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

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

For the quarterly period ended June 30, 20192020

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

State or other jurisdiction of incorporation or organization:
NOT APPLICABLE

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
(214)969-5530

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
Former name, former address and former fiscal year, if changed since last report:
1700 Pacific Avenue, Suite 2770
Dallas, Texas 75201

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 ☑   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 ☑    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 filer☑ Accelerated filer☐
Non-accelerated filer (Do not check if a smaller reporting company)
☐ Smaller reporting company☐
Emerging growth company☐

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 ☑

As of July 31, 2019,2020, the Registrant had 7,756,156 Sub-share Certificates outstanding.




TEXAS PACIFIC LAND TRUST
Form 10-Q
Quarter Ended June 30, 20192020

Page No.
PART I
FINANCIAL INFORMATION
Page No.
PART I1
FINANCIAL INFORMATION
Item 1.
1
Condensed Consolidated Balance Sheets as of June 30, 20192020 and December 31, 20182019
1
2
3
34
45
1011
1620
1620
PART II
OTHER INFORMATION
21
Item 1.1A.
1721
17
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
1722
1722
1722
1722
1823
1924




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)
 June 30,
2019		 December 31,
2018
 (Unaudited)  
ASSETS
   
    
Cash and cash equivalents$155,401
 $119,647
Accrued receivables68,011
 48,750
Tax like-kind exchange escrow35,120
 3,799
Other assets2,781
 3,884
Prepaid income taxes—
 9,398
Property, plant and equipment, net of accumulated depreciation of $5,575 and $3,012 as of June 30, 2019 and December 31, 2018, respectively84,792
 64,802
Real estate acquired84,902
 10,492
Royalty interests acquired29,320
 24,303
Operating lease right-of-use assets3,285
 —
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:   
Land (surface rights)—
 —
1/16th nonparticipating perpetual royalty interest—
 —
1/128th nonparticipating perpetual royalty interest—
 —
Total assets$463,612
 $285,075
    
LIABILITIES AND CAPITAL
   
    
Accounts payable and accrued expenses$22,899
 $10,505
Income taxes payable7,329
 1,607
Deferred taxes payable30,178
 14,903
Unearned revenue16,321
 13,369
Operating lease liabilities3,491
 —
Total liabilities80,218
 40,384
    
Commitments and contingencies—
 —
    
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 June 30, 2019 and December 31, 2018, respectively—
 —
Accumulated other comprehensive loss(1,060) (1,078)
Net proceeds from all sources384,454
 245,769
Total capital383,394
 244,691
Total liabilities and capital$463,612
 $285,075

June 30, 2020December 31, 2019
(Unaudited)
ASSETS
Cash and cash equivalents$258,364  $303,645  
Accrued receivables, net49,564  62,995  
Other assets3,208  3,980  
Property, plant and equipment, net of accumulated depreciation of $18,130 and $11,313
as of June 30, 2020 and December 31, 2019, respectively
85,477  88,323  
Real estate acquired108,296  107,075  
Royalty interests acquired, net of accumulated depletion of $360 and $260 as of June 30, 2020 and December 31, 2019, respectively45,905  29,060  
Operating lease right-of-use assets2,786  3,098  
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:
Land (surface rights)—  —  
1/16th nonparticipating perpetual royalty interest—  —  
1/128th nonparticipating perpetual royalty interest—  —  
Total assets$553,600  $598,176  
LIABILITIES AND CAPITAL
Accounts payable and accrued expenses$15,372  $19,193  
Income taxes payable1,985  5,271  
Deferred taxes payable40,127  40,827  
Unearned revenue20,036  17,381  
Operating lease liabilities3,141  3,367  
Total liabilities80,661  86,039  
Commitments and contingencies—  —  
Capital:
Certificates 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 June 30, 2020 and December 31, 2019—  —  
Accumulated other comprehensive loss(1,434) (1,461) 
Net proceeds from all sources474,373  513,598  
Total capital472,939  512,137  
Total liabilities and capital$553,600  $598,176  
See accompanying notes to condensed consolidated financial statements.
1


TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
 
 Three Months Ended
June 30,		 Six Months Ended
June 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
 2019 2018 2019 20182020201920202019
Revenues:        Revenues:
Oil and gas royalties $39,641
 $30,278
 $72,854
 $56,825
Oil and gas royalties$20,513  $39,641  $62,873  $72,854  
Easements and other surface-related income 22,357
 27,799
 53,724
 44,777
Easements and other surface-related income24,767  22,357  51,034  53,724  
Water sales and royalties 20,430
 15,643
 43,413
 29,250
Water sales and royalties8,419  20,430  35,386  43,413  
Land sales 4,774
 —
 108,399
 2,750
Land sales787  4,774  1,687  108,399  
Other operating revenue 108
 124
 244
 249
Other operating revenue82  108  182  244  
Total revenues 87,310
 73,844
 278,634
 133,851
Total revenues54,568  87,310  151,162  278,634  
        
Expenses:        Expenses:    
Salaries and related employee expenses 7,741
 3,835
 14,205
 6,399
Salaries and related employee expenses8,937  7,741  19,557  14,205  
Water service-related expenses 5,723
 2,588
 10,301
 3,894
Water service-related expenses2,165  5,723  8,945  10,301  
General and administrative expenses 2,095
 1,013
 4,237
 1,692
General and administrative expenses2,448  2,095  5,407  4,237  
Legal and professional fees 7,858
 420
 9,641
 1,067
Legal and professional fees2,610  7,858  4,968  9,641  
Depreciation and amortization 1,451
 483
 2,655
 813
Depreciation, depletion and amortizationDepreciation, depletion and amortization3,678  1,451  7,013  2,655  
Total operating expenses 24,868
 8,339
 41,039
 13,865
Total operating expenses19,838  24,868  45,890  41,039  
        
Operating income 62,442
 65,505
 237,595
 119,986
Operating income34,730  62,442  105,272  237,595  
        
Other income 437
 160
 830
 290
Other income193  437  1,019  830  
Income before income taxes 62,879
 65,665
 238,425
 120,276
Income before income taxes34,923  62,879  106,291  238,425  
Income tax expense (benefit):        Income tax expense (benefit):
Current 19,018
 13,162
 33,566
 23,982
Current7,985  19,018  22,007  33,566  
Deferred (5,725) —
 15,275
 —
Deferred(645) (5,725) (700) 15,275  
Total income tax expense 13,293
 13,162
 48,841
 23,982
Total income tax expense7,340  13,293  21,307  48,841  
Net income $49,586
 $52,503
 $189,584
 $96,294
Net income$27,583  $49,586  $84,984  $189,584  
        
Other comprehensive income — periodic pension costs, net of income taxes of $2, $3, $5 and $7, respectively 9
 13
 18
 26
Other comprehensive income — periodic pension costs, net of income taxes of $3, $2, $7 and $5, respectivelyOther comprehensive income — periodic pension costs, net of income taxes of $3, $2, $7 and $5, respectively13  9  27  18  
Total comprehensive income $49,595
 $52,516
 $189,602
 $96,320
Total comprehensive income$27,596  $49,595  $85,011  $189,602  
        
