EagleRock Land, LLC (EROK) Earnings Call Transcript

Thank you. Hello everyone. Thank you for joining us and welcome to the Eagle Rock Q2 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Chris Cossie, Vice President of Finance. Chris, please go ahead.

Thank you, operator. Good morning and thank you for joining Eagle Rock's second for 2026 earnings conference call. With me today are Greg Fitkin, Chief Executive Officer, and Neal Shaw, President and Chief Financial Officer Shortly, Greg and Neil will deliver their prepared comments before going into a question and answer session. Yesterday we posted an updated investor presentation on our investor relations website. We may reference certain slides during today's discussion. A replay of today's call will be available on our website after the call. Before we begin, I'd like to remind you that in this call and the related presentation, we will make forward-looking statements, current beliefs, plans, and expectations which are not guarantees of future performance and are subject to the U.S. Department of State's to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from results and events contemplated by such forward-looking statements. Your cautions not to place under reliance on forward looking statements. Please refer to the risk factors and other cautionary statements included in our filings with the SEC. I would also like to point out that our investor presentation and today's conference call will contain discussions of non gap financial measures, which we believe are useful in evaluating funds. These supplemental measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. Reconciliations to the most directly comparable GATT measures are included in our earnings release and the appendix of today's accompanying presentation. Now I'm pleased to turn the call over to Greg.

Thank you, Chris, and good morning, everyone. We appreciate you joining us for Eagle Rock's second quarter 2026 earnings call. After our successful IPO in May, we moved quickly to build on that momentum. What amounts to less than a full quarter as a public company, we are already beginning to demonstrate the potential that is inherent to Eagle Rock's unique platform. Through the execution of our densification strategy, we delivered strong results for the quarter, with revenue growth of 32.3% and EBITDA growth of 31.7% versus Q1. We also took further steps this quarter to deepen our relationship with Double Eagle, which I'll expand on shortly. And subsequent to quarter end, we announced the acquisition of Intrepid Ranch, which is comprised of surface acres that is directly contiguous to our existing footprint in New Mexico, sharpening an already strategic position in the region. Before we dive deeper into Q2, I would like to take a moment to explain Eagle Rock's differentiated surface utilization strategy and go-forward value proposition. Eagle Rock owns or controls approximately 286,000 surface acres to both the Delaware Subbasin in New Mexico and the Midland Subbasin in Texas within the heart of the Permian Basin. We maintain a stronghold position in both major subbasins with our acreage co-local or adjacent to deep economic drilling inventory within one of the premier regions for oil and natural gas development in the world. Importantly, the activity on our land, which directly drives revenue, requires little to no capital or operating expenses on our part. By spanning the basin, we benefit from the complementary nature of our position and at the same time have a broader base from which to grow, both organically and through acquisition. Full Eagle is one of our key strategic relationships and a meaningful component of our growth story. They are our largest shareholder and continue to be one of the most active private operators in the Midland Basin. This quarter we took several steps to further expand our double-eagle relationship. Our DE flow water infrastructure system has begun to sell water into double-eagles acreage ahead of schedule. This relationship is backed by a long-term agreement with minimum annual royalty commitments that provide predictable, largely commodity-price insulated cash flow. the water business we see real synergies across the asset double eagle contributed to us and we continue to see a pipeline of additional drop down opportunities over time DE flow isn't just an infrastructure asset. It's a strategic advantage that strengthens our position in the Midland Basin. While the Permian is a prolific oil and gas play, it is evolving and diversifying into a full-scale energy ecosystem. Commercial development, power generation and transmission, renewables and data centers are broadening the potential uses for our land and resources beyond traditional EMP activity. We're continually evaluating a number of ways to participate in that broader value chain directly, including power and data center development and wind. We think about these opportunities as potential upside to the plan we've laid out as we came to market and not as something we're depending on. Our business model is also unique because of the quality and durability of the revenue it generates. Our royalty revenue and fee streams are separate from any operating business and Eagle Rock carries little to no operating or capital expenditures. Additionally, we hold no oil and gas minerals. Instead, our revenue comes 100% from land related streams. They give us significant size and scale without being directly impacted by the volatility of global commodity markets. Our land position is differentiated because of the quality and depth of the subsurface drilling inventory, which has attracted the premier North American upstream operators who are well capitalized and focused on financial discipline. This directly contributes to the durability of our revenue stream. In just the past few months, oil has traded from around $60 a barrel, where it sat when we launched our IPO process up towards $120 and back closer to $60. Through that swing activity on our acreage has stayed remarkable consistent and the capital discipline across the EMP sector means our royalty and fee streams move largely independent of near-term oil price swings. Surface use agreements spell out exactly what we're paid for, which is essentially every activity that touches our land. When a developer wishes to pursue a commercial opportunity outside of an existing agreement, they have to come back to the negotiating table, which often gives us the chance to revisit other terms as well. That structural leverage, together with the minimum royalty commitments from our operating partners, is a key reason we're confident in the durability of this cash flow. Turning to growth. Organic commercialization and acquisitive growth work hand in hand on this platform and the same discipline guides both. We look for assets that are worth more inside Eagle Rock than standalone with accretion to shareholders as a standard for every deal. The clearest example in motion is Intrepid Ranch. As announced after market closed yesterday, we've acquired this approximately 50,000 acre asset in Lee County, New Mexico. The acreage is directly adjacent to our existing New Mexico footprint and includes approximately 22,000 fee acres, an increase of roughly 60% to our fee acreage in the state. It sits in a corridor developed by several of the industry's most active blue chip operators and its proximity to growing urban development in the region and opens the door to non-oil and gas commercial opportunities over time. As with the rest of our portfolio, we intend to bring an active management approach to Intrepid, renegotiating and modernizing surface use agreements. optimizing and expanding our water infrastructure and water rights, and unlocking additional royalty opportunities, including from sand development, all of which we expect to meaningfully improve the acquisition's economics over time. That's exactly the kind of accretive adjacent acquisition we described during our IPO process, and we will walk through the financial details of that deal in a moment. Every deal we do follows that same discipline assets that make this platform stronger and are more valuable within the Eagle Rock portfolio than they would be individually. Now, our focus turns to integrating intrepid and executing on that same strategy across that position.

