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 ~~September 30, 2019~~March 31, 2020

☐ 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

~~Former name, former address and former fiscal year, if changed since last report:~~

~~Not Applicable~~

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 class	Trading Symbol(s)	Name of each exchange on which registered
Sub-shares in Certificates of Proprietary Interest (par value $0.03-1/3 per share)	TPL	New 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 ~~October 31, 2019,~~April 30, 2020, the Registrant had 7,756,156 Sub-share Certificates outstanding.

TEXAS PACIFIC LAND TRUST

Form 10-Q

Quarter Ended ~~September 30, 2019~~March 31, 2020

Page No.

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019

Condensed Consolidated Statements of Income and Total Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019

Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019

Notes to Condensed Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

1110

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

1816

Item 4.

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

1918

Item 3.

Defaults Upon Senior Securities

1918

Item 4.

Mine Safety Disclosures

#SectionPage#

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

TEXAS PACIFIC LAND TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share amounts)

September 30, 2019 December 31, 2018
(Unaudited)
ASSETS
Cash and cash equivalents $ 249,881 $ 119,647
Accrued receivables 62,803 48,750
Tax like-kind exchange escrow — 3,799
Other assets 4,766 3,884
Prepaid income taxes — 9,398
Property, plant and equipment, net of accumulated depreciation of $8,006 and $3,012 as of September 30, 2019 and December 31, 2018, respectively 87,072 64,802
Real estate acquired 84,902 10,492
Royalty interests acquired 29,320 24,303
Operating lease right-of-use assets 3,250 —
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 $ 521,994 $ 285,075
LIABILITIES AND CAPITAL
Accounts payable and accrued expenses $ 19,553 $ 10,505
Income taxes payable 4,364 1,607
Deferred taxes payable 34,996 14,903
Unearned revenue 16,184 13,369
Operating lease liabilities 3,471 —
Total liabilities 78,568 40,384
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 and 7,762,414 Sub-share Certificates as of September 30, 2019 and December 31, 2018, respectively — —
Accumulated other comprehensive loss (1,051) (1,078)
Net proceeds from all sources 444,477 245,769
Total capital 443,426 244,691
Total liabilities and capital $ 521,994 $ 285,075


	March 31, 2020		December 31, 2019
	(Unaudited)
ASSETS

Cash and cash equivalents	$	223,743	$	303,645
Accrued receivables, net	68,679		62,995

Other assets	3,676		3,980

Property, plant and equipment, net of accumulated depreciation of $14,544 and $11,313 as of March 31, 2020 and December 31, 2019, respectively	88,709		88,323
Real estate acquired	110,965		107,075
Royalty interests acquired, net of accumulated depletion of $318 and $260 as of March 31, 2020 and December 31, 2019, respectively	45,938		29,060
Operating lease right-of-use assets	2,939		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	$	544,649	$	598,176

LIABILITIES AND CAPITAL

Accounts payable and accrued expenses	$	21,139	$	19,193
Income taxes payable	14,697		5,271
Deferred taxes payable	40,772		40,827
Unearned revenue	19,448		17,381
Operating lease liabilities	3,250		3,367
Total liabilities	99,306		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 March 31, 2020 and December 31, 2019	—		—
Accumulated other comprehensive loss	(1,447)		(1,461)
Net proceeds from all sources	446,790		513,598
Total capital	445,343		512,137
Total liabilities and capital	$	544,649	$	598,176

See accompanying notes to condensed consolidated financial statements.

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 September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Revenues:	Revenues:									Revenues:
Oil and gas royalties	Oil and gas royalties	$	38,259	$	31,253	$	111,113	$	88,078	Oil and gas royalties	$	42,360	$	33,213
Easements and other surface-related income	Easements and other surface-related income	33,911		22,068		87,635		66,845		Easements and other surface-related income	26,267		31,367
Water sales and royalties	Water sales and royalties	21,654		18,178		65,067		47,428		Water sales and royalties	26,967		22,983
Land sales	Land sales	4,621		1,543		113,020		4,293		Land sales	900		103,625
Other operating revenue	Other operating revenue	85		126		329		375		Other operating revenue	100		136
Total revenues	Total revenues	98,530		73,168		377,164		207,019		Total revenues	96,594		191,324

Expenses:	Expenses:									Expenses:
Salaries and related employee expenses	Salaries and related employee expenses	8,537		4,050		22,742		10,449		Salaries and related employee expenses	10,620		6,464
Water service-related expenses	Water service-related expenses	5,122		3,707		15,423		7,601		Water service-related expenses	6,780		4,578
General and administrative expenses	General and administrative expenses	2,864		1,190		7,102		2,882		General and administrative expenses	2,959		2,142
Legal and professional fees	Legal and professional fees	5,558		556		15,198		1,623		Legal and professional fees	2,358		1,783
Depreciation and amortization		2,631		706		5,286		1,519
Depreciation, depletion and amortization										Depreciation, depletion and amortization	3,335		1,204
Total operating expenses	Total operating expenses	24,712		10,209		65,751		24,074		Total operating expenses	26,052		16,171

Operating income	Operating income	73,818		62,959		311,413		182,945		Operating income	70,542		175,153

Other income	Other income	941		236		1,771		526		Other income	826		393
Income before income taxes	Income before income taxes	74,759		63,195		313,184		183,471		Income before income taxes	71,368		175,546
Income tax expense (benefit):	Income tax expense (benefit):									Income tax expense (benefit):
Current	Current	9,918		12,433		43,485		36,415		Current	14,022		14,548
Deferred	Deferred	4,819		—		20,093		—		Deferred	(55)		21,000
Total income tax expense	Total income tax expense	14,737		12,433		63,578		36,415		Total income tax expense	13,967		35,548
Net income	Net income	$	60,022	$	50,762	$	249,606	$	147,056	Net income	$	57,401	$	139,998

Other comprehensive income — periodic pension costs, net of income taxes of $2, $3, $7 and $10, respectively		9		13		27		39
Other comprehensive income — periodic pension costs, net of income taxes of $4 and $2, respectively										Other comprehensive income — periodic pension costs, net of income taxes of $4 and $2, respectively	13		9
Total comprehensive income	Total comprehensive income	$	60,031	$	50,775	$	249,633	$	147,095	Total comprehensive income	$	57,414	$	140,007

Weighted average number of Sub-share Certificates outstanding	Weighted average number of Sub-share Certificates outstanding	7,756,156		7,786,692		7,756,643		7,797,262		Weighted average number of Sub-share Certificates outstanding	7,756,156		7,759,808

Net income per Sub-share Certificate — basic and diluted	Net income per Sub-share Certificate — basic and diluted	$	7.74	$	6.52	$	32.18	$	18.86	Net income per Sub-share Certificate — basic and diluted	$	7.40	$	18.04

Cash dividends per Sub-share Certificate	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.

