TPL looks reasonable with asymmetric upside if energy inflation takes hold.
As a reminder, TPL is a royalty company with 100% of their acreage located in the Texas Permian Basin. In a nutshell they make money when drilling activity occurs but DO NOT have the capital needs. The incremental amount of work on TPL’s part is minimal as the extraction and movement of the oil/natural gas is undertaken by others. They are merely a toll collector with Returns on Capital of 80+%.
In an inflationary environment, businesses that have lower capital intensity both in capital assets and people, stand to benefit. In other words, if oil goes up a lot, the incremental cost to TPL is close to 0 so it is all incremental profit. This is a business that should benefit in a massive way if we have energy inflation.
Submitted October 16, 2021 at 07:33AM by Lyman-Zerga https://ift.tt/3aKWrbG