Weighted average number of Sub-share Certificates outstanding 7,756,156
 7,803,162
 7,757,199
 7,808,064
Weighted average number of Sub-share Certificates outstanding7,756,156  7,756,156  7,756,156  7,757,199  
        
Net income per Sub-share Certificate — basic and diluted $6.39
 $6.73
 $24.44
 $12.33
Net income per Sub-share Certificate — basic and diluted$3.56  $6.39  $10.96  $24.44  
        
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 NET PROCEEDS FROM ALL SOURCES
(in thousands)
(Unaudited)


Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Net proceeds from all sources
Balance, beginning of period$446,790  $334,868  $513,598  $245,769  
Net income27,583  49,586  84,984  189,584  
Dividends paid—  —  (124,098) (46,546) 
Repurchase and retirement of Sub-share Certificates of Proprietary Interest—  —  —  (4,353) 
Cumulative effect of accounting change—  —  (111) —  
Balance, end of period474,373  384,454  474,373  384,454  
Accumulated other comprehensive income (loss)
Balance, beginning of period(1,447) (1,069) (1,461) (1,078) 
Periodic pension costs, net of income taxes13  9  27  18  
Balance, end of period(1,434) (1,060) (1,434) (1,060) 
Total capital$472,939  $383,394  $472,939  $383,394  

3


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

Six Months Ended
June 30,		Six Months Ended
June 30,
2019 2018 20202019
Cash flows from operating activities:   Cash flows from operating activities:  
Net income$189,584
 $96,294
Net income$84,984  $189,584  
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 taxes15,275
 —
Deferred taxes(700) 15,275  
Depreciation and amortization2,655
 813
Depreciation, depletion and amortizationDepreciation, depletion and amortization7,013  2,655  
Land sale revenue recognized on exchanges and sales with basisLand sale revenue recognized on exchanges and sales with basis(123) —  
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Operating assets, excluding income taxes(21,518) (18,109)Operating assets, excluding income taxes14,310  (21,518) 
Prepaid income taxes9,398
 1,202
Prepaid income taxes—  9,398  
Operating liabilities, excluding income taxes18,855
 6,958
Operating liabilities, excluding income taxes(1,365) 18,855  
Income taxes payable5,722
 2,071
Income taxes payable(3,286) 5,722  
Cash provided by operating activities219,971
 89,229
Cash provided by operating activities100,833  219,971  
   
Cash flows from investing activities:   Cash flows from investing activities:  
Proceeds from sale of fixed assets30
 —
Proceeds from sale of fixed assets—  30  
Proceeds from land sales with basisProceeds from land sales with basis2,814  —  
Acquisition of land(74,410) (2,663)Acquisition of land(3,912) (74,410) 
Acquisition of royalty interests(5,017) —
Acquisition of royalty interests(16,945) (5,017) 
Purchase of fixed assets(22,600) (31,564)Purchase of fixed assets(3,973) (22,600) 
Cash used in investing activities(101,997) (34,227)Cash used in investing activities(22,016) (101,997) 
   
Cash flows from financing activities:   Cash flows from financing activities:  
Purchase of Sub-share Certificates in Certificates of Proprietary Interest(4,353) (17,035)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) (48,687)Cash used in financing activities(124,098) (50,899) 
   
Net increase in cash, cash equivalents, and restricted cash67,075
 6,315
Net (decrease) increase in cash, cash equivalents and restricted cashNet (decrease) increase in cash, cash equivalents and restricted cash(45,281) 67,075  
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$190,521
 $85,895
Cash, cash equivalents, and restricted cash, end of period$258,364  $190,521  
   
Supplemental disclosure of cash flow information:   Supplemental disclosure of cash flow information:
Income taxes paid$18,451
 $21,951
Income taxes paid$25,300  $18,451  
Supplemental non-cash investing information:Supplemental non-cash investing information:
Operating lease right-of-use assetsOperating lease right-of-use assets$—  $3,712  
Land exchangeLand exchange$15  $—  
 
See accompanying notes to condensed consolidated financial statements.
4

TEXAS PACIFIC LAND TRUST
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 Services 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.

2.Summary of Significant Accounting Policies
Corporate Reorganization

As previously announced on March 23, 2020, our Trustees approved a plan to reorganize the Trust from its current structure to a corporation formed under the laws of the State of Delaware. We continue to progress towards the conversion. On June 15, 2020, the Trust announced the new corporation will be named Texas Pacific Land Corporation (“TPL Corp”) and the prospective members of the Board of Directors of TPL Corp. Additionally, a draft registration statement on Form 10 has been submitted to the Securities and Exchange Commission (the “SEC”) for review, on a non-public basis. It is currently anticipated that the corporate reorganization will be effective by the end of the third quarter of 2020, barring any unforeseen impacts of the COVID-19 pandemic or other developments, which could potentially extend this timeframe.

COVID-19 Pandemic and Market Conditions

The uncertainty surrounding the severity and duration of the COVID-19 pandemic, as well as dramatic declines in crude oil prices due in part to the global spread of COVID-19, continued to cause volatility in the global financial markets during the second quarter of 2020. The full impact of shut-in oil and gas wells, production curtailments and/or decreased investments in response to lower commodity prices and conservation of capital by the owners and operators of the oil and gas wells to which the Trust’s royalty interests relate, is unknown at this time. These events have negatively affected the Trust’s business and results of operations for the three and six months ended June 30, 2020.

During these uncertain times, we have continued to generate positive operating results and remain focused on meeting the operational needs of our customers while maintaining a safe and healthy work environment for our employees. Our existing information technology infrastructure has afforded us the opportunity to allow our corporate employees to work remotely. We have deployed additional safety and sanitization measures, including quarantine facilities for our field employees, if needed.

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 continue to monitor 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 operations currently have limited capital expenditure requirements, the amount and timing of which are entirely within our control.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. The Trust continues to assess the provisions and potential impacts of this legislation; however, there have been no significant impacts to the Company's results of operations or financial position resulting from the CARES Act in the three and six months ended June 30, 2020.



5

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 June 30, 20192020 and the results of its operations for the three and six months ended June 30, 20192020 and 2018,2019, respectively, and its cash flows for the six months ended June 30, 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 six months ended June 30, 2018 has been revised to conform to the current year presentation. These revisions include, but are not limited to, 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):
  June 30, 2019 December 31, 2018
Cash and cash equivalents $155,401
 $119,647
Tax like-kind exchange escrow 35,120
 3,799
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $190,521
 $123,446


Recently Adopted Accounting Guidance

Leases

In FebruaryJune 2016, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2016-02,ASU 2016-13, “LeasesFinancial Instruments — Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments.” which amendedThe 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.

As of June 30, 2019, we have recorded right-of-use assets of $3.3 million and lease liabilities for $3.5 million primarily related to operating leases in connection with our administrative offices located in Dallas and Midland, Texas. The office lease agreements require monthly rent payments and expire in December 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 and six months ended June 30, 2019 was $0.2 million and $0.3 million, respectively.

