Activism Story: Texas Pacific Land Trust ($TPL)

An Oddball correspondent wrote in about the ongoing proxy fight at Texas Pacific Land Trust (TPL), which, while too big to be a true "Oddball" is certainly Odd, unique, very old, and interesting:

Here's a 55 minute video that allows you to experience the drama (from the special shareholders meeting on May 22). The man in front speaking is Eric Oliver, a "dissident" candidate who handily won the open trustee spot, although this is hotly contested in federal court. He is frequently interrupted by the attorney for the two existing sitting trustees. There's also a blog that has frequent updates.

Texas Pacific Land Trust has been around since 1888 and is a favorite of the Horizon Kinetics fund managers. From the Wikipedia history of the trust:

TPL was created in February 1888 in the wake of the Texas and Pacific Railway bankruptcy, as a means to dispose of the T&P's vast land holdings. TPL received over 3.5 million acres, and certain T&P bondholders were allowed to exchange their (now worthless) bonds for trust certificates. The certificates were later divided into "sub-share" certificates (3,000 sub-share certificates is the equivalent of one trust certificate), and the sub-share certificates have been traded on the NYSE since January 1927.

Over 100 years later, even having sold 75 percent of its original landholdings, TPL is still among the largest private landowners in the State of Texas. As of December 31, 2008, TPL owned 963,248.33 acres of land in 20 West Texas counties, of which around 70 percent is located in Culberson (315,640.09 acres), Reeves (194,750.28 acres), and Hudspeth (160,467.44 acres) counties. In addition, TPL owns a 1/128 nonparticipating perpetual royalty interest in 85,413.60 acres (over half of which is in Ector and Midland counties), and a 1/16 nonparticipating perpetual royalty interest in 386,987.70 acres (over 60 percent of which is in Culberson and Reeves counties).

See the map of TPL's west Texas acreage. One of the things that investors have liked about TPL is that it is a "cannibal" - allocating income to significant share repurchases:

TPL has a long-standing policy to repurchase sub-shares with excess cash. As noted in the 2015 annual report, "As provided in Article Seventh of the Declaration of Trust, dated February 1, 1888, establishing the Trust, it will continue to be the practice of the Trustees to purchase and cancel outstanding certificates and sub-shares. These purchases are generally made in the open market and there is no arrangement, contractual or otherwise, with any person for any such purchase."

In 2015, the Trust purchased and retired 204,335 sub-shares at a cost of $28,771,073, representing an average cost of $140.80 per sub-share. The number of sub-shares purchased and retired in 2015 amounted to 2.5% of the total number of sub-shares outstanding as of December 31, 2014.

The policy of buy backs has reduced the sub-share count by 26% between 2004 and 2015 (from 10,971,375 at the end of 2004 to 8,118,064 at the end of 2015.)

Of course, it helps that TPL's land was on top of the Permian oil bounty! Yet, historically, TPL's almost "autopilot" policy of self-repurchasing has proven to be a great capital allocation strategy, avoiding the all-too-common resource producer patterns of buying overpriced land (often at cyclical commodity peaks) just to grow production, or boondoggles from straying afield (something that Pardee investors are currently grappling with).

While we are not involved in the TPL flight, we believe that good corporate governance consists of real owners (not professional board members) sitting in the board room making decisions (with skin in the game) about their property. (See this example of an older Oddball post on activism.)

There is litigation between the Trust and the activist investors, and the countersuit by the dissident nominee is very interesting:

On information and belief, the incumbent trustees have caused TPL to spend upwards of $5 million of shareholder capital on this proxy contest to date. But nowhere in the Declaration of Trust are trustees vested with the authority to wage proxy contests against shareholders, or in any way utilize trust property to impose on shareholders the nominee of the incumbent trustees. The trustees do not enjoy the same broad set of powers and wide field of discretion as the directors of a modern corporation. Nothing gives the incumbent trustees the power to take actions outside of managing the trust's property as strictly outlined in the trust documents. Because the incumbent trustees have exceeded their authority under the Declaration of Trust, they are personally liable to the trust for all the expenses they have incurred without proper authority.

Check out how many copies of their proxy card the incumbents sent - all with the Trust beneficiaries' money!

The Eric Oliver dissident nominee is the Chairman of AMEN Properties which is a micro cap and kind of an Oddball. He and his fund have a $31 million stake in TPL! Oliver was also involved in a company that maps oil and gas activity in the Permian.

We'll have more on these topics - activism, share cannibalization, capital allocation, resource investments like Pardee Resources - in the upcoming June Issue of the Oddball Stocks Newsletter. If you've read this far into this post, you should really think about subscribing. Maybe try an à la carte back Issue, like Issue 19 or Issue 20 from last year.