WaterBridge: Oil and Water - [Business Breakdowns, EP.228]

[MUSIC] This is Business Breakdowns. [MUSIC] Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. [MUSIC] We believe every business has lessons and secrets that investors and operators can learn from. And we are here to bring them to you. To find more episodes of Breakdowns, check out joincollossus.com. All opinions expressed by hosts and podcast guests are soleater own opinions, hosts, podcast guests, their employers or affiliates, main maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. [MUSIC] This is Matt Russell and today we are breaking down the recent IPO Water Bridge. I was joined by James Davilos from Horizon Kinetics. And this one was a long time in the making as you will hear in the episode, HK has a long history in these unique capital light, high cash flow potential businesses, most notoriously with TPL, Texas Pacific land trust. And I had been in pursuit of getting HK as guests, but it wasn't until friendly listener Chris Pope made the connection that this all came to life. So we start the episode with a bit about HK's history with again, these very unique businesses that are off the radar for many with TPL land bridge and now water bridge. And then we get into the weeds and nuances about what this business actually does, why this disposal water and this service that they're providing is so incredibly important, particularly with US shale and where they are in the Permian basin. So this is an interesting one from all different angles and it's a timely one, which is always special. So please enjoy this breakdown of Water Bridge. [MUSIC] All right, James, I am excited to have you here. It's a timely business breakdown. We're here to talk water bridge. I think we're going to get into a bit about land bridge as well. The overall space and what these businesses kind of represent in the market. Maybe you could just start us off with a simple introduction, how you would describe water bridge, maybe even land bridge as well, to a broader audience to get them familiar with what's going on at these businesses. Sure. First, I want to say thanks for having me. I've been a big fan of the podcast and everything at Colossus for a long time now. I think let's start with water bridge. So water bridge came public yesterday. And water bridge is the leading water infrastructure company in Texas. And so unlike traditional water infrastructure, you might be familiar with which are utilities that generally treat, dispose, and move water around in residential and commercial systems for consumption. This is actually a waste buy product that is part of the oil and gas extraction industry. I think a lot of the listeners will be surprised to learn that in the Delaware base, which is the largest and fastest growing part of US oil production, about four barrels of this water are produced for every barrel of oil and gas. It's a lot suffice it to say. Land bridge is actually already public in public a little over a year ago. And the way I think about it is they are the land company with basically triple net leases that facilitate the activities of water bridge and other infrastructure companies operating in that Texas ecosystem. So while the core business is driven by water, there's definitely some next gen things in power generation transmission, maybe some data centers, etc. It's a very helpful overview. And these are unique businesses. I would almost say they're a class of business, not quite an asset class, but they're a class of business. And I know you have history horizon kinetics has history in the space. So can you talk a little bit about the history that would result in these coming on to your radar and a little bit about that background? Absolutely. Can't take any credit for it because you're going back to 1995 when the firm was founded and I was 11 or 12 years old. But Murray stall, hard chairman came across this funky liquidating land trust in Texas. That was listed on the NYSE called Texas Pacific land corporation. And the original thesis was very simple. We actually have a research report that he issued publicly back then and it was essentially this company was created through the bankruptcy of the Texas and Pacific Railway in the late 1880s. The idea was to connect Texas to Southern California, people that remember history of that era and the robber barons and railroads and the leverage are pretty familiar that didn't end well. They got land grants for every mile of railroad that was built in the state of Texas impossible to sell off a couple million acres, certainly in 1888 probably no less so today. And so they listed it on the NYSE and it was a liquidating trust. So basically they would take their proceeds. Much of it was from grazing land later some small oil and gas royalties and then buyback stock or pay dividends. But if you bought back stock at a lower value you're effectively buying back acres at a lower implied price. So if you're buying back stock at an implied price of $10 an acre and acres on the fair market were a hundred it was the most accretive compounding machine you've ever seen. So that was the thesis and then obviously things have changed dramatically with fracking the development of water or the development of the Permian basin. But our history with that company which is now a corporation and Murray is on the board of directors was one of the earlier windows that we had into this large mason water infrastructure industry within the larger US energy complex. Yeah, it's the fascinating background and the railroad story and then getting those grants. It's something that came up on our union Pacific railroad episode where their assets they eventually sold to anadarko for four billion twenty five years ago. So it's interesting to see how these assets these grants all preserve some interesting value over the years. So how would you define this group or this concept of investing if you could in a snapshot? How do you frame it or approach it just in general terms? You can look at the broader energy industry and most people in energy look at three different business models and there's new wants to each. So you've got your companies in a primarily E and P so exploration of production they drill and they make their money basically drilling for hydrocarbons. Then some of those companies then can be integrated where they're fully upstream which is drilling. The second set is midstream which would be transporting those hydrocarbons. The third would be downstream which would be here refining and then your retail petroleum station. So those are the three traditional verticals. You can add a slight adjacent CBA oil field services. So the companies that slumber Jay, Haliburton, maybe some of the offshore companies that do services that are ancillary but part of oil field energy extraction. Those businesses tend to be very capital intensive and very cyclical. Some of them have more stable cash flows but generally they're all somewhat cyclical relative to the volume and the pricing of oil and gas markets. We prefer to look at companies that have lower capital intensity and less cyclicality. You can't remove all of that but so our protracted history now investing in Texas specific and then other companies within the ecosystem is we came to the conclusion that land and