Future minimum lease payments under these operating leases are as follows as of June 30, 2019 (in thousands):
2019 (excluding the six months ended June 30) $336
2020 781
2021 802
2022 705
2023 546
Thereafter 701
Total lease payments 3,871
Less: imputed interest (380)
Total operating lease liabilities $3,491


3. Recent Accounting Pronouncements
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.

6
4.Property, Plant and Equipment



4. Property, Plant and Equipment

Property, plant and equipment, net consisted of the following as of June 30, 20192020 and December 31, 20182019 (in thousands):

 June 30, 2019 December 31, 2018June 30, 2020December 31, 2019
Property, plant and equipment:    Property, plant and equipment:
Water service-related assets (1)
 $83,955
 $62,919
Water service-related assets (1)
$96,921  $93,097  
Furniture, fixtures and equipment 5,814
 4,297
Furniture, fixtures and equipment6,088  5,941  
Other 598
 598
Other598  598  
Property, plant and equipment at cost 90,367
 67,814
Property, plant and equipment at cost103,607  99,636  
Less: accumulated depreciation (5,575) (3,012)Less: accumulated depreciation(18,130) (11,313) 
Property, plant and equipment, net $84,792
 $64,802
Property, plant and equipment, net$85,477  $88,323  

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

Depreciation expense was $1.4$3.6 million and $0.5$1.4 million for the three months ended June 30, 20192020 and 2018,2019, respectively. Depreciation expense was $2.6$6.8 million and $0.8$2.6 million for the six months ended June 30, 20192020 and 2018,2019, respectively.

5.Real Estate Activity
5. Real Estate Activity

As of June 30, 20192020 and December 31, 2018,2019, the Trust owned the following land and real estate (in thousands, except number of acres):
  June 30, 2019 December 31, 2018
  Number of Acres Net Book Value Number of Acres Net Book Value
Land (surface rights) 855,553
 $—
 877,462
 $—
Real estate acquired 46,386
 84,902
 24,715
 10,492
Total real estate situated in 19 counties in Texas 901,939
 $84,902
 902,177
 $10,492

June 30, 2020December 31, 2019
Number of AcresNet Book ValueNumber of AcresNet Book Value
Land (surface rights)849,784  $—  849,856  $—  
Real estate acquired52,232  108,296  51,931  107,075  
Total real estate situated in 19 counties in Texas902,016  $108,296  901,787  $107,075  

No valuation allowance was necessary at June 30, 20192020 and December 31, 2018.2019.

Land Sales

For the six months ended June 30, 2020, the Trust sold approximately 527 acres of land in Texas (Loving, Pecos and Reeves Counties) for an aggregate sales price of approximately $4.4 million, an average of approximately $8,305 per acre. The aggregate sales price excludes a reduction of $2.7 million in land basis.

For the six months ended June 30, 2019, the Trust sold approximately 21,909 acres (13,180 acres in Loving County, 5,598 acres in Culberson County, 1,651 acres in Hudspeth County, 843 acres in Reeves County, 636 acres in Midland County and approximately 1 acre in Glasscock County) of land in Texas (Culberson, Glasscock, Hudspeth, Loving, Midland and Reeves Counties) for an aggregate sales price of approximately $108.4 million, with an average of approximately $4,948 per acre. There was no land basis associated with land sales for the six months ended June 30, 2019.

Land Acquisitions

For the six months ended June 30, 2018,2020, the Trust soldacquired approximately 120756 acres (80 acres in Culberson County and 40 acres in Loving County) of land in Texas (Culberson and Reeves Counties) for an aggregate salespurchase price of approximately $2.8$3.9 million, with an average of approximately $22,917$5,134 per acre.


7
Land Acquisitions


For the six months ended June 30, 2019, the Trust acquired approximately 21,671 acres of land in Texas (Culberson, Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $74.4 million, with an average of approximately $3,434 per acre.

For the six months ended June 30, 2018, the Trust acquired approximately 2,884 acres (Mitchell and Upton County) of land in Texas for an aggregate purchase price of approximately $2.7 million, with an average of approximately $924 per acre.

6. Royalty Interests
6.Royalty Interests

As of June 30, 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
June 30, 2020December 31, 2019
1/16th nonparticipating perpetual royalty interests$—  $—  
1/128th nonparticipating perpetual royalty interests—  —  
Royalty interests acquired46,265  29,320  
Total royalty interests, gross46,265  29,320  
Less: accumulated depletion(360) (260) 
Total royalty interests, net$45,905  $29,060  
  Net Book Value
  June 30, 2019 December 31, 2018
1/16th nonparticipating perpetual royalty interests $—
 $—
1/128th nonparticipating perpetual royalty interests —
 —
Royalty interests acquired 29,320
 24,303
Total royalty interests $29,320
 $24,303

No valuation allowance was necessary at June 30, 20192020 and December 31, 2018.2019.

For the six months ended June 30, 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 $16,668 per net royalty acre.

For the six months ended June 30, 2019, the Trust acquired oil and gas royalty interests in approximately 1,247 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $4.7 million, an average price of approximately $3,800 per net royalty acre.

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

For the six months ended June 30, 2018.

7.Income Taxes

Effective January 1, 2018, the statutory Federal2020 and 2019, income tax expense was $21.3 million and $48.8 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 measures to provide aid and economic stimulus. These measures include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Trust structured the $100.0 million land sale consummated in January 2019 as a §1031 exchange for federalCARES Act 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 expense were each reduced by approximately $15.3 million duringlaws. For the six months ended June 30, 2019, while the deferred federal income2020, there were no material tax liability and expense increasedimpacts to our condensed consolidated financial statements as it relates to COVID-19 measures. We continue to monitor additional guidance issued by the same amount.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.
8

Repurchases of Sub-shares

For the six months ended June 30, 2020, there were 0 Sub-shares repurchased. During the six months ended June 30, 2019, we purchased and retired 6,258 Sub-shares. During the six months ended June 30, 2018, we purchased and retired 29,062 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 Services 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 Services 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 principally consist of revenue generated from direct sales of sourced and treated water as well as revenuesrevenue from royalties onproduced water service-related activity.royalties.