TEXAS PACIFIC LAND TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


		Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018			2020		2019
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	249,606	$	147,056	Net income	$	57,401	$	139,998
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	Deferred taxes	20,093		—		Deferred taxes	(55)		21,000
Depreciation and amortization		5,286		1,519
Depreciation, depletion and amortization						Depreciation, depletion and amortization	3,335		1,204
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Operating assets, excluding income taxes	Operating assets, excluding income taxes	(18,278)		(28,706)		Operating assets, excluding income taxes	(5,377)		(19,331)
Prepaid income taxes	Prepaid income taxes	9,398		1,202		Prepaid income taxes	—		9,398

Operating liabilities, excluding income taxes	Operating liabilities, excluding income taxes	15,361		7,555		Operating liabilities, excluding income taxes	3,909		4,579
Income taxes payable	Income taxes payable	2,757		2,208		Income taxes payable	9,426		5,153
Cash provided by operating activities	Cash provided by operating activities	284,223		130,834		Cash provided by operating activities	68,639		162,001

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from sale of fixed assets	Proceeds from sale of fixed assets	117		25		Proceeds from sale of fixed assets	—		30
Acquisition of land	Acquisition of land	(74,410)		(2,663)		Acquisition of land	(3,890)		(47,189)
Acquisition of royalty interests	Acquisition of royalty interests	(5,017)		—		Acquisition of royalty interests	(16,936)		(3,418)
Purchase of fixed assets	Purchase of fixed assets	(27,579)		(40,006)		Purchase of fixed assets	(3,617)		(9,247)
Cash used in investing activities	Cash used in investing activities	(106,889)		(42,644)		Cash used in investing activities	(24,443)		(59,824)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Purchase of Sub-share Certificates in Certificates of Proprietary Interest	Purchase of Sub-share Certificates in Certificates of Proprietary Interest	(4,353)		(25,501)		Purchase of Sub-share Certificates in Certificates of Proprietary Interest	—		(4,353)
Dividends paid	Dividends paid	(46,546)		(31,652)		Dividends paid	(124,098)		(46,546)
Cash used in financing activities	Cash used in financing activities	(50,899)		(57,153)		Cash used in financing activities	(124,098)		(50,899)

Net increase in cash, cash equivalents, and restricted cash		126,435		31,037
Net (decrease) increase in cash, cash equivalents and restricted cash						Net (decrease) increase in cash, cash equivalents and restricted cash	(79,902)		51,278
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	123,446		79,580		Cash, cash equivalents and restricted cash, beginning of period	303,645		123,446
Cash, cash equivalents, and restricted cash, end of period	Cash, cash equivalents, and restricted cash, end of period	$	249,881	$	110,617	Cash, cash equivalents, and restricted cash, end of period	$	223,743	$	174,724

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Income taxes paid	Income taxes paid	$	31,337	$	34,251	Income taxes paid	$	4,600	$	—
Supplemental non-cash investing information:						Supplemental non-cash investing information:
Operating lease right-of-use assets						Operating lease right-of-use assets	$	—	$	3,712

See accompanying notes to condensed consolidated financial statements.

TEXAS PACIFIC LAND TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 and gas royalties, sales of water and land, easements and commercial leases of the land.

We operate our business in 2 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.

Corporate Reorganization

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

2. Summary of Significant Accounting Policies

Interim Unaudited Financial Information

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position of the Trust as of ~~September 30, 2019~~March 31, 2020 and the results of its operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, and its cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ 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.

~~Change in Accounting Estimate~~

Management evaluates its estimates on a routine basis. Effective July 1, 2019, the Trust revised the estimated useful lives of certain water service-related assets after its disaggregation of water service-related projects into sub classifications. The Trust purchased these water service-related assets from July 1, 2017 through June 30, 2019. Based on information gained from operations over this time period, management believes that these water service-related assets will benefit periods ranging from ~~four~~ ~~to 15 years, beginning at the point the water service-related assets were originally placed in service.~~

The net book value of these water service-related assets at June 30, 2019, was not modified and is depreciated over the revised estimated useful lives of these assets. The effect of the change in estimated useful lives to depreciation expense, net

~~income and earnings per share for the three and nine months ended September 30, 2019 is presented in the table below (in thousands, except earnings per share):~~

Effect on income statement line items due to change in estimated useful lives Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Increase in depreciation and amortization expense $ 916 $ 916
Decrease in net income $ (723) $ (723)
Decrease in net income per Sub-share Certificate — basic and diluted $ (0.09) $ (0.09)

~~Reclassifications~~

Certain financial information on the condensed consolidated balance sheets as of December 31, 2018 and condensed consolidated statements of income for the three and nine months ended September 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):

September 30, 2019 December 31, 2018
Cash and cash equivalents $ 249,881 $ 119,647
Tax like-kind exchange escrow — 3,799
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 249,881 $ 123,446

Recently Adopted Accounting Guidance

~~Leases~~

In ~~February~~June 2016, ~~the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)~~”which amended the existing lease accounting guidance to require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms greater than twelve months. We adopted the new leasing standard and all related amendments on January 1, 2019. We elected the optional transition method provided by ASU No. 2018-11, “~~Leases (Topic 842): Targeted Improvements~~” and as a result, have not restated 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.

As of September 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 nine months ended September 30, 2019 was $0.2 million and $0.4 million, respectively.

~~Future minimum lease payments under these operating leases are as follows as of September 30, 2019 (in thousands):~~

2019 (excluding the nine months ended September 30) $ 144
2020 696
2021 796
2022 697
2023 537
Thereafter 1,067
Total lease payments 3,937
Less: imputed interest (466)
Total operating lease liabilities $ 3,471

~~Implementation Costs Incurred in Cloud Computing Arrangements~~

~~In August 2018,~~ the FASB issued ASU ~~2018-15,~~ 2016-13, “~~“Intangibles~~Financial Instruments — ~~Goodwill and Other — Internal-Use Software (Subtopic 350-40)~~Credit Losses (Topic 326): ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.~~Measurement of Credit Losses on Financial Instruments.”The ASU ~~requires~~amends the impairment model by requiring entities to use a ~~customer in a cloud computing arrangement that is a service contract~~forward-looking approach based on expected losses to follow existing internal-use software guidance to determine which implementation costs to capitalize as an asset. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted, and may be applied retrospectively or asestimate credit losses on certain types of ~~the beginning of the period of adoption.~~financial instruments, including trade receivables. The Trust adopted the guidance effective January 1, ~~2019. The~~2020. Due to the short-term nature of our trade accounts receivable, the adoption of ~~the~~this guidance ~~did not have~~had a ~~significant~~minimal impact on our consolidated financial statements.

