Sitio Royalties Corp

NYSE:STR

Earnings Call Analysis

Sitio Royalties Second Quarter 2024 Performance and Guidance Update

Sitio Royalties continued its strong performance in the second quarter of 2024, achieving record production volumes of 39,231 BOEs per day, a 3% increase from Q1. This success was supported by high production from newly turned-in-line wells, particularly in the Permian and DJ Basins. The company raised its full-year production guidance to 36,000-38,000 BOEs per day and decreased cash tax guidance to $9-15 million. Sitio completed $38.5 million in acquisitions, enhancing its position in key basins. Financially, the company reported record adjusted EBITDA of $151.6 million and announced a $0.71 per share return of capital, combining dividends and buybacks.

Record Production Drives Financial Strength

In the second quarter of 2024, Sitio Royalties achieved a significant milestone, with production volumes reaching record highs of 39,231 barrels of oil equivalent (BOE) per day, marking a 3% increase from the previous quarter. Oil production specifically hit an all-time high of 19,747 barrels per day. This operational success was bolstered by the wealthy activities in crucial regions, primarily the Permian and DJ Basins, which accounted for 94% of net wells coming online. Furthermore, the company has positioned itself for sustained growth with new acquisitions and increased operator activity, enhancing its footprint in key areas.

Strategic Acquisitions Fuel Growth

During the quarter, Sitio executed six acquisitions totaling $38.5 million, adding over 2,100 net royalty acres (NRA) to its portfolio. Among these acquisitions, 61% were located in the Permian Basin, with the remainder in the DJ Basin, which continues to see robust operator activity. This active acquisition strategy is reflective of Sitio's commitment to diversifying its asset base and capturing growth opportunities, regardless of deal size. The ongoing competitive nature of the mineral market has not deterred the company from making strategic investments, indicating its strong operational capability.

Increased Production Guidance for 2024

Sitio raised its full-year 2024 production guidance to an average daily range of 36,000 to 38,000 BOEs, an increase of 500 BOEs at the midpoint compared to previous estimates. This anticipated growth is attributed to both recent acquisitions and organic activity enhancements, showcasing management's confidence in the company’s operational strategies and market positioning even amidst competitive pressures.

Robust Financial Performance

The financial results for the second quarter were equally impressive, with adjusted EBITDA reaching $151.6 million and discretionary cash flow amounting to $129.3 million. The favorable pricing environment, with realized oil prices standing at $80.21 per barrel (a 3% increase from the prior quarter), significantly contributed to these results. With a payout ratio of 85% of discretionary cash flow, which exceeds its minimum target of 65%, Sitio remains committed to returning capital to its shareholders through dividends and stock repurchases.

Shareholder Returns and Capital Management

Reflecting its focus on shareholder value, Sitio declared a return of capital of $0.71 per share in Q2 2024, comprising a $0.30 cash dividend and $0.41 for stock repurchases. Since initiating its buyback program in March, the company has repurchased 3.1 million shares, constituting 2% of its outstanding shares. This strategic repurchase underscores Sitio’s belief in its intrinsic value and willingness to invest in its own stock when trading below perceived value.

Ongoing Focus on Debt and Financial Stability

Despite an increase in net debt surpassing $1 billion, management reiterates its commitment to improving its financial leverage toward a target of 1x. Retained cash flow will continue to be utilized for debt repayment alongside strategic acquisitions, preserving the company’s financial flexibility. The company looks to balance its commitments between growth initiatives and maintaining a strong balance sheet, critical for future opportunities.

Market Outlook and Operating Efficiency

Current market dynamics have seen operators achieving greater efficiencies, enabling stable production levels despite fluctuations in rig counts. The management team has indicated no significant changes in operator activity despite recent commodity volatility, reinforcing confidence in the region's operational capabilities. Additionally, ongoing trends suggest that larger operators are stabilizing capital plans, which is favorable for Sitio’s long-term outlook, given their focus on quality and sustainability in operations.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone, and a warm welcome to the Sitio Royalties Second Quarter 2021 Earnings Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host, Ross Wong, Vice President of Investor Relations and Finance. Please go ahead.

[Ross Wong, executive]

Thanks, operator, and good morning, everyone. Welcome to the Sitio Royalties Second Quarter 2021 Earnings Call. If you don't already have a copy of our recent press release and updated investor presentation, please visit our website at www.sitio.com, where you will find them in our Investor Relations section. With me today to discuss second quarter 2024 financial and operating results is Chris Conoscenti, our Chief Executive Officer; Carrie Osicka, our Chief Financial Officer; and other members of our executive leadership team.