With that, I'll turn it over to Neil. Thank you, Greg, and good morning to all. Before turning to our second quarter results, I'd like to briefly reflect on an important milestone for Eagle Rock. In May, we successfully completed our initial public offering on the NYSE and NYSE Texas, issuing approximately 19.9 million Class A shares, including full exercise of the underwriters over allotment option at $18.50 per share and raising approximately $368 million in gross proceeds. Through the IPO, we combine three complementary businesses into a single publicly traded platform, establishing Eagle Rock as a differentiated land and resource management company focused on creating long-term value across the Permian Basin for our shareholders. This milestone is truly reflective of our employees and their dedication. Turning to our second quarter financials. For context, I will be discussing our results on a normalized basis, treating the contributions of the Double Eagle and Shallow Valley assets as if they had occurred on January 1, 2026, so that you have an apples to apples comparison between our second quarter and first quarter results. Our normalized numbers also include additional cost assumptions related to operating as a public company. The second quarter was an especially strong period. The team were tarred to deliver results that were above our internal forecast across all metrics. We generated strong normalized revenue of 46.8 million, an increase of approximately 32% when compared to the first quarter of 2026, reflecting continued growth across our diversified portfolio of land management and royalty assets. Looking at the composition of normalized revenue, service use revenues represented $7.1 million or 15% of the total. Surface use royalties represented $15.5 million or 33% of the total. And resource sales represented $24.2 million or 52% of the total. On the On the operating side, water sales volumes increased by 9% quarter over quarter, driven by strong brackish water volumes. Freezwater takeaway volumes continue to increase into the second half of the year, benefiting high-margin surface-use royalty revenue. Normalized adjusted EBITDA was $36.2 million, up approximately 32% from the first quarter of 2026, with normalized adjusted EBITDA margins of 77.5%, demonstrating both the benefit of our high margin revenue with low operating costs, as well as the advantage of Eagle Rock's scale encompassing both New Mexico and Texas. Also, we continue to expect increased revenues from our high margin service use royalties, which carry no associated cost of sales, to become a larger share of our revenue mix during the second half of 2026. Turning to the cash flow statement and balance sheet, the company generated free cash flow of $22.2 million for the quarter. Capital expenditures were $1.2 million, resulting in free cash flow conversion of 75%. Importantly, adjusting for the cash interest expense associated with carrying the predecessor the Spencer Company's credit facility would have increased free cash flow by $6.4 million, resulting in free cash flow conversion of approximately 96%, demonstrating the immense potential of our capital life business model. On June 30th, 2026, we had $61.8 million of cash and cash equivalents and $261.8 million of available liquidity. Our balance sheet remains strong and provides ample financial flexibility to support both our organic growth initiatives and disciplined evaluation of strategic opportunities. Turning to our outlook, we're initiating full year 2026 guidance. While August is an unusual time to initiate full year guidance, as a newly public company, we are pleased to report that our initial outlook is now above our original expectations. driven by the strong momentum in our business and the outstanding execution and hard work of the entire Eagle Rock team. For the full year 2026, normalized adjusted EBITDA is now expected to range between $129 million and $133 million, reflecting the continued strong commercial activity across our diversified platform and the acceleration of realized synergies between the shallow valley and DE systems. Important to note, this guidance does not include incremental EBITDA from the Intrepid acquisition. Now, let me elaborate on the specifics around the Intrepid Acquisition we announced yesterday. The $78.2 million headline purchase price net of the $1.1 million referred surface revenue results in a net purchase price of $77.1 million, implying an attractive acquisition multiple of less than nine times EBITDA. As Greg noted, we expect to meet to uniquely compress that multiple through our active land management strategy and commercialization efforts. the highly contiguous nature of the acquired acreage with our existing land position as one would expect we have intimate knowledge of the land strong relationships with the operators active across the footprint deep understanding of the applicable service use agreements and importantly a clear line of sight to additional revenue opportunities The intrepid acquisition is expected to be accretive and further benefit our already strong EBITDA margins and enhance free cash flow conversion. We funded the acquisition through a combination of cash on hand and the company's existing $200 million revolving credit facility. We're affecting Evil Rock's strong liquidity position and balance sheet capacity. Notably, we continue to view cash and debt as our preferred sources of M&A financing, avoiding dilution to existing shareholders. Thank you for your time and attention. Operator, now over to you to begin the Q&A session.