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 December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim 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 beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that interim period. The Trust is currently evaluating the impact that this guidance will have on our consolidated financial statements and disclosures.

4. Property, Plant and Equipment

Property, plant and equipment, net consisted of the following as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

September 30, 2019 December 31, 2018
Property, plant and equipment:
Water service-related assets ⁽¹⁾
$ 88,625 $ 62,919
Furniture, fixtures and equipment 5,855 4,297
Other 598 598
Property, plant and equipment at cost 95,078 67,814
Less: accumulated depreciation (8,006) (3,012)
Property, plant and equipment, net $ 87,072 $ 64,802


	March 31, 2020		December 31, 2019
Property, plant and equipment:
Water service-related assets ⁽¹⁾	$	96,600	$	93,097
Furniture, fixtures and equipment	6,055		5,941
Other	598		598
Property, plant and equipment at cost	103,253		99,636
Less: accumulated depreciation	(14,544)		(11,313)
Property, plant and equipment, net	$	88,709	$	88,323

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

Depreciation expense was ~~$2.6~~$3.2 million and ~~$0.7~~$1.2 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively. Depreciation expense was $5.2 million and $1.5 million for the nine months ended September 30, 2019 and 2018,~~ respectively.

5. Real Estate Activity

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Trust owned the following land and real estate (in thousands, except number of acres):

September 30, 2019 December 31, 2018
Number of Acres Net Book Value Number of Acres Net Book Value
Land (surface rights) 855,476 $ — 877,462 $ —
Real estate acquired 46,386 84,902 24,715 10,492
Total real estate situated in 19 counties in Texas 901,862 $ 84,902 902,177 $ 10,492


	March 31, 2020				December 31, 2019
	Number of Acres	Net Book Value		Number of Acres	Net Book Value
Land (surface rights)	849,826	$	—	849,856	$	—
Real estate acquired	52,687	110,965		51,931	107,075
Total real estate situated in 19 counties in Texas	902,513	$	110,965	901,787	$	107,075

No valuation allowance was necessary at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

Land Sales

For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Trust sold approximately ~~21,986~~30 acres ~~(13,180 acres in Loving County, 5,675 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~~(Pecos County) of land in Texas for an aggregate sales price of approximately ~~$113.0~~$0.9 million, ~~with~~ an average of approximately ~~$5,141~~$30,000 per acre.

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Trust sold approximately ~~167~~21,251 acres ~~(80 acres in~~(Loving, Culberson, ~~County, 40 acres in Loving County, 32 in~~Hudspeth and Reeves ~~County and 15 in El Paso County)~~Counties) of land in Texas for an aggregate sales price of approximately ~~$4.3~~$103.6 million, ~~with~~ an average of approximately ~~$25,734~~$4,876 per acre.

Land Acquisitions

For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Trust acquired approximately ~~21,671~~756 acres (Culberson ~~Glasscock, Loving~~ and Reeves Counties) of land in Texas for an aggregate purchase price of approximately ~~$74.4~~$3.9 million, ~~with~~ an average of approximately ~~$3,434~~$5,134 per acre.

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Trust acquired approximately ~~2,884~~11,702 acres ~~(Mitchell~~(Culberson and ~~Upton~~Reeves Counties) of land in Texas for an aggregate purchase price of approximately ~~$2.7~~$47.2 million, ~~with~~ an average of approximately ~~$924~~$4,033 per acre.

6. Royalty Interests

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Trust owned the following oil and gas royalty interests (in thousands, except number of interests):


		Net Book Value							Net Book Value
		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
1/16th nonparticipating perpetual royalty interests	1/16th nonparticipating perpetual royalty interests	$	—	$	—	1/16th nonparticipating perpetual royalty interests	$	—	$	—
1/128th nonparticipating perpetual royalty interests	1/128th nonparticipating perpetual royalty interests	—		—		1/128th nonparticipating perpetual royalty interests	—		—
Royalty interests acquired	Royalty interests acquired	29,320		24,303		Royalty interests acquired	46,256		29,320
Total royalty interests		$	29,320	$	24,303
Total royalty interests, gross						Total royalty interests, gross	46,256		29,320
Less: accumulated depletion						Less: accumulated depletion	(318)		(260)
Total royalty interests, net						Total royalty interests, net	$	45,938	$	29,060

No valuation allowance was necessary at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Trust acquired oil and gas royalty interests in approximately ~~1,247~~1,017 net royalty acres (normalized to 1/8th) for an aggregate purchase price of ~~$4.7~~$16.9 million, an average price of approximately ~~$3,800~~$16,659 per net royalty acre.

~~There were no oil and gas royalty interest transactions for the nine months ended September 30, 2018.~~

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

7. Income Taxes

~~Effective January 1, 2018,~~For the ~~statutory Federal~~three months ended March 31, 2020 and 2019, income tax expense was $14.0 million and $35.5 million, respectively. The difference between the U.S. statutory tax rate ~~for~~of 21% and the ~~Trust decreased from 35% to 21%. The Trust’s~~current effective ~~Federal income~~ tax rate is ~~less than the 21%~~primarily related to statutory ~~rate because taxable income is reduced by statutory percentage~~ depletion allowed on mineral royalty income.

In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The ~~Trust structured~~Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the ~~$100.0 million land sale consummated in January 2019 as a §1031 exchange for federal~~U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax ~~purposes and recognized temporary tax basis differences related to acquisition of property, plant and equipment for~~laws. For the three ~~and nine~~ months ended ~~September 30, 2019. As a result, the current federal income~~March 31, 2020, there were no material tax ~~liability and expense were each reduced by approximately $20.1 million during the nine months ended September 30, 2019, while the deferred federal income tax liability and expense increased~~impacts 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

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

Dividends

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

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

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

Repurchases of Sub-shares

For the three months ended March 31, 2020, there were 0 Sub-shares repurchased. During the ~~nine~~three months ended ~~September 30,~~March 31, 2019, we purchased and retired 6,258 ~~Sub-shares. During the nine months ended September 30, 2018, we purchased and retired 39,768~~ Sub-shares.

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. The revenue streams of this segment consist of revenue generated from ~~direct~~ sales of sourced and treated water as well as ~~revenues~~revenue from royalties on water service-related activity.

