LandBridge Company LLC

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

LandBridge Company LLC is a land royalty company focused on natural resources in the Delaware Basin, including oil, natural gas, water and minerals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

LandBridge Company LLC (LB) operates primarily in the Permian Basin, a region known for its prolific oil and gas production. The company’s business revolves around land and resource management, primarily through the ownership of surface acreage and mineral rights. Unlike typical energy companies that focus on extraction and production, LB focuses on land and resource management, with revenues derived from royalties, surface use, and water-related activities. This business model makes them more a landlord rather than a drilling company.

The Permian Basin is among the most prolific oil and natural gas producing regions in the U.S.. The company is primarily focused on that region, making it susceptible to risk that are particular to the area.

Revenue Streams:

Surface Use Royalties and Revenues: This is generated from agreements with oil and gas operators for surface access, as well as for easements, well pads, pipelines, and other surface-related revenue streams, such as transportation. This allows LB to make money from the activity on their land, even when they’re not the producers themselves.
Resource Sales and Royalties: These revenues come from sales of raw materials, including aggregates such as gravel, sand, and stone, that are extracted from their land and are needed for completion and construction activities for oil and gas drilling.
Oil and Gas Royalties: LB is entitled to a percentage of revenue generated from oil and gas production taking place on their land. This allows them to profit directly from well production, and is a typical royalty agreement, where payments are determined based on a percentage of total production revenue.
Produced Water Handling Revenues: This consists of payments by customers for produced water. The water must be collected, treated, and disposed of by specialized vendors using LB infrastructure, which are often sold back to the oil and gas operators for fracking purposes.

The company describes the business model as low-risk because they generate revenue based on agreements they have with their customers rather than a business model reliant on volatility from commodity production. However, the company is still reliant on the health of the oil and natural gas industry.

Most of LB’s revenue comes from Surface Use Royalties and Revenues and from Resource Sales and Royalties, making them less dependent on oil price than conventional energy companies.

Industry Trends & Competitive Landscape

The oil and natural gas industry is highly cyclical, making long-term revenue and profitability difficult to forecast and predict. Many of LB’s customers are also dependent on the price of oil and gas, causing a ripple effect if those prices drastically change.
The land and resource management space in the Permian Basin is becoming increasingly competitive as companies see the appeal in passive income generation rather than the volatility of oil drilling.
The need for water in oil and natural gas exploration is growing as companies look for more efficient ways to bring oil out of the ground. *The demand for produced water handling is increasing as more wells are becoming increasingly “mature”. These types of services are more needed on these wells, but can become commoditized as other service providers move in, putting a pressure on pricing.

What Makes LandBridge Different?

The Company owns a unique position in the heart of the Delaware Basin, a major producing area in the Permian. This provides the company with a competitive edge with access to multiple layers of resource-rich areas.
The Company has multi-faceted revenue streams (e.g. land leases, surface-related revenues, and sales of raw materials) that contribute to revenue stability, allowing them to get revenue regardless if oil is extracted or not from their land.
The management has substantial experience in the industry.
They have long-term contracts with their customers.

Moat Analysis: 2/5

LandBridge’s moat is weak. While the company has some advantages, it has a high possibility of being eroded over time by competition and other market forces.

The company’s location in the Permian Basin gives it a competitive edge with large amounts of resources, but this location is also highly susceptible to volatility depending on prices of oil and gas and the health of that industry.
The company has high switching costs in form of contracts with its customers, but that also means that their current upside on pricing or expansion is also limited.
The company’s distribution networks are important for their business of sand and aggregate, giving them a cost advantage on those products in that region, which may have some stickiness, although that is not a huge aspect of their revenue streams.
The company has multiple revenue streams, but not all of them are equally defensible against competitors. Companies can easily sell raw materials on the market, and other companies could set up water-processing infrastructure in similar areas as they develop capabilities and expertise.
Their leases are non-exclusive which increases competition risk. The company also has minimal control over whether companies on their land extract the oil and gas-affecting their revenue as well as their operational risks.
Overall, the company’s reliance on agreements with other energy players, which might be a strength, also makes them susceptible to changes to other players’ business structure.

Sources of the Moat:

Location Advantage: LandBridge is positioned in a prime area of the Permian Basin, a low-cost, high-production region.
Switching Costs: Their long-term contracts and integration with client operations create a form of switching cost that leads to higher customer retention, but it does come at the cost of limiting their upside in the pricing of their assets.
Cost Advantages: Due to location and local operations, they can take advantage of selling their aggregate and sand to other companies that need them for fracking in the area.

Risks to the Moat and Business Resilience:

Fluctuations in commodity prices: A drop in oil and gas prices can severely impact drilling and exploration activities on their leased land, directly affecting royalty revenue as well as demand for water and other services.
Regulatory changes: Regulatory changes could make it more expensive or difficult for customers to extract oil and gas or engage in water and sand mining activities, impacting demand for LB’s services.
Competition: New companies, especially private ones, are entering the market looking to purchase similar land leases that are often non-exclusive. New competitors can come in and underprice and disrupt the market.
Technological disruptions: Technologies like fracking and horizontal drilling have increased the need for water and other resources. If a new technology comes along and makes these things less important or commoditized, it could severely affect the need for LB’s services.
High concentration of operations: A large part of their operations are in a single geographical area (the Delaware basin), making the company susceptible to regional issues, both from economic factors, natural disasters, and other operational risks.
Customer bankruptcy/restructuring: If the company that holds the lease goes bankrupt, there is a risk of non-payment or cancellation of the contracts. As such, the financial health of LB’s customers directly impacts its own financial health.
Dependence on a small number of customers: While contracts may be long term, those revenues depend on relatively few customers which introduces increased risks of business loss.
Environmental liabilities: Liabilities associated with environmental protection and remediation could become substantial.
Changes in regulation in extraction or use of water, oil, gas and minerals could alter the operating costs of the company and it’s clients, impacting the value proposition for their business.

