11/26/24

The last few weeks have been a whirlwind, particularly following the presidential election. We engaged in numerous conversations with clients, some expressing cautious optimism about the future, with others sharing deep concerns.

Amid the uncertainty, the recurring question we hear is – What’s next? Candidly we do not have a crystal ball and fortunately, our investment process and strategy do not depend on one.

In our view, neither candidate tackled the proverbial “800-pound gorilla in the room” our nation’s $36 trillion in debt, $2 trillion budget deficit and the mounting interest expenses tied to this debt – approximately $1 trillion a year and growing quickly.

Since 1999, we have managed through nearly every kind of challenge – be it under Republican or Democratic leadership. Together we have weathered wars, financial crisis, pandemics and more. Given the current uncertainty a disciplined and time-tested strategy is more critical than ever and owning the right businesses or assets never more important.

Investment Update

Landbridge (LB) – You have likely heard about artificial intelligence (AI) and its immense potential and seemingly endless use cases driving the future of technology. ChatGPT’s public debut was in November of 2022. By February of 2023, it had over 100 million users, representing the most rapid adoption of an application ever. As the demand and potential use cases for artificial intelligence proliferate, the big tech companies, i.e., Microsoft, Amazon, Google, etc., find themselves in an arms race for AI dominance.

Nvidia, now the largest company in the world, cannot keep up with demand for their computer chips. With each subsequent release, delivering exponentially more computing power and consequently consuming even more electricity, facilities that house this computing equipment are essential, requiring significant resources such as land, power and water.

This is where things become interesting for us.

When we wrote to you in October, we touched on the new company that we invested in over the summer, LandBridge (LB). Like Texas Pacific (TPL), LandBridge owns land in West Texas. Aside from the strategic value of their now 272,000 acres, the current core of LB’s business is centered upon water. However, they also have robust plans for commercial development including digital infrastructure and data centers on their otherwise uninhabited land.

As part of their third quarter earnings, where they announced 60% revenue growth, they also announced they executed a lease agreement on approximately 2,000 acres of their land for the development of a data center and related facilities. They provided further commentary during their conference call with analysts explaining that once the infrastructure is in place it is a lot easier to grow these campuses. “So with the infrastructure being in place, we could see one gigawatt data center growing to 5 or 6 gigawatts of power over time”, said CEO Jason Long. For context, we asked ChatGPT “how many homes would 6 gigawatts power?” Answer – enough to power approximately 5 million homes!

We do not necessarily have an opinion or direct investments in artificial intelligence, data storage or cloud computing. However, we do know that the largest companies in the world are investing massive amounts of capital, betting that AI applications will drive future growth. These projects do not just require massive amounts of capital – these projects will require even more critical physical resources to operate effectively.

If one were to write down the critical limiting factors, (land, power and water) for the development and then list the unique physical resources of TPL and LB – they are uncannily aligned!

Where do we go from here?

As evidence that the more traditional investment world is recognizing the attributes of the businesses we own, Standard & Poor’s announced that TPL would be included in the S&P 500 Index, on Tuesday November 26th replacing Marathon Oil.

The S&P 500 Index is by far the largest pool of indexed capital in the world. For 2023, S&P estimated that $16 trillion was indexed or benchmarked to the S&P 500. Inclusion in the index will markedly increase the demand for TPL shares.

From a balance sheet standpoint this is by far the highest quality portfolio we have owned. We have repeatedly written that many of our investments have NO debt on their balance sheets, including TPL, MSB, PBT and FRMO. Further, these profitable businesses are high margin businesses with minimal recurring expenses.

Your investments are benefiting from a disciplined strategy focused on businesses with unique advantages and the capacity for long-term growth. We are thrilled to see the results of this approach and look forward to continuing to deliver value as we close out a successful year.

We would love to discuss these developments and how they position your portfolio for future success. Please do not hesitate to contact us - we are here to support you.

Best regards,

Rick Silver & Josh Stewart