Before we start, I would like to remind you that our discussion today may contain forward-looking statements and non-GAAP measures. Please refer to our earnings press release, investor presentation and publicly filed documents for additional information regarding such forward-looking statements and non-GAAP measures. And with that, I'll turn the call over to Chris.

[Christopher Conoscenti, executive]

Thanks, Ross. Good morning, and thank you for joining Sitio's Second Quarter 2024 Earnings Call. The momentum from our strong start to the year continued in the second quarter as the company set several operational and financial records closed on acquisitions of approximately 15,000 net royalty acres and announced return of capital of $0.71 per share, a 45% increase relative to the first quarter. In the second quarter, production from our mineral and royalty interests reached record high volumes of 39,231 BOEs per day, up 3% compared to pro forma first quarter volumes, which included a full quarter of production from the previously announced DJ Basin acquisition. Several other production milestones were also achieved with an all-time oil production high of 19,747 barrels per day and record Delaware Basin and Eagle Ford production of 2,991 BOEs per day and 4,061 BOEs per day, respectively.

These impressive operational results benefited from the flush production from 14.3 pro forma net wells turned in line in the first quarter and 8.5 net wells that commenced production in the second quarter, which was 6% above our 2023 quarterly average. The majority of second quarter operator activity came from the Permian and DJ Basins, which accounted for approximately 94% of all net turned-in-line wells. As of June 30, we had 44.1 net line of sight wells on our acreage, which included 25 net spuds and 19.1 net permits. During the second quarter, we evaluated dozens of acquisition opportunities totaling more than 150,000 NRAs in aggregate. The minerals [indiscernible] market remains competitive, and we're still seeing many minerals deals of all sizes transact at prices that don't meet our underwriting criteria. Despite that market dynamic, we continue to identify and successfully close multiple transactions each quarter, which demonstrates the benefit of our ability to invest capital in assets that are in different basins and are operated by a diverse set of E&P companies.

After closing the previously announced DJ Basin acquisition in early April, we closed another 6 acquisitions during the quarter for an aggregate purchase price of $38.5 million. These 6 acquisitions added over 2,100 NRAs to our portfolio, of which approximately 61% are in the Permian Basin and the remainder are in the DJ Basin. As you can see from the maps in our earnings presentation, the acquisitions we closed in the second quarter materially enhanced our position in the DJ Basin and expanded our footprint on the New Mexico side of the Delaware Basin, an area that has seen robust operator activity in recent years.

While we have generally focused on larger acquisition opportunities since becoming publicly traded in June of 2022, ultimately, our M&A decisions are driven by risk-adjusted returns regardless of deal size.

In addition to our strong production volumes and continued success on the acquisitions front, we are raising our full year 2024 pro forma average daily production guidance range to 36,000 to 38,000 BOEs per day, which represents an increase of 500 BOEs per day at the midpoint. Approximately 200 BOEs per day of this increase is from the 6 small acquisitions we completed in 2Q and the remaining 300 BOE per day is due to an increase in organic activity relative to our previous guidance. Now I'll turn the call over to Carrie to provide an update on quarterly financial results, return of capital and cash tax guidance.

[Carrie Osicka, executive]

Thanks, Chris, and good morning, everyone. Sitio generated record high adjusted EBITDA of $151.6 million and discretionary cash flow of $129.3 million in the second quarter, driven by historic high production and hedged realized oil prices of $80.21 per barrel, an increase of 3% over first quarter prices. Our Board approved our return of capital of $0.71 per share for the second quarter, comprised of $0.30 per share cash dividend and stock repurchases equating to $0.41 per share. This represents a payout ratio of 85% of DCF and is higher than our minimum 65% of DCF due to the previously disclosed privately negotiated repurchase of 2 million shares for approximately $50 million.

In addition to this privately negotiated repurchase, we also bought back over 500,000 shares in the open market during the quarter. Since we started our buyback program in March, we repurchased 3.1 million shares as of June 30 or 2% of shares outstanding prior to starting the repurchase program. At the end of the second quarter, we added approximately $124 million remaining of our $200 million share repurchase program. In addition to raising our guidance for full year 2024 pro forma production volumes, we are also decreasing our guidance for cash taxes to a range of $9 million to $15 million, which is a $21.5 million decrease at the midpoint to reflect our latest analysis from our tax experts. That concludes our prepared remarks. Operator, please open up the call for questions.

[Operator]

Thank you. As a reminder, if you would like to -- our first question today comes from Neal Dingmann with Truist Securities.

[Neal Dingmann, analyst]

My first question, Chris, is on your activity specifically. I'm just wondering -- and I think I know the answer, but I'm just wondering, given the increased commodity volatility we've seen in the last month or so, have you all seen anything different from operators, notably just on activity. And I guess another what to ask that is your line-of-sight well still as strong as ever.