Segment financial results were as follows for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Revenues:	Revenues:									Revenues:
Land and resource management	Land and resource management	$	65,076	$	47,513	$	284,223	$	142,642	Land and resource management	$	56,658	$	160,459
Water services and operations	Water services and operations	33,454		25,655		92,941		64,377		Water services and operations	39,936		30,865
Total consolidated revenues	Total consolidated revenues	$	98,530	$	73,168	$	377,164	$	207,019	Total consolidated revenues	$	96,594	$	191,324

Net income:	Net income:									Net income:
Land and resource management	Land and resource management	$	43,911	$	36,385	$	204,222	$	109,700	Land and resource management	$	39,118	$	123,117
Water services and operations	Water services and operations	16,111		14,377		45,384		37,356		Water services and operations	18,283		16,881
Total consolidated net income	Total consolidated net income	$	60,022	$	50,762	$	249,606	$	147,056	Total consolidated net income	$	57,401	$	139,998

Capital expenditures:	Capital expenditures:									Capital expenditures:
Land and resource management	Land and resource management	$	29	$	909	$	1,445	$	2,464	Land and resource management	$	88	$	534
Water services and operations	Water services and operations	4,949		7,533		26,134		37,542		Water services and operations	3,529		8,713
Total capital expenditures	Total capital expenditures	$	4,978	$	8,442	$	27,579	$	40,006	Total capital expenditures	$	3,617	$	9,247

Depreciation and amortization:
Depreciation, depletion and amortization:										Depreciation, depletion and amortization:
Land and resource management	Land and resource management	$	257	$	160	$	695	$	330	Land and resource management	$	337	$	177
Water services and operations	Water services and operations	2,374		546		4,591		1,189		Water services and operations	2,998		1,027
Total depreciation and amortization		$	2,631	$	706	$	5,286	$	1,519
Total depreciation, depletion and amortization										Total depreciation, depletion and amortization	$	3,335	$	1,204

The following table presents total assets and property, plant and equipment, net by segment as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
Assets:	Assets:					Assets:
Land and resource management	Land and resource management	$	398,120	$	198,922	Land and resource management	$	396,004	$	467,758
Water services and operations	Water services and operations	123,874		86,153		Water services and operations	148,645		130,418
Total consolidated assets	Total consolidated assets	$	521,994	$	285,075	Total consolidated assets	$	544,649	$	598,176

Property, plant and equipment, net:	Property, plant and equipment, net:					Property, plant and equipment, net:
Land and resource management	Land and resource management	$	4,470	$	3,720	Land and resource management	$	4,211	$	4,359
Water services and operations	Water services and operations	82,602		61,082		Water services and operations	84,498		83,964
Total consolidated property, plant and equipment, net	Total consolidated property, plant and equipment, net	$	87,072	$	64,802	Total consolidated property, plant and equipment, net	$	88,709	$	88,323

10. Oil and Gas Producing Activities

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

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. ~~As of September 30, 2019, the Trust has identified 424 DUC wells subject to our royalty interest. Beginning in the third quarter of 2019, we implemented a new methodology to quantify the~~The number of DUC ~~wells. We changed the measurement period for determining a DUC well from waiting a minimum of 120 days to all~~ wells ~~awaiting completion. Additionally, we began~~are determined using uniform drilling spacing units with pooled interests ~~which yields a higher number of~~for all wells awaiting completion. The Trust has identified 597 and 486 DUC wells ~~at a lower net~~subject to our royalty ~~interest. For comparative purposes, the table below presents the number~~interest as of ~~DUC wells by quarter for current~~March 31, 2020 and ~~prior periods utilizing the new methodology discussed above:~~


						~~Number of DUC wells~~
~~September 30, 2019~~						~~424~~
~~June 30, 2019~~						~~369~~
~~March 31, 2019~~						~~376~~
~~December 31, 2018~~						~~362~~
~~September 30, 2018~~						~~341~~
~~June 30, 2018~~						~~364~~
~~March 31, 2018~~						~~347~~
~~December 31, 2017~~						~~319~~

December 31, 2019, respectively.

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 did not identify any subsequent events requiring disclosure.

*****

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 prorated~~including actions of other oil and gas ~~wells authorized by~~producers or consortiums worldwide such as OPEC+, the ~~Railroad Commission of Texas, expected competition, the impacts thereof and other possible changes in composition~~proposed 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”~~Factors,” if any, of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust’s future performance. Words or phrases such as “expects” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the SEC, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Overview

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

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

Our revenues are derived primarily from oil and gas 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 fluctuations in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject to decisions made by the owners and operators of the oil and gas wells to which our royalty interests relate as to investments in and production from those wells. We monitor ~~production~~ reports 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 quarter~~The 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 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 providing~~provides full-service water offerings to operators in the Permian Basin. These services include, but are not limited to, water sourcing, produced-water gathering/treatment, infrastructure development, disposal solutions, water tracking, analytics and well testing services. TPWR's revenue streams principally consist of revenue generated from sales of sourced and treated water as well as revenues from produced water royalties.

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Trust invested approximately ~~$25.8~~$3.5 million in TPWR projects to develop water sourcing and water ~~treatment~~re-use assets.

Corporate Reorganization

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

COVID-19 Pandemic and Market Conditions Update

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

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

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

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

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

operations currently have limited capital expenditure requirements, the amount and timing of which is entirely within our control.

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

Results of Operations

We operate our business in two segments: Land and Resource Management and Water 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 ” in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

For the three months ended ~~September 30, 2019~~March 31, 2020 as compared to the three months ended ~~September 30, 2018~~March 31, 2019

Revenues. Revenues ~~increased $25.3~~decreased $94.7 million, or ~~34.7%~~49.5%, to ~~$98.5~~$96.6 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$73.2~~$191.3 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Net income ~~increased $9.2~~decreased $82.6 million, or ~~18.2%~~59.0%, to ~~$60.0~~$57.4 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$50.8~~$140.0 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Revenues and net income for the three months ended March 31, 2019 included a $100 million land sale. Excluding the impact of the 2019 land sale, revenues and net income (net of income tax) for the three months ended March 31, 2019 were $91.3 million and $61.0 million, respectively.