Segment financial results were as follows for the three and six months ended June 30, 20192020 and 20182019 (in thousands):
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Revenues:
Land and resource management$32,881  $58,688  $89,539  $219,147  
Water services and operations21,687  28,622  61,623  59,487  
Total consolidated revenues$54,568  $87,310  $151,162  $278,634  
Net income:
Land and resource management$18,721  $37,194  $57,839  $160,311  
Water services and operations8,862  12,392  27,145  29,273  
Total consolidated net income$27,583  $49,586  $84,984  $189,584  
Capital expenditures:
Land and resource management$33  $881  $121  $1,415  
Water services and operations323  12,472  3,852  21,185  
Total capital expenditures$356  $13,353  $3,973  $22,600  
Depreciation, depletion and amortization:
Land and resource management$350  $261  $687  $438  
Water services and operations3,328  1,190  6,326  2,217  
Total depreciation, depletion and amortization$3,678  $1,451  $7,013  $2,655  
  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2019 2018 2019 2018
Revenues:        
Land and resource management $58,688
 $52,376
 $219,147
 $95,129
Water services and operations 28,622
 21,468
 59,487
 38,722
Total consolidated revenues $87,310
 $73,844
 $278,634
 $133,851
         
Net income:        
Land and resource management $37,194
 $40,505
 $160,311
 $73,315
Water services and operations 12,392
 11,998
 29,273
 22,979
Total consolidated net income $49,586
 $52,503
 $189,584
 $96,294
         
Capital expenditures:        
Land and resource management $881
 $303
 $1,415
 $1,555
Water services and operations 12,472
 19,420
 21,185
 30,009
Total capital expenditures $13,353
 $19,723
 $22,600
 $31,564
         
Depreciation and amortization:        
Land and resource management $261
 $100
 $438
 $170
Water services and operations 1,190
 383
 2,217
 643
Total depreciation and amortization $1,451
 $483
 $2,655
 $813
9



The following table presents total assets and property, plant and equipment, net by segment as of June 30, 20192020 and December 31, 20182019 (in thousands):
June 30, 2020December 31, 2019
Assets:
Land and resource management$432,912  $467,758  
Water services and operations120,688  130,418  
Total consolidated assets$553,600  $598,176  
Property, plant and equipment, net:
Land and resource management$3,976  $4,359  
Water services and operations81,501  83,964  
Total consolidated property, plant and equipment, net$85,477  $88,323  
  June 30, 2019 December 31, 2018
Assets:    
Land and resource management $337,941
 $198,922
Water services and operations 125,671
 86,153
Total consolidated assets $463,612
 $285,075
     
Property, plant and equipment, net:    
Land and resource management $4,739
 $3,720
Water services and operations 80,053
 61,082
Total consolidated property, plant and equipment, net $84,792
 $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 June 30, 2020 and December 31, 2019, the Trust’s share of oil and gas produced was approximately 15.7 and 13.7 thousand BOEs per day, respectively. Reserves related to the Trust’s royalty interests are not presented because the information is unavailable.

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 is determined using uniform drilling spacing units with pooled interests for all wells awaiting completion. The Trust has identified 297583 and 486 DUC wells subject to our royalty interest. The processinterest as of identifying these wells is ongoingJune 30, 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.

On July 30, 2019, the Trust and current Trustees John R. Norris III and David E. Barry entered into a settlement agreement (the “Settlement Agreement”) with Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, Murray Stahl, SoftVest, L.P., SoftVest Advisors, LLC, Eric L. Oliver, ART-FGT Family Partners Limited, Tessler Family Limited Partnership and Allan R. Tessler (the “Investor Group”) with respect to the previous proxy contest mounted by the Investor Group and the pending litigation between the parties. Pursuant to the Settlement Agreement, the parties agreed: (i) to dismiss the pending litigation captioned Case 3:19-cv-01224-B Texas Pacific Land Trust et al v. Oliver in the U.S. District Court for the Northern District of Texas in Dallas, (ii) that the third Trustee position will remain vacant at least until the end of the Restricted Period (as defined in the Settlement Agreement), (iii) to add three new members, including Mr. Stahl and Mr. Oliver, to the Conversion Exploration Committee (the “Committee”), which was formed in June, 2019 to evaluate the conversion of the Trust into a C-corporation (the “Conversion”), (iv) the Committee will continue to be governed by its charter dated June 23, 2019, as amended and restated on July 30, 2019, and will complete its work by December 31, 2019, unless the Committee otherwise determines, (v) if the Committee recommends a plan of Conversion and proposes the approval of the Trust’s sub-shareholders, the Investor Group will be required to (1) vote all of the Sub-shares beneficially owned by it in favor of such Conversion at a special meeting called therefor by the Trustees, and (2) privately and publicly support such Conversion through a press release as an exempt solicitation, (vi) if the Trustees decide to implement such plan of Conversion in the form recommended by the Committee in all material respects, (1) the Investor Group will be prohibited from challenging such Conversion in court or otherwise prior to the end of the Restricted Period, and (2) the parties will grant mutual general releases in one another’s favor upon completion of such Conversion, and (vii) to other customary terms of settlement. The foregoing description of the Settlement Agreement is qualified by the full text of such agreement, which is attached as an exhibit to the Trust’s Current Report on Form 8-K filed, filed with the SEC on July 31, 2019 and incorporated by reference herein.


*****
10

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 of our Annual Report on Form 10-K for 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, comprised of a number of separate tracts, located in 19 counties in West Texas. Additionally, we own a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 85,000 acres of land and a 1/16th NPRI under approximately 371,000 acres of land in the western part of Texas, as well as approximately 4,000 additional net royalty acres (normalized to 1/8th). 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 revenues 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 commercial leases. Due to the nature of our operations, our revenue is subject to substantial fluctuations from quarter to quarter and year to year. The 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 commercial 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 fluctuationsfluctuating in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject
11

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 from the operators, the Texas Railroad Commission, and other private data providers to assure that we are being paid the appropriate royalties.
Our revenue from easements is primarily generated from pipelines transporting oil, gas and related hydrocarbons, power line and utility easements and subsurface wellbore easements. Since the second quarterThe majority of 2016, our easements typically have a ten-year term.thirty-plus year term but subsequently renew every ten years with an additional payment. Commercial lease revenue is derived primarily from saltwater disposal royalties, processing, storage and compression 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, water sourcing, produced-water gathering/treatment/recycling,treatment, infrastructure 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 six months ended June 30, 2019,2020, the Trust invested approximately $21.0$3.8 million in TPWR projects to develop water sourcing and water re-use assets.

Corporate Reorganization

As previously announced on March 23, 2020, our Trustees approved a plan to reorganize the Trust from its current structure to a corporation formed under the laws of the State of Delaware. We continue to progress towards the conversion. On June 15, 2020, the Trust announced the new corporation will be named Texas Pacific Land Corporation (“TPL Corp”) and the prospective members of the Board of Directors of TPL Corp. Additionally, a draft registration statement on Form 10 has been submitted to the SEC for review, on a non-public basis. It is currently anticipated that the corporate reorganization will be effective by the end of the third quarter of 2020, barring any unforeseen impacts of the COVID-19 pandemic or other developments, which could potentially extend this timeframe.

COVID-19 Pandemic and Market Conditions Update

The uncertainty surrounding the severity and duration of the COVID-19 pandemic, as well as dramatic declines in crude oil prices due in part to the global spread of COVID-19, continued to cause volatility in the global financial markets during the second quarter of 2020. The full impact of shut-in oil and gas wells, production curtailments and/or decreased investments in response to lower commodity prices and conservation of capital by the owners and operators of the oil and gas wells to which the Trust’s royalty interests relate, is unknown at this time. These events have negatively affected our business and results of operations for the three and six months ended June 30, 2020, and may continue to negatively affect, the Trust’s business and results of operations in future periods.