land in Texas there's really two different types. There's surface acreage and then there's the mineral estate and in some cases they are one and the same but land is the preeminent asset because it's essentially a pure margin business that's perpetual with optionality. So within land there are minerals or royalties. There's a variety of royalty companies that are public now but if you were to think okay Chevron, Exxon, Conaco they're spending hundreds of millions if not billions developing their US energy position. The royalty holder is literally earning a percentage of the oil and gas that they produce off the top. So you participate in no op-ex and no cap-ex. In Texas parlance they call this mailbox money because if you're so lucky is to have a ranch and Conaco's operating that lease you just go out to your mailbox and you pick up your check every month it's a pretty good gig if you can get it. Beyond royalties within the surface acreage world, your surface acreage can be monetized in any number of ways. Primarily easements for pipelines, easements for power, easements for access roads, power lines, etc. But we've also poned in on the infrastructure side of it with water. And up until very recently there was really only one pure play water infrastructure company which was Ares which was sold to Western midstream which coincidentally going back to your family's bank Union Pacific and Anadarko. Western was the midstream assets of Occidental who acquired Anadarko which was very contentious but supported by Berkshire Hathaway. A big part of those assets that was bought by Anadarko is actually something we might talk about later in the sour gas window as you get to the eastern edge of the Delaware basin. Anyway, going back on topic, so again, we look at it really, okay, surface acreage, and then within that surface acreage, royalties where we're very active in a variety of companies and now also companies that can be very dynamic in monetizing that surface acreage like land bridge, whether through water or other types of easements and then the water infrastructure that's operated, which is the water bridge business spot. Yeah, and maybe we can get into a bit on what's happening with the production of those four barrels of water for every one barrel of oil in this region. Can you just talk about what that looks like in practice and what water bridge is actually doing as a service with that water? So, maybe a little history just to bring people up to speed on exactly how this works is so the Permian basin is the largest oil and gas producing region in the US around 11 to 12 million barrels of energy equivalent, which includes natural gas, natural gas liquids. I mean, a relative to a little over 100 million barrels a day of global production, it's 10% of global volume is enormous. It's even higher when you look at just oil. These are the oiling wells in the US and so the broader US production is influenced by gas and these natural gas liquids. But so the reason the Permian basin in West Texas has hydrocarbons is that it's an ancient seabed. Decomposing carbon is where you have hydrocarbons over hundreds of millions of years. So it shouldn't be surprising that when you break up this shell rock where there's oil and gas molecules trapped in that, that there is water. Which should also not be surprising given that it's an ancient seabed of decomposing carbon is that it's very high in salinity or salt content just like the ocean. So now that we've established that, so you're going down in some cases, three, five thousand other cases, 10, 12,000 feet deep, you're breaking up one, two, three, snagging beyond three mile, fracks of rock. You have all of this water that's going into the well bore and coming out with the oil and gas. So first thing you need to do is you need to separate your oil and gas from this water. And as I mentioned earlier in the Delaware basin, you're getting about four barrels today and about 3.7 to be exact based on the last data of this, what's called produced water with your oil and gas. So now this water is not water like seawater. It's actually many magnitudes more selenic than seawater. It also has a variety of corrosive compounds and then very high total dissolved solid content. So in every sense of the water, it is a waste product. And so it needs to be remediated. And in the days of vertical wells, so you just drill down vertically. It's a pressure system. There was nowhere near as much water because you're not breaking up rock, but also you could take this produced water and then re-inject it into the well to increase pressure called enhanced oil recovery. So it didn't exist. This industry was completely non-existent before the shale boom call it 2014. So to be generous, it's about a decade. But then as the water increases, you need to dispose of it. And early days, your LRG and P, maybe you call up a rancher next door who has some scrub land and say, "Hey, can I inject this water? I just got to get rid of it." And generally it's found money to the rancher. They don't care. Early days, as you started getting more and more volumes, they were going deeper. And it makes sense to go deep below the shale. So yes, it's more expensive to go deeper, but you don't have to worry about interfering with the oil and gas formation. So if you think about the shale, like a layer cake, you inject it above that layer cake. Somebody has to drill through that to get to the oil and gas. So that presents issues in and of itself. The problem with going below the oil and gas is that down there is where there's natural fault lines and it's more susceptible as higher pressure. So bookmarked this concept of pressure and poor space and porosity. But these deep injections started creating seismic events or earthquakes. That caught the attention of authorities and Texas at the Railroad Commission. So more recently, about 75% of these disposal wells have been shallow. Shallow also has issues. A, you do not want to interfere with your oil and gas formation. If you interfere with somebody's ability to extract their minerals, you can be held liable, which is a huge liability relative to what you might be getting 10 cents, 12 cents a barrel for a water disposal. But more recently, as you've had this pressure increasing, you've had sinkholes and you've had interference with these old legacy wells. So remember those vertical wells I talked about, vertical production peaked in the 70s. And some of these wells have been capped for decades. And now you're injecting all of this water into these shallow formations. And if you're not responsible with your pressure, it invades these well-bores. And in some cases, you can have a blowout of this brackish brine water with all of the nasty associated chemicals and solids and compounds. So as you sit today, we are running out of quote, poor space. And so operators need to be very thoughtful about how to transport and how to remediate that water, because it's no longer just as simple as calling up your neighbor and saying, Hey, what is it going to cost for me to dispose of this water? You need somebody who can guarantee that you are not going to be shut in on your well because you can't get rid of your water. So a company like water bridge, so enter a third party operator versus something that used to be just handled