Chadd Garcia drills into LandBridge's value

Episode Summary

Executive Summary: Andrew Walker and Chad Garcia dissect LandBridge as a high-quality Permian land/infrastructure royalty play with growing optionality from produced water, surface easements, and data centers. Garcia argues the market undervalues LandBridge’s embedded growth, strategic acreage, and potential re-rating versus TPL, while also updating his prior Secure thesis, which was validated by GFL’s acquisition though at a price he views as light.

Main Topics: LandBridge business model and revenue mix (Priority: 5/5): Garcia explains LandBridge’s revenue streams: surface use royalties, resource sales, and minerals, emphasizing that the company is primarily a royalty/infrastructure land platform tied to the Permian’s growth. Comparison with Texas Pacific Land (TPL) (Priority: 5/5): The discussion compares LandBridge to TPL, highlighting why surface rights, produced water, and infrastructure-linked royalties can merit premium valuations, but also why TPL commands a higher multiple due to its longer history and broader mineral optionality. Produced water and incremental pore space (Priority: 5/5): A central bullish thesis is that LandBridge controls significant pore space for produced water disposal, can monetize incremental capacity for years, and may drive substantial free cash flow growth from existing permitted and near-permit acreage. Active land management and acquisition upside (Priority: 4/5): Garcia argues LandBridge creates value by actively buying strategic acreage and improving monetization through negotiated tolls, contiguity, and infrastructure access, with recent acquisitions showing strong uplift in free cash flow. Data center and power-generation optionality (Priority: 4/5): The company’s land in West Texas may benefit from AI/data center and power infrastructure buildout, including possible hyperscaler-related projects and Chevron-related power generation, though this remains optionality rather than base case. Corporate structure, related-party concerns, and sponsor behavior (Priority: 3/5): Walker presses on Five Point’s role, secondaries, and related-party transactions; Garcia defends the structure as aligned through separate LPs and argues the sponsor has incentives to hold LandBridge given the embedded upside. Secure Energy recap and thesis validation (Priority: 4/5): The conversation closes with Secure Energy’s sale to GFL, which Garcia views as validating the waste-infrastructure thesis, while noting the deal price may understate the business’s longer-term potential.

Key Arguments: LandBridge is not just a land company; it monetizes surface use, pore space, resource extraction, and infrastructure access in a way that benefits from Permian activity growth. LandBridge’s pore-space royalty stream is highly attractive because it is recurring, high margin, and tied to produced water volumes rather than commodity prices. The market may be underestimating the speed and scale of incremental free cash flow growth from newly permitted and strategically acquired pore space. Relative to TPL, LandBridge should deserve a premium multiple versus ordinary royalty or waste peers because of strategic land position, water infrastructure relevance, and data-center optionality. TPL commands a higher multiple partly because of long-standing holder base, mineral royalty embedded optionality, and historical compounding, but if separated by business line the spread looks less extreme. Recent acquisitions appear to have been made at attractive economics, and active land management can create large uplift in free cash flow through better monetization of the acreage. The data-center/power-generation thesis is still early, but power bottlenecks in West Texas and hyperscaler interest could create a significant future call option on LandBridge land. Secure Energy’s acquisition by GFL validates the thesis that energy-adjacent waste and water businesses can be rerated as durable infrastructure/waste platforms rather than cyclical energy services.

Data Points: LandBridge surface use royalties: 73% of revenue - Garcia said this is the main revenue category, largely from pore-space royalties and surface access fees. LandBridge resource sales: 20% of revenue - Includes frac sand, gravel, and source water. LandBridge minerals: 6% of revenue - Garcia noted LandBridge owns minerals but does not pursue them aggressively. TPL mineral royalties: just under 50% of revenue - Used to compare TPL’s more mineral-heavy mix versus LandBridge. TPL land position: 882,000 acres - Garcia said TPL has reduced from the original 3 million acres. TPL original acreage: 3 million acres - Land grant from the Texas and Pacific railroad bankruptcy era. LandBridge current injected water: 1.7 million barrels/day - Current water being injected into its saltwater disposal wells for which it earns a royalty. LandBridge incremental permitted pore space: over 5 million barrels/day - Permitted incremental capacity already in place. Additional unpermitted incremental pore space: about 2.5 million barrels/day - LandBridge land that likely can be permitted later. Total incremental pore space upside: over 7.5 million barrels/day - Garcia summed permitted plus likely permit-able capacity. Pore-space royalty rate: 15 cents per barrel - Current payment rate for disposed water. Potential 5-year incremental pore-space growth: 5 million barrels/day - Management suggested this could be achieved over the next five years. Estimated free cash flow CAGR: 25% - Garcia’s estimate based on incremental pore space alone, before data centers or other growth. 2024 acquisition value: $375 million - A ranch acquisition tied to strategic pore space and possible data-center land. 2024 acquisition EBITDA: $20 million - Current EBITDA on the acquired land. Pro forma pore-space value from acquisition: $75 million - Garcia’s estimate of incremental value attributable to the pore space. Acquisition valuation multiple: 3.3x EBITDA - Implied purchase price multiple for the 2024/2025 strategic land deal. Data-center/power-gen facility scale: 2.5 gigawatts expandable to 5 gigawatts - Discussed in connection with Chevron’s contemplated West Texas project. Chevron power facility CapEx: $5-$7 billion - Estimated first-phase cost of the contemplated project. Chevron-like facility land requirement: 6,000 acres - Project footprint described as spanning a mix of TPL and LandBridge acreage. Secure Energy mix pre-2025: 50% energy services / 75% waste business later - Garcia described the company’s historical shift away from energy services. Secure waste revenue recurring portion: 80% of waste business - Most waste revenue was described as recurring from ongoing production. Secure stock return over 5 years: 465% - Garcia cited this as evidence the thesis had been compounding. Secure stock return over 1 year: 77% - Noted to frame the prior rally before the GFL deal.

Pivotal Quotes: "The market is missing just, just how good this is." — Andrew Walker: Walker frames the core thesis behind the LandBridge discussion. "LandBridge is the enabler for Waterbridge's growth and in turn LandBridge benefits from the royalty stream from Waterbridge." — Andrew Walker: Walker reads from the investor day to question the related-party structure and strategic rationale. "I think LandBridge is going to... have the most, most free cash flow per share growth of the two." — Chad Garcia: Garcia chooses LandBridge over Waterbridge when forced to pick the stronger opportunity.

Implications: LandBridge could re-rate if management converts pore-space optionality into visible cash flow and if data-center/power projects materialize. Secure’s sale further supports the infrastructure/waste thesis across the Permian.