UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2019
OR
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ______ to ______
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 1-737


Exact name of registrant as specified in its charter:
Texas Pacific Land Trust
(Exact Name
State or other jurisdiction of Registrant as Specified in Its Charter)incorporation or organization:
NOT APPLICABLE
NOT APPLICABLE
(State or Other Jurisdiction of Incorporation
or Organization)
75-0279735
(I.R.S. Employer
Identification No.)
1700 Pacific Avenue, Suite 2770, Dallas, Texas
(Address of Principal Executive Offices)
75201
(Zip Code)

IRS Employer Identification No.:
75-0279735

Address of principal executive offices:
1700 Pacific Avenue, Suite 2900
Dallas, Texas 75201

Registrant’s telephone number, including area code:
(214) 969-5530
(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑   No ¨☐


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑    No ¨☐


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerþ
☑
 Accelerated filer¨☐
Non-accelerated filer¨ (Do not check if a smaller reporting company)
☐
 Smaller reporting company¨☐
Emerging growth companyo
☐
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨☐


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Sub-shares in Certificates of Proprietary Interest (par value $0.03-1/3 per share)TPLNew York Stock Exchange



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ ☐ No þ☑


As of April 30, 2019,2020, the Registrant had 7,756,156 Sub-share Certificates outstanding.





TEXAS PACIFIC LAND TRUST
Form 10-Q
Quarter Ended March 31, 20192020


Page No.
PART I
FINANCIAL INFORMATION
Page
FINANCIAL INFORMATION
Item 1.
1
Condensed Consolidated Balance Sheets as of March 31, 20192020 and December 31, 20182019
1
2
3
4
10
1416
1416
PART II
OTHER INFORMATION
17
Item 1.1A.
1517
Risk Factors
15
Item 2.
1518
1518
1518
1518
1619
Signatures
17
#SectionPage#





PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

Item 1.Financial Statements

TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
March 31,
2019		 December 31,
2018		March 31, 2020December 31, 2019
(Unaudited)  (Unaudited)
ASSETS
   
ASSETS
   
Cash and cash equivalents$113,261
 $119,647
Cash and cash equivalents$223,743  $303,645  
Accrued receivables65,728
 48,750
Tax like-kind exchange escrow61,463
 3,799
Accrued receivables, netAccrued receivables, net68,679  62,995  
Other assets3,397
 3,884
Other assets3,676  3,980  
Prepaid income taxes—
 9,398
Property, plant and equipment, net of accumulated depreciation of $4,193 and $3,012 as of March 31, 2019 and December 31, 2018, respectively72,821
 64,802
Property, plant and equipment, net of accumulated depreciation of $14,544 and $11,313
as of March 31, 2020 and December 31, 2019, respectively
Property, plant and equipment, net of accumulated depreciation of $14,544 and $11,313
as of March 31, 2020 and December 31, 2019, respectively
88,709  88,323  
Real estate acquired57,682
 10,492
Real estate acquired110,965  107,075  
Royalty interests acquired27,720
 24,303
Royalty interests acquired, net of accumulated depletion of $318 and $260 as of March 31, 2020 and December 31, 2019, respectivelyRoyalty interests acquired, net of accumulated depletion of $318 and $260 as of March 31, 2020 and December 31, 2019, respectively45,938  29,060  
Operating lease right-of-use assets2,834
 —
Operating lease right-of-use assets2,939  3,098  
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:   Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:
Land (surface rights)—
 —
Land (surface rights)—  —  
1/16th nonparticipating perpetual royalty interest—
 —
1/16th nonparticipating perpetual royalty interest—  —  
1/128th nonparticipating perpetual royalty interest—
 —
1/128th nonparticipating perpetual royalty interest—  —  
Total assets$404,906
 $285,075
Total assets$544,649  $598,176  
   
LIABILITIES AND CAPITAL
   
LIABILITIES AND CAPITAL
   
Accounts payable and accrued expenses$9,656
 $10,505
Accounts payable and accrued expenses$21,139  $19,193  
Income taxes payable6,760
 1,607
Income taxes payable14,697  5,271  
Deferred taxes payable35,903
 14,903
Deferred taxes payable40,772  40,827  
Unearned revenue15,825
 13,369
Unearned revenue19,448  17,381  
Operating lease liabilities2,963
 —
Operating lease liabilities3,250  3,367  
Total liabilities71,107
 40,384
Total liabilities99,306  86,039  
   
Commitments and contingencies—
 —
Commitments and contingencies—  —  
   
Capital:   Capital:
Certificates of Proprietary Interest, par value $100 each; none outstanding—
 —
Sub-share Certificates in Certificates of Proprietary Interest, par value $.03 1/3 each; outstanding 7,756,156 and 7,762,414 Sub-share Certificates as of March 31, 2019 and December 31, 2018, respectively—
 —
Certificates of Proprietary Interest, par value $100 each; NaN outstandingCertificates of Proprietary Interest, par value $100 each; NaN outstanding—  —  
Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 Sub-share Certificates as of March 31, 2020 and December 31, 2019Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 Sub-share Certificates as of March 31, 2020 and December 31, 2019—  —  
Accumulated other comprehensive loss(1,069) (1,078)Accumulated other comprehensive loss(1,447) (1,461) 
Net proceeds from all sources334,868
 245,769
Net proceeds from all sources446,790  513,598  
Total capital333,799
 244,691
Total capital445,343  512,137  
Total liabilities and capital$404,906
 $285,075
Total liabilities and capital$544,649  $598,176  
See accompanying notes to condensed consolidated financial statements.

1


TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEAND TOTAL COMPREHENSIVE INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
 
 Three Months Ended
March 31,		Three Months Ended
March 31,
 2019 201820202019
Revenues:    Revenues:
Oil and gas royalties $33,213
 $26,547
Oil and gas royalties$42,360  $33,213  
Easements and other surface-related income 31,367
 16,978
Easements and other surface-related income26,267  31,367  
Water sales and royalties 22,983
 13,607
Water sales and royalties26,967  22,983  
Land sales 103,625
 2,750
Land sales900  103,625  
Other operating revenue 136
 125
Other operating revenue100  136  
Total revenues 191,324
 60,007
Total revenues96,594  191,324  
    
Expenses:    Expenses:      
Salaries and related employee expenses 6,464
 2,563
Salaries and related employee expenses10,620  6,464  
Water service-related expenses 4,578
 1,306
Water service-related expenses6,780  4,578  
General and administrative expenses 2,142
 680
General and administrative expenses2,959  2,142  
Legal and professional fees 1,783
 647
Legal and professional fees2,358  1,783  
Depreciation and amortization 1,204
 330
Depreciation, depletion and amortizationDepreciation, depletion and amortization3,335  1,204  
Total operating expenses 16,171
 5,526
Total operating expenses26,052  16,171  
    
Operating income 175,153
 54,481
Operating income70,542  175,153  
    
Other income 393
 130
Other income826  393  
Income before income taxes 175,546
 54,611
Income before income taxes71,368  175,546  
Income tax expense    
Income tax expense (benefit):Income tax expense (benefit):
Current 14,548
 10,820
Current14,022  14,548  
Deferred 21,000
 —
Deferred(55) 21,000  
Total income tax expense 35,548
 10,820
Total income tax expense13,967  35,548  
Net income $139,998
 $43,791
Net income$57,401  $139,998  
    