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

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

Three Months Ended September 30,
2019 2018
Revenues:
Land and resource management:
Oil and gas royalties $ 38,259 39 % $ 31,253 43 %
Easements and other surface-related income 22,111 22 % 14,591 20 %
Land sales and other operating revenue 4,706 5 % 1,669 2 %
65,076 66 % 47,513 65 %
Water services and operations:
Water sales and royalties 21,654 22 % 18,178 25 %
Easements and other surface-related income 11,800 12 % 7,477 10 %
33,454 34 % 25,655 35 %
Total consolidated revenues $ 98,530 100 % $ 73,168 100 %
Net income:
Land and resource management $ 43,911 73 % $ 36,385 72 %
Water services and operations 16,111 27 % 14,377 28 %
Total consolidated net income $ 60,022 100 % $ 50,762 100 %


	Three Months Ended March 31,
	2020						2019
Revenues:
Land and resource management:
Oil and gas royalties	$	42,360	44	%	$	33,213	18	%
Easements and other surface-related income	13,298		14	%	23,485		12	%
Land sales and other operating revenue	1,000		1	%	103,761		54	%
	56,658		59	%	160,459		84	%
Water services and operations:
Water sales and royalties	26,967		28	%	22,983		12	%
Easements and other surface-related income	12,969		13	%	7,882		4	%
	39,936		41	%	30,865		16	%
Total consolidated revenues	$	96,594	100	%	$	191,324	100	%

Net income:
Land and resource management	$	39,118	68	%	$	123,117	88	%
Water services and operations	18,283		32	%	16,881		12	%
Total consolidated net income	$	57,401	100	%	$	139,998	100	%

Land and Resource Management

Land and Resource Management segment revenues ~~increased $17.6~~decreased $103.8 million, or ~~37.0%~~64.7%, to ~~$65.1~~$56.7 million for the three months ended ~~September 30, 2019~~March 31, 2020 as compared with ~~$47.5~~$160.5 million for the comparable period of ~~2018.~~2019. Segment revenues for the three months ended March 31, 2019 include a $100 million land sale.Excluding the $100 million land sale, segment revenues for the three months ended March 31, 2019 were $60.5 million.

Oil and gas royalties. Oil and gas royalty revenue was ~~$38.3~~$42.4 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$31.3~~$33.2 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Oil royalty revenue was ~~$33.1~~$35.9 million for the three months ended ~~September 30, 2019,~~March 31, 2020, an increase of ~~37.2%~~36.0% over the three months ended ~~September 30, 2018~~March 31, 2019 when oil royalty revenue was ~~$24.1~~$26.4 million. This increase in oil royalty revenue is principally due to the combined effect of a ~~50.4%~~11.9% increase in crude oil production subject to the Trust’s royalty interest ~~partially offset by~~and a ~~8.8% decrease~~21.9% increase in the average price per royalty barrel of crude oil received during the three months ended ~~September 30, 2019~~March 31, 2020 compared to the same period in ~~2018.~~2019. Gas royalty revenue was ~~$5.2~~$6.5 million for the three months ended ~~September 30, 2019,~~March 31, 2020, a decrease of ~~27.6% over~~5.2% compared to the three months ended ~~September 30, 2018~~March 31, 2019 when gas royalty revenue was ~~$7.1~~$6.8 million. While gas production increased ~~125.9%~~31.4% in the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~September 30, 2018,~~March 31, 2019, the ~~64.6% decrease in prices~~average price received ~~for gas production~~decreased 23.1% over the same ~~time period had a more significant impact on gas royalty revenue.~~period.

Easements and other surface-related income. Easements and other surface-related income was ~~$22.1~~$13.3 million for the three months ended ~~September 30, 2019, an increase~~March 31, 2020, a decrease of ~~51.5%~~43.4% compared to ~~$14.6~~$23.5 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales, and seismic and temporary permits. The ~~increase~~decrease in easements and other surface-related income is principally related to a ~~39.6% increase~~63.4% decrease in pipeline easement income to ~~$12.8~~$6.1 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$9.1~~$16.6 million for the three months ended September 30, 2018. Additionally, commercial lease revenue was $3.0 million for the three months ended September 30, 2019, more than double the $1.2 million for the three months ended September 30, 2018.March 31, 2019. Easements and other surface-related income is unpredictable and may vary significantly from period to period.

Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the three months ended ~~September 30, 2019,~~March 31, 2020, we sold approximately 7730 acres of land for total consideration of ~~$4.6~~approximately $0.9 million, or approximately ~~$59,960~~$30,000 per acre. ~~Land sales revenue was $1.5 million for~~For the three months ended ~~September 30, 2018, when the Trust~~March 31, 2019, we sold approximately 4721,251 acres of land for ~~an average price~~total consideration of approximately ~~$32,953~~$103.6 million, or approximately $4,876 per acre.

Net income. Net income for the Land and Resource Management segment was ~~$43.9~~$39.1 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$36.4~~$123.1 million for the three months ended ~~September 30, 2018.~~March 31, 2019. As discussed above, 2019 revenues for the Land and Resource Management segment ~~increased $17.6~~included a $100 million land sale. Excluding the impact of the 2019 land sale (net of income tax), net income for the first three months ended ~~September 30,~~March 31, 2019 ~~compared to the same period of 2018.~~was $44.1 million. Expenses, including income tax expense, for the Land and Resource Management segment were ~~$21.2~~$17.6 million and ~~$11.1~~$37.4 million ($16.4 million excluding the income tax expense associated with the $100 million land sale) for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in expenses was principally related to approximately $4.9 million of legal and professional fees as discussed further below under “Other Financial Data — Consolidated.” No such expenses were incurred for the three months ended September 30, 2018. The remaining increase was principally related to salaries and related employee expenses asExpenses are discussed further below under “Other Financial Data — Consolidated.”

Water Services and Operations

Water Services and Operations segment revenues increased ~~30.4%~~29.4% to ~~$33.5~~$39.9 million for the three months ended ~~September 30, 2019~~March 31, 2020 as compared with ~~$25.7~~$30.9 million for the comparable period of ~~2018.~~2019.

Water sales and royalties. Water sales and ~~royalties~~royalty revenue was ~~$21.7~~$27.0 million for the three months ended ~~September 30, 2019,~~March 31, 2020, an increase of ~~$3.5~~$4.0 million or ~~19.1%~~17.3%, compared with the three months ended ~~September 30, 2018~~March 31, 2019 when water sales and royalty revenue was ~~$18.2~~$23.0 million. This increase was principally due to a ~~34.0% sales~~50.5% increase in the number of barrels of sourced and treated water sold in the three months ended ~~September 30, 2019~~March 31, 2020 as compared to the same period in ~~2018.~~2019, partially offset by decreased water royalties.

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 ~~September 30, 2019,~~March 31, 2020, the combined income from these revenue streams was ~~$11.8~~$13.0 million, an increase of ~~57.8%~~64.5%, as compared to ~~$7.5~~$7.9 million for the three months ended ~~September 30, 2018. Pipeline easement~~March 31, 2019. The increase in easements and other surface-related income was principally related to an increase in produced water royalties ~~increased $4.0 million to $6.5 million~~ for the three months ended ~~September 30, 2019 from $2.5 million for~~March 31, 2020 compared to the ~~three months ended September 30, 2018.~~same period of 2019.