During these uncertain times, we have continued to generate positive operating results and remain focused on meeting the operational needs of our customers while maintaining a safe and healthy work environment for our employees. Our existing information technology infrastructure has afforded us the opportunity to allow our corporate employees to work remotely. We have deployed additional safety and sanitization measures, including quarantine facilities for our field employees, if needed.

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 continue to monitor 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 operations currently have limited capital expenditure requirements, the amount and timing of which are entirely within our control.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. The Trust continues to assess the provisions and potential impacts of this legislation; however, there have been no significant impacts to the Company's results of operations or financial position resulting from the CARES Act in the three and six months ended June 30, 2020.

Despite the uncertainty the record low oil prices and the COVID-19 pandemic have had on both the global and U.S. oil and 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, a strong cash position (cash and cash equivalents were $258.4 million as of June 30, 2020) and we continue to maintain our capital resource allocation discipline.
12


Results of Operations

We operate our business in two segments: Land and Resource Management and Water Services 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“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”).

Due to the continued economic impacts related to the severe drop in oil prices during the second quarter of 2020 and the COVID-19 pandemic, our results of operations for the three and six months ended June 30, 2020 have been negatively impacted. Given the uncertainty surrounding the duration of the COVID-19 pandemic, our results of operations may continue to be impacted in future periods.

For the three months ended June 30, 20192020 as compared to the three months ended June 30, 20182019

Revenues. Revenues increased $13.5decreased $32.7 million, or 18.2%37.5%, to $54.6 million for the three months ended June 30, 2020 compared to $87.3 million for the three months ended June 30, 2019 compared2019. Net income decreased $22.0 million, or 44.4%, to $73.8$27.6 million for the three months ended June 30, 2018. Net income decreased $2.9 million, or 5.6%,2020 compared to $49.6 million for the three months ended June 30, 2019 compared to $52.5 million for the three months ended June 30, 2018.2019.

The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
  Three Months Ended June 30,
  2019 2018
Revenues:        
Land and resource management:        
Oil and gas royalties $39,641
 46% $30,278
 41%
Easements and other surface-related income 14,165
 16% 21,974
 30%
Land sales and other operating revenue 4,882
 6% 124
 —%
  58,688
 68% 52,376
 71%
Water services and operations:        
Water sales and royalties 20,430
 23% 15,643
 21%
Easements and other surface-related income 8,192
 9% 5,825
 8%
  28,622
 32% 21,468
 29%
Total consolidated revenues $87,310
 100% $73,844
 100%
         
Net income:        
Land and resource management $37,194
 75% $40,505
 77%
Water services and operations 12,392
 25% 11,998
 23%
Total consolidated net income $49,586
 100% $52,503
 100%

Three Months Ended June 30,
20202019
Revenues:
Land and resource management:
Oil and gas royalties$20,513  37 %$39,641  46 %
Easements and other surface-related income11,499  21 %14,165  16 %
Land sales and other operating revenue869  2 %4,882  6 %
32,881  60 %58,688  68 %
Water services and operations:
Water sales and royalties8,419  16 %20,430  23 %
Easements and other surface-related income13,268  24 %8,192  9 %
21,687  40 %28,622  32 %
Total consolidated revenues$54,568  100 %$87,310  100 %
Net income:
Land and resource management$18,721  68 %$37,194  75 %
Water services and operations8,862  32 %12,392  25 %
Total consolidated net income$27,583  100 %$49,586  100 %

Land and Resource Management

Land and Resource Management segment revenues increased $6.3decreased $25.8 million, or 12.1%44.0%, to $58.7$32.9 million for the three months ended June 30, 20192020 as compared with $52.4$58.7 million for the comparable period of 2018.2019. The decrease in Land and Resource Management segment revenues is due to decreases in oil and gas royalty revenue, easements and other surface-related income and land sales and other operating revenue, which are discussed below.


Oil and gas royalties. Oil and gas royalty revenue was $20.5 million for the three months ended June 30, 2020 compared to $39.6 million for the three months ended June 30, 2019 compared to $30.32019. Oil royalty revenue was $16.8 million for the three months ended June 30, 2018. Oil royalty revenue was $33.1 million for2020, a decrease of 49.3% compared to the three months ended June 30, 2019 an increase of 34.0% over the three months ended June 30, 2018 when oil royalty revenue
13

was $24.7$33.1 million. This increasedecrease in oil royalty revenue is principally due to a 41.3% increase in crude oil production subject to the Trust’s royalty interest, partially offset by a 4.8%54.0% decrease in the average price per royalty barrel of crude oil received, partially offset by a 10.6% increase in crude oil production subject to the Trust’s royalty interest during the three months ended June 30, 20192020 compared to the same period in 2018.2019. Gas royalty revenue was $6.5$3.7 million for the three months ended June 30, 2019, an increase2020, a decrease of 17.3% over the three months ended June 30, 2018 when gas royalty revenue was $5.6 million. This increase in gas royalty revenue resulted principally from a volume increase of 120.2% for42.8% compared to the three months ended June 30, 2019 as comparedwhen gas royalty revenue was $6.5 million. The decrease in gas royalty revenue is principally due to the same period of 2018, partially offset by a 43.5%53.7% decrease in the average price received, overpartially offset by a 49.6% increase in gas production during the three months ended June 30, 2020 compared to the same period.period in 2019.

Easements and other surface-related income. Easements and other surface-related income was $11.5 million for the three months ended June 30, 2020, a decrease of 18.8% compared to $14.2 million for the three months ended June 30, 2019, a decrease of 35.5% compared to $22.0 million for the three months ended June 30, 2018.2019. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales, and seismic and temporary permits. The decrease in easements and other surface-related income is principally related to a 41.6%35.8% decrease in pipeline easement income to $6.3 million for the three months ended June 30, 2020 from $9.9 million for the three months ended June 30, 20192019. The amount of income derived from $16.9 millionpipeline easements is a function of the term of the easement, the size of the easement and the number of easements entered into for any given period. The demand for pipeline easements is determined by capital decisions made by companies that operate in the three months ended June 30, 2018. Easementsareas where we own land. As such, 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. Land sales were $0.8 million and $4.8 million for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020, we sold approximately 497 acres of land for an aggregate sales price of approximately $3.5 million, or approximately $6,995 per acre. The aggregate sales price of $3.5 million for the three months ended June 30, 2020 excludes a reduction of $2.7 million in land basis. For the three months ended June 30, 2019, we sold approximately 658 acres of land for total considerationan aggregate sales price of approximately $4.8 million, or approximately $7,260 per acre. There werewas no land basis associated with land sales for the three months ended June 30, 2018.2019.

Net income. Net income for the Land and Resource Management segment was $18.7 million for the three months ended June 30, 2020 compared to $37.2 million for the three months ended June 30, 2019 compared to $40.5 million for the three months ended June 30, 2018. As discussed above, revenues for the Land and Resource Management segment increased $6.3 million for the three months ended June 30, 2019 compared to the same period of 2018.2019. Expenses, including income tax expense, for the Land and Resource Management segment were $21.5$14.2 million and $11.9$21.5 million for the three months ended June 30, 20192020 and 2018,2019, respectively. The increasedecrease in expenses was principally related to approximately $6.7 million of expenses related to the proxy contest to elect a new Trustee for the three months ended June 30, 2019. No such expenses were incurred for the three months ended June 30, 2018. The remaining increase was principally related to salariesdecreases in legal and related employee expenses asprofessional fees. Expenses are discussed further below under “Other Financial Data — Consolidated.”

