# Texas Pacific Land Corp (TPL) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Texas Pacific Land Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1811074/000181107422000014/tpl-20211231.htm
Accession: 0001811074-22-000014
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TPL/
All MD&A years: /company/TPL/mda/
Next year: /company/TPL/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Texas Pacific Land Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements included in Part II, Item 8 of this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including, but not limited to, those factors presented in Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. This section generally discusses the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

TPL was originally organized in 1888 as a business trust to hold title to extensive tracts of land in numerous counties in West Texas which were previously the property of the Texas and Pacific Railway Company. As discussed in Item 1. “Business — General — Corporate Reorganization,” on January 11, 2021, we completed our Corporate Reorganization from a business trust to a corporation changing our name from Texas Pacific Land Trust to Texas Pacific Land Corporation.

For an overview of our business and discussion of our business segments, see Item 1. “Business — General.”

Our business activity is generated from our surface and royalty interest ownership in West Texas, primarily in the Permian Basin. Our revenues are derived from oil, gas and produced water royalties, sales of water and land, easements and commercial leases. Due to the nature of our operations and concentration of our ownership in one geographic location, our revenue and net income are subject to substantial fluctuations from quarter to quarter and year to year. In addition to fluctuations in response to changes in the market price for oil and gas, our financial results are also subject to decisions by the owners and operators of not only the oil and gas wells to which our oil and gas royalty interests relate, but also to other owners and operators in the Permian Basin as it relates to our other revenue streams, principally water sales, easements and other surface-related revenue.

Market Conditions

COVID-19 Pandemic and Global Oil Market Impact in 2021

The uncertainty caused by the global spread of COVID-19 commencing in 2020, among other factors, led to a significant reduction in global oil demand and prices. These events generally led to production curtailments and capital investment reductions by the operators of the oil and gas wells to which the Company’s royalty interests relate. This slowdown in well development has negatively affected the Company’s business and operations. Production and activity curtailments were generally most pronounced in 2020 as many nations around the world implemented economic and social interventions in response to COVID-19. Development activity in the Permian Basin was likewise reduced, and our operations were commensurately negatively impacted. In 2021, oil market fundamentals improved as economic and social interventions subsided in some nations and as OPEC+ enacted and maintained oil supply cuts. With current oil, natural gas, and NGL prices higher than the comparable period in 2020, development activities in the Permian Basin have rebounded from the lows in 2020 and producer activity has increased, albeit at a pace still below pre-pandemic levels. Development activity on our royalty surface acreage likewise significantly improved in 2021 compared to the prior year. More recently, development activity has also been impacted by shortages in labor and certain equipment as well as escalating costs. While labor and resource shortages and rising costs have not directly impacted us thus far, these shortages and rising costs could potentially impact our future operating activity. Future production and development activity will continue to be influenced by changes in commodity prices and by the evolving economic and health impact of COVID-19. However, COVID-19 continues to impact certain regions domestically and globally, and any additional containment measures, now or in the future, could impede a recovery. Although our revenues are directly and indirectly impacted by changes in oil prices, we believe our royalty interests (which require no capital expenditures or operating expense burden from us for well development), strong balance sheet, and liquidity position will help us navigate through potential oil price volatility.

In 2020, we implemented certain cost reduction measures to manage costs with an initial focus on negotiating price reductions and discounts with certain vendors and reducing our usage of independent contract service providers. In 2021, we continued to identify additional cost reduction opportunities. As part of our longer-term water business strategy, we have

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invested in electrifying our water sourcing infrastructure. The use of electricity instead of fuel-powered generators to source and transport water is anticipated to further reduce our dependence on fuel, equipment rentals, and repairs and maintenance. Additionally, our investment in automation has allowed us to curtail our reliance on independent contract service providers to support our field operations.

Our business model and disciplined approach to capital resource allocation have helped us maintain our strong financial position while navigating the uncertainty of the current environment. Further, we continue to prioritize maintaining a safe and healthy work environment for our employees. Our information technology infrastructure allowed our corporate employees to transition to a remote work environment starting in March 2020 and we were able to deploy additional safety and sanitation measures for our field employees. As vaccination rates in the United States have risen, we have taken a phased-in approach to returning employees to the office and continue to monitor guidance provided by the Centers for Disease Control and Prevention as new information becomes available. We continue to provide safety and sanitation measures for all employees and maintain communication with employees regarding any concerns they may have during the transition.