Net income. Net income for the Water Services and Operations segment was ~~$16.1~~$18.3 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$14.4~~$16.9 million for the three months ended ~~September 30, 2018.~~March 31, 2019. As discussed above, revenues for the

Water Services and Operations segment increased ~~30.4%~~29.4% for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the same period of ~~2018.~~2019. Expenses, including income tax expense, for the Water Services and Operations segment were ~~$17.4~~$21.6 million for the three months ended ~~September 30, 2019~~March 31, 2020 as compared to ~~$11.3~~$14.0 million for the three months ended ~~September 30, 2018.~~March 31, 2019. The increase in expenses during 2020 is principally related to ~~the $1.8 million increase in depreciation and amortization expense for the three months ended September 30, 2019 compared to the same period of 2018. Additionally,~~increased water ~~service~~service-related operating expenses, primarily ~~fuel and~~ repairs and maintenance, equipment rental and fuel related to increased sourcing and transfer of ~~water, increased $1.4 million for the three months ended September 30, 2019 compared to the same period of 2018.~~water. The remaining increase was principally related to increased salaries and related employee expenses and depreciation expense as discussed further below under “Other Financial Data — Consolidated.”

Other Financial Data — Consolidated

Salaries and related employee expenses. Salaries and related employee expenses were ~~$8.5~~$10.6 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$4.1~~$6.5 million for the comparable period of ~~2018.~~2019. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 5875 employees as of ~~September 30, 2018~~March 31, 2019 to 89102 as of ~~September 30, 2019~~March 31, 2020 and additional contract labor expenses for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the same period of ~~2018.~~2019.

Water service-related expenses. Water service-related expenses were ~~$5.1~~$6.8 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$3.7~~$4.6 million for the comparable period of ~~2018.~~2019. This increase in expenses was principally the result of an increase in ~~fuel and~~ repairs and maintenance, ~~expenses~~equipment rental and fuel to source and transfer ~~water. The increase in expenses~~water and is directly related to the ~~34.0% sales~~50.5% increase in the number of barrels of sourced and treated water sold as previously discussed.

General and administrative expenses. General and administrative expenses increased ~~$1.7~~$0.8 million to ~~$2.9~~$3.0 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$1.2~~$2.1 million for the same period of ~~2018.~~2019. The increase in general and administrative expenses is ~~principally~~primarily related to increased expenses associated with our independent contractor service providers, computer-related software and services and additional liability ~~insurance.~~insurance during the three months ended March 31, 2020.

Legal and professional ~~fees~~expenses. Legal and professional fees were ~~$5.6~~$2.4 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$0.6~~$1.8 million for the comparable period of ~~2018.~~2019. The increase in legal and professional fees for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~2018~~2019 is principally due to approximately ~~$4.9~~$1.8 million of legal and professional fees related to our anticipated corporate reorganization. See further information regarding the ~~proxy contest to elect a new Trustee, the entry into~~anticipated corporate reorganization in Item 2. “Man agement's Discussion and payments made under the settlement agreement dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust's Current Report on Form 8-K filed with the SEC on July 30, 2019. We anticipate receiving a partial reimbursementAnalysis of ~~these legal and professional fees under coverage provided by our director and officer insurance policy. The amount~~Finan cial Condition —R esult s of ~~the reimbursement has not yet been determined.~~Operations —Corporate Reorganization ”.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was ~~$2.6~~$3.3 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$0.7~~$1.2 million for the three months ended ~~September 30, 2018.~~March 31, 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 ~~2019~~2020 and ~~the latter half of 2018, and to a lesser extent, additional depreciation expense related to the change in estimated useful lives of certain water service-related assets as discussed in~~ ~~Note 2~~, “~~Summary of~~ ~~Significant Accounting Policies~~ — ~~Change in Accounting Estimate~~.”

~~For the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018~~

~~Revenues~~. Revenues increased $170.2 million, or 82.2%, to $377.2 million for the nine months ended September 30, 2019 compared to $207.0 million for the nine months ended September 30, 2018. Net income increased $102.5 million, or 69.7%, to $249.6 million for the nine months ended September 30, 2019 compared to $147.1 million for the nine months ended September 30, 2018.

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

Nine Months Ended September 30,
2019 2018
Revenues:
Land and resource management:
Oil and gas royalties $ 111,113 29 % $ 88,078 43 %
Easements and other surface-related income 59,761 16 % 49,896 24 %
Land sales and other operating revenue 113,349 30 % 4,668 2 %
284,223 75 % 142,642 69 %
Water services and operations:
Water sales and royalties 65,067 17 % 47,428 23 %
Easements and other surface-related income 27,874 8 % 16,949 8 %
92,941 25 % 64,377 31 %
Total consolidated revenues $ 377,164 100 % $ 207,019 100 %
Net income:
Land and resource management $ 204,222 82 % $ 109,700 75 %
Water services and operations 45,384 18 % 37,356 25 %
Total consolidated net income $ 249,606 100 % $ 147,056 100 %

~~Land and Resource Management~~

Land and Resource Management segment revenues increased $141.6 million, or 99.3%, to $284.2 million for the nine months ended September 30, 2019 as compared with $142.6 million for the comparable period of 2018.

~~Oil and gas royalties~~. Oil and gas royalty revenue was $111.1 million for the nine months ended September 30, 2019 compared to $88.1 million for the nine months ended September 30, 2018. Oil royalty revenue was $92.6 million for the nine months ended September 30, 2019, an increase of 34.2% over the nine months ended September 30, 2018 when oil royalty revenue was $69.0 million. This increase in oil royalty revenue is principally due to a 49.4% increase in crude oil production subject to the Trust’s royalty interest, partially offset by a 9.8% decrease in the average price per royalty barrel of crude oil received during the nine months ended September 30, 2019 compared to the same period in 2018. Gas royalty revenue was $18.5 million for the nine months ended September 30, 2019, a decrease of 3.0%, over the nine months ended September 30, 2018 when gas royalty revenue was $19.1 million. While gas production increased 122.3% in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, the 52.6% decrease in prices received for gas production over the same time period had a more significant impact on gas royalty revenue.