[Christopher Conoscenti, executive]

Neal, thanks for the question. Short answer is no. We haven't seen any meaningful change in activity. We continue to see operators achieving greater and greater -- excuse me, efficiencies. So what we're seeing is the operator is doing more with less. So the migration of assets in the larger operators and has led to better operational efficiencies. It's led to better footprint configuration so that there's more contiguous acreage. And operators are able to drill longer laterals and enhanced completion design.

So we are seeing sort of a flattish rig count flat frac-through count, but it isn't really meaningfully impacting the number of wells getting turned-in-line, which tells us that operators continue to achieve the efficiencies that we like to see. In terms of the line-of-site wells, yes, we do see a decrease in the net line-of-sight wells, but gross activity has remained relatively constant.

[Neal Dingmann, analyst]

Great details. Then my second question is just on M&A. Just wondering what -- when you look at deals out there right now, is there any one area that's more active right now than others?

[Christopher Conoscenti, executive]

The most active areas for us continue to be the Permian Basin and the DJ Basin. From a rate of return standpoint, we're seeing attractive opportunities in both. I would say that the Permian Basin is still very, very competitive. And there's still a large number of mineral companies pursuing the same opportunities. So you have to have a differentiated approach, a relationship-driven approach. And in the DJ Basin, there's some really kind of good collections of assets there that we've been able to acquire. And we're still seeing a lot of success on the ground there, too.

[Operator]

Our next question comes from Noel Parks with Tuohy Brothers Investment. Please go ahead.

[Noel Parks, analyst]

Just had a couple. I'm just wondering, general terms, as you look at what is available out there for deal flow. What's your current thinking on valuation of gas optionality. And I'm thinking in particular in the Permian, sort of hitting further south in the Delaware, for instance, where -- will the effect tend to be [ gas assets ] and the sort of pro LNG narrative seems a little distant right now compared to just the tough time that the gas markets have had. So I'm just curious about your current thoughts.

[Christopher Conoscenti, executive]

Yes. Thanks for the question. We remain commodity agnostic and really returns driven. So we're not opposed to acquiring more gas assets if we can do it at the right price. And as you noted, our assets have a fair amount of embedded gas within them. So it's not like we have to go to a pure gas basin to have gas exposure. We do have a virtue of the associated gas with our existing assets. So we are not opposed to picking up more assets in the areas where we already have exposure like the Southern Delaware Basin or in the DJ Basin. And we're also not opposed to going to other places like [indiscernible], if the opportunity presented itself at the appropriate rate of return for us.

[Noel Parks, analyst]

Great. Fair enough. And also, as you mentioned a little bit earlier, just operators doing more with less and that general trend of greater capital efficiency. And I just wondered if you had -- if there -- with that trend have gone on as long as it has, do you feel like your operators, pretty uniformly in your basin, are sort of heading in the right direction with that?

Or I wondered if, for instance, you're seeing much in the way of private operators being more aggressive ramping up production potentially with an eye to a sale. We've seen some very long held on the operated side, some very long-held PE-based assets that have or -- finally be transacting. And I was just wondering if you sort of see the ripple effects of that in terms of what's on the market, what people might be thinking you're paying and so forth?

[Christopher Conoscenti, executive]

Yes. The trend that we see is that with these assets moving to larger operator hands, we're seeing just less volatility in the capital programs. The larger operators tend to be less influenced by a $5 or $10 move in the price of oil. They tend to set their capital plans with a lower long-range price that can mine and they don't get rattled by some volatility that can be short term. So we like that stability in the operating base as our asset has evolved over time, you've seen our operator mix shift from a lot of private, a lot of SMID Cap names to really the largest of large from Chevron, Exxon, Oxy, ConocoPhillips, Diamondback, et cetera. So those are folks that don't whipsaw around their capital plans with the commodity.

To address your question about the mix of private versus public or large operators, the phenomenon you described still exists where you have some of these small private equity-backed companies that are ramping up production to build a production profile so that they are capable of selling to a public independent. There's just far fewer of those left. So while we do still see that, it's just a very, very small fraction of our portfolio today.

[Operator]

The next question comes from Tim Rezvan with KeyBanc.

[Unknown Analyst]

This is John on for Tim. So in the absence of large-scale M&A, do you think this pattern of small acquisitions you've done in the quarter is repeatable. We're just trying to understand whether you have line of sight on more acquisitions of this size.