Permian Basin Activity

The Permian Basin is one of the oldest and most well-known hydrocarbon-producing areas and currently accounts for a substantial portion of oil and gas production in the United States, covering approximately 86,000 square miles in 52 counties across southeastern New Mexico and western Texas. All of our assets are located in West Texas.

With our ownership concentration in the Permian Basin, our revenues are directly impacted by oil and gas pricing and drilling activity in the Permian Basin. Below are metrics for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020"],["Oil and Gas Pricing Metrics:(1)"],["WTI Cushing average price per bbl","","$","68.14","","","$","39.16"],["Henry Hub average price per mmbtu","","$","3.89","","","$","2.03"],["Activity Metrics specific to the Permian Basin:(1)(2)"],["Average monthly horizontal permits","","549","","506"],["Average monthly horizontal wells drilled","","399","","309"],["Average weekly horizontal rig count","","231","","212"],["DUCs as of December 31 for each applicable year","","4,513","","4,616"],["Total Average US weekly horizontal rig count (2)","","431","","384"]]
[[/GREPCENT_TABLE]]

(1)    Commonly used definitions in the oil and gas industry provided in the table above are defined as follows: WTI Cushing represents West Texas Intermediate. Bbl represents one barrel of 42 U.S. gallons of oil. Mmbtu represents one million British thermal units, a measurement used for natural gas. DUCs represent drilled but uncompleted wells.

(2)    Permian Basin specific information per Enverus analytics. US weekly horizontal rig counts per Baker Hughes United States Rotary Rig Count for horizontal rigs. Statistics for similar data are also available from other sources. The comparability between these other sources and the sources used by the Company may differ.

The metrics above demonstrate the shifts in activity in the Permian Basin for the years ended December 31, 2021 and 2020. While oil and gas prices, which began declining in the first quarter of 2020 (prior to oil reaching record lows in the second quarter of 2020), have rebounded in 2021, development, drilling and completion and production activities broadly across the Permian have not returned to their pre-pandemic levels. Operators continue to manage their capital allocations by deploying at a decreased pace of development while oil demand continues to recover. As we are a significant landowner in the Permian Basin and not an oil and gas producer, our revenue is affected by the development decisions made by companies that operate in the areas where we own royalty interests and land. Accordingly, these decisions made by others affect not only our production and produced water disposal volumes but also directly impact our surface-related income and water sales.

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Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash and cash flows generated from our operations. Our primary liquidity and capital requirements are for capital expenditures related to our Water Services and Operations segment (the extent and timing of which are under our control), working capital and general corporate needs.

We continuously review our liquidity and capital resources. If market conditions were to change and our revenues were to decline significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Should this occur, we could seek alternative sources of funding. We have no debt or credit facilities, nor any off-balance sheet arrangements as of December 31, 2021.

As of December 31, 2021, we had cash and cash equivalents of $428.2 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business, to repurchase our Common Stock subject to market conditions, to pay dividends subject to the discretion of our Board and for general corporate purposes. For the year ended December 31, 2021, we repurchased $19.9 million of shares and paid $85.3 million in dividends to our stockholders. We believe that cash from operations, together with our cash and cash equivalents balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.

Cash Flows from Operating Activities

For the years ended December 31, 2021 and 2020, net cash provided by operating activities was $265.2 million and $207.0 million, respectively. Our cash flow provided by operating activities is primarily from oil, gas and produced water royalties, easements and other surface-related income and water and land sales. Cash flow used in operations generally consists of operating expenses associated with our revenue streams, general and administrative expenses and income taxes.

The increase in cash flows provided by operating activities for the year ended December 31, 2021 compared to the same period of 2020, was primarily related to increased prices and volumes of oil and gas production and was partially offset by increased working capital needs resulting from such activity.

Cash Flows Used in Investing Activities

For the years ended December 31, 2021 and 2020, net cash used in investing activities was $15.0 million and $26.0 million, respectively. Our cash flows used in investing activities are primarily related to acquisitions of land and royalty interests and capital expenditures related to our water services and operations segment.