~~Easements and other surface-related income~~. Easements and other surface-related income was $59.8 million for the nine months ended September 30, 2019, an increase of 19.8% compared to $49.9 million for the nine months ended September 30, 2018. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales, and seismic and temporary permits. The increase in easements and other surface-related income is principally related to the increase in pipeline easement income which increased 16.1% to $39.2 million for the nine months ended September 30, 2019 from $33.8 million for the nine months ended September 30, 2018. Additionally, commercial lease revenue was $5.8 million for the nine months ended September 30, 2019, more than double the $2.1 million for the nine months ended September 30, 2018. Easements and other surface-related income is unpredictable and may vary significantly from period to period.

~~Land sales and other operating revenue~~. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the nine months ended September 30, 2019, we sold approximately 21,986 acres of land for total consideration of $113.0 million, or approximately $5,141 per acre. For the nine months ended September 30, 2018, we sold approximately 167 acres of land for total consideration of $4.3 million, or approximately $25,734 per acre.

~~Net income~~. Net income for the Land and Resource Management segment was $204.2 million for the nine months ended September 30, 2019 compared to $109.7 million for the nine months ended September 30, 2018. As discussed above, revenues for the Land and Resource Management segment increased $141.6 million for the nine months ended September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Land and Resource Management segment were $80.0 million and $32.9 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with 2019 land sales totaling $113.0 million. Total consolidated income tax expense of $63.6 million for the nine months ended September 30, 2019 includes $20.1 million which is eligible for deferral as a result of our classification of a land sale in January 2019 as a §1031 tax exchange and recognized temporary tax basis differences related to acquisitions of property, plant and equipment. The remaining increase was principally related to increased legal and professional fees, salaries and related employee expenses and general and administrative expenses as discussed further below under “Other Financial Data — Consolidated.”

~~Water Services and Operations~~

Water Services and Operations segment revenues increased $28.5 million, or 44.4%, to $92.9 million for the nine months ended September 30, 2019 as compared with $64.4 million for the comparable period of 2018.

~~Water sales and royalties~~. Water sales and royalties revenue was $65.1 million for the nine months ended September 30, 2019, an increase of $17.7 million, or 37.2%, compared with the nine months ended September 30, 2018 when water sales and royalty revenue was $47.4 million. This increase was principally due to a 41.8% sales increase in the number of barrels of sourced and treated water sold in the nine months ended September 30, 2019 as compared to the same period in 2018.

~~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 nine months ended September 30, 2019, the combined income from these revenue streams was $27.9 million as compared to $16.9 million for the nine months ended September 30, 2018, an increase of 64.5%. This increase was principally related to pipeline easement royalties which increased $11.1 million to $14.4 million for the nine months ended September 30, 2019 from $3.3 million for the nine months ended September 30, 2018.

~~Net income~~. Net income for the Water Services and Operations segment was $45.4 million for the nine months ended September 30, 2019 compared to $37.4 million for the nine months ended September 30, 2018. As discussed above, revenues for the Water Services and Operations segment increased $28.5 million for the nine months ended September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Water Services and Operations segment were $47.5 million for the nine months ended September 30, 2019 as compared to $27.0 million for the nine months ended September 30, 2018. The increase in expenses during 2019 is principally related to increased water service-related operating expenses, principally fuel, repairs and maintenance and equipment rental related to sourcing and transfer of water. The remaining increase was principally related to increased salaries and related employee expenses as discussed further below under “Other Financial Data — Consolidated.”

~~Other Financial Data — Consolidated~~

~~Salaries and related employee expenses~~. Salaries and related employee expenses were $22.7 million for the nine months ended September 30, 2019 compared to $10.4 million for the comparable period of 2018. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 58 employees as of September 30, 2018 to 89 as of September 30, 2019 and additional contract labor expenses for the nine months ended September 30, 2019 compared to the same period of 2018.

~~Water service-related expenses~~. Water service-related expenses were $15.4 million for the nine months ended September 30, 2019 compared to $7.6 million for the comparable period of 2018. This increase in expenses was principally related to an increase in fuel, repairs and maintenance and equipment rental to source and transfer water. The increase in expenses is directly related to the 41.8% sales increase in the number of barrels of sourced and treated water sold as previously discussed.

~~General and administrative expenses~~. General and administrative expenses increased $4.2 million to $7.1 million for the nine months ended September 30, 2019 from $2.9 million for the same period of 2018. The increase in general and administrative expenses is primarily due to increased expenses associated with our independent contractor service providers, computer-related software and services, and a contribution of $0.3 million to the Texas Parks and Wildlife Foundation to benefit the Balmorhea State Park in West Texas during the nine months ended September 30, 2019.

~~Legal and professional fees~~. Legal and professional fees were $15.2 million for the nine months ended September 30, 2019 compared to $1.6 million for the comparable period of 2018. The increase in legal and professional fees for the nine months ended September 30, 2019 compared to 2018 is principally due to approximately $12.2 million of legal and professional fees related to the proxy contest to elect a new Trustee, the entry into and payments made under the settlement agreement dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust's Current Report on Form 8-K filed with the SEC on July 30, 2019. We anticipate receiving a partial reimbursement of these legal and professional fees under coverage provided by our director and officer insurance policy. The amount of the reimbursement has not yet been determined.

~~Depreciation and amortization~~. Depreciation and amortization was $5.3 million for the nine months ended September 30, 2019 compared to $1.5 million for the nine months ended September 30, 2018. The increase in depreciation and amortization is principally related to the Trust’s investment in water service-related assets placed in service in 2019 and the latter half of 2018 and to a lesser extent, additional depreciation expense related to the change in estimated useful lives of certain water service-related assets as discussed in ~~Note 2, “Summary of Significant Accounting Policies —~~ ~~Change in Accounting Estimate~~.”

Cash Flow Analysis

For the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as compared to the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019

Cash flows provided by operating activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$284.2~~$68.6 million and ~~$130.8~~$162.0 million, respectively. ~~This increase~~Cash flows provided by operating activities for the three months ended March 31, 2019 included proceeds from a $100 million land sale in ~~operating~~January 2019. Excluding the impact of the 2019 land sale on cash flows ~~is principally due to increases~~ in 2019, cash flows provided by operating activities for the three months ended March 31, 2020 were positively impacted by increased proceeds from ~~land sales,~~ oil and gas royalties ~~easements and other surface-related payments~~collected, and water sales and royalties collected during the ~~nine~~three months ended ~~September 30, 2019 compared to the nine months ended September 30, 2018.~~March 31, 2020.

Cash flows used in investing activities were ~~$106.9~~$24.4 million compared to ~~$42.6~~$59.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~The increased use of investing cash flows is principally due to our acquisition of approximately 21,671 acres~~Acquisitions of land ~~in Culberson, Glasscock, Loving~~ and ~~Reeves Counties, Texas~~purchases of fixed assets decreased $48.9 million for ~~approximately $74.4 million during~~ the ~~nine~~three months ended ~~September 30, 2019. This increase was partially offset by a $12.4 million reduction in capital expenditures during the nine months ended September 30, 2019 as~~March 31, 2020 compared to the same period of ~~2018.~~2019. This decrease was partially offset by the $13.5 million increase in the acquisition of royalty interests over the same periods.

