's only a few companies that are even in the business of doing longer-haul pipes today. WaterBridge being the most well-known and highest regarded. But I really think it's going to end up being an oligopolistic industry where today a lot of it is controlled by the E&P. So internally Conoco deals with their own water, but they really aren't in the business of dealing with 80 miles of easements. And then you're drilling disposal wells and then maybe commingling some third-party volumes. I'd say the answer is it used to be very easy, now it is difficult. And I think in the future it's getting closer to infeasible than just difficult.