UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number: 1-737

Texas Pacific Land Trust
(Exact Name of Registrant as Specified in Its Charter)

(214) 969-5530

(Registrant’s Telephone Number, Including Area Code)

__________________________________________________________________

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

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.    ☐

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

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 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 oil and gas wells authorized by the Railroad Commission of Texas, 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, 2016, 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.

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

TEXAS PACIFIC LAND TRUST

CONSOLIDATED BALANCE SHEETS

TEXAS PACIFIC LAND TRUST

CONSOLIDATED STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

TEXAS PACIFIC LAND TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

TEXAS PACIFIC LAND TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

Supplemental cash flow information for the nine month periods ended September 30, 2017 and 2016 is summarized as follows:

We have made significant progress evaluating our revenue agreements, by type, to determine the potential impact of adopting the new standard. The most significant impact will involve easement agreements. Under current accounting, we recognize revenue related to term easement agreements over the term of the agreement. Upon adoption of the new standard on January 1, 2018, we will recognize revenue for term easements upon execution of these agreements and as a result, we will no longer have deferred revenue on our term easements. At December 31, 2016 and September 30, 2017, deferred revenue for term easements is $7,809,669 and $30,845,929, respectively. In addition, we are implementing appropriate changes to our business processes, systems, and controls to support recognition and disclosure requirements as a result of the new standard. We plan to apply the full retrospective method with optional practical expedients upon adoption. Under this transition approach, all prior periods presented in the financial statements will be presented as though the new standard had always been in effect. We are continuing to monitor additional authoritative and interpretive guidance related to the new standard as it becomes available.

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

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, 2016, (ii) the factors discussed in Part II, Item 1A “Risk Factors,” if any, of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust’s future performance. Words or phrases such as “does not believe” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the Securities and Exchange Commission (the “SEC”), are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Results of Operations for the Quarter Ended September 30, 2017 Compared to the Quarter Ended September 30, 2016

Earnings per Sub-share certificate. Earnings per Sub-share certificate were $3.36 for the third quarter of 2017, compared to $1.12 for the third quarter of 2016. Total operating and investing revenues were $42,496,527 for the third quarter of 2017 compared to $14,273,252 for the third quarter of 2016, an increase of 197.7%. This increase in revenue and earnings was due primarily to increases in oil and gas royalty revenue, easements and sundry income, and water sales and royalty revenue. See further discussion of these revenue increases below.

Oil and gas royalties. Oil and gas royalty revenue was $21,212,568 (including $7,710,543 for the arbitration settlement with Chevron U.S.A., Inc. previously disclosed in our Form 8-K filed with the SEC on September 14, 2017, the “Chevron Settlement”) for the third quarter of 2017, compared to $8,454,876 for the third quarter of 2016, an increase of 150.9% (59.7% excluding the Chevron Settlement). Oil royalty revenue was $9,703,529 (excluding the Chevron Settlement) for the third quarter of 2017, an increase of 63.3% from the third quarter of 2016 when oil royalty revenue was $5,942,203. This increase is due to the combined effect of a 55.3% increase in crude oil production, subject to the Trust’s royalty interest, and a 5.1% increase in the average price per royalty barrel of crude oil during the third quarter of 2017 compared to the third quarter of 2016. Gas royalty revenue was $3,798,496 (excluding the Chevron Settlement) for the third quarter of 2017, an increase of 51.2% from the third quarter of 2016 when gas royalty revenue was $2,512,673. This increase in gas royalty revenue resulted from a volume increase of 58.2% in the third quarter of 2017 compared to the third quarter of 2016, partially offset by a 4.5% decrease in the average price received.

Easements and sundry income. Easements and sundry income was $13,221,548 for the third quarter of 2017, an increase of 351.5% compared to the third quarter of 2016 when easements and sundry income was $2,928,095. This increase resulted primarily from increases in pipeline easement income and, to a lesser extent, sundry lease rental income, temporary permit income, and material sales. Pipeline easement income was $14,490,663 (before deferral of term easements) for the third quarter of 2017, compared to $4,313,407 (before deferral of term easements) for the third quarter of 2016, an increase of 235.9%. During the third quarter of 2017, $10,292,827 of easement income was deferred compared to $3,240,403 in the third quarter of 2016. This category of income was the primary reason for the 217.9% increase in unearned revenue on the Trust’s consolidated balance sheets. This category of income is unpredictable and may vary significantly from quarter to quarter.

Water sales and royalties. Water sales and royalty revenue was $7,917,581 for the third quarter of 2017, compared to $2,272,653 for the third quarter of 2016, an increase of 248.4%. This increase in water sales and royalties is due primarily to the Trust’s decision to develop water well fields on its land along with an increase in the royalties received from existing agreements.

Land sales. In the third quarter of 2016, the Trust sold approximately 647 acres of land for a total of $485,505, or approximately $750 per acre. There were no land sales in the third quarter of 2017.

Other income. Other income, including interest on investments, was $144,830 for the third quarter of 2017 compared to $132,123 for the third quarter of 2016, an increase of 9.6%. Grazing lease income was $123,913 for the third quarter of 2017, compared to $122,769 for the third quarter of 2016. Interest income earned from investments was $20,073 for the third quarter of 2017, compared to $7,500 for the third quarter of 2016, an increase of 167.6%. Interest on investments is affected by such variables as cash on hand for investment and the rate of interest on short-term investments.