Water Services and Operations

Water Services and Operations segment revenues increased 33.3%decreased 24.2% to $28.6$21.7 million for the three months ended June 30, 20192020 as compared with $21.5$28.6 million for the comparable period of 2018.2019. The decrease in Water Services and Operations segment revenues is due to changes in water sales and royalty revenue and easements and other surface-related income, which are discussed below.

Water sales and royalties. Water sales and royalty revenue was $20.4$8.4 million for the three months ended June 30, 2019, an increase2020, a decrease of $4.8$12.0 million or 30.6%58.8%, compared with the three months ended June 30, 20182019 when water sales and royalty revenue was $15.6$20.4 million. This increasedecrease was principally due to a 39.8% sales increase48.0% decrease in the number of barrels of sourced and treated water sold and a $2.9 million decrease in water royalties in the three months ended June 30, 2019 assecond quarter of 2020 compared to the same period in 2018.2019.

Easements and other surface-related income. Easements and other surface-related income for the Water Services and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For the three months ended June 30, 2019,2020, the combined income from these revenue streams was $8.2$13.3 million, an increase of 40.6%62.0%, as compared to $5.8$8.2 million for the three months ended June 30, 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 June 30, 2020 compared to the same period of 2019.

Net income. Net income for the Water Services and Operations segment was $8.9 million for the three months ended June 30, 2020 compared to $12.4 million for the three months ended June 30, 2019 compared to $12.0 million for the three months ended June 30, 2018.2019. As discussed above, revenues for the Water Services and Operations segment increased 33.3%decreased 24.2% for the three months ended June 30, 20192020 compared to the same period of 2018.2019. Expenses, including income tax expense, for the Water Services and Operations segment were $12.8 million for the three months ended June 30, 2020 as compared to $16.2 million for the three months ended June 30, 2019 as compared to $9.5 million for the three months ended June 30, 2018.2019. The increasedecrease in expenses during 20192020 is principally related to increaseddecreased water serviceservice-related operating expenses, primarily fuel, equipment
14

rental and equipment rentalrepairs and maintenance related to increaseddecreased sourcing and transfer of water. The remaining increase was principally related to increased salaries and related employee expenses and depreciation and amortization expense asExpenses are discussed further below under “Other Financial Data — Consolidated.”


Other Financial Data — Consolidated
 
Salaries and related employee expenses. Salaries and related employee expenses were $7.7$8.9 million for the three months ended June 30, 20192020 compared to $3.8$7.7 million for the comparable period of 2018.2019. The increase in salaries and related employee expenses is directlyprincipally related to the increase in the number of employees from 4778 employees as of June 30, 20182019 to 78101 as of June 30, 2019 and additional contract labor expenses for the three months ended June 30, 2019 compared to the same period of 2018.2020.

Water service-related expenses. Water service-related expenses were $5.7$2.2 million for the three months ended June 30, 20192020 compared to $2.6$5.7 million for the comparable period of 2018. This increase2019. The decrease in expenses wasduring 2020 is principally the result of an increase inrelated to decreased fuel, equipment rental and fuelrepairs and maintenance related to sourcethe 48.0% decrease in the number of barrels of sourced and transfer water.treated water sold as previously discussed.

General and administrative expenses. General and administrative expenses increased $1.1$0.4 million to $2.1$2.4 million for the three months ended June 30, 20192020 from $1.0$2.1 million for the same period of 2018.2019. The increase in general and administrative expenses is primarily duerelated to increased expenses related to a change in our principal independent contractor service providerassociated with computer-related software and $0.2 million of expenses related to the proxy contest to elect a new Trusteeservices and additional liability insurance during the three months ended June 30, 2020 compared to the same period of 2019.

Legal and professional expenses. Legal and professional fees were $7.9$2.6 million for the three months ended June 30, 20192020 compared to $0.4$7.9 million for the comparable period of 2018. The increase2019. Legal and professional fees for the three months ended June 30, 2020 principally related to our anticipated corporate reorganization. See further information regarding the anticipated corporate reorganization in legalItem 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Corporate Reorganization”. Legal and professional fees for the three months ended June 30, 2019 compared to 2018 is principally due to approximately $6.5 million of legal and professional fees related to the proxy contest to elect a new Trustee.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $3.7 million for the three months ended June 30, 2020 compared to $1.5 million for the three months ended June 30, 2019 compared to $0.5 million for the three months ended June 30, 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 2020 and 2019 and, to a lesser extent, additional depreciation expense related to the latter halfchange in estimated useful lives of 2018.certain water service-related assets during the third quarter of 2019.

For the six months ended June 30, 20192020 as compared to the six months ended June 30, 20182019

Revenues. Revenues more than doubled, from $133.9decreased $127.5 million, or 45.7%, to $151.2 million for the six months ended June 30, 20182020 compared to $278.6 million for the six months ended June 30, 2019. Net income increased $93.3decreased $104.6 million, or 96.9%55.2%, to $85.0 million for the six months ended June 30, 2020 compared to $189.6 million for the six months ended June 30, 2019 compared to $96.3 million2019. Revenues and net income for the six months ended June 30, 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 six months ended June 30, 2019 were $178.6 million and $110.6 million, respectively.

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The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
  Six Months Ended June 30,
  2019 2018
Revenues:        
Land and resource management:        
Oil and gas royalties $72,854
 25% $56,825
 43%
Easements and other surface-related income 37,650
 14% 35,305
 26%
Land sales and other operating revenue 108,643
 39% 2,999
 2%
  219,147
 78% 95,129
 71%
Water services and operations:        
Water sales and royalties 43,413
 16% 29,250
 22%
Easements and other surface-related income 16,074
 6% 9,472
 7%
  59,487
 22% 38,722
 29%
Total consolidated revenues $278,634
 100% $133,851
 100%
         
Net income:        
Land and resource management $160,311
 85% $73,315
 76%
Water services and operations 29,273
 15% 22,979
 24%
Total consolidated net income $189,584
 100% $96,294
 100%


Six Months Ended June 30,
20202019
Revenues:
Land and resource management:
Oil and gas royalties$62,873  42 %$72,854  25 %
Easements and other surface-related income24,797  16 %37,650  14 %
Land sales and other operating revenue1,869  1 %108,643  39 %
89,539  59 %219,147  78 %
Water services and operations:
Water sales and royalties35,386  24 %43,413  16 %
Easements and other surface-related income26,237  17 %16,074  6 %
61,623  41 %59,487  22 %
Total consolidated revenues$151,162  100 %$278,634  100 %
Net income:
Land and resource management$57,839  68 %$160,311  85 %
Water services and operations27,145  32 %29,273  15 %
Total consolidated net income$84,984  100 %$189,584  100 %

Land and Resource Management

Land and Resource Management segment revenues increased $124.0decreased $129.6 million, or 130.4%59.1%, to $219.1$89.5 million for the six months ended June 30, 20192020 as compared with $95.1$219.1 million for the comparable period of 2018.2019. Segment revenues for the six months ended June 30, 2019 include a $100 million land sale.Excluding the $100 million land sale, segment revenues for the six months ended June 30, 2019 were $119.1 million. The decrease in Land and Resource Management segment revenues is due to decreases in oil and gas royalty revenue, easements and other surface-related income and land sales and other operating revenue, which are discussed below.

