This Hidden Gem Oil Stock More Than Doubled in a Year. Here's Why It's Still a Great Buy Now

Texas Pacific Land Corporation (NYSE: TPL) is up a staggering 142.8% over the past year, compared to a less than 10% return in the S&P 500 and a less than 2% gain in the energy sector.

Here's why Texas Pacific Land, commonly known as TPL, has been such a strong-performing energy stock and why it still could be worth buying now.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Image source: Getty Images.

Playing a pivotal role in the Texas oil boom

There are plenty of ways to invest in the energy sector.

Integrated majors like ExxonMobil and Chevron have diverse operations across the oil and gas value chain and growing low-carbon businesses.

Upstream companies like ConocoPhillips explore for and produce oil and gas, making them sensitive to lower oil prices. However, exploration and production companies can rake in the cash flow during periods of higher oil and gas prices.

Midstream companies like Kinder Morgan build capital-intensive energy infrastructure assets, such as pipelines and terminals, that support the transportation and storage of hydrocarbons.

Downstream companies like Valero Energy make products from refined fuels.

TPL isn't like other oil and gas companies. It is one of the largest landowners in Texas, formed out of the bankruptcy of Pacific Railroad in the 19th century. TPL owns approximately 873,000 acres of land. That land didn't have a ton of value during the 19th century. The advent of horizontal drilling and hydraulic fracturing and the buildout of the oil and gas industry in West Texas and southern New Mexico have made TPL's land worth a fortune.

TPL makes money from oil and gas royalties, water sales, easements, commercial leases, permits, and land sales. Its simple, low-risk business model is also capital-light because it doesn't drill for oil and gas. So, the company can still turn a tidy profit even when oil and gas prices are falling. The company's profits have exploded over the last decade as the Permian Basin -- right in TPL's backyard -- has become the largest onshore oil and gas production region in the U.S.

The water business is thriving

TPL's water business has gotten much larger in recent years, achieving record sales in 2024. The company operates one of the largest water production, storage, and delivery networks in the Permian, which should continue growing as TPL has developed an energy-efficient method of produced water desalination and treatment. Water is used for drilling and completing wells and general on-site sanitary purposes. Given the harsh West Texas climate, supply is limited, making water a valuable asset.

In 2024, oil and gas royalties were $373.3 million -- just 4.5% higher than 2023. But water sales and produced water royalties combined for $254.8 million, up over 30% year over year.

As you can see in the following chart, TPL has been steadily growing sales, operating income, and earnings, and it still turned a solid profit during the COVID-19-induced oil and gas crash.

TPL Revenue (TTM) data by YCharts.

The buildout of the water business has taken earnings to the next level, and TPL directly passes along some of those profits to shareholders through dividends.

A so-so dividend

In 2021, TPL began paying a regular quarterly dividend, which has grown substantially in recent years to $1.62 per share. TPL will also pay extra dividends depending on the business' performance. Special dividends provide an added incentive to hold the stock. But even when factoring in special dividends, TPL doesn't yield nearly as much as other oil and gas stocks.

In 2024, TPL paid a record $13.51 per share in dividends -- but that is a yield of just 1% based on the stock price at the time of this writing. So investors interested in generating reliable and sizable passive income may want to consider other oil and gas stocks instead.

TPL's low operating expenses allow it to convert the majority of revenue into net income, making TPL a highly profitable business. But because the stock has done so well, TPL's valuation has ballooned to 69 times trailing earnings. That is a very expensive price to pay, even for a high-quality business.

The ultimate "safe stock" is still worth a look

TPL has been a red-hot stock, stretching the valuation and compressing the yield. However, the company could remain a steady performer and grow into its valuation in time.

TPL benefits from higher Permian oil and gas production and water demand. This isn't always true for exploration and production companies, which may boost production but generate lower margins if oil prices fall.

TPL isn't as attractive a buy as it used to be, because the valuation has gotten so pricey. Still, it has arguably one of the best business models out there, especially when factoring in how much larger the water business is today than it was just a few years ago.

Should you invest $1,000 in Texas Pacific Land right now?

Before you buy stock in Texas Pacific Land, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Texas Pacific Land wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $675,119!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of April 1, 2025

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Kinder Morgan. The Motley Fool has a disclosure policy.