Acquisitions of land and royalty interests decreased approximately $20.4 million for the year ended December 31, 2021 compared to the same period 2020. This decrease was partially offset by increased capital expenditures for the year ended December 31, 2021 compared to the same period of 2020.

Cash Flows Used in Financing Activities

For the years ended December 31, 2021 and 2020, net cash used in financing activities was $104.9 million and $201.7 million, respectively. Our cash flows used in financing primarily consist of activities which return capital to our shareholders such as dividends and repurchases of our Common Stock.

During the year ended December 31, 2021, we paid total dividends of $85.3 million consisting of cumulative paid cash dividends of $11.00 per share and repurchased Common Stock for $19.9 million (including share repurchases not yet settled as of December 31, 2021). During the year ended December 31, 2020, we paid total dividends of $201.7 million consisting of a regular cash dividend of $10.00 per Sub-share and special dividends aggregating $16.00 per Sub-share.

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Results of Operations

The following table shows our consolidated results of operations for the years ended December 31, 2021, 2020, and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["Revenues:"],["Oil and gas royalties","$","286,468","","","$","137,948","","","$","154,729"],["Water sales","67,766","","","54,862","","","84,949"],["Produced water royalties","58,081","","","50,640","","","39,119"],["Easements and other surface-related income","37,616","","","41,398","","","76,243"],["Land sales and other operating revenue","1,027","","","17,716","","","135,456"],["Total revenues","450,958","","","302,564","","","490,496"],["Expenses:"],["Salaries and related employee expenses","40,012","","","32,173","","","35,041"],["Water service-related expenses","13,233","","","14,233","","","20,808"],["General and administrative expenses","11,782","","","9,751","","","9,540"],["Legal and professional fees","7,281","","","10,778","","","16,403"],["Land sales expenses","\u2014","","","3,973","","","225"],["Depreciation, depletion and amortization","16,257","","","14,395","","","8,906"],["Total operating expenses","88,565","","","85,303","","","90,923"],["Operating income","362,393","","","217,261","","","399,573"],["Other income, net","624","","","2,401","","","2,682"],["Income before income taxes","363,017","","","219,662","","","402,255"],["Income tax expense (benefit):"],["Current","93,265","","","46,002","","","57,492"],["Deferred","(228)","","","(2,389)","","","26,035"],["Total income tax expense","93,037","","","43,613","","","83,527"],["Net income","$","269,980","","","$","176,049","","","$","318,728"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Consolidated Revenues and Net Income:

Total revenues and net income increased $148.4 million and $93.9 million, respectively, for the year ended December 31, 2021 compared to the same period for the year ended December 31, 2020. These increases were principally due to the $148.5 million increase in oil and gas royalty revenue over the same period. Individual revenue line items are discussed below under “Segment Results of Operations.”

Consolidated Expenses:

Salaries and related employee expenses. Salaries and related employee expenses were $40.0 million for the year ended December 31, 2021 compared to $32.2 million for the comparable period of 2020. The increase in salaries and related employee expenses during 2021 as compared to the same period of 2020 is principally due to $6.7 million of severance costs and a $1.4 million increase in pension costs, partially offset by decreased usage of contract labor by our Water Services and Operations segment.

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Water service-related expenses. Water service-related expenses decreased to $13.2 million for the year ended December 31, 2021 from $14.2 million for the same period of 2020. This decrease in expenses was principally the result of a decrease in equipment rental and field logistical expenses. While fuel expenses for the years ended December 31, 2021 and 2020 were relatively constant, we began to realize fuel savings during the second half of 2021 as a result of our investment in electrifying our water sourcing infrastructure. We expect these fuel savings to positively impact our expenses in future periods.

General and administrative expenses. General and administrative expenses increased $2.0 million to $11.8 million for the year ended December 31, 2021 from $9.8 million for the same period of 2020. The increase in general and administrative expenses during the year ended December 31, 2021 compared to the same period of 2020 was principally related to increased board of director fees resulting from our Corporate Reorganization in January 2021.