Other comprehensive income — periodic pension costs, net of income taxes of $2 and $3, respectively 9
 13
Other comprehensive income — periodic pension costs, net of income taxes of $4 and
$2, respectively
Other comprehensive income — periodic pension costs, net of income taxes of $4 and
$2, respectively
13  9  
Total comprehensive income $140,007
 $43,804
Total comprehensive income$57,414  $140,007  
    
Weighted average number of Sub-share Certificates outstanding 7,759,808
 7,818,168
Weighted average number of Sub-share Certificates outstanding7,756,156  7,759,808  
    
Net income per Sub-share Certificate — basic and diluted $18.04
 $5.60
Net income per Sub-share Certificate — basic and diluted$7.40  $18.04  
    
Cash dividends per Sub-share Certificate $6.00
 $4.05
Cash dividends per Sub-share Certificate$16.00  $6.00  
 
See accompanying notes to condensed consolidated financial statements.

2


TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Three Months Ended
March 31,		Three Months Ended
March 31,
2019 2018 20202019
Cash flows from operating activities:   Cash flows from operating activities:  
Net income$139,998
 $43,791
Net income$57,401  $139,998  
Adjustments to reconcile net income to net cash provided by operating activities:   Adjustments to reconcile net income to net cash provided by operating activities:      
Deferred taxes21,000
 —
Deferred taxes(55) 21,000  
Depreciation and amortization1,204
 330
Depreciation, depletion and amortizationDepreciation, depletion and amortization3,335  1,204  
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Operating assets, excluding income taxes(19,331) (10,102)Operating assets, excluding income taxes(5,377) (19,331) 
Prepaid income taxes9,398
 1,202
Prepaid income taxes—  9,398  
Operating liabilities, excluding income taxes4,579
 (172)Operating liabilities, excluding income taxes3,909  4,579  
Income taxes payable5,153
 9,622
Income taxes payable9,426  5,153  
Cash provided by operating activities162,001
 44,671
Cash provided by operating activities68,639  162,001  
   
Cash flows from investing activities:   Cash flows from investing activities:      
Proceeds from sale of fixed assets30
 —
Proceeds from sale of fixed assets—  30  
Acquisition of land(47,189) (751)Acquisition of land(3,890) (47,189) 
Acquisition of royalty interests(3,418) —
Acquisition of royalty interests(16,936) (3,418) 
Purchase of fixed assets(9,247) (11,841)Purchase of fixed assets(3,617) (9,247) 
Cash used in investing activities(59,824) (12,592)Cash used in investing activities(24,443) (59,824) 
   
Cash flows from financing activities:   Cash flows from financing activities:      
Purchase of Sub-share Certificates in Certificates of Proprietary Interest(4,353) (6,709)Purchase of Sub-share Certificates in Certificates of Proprietary Interest—  (4,353) 
Dividends paid(46,546) (31,652)Dividends paid(124,098) (46,546) 
Cash used in financing activities(50,899) (38,361)Cash used in financing activities(124,098) (50,899) 
   
Net increase in cash, cash equivalents, and restricted cash51,278
 (6,282)
Net (decrease) increase in cash, cash equivalents and restricted cashNet (decrease) increase in cash, cash equivalents and restricted cash(79,902) 51,278  
Cash, cash equivalents and restricted cash, beginning of period123,446
 79,580
Cash, cash equivalents and restricted cash, beginning of period303,645  123,446  
Cash, cash equivalents, and restricted cash, end of period$174,724
 $73,298
Cash, cash equivalents, and restricted cash, end of period$223,743  $174,724  
   
Supplemental disclosure of cash flow information:   Supplemental disclosure of cash flow information:
Income taxes paid$—
 $—
Income taxes paid$4,600  $—  
   
Supplemental non-cash investing information:Supplemental non-cash investing information:
Operating lease right-of-use assetsOperating lease right-of-use assets$—  $3,712  
 
See accompanying notes to condensed consolidated financial statements.

3

TEXAS PACIFIC LAND TRUST
NOTES TO CONDENSEDCONSOLIDATEDFINANCIAL STATEMENTS
(UNAUDITED)
  
1. Organization and Description of Business Segments
1.Organization and Description of Business Segments


Texas Pacific Land Trust (which, together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. Texas Pacific was organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company, and to issue transferable Certificates of Proprietary Interest pro rata to the original holders of certain debt securities of the Texas and Pacific Railway Company.

The Trust is organized to manage land, including royalty interests, for the benefit of its owners. The Trust’s income is derived primarily from oil gas and watergas royalties, sales of water and land, easements and commercial leases of the land.

We operate our business in two2 segments: Land and Resource Management and Water ServiceServices and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of the Trust and provide a framework for timely and rational allocation of resources within businesses. See Note 9,9. “Business Segment Reporting” for further information regarding our segments.


Corporate Reorganization
2.Summary of Significant Accounting Policies


On March 23, 2020, we announced that our Trustees approved a plan for reorganizing the Trust from its current structure to a corporation formed under the laws of the State of Delaware. The Trustees made their determination following careful consideration of the recommendation of the Conversion Exploration Committee of the Trust. The Trust presently intends that the corporate reorganization will be effected by the end of the third quarter of 2020, but the Trust recognizes that unforeseen impacts of COVID-19 or other developments could extend this timeframe despite the Trust’s efforts. Barring any unforeseen disruptions, further information regarding the corporate reorganization will be included in a registration statement on Form 10 to be filed by the corporation with the SEC as well as in other communications and disclosures anticipated to be made by the Trust and the corporation.

2. Summary of Significant Accounting Policies

Interim Unaudited Financial Information


The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position of the Trust as of March 31, 20192020 and the results of its operations for the three months ended March 31, 20192020 and 2018,2019, respectively, and its cash flows for the three months ended March 31, 20192020 and 2018,2019, respectively. Such adjustments are of a normal recurring nature.


Principles of Consolidation and Basis of Presentation


The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include our consolidated accounts and the accounts of our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, which was filed with the SEC on February 28, 2019.27, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report.


Use of Estimates in the Preparation of Financial Statements


The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent asset and liabilities at the date of the financial statements and reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain financial information on the condensed consolidated balance sheets as of December 31, 2018 and condensed consolidated statements of income for the three months ended March 31, 2018 has been revised to conform to the current year presentation. These revisions affected the classification of the tax like-kind exchange escrow from other assets to a separate balance sheet line item and certain expense items from one expense line item to another expense line item. Total assets and expenses were not affected by these reclassifications.


Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):


4
  March 31, 2019 December 31, 2018
Cash and cash equivalents $113,261
 $119,647
Tax like-kind exchange escrow 61,463
 3,799
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $174,724
 $123,446
     


Recently Adopted Accounting Guidance


Leases

In FebruaryJune 2016, the FASB issued ASU 2016-13, “Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “LeasesInstruments — Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments.”which amended The ASU amends the existing lease accounting guidanceimpairment model by requiring entities to require lesseesuse a forward-looking approach based on expected losses to recognize a rightestimate credit losses on certain types of use asset and lease liability on the balance sheet for all leases with terms greater than twelve months. Wefinancial instruments, including trade receivables. The Trust adopted the new leasing standard and all related amendments onguidance effective January 1, 2019. We elected2020. Due to the optional transition method provided by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and asshort-term nature of our trade accounts receivable, the adoption of this guidance had a result, have not restatedminimal impact on our condensed consolidated financial statements for prior periods presented. We also elected the practical expedients permitted under the transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, we have not reassessed the accounting treatment of contracts entered into prior to adoption of the new lease guidance.statements.


Upon adoption, we recorded a right-of-use asset for $3.0 million and a lease liability for $3.0 million related to operating leases in connection with our administrative offices located in Dallas and Midland, Texas. The lease agreements require monthly rent payments and expire in March 2025 and August 2022, respectively. Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease cost for the three months ended March 31, 2019 was $0.1 million.

3. Recent Accounting Pronouncements
Future minimum lease payments under these operating leases are as follows as of March 31, 2019 (in thousands):
2019 (excluding the three months ended March 31) $344
2020 597
2021 613
2022 597
2023 546
Thereafter 701
Total lease payments 3,398
Less: imputed interest (435)
Total operating lease liabilities $2,963
   

3.Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, “Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to Disclosure Requirements for Defined Benefit Plans.” The ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Trust is currently evaluating the impact that ASU 2018-14 will have on our consolidated financial statements and disclosures.


In August 2018,December 2019, the FASB issued ASU 2018-15, 2019-12, “IntangiblesIncome Taxes (Topic 740) — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’sSimplifying the Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a

Service Contract.Income Taxes.”The ASU requires a customersimplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in a cloud computing arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize as an asset. Theinterim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years and interim periods beginning after December 15, 2019,2020, including interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with early adoption permitted, and may be applied retrospectively orany adjustments reflected as of the beginning of the annual period of adoption.that includes that interim period. The Trust is currently evaluating the impact that ASU 2018-15this guidance will have on our consolidated financial statements and disclosures.


4.Property, Plant and Equipment

4. Property, Plant and Equipment

Property, plant and equipment, net consisted of the following as of March 31, 20192020 and December 31, 20182019 (in thousands):

 March 31, 2019 December 31, 2018March 31, 2020December 31, 2019
Property, plant and equipment:    Property, plant and equipment:
Water service-related assets (1)
 $71,593
 $62,919
Water service-related assets (1)
$96,600  $93,097  
Furniture, fixtures and equipment 4,823
 4,297
Furniture, fixtures and equipment6,055  5,941  
Other 598
 598
Other598  598  
Property, plant and equipment at cost 77,014
 67,814
Property, plant and equipment at cost103,253  99,636  
Less: accumulated depreciation (4,193) (3,012)Less: accumulated depreciation(14,544) (11,313) 
Property, plant and equipment, net $72,821
 $64,802
Property, plant and equipment, net$88,709  $88,323  
    


(1)Water service-related assets reflect assets related to brackish water sourcing and water re-use projects.

(1) Water service-related assets reflect assets related to water sourcing and water treatment projects.

Depreciation expense was $1.2$3.2 million and $0.3$1.2 million for the three months ended March 31, 20192020 and 2018,2019, respectively.


5

5.Real Estate Activity


5. Real Estate Activity

As of March 31, 20192020 and December 31, 2018,2019, the Trust owned the following land and real estate (in thousands, except number of acres):

 March 31, 2019 December 31, 2018March 31,
2020		December 31,
2019
 Number of Acres Net Book Value Number of Acres Net Book ValueNumber of AcresNet Book ValueNumber of AcresNet Book Value
Land (surface rights) 856,211
 $—
 877,462
 $—
Land (surface rights)849,826  $—  849,856  $—  
Real estate acquired 36,416
 57,682
 24,715
 10,492
Real estate acquired52,687  110,965  51,931  107,075  
Total real estate situated in 19 counties in Texas 892,627
 $57,682
 902,177
 $10,492
Total real estate situated in 19 counties in Texas902,513  $110,965  901,787  $107,075  
        


No valuation allowance was necessary at March 31, 20192020 and December 31, 2018.2019.


Land Sales


For the three months ended March 31, 2020, the Trust sold approximately 30 acres (Pecos County) of land in Texas for an aggregate sales price of approximately $0.9 million, an average of approximately $30,000 per acre.

For the three months ended March 31, 2019, the Trust sold approximately 21,251 acres (13,180 acres in Loving County, 5,598 acres in(Loving, Culberson, County, 1,651 acres in Hudspeth County and 822 acres in Reeves County)Counties) of the Trust’s Assigned land in Texas for an aggregate sales price of approximately $103.6 million, with an average of approximately $4,876 per acre.


Land Acquisitions

For the three months ended March 31, 2018,2020, the Trust soldacquired approximately 120756 acres (80 acres in Culberson County(Culberson and 40 acres in Loving County)Reeves Counties) of the Trust’s Assigned land in Texas for an aggregate salespurchase price of approximately $2.8$3.9 million, with an average of approximately $22,917$5,134 per acre.


Land Acquisitions


For the three months ended March 31, 2019, the Trust acquired approximately 11,702 acres (Culberson and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $47.2 million, with an average of approximately $4,033 per acre.


For the three months ended March 31, 2018, the Trust acquired approximately 641 acres (all in Upton County) of land in Texas for an aggregate purchase price of approximately $0.8 million, with an average of approximately $1,171 per acre.

6. Royalty Interests
6.Royalty Interests


As of March 31, 20192020 and December 31, 2018,2019, the Trust owned the following oil and gas royalty interests (in thousands, except number of interests):
Net Book Value
March 31, 2020December 31, 2019
1/16th nonparticipating perpetual royalty interests$—  $—  
1/128th nonparticipating perpetual royalty interests—  —  
Royalty interests acquired46,256  29,320  
Total royalty interests, gross46,256  29,320  
Less: accumulated depletion(318) (260) 
Total royalty interests, net$45,938  $29,060  
  Net Book Value
  March 31, 2019 December 31, 2018
1/16th nonparticipating perpetual royalty interests $—
 $—
1/128th nonparticipating perpetual royalty interests —
 —
Royalty interests acquired 27,720
 24,303
Total royalty interests $27,720
 $24,303
     


No valuation allowance was necessary at March 31, 20192020 and December 31, 2018.2019.


For the three months ended March 31, 2020, the Trust acquired oil and gas royalty interests in approximately 1,017 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $16.9 million, an average price of approximately $16,659 per net royalty acre.

6

For the three months ended March 31, 2019, the Trust acquired oil and gas royalty interests in approximately 301 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $3.2 million, an average price of approximately $10,500 per net royalty acre.


There were no oil and gas royalty interest transactions for
7. Income Taxes

For the three months ended March 31, 2018.


