Annotations (18)
“The original thesis for Texas Pacific Land was simple: they would take proceeds from grazing land and small oil and gas royalties, then buy back stock. If you bought back stock at an implied price of $10 an acre and acres on the fair market were $100, it was the most accretive compounding machine you've ever seen. Buying back stock at a lower value meant buying back acreage at a lower implied price.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Buybacks at discount to asset value compound wealth
“Water is not protected by eminent domain, even though it could shut in oil and gas production. A rancher could literally just say, no, you cannot cross my land for a water pipeline. Hard stop. Or they could ask for some extravagant amount of money. If you have to go 50 miles and deal with 50 different landholders asking different rates, that shows you how difficult it is to compete with incumbent systems because there's no protection around giving you egress to get rid of that water.”— James Davalos
Strategy & Decision Making · History & Geopolitics
DUR_CONTEXTUAL
No eminent domain for water creates moat
“If the Permian produces flat oil for the next 20 years, water volumes will grow almost certainly mid to high single digits, if not higher. As operators drill into lower tier, lower quality formations, you're going to start seeing that 4:1 inch up to 5:1 to 6:1. There's even areas where some of these wells could be over 10:1 water to oil. This creates organic growth in water disposal demand even if oil production stays flat.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Water demand grows even if oil stays flat
“Devon Energy in a first of its kind transaction has paid WaterBridge for the right to use pore space in the future. They're saying we might not get to this well pad for 3 or 4 years, but we're worried you're going to fill up your capacity between now and then. So we're going to pay you to reserve that pore space for us for if and when it comes around. This signals extreme scarcity in disposal capacity.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_CONTEXTUAL
Prepaying for future scarce capacity signals power
“This has been escalated in terms of priority for these companies. It used to be some junior person in the marketing team dealing with gathering systems. Now it's up in the CFO's office because if you're talking 4 or 5, 6 bucks of your LOE, this goes directly into every decision at this company. Once you start adding complexity with geology and easements and multiple landowners, it increasingly makes sense to utilize third parties.”— James Davalos
Leadership & Management · Strategy & Decision Making
DUR_ENDURING
Decision escalation signals strategic importance
“In the Delaware Basin, about 4 barrels of this water are produced for every barrel of oil and gas. When you first start producing a well, the water cut is at its lowest because you have a lot of oil and gas going into the wellbore. But after steep declines in oil production, your water cut gets higher and higher as that well ages. Despite the overall decline in volume of oil and gas, what's actually coming out of the ground is very similar amounts of volume, just more and more water.”— James Davalos
Operations & Execution · Technology & Engineering
DUR_ENDURING
Water volume stays stable as oil declines
“Newmont Mining bought Franco Nevada 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. 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 an operated midstream asset.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Markets don't value bundled dissimilar assets
“Royalty holders earn a percentage of the oil and gas that producers extract off the top. You participate in no OpEx and no CapEx. In Texas parlance, they call this mailbox money because if you're lucky enough to have a ranch and Conoco's operating that lease, you just go out to your mailbox and pick up your check every month. It's a pretty good gig if you can get it. Land is the preeminent asset because it's essentially a pure margin business that's perpetual with optionality.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Land: pure margin, perpetual, optionality
“The average permitting time in New Mexico was over 2 years for a disposal well. It's easier to build a long-haul pipeline to get water out of New Mexico into Texas where permits can be obtained in weeks or months. So the big opportunity has been that lower state line in New Mexico and getting water east over the border into the Texas panhandle where disposal capacity exists.”— James Davalos
Strategy & Decision Making · History & Geopolitics
DUR_ENDURING
Build pipes across borders to arbitrage regulation
“Capital efficiency. Capital light is something we hammer through our team. A capital light business model where if you were to just cut everything and go into maintenance CapEx mode, is this a good business today? Not a lot of businesses are. That notion of being capital light from a working capital and CapEx standpoint, you tend to pay more for these businesses, but in many cases you should.”— James Davalos
Business & Entrepreneurship · Economics & Markets
DUR_ENDURING
Cut to maintenance mode: still good?