Legal and professional fees. Legal and professional fees decreased $3.5 million to $7.3 million for the year ended December 31, 2021 from $10.8 million for the comparable period of 2020. Legal and professional fees for the year ended December 31, 2020 were higher principally due to legal expenses associated with the 2019 proxy contest and our Corporate Reorganization.

Land sales expenses. There were no land sales expenses for the year ended December 31, 2021 compared to $4.0 million for the comparable period of 2020. Land sales expenses represent expenses related to land sales and include cost basis and closing costs associated with land sales. Land sales expenses for the year ended December 31, 2020 include $3.9 million of cost basis related to 2020 land sales.

Depreciation, depletion and amortization. Depreciation, depletion and amortization was $16.3 million for the year ended December 31, 2021 compared to $14.4 million for the year ended December 31, 2020. The increase in depreciation, depletion and amortization is principally related to our investment in water service-related assets placed in service in 2021 and increased depletion related to our oil and gas royalty interests.

Other income, net. Other income, net was $0.6 million and $2.4 million for the year ended December 31, 2021 and 2020, respectively. Other income, net for the year ended December 31, 2020, included a $1.2 million accrued insurance reimbursement related to legal fees incurred in 2019 associated with the proxy contest.

Total income tax expense. Total income tax expense was $93.0 million and $43.6 million for the years ended December 31, 2021 and 2020, respectively. During the quarter ended December 31, 2021, the Company recorded an out of period tax adjustment of $19.4 million to current income tax expense and income taxes payable, $13.0 million of which related to historical annual periods and $6.4 million of which related to current year quarterly periods. For further discussion, please see Note 8, “Income Taxes” in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Segment Results of Operations

We operate our business in two reportable segments: Land and Resource Management and Water Services and Operations. We eliminate any inter-segment revenues and expenses upon consolidation.

We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. The reportable segments presented are consistent with our reportable segments discussed in Note 12, “Business Segment Reporting” in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Our results of operations for the year ended December 31, 2021 have benefited from a rebound in oil and gas activity in the Permian Basin and commodity prices from depressed levels in 2020. While our oil and gas royalty revenues have benefited from increased royalty production and higher commodity prices during this time period, our water sales and surface-related income continue to be impacted by the reduced overall development pace compared to pre-pandemic levels.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020"],["Revenues:"],["Land and resource management:"],["Oil and gas royalty revenue","$","286,468","","","64","%","","$","137,948","","","46","%"],["Easements and other surface-related income","32,892","","","7","%","","39,478","","","13","%"],["Land sales and other operating revenue","1,027","","","\u2014","%","","17,716","","","6","%"],["Total Land and resource management","320,387","","","71","%","","195,142","","","65","%"],["Water services and operations:"],["Water sales","67,766","","","15","%","","54,862","","","18","%"],["Produced water royalties","58,081","","","13","%","","50,640","","","16","%"],["Easements and other surface-related income","4,724","","","1","%","","1,920","","","1","%"],["Total Water services and operations","130,571","","","29","%","","107,422","","","35","%"],["Total consolidated revenues","$","450,958","","","100","%","","$","302,564","","","100","%"],["Net income:"],["Land and resource management","$","208,897","","","77","%","","$","127,977","","","73","%"],["Water services and operations","61,083","","","23","%","","48,072","","","27","%"],["Total consolidated net income","$","269,980","","","100","%","","$","176,049","","","100","%"]]
[[/GREPCENT_TABLE]]

Land and Resource Management

Land and Resource Management segment revenues increased $125.2 million, or 64.2%, to $320.4 million for the year ended December 31, 2021 as compared with revenues of $195.1 million for the comparable period of 2020. The increase in Land and Resource Management segment revenues is due to increases in oil and gas royalties, which more than doubled for the year ended December 31, 2021 compared to the comparable period of 2020.

