Sitio Royalties Corp

NYSE:STR

Hello, and welcome, everyone, to the Sitio Royalties Fourth Quarter 2024 Earnings Call. My name is Becky, and I'll be your operator today.

I will now hand over to your host, Alyssa Stevens, Vice President of Investor Relations to begin. Please go ahead.

Thanks, operator. Good morning, and welcome to our fourth quarter and full year 2024 Conference Call. By now, it is our hope that you have been through our materials. You can find our recent news release and some supplemental slides on our website under the Investor Relations section. I'm joined this morning by our CEO, Chris Conoscenti; and our CFO, Carrie Osicka. After our brief prepared remarks, Chris, Carrie and other members of our leadership team will be available to take your questions.

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 release, investor presentation and publicly filed documents for additional information regarding such forward-looking statements and non-GAAP measures. I will now turn the call over to Chris.

Thanks, Alyssa, and welcome, everyone. I want to publicly welcome Alyssa Stephens to the Sitio team. She joined us earlier this year as our new VP of Investor Relations. Many of you may have met her already, but she is a great addition to Sitio. This has allowed Ross Wong to take on additional leadership responsibilities on our finance team. So let's get started. We will divide today's call into 3 segments. First, I'll review our 2024 highlights and how we strengthen the business through accretive acquisitions and active management of our minerals. Second, Carrie will summarize our recent financial results and our 2025 outlook.

Lastly, we will review our key priorities for the year. 2024 was a strong year of execution for Sitio and we have a solid list of accomplishments. I'll hit the highlights. First, we delivered against our full year projections. We had record fourth quarter production of about 41,000 barrels of oil equivalent per day, a 14% year-over-year increase and averaged over 39,000 barrels of oil equivalent for the year pro forma for the DJ Basin acquisition. We exceeded the high end of full year guidance even after raising guidance twice during the year. Our expenses and taxes fell within or slightly below our guidance range. Our solid results were due to the exceptional work of the entire team at Sitio, the quality of our land positions in the most prolific U.S. basins, strong activity and well performance from our industry-leading operators accretive acquisitions and our differentiated asset management capabilities.

Second, we continue to develop innovative efficiencies. This is one of our core competencies that differentiates us from our peers. Throughout 2024, we refined our proprietary custom-built asset management applications, which allow us to process and analyze significantly more data per person. We can now automatically process more than 99% of the revenue check data we receive from our operators, reducing approximately 21 million rows of data down to 100,000 records for our staff to review annually. Taking this a step further, we use AI models to interpret contracts that enable us to identify revenue payment discrepancies, producing a dashboard for further analysis by our team. In 2024, we captured $19 million of missing revenue payments. offsetting over 2/3 of our cash G&A. We have invested in our future, both in terms of highly skilled people across the company and new technologies. Our relatively small investments in asset management systems will be returned many times over and we expect meaningful reductions in cash G&A costs per BOE as we continue to scale our minerals position.

Next, we closed 16 high-value acquisitions throughout the year. These were immediately accretive to discretionary cash flow per share and represented some of the highest return investments in our history. It was a standout year for consolidation of high-return, small- and medium-sized deals. Sitio has demonstrated its ability to negotiate deals outside of normal broad auction processes. Our practices are repeatable and the deals we've executed are impactful in the aggregate. It was a healthy year of deal flow for us with acquisitions totaling more than $350 million, including fourth quarter deals of approximately $140 million. The fourth quarter deals added 3,300 net royalty acres to our portfolio primarily in the Delaware Basin. Number four, we are committed to a strong balance sheet and our capital structure is solid. In December, our borrowing base was increased to $925 million, an increase of $75 million. Year-over-year, our annual interest expense on a per BOE basis was down over 17% as we refinanced higher-cost notes in late 2023.

Our balanced capital structure high-quality assets and robust coverage ratios helped ensure financial flexibility, ample liquidity and access to future capital at attractive rates. Our senior notes continue to trade well above par and we are 1 of 2 minerals companies currently accessing the public debt markets, which advantages our cost of capital. Lastly, we prioritize capital return to shareholders and deliver value on a per share basis. In 2024, we returned $330 million to owners or over 70% of our discretionary cash flow. Since becoming public in mid-2022, our cumulative return of capital to shareholders is nearly $850 million, including dividends and share buybacks. This represents nearly 30% of our current market capitalization.

At current commodity prices, we expect that number to exceed $1 billion in 2025. This was a great year for us. We had a winning combination of execution, efficiency gains and acquisition activity that allowed us to maintain our strong balance sheet and return capital to shareholders. Importantly, our results underscore the repeatability of our business model. With that, I'll turn it over to Carrie to summarize our recent financial results and 2025 outlook.

Thanks, Chris. For the fourth quarter, our results beat consensus estimates for production, adjusted EBITDA and discretionary cash flow. Adjusted EBITDA was $141.2 million, which was 4% higher than the prior quarter and reflected strong production and lower-than-expected cash G&A. Production was up 6% quarter-over-quarter, averaging nearly 41,000 BOE per day. We had a 9% increase in net turned-in-line wells in the quarter, which was driven by increased operator drilling and completion activity. We closed on approximately $140 million of acquisitions late in the quarter.