7.Income Taxes

Effective January 1, 2018, the statutory Federal2020 and 2019, income tax expense was $14.0 million and $35.5 million, respectively. The difference between the U.S. statutory tax rate forof 21% and the Trust decreased from 35% to 21%. The Trust’scurrent effective Federal income tax rate is less than the 21%primarily related to statutory rate because taxable income is reduced by statutory percentage depletion allowed on mineral royalty income.


In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Trust structuredCoronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the $100.0 million land sale in January 2019 as a §1031exchange for federalU.S., includes measures to assist companies, including temporary changes to income and non-income-based tax purposes. As a result, the current federal income tax liability and current federal income tax expense were each reduced by approximately $21.0 million duringlaws. For the three months ended March 31, 2019.2020, there were no material tax impacts to our condensed consolidated financial statements as it relates to COVID-19 measures. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.



8. Capital
8.Capital


The Sub-share Certificates (“Sub-shares”) and the Certificates of Proprietary Interest are freely interchangeable in the ratio of one Certificate of Proprietary Interest for 3,000 Sub-shares or 3,000 Sub-shares for one Certificate of Proprietary Interest.


Dividends


On March 16, 2020, we paid $124.1 million in dividends representing a regular cash dividend of $10.00 per Sub-share and a special dividend of $6.00 per Sub-share for sub-shareholders of record at the close of business on March 9, 2020.

On March 15, 2019, we paid $46.5 million in dividends representing a regular cash dividend of $1.75 per Sub-share and a special dividend of $4.25 per Sub-share for sub-shareholders of record at the close of business on March 8, 2019.

On March 16, 2018, we paid $31.7 million in dividends representing a regular cash dividend of $1.05 per Sub-share and a special dividend of $3.00 per Sub-share for sub-shareholders of record at the close of business on March 9, 2018.



Repurchases of Sub-shares


For the three months ended March 31, 2020, there were 0 Sub-shares repurchased. During the three months ended March 31, 2019, we purchased and retired 6,258 Sub-shares. During the three months ended March 31, 2018, we purchased and retired 13,146 Sub-shares.



9. Business Segment Reporting
9.Business Segment Reporting

During the periods presented, we reported our financial performance based on the following segments: Land and Resource Management and Water ServiceServices and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of the Trust and provide a framework for timely and rational allocation of resources within businesses. We eliminate any inter-segment revenues and expenses upon consolidation.


The Land and Resource Management segment encompasses the business of managing approximately 900,000 acres of land and related resources in West Texas owned by the Trust. The revenue streams of this segment consist primarily of royalties from oil and gas, revenues from easements and commercial leases and land and material sales.

The Water ServiceServices and Operations segment encompasses the business of providing a full-service water offering to operators in the Permian Basin as well as managing agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct water-related infrastructure and purchase water sourced from land that we own.Basin. The revenue streams of this segment consist of revenue generated from direct sales of sourced and treated water as well as revenuesrevenue from royalties on water service-related activity.
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Segment financial results were as follows for the three months ended March 31, 20192020 and 20182019 (in thousands):
Three Months Ended
March 31,
20202019
Revenues:
Land and resource management$56,658  $160,459  
Water services and operations39,936  30,865  
Total consolidated revenues$96,594  $191,324  
Net income:
Land and resource management$39,118  $123,117  
Water services and operations18,283  16,881  
Total consolidated net income$57,401  $139,998  
Capital expenditures:
Land and resource management$88  $534  
Water services and operations3,529  8,713  
Total capital expenditures$3,617  $9,247  
Depreciation, depletion and amortization:
Land and resource management$337  $177  
Water services and operations2,998  1,027  
Total depreciation, depletion and amortization$3,335  $1,204  
  Three Months Ended
March 31,
  2019 2018
Revenues:    
Land and resource management $160,459
 $42,753
Water service and operations 30,865
 17,254
Total consolidated revenues $191,324
 $60,007
     
Net income:    
Land and resource management $123,117
 $32,811
Water service and operations 16,881
 10,980
Total consolidated net income $139,998
 $43,791
     
Capital expenditures    
Land and resource management $534
 $1,252
Water service and operations 8,713
 10,589
Total capital expenditures $9,247
 $11,841
     
Depreciation and amortization:    
Land and resource management $177
 $70
Water service and operations 1,027
 260
Total depreciation and amortization $1,204
 $330
     


The following table presents total assets and property, plant and equipment, net by segment as of March 31, 20192020 and December 31, 20182019 (in thousands):
March 31, 2020December 31, 2019
Assets:
Land and resource management$396,004  $467,758  
Water services and operations148,645  130,418  
Total consolidated assets$544,649  $598,176  
Property, plant and equipment, net:
Land and resource management$4,211  $4,359  
Water services and operations84,498  83,964  
Total consolidated property, plant and equipment, net$88,709  $88,323  
  March 31, 2019 December 31, 2018
Assets:    
Land and resource management $297,450
 $198,922
Water service and operations 107,456
 86,153
Total consolidated assets $404,906
 $285,075
     
Property, plant and equipment, net    
Land and resource management $4,052
 $3,720
Water service and operations 68,769
 61,082
Total consolidated property, plant and equipment, net $72,821
 $64,802
     

10. Oil and Gas Producing Activities


We measure the Trust’s share of oil and gas produced in barrels of equivalency (“BOEs”). One BOE equals one barrel of crude oil, condensate, NGLs (natural gas liquids) or approximately 6,000 cubic feet of gas. As of March 31, 2020 and December 31, 2019, the Trust’s share of oil and gas produced was approximately 16.5 and 13.7 thousand BOEs per day, respectively. Reserves related to the Trust’s royalty interests are not presented because the information is unavailable.

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There are a number of oil and gas wells that have been drilled but are not yet completed (“DUC”) where the Trust has a royalty interest. Currently, theThe number of DUC wells are determined using uniform drilling spacing units with pooled interests for all wells awaiting completion. The Trust has identified 313597 and 486 DUC wells subject to our royalty interest. The processinterest as of identifying these wells is ongoingMarch 31, 2020 and we anticipate updates going forward to be affected by a number of factors including, but not limited to, ongoing changes/updates to our identification process, changes/updates by Drilling Info (our main source of information in identifying these wells) in their identification process, the eventual completion of these DUC wells, and additional wells drilled but not completed by companies operating where we have a royalty interest.December 31, 2019, respectively.



11. Subsequent Events
11.Subsequent Events


We evaluate events that occur after the balance sheet date but before consolidated financial statements are, or are available to be issued to determine if a material event requires our amending the consolidated financial statements or disclosing the event. We evaluated subsequent events through the filing date we issued these consolidated financial statements and identified the followingdid not identify any subsequent eventevents requiring disclosure.


Land Transaction

On April 22, 2019, the Trust acquired approximately 3,400 acres of land in Loving County, Texas for an aggregate purchase price of $20.4 million. The Trust utilized proceeds from the land sale in January 2019 to fund the acquisition.