Oil and gas royalties. Oil and gas royalty revenue was $62.9 million for the six months ended June 30, 2020 compared to $72.9 million for the six months ended June 30, 2019 compared to $56.82019. Oil royalty revenue was $52.7 million for the six months ended June 30, 2018. Oil royalty revenue was $59.5 million for2020, a decrease of 11.5% compared to the six months ended June 30, 2019 an increase of 32.6% over the six months ended June 30, 2018 when oil royalty revenue was $44.9$59.5 million. This increasedecrease in oil royalty revenue is principally due to a 49.0% increase in crude oil production subject to the Trust’s royalty interest, partially offset by a 10.5%19.9% decrease in the average price per royalty barrel of crude oil received, partially offset by a 10.9% increase in crude oil production subject to the Trust’s royalty interest during the six months ended June 30, 20192020 compared to the same period in 2018.2019. Gas royalty revenue was $13.4$10.2 million for the six months ended June 30, 2019, an increase2020, a decrease of 11.6% over the six months ended June 30, 2018 when gas royalty revenue was $11.9 million. This increase in gas royalty revenue resulted from a volume increase of 119.9% for23.6% compared to the six months ended June 30, 2019 aswhen gas royalty revenue was $13.3 million. The decrease in gas royalty revenue was principally due to a 34.2% decrease in the average price received, partially offset by a 30.1% increase in gas production during the six months ended June 30, 2020 compared to the same period of 2018, partially offset by a 45.2% decrease in the average price received over the same period.2019.

Easements and other surface-related income. Easements and other surface-related income was $24.8 million for the six months ended June 30, 2020, a decrease of 34.1% compared to $37.7 million for the six months ended June 30, 2019, an increase of 6.6% compared to $35.3 million for the six months ended June 30, 2018.2019. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales, and seismic and temporary permits. The increasedecrease in easements and other surface-related income is principally related to the increasea 53.1% decrease in pipeline easement income which increased 7.4% to $12.4 million for the six months ended June 30, 2020 from $26.4 million for the six months ended June 30, 20192019. The amount of income derived from $24.6 millionpipeline easements is a function of the term of the easement, the size of the easement and the number of easements entered into for any given period. The demand for pipeline easements is determined by capital decisions made by companies that operate in the six months ended June 30, 2018. Easementsareas where we own land. As such, easements and other surface-related income is unpredictable and may vary significantly from period to period.

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Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. Land sales were $1.7 million and $108.4 million for the six months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020, we sold approximately 527 acres of land for an aggregate sales price of approximately $4.4 million, or approximately $8,305 per acre. The aggregate sales price of $4.4 million for the six months ended June 30, 2020 excludes a reduction of $2.7 million in land basis. For the six months ended June 30, 2019, we sold approximately 21,909 acres of land for total considerationan aggregate sales price of approximately $108.4 million, or approximately $4,948 per acre. ForThere was no land basis associated with land sales for the six months ended June 30, 2018, we sold approximately 120 acres of land for total consideration of $2.8 million, or approximately $22,917 per acre.2019.

Net income. Net income for the Land and Resource Management segment was $57.8 million for the six months ended June 30, 2020 compared to $160.3 million for the six months ended June 30, 2019 compared to $73.3 million for the six months ended June 30, 2018.2019. As discussed above, 2019 revenues for the Land and Resource Management segment increased $124.0included a $100 million land sale. Excluding the impact of the 2019 land sale (net of income tax), net income for the first six months ended June 30, 2019 compared to the same period of 2018.was $81.3 million. Expenses, including income tax expense, for the Land and Resource Management segment were $31.7 million and $58.8 million, and $21.8respectively. The decrease in expenses during 2020 is principally related to the approximately $21.0 million forin income tax expense associated with the $100 million land sale that occurred during the six months ended June 30, 2019 and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with 2019 land sales totaling $108.4 million. Total consolidated income tax expenseno comparable sale of $48.8 million forassets having occurred during the six months ended June 30, 2019 includes $15.3 million which is eligible for deferral as a resultsame period of our classification of the land sale as a §1031 tax exchange. The remaining increase was principally related to increased legal and professional fees, salaries and related employee expenses and general and administrative expenses as2020. Expenses are discussed further below under “Other Financial Data — Consolidated.”

Water Services and Operations

Water Services and Operations segment revenues increased $20.8 million, or 53.6%,3.6% to $59.5$61.6 million for the six months ended June 30, 20192020 as compared with $38.7$59.5 million for the comparable period of 2018.2019. The increase in Water Services and Operations segment revenues is due to changes in water sales and royalty revenue and easements and other surface-related income, which are discussed below.

Water sales and royalties. Water sales and royalty revenue was $43.4$35.4 million for the six months ended June 30, 2019, an increase2020, a decrease of $14.2$8.0 million or 48.4%18.5%, compared with the six months ended June 30, 20182019 when water sales and royalty revenue was $29.2$43.4 million. This increasedecrease was principally due to a 46.7% sales increase$5.1 million decrease in the number of barrels of sourced and treated water sold inroyalties for the six months ended June 30, 2019 as2020 compared to the same period in 2018.2019.

Easements and other surface-related income. Easements and other surface-related income for the Water Services and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For the six months ended June 30, 2019,2020, the combined income from these revenue streams was $16.1$26.2 million, an increase of 63.2%, as compared to $9.5$16.1 million for the six months ended June 30, 2018,2019. The increase in easements and other surface-related income was principally related to an increase in produced water royalties for the six months ended June 30, 2020 compared to the same period of 69.7%.2019.

Net income. Net income for the Water Services and Operations segment was $27.1 million for the six months ended June 30, 2020 compared to $29.3 million for the six months ended June 30, 2019 compared to $23.0 million for the six months ended June 30, 2018.2019. As discussed above, revenues for the Water Services and Operations segment increased $20.8 million3.6% for the six months ended June 30, 20192020 compared to the same period

of 2018.2019. Expenses, including income tax expense, for the Water Services and Operations segment were $34.5 million for the six months ended June 30, 2020 as compared to $30.2 million for the six months ended June 30, 2019 as compared to $15.7 million for the six months ended June 30, 2018.2019. The increase in expenses during 20192020 is principally related to increased waterthe $4.1 million increase in depreciation expense resulting from the Trust’s investment in assets placed in service operating expenses, principally fuelin 2020 and equipment rental related to sourcing and transfer of water. The remaining increase was principally related to increased salaries and related employee expenses as2019. Expenses are discussed further below under “Other Financial Data — Consolidated.”

