LandBridge: It’s the Pore Space Stupid!
The Datacenter Thesis is nice to have, but the real value is in the pore space.
Weird events frequently happen in the stock market, but one of the weirdest things I have seen in the market recently has to be the price action of LandBridge’s stock price over the last few months. LandBridge had been trading in the $50s per share since the price collapsed over the summer on general malaise in the oil markets (not that produced water isn’t resilient to lower oil prices, but let’s set that aside). Then in early November, competitor Texas Pacific Land Corp. (“TPL”) mentioned on their earnings call that they were close to landing a data center on some of their land in the Permian Basin. This caused TPL’s stock price to run and LandBridge’s stock price to run in sympathy; LandBridge’s price appreciation even outpaced TPL’s! Then, as quickly as the price appreciated, it collapsed. It fell as far as the mid $40s per share in early January and then abruptly started to rebound. While we will never know what exactly drove the erratic price movement, I will lay out my hypothesis. I believe the market is overly fixated, perhaps understandably so, on the Datacenter Thesis of LandBridge, while missing the value in its core business, the ownership of pore space.
The Datacenter Thesis
LandBridge is a land play on the energy development of the Delaware Basin in the Permian (Midland Basin expansion also highly likely). Sixty-nine percent of its revenue (Q3 25) comes from surface use royalties, which is primarily providing pore space that is utilized by LandBridge’s sister company WaterBridge (we will get more into this this later). Thirty-one percent of its revenue comes from selling resources such as frac sand and brackish water. Seven percent of its revenue comes from oil and gas royalties that are tied to some of LandBridge’s surface acreage ownership. The only close comparable company is TPL. Although TPL is weighted more towards oil and gas (minerals) royalty revenue (54% as of Q3 25) than produced water and surface royalties (24%) and brackish water sales (22%). That said, TPL, and LandBridge, trade at substantial premia to pure-play mineral royalty companies. TPL is currently (1/16/26) trading at 28.7x 26E EBITDA (LandBridge is at 19.1x), compared to leading mineral royalty companies at around 10x . TPL’s premium to mineral royalty companies could come, in part, from TPL’s massive holdings of mineral reserves. More likely it is that TPL’s exposure to surface royalties. Mineral royalties are finite. Once the mineral is extracted and the royalty is paid, it is gone forever. Also, mineral royalties are directly tied to the price of oil and gas, making them volatile. Royalties for produced water and other surface use royalties are longer lasting and more resilient in times of low energy prices. The Canadian produced water disposal company, Secure Waste Infrastructure Corp., has a good slide on resilience during low prices (1). Many investors do not understand the difference between land-based royalties and mineral royalties, so it was no surprise that when LandBridge went public, it priced on the low end of the expected range. The day of the IPO LandBridge’s founder and chairman, David Capobianco, went on CNBC to discuss the company, where he focused on the Data Center Thesis on LandBridge.
The thesis is that AI datacenters need massive amounts of power and the current energy infrastructure will not support the power demands of these datacenters. The Permian Basin has trapped natural gas. Consequently, AI datacenters will be in the Permian Basin. The area offers vast amounts of contiguous land on which datacenters can be built, as well as land for natural gas power generation facilities and solar fields that will power the centers. Being in Texas and in low-population areas also will bring the benefit of favorable regulatory regimes that are conducive to building the datacenters quickly; if AI is an existential threat to hyperscalers, then time is of the essence. This interview served as the kickoff point that took LandBridge’s stock price from $17 per share at the IPO on 6/28/24 to over $80 per share the following November.
This thesis is interesting and I hope it happens. It certainly seems like a big datacenter announcement is incoming. In November it was announced that Chevron plans to build a 2.5GW power generation facility in Texas, later discovered to be Reeves County (2). In December it was announced that Eric Schmidt, formerly of Google, launched Bolt Data & Energy, with the goal of bringing 10GW of datacenters to the Permian Basin (2). That said, the Datacenter Thesis seems to be a double-edged sword for LandBridge. Its stock price seems to do well when there is positive news on datacenters in the Permian and it does poorly when sentiment on the thesis turns. Let’s look at the stock price since last November. November started with TPL giving the market some hope on datacenters in their Q3 earnings call. That sent LandBridge’s stock price moving from the low $60s per share to the mid $80s. LandBridge had an approximate 16% short interest at the beginning of November. It is easy to see how the positive datacenter sentiment from the TPL call and shorts closing their positions drove the stock price up. Then LandBridge’s stock price started to collapse suddenly. It later came out that LandBridge’s sponsor was selling shares in a secondary offering (sponsors need DPI). The word probably got out by investors who were wall crossed, causing the sell off. The sponsor placed the shares at $70, which caused a further selloff that ended in the mid $40s. The shorts probably figured that if a sponsor was going to sell shares, then a datacenter announcement would not come anytime soon. Furthermore, the thesis of the shorts is likely that they are skeptical of the Datacenter Thesis, and if you remove that, then LandBridge should trade at 10x EBITDA, inline with mineral royalty companies (according to them, most likely, not me). I think that this view is incorrect, and the correct view is that there is massive value in the land-based royalties, which is primarily driven by LandBridge’s pore space. Any value in the future from datacenters, as significant as it may be, is the topping on the sundae, while ice cream is the pore space.