*****

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

Cautionary Statement Regarding Forward-Looking Statements
 
Statements in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include statements regarding the Trust’s future operations and prospects, the severity and duration of the COVID-19 pandemic and related economic repercussions, the markets for real estate in the areas in which the Trust owns real estate, applicable zoning regulations, the markets for oil and gas production limits on proratedincluding actions of other oil and gas wells authorized byproducers or consortiums worldwide such as OPEC+, the Railroad Commission of Texas, expected competition, the pending proxy contest, the impacts thereof and other possible changes in compositionproposed reorganization of the Trustees,Trust into a corporation, expected competition, management’s intent, beliefs or current expectations with respect to the Trust’s future financial performance and other matters. All forward-looking statements in this Report are based on information available to us as of the date this Report is filed with the Securities and Exchange Commission(the“SEC”), and we assume no responsibility to update any such forward-looking statements, except as required by law. All forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the factors discussed in Item 1A. “Risk Factors” of Part I ofour Annual Reporton Form 10-Kfor the year ended December 31, 2018,2019, and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q.


The following discussion and analysis should be read together with (i) the factors discussed in Item 1A. “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, (ii) the factors discussed in Part II, Item 1A. “Risk Factors,” if any, of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust’s future performance. Words or phrases such as “expects” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the SEC, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.


Overview


Texas Pacific Land Trust (which together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. We were organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company. Our Trustees are empowered under the Declaration of Trust to manage the lands with all the powers of an absolute owner.

Our surface and royalty ownership allow steady revenue generation through the entire value chain of oil and gas development. While we are not an oil and gas producer, we benefit from various revenue sources throughout the life cycle of a well. During the initial development phase where infrastructure for oil and gas development is constructed, we receive fixed fee payments for use of our land and revenue for sales of materials (caliche) used in the construction of the infrastructure. During the drilling and completion phase, we generate revenue for providing sourced water and/or treated produced water in addition to fixed fee payments for use of our land. During the production phase, we receive revenue from our oil and gas royalty interests and also revenue related to saltwater disposal on our land. In addition, we generate revenue from a variety of land uses including midstream infrastructure projects and processing facilities as hydrocarbons are processed and transported to market.

Our revenues are derived primarily from oil gas and water-relatedgas royalties, sales of water and land, easements and leases of the land.commercial leases. Due to the nature of our operations, our revenue is subject to substantial fluctuations from quarter to quarter and year to year. We do not actively solicit sales of land. In addition, theThe demand for, and sale price of, particular tracts of land is influenced by many factors beyond our control, including general economic conditions, the rate of development in nearby areas and the suitability of the particular tract for the ranchingcommercial uses prevalent in western Texas.

We are not an oil and gas producer. Rather, our oil and gas revenue is derived from our oil and gas royalty interests. Thus, in addition to being subject to fluctuations in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject to decisions made by the owners and operators of the oil and gas wells to which our royalty interests relate as to investments in and production from those wells. We monitor production reports byfrom the oiloperators, the Texas Railroad Commission, and gas companiesother private data providers to assure that we are being paid the appropriate royalties. We review conditions in the agricultural industry in the areas in which our lands are located and seek to keep as much of our lands as possible under lease to local ranchers.
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Our revenue from easements is primarily generated from easement contracts covering activities such aspipelines transporting oil, gas and gas pipelinesrelated hydrocarbons, power line and utility easements and subsurface wellbore easements. The majority of our easements have a ten-year term. We also enter into agreementsthirty-plus year term but subsequently renew every ten years with operatorsan additional payment. Commercial lease revenue is derived primarily from saltwater disposal royalties, processing, storage and mid-stream companies to lease land from us, primarily forcompression facilities and roads.
In prior years, we entered into agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct water-related infrastructure and purchase water sourced from land that we own. Energy businesses use water for their oil and gas projects while non-energy businesses (i.e., water management

service companies) operate water facilities to produce and sell water to energy businesses. We collect revenue from royalties and water sales under these legacy agreements.
Demand for water solutions is expected to grow as drilling and completion activity in the Permian Basin continues to increase. In response to that anticipated demand, the Trust formed Texas Pacific Water Resources LLC (“TPWR”) in June 2017. TPWR,, a single member LLC and wholly owned subsidiary of the Trust, focuses on providingprovides full-service water offerings to operators in the Permian Basin. These services include, but are not limited to, brackish water sourcing, produced-water gathering/treatment/recycling,treatment, infrastructure development/construction,development, disposal solutions, water tracking, analytics and well testing services. TPWR is committed to sustainableTPWR's revenue streams principally consist of revenue generated from sales of sourced and treated water development with significant focus on the large-scale implementation of recycledas well as revenues from produced water operations.royalties.


During the three months ended March 31, 2019,2020, the Trust invested approximately $8.7$3.5 million in TPWR projects to develop brackish water sourcing and water re-use assets.


Corporate Reorganization

On March 23, 2020, we announced that our Trustees approved a plan for reorganizing the Trust from its current structure to a corporation formed under the laws of the State of Delaware. The Trustees made their determination following careful consideration of the recommendation of the Conversion Exploration Committee of the Trust. The Trust presently intends that the corporate reorganization will be effected by the end of the third quarter of 2020, but the Trust recognizes that unforeseen impacts of COVID-19 or other developments could extend this timeframe despite the Trust’s efforts. Barring any unforeseen disruptions, further information regarding the corporate reorganization will be included in a registration statement on Form 10 to be filed with the SEC as well as in other communications and disclosures anticipated to be made by the Trust and the corporation.

COVID-19 Pandemic and Market Conditions Update

The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and gas industry. Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. In the midst of the ongoing COVID-19 pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations (OPEC+) were unable to reach an agreement on production levels for crude oil, at which point Saudi Arabia and Russia initiated efforts to aggressively increase their production.Although certain OPEC+ nations have reached a tentative agreement on production cuts since such time, there is an excess supply of oil on the market and constraints on storage capacity. The convergence of these events is expected to result in the downward pressure on certain commodity prices continuing for the foreseeable future.

These events have negatively affected, and are expected to continue to negatively affect, the Trust’s business and results of operations.Should oil and gas wells be shut in, production curtailed or the owners and operators of the oil and gas wells to which the Trust’s royalty interests relate decrease investment in response to lower commodity prices and conservation of capital, we would expect the Trust’s royalty income and demand for our water services to decline.

Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist, or the extent of the impact they will have on the Trust’s business or results of operations and financial condition.

During these uncertain times, we have continued to meet the operational needs of our customers while maintaining a safe and healthy work environment for our employees. Our existing information technology infrastructure gave us the ability to respond rapidly to the recommended measures of closing our corporate offices and allowing our corporate employees to work remotely. We employed additional safety measures and personal protective equipment for our field employees, including quarantine facilities, if needed, and implementation of a medical hotline for access by all employees should they experience symptoms or seek additional medical information.

In an effort to decrease ongoing operational costs, we have implemented certain cost reduction measures which include, but are not limited to, negotiated price reductions and discounts with certain vendors. We are closely monitoring our customer base and outstanding accounts receivable balances as a means of minimizing any potential collection issues. As a royalty owner, we have no capital expenditure or operating expense burden for development of wells. Furthermore, our water
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operations currently have limited capital expenditure requirements, the amount and timing of which is entirely within our control.