internally by maybe the midstream and marketing team. Who can say, Look, I can guarantee your billion dollar pad drilling plan. If you're going to need 50,000, 100,000, even a couple hundred thousand barrels of disposal, here's my injection wells, here's my pipe lines. And then, okay, if this gets filled up, I've got these long haul pipe lines to even take it out of the beast. So now you don't have to worry about something that a, could completely curtail your ability to produce, b, is getting increasingly expensive and prohibitive. I mean, if you're paying a dollar a barrel to get rid of water and you have four to one water cuts, it's four dollars of your L.O.E. and you're lucky if you're netting 40 in the Permian when you take into account the Ellen, she's the NGL and gas mix of that barrel. So it's a big deal. The point is third party companies that specialize in doing this can guarantee that disposal and that flow can do it in a way where you're not jeopardizing environmental or regulatory issues are now absolutely critical infrastructure points for the entire U.S. energy ecosystem. Yeah, it just feels like they're solving a pain point and removing one of the logistical things that a producer would need to worry about. I would imagine water bridge owns the infrastructure like you mentioned pipe lines, there might be well-bores, but just talk about that what infrastructure they have to own to facilitate the service and how are they finding ways to dispose of this? Is it just a network of well-bores from other producers? What goes into mechanics of them having the capacity to dispose of this? So, if you start at the life cycle, they need an ability to take control of that water at the wellhead, which is operated by the E&P company, separate the skim oil. So a very small part of water bridges businesses, there is some residual oil in that stream, but then the two critical parts of infrastructure is pipe. And so anywhere from 16 to 24 inch diameter pipe, just like an oil and gas pipe line, needs to transport that. In some cases, you're talking a matter of yards. In some cases, you're talking hundreds of miles if you need to get it out of basin. So the next part is okay, you need land. And in some cases, you're just getting easements from third parties where you're paying an easement to cross their land. In other cases with land bridge, you own the land and land bridge, obviously, is a symbiotic relationship where they lease that to water bridge. But then a critical component after that easement is you then need the salt water disposal well. And a salt water disposal well is owned and operated by the company. As you can imagine when I explain, these are pretty complex. You're drilling fairly deep, even going into the shallow or formation of the Delaware mountain group. You're still going thousands of feet deep. And this is pretty nasty waste product. So it needs to be encased in steel and concrete. And the water bridges of the world have a lot of technology to monitor that downhole pressure, monitor to make sure you don't have leaks, monitor the flow rates. And so I guess to answer your question in a P.P. and E sense, your P.P. and E is the land, the pipe, and the actual disposal wells themselves. But the limiting factor today, which is making it harder and harder, is the land. So the poor space and then the easements where there's any number of ability to drill the salt water disposal. wells. If you're, so for people familiar with Texas, if you're way out in the middle of Culberson County or you're up in the Panhandle in Crane County, sure, there's plenty of poor space, but it's the ability to take a pipe and get it there. The area is around state line where New Mexico and Texas meet. It's very scarce. So having incremental disposal capacity there is incredibly valuable as is the ability to have offtake, which is going to get it out of the beast. Yeah, I certainly get the offtake. I can understand the land side as well and just to go back to what you were mentioning earlier. In this case, water bridge, I know they're getting easements from land bridge. If they're moving over that land, are they also leasing the land or using land bridges land in the case of the wells themselves? It tends to be an all in contract. So let's say I'm using, I don't know, a couple dozen of your acres and then I have a couple of SWDs on your acreage. It tends to be priced on a per barrel basis, which is better than an easement because term easements tend to not be as lucrative, but we can get into the contract structures later, but you want to have that optionality around volume and pricing. And in this sense, the landowners that are astute retain that got it. I think you've given a pretty good rundown of the Permian. It's importance to the overall industry, how it captures this idea of fracking in the US and how that unlocked so much resource that had previously been left behind before we really dialed in on the technology. In regards to thinking about that basin and the future dynamics there, I mean, I'll just lead off with a simple question is it's very unique when it relates to Shell oil, where you have very rapid decline curves. There's an incredible amount of oil produced from these wells. A lot of that is seen up front from a time value money standpoint that could be a good thing, but that means you need to drill more to maintain that production. Do any of these things as it relates to Shell and the unique dynamics of Shell oil have an impact on water bridge when you think about the opportunity, both medium term and then obviously longer term as well. Absolutely. I think this is one of the biggest misperceptions around the business today is around that dynamic you mentioned is that decline rates on a traditional Shell oil might be 30% or more in your first couple of years and then pretty high thereafter and then you kind of flat line into a much slower, more traditional decline rate. But that dynamic that people have cited as you the treadmill where you have to keep drilling at an ever higher rate just to maintain production, let alone grow. It's different with water because maybe we'll introduce this concept of water cuts. And so a water cut is how much water comes out with the oil and gas. And when you first start producing a well, the water cut is actually at its lowest because you have a lot of that oil and gas going into the well borer, but that after those really steep declines, your water cut gets higher and higher and higher as that well ages. And so despite the overall decline in volume of oil and gas in that well, what's actually coming out of the ground is very similar amounts of volume. It's just more and more water. There's almost a very stable rate to the water over the decades that that well produces as the well ages, the water cut goes up. And so you don't have to have this treadmill just to maintain production. It's a much more long, stable, contracted stream of water. And that's why it's such a big deal. You drill one of these big wells, you're going to have a couple million dollar estimate ultimate recovery or EUR. You've got decades, maybe 30 years of water liabilities that you need to figure out. The other concept that's really important is people have been hypothesizing the end of the permeant based on this concept of high