Shale Oil Powerhouse Sues Its Own Investors After 4,000% Stock Surge

(Bloomberg) — One of the biggest landowners in Texas oil country doubled returns to investors in 2022. It’s starting the new year by suing some of them as a dispute over the future direction of the company spills into a Delaware court.

Most Read from Bloomberg

Texas Pacific Land Corp., a land bank created out of a 19th-century railroad bankruptcy, shelved plans to issue new stock last month after shareholders balked at the implicit dilution of their holdings and the prospect of executives inexperienced in dealmaking looking for acquisitions.

Texas Pacific management has been vague about what it intends to do with the new shares but has taken its biggest holders to court so it can push through the issuance in February. That puts a company in the odd position of suing investors — including entities run by two of its own directors — who’ve seen the stock swell more than 4,000% in the past decade and dividends almost triple in the past year to $32 a share.

“Going on an acquisition spree funded with the equity of TPL is something that has never happened in the history of the trust going back to when it was formed in the 1880s,” said Chadd Garcia, portfolio manager with Schwartz Investment Counsel, a top-10 Texas Pacific shareholder. As a result of the dispute, the company “has the most disliked board and management.”

Texas Pacific’s unusual business model revolves around charging oil explorers access fees to its land, selling them raw materials needed to drill wells, and taking a cut of the proceeds from crude and natural gas production. The $19 billion company has been this year’s second-best performer in the Russell 1000 Energy Index and is on course for its best annual performance since 2016.

Even Warren Buffett is a fan. Texas Pacific was the second stock Buffett ever bought, when in his teens he surmised that the land bank’s strategy of collecting fees while repurchasing stock was a long-term winner. At Berkshire Hathaway Inc.’s annual meeting in April, the billionaire said that as more oil was discovered in the Permian, the company’s approach “ought to work out well for anybody that sat around for a long time.”

Texas Pacific is “generally agnostic across the various capital allocation options, and the company strives to allocate capital to what we believe provides the highest return for our shareholders,” a spokesperson said, noting that executives have been saying for two years that they’re always looking for deals.

“Specific to potential M&A, it depends on a number of factors,” Shawn Amini, Texas Pacific’s vice president of finance and investor relations, said in an email. “Basically, we’re trying to solve for deploying capital towards the highest return uses.”

The shares were little-changed at $2,498 at 10:24 a.m. in New York.

Armed Security

Shareholders have objected to management steps that would upend the company’s century-old business model and expressed skepticism about an executive team with little history of dealmaking.

Schwartz Investment’s Garcia and other investors were alarmed in November when four armed officers turned up at the annual meeting at the Renaissance Dallas Hotel. Texas Pacific said it hired security because it expected the meeting “might be well attended and wanted to ensure safety for a large group.”

Texas Pacific planned to present the proposal to allow management to issue additional shares but postponed that amid investor opposition. A week later, the company sued major shareholders Horizon Kinetics LLC and SoftVest LP, claiming they violated an agreement requiring them to support the measure, according to court filings. Horizon and SoftVest are led by Texas Pacific directors Murray Stahl and Eric Oliver, respectively.

Texas Pacific sued in Delaware because it’s among more than 1.8 million companies — including more than 60% of Fortune 500 firms — incorporated in the state. Its chancery judges are business-law experts who hear cases without a jury, often on a fast-track basis. Judge Travis Laster is overseeing the case in Wilmington.

February Request

The investment firms, which filings indicate own a combined 22% of Texas Pacific, argued the agreement doesn’t bar them from opposing the additional-shares proposal. Stahl and Oliver won their board seats in the aftermath of an earlier court battle with Texas Pacific over efforts to convert it from a trust into a c-corporation. Both men declined through a spokesman to comment for this story.

In the latest suit, Texas Pacific asked the court to resolve the case in early February trial – just days before the shelved proposal is set to be considered by the company’s board. The dissenting shareholders are proposing an April trial, court filings show.

The case is Texas Pacific Land Corporation v. Horizon Kinetics LLC, et al, 2022-1066, Delaware Chancery Court (Wilmington).

–With assistance from Kevin Crowley and Jef Feeley.

(Updates with share price in ninth paragraph)