Taxes, other than income taxes. Taxes, other than income taxes, were $796,633 for the third quarter of 2017 compared to $497,244 for the third quarter of 2016, an increase of 60.2%. This increase is primarily attributable to an increase in oil and gas production taxes which resulted from the increase in oil and gas royalty revenues discussed above.

General and administrative expenses. General and administrative expenses were $2,608,455 for the third quarter of 2017 compared to $676,332 for the third quarter of 2016, an increase of 285.7%. This increase was primarily due to increases in employment expenses, including contract labor costs and, to a lesser extent, non-recurring legal fees and depreciation. Employment costs were higher for third quarter 2017 due to the hiring of additional staff and contractors to address the ongoing increase in drilling and exploration activity on land owned by the Trust.

Results of Operations for the Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

Earnings per Sub-share certificate. Earnings per Sub-share certificate were $7.37 for the first nine months of 2017, compared to $3.28 for the first nine months of 2016. Total operating and investing revenues were $94,092,908 for the first nine months of 2017 compared to $42,367,466 for the first nine months of 2016, an increase of 122.1%. This increase in revenue and earnings was due primarily to increases in oil and gas royalty revenue, easements and sundry income, and water sales and royalty revenue. See further discussion of these revenue increases below.

Oil and gas royalty revenue. Oil and gas royalty revenue was $45,288,306 (including $7,710,543 for the previously announced Chevron Settlement) for the first nine months of 2017, compared to $20,932,329 for the first nine months of 2016, an increase of 116.4% (79.5% excluding the Chevron Settlement). Oil royalty revenue was $26,975,330 (excluding the Chevron Settlement) for the first nine months of 2017, an increase of 75.3% from the first nine months of 2016 when oil royalty revenue was $15,387,710. This increase is due to the combined effect of a 39.0% increase in crude oil production, subject to the Trust’s royalty interest, and a 26.1% increase in the average price per royalty barrel of crude oil during the third quarter of 2017 compared to the third quarter of 2016. Gas royalty revenue was $10,602,433 (excluding the Chevron Settlement) for the first nine months of 2017, an increase of 91.2% from the first nine months of 2016 when gas royalty revenue was $5,544,619. This increase in gas royalty revenue resulted from a volume increase of 52.7% in the first nine months of 2017 compared to the first nine months of 2016, coupled with a price increase of 25.3%.

Easements and sundry income. Easements and sundry income was $28,587,706 for the first nine months of 2017, an increase of 96.7% compared to the first nine months of 2016 when easements and sundry income was $14,535,517. This increase resulted primarily from increases in pipeline easement income, temporary permit income, and material sales. Pipeline easement income was $33,441,720 (before deferral of term easements) for the first nine months of 2017, compared to $13,810,736 (before deferral of term easements) for the first nine months of 2016, an increase of 142.1%. During the first nine months of 2017, $23,036,260 of easement income was deferred compared to $5,726,314 in the first nine months of 2016. This category of income was the primary reason for the 217.9% increase in unearned revenue on the Trust’s consolidated balance sheets. This category of income is unpredictable and may vary significantly from quarter to quarter.

Water sales and royalties. Water sales and royalty revenue was $19,583,897 for the first nine months of 2017, compared to $5,935,174 for the first nine months of 2016, an increase of 230.0%. This increase in water sales and royalties is due primarily to the Trust’s decision to develop water well fields on its land along with an increase in the royalties received from existing agreements.

Land sales. During the first nine months of 2017, the Trust sold approximately 11.02 acres of land for a total of $220,400 or approximately $20,000 per acre. In the first nine months of 2016, the Trust sold approximately 656 acres for a total of $571,505, or approximately $871 per acre.

Other income. Other income, including interest on investments, was $412,599 for the first nine months of 2017 compared to $392,941 for the first nine months of 2016, an increase of 5.0%. Grazing lease income was $370,521 for the first nine months of 2017, compared to $367,078 for the first nine months of 2016. Interest income earned from investments was $39,132 for the first nine months of 2017, compared to $19,286 for the first nine months of 2016, an increase of 102.9%. Interest on investments is affected by such variables as cash on hand for investment and the rate of interest on short-term investments.

Taxes, other than income taxes. Taxes, other than income taxes, were $2,218,599 for the first nine months of 2017 compared to $1,238,046 for the first nine months of 2016, an increase of 79.2%. This increase is primarily attributable to an increase in oil and gas production taxes which resulted from the increase in oil and gas royalty revenue discussed above.

General and administrative expenses. General and administrative expenses were $5,927,862 for the first nine months of 2017 compared to $2,123,860 for the first nine months of 2016, an increase of 179.1%. This increase is primarily due to an increase in professional fees related to a strategic review of the Trust and an increase in employment expenses (including contract labor) related to the hiring of additional staff to address the ongoing increase in drilling and exploration activity on land owned by the Trust.

Liquidity and Capital Resources

The Trust’s principal sources of liquidity are revenues from oil and gas royalties, easements and sundry income, and land sales. In the past, those sources have generated more than adequate amounts of cash to meet the Trust’s needs and, in the opinion of management, should continue to do so in the foreseeable future.

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, 2016.

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 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 1A.     Risk Factors

There have been no material changes in the risk factors previously disclosed in response to Item 1A “Risk Factors” of Part I of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

* The Trust purchased and retired 19,512 Sub-shares in the open market.

INDEX TO EXHIBITS

SIGNATURES

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

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