“Once you add in these longer haul pipelines that are required, it's going to be incredibly difficult to switch vendors because there's only a few companies in the business of doing longer haul pipes today. WaterBridge being the most well-known and highest regarded. I really think it's going to end up being an oligopolistic industry where it used to be very easy to switch, now it is difficult, and in the future it's getting closer to infeasible than just difficult.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Switching costs rising toward infeasible
“WaterBridge identified $3.5 billion of CapEx which should contribute about $1 billion of EBITDA on a fully utilized basis. That's around a 30% unlevered return on incremental invested capital. The ability to control the land and then scale the business creates extraordinary returns that are superior to midstream. The returns here and the ability to get these systems online and capture market share is just a completely different universe.”— James Davalos
Economics & Markets · Strategy & Decision Making
DUR_CONTEXTUAL
Land control enables 30% unlevered ROIC
“One of their biggest holders is going to be Devon because Devon contributed their water disposal asset and said, I'm better off contributing this to you, letting you run it, and then let you handle my growth. Conoco also contributed a legacy system to Ares. More and more operators are saying it makes more sense to contribute my system, let you operate it, guarantee me I'm going to get what I need through partnering with you.”— James Davalos
Strategy & Decision Making · Business & Entrepreneurship
DUR_ENDURING
Contribute assets for equity plus guaranteed service
“If you're paying a dollar a barrel to get rid of water and you have 4-to-1 water cuts, it's $4 of your lease operating expense. When you're lucky if you're netting $40 per barrel when you account for the NGL and gas mix, water disposal becomes a huge deal. This industry didn't even exist before the shale boom around 2014. To be generous, it's about a decade old.”— James Davalos
Economics & Markets · Operations & Execution
DUR_CONTEXTUAL
10% of net revenue on water disposal
“Always have your head on a swivel looking for peripheral or adjacent opportunities. FivePoint saw water, they saw sour gas, they see data centers and infrastructure. By having that core competency, it gives you a running start to then jump into these other areas once you see that it's there. It's easy to have blinders on and just say all I do is traditional infrastructure.”— James Davalos
Strategy & Decision Making · Creativity & Innovation
DUR_ENDURING
Core competency plus peripheral vision
“Contracts tend to be very long-term, around 11 years weighted average. The two main types: acreage dedication where you control the drill bit on 30,000 acres and guarantee flow at X per barrel with CPI-linked escalators, and minimum volume commitments. Acreage dedication is preferable because you capture all their water. As this becomes more scarce, there's going to be pricing power as these contracts reset, although that's a decade out.”— James Davalos
Business & Entrepreneurship · Strategy & Decision Making
DUR_ENDURING
Acreage dedication superior to volume minimums
“The ultimate capital-light real asset is land. It's perpetual, there's optionality, it's finite. Every time I look at things with land, especially if there's a water angle, it's really easy to get excited. I always remind myself how great of an asset land is. I wish there was a bigger opportunity set to scale land investing.”— James Davalos
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Land: perpetual, optionality, finite
“Deep injections below the oil and gas formation started creating seismic events or earthquakes that caught the attention of authorities. More recently, about 75% of these disposal wells have been shallow. Shallow also has issues: you do not want to interfere with your oil and gas formation, and you've had sinkholes and interference with old legacy wells.”— James Davalos
Technology & Engineering · Operations & Execution
DUR_CONTEXTUAL
Both deep and shallow disposal have failure modes
Frameworks (1)
Capital-Light Asset Selection Framework
Evaluating Real Assets Through Perpetuity, Optionality, and Scarcity
A systematic approach to identifying and evaluating capital-light real assets based on three dimensions: perpetuity (the asset doesn't depreciate), optionality (multiple future use cases), and scarcity (finite supply). This framework helps investors identify businesses that generate high returns without proportional capital reinvestment.
Components
- Test for Perpetuity
- Evaluate Optionality
- Confirm Scarcity
- Apply the Maintenance CapEx Test
Prerequisites
- Understanding of asset depreciation
- Basic financial statement analysis
- Industry-specific knowledge for the asset class
Success Indicators
- Portfolio of assets that require minimal reinvestment
- Growing cash flows without proportional CapEx growth
- Increasing pricing power over time
Failure Modes
- Overestimating perpetuity (assets do degrade)
- Ignoring regulatory risks
- Paying too much for optionality that never materializes
Mental Models (4)
Opportunity Cost
EconomicsThe value of the next best alternative forgone when making a decision.