We will now begin the question and answer session. Please limit yourself to one question. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Stand by while we compile the Q&A roster. Your first question comes from the line of Teresa Chen with Barclays. Teresa, your line is now open.

Good morning and thank you for taking my questions. I appreciate all the color and context related to what you've seen across your footprint in the few months following IPO. I am curious as far as the integration of the assets, the volumetric outlook, it sounds like certain things are running ahead of schedule, translating to an improved EBITDA outlook. What has surprised you along the way and how does this translate to your outlook beyond 2026? Hi, Teresa. Thank you for the question.

I wouldn't say that anything has necessarily surprised us. I think from a high level, we have We knew going into this that combining assets in New Mexico and in Texas together that there would be synergy capture related to putting a surface position that was largely passively managed with an active water midstream asset. And so when you think about our ability to utilize the full benefit of what we have on Shallow Valley. from a surface infrastructure perspective, near term when you think about refresh rates from water wells and the ability to, combined with above ground storage, to be able to move a large amount of water to Double Eagle, that alone provided a lot of upside to us and being able to realize that ahead of schedule provides meaningful upside to our shareholders. the stakeholders. Understood. And on the.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander, apologies folks. Your next question comes from Eli Johnson from JP Morgan. Eli, your line is now open.

Hey, good morning, everyone. I guess maybe just to continue on the kind of M&A landscape, obviously generating a ton of free cash across the business. And it seems like It's a really creative way for you guys to continue to grow. Can you just describe what you see out there? you know, what kind of opportunities exist for the business and, you know, realistically, what we might see in terms of future bolt ons.