Despite the uncertainty the record low oil prices and the COVID-19 pandemic have had on both the global and U.S. oil & gas industry as a whole, we believe our longevity in the industry and strong financial position provide us with the tools necessary to navigate these unprecedented times. We have no debt and a strong cash position. Our cash and cash equivalents balance as of March 31, 2020 was $223.7 million.

Results of Operations


We operate our business in two segments: Land and Resource Management and Water ServiceServices and Operations. We eliminate any inter-segment revenues and expenses upon consolidation.


We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in Note 9,9. “Business Segment Reporting” in Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).


For the three months ended March 31, 20192020 as compared to the three months ended March 31, 20182019


Revenues. Revenues increased $131.3decreased $94.7 million, or 218.8%49.5%, to $96.6 million for the three months ended March 31, 2020 compared to $191.3 million for the three months ended March 31, 2019 compared2019. Net income decreased $82.6 million, or 59.0%, to $60.0$57.4 million for the three months ended March 31, 2018. Net income increased $96.2 million, or 219.7%,2020 compared to $140.0 million for the three months ended March 31, 2019 compared to $43.8 million2019. Revenues and net income for the three months ended March 31, 2018.2019 included a $100 million land sale. Excluding the impact of the 2019 land sale, revenues and net income (net of income tax) for the three months ended March 31, 2019 were $91.3 million and $61.0 million, respectively.


Due to the economic impacts related to the severe drop in oil prices in late March 2020 and continuing into the second quarter of 2020 and the COVID-19 pandemic, we anticipate our future oil and gas royalties, future easements and other surface-related income and future water sales will be impacted. The extent of those impacts is unknown at this time.

The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):

Three Months Ended March 31,
20202019
Revenues:
Land and resource management:
Oil and gas royalties$42,360  44 %$33,213  18 %
Easements and other surface-related income13,298  14 %23,485  12 %
Land sales and other operating revenue1,000  1 %103,761  54 %
56,658  59 %160,459  84 %
Water services and operations:
Water sales and royalties26,967  28 %22,983  12 %
Easements and other surface-related income12,969  13 %7,882  4 %
39,936  41 %30,865  16 %
Total consolidated revenues$96,594  100 %$191,324  100 %
Net income:
Land and resource management$39,118  68 %$123,117  88 %
Water services and operations18,283  32 %16,881  12 %
Total consolidated net income$57,401  100 %$139,998  100 %

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  Three Months Ended March 31,
  2019 2018
Revenues:        
Land and resource management:        
Oil and gas royalties $33,213
 18% $26,547
 44%
Easements and other surface-related income 23,485
 12% 13,331
 22%
Land sales and other operating revenue 103,761
 54% 2,875
 5%
  160,459
 84% 42,753
 71%
Water service and operations:        
Water sales and royalties 22,983
 12% 13,607
 23%
Easements and other surface-related income 7,882
 4% 3,647
 6%
  30,865
 16% 17,254
 29%
Total consolidated revenues $191,324
 100% $60,007
 100%
         
Net income:        
Land and resource management $123,117
 88% $32,811
 75%
Water service and operations 16,881
 12% 10,980
 25%
Total consolidated net income $139,998
 100% $43,791
 100%
         


Land and Resource Management


Land and Resource Management segment revenues increased $117.7decreased $103.8 million, or 275.3%64.7%, to $160.5$56.7 million for the three months ended March 31, 20192020 as compared with $42.8$160.5 million for the comparable period of 2018.2019. Segment revenues for the three months ended March 31, 2019 include a $100 million land sale.Excluding the $100 million land sale, segment revenues for the three months ended March 31, 2019 were $60.5 million.

Oil and gas royalties. Oil and gas royalty revenue was $42.4 million for the three months ended March 31, 2020 compared to $33.2 million for the three months ended March 31, 2019 compared to $26.52019. Oil royalty revenue was $35.9 million for the three months ended March 31, 2018. Oil royalty revenue was $26.4 million for2020, an increase of 36.0% over the three months ended March 31, 2019 compared to $20.1 million for the comparable period of 2018.when oil royalty revenue was $26.4 million. This increase in oil royalty revenue is principally due to the combined effect of a 58.5%11.9% increase in crude oil production subject to the Trust’s royalty interest partially offset byand a 16.7% decrease21.9% increase in the average price per royalty barrel of crude oil received during the three months ended March 31, 20192020 compared to the same period in 2018.2019. Gas royalty revenue was $6.8$6.5 million for the three months ended March 31, 2019, an increase2020, a decrease of 6.6% over5.2% compared to the three months ended March 31, 20182019 when gas royalty revenue was $6.4$6.8 million. This increaseWhile gas production increased 31.4% in gas royalty revenue resulted from a volume increase of 119.6%the three months ended March 31, 2020 compared to March 31, 2019, the average price received decreased 23.1% over the same period.

Easements and other surface-related income. Easements and other surface-related income was $13.3 million for the three months ended March 31, 2019 as2020, a decrease of 43.4% compared to the same period of 2018, partially offset by a 46.7% decrease in the average price received.
Easements and other surface-related income. Easements and other surface-related income was $23.5 million for the three months ended March 31, 2019, an increase of 76.2% compared to $13.3 million for the three months ended March 31, 2018.2019. Easements and other surface-related income includes pipeline, easement income,power line and utility easements, commercial leases, material sales, and seismic and temporary permit income, lease rental income and income from material sales.permits. The increasedecrease in easements and other surface-related income is principally related to the increasea 63.4% decrease in pipeline easement income which increased 115.0% to $6.1 million for the three months ended March 31, 2020 from $16.6 million for the three months ended March 31, 2019 from $7.7 million for the three months ended March 31, 2018.2019. Easements and other surface-related income is unpredictable and may vary significantly from period to period.

Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the three months ended March 31, 2020, we sold approximately 30 acres of land for total consideration of approximately $0.9 million, or approximately $30,000 per acre. For the three months ended March 31, 2019, we sold approximately 21,251 acres of land for total consideration of approximately $103.6 million, or approximately $4,876 per acre. For the three months ended March 31, 2018, we sold approximately 120 acres of land for total consideration of $2.8 million, or approximately $22,917 per acre.

Net income. Net income for the Land and Resource Management segment was $39.1 million for the three months ended March 31, 2020 compared to $123.1 million for the three months ended March 31, 2019 compared to $32.8 million for the three months ended March 31, 2018.2019. As discussed above, 2019 revenues for the Land and Resource Management segment increased $117.7included a $100 million land sale. Excluding the impact of the 2019 land sale (net of income tax), net income for the first three months ended March 31, 2019 compared to the same period of 2018.was $44.1 million. Expenses, including income tax expense, for the Land and Resource Management segment were $17.6 million and $37.4 million and $10.0($16.4 million excluding the income tax expense associated with the $100 million land sale) for the three months ended March 31, 2020 and 2019, and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with 2019 land sales totaling $103.6 million. Total income tax expense of $35.5 million for the three months ended March 31, 2019 includes $21.0 million which is eligible for deferral as a result of our classification of the land sale as a §1031 tax exchange. The remaining increase was principally related to increased salary and related employee expenses and general and administrative expenses asExpenses are discussed further below under “Other Financial Data — Consolidated.”