Pore Space
Pore space is a geographic formation that has the requisite amount of space and porosity that is ideal for a salt-water disposal (“SWD”) well. This is extremely important in the Delaware Basin as the water cut (water to oil ratio) is currently 4. So, for every barrel of oil that flows from a well, 4 barrels of produced water flow with it. Additionally, the water cut for the Delaware Basin is expected to increase as time goes on, perhaps finishing the decade at 6. Taking a step back in time, when fracking began in the Delaware Basin, produced water was disposed of in deep wells. This led to seismic activity (the fracking / earthquake issue), the curtailment of that practice, and the use of shallow SWD wells. It is worth pointing out that New Mexico, from a regulatory perspective, allows very little SWD wells, so produced water from New Mexico often flows south or east to be disposed in Texas. The ability of SWD wells to take water is based on two factors – space and porosity. Most of the industry over-pressurized their SWD wells (WaterBridge/LandBridge excluded; for more on this see (3)). This practice led to interference with surrounding oil and gas drilling activities and environmental issues (again see (3), and for good podcasts on the issue listen to (4) and (5)). Regulators acted in 2024 by adding pressure limits to the previous volume limits to the permits of SWD wells. Recall that if an oil and gas operator has no place to put produced water, then their production shuts down. The combination of high water cuts, a high amount of surrounding oil and gas drilling activity, new regulations, and the possibility of operators being forced to shut-in production means that any incremental pore space is now more valuable, particularly if it is in the right location, as each property line water crosses is an opportunity to be held hostage by fees to cross the property.
When the practice of using shallow SWD wells took off, north central Loving County attracted many of the first SWD wells given its proximity to the New Mexico border and being controlled by a limited number of landowners who controlled a vast swath of land. Consequently, the area quickly became over pressurized, as you can see reddish area on the above map (an up-close of version can be seen below (6)). Currently,1.5mmbpd of produced water is disposed of in LandBridge’s pore space. LandBridge owns an incremental 6.9mmbpd of incremental pore space. WaterBridge transports the produced water and operates the disposal wells, which are on LandBridge’s property. LandBridge gets paid royalties to allow WaterBridge to access its pore space. It would be akin to owning, but not operating, a landfill and getting paid a royalty based on the volume of trash disposed of into the landfill.
Valuation Thoughts and Catalysts
It makes sense for WaterBridge and LandBridge to trade as separate entities given that land royalty companies trade at higher multiples than operating companies. That said, it makes sense for them to be managed as if they are one entity. The benefit to LandBridge is it gets access to the scaled gathering and water transportation network of WaterBridge. Having a land company focused on acquiring incremental pore space, a practice that LandBridge / WaterBridge innovated also has benefits. First, the combination of a scaled transportation network and the availability of incremental pore space provides “flow assurance” to customers, which allows for WaterBridge and LandBridge to offer services at higher prices than that of competitors who lack flow assurance (3, 5). Second, the large swaths of landownership in strategic locations (starting with the TPL AMI, moving west to Loving and then Winkler Counties, and then north into Lea and Andrews Counties) provide a blocking position to other operators in New Mexico. Essentially, other operators with pore space south or east of LandBridge’s, will likely to be required to cross LandBridge property to access that space, which entitles LandBridge to an easement. Third, it provides LandBridge with a strategic advantage in acquiring additional pore space. This is illustrated in the recent acquisition of the 1918 Ranch (see map above) where LandBridge acquired an ~900kbpd of incremental pore space. This pore space is contiguous with some of LandBridge’s existing pore space. While LandBridge can access the 1918 pore space easily, anyone else wishing to bring water from New Mexico to it, would be required to cross third-party land. This makes it more expensive for anyone except WaterBridge to access. LandBridge paid a pro forma 3.3x EBITDA for the ranch.
The timing of purchase is also interesting. As previously mentioned, LandBridge handles ~1.5mmbpd of produced water. This leads to $140mm in LandBridge’s run-rate Surface Use Royalties and Revenue, which is most of LandBridge’s run-rate EBITDA of $179mm. Why would a company that is currently handling 1.5mmbpd and has an incremental 6.0mmbpd behind it be in a hurry and buy an additional 900kbpd? My gut tells me that LandBridge will go through its incremental pore space via growth at a much quicker rate than the market is anticipating. If that is true, then it is the pore space that is the real story here and not the Datacenter Thesis. LandBridge is trading at 19.1x 26E EBITDA (pro forma for 1918 Ranch) versus the much slower growing TPL at 28.7x. It would not surprise me if LandBridge trading multiple closes the gap on TPL and ultimately surpasses it.
Don’t get me wrong. I am not rooting against the Datacenter Thesis. I just think there is plenty of value in LandBridge without it. Given the growth of LandBridge’s revenue from pore space royalties, there is plenty of value at the current price and you get an option on the Datacenter Thesis for free. From an upside catalyst perspective, I am a bit puzzled when I look at the high short interest of LandBridge (presently 14.7%). This company has downside protection in the value of its pore space, but all it takes is one press release that features the definitive signing of a datacenter backed by a hyperscaler and LandBridge could go parabolic. I would not sleep too well at night if I were short it.
(1) Secure Investor Presentation
(2) Data Centers in the Permian Basin Part 3
(3) Drilling Down on the Parallels Between Produced Water and Municipal Waste Disposal
(4) James Davolos / Business Brew Podcast
(5) Chadd Garcia - Yet Another Value Podcast
(6) WaterBridge Map
Disclaimer: For entertainment and informational purposes only. Not a solicitation to buy or sell any security. Do your own due diligence.
Great write up with more information than I have been able to find. LB is the only IPO I have bought so far it has been a good decision. Looking forward to the next update!