Yes, thank you. I, you know, M&A was one of the main drivers and why we went public and having a public currency gives us a lot of flexibility and creativity around acquiring assets. I would say that as we sit here today, we have a handful of deals at various stages of negotiation. Those opportunities range in size with varying levels of commercial activity on those specific deals. And, you know, I think part of the reason Our ability to transact on M&A really comes down to our relationships, our infrastructure, and our contiguous footprint. And when you think about our strategic relationship with specifically Double Eagle and the Midland Basin, that's a differentiator. us a unique ability to source and execute deals relative to other public and private buyers in the space. Eli, hey, good morning. It's Neil. I'm going to add on to Greg and some of that color there, which I think is extremely important in terms of what he articulated. I mean, suffice it to say, look, M&A is as we've discussed really remains an important part of our growth strategy. We're going to be thoughtful in how we approach it. You know, if you think about the Intrepid Ranch, really focused on those assets that fit our proven template where we really understand the land, see clear opportunities to grow revenue, and believe we can actually create additional value through commercialization PROACTIVE LAND MANAGEMENT. AND REALLY FROM THE FINANCIAL PERSPECTIVE, ONE THAT SPECIFICALLY DRIVES INCREMENTAL EBITDA, AND IS DECREATIVE TO THE EBITDA MARGINS AND FREE CASH FIELD YIELD. YOU KNOW, WHEN YOU THINK ABOUT FROM THE FUNDING PERSPECTIVE, YOU KNOW, IF YOU ASSESS OUR CAPITAL LIFE MODEL AND YOU REALLY SAW THE BENEFIT OF THAT THIS QUARTER, IS ONCE YOU NET OUT THE INCREMENTAL as I noted in my earlier commentary and our low operating costs, we generate a tremendous amount of free cash flow, really, which provides us a significant amount of flexibility. So we expect cash and debt really to remain those preferred sources for M&A financing. But look, if you think about it, we can prudently add leverage for the right acquisition and then really use our strong free cash flow to quickly deliver rebuilding the capacity for really the next opportunity, right? Because that is avenue of material growth that really benefits our investors on a long-term basis. We'll just continue to be thoughtful in assessing those opportunities that drive financial performance for our investors.

Yes, awesome. I guess maybe further on the kind of organic and double-eagle side, You alluded to in your opening remarks, just kind of consistent performance despite a volatile macro backdrop. As you look towards 27, I know it's probably early to give guidance, but as we think about the outlook across the business and the visibility that your relationship with Double Legal provides, you know, what are you kind of seeing and hearing from your customers and producers that, you know, shapes confidence going into next year, particularly relative to, you know, the type of visibility you had when you launched the IPO? Thanks.

Yes, I'll hit on the double eagle piece and kick it over to Neil about the 2027 outlook. Our relationship with Double Eagle, as we mentioned, is backed by a long-term agreement. with minimum annual royalty commitments, which really sets a tremendous floor and gives that's largely insulated from commodity prices. Outside of that commitment, we're seeing tangible synergies across our assets, as I mentioned, But continuing in on the M&A front and the double legal relationship, we expect to see of drop down opportunities over time. So, when you think about that relationship, it's multifaceted and we'll continue to lean on it moving forward.

And then, as you said, it's early for 2027, but in terms of the context of how we view 2027 as we discussed in the past, it's really an increase of margins as we see margin expansion as a larger part of our revenue is derived from service use royalties, and a part of that will increase more connectivity into the DE flow and shallow valley connector and the benefits that we saw there. And then the benefits that come through DE, DE flow as it pertains to their business specifically. So like we saw that tremendous amount of confidence in 2027, I give a tremendous amount of credit to the DE the team, you know, we talk about commercialization and proactive land management. I can tell you it's very easy for us to say those words. And it's another thing for the team that's out there day to day, executing at a very high level. And really we saw the benefits of that here in the first half. We're going to continue to see the benefits of that in the second half. And I would expect us to see the benefits of their labor and and the commercialization of our land here in 2027 as well.

Awesome. Really appreciate the color today, guys. Your next question comes from the line of John McKay with Goldman Sachs. John, your line is now open.

Hey, team. Thank you for the time. I appreciate all the color so far. I was just wondering, to pick up on the M&A, Greg, you mentioned a couple deals you guys are considering. Maybe if you could just walk us through a little bit more of how you're thinking about Midland versus Delaware fees. versus adding state or BLM land. Just kind of walk through that matrix for us. Yes, thanks for the question, John.

