Landbridge recently IPO’d on June 28th and I think their business model presents an interesting growth opportunity. So who are they? Founded in 2021, Landbridge owns about 220,000 acres of land across Texas and New Mexico in the Permian Basin
When I found out LandBridge owns land in the Permian, I immediately thought of the stock $TPL (Texas Pacific Land). TPL also owns land in the region (around 870,000 acres). Over the past decade, TPL has returned 1390%, while the S&P returned 225%. Why has TPL done so well? The Permian Basin is one of the most active regions in the United States for o&g exploration and development. Here’s the thing: companies like TPL/LB don’t actually produce any o&g. They simply own the land and get benefits like surface use rights/royalties, resource sales/royalties, and o&g royalties. Revenue opportunities include: fixed fee payments for using their land, revenue sales for materials used in construction of infrastructure, and any commercial leases. Instead of actually producing o&g, they basically just let others do the job and collect fees for barrels extracted. LB is essentially a mini TPL, since LB owns less land and is much younger.
So why not just invest in TPL? I mean why not TPL is still a great company, but I think Landbridge has a lot more potential. I’m bullish on several aspects:
- Landbridge recently signed a letter of intent for a ground lease to support construction of a data center. If you’re bullish on the data center/AI story, this is a great sign. There’s potential to sign several more of these deals. (founder seems very bullish on data center hype)
- Bitcoin mining has been an increasing trend in Texas in recent years. I don’t think you necessarily have to be bullish on crypto. It’s simply exposure to growth in crypto mining. Landbridge currently only has one crypto facility using its land but it still earned $52.2 million from that revenue.
- LB owns land specifically in the Delaware part of the Permian, which actually sees 4x water production than oil production. Water is essential for the cooling of these data centers and mining facilities, among several other things. The same firm that started Landbridge also owns a company named Waterbridge, who are the ones responsible for the costs related to water infrastructure. Again, Landbridge simply collects royalties for all the use of their land. Waterbridge has a deal with TPL as well.
- Landbridge has potential exposure to renewables through solar/wind farms
- In their latest earnings, LB reported 20% YOY growth and has an adjusted EBITDA margin of 90%
- FCF margin is 60%
- There’s a potential for a dividend in the future (hinted at it in latest earnings report)
Negatives:
- They have debt, unlike TPL, but that’s not too concerning given their age and they’re also lowering it.
- They’re pretty difficult to value since they’re so young. Lots of questions about how they’ll handle their future. How aggressively will they continue to pursue these deals? How will they handle their debt? How can they diversify?
- Since a portion of their revenue comes from o&g production, they do have some exposure to the markets. This correlation can be observed in TPL, however LB has significantly less reliance on o&g revenue to begin with. Again, LB doesn’t actually produce o&g so this exposure is significantly less than an actual oil producer like Exxon or Chevron. However, there would still be a decrease in revenue if o&g demand went significantly down. I’m pretty bullish on energy in general and think o&g demand still hasn’t peaked.
- Regulations on certain industries could prevent future deals and potential revenue streams. I’m not too concerned given the general deregulated environments in Texas.
TLDR: this company owns thousands of acres in the Permian Basin and its business model allows for multiple revenue streams. Given its youth, there is still massive potential for expansion.