grading tier one vocation. So nobody's really defined tier one other than it's the lowest cost to drill. So once you go into tier two, it tends to be these deeper formations in the Wolf Camp. And why is it tier two? Well, maybe there's a little bit less oil in place, but it's also more expensive to extract. And it's not more expensive because you're going deeper per se. It's generally more expensive because there's more water. So as you see operators drilling into lower tier or lower quality, you're going to start seeing that four to one in shop to five to one to six to one. There's even areas where if you believe that the permeants going to be producing for decades like we do, you could be in scenarios where some of these wells are over tendable. But so those are the two really important dynamics, which is a) the water cut increasing as the well ages and then b) the water cuts increasing as you go into lower tiers. So this basically creates a much more stable even organic growth rate to water. If the permeant produces flat oil for the next 20 years, water volumes will grow almost certainly mid to high single digits if not higher. I don't think very many people appreciate that. I can tell you I definitely did not appreciate that and it's a very important detail. So perhaps I'd buried the lead with that question and waiting to get there. But yeah, that's an incredibly interesting dynamic both on the difference in decline curve for water versus oil from any traditional well, but then also what it means when you're moving theoretically down in quality. I guess when you think about the permeant, obviously I think that is the basin within the US. Would this theoretically translate into other basins like the eagle ferd up in Williston in the Bakin? Is that something that could happen? I don't say too close to the basin production anymore, but I'd be curious to know. Sure the answer is no. They don't have nearly as high of water cuts, but they also don't have nearly the amount of oil and gas produced. So maybe in many decades out, if we really need to exploit different reservoirs. But for the time being, the opportunity is very acute and the largest in the permeant, specifically the Delaware. Got it. I have to bring up five point infrastructure because you can't read about water bridge or land bridge without reading five point infrastructure. They seem to be the sponsors behind this company, but I think you have a much better appreciation for who they are and what they've done. Can you give us a snapshot of five point? Yeah, absolutely. And you know, one of the things that I've loved about guests on your podcast is how much they stress the people. And in this case, the people it really starts with David Coppobioco. David's history is really interesting. He was your traditional banker, midstream experience. He went to go work for Vulcan, which was Paul Allen of Microsoft, Fame and Fortune's family office. He took plays American, which is one of the larger oil and gas pipeline systems in the US private based on the filings and legal analysis that was done by my trustee AI assistants David was terminated and then replaced by his team in an effort for Vulcan to not pay him what was ultimately disclosed as a $20 million settlement. David and his partner won when litigating that in court, but the genesis of his dismissal at Vulcan and familiarity with midstream was ultimately what started water bridge. So that gave him the opportunity to go out and create five point in 2012. And really he did that with the intention of what he learned from being in the midstream space was, you know, I want to be in water because this is only going to get bigger and bigger. And eventually you're going to need third parties to be involved there. So one of his initial transactions was he acquired a water company run by Jason Long who's now the CEO of water bridge and land bridge and basically built water bridge from the ground up as the premier water disposal infrastructure company really fragmented industry. They did a lot of organic things, but they also did a lot of bolt-ons. So eventually I should say they came to the realization that it's going to be really difficult to scale this into the aspirations that we have if we're constantly having to call up these ranchers and get access to their land. And so one of the really unique deals that they were able to structure and I don't think many people could have pulled this off other than David and Jason is they agreed to an area of mutual interest essentially a joint venture with Texas Pacific land corporation to really exploit that state line area in northern loving county. It's a really symbiotic relationship TPL doesn't operate water systems. They're more of a royalty taker on the saltwater disposal wells, but then also in the wake of COVID they were able to buy the hanging H-rage. And so what I say they I need five point. So five point a lot of its business they had some really interesting midstream assets San Mateo they had a acid injection company called Northwind which we should talk about later, but they raised the capital to go out and say look we really want to get some surface acreage to facilitate the growth of water bridge. The hanging H-rage was actually under contract by a PE back sponsor and they were unable to close during COVID David and five point fortunately stayed in the vicinity of the deal and we're able to close on that. in 2021. It was about 70,000 acres, really in that core of the core of the Permian Basin. So now you've got five point with your sponsor company water bridge and then you've got the land company with land bridge with that first toe hold of around 70,000 acres with the hanging each ranch. A lot has gone on since then, but I should also mention just I definitely want to stay on the five point is that when you look at the development of the basin, A, they've been very forward thinking with sour gas with North wind, which they just sold to MPLX, but then also they launched a new company called power bridge where if you're of the belief, which we are inclined to be that you're going to see large scale data centers and infrastructures coming to Texas, power bridges now another port co of five point run by the X talent CEO to really facilitate that development. And so the commonality here is very forward thinking, very aggressive by thoughtful deal making and I really speaks volumes to what they've been able to achieve and then our willingness to partner with them. Yeah, it's very interesting to hear. I think so many people tried to be opportunistic, particularly post the fallout of the shale boom and that took many different routes to do it, but I don't think you saw too many successes. This one is quite interesting from an infrastructure perspective. I'm curious from your standpoint, when you think about the different vehicles, I guess the simple answer is you'd rather invest in a pure play than have these piece together, but do you think there's anything else beyond that separating land bridge and water bridge? I understand there are two different businesses, but from a scale standpoint, sometimes it helps to bunch things together. Any thoughts on just their approach to doing that? Yeah, I think you would never get the appropriate multiple of land within a broader portfolio. And we've