Cash flows used in financing activities were ~~$50.9~~$124.1 million compared to ~~$57.2~~$50.9 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. During the ~~nine~~three months ended ~~September 30,~~March 31, 2020, the Trust paid total dividends of $124.1 million consisting of a regular cash dividend of $10.00 per Sub-share Certificate (“Sub-share”) and a special dividend of $6.00 per Sub-share to each sub-shareholder of record at the close of business on March 9, 2020. During the three months ended March 31, 2019, the Trust paid total dividends of $46.5 million consisting of a regular cash dividend of $1.75 per ~~Sub-share Certificate (“Sub-share”)~~Sub-

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 nine months ended September 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 and gas 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 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 ~~September 30, 2019,~~March 31, 2020, we had cash and cash equivalents of ~~$249.9~~$223.7 million that we expect to utilize, along with cash flow from operations, to provide capital to support the ~~growth~~operation of our business, particularly ~~the growth of~~ TPWR, to potentially repurchase additional Sub-shares subject to market conditions, and for general corporate purposes. We currently believe that cash from operations, together with our cash and cash equivalents balances, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 2 to the Consolidated Financial Statements included in our ~~2018~~2019 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 ~~2018~~2019 Annual Report on Form 10-K.

New Accounting Pronouncements

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

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.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors

The following risk factor supplements the risk factors contained in Part I, Item 1A. “Risk Factors” set 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 ~~28, 2019.~~27, 2020.

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

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

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

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

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

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

Our business could be adversely affected by the ~~Trust~~effects of a widespread outbreak of contagious disease, including the recent outbreak of COVID-19. A significant outbreak of contagious diseases in the human population and resulting widespread health crisis could adversely affect the ~~trading price and/or form~~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 ~~Certificates of Proprietary Interest~~operating costs and ~~Sub-shares.~~have a material impact on our business segments and earnings, cash flow and financial condition.

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

~~Our~~

Although our Trustees ~~formed~~approved a ~~conversion exploration committee (the "Committee") in June 2019 to evaluate, from a corporate, corporate governance, tax, accounting and business perspective, whether~~plan for reorganizing the Trust ~~should be converted into~~from its current structure to a ~~C-corporation or, in~~corporation formed under the ~~alternative, whether~~laws of the ~~Trust should remain a business trust (with potential amendments to the Trust’s Declaration~~State of Trust). The Committee has been tasked with making a non-binding recommendation to the Trustees regarding this matter. We cannot predict whether, or when, any structural or governance change may be made that would affect the securities held by our sub-shareholders, our governance and/or our Declaration of Trust and how our sub-shareholders and investors may view any structural or governance change, if any. ThereDelaware, 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 ~~terms~~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 ~~changes or their effect on our securities or trading price. The trading price of our securities~~benefits may be ~~adversely affected by any decision~~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 ~~Trustees~~benefits expected to ~~convert~~result from the ~~Trust~~corporate reorganization are not achieved, or if such benefits are delayed or investors do not value changes to ~~a C-corporation or to remain as a trust~~.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 ~~September 30, 2019.~~March 31, 2020.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

EXHIBIT INDEX


EXHIBIT NUMBER						DESCRIPTION

~~31.1~~10.1						*Second Amendment to Settlement Agreement dated March 6 , 2020 (incorporated by reference to Exhibit 10.1 to the Trust’s Current Report on Form 8-K filed on March 6 , 2020 (File No. 001-00737)).
31.1*						Rule 13a-14(a) Certification of Chief Executive ~~Officer~~.Officer.
31.2*						Rule 13a-14(a) Certification of Chief Financial ~~Officer~~Officer..
~~32.1~~32.1**						Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of ~~200~~2002.2.
32.2*						Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002..
101*						The following information from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 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.
104						The cover page from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL.

* Filed or furnished herewith.

~~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:~~

~~November 7, 2019~~

~~By:~~

~~/s/ Tyler Glover~~

~~Tyler Glover, General Agent and~~

~~Chief Executive Officer~~

~~Date:~~

~~November 7, 2019~~

~~By:~~

~~/s/ Robert J. Packer~~

~~Robert J. Packer, General Agent and~~

~~Chief Financial Officer~~

2119


Effect on income statement line items due to change in estimated useful lives	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Increase in depreciation and amortization expense	$	916	$	916
Decrease in net income	$	(723)	$	(723)
Decrease in net income per Sub-share Certificate — basic and diluted	$	(0.09)	$	(0.09)


2019 (excluding the nine months ended September 30)	$	144
2020	696
2021	796
2022	697
2023	537
Thereafter	1,067
Total lease payments	3,937
Less: imputed interest	(466)
Total operating lease liabilities	$	3,471


	Three Months Ended September 30,
	2019						2018
Revenues:
Land and resource management:
Oil and gas royalties	$	38,259	39	%	$	31,253	43	%
Easements and other surface-related income	22,111		22	%	14,591		20	%
Land sales and other operating revenue	4,706		5	%	1,669		2	%
	65,076		66	%	47,513		65	%
Water services and operations:
Water sales and royalties	21,654		22	%	18,178		25	%
Easements and other surface-related income	11,800		12	%	7,477		10	%
	33,454		34	%	25,655		35	%
Total consolidated revenues	$	98,530	100	%	$	73,168	100	%

Net income:
Land and resource management	$	43,911	73	%	$	36,385	72	%
Water services and operations	16,111		27	%	14,377		28	%
Total consolidated net income	$	60,022	100	%	$	50,762	100	%


	Nine Months Ended September 30,
	2019						2018
Revenues:
Land and resource management:
Oil and gas royalties	$	111,113	29	%	$	88,078	43	%
Easements and other surface-related income	59,761		16	%	49,896		24	%
Land sales and other operating revenue	113,349		30	%	4,668		2	%
	284,223		75	%	142,642		69	%
Water services and operations:
Water sales and royalties	65,067		17	%	47,428		23	%
Easements and other surface-related income	27,874		8	%	16,949		8	%
	92,941		25	%	64,377		31	%
Total consolidated revenues	$	377,164	100	%	$	207,019	100	%

Net income:
Land and resource management	$	204,222	82	%	$	109,700	75	%
Water services and operations	45,384		18	%	37,356		25	%
Total consolidated net income	$	249,606	100	%	$	147,056	100	%