Other Financial Data — Consolidated
 
Salaries and related employee expenses. Salaries and related employee expenses were $14.2$19.6 million for the six months ended June 30, 20192020 compared to $6.4$14.2 million for the comparable period of 2018.2019. The increase in salaries and related employee expenses is directlyprincipally related to the increase in the number of employees from 4778 employees as of June 30, 20182019 to 78101 as of June 30, 2019 and additional contract labor expenses for the six months ended June 30, 2019 compared to the same period of 2018.2020.

Water service-related expenses. Water service-related expenses were $10.3$8.9 million for the six months ended June 30, 20192020 compared to $3.9$10.3 million for the comparable period of 2018.2019. This increasedecrease in expenses was principally related to an increasethe result of a decrease in fuel and equipment rental and fuel to source and transfer water.water, partially offset by increased repairs and maintenance expenses.

General and administrative expenses. General and administrative expenses increased $2.5$1.2 million to $4.2$5.4 million for the six months ended June 30, 20192020 from $1.7$4.2 million for the same period of 2018.2019. The increase in general and administrative expenses is primarily duerelated to increased expenses associated with computer-related software and services, additional liability
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insurance and our independent contractor service providers a contribution of $0.3 million to the Texas Parks and Wildlife Foundation to benefit the Balmorhea State Park in West Texas, expenses related to land transactions and $0.2 million of expenses related to the proxy contest to elect a new Trustee during the six months ended June 30, 2020 compared to the same period of 2019.

Legal and professional expenses. Legal and professional fees were $9.6$5.0 million for the six months ended June 30, 20192020 compared to $1.1$9.6 million for the comparable period of 2018. The increase2019. Legal and professional fees for the six months ended June 30, 2020 principally related to our anticipated corporate reorganization. See further information regarding the anticipated corporate reorganization in legalItem 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Corporate Reorganization”. Legal and professional fees for the six months ended June 30, 2019 compared to 2018 is principally due to approximately $7.3 million of legal and professional fees related to the proxy contest to elect a new Trustee.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $7.0 million for the six months ended June 30, 2020 compared to $2.7 million for the six months ended June 30, 2019 compared to $0.8 million for the six months ended June 30, 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 2020 and 2019 and to a lesser extent, additional depreciation expense related to the latter halfchange in estimated useful lives of 2018.certain water service-related assets during the third quarter of 2019.

Cash Flow Analysis

For the six months ended June 30, 20192020 as compared to the six months ended June 30, 20182019

Cash flows provided by operating activities for the six months ended June 30, 2020 and 2019 were $100.8 million and 2018 were $220.0 million, and $89.2respectively. Cash flows provided by operating activities for the six months ended June 30, 2019 included proceeds from a $100 million respectively. This increaseland sale consummated in operatingJanuary 2019. Excluding the impact of the 2019 land sale on cash flows is principally duein 2019, cash flows provided by operating activities decreased for the six months ended June 30, 2020 as compared to increases inthe same period of 2019. This decrease was primarily related to decreased proceeds from land sales, oil and gas royalties collected, easements and other surface-related payments received and water sales and royalties collected during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.2020.

Cash flows used in investing activities were $102.0$22.0 million compared to $34.2$102.0 million for the six months ended June 30, 2020 and 2019, and 2018, respectively. The increased use of investing cash flows is principally due to our acquisition of approximately 21,671 acresAcquisitions of land in Culberson, Glasscock, Loving and Reeves Counties, Texaspurchases of fixed assets decreased a combined $89.1 million for approximately $74.4 million during the six months ended June 30, 2020 compared to the same period of 2019. This decrease was partially offset by the $11.9 million increase in the acquisition of royalty interests compared to the same periods.

Cash flows used in financing activities were $50.9$124.1 million compared to $48.7$50.9 million for the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 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 six months ended June 30, 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”) 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 six months ended June 30, 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 Services and Operations 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 and/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 June 30, 2019,2020, we had cash and cash equivalents of $155.4$258.4 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.

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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“Financial Statements” in this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures About Market 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, except as described below.proceedings.
In March 2019, the Investor Group launched a proxy contest relating to their nomination of a candidate for election as trustee to fill the vacancy resulting from the resignation of Maurice Meyer III. In connection with the proxy contest, on May 21, 2019, the Trust filed a lawsuit against Eric L. Oliver captioned Case 3:19-cv-01224-B Texas Pacific Land Trust et al v. Oliver in the U.S. District Court for the Northern District of Texas. The lawsuit alleged violations of federal securities laws in Mr. Oliver’s campaign to become the Trust’s next trustee and asked the court to require that Mr. Oliver correct misstatements and omissions in such campaign. Mr. Oliver asserted numerous counterclaims against Mr. Norris and Mr. Barry based on negligence, gross negligence, breach of fiduciary duty and waste, in addition to claiming that the Trustees lacked authority to cancel or postpone a scheduled shareholder meeting. On July 30, 2019, the lawsuit and the proxy contest were settled upon the execution by the parties of a settlement agreement. See Note 11, “Subsequent Events” in the notes to the consolidated financial statements included in Item 1. Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have been no material changes inThe following risk factors supplement 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. In 2020, our oil and gas royalties were impacted by lower oil and gas prices and may continue to be affected in future periods. 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/or a decrease in our revenues 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 has adversely impacted our earnings, cash flow and financial condition and may continue to do so in the future.

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.

In 2020, the results of operations for the Water Services and Operations segment have been impacted by reduced demand and declines in expenditures by our customers and may continue to be impacted in future periods.

Global health threats may adversely affect our business.

Our business has been adversely affected by the effects of the recent outbreak of COVID-19. A significant outbreak of contagious diseases in the human population and resulting widespread health crisis has adversely affected 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 may continue to have a material impact on our business segments and earnings, cash flow and financial condition.

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We may not be able to complete our proposed 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 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
  
The Trust did not repurchase any Sub-shares during the three months ended June 30, 2019.2020.


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
10.1Stockholders’ Agreement dated June 11, 2020 (incorporated by reference to Exhibit 10.1 to the Trust’s Current Report on Form 8-K filed on June 15, 2020 (File No. 001-00737)).
10.2Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Trust’s Current Report on Form 8-K filed on June 30, 2020 (File No. 001-00737)).
31.131.1**
31.231.2**
32.132.1**
32.232.2**
101*The following information from the Trust’s Quarterly Report on Form 10-Q for the quarter ended June 30, 20192020 formatted in iXBRL (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 June 30, 2019,2020, formatted in iXBRL.

*Filed or furnished herewith.

* Filed or furnished herewith.


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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.
 
 
TEXAS PACIFIC LAND TRUST
(Registrant)
Date:August 6, 2020TEXAS PACIFIC LAND TRUST
By:(Registrant)
Date:August 7, 2019By:/s/ Tyler Glover
Tyler Glover, General Agent, Secretary and
Chief Executive Officer
Date:August 7, 20196, 2020By:/s/ Robert J. Packer
Robert J. Packer, General Agent and
Chief Financial Officer

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