seen this with gold royalties, new-mot mining bought Franco Novata, and then they spun it back out at the end of 2007 because they got frustrated that the market would never give them credit for their royalties. You also see oil and gas companies that don't get credit for their surface acreage and their royalties. And so I think that what five point recognized is land is a really unique asset with very high optionality, and we need to keep that separate because it really should be capitalized at a different rate than a operated midstream asset. I think also it's important to keep water as a pure play. So there's a variety of companies out there that have water within a broader midstream business. NGL has a water business, Western has a business which is now larger acquiring Ares. And Ares probably never got the multiple that they deserved, but I think that it was really important if you want the market to appreciate and capitalize this business appropriately, you need to allow investors to isolate the water business for what it is. Does Kinder Morgan still have a water business? I believe they do, but I don't know how big of a market share. They don't really come across as having a big market share in the Permian at least. Yeah, okay, that makes sense. I guess it is helpful to touch on landbridge just because you do have these two vehicles. Landbridge, yeah, this previous IPO process, a year forward from where waterbridge is at today. Can you talk through a little bit more of a snapshot of are they doing anything beyond what you've referenced, what they do with water bridge and then what has been the public market perception to landbridge since that IPO? Yeah, I was actually not the greatest IPO. I mean, even though the stock is done really well, I think it was originally slated to price in the 19 to 22 range, which was around 15 times trailing our forward EBITDA. It ultimately broke price and traded at 17 and people can pull up a chart, it traded 80 by year and it's I think mid 50s today, but so there's a lot of different things going on there and I think that that creates the confusion, but if you just underwrite the core business, which is assembling ranches that are very complimentary in Texas in New Mexico, which can facilitate water infrastructure development, it's a very compelling investment case. Five point has been really forward thinking and also developing these next gen opportunities. And so they've identified six or eight facilities where basically they think it's essentially plug-and-play for multi gigawatt data centers in West Texas. You've got your fiber to basically pop plug in your fiber optic. In some cases, you can get some grid power, but I think a lot of this is going to be direct generation. You've got the Erkont grid, you've got the substations, critically, you've got the water, you've also got the gas, which is really cheap for direct generation. And so they basically have it ready to go. And I think that once the hyper scalers and the other people involved here realize you can't co-locate a three gigawatt facility, let alone 500 megawatts anymore. All those things have basically been gobbled up. I think you're going to start seeing a lot more traction there. So I think with Landbridge, a lot of the narrative gotten taken over about these next gen opportunities where as great as they are and as much as we believe in them, people ignored how great the water opportunity is today. And I think one of the thing that Landbridge has talked up is the beneficial reuse of this water. So to the extent that some is being quote recycled today, which is just being cleaned up enough to be used in refrax, which is a fairly low bar. The next iteration of beneficial reuse would be to desaliny. And then can you use it to replenish the PAKUS river watershed? Can you use it for crops? Can you use it for animals? And then ultimately, could it be used for industrial, whether it's power plants or cooling, things like that? And so all these things are incredibly exciting. They're call options, but I think the market maybe got a little too excited about them happening now versus T plus one, T plus two, T plus three. But anything interesting going on in West Texas, land and infrastructure, you're rest assured that they're involved at least looking into it. Yeah, certainly for mall angles, it seems like I know if someday, I guess they can't take the name liquid death, but if there's some questionable name about water that I'm drinking, I'll make sure to know if it's coming out of this space. That's a wall. That's T plus 25, I suppose. But I guess moving to the water bridge IPO, I think it captured the opportunity and the trajectory of growth. Can you talk a bit about the contracts themselves? You mentioned some references to a cut of per barrel of oil, but how does it work with the EMP when they're contracting them? When does it happen? Is it flat rate per barrel? Anything you can get into around those contracts. So generally, you are as an EMP are not going to even start thinking about drilling a large development right now, unless you know for a fact that your water is taken care of. In this case, they tend to be very long term. So I believe water bridges around 11 years, weighted average contract. The two main types of these long term fixed fee contracts, there's what's an acreage dedication, which is really a preferable term. So you have 30,000 acres that you are controlling the drill bit on. Give me an acreage dedication on that. And basically, I will guarantee your flow at ex per barrel. They tend to have CPI linked escalators. And so in the higher nominal growth world, you have back growth working in your favor. And then in our view, as this becomes more and more scarce, there's going to be pricing power as these contracts reset, although that's a decade out. There's also minimum volume commitments. So minimum volume commitments would say, look, I'm going to guarantee you X amount of volume. These are as great because you really want to know you can capture all of their water, but they can be used to basically look, I can de risk a large project where let me get it started with a minimum volume commitment, which again tends to be long term fixed fee CPI escalators. It's just there's only a minimum guarantee. But if that can basically de risk my project, and then I can bring on new customers and quintuple the size de risk, it's a home run. The smallest part is spot. And you always want to leave a little bit of room for spot, which is basically somebody's in a jam, they need 20,000 barrels at a handle for a month. You can have a extract a lot of economics on those contracts. But again, they'll probably try to figure out a way to mitigate that on their own. And so it's not recurring or nearly as stable as the other types of contracts. So we think that as the market is reckoning with the fact that we're running out of easy poor space, and nobody's denying it anymore. Some people are downplaying how big of a deal it is. Other people are downplaying. Is it an issue today versus 2027 or 2028? But everybody acknowledges there is not enough disposal capacity either from a transportation or a disposal well standpoint. And about the testament to this, Devon energy and at first of its kind, transaction has paid water bridge for the right to