Water ServiceServices and Operations

Water ServiceServices and Operations segment revenues increased $13.6 million, or 78.9%,29.4% to $30.9$39.9 million for the three months ended March 31, 20192020 as compared with $17.3$30.9 million for the comparable period of 2018.2019.

Water sales and royalties. Water sales and royalty revenuesrevenue was $27.0 million for the three months ended March 31, 20192020, an increase of $23.0 million increased $9.4$4.0 million or 68.9% over17.3%, compared with the comparable period of 2018.three months ended March 31, 2019 when water sales and royalty revenue was $23.0 million. This increase iswas principally due to increased brackisha 50.5% increase in the number of barrels of sourced and treated water sales and,sold in the three months ended March 31, 2020 as compared to a lesser extent, pipeline easementthe same period in 2019, partially offset by decreased water royalties.

Easements and other surface-related income. Easements and other surface-related income for the Water ServiceServices and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For the three months ended March 31, 2019,2020, the combined revenueincome from these revenue streams was $7.9$13.0 million, an increase of 64.5%, as compared to $3.6$7.9 million for the three months ended March 31, 2018.2019. The increase in easements and other surface-related income was principally related to an increase in produced water royalties for the three months ended March 31, 2020 compared to the same period of 2019.

Net income. Net income for the Water ServiceServices and Operations segment was $18.3 million for the three months ended March 31, 2020 compared to $16.9 million for the three months ended March 31, 20192019. As discussed above, revenues for the
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Water Services and Operations segment increased 29.4% for the three months ended March 31, 2020 compared to $11.0the same period of 2019. Expenses, including income tax expense, for the Water Services and Operations segment were $21.6 million for the three months ended March 31, 2018. As discussed above, revenues for the Water Service and Operations segment increased $13.6 million for the three months ended March 31, 20192020 as compared to the same period of 2018. Expenses, including income tax expense, for the Water Service and Operations segment were $14.0 million for the three months ended March 31, 20192019. The increase in expenses during 2020 is principally related to increased water service-related operating expenses, primarily repairs and maintenance, equipment rental and fuel related to increased sourcing and transfer of water. The remaining increase was principally related to increased salaries and related employee expenses and depreciation expense as compared to $6.3discussed further below under “Other Financial Data — Consolidated.”

Other Financial Data — Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were $10.6 million for the three months ended March 31, 2018.

The increase in expenses during 2019 is principally related to increased income tax expense related to increased revenues and increased water service operating expenses, principally fuel and equipment rental related to sourcing and transfer of water.
Other Financial Data — Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were $6.5 million for the three months ended March 31, 20192020 compared to $2.6$6.5 million for the comparable period of 2018.2019. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 3675 employees as of March 31, 20182019 to 75102 as of March 31, 20192020 and additional contract labor expenses for the three months ended March 31, 20192020 compared to the same period of 2018.2019.

Water service-related expenses. Water service-related expenses were $4.6$6.8 million for the three months ended March 31, 20192020 compared to $1.3$4.6 million for the comparable period of 2018. These2019. This increase in expenses include expenses forwas principally the result of an increase in repairs and maintenance, equipment rental and fuel to source and other equipment-related expenses associated with sourcingtransfer water and transportingis directly related to the 50.5% increase in the number of barrels of sourced and treated water for our water service and operations segment.sold as previously discussed.

General and administrative expenses. General and administrative expenses increased $1.5$0.8 million to $2.1$3.0 million for the three months ended March 31, 20192020 from $0.7$2.1 million for the same period of 2018.2019. The increase in general and administrative expenses is primarily due to expenses related to land transactionsincreased expenses associated with our independent contractor service providers, computer-related software and a contribution of $0.3 million to the Texas Parksservices and Wildlife Foundation to benefit the Balmorhea State Park in West Texasadditional liability insurance during the three months ended March 31, 2019. No such contributions were made during the three months ended March 31, 2018.2020.

Legal and professional expenses. Legal and professional fees increased 175.6% to $1.8were $2.4 million for the three months ended March 31, 2019 from $0.62020 compared to $1.8 million for the comparable period of 2018.2019. The increase in legal and professional fees for the three months ended March 31, 20192020 compared to 20182019 is principally due to increasedapproximately $1.8 million of legal and professional fees related to land transactions, new water agreementsour anticipated corporate reorganization. See further information regarding the anticipated corporate reorganization in Item2. “Management's Discussion and proxy fees.Analysis of Financial Condition—Results of Operations —Corporate Reorganization”.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $3.3 million for the three months ended March 31, 2020 compared to $1.2 million for the three months ended March 31, 2019 compared to $0.3 million for the three months ended March 31, 2018.2019. The increase in depreciation, depletion and amortization is principally related to the Trust’s investment in water service-related assets placed in service in 20192020 and the latter half of 2018.2019.


Cash Flow Analysis

For the three months ended March 31, 20192020 as compared to the three months ended March 31, 20182019

Cash flows provided by operating activities for the three months ended March 31, 2020 and 2019 were $68.6 million and 2018 were $162.0 million, and $44.7respectively. Cash flows provided by operating activities for the three months ended March 31, 2019 included proceeds from a $100 million respectively. This increaseland sale in operatingJanuary 2019. Excluding the impact of the 2019 land sale on cash flows is principally due to increases in 2019, cash flows provided by operating activities for the three months ended March 31, 2020 were positively impacted by increased proceeds from land sales, oil and gas royalties collected, easements and other surface-related payments received and water sales and royalties collected during the three months ended March 31, 2019 compared to the three months ended March 31, 2018.2020.

Cash flows used in investing activities were $59.8$24.4 million compared to $12.6$59.8 million for the three months ended March 31, 2020 and 2019, and 2018, respectively. The increased use of investing cash flows is principally due to our acquisition of approximately 11,702 acresAcquisitions of land in Culberson and Reeves Counties, Texaspurchases of fixed assets decreased $48.9 million for $47.2 million during the three months ended March 31, 2020 compared to the same period of 2019. This decrease was partially offset by the $13.5 million increase in the acquisition of royalty interests over the same periods.

Cash flows used in financing activities were $50.9$124.1 million compared to $38.4$50.9 million for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, the Trust paid total dividends of $124.1 million consisting of a regular cash dividend of $10.00 per Sub-share Certificate (“Sub-share”) and 2018, respectively.a special dividend of $6.00 per Sub-share to each sub-shareholder of record at the close of business on March 9, 2020. During the three months ended March 31, 2019, the Trust paid total dividends of $46.5 million consisting of a regular cash dividend of $1.75 per Sub-share Certificate (“Sub-share”)Sub-
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share and a special dividend of $4.25 per Sub-share to each sub-shareholder of record at the close of business on March 8, 2019. During the three months ended March 31, 2018, the Trust paid total dividends of $31.7 million consisting of a regular cash dividend of $1.05 per Sub-share and a special dividend of $3.00 per Sub-share to each sub-shareholder of record at the close of business on March 9, 2018.

