We came across a bearish thesis on Texas Pacific Land Corporation (NYSE:TPL) on ValueInvestorsClub by manny. In this article, we will summarize the bears’ thesis on TPL. The company’s shares were trading at $1,365.00 when this thesis was published, vs. the closing price of $1,334.95 on Mar 06.

A pipeline running through a rural landscape, a reminder of the companies oil and gas Royalty Interest.

TPL operates through two segments: Land & Resource Management and Water Services & Operations. The Land and Resource Management segment primarily manages surface acres of land and oil & gas royalty interest in the Permian Basin. The Water Services and Operations segment provides full-service water offerings, including water sourcing, produced-water treatment, infrastructure development, and disposal solutions.

The share price of TPL has been rising on account of a unique business model, fund inflows and Horizon Kinetics’ (HK) pitch promoting TPL as a benefactor of the data center buildout in the Permian Basin.  It is highly unlikely that the land TPL owns would nurture a data center hub since no major player has expressed interest in this location. Moreover, the data center requires cheap power sources and high water purity which is absent in Permian Basin.

TPL also faces competition on its Royalty Acreage assets, a high-returning endeavor with almost no capital investment. Based on the oil barrel output per day and the natural gas revenue, the relative valuation of TPL will yield a value in the range of $4-5 billion. The water royalty business is another unique asset but has a declining inventory and can be valued at $2-2.5 billion based on the present value of future cash flows. The Water Sales business generates an EBITDA of $70 million and commands a valuation of $0.7-1 billion using a multiple of 7-10x. Another $1 billion in value can be attributed to the Easement business that earns rental payments for pipelines. The true value of the company is in the range of $8-10 billion, almost a third of its current market capitalization.

The stock has also been promoted across internet media outlets that emphasize insiders buying the stock. The buying of 14 shares by HK on a daily basis to corroborate the news is a suspicious move. There have been numerous instances when insiders have created confusion through their trading activities and in most cases, they have been net sellers. The urge to tempt retail investors into buying can be construed as a move to silently offload shares by these insiders.

While we acknowledge the potential of TPL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.