I would say that we are largely basin agnostic when deciding on acreage to pursue either in New Mexico or Texas. really all comes down to being able to evaluate a deal and our ability to buy at an accretive multiple with an opportunity to compress that multiple via our active plan management strategy. That combined with integrating an asset into our existing footprint, are several ways that we can really drive that multiple down and create value. We're less concentrated on one region or one basin and more focused on asset quality and the overall commercial dynamic as a whole. you know when you think about kind of the m a landscape between the two states i would say that new mexico has several large contiguous acres positions where the midland basin is is a little bit more fragmented um with anything from a half section all the way up to 50,000 acre surface positions that are super commercial. When we evaluate a position, whether it has fee or lease land in our position, is that all acreage is important. evaluate an asset. In most cases, SUAs govern both leased and fee land. As it pertains to New Mexico acreage, the lease lands there hold significant value, especially when you are the owner of a grazing lease. And that has some significant advantages as it relates to market intel, conversations with operators. being able to drive activity towards your acreage position.

I appreciate all that color. Kind of a follow-up is you guys included some of the recent comps on a dollar per acre basis in terms of acreage deals you've seen. It's a kind of trend we've been watching as well. Just be curious, your chart makes the point that we actually haven't seen acreage prices on these public comps basis go up that much over the last couple of years. I'm wondering if you kind of have a view on where that could go from here. Should it stay steady because there aren't that many buyers yet or are there only that many buyers that can kind of transact? Just walk us through what you think that trajectory could look like.

Hey, John, it's Neil. I'll take that. Look, if you think about trajectory, it's exactly what we're trying to demonstrate through those graphs, right? There's two ways to look at acreage. There's those acreage positions that may be somewhat more commercialized that will have a higher EBITDA. So with that, there might be some impact to multiple, but you have to look at it as you said, as it pertains to also a dollar per acre. From our perspective, right, if we're able to pick up acreage that has true intrinsic value in which you can really feel you can incorporate it into the business, commercialize it, practically manage that acreage, you're purchasing at a low level on the dollar per acre basis, although it may seem potentially high on a EBITDA multiple. You can see how from an intrinsic level, you're buying it really relatively inexpensively with the ability to really drive EBITDA higher and compress the EBITDA multiple, or the EBITDA multiple in this case. So we're really looking at it from two perspectives. You want to really try which you believe is the right value of the acreage. And it's a function of both, right? The dollar per acre, which is I'd say more the intrinsic value kind of giving you a level set baseline assessment, these are the other acreage transactions in the area. And then it's the assessment that we utilize with the teams of, okay, what is the land? What is the water resource? the ability to drive commercialization of that land? Where do we believe we can take EBITDA? And then what does that EBITDA multiple compress do over time? And that's really how we would say we can drive incremental additional long-term shareholder value is by really taking those positions that are passively managed, putting them in our hands, machine and proactively managing the acreage position and commercializing the extra position now in reference to your other question about where we see values moving i think i think your assessment is pretty accurate although we do see some others in there from time to time i don't foresee a tremendous amount of buyers really right now out there i think it is a a smaller subset a few of us tend to play in our sandbox so to speak so the competitive landscape as you can see on a dollar per acre basis and even on the evd the evita multiple or even on multiple that we transacted out as being very very attractive i don't see it as being being overly competitive in which I would see any of or either of those two metrics deviate materially over time.

Neil, that was great. Appreciate the time, guys. Thank you. Thank you.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander, your line is now open.

Oh, hey, good morning and thank you. So two questions, first, can you give us Can you spill over the economics of leased land? So obviously fee, you can do whatever you want, but when you acquire leased land and then you want to do different uses on that, can you just walk us through what you have to do in terms of whether it's BLM or state of New Mexico versus the user who wants to use the land?.

Yes, thanks Alex. Like I mentioned earlier, in most cases, SUAs govern both leased and fee land. And so from an SUA perspective, that agreement will dictate what an operator or commercial activity can be done as it relates to that acreage. Like I said, we continue to believe and feel that all acreage is important. From a business operations perspective, operators tend to want to do business with with people on fee land as it relates to a landowner like us versus the state land office or the BLM. So in terms of keeping relationships intact, it's important that our grazing lease is maintained properly and that they communicate any activity to us. And so that dialogue gives us kind of an open playbook and open conversation with any commercial activity on the fee or on the leased or BLM land. And then from an economics perspective, the grazing leaseholder still receives disruption payments and we still have the ability to sell resource into any commercial activity.