Liquidity and Capital Resources
 
We continuously review our liquidity and capital resources. The Trust’s principal sources of liquidity are its revenues from oil gas and watergas royalties, easements and other surface-related income, and water and land sales.
Our primary liquidity and capital requirements are for capital expenditures related to our water serviceWater Services and operationsOperations segment, working capital and general corporate needs. If market conditions were to change, for instance due to the uncertainty created by the COVID-19 pandemic or the significant decline in oil prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Should this occur, we could seek alternative sources of funding, including potential future borrowing under a credit facility or other financing options.

As of March 31, 2019,2020, we had cash and cash equivalents of $113.3

$223.7 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growthoperation of our business, particularly the growth of TPWR, to potentially repurchase additional Sub-shares subject to market conditions, and for general corporate purposes. We currently believe that cash from operations, together with our cash and cash equivalents balances, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.


Off-Balance Sheet Arrangements


The Trust has not engaged in any off-balance sheet arrangements.


Critical Accounting Policies and Estimates


This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 2 to the Consolidated Financial Statements included in our 20182019 Annual Report on Form 10-K filed with the SEC on February 28, 2019.27, 2020. Our most critical accounting policies and estimates include:include our accrual of oil and gas royalties and gain recognition on land sales.royalties. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20182019 Annual Report on Form 10-K.


New Accounting Pronouncements


For further information regarding recently issued accounting pronouncements, see Note 3, “Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q.


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Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk
 
There have been no material changes in the information related to market risk of the Trust since December 31, 2018.2019.
 
Item 4. Controls and Procedures
 
Pursuant to Rule 13a-15, management of the Trust under the supervision and with the participation of Tyler Glover, the Trust’s Chief Executive Officer, and Robert J. Packer, the Trust’s Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of the end of the Trust’s fiscal quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, Mr. Glover and Mr. Packer concluded that the Trust’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Trust required to be included in the Trust’s periodic SEC filings.
 
There have been no changes in the Trust’s internal control over financial reporting during the Trust’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.



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PART II
OTHER INFORMATION
 
Item 1. Legal Proceedings.


Texas Pacific is not involved in any material pending legal proceedings.


Item 1A. Risk Factors

There have been no material changes inThe following risk factor supplements the risk factors previously disclosedcontained in response toPart I, Item 1A. “Risk Factors” of Part I ofset forth in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018.2019 filed with the SEC on February 27, 2020.

Our oil and gas royalty revenue is dependent upon the market prices of oil and gas, which fluctuate.

The oil and gas royalties that we receive are dependent upon the market prices for oil and gas. When lower market prices for oil and gas occur, they will have an adverse effect on our oil and gas royalty revenues. The market prices for oil and gas are subject to national and international economic and political conditions and, in the past, have been subject to significant price fluctuations. Price fluctuations for oil and gas have been particularly volatile in recent years and prices have recently experienced a severe decrease due to increased supply by member nations of the Organization of the Petroleum Exporting Countries (“OPEC”) and general economic downturn. At the same time, COVID-19 has spread to many nations of the world and has resulted in the implementation of numerous actions taken by governments and governmental agencies in an attempt to mitigate the spread of the virus. These measures have resulted in a significant reduction in global economic activity and extreme volatility in the global financial markets. The reduction of economic activity has significantly reduced the global demand for oil and gas. The scale and duration of the impact of these factors remain unknowable but could lead to an increase in our operating costs and have a material impact on our business segments and earnings, cash flow and financial condition.

Demand for TPWR’s products and services is substantially dependent on the levels of expenditures by our customers. The recent oil and gas industry downturn has (and current market conditions have) resulted in reduced demand for oilfield services and lower expenditures by our customers, which could adversely impact our earnings, cash flow and financial condition.

Demand for TPWR’s products and services depends substantially on expenditures by our customers for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on our customers’ views of future oil and natural gas prices and are sensitive to our customers’ views of future economic growth and the resulting impact on demand for oil and natural gas.

Declines, as well as anticipated declines, in oil and gas prices have in the past resulted in, and may in the future result in, lower capital expenditures, project modifications, delays or cancellations, general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to us, which would adversely affect our earnings, cash flow and financial condition.

Global health threats, such as COVID-19, may adversely affect our business.

Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of COVID-19. A significant outbreak of contagious diseases in the human population and resulting widespread health crisis could adversely affect the economies and financial markets of many countries, resulting in an economic downturn, reduced demand for oil and gas and interruption to supply chains related to oil and gas. The reduction of economic activity and reduced global demand for oil and gas related to COVID-19 and actions taken by governments to mitigate the spread of the virus could lead to an increase in our operating costs and have a material impact on our business segments and earnings, cash flow and financial condition.

We may not be able to complete the corporate reorganization or achieve some or all of the expected benefits of the corporate reorganization, and the corporate reorganization may adversely affect our business.

Although our Trustees approved a plan for reorganizing the Trust from its current structure to a corporation formed under the laws of the State of Delaware, there can be no assurance that we will be able to complete the corporate reorganization when expected or at all. The Trust presently intends that the corporate reorganization will be effected by the end of the third quarter of 2020, but the Trust recognizes that unforeseen impacts of COVID-19 or other developments could extend this
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timeframe despite the Trust’s efforts. Additionally, we may not be able to achieve the full strategic and financial benefits expected to result from the corporate reorganization, or such benefits may be delayed or not occur at all.

We may not achieve the anticipated benefits for a variety of reasons, including, among others: (a) the corporate reorganization will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business; and (b) following the corporate reorganization, the reorganized corporation’s stock price may be susceptible to market fluctuations and other events. If some or all of the benefits expected to result from the corporate reorganization are not achieved, or if such benefits are delayed or investors do not value changes to corporate governance and business resulting from the corporate reorganization, the business, financial condition and results of operations of the reorganized corporation could be adversely affected.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
DuringThe Trust did not repurchase any Sub-shares during the three months ended March 31, 2019, the Trust repurchased Sub-shares as follows:2020.

Period 
Total
Number of
Sub-shares
Purchased
 
Average
Price Paid
per
Sub-share
 
Total Number
of Sub-shares
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Sub-shares that
May Yet Be
Purchased Under
the Plans or
Programs
January 1 through January 31, 2019 2,000
 $624.60
 —
 —
February 1 through February 28, 2019 1,879
 728.54
 —
 —
March 1 through March 31, 2019 2,379
 729.39
 —
 —
Total 6,258
 $695.64
 —
 —
         
(1)The Trust purchased and retired 6,258 Sub-shares in the open market during the three months ended March 31, 2019.


Item 3. Defaults Upon Senior Securities


Not applicable 



Item 4. Mine Safety Disclosures


Not applicable



Item 5. Other Information


None



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Item 6. Exhibits


EXHIBIT INDEX
EXHIBIT
NUMBER
DESCRIPTION
31.110.1*
31.1*
31.2*
32.132.1**
32.2*
101*
101*
The following information from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 20192020 formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income and Total Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements.
104The cover page from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL.

*Filed or furnished herewith.




* Filed or furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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TEXAS PACIFIC LAND TRUST
(Registrant)
Date:May 7, 2019By:/s/ Tyler Glover
Tyler Glover, General Agent and
Chief Executive Officer
Date:May 7, 2019By:/s/ Robert J. Packer
Robert J. Packer, General Agent and
Chief Financial Officer

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