In Practice: Why E&P companies contribute water disposal assets to third-party specialists
Demonstrated by Leg-jdr-001
Feedback Loops
Systems ThinkingSelf-reinforcing cycles where the output of a system feeds back as input, creati
In Practice: Explanation of how water volumes grow even as oil production stays flat, creatin
Demonstrated by Leg-jdr-001
Moats (Competitive Advantages)
Strategic ThinkingStructural competitive advantages that protect a business from competition. WaterBridge's moats incl
In Practice: Discussion of why WaterBridge's competitive position is strengthening over time
Demonstrated by Leg-jdr-001
Exploration vs. Exploitation
Decision MakingThe tradeoff between trying new things to discover opportunities and maximizing current advantages to capture value.
In Practice: Investment lessons section discussing how FivePoint identifies adjacent opportunities
Demonstrated by Leg-jdr-001
Connective Tissue (4)
Mineral rights eminent domain vs. surface rights in Roman property law
In Texas, mineral estate holders have eminent domain to extract their minerals, but water disposal infrastructure does not. This mirrors Roman property law where rights to minerals (especially precious metals) belonged to the state or emperor and could be exercised regardless of surface ownership, while water rights were more complex and depended on specific circumstances. The Romans recognized that controlling what flows through or under land can be more valuable than the land itself, a principle that shapes Texas water disposal economics today.
Discussion of why water disposal companies need to negotiate easements while oil companies can exercise eminent domain for mineral extraction
Medieval trade routes and regulatory arbitrage across principalities
Medieval merchants built long-distance trade routes specifically to move goods from restrictive jurisdictions to permissive ones. The Hanseatic League's power came partly from controlling ports and trade routes that allowed merchants to bypass local regulations in individual German principalities. Similarly, WaterBridge's value proposition is building long-haul pipelines to move water from New Mexico (2-year permit times) into Texas (weeks to months), creating value through regulatory arbitrage via infrastructure.
Explanation of why Speedway pipeline from New Mexico to Texas creates value by crossing regulatory boundaries
Venetian Arsenal galley production stations and Ford assembly line
The podcast mentions the Venetian Arsenal's division of galley construction into sequential stations where each craftsman performed one task as the hull moved past, predating Ford's assembly line by 400 years. Both systems solved the same problem: skilled labor was the bottleneck, so they decomposed complex work into simple, repeatable tasks. This same principle applies to WaterBridge's standardized disposal well operations where specialized teams handle specific stages (wellbore construction, pressure monitoring, transportation) rather than generalist operators handling entire systems.
Implicit in discussion of how third-party specialists like WaterBridge achieve superior results through focus and standardization
Stock buybacks at discount to asset value as land repurchase at discount
The Texas Pacific Land Corporation thesis of buying back stock at $10 per acre implied value when fair market value is $100 per acre is mathematically equivalent to compound interest formulas. Each buyback increases per-share ownership of the underlying fixed asset (land) by the discount ratio. If repeated consistently, this creates exponential wealth accumulation for remaining shareholders. This is the same mathematical principle behind buying any fixed asset at a discount: the compounding comes from the growing per-unit ownership of a scarce asset, not from the asset itself growing.
Explanation of the original Texas Pacific Land investment thesis from 1995
Key Figures (4)
David Coppobianco
5 mentionsFounder of FivePoint Infrastructure
Murray Stahl
3 mentionsChairman of Horizon Kinetics
Discovered Texas Pacific Land Corporation in 1995.
- Identified that buying back stock at $10 implied per acre when fair value was $100 created the most accretive compounding machine
Devon Energy
3 mentionsE&P Company
ConocoPhillips
2 mentionsE&P Company
Glossary (4)
mailbox money
VOCABULARYPassive income requiring no work; Texas term for royalty payments
“In Texas parlance, they call this mailbox money.”
water cut
DOMAIN_JARGONThe ratio of water to oil produced from a well
“When you first start producing a well, the water cut is at its lowest because you have a lot of oil and gas going into the wellbore.”
brackish
VOCABULARYSlightly salty water; less saline than seawater but not fresh
“You can have a blowout of this brackish brine water.”
pore space
DOMAIN_JARGONEmpty space within rock formations where fluids can be stored
“Devon Energy has paid WaterBridge for the right to use pore space.”
Key People (1)
Murray Stahl
Chairman of Horizon Kinetics
Concepts (3)
lease operating expense (LOE)
CL_FINANCIALOngoing costs to operate a producing well, including labor, water disposal, maintenance
return on invested capital (ROIC)
CL_FINANCIALMeasure of how efficiently a company generates profits from its capital base
eminent domain
CL_LEGALGovernment power to take private property for public use with compensation
Synthesis
Synthesis
Migrated from Scholia