Business Resilience:

The company’s focus on land, and not commodity price increases, may lead to higher stability and resilience than a regular oil and gas company.
The company has a strong balance sheet with good liquidity.
The company generates very strong revenue and positive cash flows, which enables it to continue operating in a difficult market environment.

Financials (FY 2023 and Q1 2024):

Revenues: Increased by 16.9%, from $72.7 million in 2022 to $84.9 million in 2023. In the latest Q1 2024 report, revenues are roughly the same as in Q1 2023. (Exhibits indicate some volatility in oil and gas prices, however the company revenue has been stable and growing).
Operating Income: The operating income rose from $57.9m in 2022 to $71.8m in 2023. However, in the first quarter of 2024, it dropped to $16.9m from $19.2m in Q1 2023. Showing the same volatility from the business that their revenue was showing.
Net Income Net income grew from $37.8m to $44.6m from 2022 to 2023. Again, in Q1 2024, net income dropped to $5.7m vs $8.6m in Q1 2023.
EBITDA Adjusted EBITDA grew from $51.4m to $65.9m from 2022 to 2023. Again a fall to 16.1m from 17.6m in Q1 2024.
Capital Expenditures: Were down in Q1 2024 to 4.3m from 8.6m a year earlier. But still are high at $60.6m in 2023 vs $58.5m in 2022.
Free Cash Flow: Grew from $34.6m to $47.4m from 2022 to 2023. But, then again, a decrease to 11.9m from 12.7m in Q1 2023 to Q1 2024.
Debt The company’s debt is low. In Q1 2024, total debt is at 141.8m down from 173.4m at the end of the year 2023. The debt-to-equity ratio is relatively high. The company has a credit facility and a term loan and has been taking the opportunity to reduce the debt on the balance sheet.
Margins: The company enjoys high EBITDA margins, which were 77.7% in 2023. This is despite a decrease in margins from 86.5% in 2022. However, they are a clear indication of business profitability.
Balance Sheet Analysis: The company has a healthy amount of cash on hand ($37.2m at Q1 2024, $34.6m at the end of 2023). Property, plant and equipment comprise the largest assets ($235.2m in 2023). Trade and other receivables at about $13m. Goodwill at about $2.6bn. The liabilities side is small at $170m with equity making up the rest. The debt-to-equity ratio is 0.39 at the end of Q1 2024. (however it was close to 0.5 at the end of 2023)

LB’s revenue and profitability has risen year over year, however, the company is still very dependent on how other energy businesses perform, and susceptible to any disruption in their revenues.

The company has decreased debt, is very profitable, and has high margins, however, the future results are volatile and can change significantly.

Understandability: 2/5

LandBridge’s business model is complex.

It is difficult to understand the specific details of the contracts and the different mechanisms the company has in place to generate different sources of revenue.
It is also difficult to understand how all of these different activities are related to the company’s profitability and where they stand in the priority of revenue generation.
The complexity of the oil and gas industry as a whole also adds to the difficulty in fully grasping the nuances of the business.
The many areas of activity, such as water treatment and sand mining, add further complications to a seemingly straightforward royalty business.

Balance Sheet Health: 3/5

LandBridge’s balance sheet is moderately healthy:

Debt is low but debt to equity ratio is high at 0.39, especially considering their cash balance, which can be used to further pay down debt. This does pose some stability to the business, but does not give a complete green flag.
The company has a lot of goodwill from acquisitions, which is always a risk to earnings or profits.
The level of cash and liquid assets is quite high, signifying good financial health.
The company is profitable.
Overall, the balance sheet shows adequate financial health but has some risks stemming from large intangibles and a high debt-to-equity level.

Recent Issues

The company is dealing with volatile oil and gas prices, which have been swinging from high to low, causing a high level of uncertainty for the market. As stated in the last few filings, the company is making progress in its expansion strategy, but that has required increased costs and spending which has eaten into overall earnings, especially for its short term results. However, the company did have strong results on a per share basis, which means their operational efficiency is up compared to previous results. The market is also taking notice as the stock price has climbed significantly from its previous low.

The last quarterly results were a mix of highs and lows. While the revenue was still similar to the previous year, their earnings were down. They stated it was mostly due to increasing operating costs, mainly from increase in amortization of acquired intangibles and interest expenses related to credit facilities and the term loan.

The company also stated that the long term outlook was still positive with improvements made during the quarter, especially around operations and the acquisition front. The company is focusing on reducing debt, and believes it will lead to higher shareholder value.

The most important part that has to be kept in mind is that the company is a passive player in the commodity cycle and heavily reliant on the success of other oil and gas companies that work in the Delaware Basin. In periods of lower activity in the area, they would probably see revenues slow as well, and thus, may not be able to maintain the same earnings and profitability.

Overall, they seem to be focusing more on operations and cost management, hoping that any improvement in their operations translates to higher profitability over the coming years.