use poor space in the future. So that's them saying we might not get to this well pad for three or four years, but we're worried you're going to fill up your capacity around it between now and then. So we're going to pay you for you to reserve that poor space for us for if and when it comes around. So if that's any indication, we think that obviously there's going to be some pricing power as they add capacity and as these contracts were new, but even at the current state, their long term fixed fee CPI escalator, almost utility-like types of contract streams. Yeah, that's a pretty remarkable deal for Dev and Turserve. That space just thinking that far advanced contradicts a lot of what the producers do in oil world. On the point about the minimum guarantees, should I just think about that as anything that is produced on that acreage is ultimately going to go to water bridge from a water standpoint? It's just a matter of you might only be at the minimum levels for a period of time if the producer doesn't choose to produce more. It's just mostly about the timeline. It's not about somebody else coming in and doing some of that disposal. A minimum volume commitment, it's just what it sounds like. They might guarantee you 20,000 barrels a day, but to the extent that they could find a way to do it internally or cheaper or go around you, it doesn't guarantee you all that flow. And so that's why the acreage dedication where there's actually penalties to not using them for some of your disposal on that acreage dedication is much more powerful. So again, it does make sense to do minimum volume commitments, but acreage dedication is much more attractive long term. Yeah, I mean, the NBC saved some of the mainstream companies at least for a period of time, but that's an interesting dynamic. I was connecting that all of those were associated with acreage commitments. I guess how easy is switching in this case. So using an alternative provider, if that were to be the case, is there low friction associated with substituting someone in whether it be in that example or at the end of 10 years? It's getting really, really hard to switch because again, this concept of porosity where a lot of these saltwater disposal wells, let's say in West Texas, the acreage tends to be in the 640 acre or square miles, which are sections. So even if you're being responsible with how you're injecting on your section, you have no ability to control what your neighbor's doing, which in some cases could be just a couple hundred meters away. And you're seeing these by increasing pressurization. And so now that you're seeing more discretion around permits for the wells and issues with porosity, it's getting harder and harder to change vendors. Once you add in these longer haul pipelines that are going to be required, then it's going to be incredibly difficult because there's only a few companies that are even in the business of doing longer haul pipes today. Waterbridge being the most well-known and highest regarded. But I really think it's going to end up being an oligopolistic industry where today a lot of it is controlled by the EMP. So internally, Conaco deals with their own water. But they really aren't in the business of dealing with 80 miles of easements and then you're drilling disposal wells and then maybe co-mingling some third-party volumes. I'd say the answer is it used to be very easy. Now it is difficult. And I think in the future, it's getting closer to infeasible than just difficult. And in those cases, if you have a transition towards outsourcing, is that come with potential for M&A to a lot of these producers that are handling it on their own? Do they have infrastructure inside their businesses at this point that would be valuable to acquire? Or is this more likely come in the case of waterbridge organically building out the infrastructure necessary to work with them? Probably the former. One of the biggest holders of waterbridge equity is going to be Devon because Devon said, "Look, I'm better off contributing this asset to you, letting you run it and then let you handle my growth." In that case, they just contributed that. Aerys, which has recently been sold, has enclosed it to Western. One of their biggest holders was Conoco because a legacy conscious system was contributed. And so I think you're going to see more and more operators say, "Okay, it makes more sense. Let me just contribute my system, let you operate it. Just guarantee me I'm going to get what I need through partnering with you." It's interesting you mentioned that because it wasn't that long ago that conversations were like, "Hey, the big, big, big integrated player. So mostly Chevron, Exxon, Conoco, they're going to handle it themselves." And now it's actually like, well, when we did deal with them, it was some junior person in the marketing team that deals with their gathering systems and their pricing. Now let's up in the CFO's office because if you're talking four, five, six bucks of your L.O.E. this goes directly into every decision at this company. So not only has it been escalated in terms of priority for these companies, but now they're saying, "Look, we're pretty good at handling things when we can do it on our acreage in our footprint." But once you start adding complexity with geology and easements and multiple landowners, it increasingly makes sense to utilize third parties. So just to close the circle here, I think there's going to be very large market share growth for third parties, some of what's going to be organic, and then some of which is you're going to be consolidating systems, some are EMP own, and a few out there are still independent. Just a very interesting theme that you mentioned. Anytime you see a decision that moves from inside the operational office up to the CFO office, it's a real thing. And it has a real impact. You just have to figure out what type of impact it's going to have in the industry. So interesting to hear it. And it makes a lot of sense. I guess when you think about the pricing with, I have a few different frameworks in my head just in terms of value capture relative to the EMP. You can only get a certain portion of whatever oil is selling at, whatever they're profiting from. But you also have to earn a return in terms of whatever your costs are. So if we're going to use the hypothetical dollar per barrel of water, so for per barrel of oil, how does that equate back to their own cost line, their own margin profile? Can you just just generalize what that means for them and how much fluctuation there is in terms of that pricing? Yep. So for the produced water, which is really that basic business of you take the water from the well borer, transport it and dispose of it, they're getting about 78 cents a barrel right now on a run rate pro forma basis for handling that water and that includes a little bit of skim oil. But about 85% of their pro forma revenue is just handling the water. 