Business Breakdowns
· James Davolos
[00:00:00] S1: We ultimately build everything bottom up. We look at our volume pricing margin, discount it back using a fairly conservative discount rate. However, ultimately I think it's more discernible to look at okay, what are comps and what are multiples on a static rate and then reconcile that with your DCF. So today you're gathering and processing peer groups. So mostly natural gas, Western and MPLX, ONEOK, et cetera. They tend to trade around 9 times 4 forward EBITDA. The IPO process targeted a peer set to GNPs with a one turn discount to incentivize the IPO book build. I think it did so and then more so. It priced at the top end of the range and they were able to upsize. I think that pricing at a GNP multiple, while I think it's necessary because it's such a nuanced, idiosyncratic business, you have to use something the market has familiarity with. We think the business can grow on a fairly organic basis for 15% or better for three to five years. So that's expanding Kraken, that's expanding Speedway, that's isolating the sour gas window. You can also bolt on some M&A assets. So Pilot, which is owned by Berkshire is up for sale. They have a very interesting Midland Basin business that is legacy Diamondback which could be bolted on. But forgetting those more aggressive bolt-ons, again, the organic-ish growth profile around 15 at 8 times with multi-decade contracted CPI escalator, 50% EBITDA margin. Doesn't sound right to you? It doesn't sound right to me. So what does it sound like? It sounds like waste. You look at Casella, GFL, Waste Management, Clean Harbors is one of the more industrial players and those companies tend to be 14 to 18 or even more. I would argue WaterBridge has better returns on invested capital and better growth. So if you're looking for a peer-based comp set, this is really more of an infra waste business than it is a midstream business. So for it to trade in line or better than infra and waste, I think as the market appreciates the growth, the margin and the pricing wouldn't shock me. And we try not to use multiple expansion in our base case. So go back to the organic growth rate, add some M&A. If the company pays down debt, buys back some stock, it's pretty easy to get excited. But then if you do add on that re-rate which we think is more than justified, then the numbers get really compelling.
· Matt Reustle, James Davolos
[00:00:00] S0: It's definitely interesting enough based on what you laid out from a organic perspective alone. [00:00:00] S1: Yeah, we haven't even talked about the beneficial reuse because you can't monetize it or even think about the economics today. But to the extent that you can clean this water and use it for agricultural purposes or even industrial uses, that adds another component that will probably be here someday. But definitely not within 12 to 18 months. [00:00:00] S0: Right? Yeah, makes sense. And then just thinking about the sensitivity of the business and where there would be most swing in terms of outcome here, what do you hone in on just in terms of the key variables, things that matter the most?
· Matt Reustle, James Davolos
[00:00:00] S0: Right? Yeah, makes sense. And then just thinking about the sensitivity of the business and where there would be most swing in terms of outcome here, what do you hone in on just in terms of the key variables, things that matter the most? [00:00:00] S1: To the extent that we are very comfortable that Permian production is going to be stable to the extent that there's a shift, do we think it's going to shift more west into the Delaware where there's more volume? There's also some more gas opportunities which to the extent you believe in the AI and the power generation thesis, a lot of that macro ties in very well to just the stable, if not growing Delaware Basin production volumes. So that's your KPI, because as long as volume is stable, if not growing, then you have the addressable market established and then it's really, can they capture volume? Can they push price? And the debit agreement? The final investment decision on Speedway, the completion of Kraken is showing us that all these cross references to the thesis are in place. And so now it's just looking at the sensitivities of what is the volume growth, at what price and then at what margin. And that's your toggles in terms of looking at the valuation. And then that's where it's fairly clear cut. Where it gets a little bit more murky is, okay, are these returns on an incremental invested capital as high as we thought? Is the addressable market for that as big as we thought? That's the second layer to the analysis.
· Matt Reustle
[00:00:00] S0: That makes sense. Yeah, it's very interesting. I came into this with one subsegment of the oil market—the frac sand businesses I had in mind. And I was like, how can I separate this from frac sand? The first was I was thinking about this in the injection mindset rather than the disposal. But I think there's been plenty more to that. As we close these conversations out, we try to hit on the lessons as you step back and try to take away the lessons from this, from LandBridge, from TPL. What would you use as a lesson that you can take from those businesses and think about elsewhere when you're investing?
· James Davolos
[00:00:00] S1: I'd say three lessons that I would definitely come away from this experience, which is now measured in a decade. One is really develop your expertise and core competency in something. And when you do that, always have your head on a swivel looking for peripheral or adjacent opportunities. So it's easy to have blinders on and just say all I do is traditional infra, all I do is traditional oil and gas and pipelines in midstream. But to Five Point's credit, they saw water, they saw sour gas, they see data center and infrastructure. And so by having that core competency, it gives you a running start to then jump into these other areas once you see that it's there. Number two is capital efficiency. So capital-light is something that we hammer through our team and just a capital-light business model that—let's say you were to just cut everything and just go into maintenance capex mode—is this a good business today? And not a lot of businesses are. And so that notion of being capital-light from a working capital, but then also a capex standpoint, you tend to pay more for these businesses, but in many cases you should. The last one is probably the ultimate capital-light real asset is land. Just—it's perpetual, there's optionality, it's finite. And every time I look at things with land, especially if there's a water angle, it's really easy to get excited and I always remind myself how great of an asset land is. And I wish there was a bigger opportunity set, both public and private, to scale land investing.
· Matt Reustle, James Davolos
[00:00:00] S0: Yeah, well you guys have done an impressive job finding the opportunities there and it took some time with the recognition with TPL in terms of that explosion. But I think in recent years it's just been amazing. So this has been a pleasure. I really enjoyed diving in. It brought me back down memory lane. Thank you for sharing the knowledge and getting into the nuance on this one. It was a pleasure. [00:00:00] S1: Yeah, this was really enjoyable. Happy to come back anytime.