Oil and gas royalties. Oil and gas royalty revenue was $286.5 million for the year ended December 31, 2021 compared to $137.9 million for the year ended December 31, 2020, an increase of 107.7%. The table below provides financial and operational data by royalty stream for the years ended December 31, 2021 and 2020:

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[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020"],["Our share of production volumes(1):"],["Oil (MBbls)","","3,076","","","2,778"],["Natural gas (MMcf)","","12,082","","","9,643"],["NGL (MBbls)","","1,705","","","1,561"],["Equivalents (MBoe)","","6,795","","","5,946"],["Equivalents per day (MBoe/d)","","18.6","","","16.2"],["Oil and gas royalty revenue (in thousands):"],["Oil royalties","","$","195,710","","","$","109,106"],["Natural gas royalties","","40,964","","","11,097"],["NGL royalties","","49,794","","","17,745"],["Total oil and gas royalties","","$","286,468","","","$","137,948"],["Realized prices:"],["Oil ($/Bbl)","","$","66.62","","","$","41.13"],["Natural gas ($/Mcf)","","$","3.67","","","$","1.24"],["NGL ($/Bbl)","","$","31.56","","","$","12.29"],["Equivalents ($/Boe)","","$","44.14","","","$","24.29"]]
[[/GREPCENT_TABLE]]

(1)    Commonly used definitions in the oil and gas industry not previously defined: Boe represents barrels of oil equivalent. MBbls represents one thousand barrels of crude oil, condensate or NGLs. Mcf represents one thousand cubic feet of natural gas. MMcf represents one million cubic feet of natural gas. MBoe represents one thousand Boe. MBoe/d represents one thousand Boe per day.

Our share of crude oil, natural gas and NGL production volumes was 18.6 thousand Boe per day for the year ended December 31, 2021 compared to 16.2 thousand Boe per day for the same period of 2020. The average realized prices were $66.62 per barrel of oil, $3.67 per Mcf of natural gas, and $31.56 per barrel of NGL, for a total equivalent price of $44.14 per Boe for the year ended December 31, 2021, an increase of $19.85 per Boe compared to the total equivalent price of $24.29 per Boe for the same period of 2020.

Easements and other surface-related income. Easements and other surface-related income was $32.9 million for the year ended December 31, 2021, a decrease of 16.7% compared to $39.5 million for the year ended December 31, 2020. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases and seismic and temporary permits. The decrease in easements and other surface-related income is principally related to decreases of $9.4 million in pipeline easement income and $1.3 million in power line and utility easements for the year ended December 31, 2021 compared to the same period of 2020. These decreases were partially offset by a $4.1 million increase in commercial lease revenue for the year ended December 31, 2021. Easements and other surface-related income is dependent on development decisions made by companies that operate in the areas where we own land and is, therefore, unpredictable and may vary significantly from period to period. See “Market Conditions” above for additional discussion of development activity in the Permian Basin during the year ended December 31, 2021.

Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. Land sales were $0.7 million and $17.4 million for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, we sold 30 acres of land for an aggregate sales price of $0.7 million or approximately $25,000 per acre. For the year ended December 31, 2020, we sold 22,160 acres of land for an aggregate sales price of approximately $16.0 million, or approximately $721 per acre. Additionally, we recognized land sales revenue of $1.4 million for the year ended December 31, 2020 related to land exchanges where we had no cost basis in the land conveyed.

Net income. Net income for the Land and Resource Management segment was $208.9 million for the year ended December 31, 2021 compared to $128.0 million for the year ended December 31, 2020. Expenses, including income tax expense, for the Land and Resource Management segment were $111.5 million and $67.2 million for the years ended December

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31, 2021 and 2020, respectively. The increase in expenses during 2021 is principally related to a $46.2 million increase in income tax expense for the year ended December 31, 2021 compared to the same period of 2020. Expenses are discussed further above under “Results of Operations.”

Water Services and Operations

Water Services and Operations segment revenues increased 21.5%, to $130.6 million for the year ended December 31, 2021 as compared with revenues of $107.4 million for the comparable period of 2020. The increase in Water Services and Operations segment revenues is due to increases in water sales and produced water royalty revenue. As discussed in “Market Conditions” above, our segment revenues are directly influenced by development decisions made by our customers and the overall activity level in the Permian Basin. Accordingly, our segment revenues and sales volumes, as further discussed below, will fluctuate from period to period based upon those decisions and activity levels.