8% is skim. The remaining is mostly this water solutions business, which is cleaning it up for refrax. But again, 78 cents with an adjusted margin, an operating margin per barrel of about 44 cents. So call it about a 56% operating margin on a per barrel basis. The consolidated EBITDA margin of the business on a run rate where they're just shy of about a $400 million run rate of EBITDA. That's running around 51%. So fairly high margin business, but to your point, okay, I was referencing dollar rates. And so one of their newer projects is getting water from New Mexico east over the state line on a new pipeline called Speedway into Texas. And this is important because New Mexico is far more stringent in their permitting. In some cases, again, both notwithstanding the newer crackdown on permits, but you could get a Texas well permitted in weeks, if not a month or two. The average permitting time in New Mexico was over two years. Wow. And a lot of people don't realize a huge part of the Permian Basin is in New Mexico. Lee and Eddie County are juggernauts of US energy group. So it's easier to build a long haul pipeline to get that out of New Mexico into Texas. So the big gold mine has been that lower state lines, or the southern border of New Mexico. Speedway is going to take water east over the eastern border into the frying panhandle of Texas. So yes, there is a higher incremental capital investment because you're building a long haul pipeline to get it over that border. But one of the interesting things when talking to them is they've identified about three and a half billion of catbacks, which should contribute about a billion of EBITDA on a fully utilized basis. So call it around a 30% unlevered return on incremental invested capital. And as you start having higher pricing power and you start having higher utilization, I would expect these numbers to drift higher. And so the reason that you can have such extraordinary returns on an incremental invested capital is the ability to control the land and then scale the business. And so it's not the same as how difficult it's going to be to capture if you're going to try to expand oil and gas pipe lines. And I think that's another nuance is that the returns here and then the ability to get these systems online and then capture market share is just a completely different universe. I'd say superior to midstream. Yeah. I mean, midstream, especially once we're talking about some of the state lines that they try to cross is a totally different ball game. The three and a half billion of catbacks is that spread out over a long time period is that all going to come quickly. So that's just what they've identified in a theoretical standpoint. I don't want to represent that as being guidance, but as an indicative case study of what hypothetically could happen if this really comes to fruition, but to the extent that that does come, I'd say probably five to 10 years, that would be spread out over depending on how quickly some of these developments come to bear. But actually, something else just popped in my head that I feel like we should touch on that I forgot is so going back to my comments earlier about so in Texas, you have the surface of state, which is the surface, just like your fee simple ownership in your house, then there's the mineral estate, which is the oil and gas. There's essentially emitting domain for the mineral holder where the surface owner cannot prevent you under reasonable circumstances from extracting your oil and gas. And so they can't say no, you can't get a well bore easement. No, you can't get a frack pad. No, you can't get an easement for a pipeline. There's different university land systems that publish systems around the rates for these things. But and as if there's eminent domain for the oil and gas holder to extract their minerals, water is not protected by eminent domain, even though it could shut in oil and gas. So a ranger could literally just say no, you cannot cross my land hard stuff or they could ask for some extravagant amount of money. When I say it's getting harder and harder to compete with the incumbent systems, go back to that checkerboard I mentioned of the 640 acre square miles. If you have to go 50 miles and deal with 50 different landholders, asking you different rates. I mean, that just shows you how difficult it is because there's no protection around giving you egress to get rid of that water, even though it could very literally shut in your operations. Yeah, it's interesting just in terms of the nuances of that legal domain and legal rights. So yes, nimbi rules everywhere when it's allowed to. I wanted to close on one last point just on the catbacks because again, the 50-ish percent EBITDA margins, I understand that catback spend for growth opportunities is spread out. When it comes to maintenance catbacks, which I know is a dirty word in this midstream infrastructure space, but do you have some sense of just the maintenance costs associated with keeping obviously infrastructure that's dealing with very intense saltwater that would, I'm sure, corrode. Is that a heavy burden on the business? Yes, so you definitely have maintenance of the pumps and the pipes. And it's a newer nascent industry, but we're looking, depending on the different pipes of equipment, you have anywhere from seven up to 28 years of useful lives, but we look at it and saying, okay, 10 to 15% of undepreciated P.P. and E. Justice with heuristic probably on the high side. But again, there's one stick build out the growth. There's really, really high recast flow conversion to this business. And then something else going back to the growth that I think is worth mentioning. And I mentioned earlier, five point had an asset called Northwind. And Northwind is more of a traditional midstream business, but they specialize in AGI injection wells. So acid gas injection. Other AGI. So this is sour gas. So if you look at the Delaware basin, that Easter shelf is what's called sour gas. And it's sour because it has very high hydrogen sulfide and hydrogen sulfide in high levels is extremely dangerous deadly. And that's that really sulfuric egg smell that then it high doses. You don't smell it at all. And it can be life threatening. But it's very difficult and expensive to deal with. So you've seen a lot of operators just ignore that sour gas window. But Northwind five point funded when out and said, if we build these AGI's, basically you're setting the infrastructure for people to come up there and start really drilling and earnest. And so MPLX recognized that they bought them and what I've heard was a very aggressive, hotly contested bidding war for Northwind because people see all that growth around sour gas. Water bridge, obviously working as a five point port co is like, well, if this growth really comes into this Easter shelf, we want to be in a position. So not only to the acquire a lot of surface at land bridge, but they're developing a lot of infrastructure. So they're ready to go once those drill bits come, whether it's going to be Devon, Oxey, Cotera. And so I don't want to call it de-risked. But I think there's a lot of visible growth simply from that sour gas window starting to get developed that again, something very few people are talking about. But that's also probably a significant portion of that incremental capEx and growth that I referred to earlier. Yeah, there seems to be just some interesting non-obvious growth angles would have stood out to me. I guess if we just transition to how you frame a business like this, thinking about any type of valuation approach that you would use, how would you go about that? And if you want to use what you've seen