[Christopher Conoscenti, executive]

John, thanks for the question. We do still see a number of opportunities of all sizes. And so we're evaluating a lot of small acquisitions every day. And then we're working to make progress on some of these larger acquisitions all the time. And we just know that these larger acquisitions are going to be more episodic and they tend to be years in the making instead of a quick 1 or 2 weeks turnaround as we do with the smaller deals. So our visibility on the smaller deals is candidly better, and we're still working on a number of those. So I do expect to continue to make a number of those. But the predictive capability of the larger acquisitions is just not as good because they take longer to develop, but we're working on transactions of all sizes really, it's just going to depend on where we can allocate the capital to get the best rate of return.

[Unknown Analyst]

Okay. That makes sense. Just to follow up with that, these acquisitions in the quarter, they pushed net debt over $1 billion, and leverages ticked higher. You've talked before about wanting to have leverage of 1x. Do you think that's still reasonable? And I just want to see how the Board is currently thinking about this?

[Christopher Conoscenti, executive]

Yes. The thinking around debt has not changed one bit. We still have the objective of having a very strong balance sheet, using our retained cash flow to pay down prepayable debt and to preserve maximum balance sheet flexibility so that we can take advantage of cash acquisitions. So we do retain more of our discretionary cash flow than our peers, and we use that to make accretive cash acquisitions and to pay down our prepayable debt. So you'll see like we did this quarter where we borrowed some money to make some accretive cash acquisitions. And then we'll continue to work towards our goal of getting that closer to 1x, so that we have the balance sheet flexibility to make a large cash acquisition in the future.

[Unknown Analyst]

Okay. That's great. That's all we had. Appreciate the time.

[Operator]

Our next question comes from Betty Jiang with Barclays.

[Wei Jiang, analyst]

Maybe I'll start with buyback, and that's a good follow-up on the last question. Just given second quarter, we're actually seeing pretty outsized buyback and including some open market, wondering your thoughts around that buyback against a net reduction for uses of cash going forward?

[Christopher Conoscenti, executive]

Yes. Thanks for the question, Betty. I'm glad you asked me just -- we actually got an e-mail from a shareholder asking the same question about the thought process on the allocation between dividends and buybacks and debt paydowns. So I'm glad to address that here. As we think about it, we don't have to make a trade-off between buying back stock or paying down debt. because we are focused on returning at least 65% of our discretionary cash flow to shareholders. So our decision becomes how do we allocate that 65% between dividends and buybacks.

And when we see opportunities like we saw in this past quarter and in the first quarter to repurchase stock well below what we believe this massive value and to make NAV accretive buybacks, we want to take advantage of that. So you saw in the second quarter, we paid out the minimum cash dividend of 35% of discretionary cash flow. And then we use the rest of the return of capital in the form of buybacks to take advantage of the NAV accretive opportunity. So we don't look at it as a trade-off between do we need the buyback or we pay down debt.

[Wei Jiang, analyst]

Got it. That makes sense. And my follow-up, perhaps just on the line-of-site activity -- line-of-site backlog. I understand that the second quarter line-of-sight is down from 1Q, and that is reflecting the very high number of TILs in 1Q. So looking forward, just wondering how your thoughts about the net line-of-site activity across the portfolio gets the historical trends that you have been seeing? And I really appreciate the additional disclosure on [ TIL cap ] as well.

[Christopher Conoscenti, executive]

Sure. I'll make a quick comment, and then I'll turn it over to Jarret to add his thoughts. But the comment I'd make on the second quarter was very much in line with the 2023 historical average. In fact, it's slightly above the 2023 historical average. We're -- the second quarter, we had about 8.5 net TILs in the quarter. And I think you're referring to the first quarter, which was a bit of an anomaly, so I'll let Jarret cover the rest.

[Jarret Marcoux, executive]

Sure. Betty, A couple of comments here. Our rig count is obviously what's feeding these line-of-sight wells. And if we look back at the last year, our rig count as a percentage of North America has always run between roughly 18% and 20%, and that hasn't materially changed in recent history. So when you look at our asset, given the growth footprint we have, we're really -- the overall rig count that we see from Baker Hughes or the other reporting agencies is really a proxy for our activity.

And one other comment I can make is we're obviously really happy about the recent activity we've had. And yes, our line-of-sight wells are down quarter-over-quarter sequentially. We do track this metric monthly. And what I can tell you is, is already partially recovered as of this month. So on a go-forward basis, we're not modeling anything that is materially lower than the historical averages we have had. But obviously, the recent activity we have had has been very high relative to the -- our historical averages.

[Operator]

[Operator Instructions] As we have no further questions registered, this concludes today's call. Thank you, everyone, for joining us today. You may now disconnect your lines.