Water sales. Water sales and royalty revenue was $67.8 million for the year ended December 31, 2021, an increase of $12.9 million or 23.5%, compared with the year ended December 31, 2020 when water sales and royalty revenue was $54.9 million. The increase in water sales is principally due to a 14.7% increase in the number of sourced and treated barrels sold. Additionally, water sales for the year ended December 31, 2020, was impacted by a approximately $7.0 million deferral of water sales revenue related to take or pay contracts.

Produced water royalties. Produced water royalties are royalties received from the transportation or disposal of produced water on our land. We do not operate any saltwater disposal wells. Produced water royalties were $58.1 million for the year ended December 31, 2021 compared to $50.6 million for the same period in 2020. This increase is principally due to increased produced water volumes for the year ended December 31, 2021 compared to the same period of 2020.

Easements and other surface-related income. Easements and other surface-related income was $4.7 million for the year ended December 31, 2021, an increase of $2.8 million compared to $1.9 million for the year ended December 31, 2020. The increase in easements and other surface-related income relates to an increase in temporary permits for sourced water lines for the year ended December 31, 2021 compared to the same period in 2020.

Net income. Net income for the Water Services and Operations segment was $61.1 million for the year ended December 31, 2021 compared to $48.1 million for the year ended December 31, 2020. As discussed above, revenues for the Water Services and Operations segment increased 21.5% for the year ended December 31, 2021 compared to the same period of 2020. Expenses, including income tax expense, for the Water Services and Operations segment were $69.5 million for the year ended December 31, 2021 as compared to $59.3 million for the year ended December 31, 2020. The overall increase in segment expenses during 2021 is principally related to increased income tax expense as a result of increased segment operating income during the same time period. The remaining increase in segment expenses is principally a result of an increase in the segment’s share of all corporate overhead expenses impacted by the Corporate Reorganization in 2021. Expenses are discussed further above under “Results of Operations.”

Non-GAAP Performance Measures

In addition to amounts presented in accordance with GAAP, we also present certain supplemental non-GAAP measurements. These measurements are not to be considered more relevant or accurate than the measurements presented in accordance with GAAP. In compliance with requirements of the SEC, our non-GAAP measurements are reconciled to net income, the most directly comparable GAAP performance measure. For all non-GAAP measurements, neither the SEC nor any other regulatory body has passed judgment on these non-GAAP measurements.

EBITDA and Adjusted EBITDA

EBITDA is a non-GAAP financial measurement of earnings before interest, taxes, depreciation, depletion and amortization. Its purpose is to highlight earnings without finance, taxes, and depreciation, depletion and amortization expense, and its use is limited to specialized analysis. We calculate Adjusted EBITDA as EBITDA excluding the impact of certain non-cash, non-recurring and/or unusual, non-operating items, including, but not limited to: proxy and conversion costs related to our Corporate Reorganization, severance costs, and land sales deemed significant. We have presented EBITDA and Adjusted EBITDA because we believe that both are useful supplements to net income in analyzing operating performance.

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The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2021, 2020, and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["Net income","","$","269,980","","","$","176,049","","","$","318,728"],["Add:"],["Income tax expense","","93,037","","","43,613","","","83,527"],["Depreciation, depletion and amortization","","16,257","","","14,395","","","8,906"],["EBITDA","","379,274","","","234,057","","","411,161"],["Add:"],["Proxy and Corporate Reorganization costs","","2,026","","","5,050","","","13,004"],["Severance costs","","6,680","","","\u2014","","","\u2014"],["Land sales deemed significant","","\u2014","","","\u2014","","","(122,000)"],["Adjusted EBITDA","","$","387,980","","","$","239,107","","","$","302,165"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. It is our opinion that we fully disclose our significant accounting policies in the Notes to the Consolidated Financial Statements. Consistent with our disclosure policies, we include the following discussion related to what we believe to be our most critical accounting policies that require our most difficult, subjective or complex judgment.

Accrual of Oil and Gas Royalties

The Company accrues oil and gas royalties. An accrual is necessary due to the time lag between the production of oil and gas and generation of the actual payment by operators. The oil and gas royalty accrual is based upon historical production, estimates of the timing of future payments and recent market prices for oil and gas.

New Accounting Pronouncements

For further information regarding recently issued accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.”