Texas Pacific Land (TPL) Q2 2025: Produced Water Royalties Hit $31M, Underscoring Permian Resilience

2025-08-07 | By EarningsIQ Research

Despite sub-$65 oil, Texas Pacific Land (TPL) delivered record produced water royalties and surface income, highlighting the durability of its Permian-centric business model. Management emphasized a long-term view on Permian resource life, countering “peak Permian” fears with data and innovation trends. Strategic water infrastructure and desalination investments position TPL for future demand in energy, power, and data center markets, even as near-term commodity volatility persists.

Summary

• Permian Inventory Narrative Challenged: TPL leadership directly refuted "peak Permian" concerns with drilling data and innovation examples.
• Water Royalties Surpass Prior Highs: Produced water royalties and surface income both set new records, supporting cash flow strength.
• Desalination and Power Synergies: Strategic water projects and land positioning aim to capture future demand from energy and data center growth.

Performance Analysis

TPL’s Q2 results demonstrated operational leverage and revenue resilience despite a 21% year-over-year decline in realized oil prices. The company set new records in produced water royalties ($31 million) and surface-related income (SLIM, $36 million), both benefiting from secular trends in Permian infrastructure buildout and water management. Royalty production reached 33,200 barrels of oil equivalent per day, up 33% year-over-year, even as the average WTI Cushing price fell to $64 per barrel.

Adjusted EBITDA margin of 89% and free cash flow of $130 million (up 12% YoY) reflected TPL’s asset-light, royalty-driven model, which converts top-line volatility into robust bottom-line performance. While water sales dipped sequentially due to deferred customer activity and spatial variation in completions, management indicated that most deferred volumes are scheduled for the second half. The company’s net well inventory and record pipeline easements signal ongoing infrastructure and drilling momentum despite macro headwinds.

• Water Royalties Scale: For the first time, TPL generated royalties on over 4 million barrels per day of produced water, reflecting both volume growth and strategic contracting.
• SLIM Income Surge: Surface income benefited from $20 million in pipeline easements, underscoring the value of TPL’s land position as Permian infrastructure expands.
• Resilient Production: Royalty production growth offset weaker oil prices, maintaining cash generation even as industry rig counts fell over 20% from 2023 peaks.

Overall, TPL’s diversified royalty and surface streams acted as a buffer against commodity price weakness, while water management and infrastructure revenues provided incremental upside.

Executive Commentary

Strategic Positioning

1. Permian Resource Longevity and Innovation

Management directly addressed “peak Permian” concerns, highlighting over 60,000 remaining drilling locations with sub-$60 break-evens and 30 billion barrels of undeveloped oil. TPL emphasized that recent rig declines are price-driven, not inventory-driven, and pointed to ongoing technology gains—such as longer laterals, higher propant intensity, and horseshoe well innovation—that extend the basin’s productive life. Horseshoe wells, U-shaped laterals enabling development of otherwise stranded acreage, have grown from zero to 48 on TPL land in three years, reflecting adaptation and incremental value capture.

2. Water Infrastructure and Desalination Leadership

TPL’s water business is scaling across produced water royalties, disposal, and desalination, positioning the company for the next phase of Permian growth. The Phase 2B desalination facility, a 10,000 barrel per day project in Orla, is on track for year-end commissioning and represents the largest such facility in the Permian to date. Desalination, the process of converting produced water into fresh water, is being developed not just as a regulatory solution, but as a strategic lever for attracting power generation and data center cooling demand to the region.

3. Optionality Across Cycles and Capital Allocation

With a debt-free balance sheet and high cash conversion, TPL retains significant flexibility to deploy capital through buybacks, organic investment, or asset acquisitions. Management signaled readiness to act opportunistically if the downcycle persists, leveraging its advantaged position as the largest public royalty and surface owner in the Permian. Surface and pore space ownership, the rights to use subsurface formations for water disposal, are increasingly valuable as regulatory scrutiny of water injection intensifies.

4. Beneficial Reuse and Power Generation Synergies

Management is proactively linking water solutions to emerging Permian power and data center needs. The company is piloting beneficial reuse of desalinated water for industrial applications, including power generation and data centers, with waste heat capture and co-generation synergies. Analyst questions highlighted industry momentum in Permian power projects, and TPL expects further announcements and demand tailwinds as energy and digital infrastructure needs grow.

Key Considerations

TPL’s Q2 highlighted not only operational resilience but also strategic foresight in the face of cyclical and structural industry shifts. The following considerations frame the company’s investment case and risk profile:

• Permian Activity Deceleration: While rig counts have declined, TPL’s royalty production continues to grow due to drilling efficiency and inventory depth.
• Water Asset Monetization: Secular growth in produced water handling and disposal underpins recurring royalty streams, with upside from desalination and beneficial reuse.
• Surface and Infrastructure Leverage: Pipeline easements and surface rights provide non-commodity revenue, especially as Permian infrastructure expands.
• Capital Return Readiness: High cash flow and no debt enable opportunistic buybacks or acquisitions if macro conditions warrant.
• Regulatory and Environmental Positioning: Conservative water disposal practices and early desalination investments position TPL to navigate tightening environmental scrutiny.

Risks

Near-term commodity price volatility remains the most significant risk, with sustained sub-$60 oil potentially curbing operator activity and delaying water sales. Regulatory changes on water disposal and environmental standards could impact disposal economics or require additional capital outlays. While management’s long-term Permian outlook is well-supported, further consolidation among operators or water midstream players could shift bargaining power or alter contract structures.

Forward Outlook

For Q3 2025, TPL expects:

• Water sales volumes and surface income to rebound as deferred operator activity resumes, particularly in completion schedules.
• Continued growth in produced water royalty volumes, reflecting both new contracts and secular basin trends.

For full-year 2025, management maintained a constructive outlook:

• Desalination facility commissioning remains on schedule for year-end, with regulatory approvals targeted in the coming months.

Management highlighted several factors that will shape results:

• Q4 activity levels are expected to be more sensitive to commodity prices than prior quarters.
• Strategic capital deployment will depend on macro conditions and asset market opportunities.

Takeaways

TPL’s Q2 results reaffirmed its position as a cash-generative, Permian-levered royalty and surface asset owner with embedded optionality on water, infrastructure, and energy transition themes.

• Permian Endurance: Management’s data-driven refutation of “peak Permian” fears and operational innovation set TPL apart from short-cycle narratives.
• Water Strategy as Growth Engine: Record royalty volumes and progress on desalination signal long-term upside from produced water management and industrial reuse.
• Watch for Capital Deployment: Investors should monitor buybacks, M&A, and regulatory developments as TPL leverages its balance sheet and land portfolio in a volatile macro environment.

Conclusion

Texas Pacific Land delivered record royalty and surface revenues in Q2 2025, validating its asset-light model and strategic positioning in the Permian. Ongoing water infrastructure investments and a proactive approach to innovation and regulatory risk underpin a long-term value creation thesis, even as commodity headwinds persist.

Industry Read-Through

TPL’s results and commentary provide a clear read-through for the broader Permian and US royalty sector. Despite widespread concerns about inventory exhaustion and rig count declines, efficiency gains and emerging water management solutions are extending basin life and opening new revenue streams. Water midstream consolidation and infrastructure buildout will benefit surface and pore space owners, while desalination and beneficial reuse are set to become critical as power and data center demand grows in the region. Investors in oil and gas, water infrastructure, and energy transition assets should monitor these trends for both risk and opportunity signals.

TPL Energy Oil and Gas Permian Water Infrastructure Royalties Desalination Surface Rights