in the market or anything else like that, I'm always curious as this mid-streamish, not quite linked to oil prices, linked to the production, but with a very unique profile in terms of the durability of some of the stuff. So putting that all together, how do you go about framing valuation? We ultimately build everything bottom up. We look at our volume pricing margin, discount it back, using a fairly conservative discount rate. However, ultimately, I think it's more discernible to look at, okay, what are cops and what are multiples on a static rate and then reconcile that with your DCF. So today, you're gathering and processing peer group, so mostly natural gas, Western and PLX, One Oak, etc. They tend to trade around nine times forward EBITDA. The IPO process targeted a peer set to GNPs with a one-turn discount to incentivize the IPO book build. I think it did so and then more so and so a price at the top end of the range and they were able to upsets. I think that pricing at a GNP multiple, while I think it's necessary because it's such a nuanced idiosyncratic business, you have to use something the market has familiarity with. We think that business can grow on a fairly organic basis for 15% or better for three to five years. So that's expanding crack in, that's expanding speedway. That's isolating the sour gas window. You can also bolt on some M&A assets, so pilot, which is owned by Berkshire is up for sale. They have a very interesting Midland Basin business that is legacy diamond back, which can be bolted on. But forgetting those more aggressive bolt-ons, again, the organic ish growth profile around 15 at eight times with multi-decade contract and CPIScalator 50% EBITDA margin. It doesn't sound right to you. It doesn't sound right to me. So what does it sound like? It sounds like waste. You look at Kisella, GFL, Waste Management, clean harbor is one of the more industrial players. And those companies tend to be 14 to 18 or even more. I would argue water bridge has better returns on invested capital and better growth. So if you're looking for a peer-based comp set, this is really more of an infra waste business than it is a midstream business. So for it to trade in line or better than infra and waste, I think as the market appreciates the growth, the margin and the pricing wouldn't shock me. And we try not to use multi-lux banchen in our base case. So go back to the organic growth rate, add some M&A. If the company pays down debt, buys back some stock, it's pretty easy to get excited. But then if you do add on that re-rate, which we think is more than justify, then the numbers get really compelling. It's definitely interesting enough based on what you laid out from our organic perspective alone. Yeah, we haven't even talked about the beneficial re-years because you can't monetize it or even think about the economics today. But to the extent that you can clean this water and use it for agricultural purposes or even industrial uses, that adds another component that will probably be here someday, but definitely not within 12 to 18 months. Right. Yeah, make sense. And then just thinking about the sensitivity of the business and where there would be most swing in terms of outcome here. What do you hone in on just in terms of the key variables, things that matter the most? To the extent that we are very comfortable that Hermian production is going to be stable, to the extent that there's a shift, do we think it's going to shift more west into the Delaware where there's more volume? There's also some more gas opportunities, which to the extent you believe in the AI and the power generation thesis. A lot of that macro ties in very well. well to just the stable, if not growing, Delaware based and production volumes. So that's your KPI, because as long as volume is stable, if not growing, then you have the addressable market established, and then it's really, can they capture volume, can they push price? And the Devon Agreement, the final investment decision on Speedway, the completion of Crackin is showing us that all these cross references to the thesis are in place. And so now it's just looking at the sensitivities of what is the volume growth at what price and then at what margin? And that's your toggles in terms of looking at the valuation. And then that's where it's fairly clear cut, where it gets a little bit more murky is, OK, are these returns on an incremental invested capital, as high as we thought, is the addressable market for that as big as we thought? That's the second layer to the analysis. That makes sense. Yeah. It's very interesting. I came into this with one sub-segment of the oil market, the Fraxand businesses I had in mind. And I was like, how can I separate this from Fraxand? The first was, I was thinking about this. In the injection mindset rather than the disposal, but I think there's been plenty more to that. As we close these conversations out, we try to hit on the lessons. As you step back and try to take away the lessons from this, from Landbridge, from TPL, what would you use as a lesson that you can take from those businesses and think about elsewhere when you're investing? I'd say three lessons that I would say definitely come away from this experience, which is now measured in a decade, is one is really develop your expertise and core competency in something. And when you do that, always have your head on a swivel looking for peripheral or adjacent opportunities. So it's easy to have blinders on and just say, all I do is traditional info. All I do is traditional oil and gas and pipelines and midstream, but to five points credit, they saw water. They saw sour gas. They see data center and infrastructure. And so by having that core competency, and then it gives you a running start to then jump into these other areas, once you see that it's there. Number two is capital efficiency. So capital light is something that we hammer through our team and just a capital light business model that let's say you were to just cut everything and just go into maintenance capExmo. Is this a good business today? And not a lot of businesses are. And so that notion of being capital light from a working capital, but then also a capEx standpoint, you tend to pay more for these businesses, but in many cases, you should. The last one is probably the ultimate capital light real asset is land. It's perpetual. There's optionality. It's finite. And every time I look at things with land, especially if this is a water angle, it's really easy to get excited. And I always remind myself how great of an asset land is. And I wish there was a bigger opportunity set both public and private to scale land investing. Yeah. Well, you guys have done an impressive job. I'm finding the opportunities there. And it took some time with the recognition with TPL in terms of that explosion. But I think in recent years, it's just been amazing. So this has been a pleasure. I really enjoyed diving in. It brought me back down memory lane. Thank you for sharing the knowledge and getting into the nuance on this one. It was a pleasure. Yeah, this was really enjoyable. Happy to come back anytime. To find more episodes of breakdowns, ranging from Costco to Visa to Moderna, Before signing up for our Weekly Summary, check out Join Colossus.com. That's joioncollosus.com.