We are committed to returning capital to shareholders through cash dividends and opportunistic share repurchases. Our Board declared a fourth quarter cash dividend of $0.41 per share, payable on March 28, and during the fourth quarter, we repurchased 643,000 shares for $12.9 million equating to $0.08 per share in repurchases. Importantly, this represents a total return of capital of $0.49 per share. At year-end, we had about $80 million remaining under our $200 million repurchase authorization. Turning now to the balance sheet. We had $1.1 billion of debt outstanding with $437.2 million of availability under our revolving credit facility at year-end 2024. Our borrowing base was increased by $75 million to $925 million and despite our $140 million of cash acquisitions in the fourth quarter, liquidity only decreased by $15 million.

As we look to 2025, we expect activity levels to remain consistent with last year and have good visibility via 45 net line-of-sight wells and commentary from operators and their activity levels. We expect our oil production at the midpoint will be 18,500 barrels per day and total production will be just under 40,000 BOE per day at the midpoint. This represents a 3% increase over reported full year 2024 production. As a reminder, we do not forecast acquisitions in our published guidance. However, history shows that we consistently create value through blocking and tackling with high-return acquisitions and our pipeline remains strong. Please reference our materials for additional details. I'll hand it back to Chris.

Thanks, Carrie. Before taking your questions, let me quickly discuss how we define and measure success at Sitio. Number one on the list is healthy deal flow. We have a proven team with relationships and technical experience across all the major U.S. basins. We maintain strong relationships with large mineral owners and smaller mineral aggregators and Today, we continue to see consistent deal flow and attractive opportunities that meet our criteria for risk-adjusted returns. The continued market interest in M&A activity in the mineral space is increasingly drawing the attention of long-term mineral owners some who have held their minerals for more than 20 years and now appear more open to selling.

Many have been holding for yield but are recognizing that basin maturity along with development activity levels suggest favorable timing for a sale. We are very selective in the deals we consider must clear a high bar. In 2024, we evaluated more than 160 transactions and ultimately executed on just 10% of those. From a net royalty acre standpoint, we acquired just 4% of what we screened. As a result, our 2024 deals had a weighted average unlevered IRR of more than 15%, and next 12-month cash flow yield exceeding 25% well above our underwrite thresholds. We will remain disciplined in our underwriting assumptions, and we'll continue to look for the right deals to create value.

Second is growth per share. We are focused on adding value on a per share basis. Our fourth quarter production was up 14% year-over-year, while our share count dropped 3%. Since becoming public, we have increased production per debt adjusted share by more than 50% and representing a 20% compound annual growth rate. We will continue to use free cash flow to maintain our balance sheet and return meaningful cash to shareholders. Third on the list is efficiency as measured by cash G&A per BOE EBITDA margins and capturing missing revenue. We are in the early innings of realizing the full potential of our proprietary automation tools and applications that underpin our asset management system.

Automation increases the value-add of our professionals and maximizes the value of our assets. With this platform in place, we're positioned to seamlessly tack on additional assets supporting our margins and cost-effective growth in the future. Over the last 3 years, we have been very selective in how we have grown our business. Today, we have scale that can be leveraged to the advantage of our owners. Recent investments in people and new technologies will create sustainable efficiencies in the years ahead. In closing, Sitio is in a strong and advantaged position today in the minerals industry. Consolidation will continue and minerals assets will continue to migrate to bigger and more efficient companies like us.

We will continue to employ our proprietary practices to prudently manage our assets, maintain financial strength and create long-term value for our shareholders. Operator, we are now ready to take questions.

[Operator Instructions]

Our first question is from Neal Dingmann from Truist Securities. Please go ahead.

My first question, just could you talk about your various marketing deals and I'm just wondering how those compared? There's been a lot of market deals out there, how that compares to the number of deals which all will complete?

Neil, it's Chris. Great to hear from you. Just a couple of comments on the M&A environment. You noted the deals we evaluated and the deals we did. So it was a robust year from deals standpoint. The important thing to highlight really is the consistency of how we're delivering on the acquisition program. So you look at just the last couple of years, quarter in, quarter out, we continue to make the small and medium-sized acquisitions. Our capital -- our job here really is to allocate this capital most efficiently. Our capital is flowing to the highest rate of return opportunities. So as you can tell by the statistics that we mentioned in the call, we looked at hundreds of thousands of net royalty acres during the year and acquired 20,000 throughout the entire year. That's because those are the highest rate of return opportunities.

And we talk about IRRs around here because that is our North Star in terms of what guides us on all of our investment divisions. It's hard for people on the outside of the company to wrap their heads around it because we don't have all the data we have. So perhaps it helps to share some more information around where that shows up in the company. So it manifests in a couple of ways. One is when you look at the high cash flow yield on the deals that we did this year, as I mentioned in the call, cash flow yield over 25% on the next 12 months basis for the deals we did in 2025. The other place it shows up is in production per debt adjusted share since the time we've been public just since June of 2022, our production per debt adjusted share has grown by a compounded annual growth rate of about 20%.

So when we look at the 2024 program, 2 of the deals we did out of the 16 or actual auction processes. The remaining 14 were based on the relationships we have and its relationships with the mineral owners, and then it's supported by relationships we have with the operators who occasionally serve some information with us on line-of-sight, which helps underpin our underwriting. So a great job by the team this year at Sitio. I'm really proud of what everybody accomplished here on the acquisition program. And the more important thing for us looking forward is 2025 looks every bit is promising. The opportunity in front of us is enormous, not just sort of the art of the possible, but the actual tangible pipeline in front of us is large. So we're working our way through it, and we'll continue to allocate capital towards the highest rate of return opportunities.

And then a second, just most operators you now have plans on. I'm just wondering what does activity look like for the remainder of the year versus what you all were expecting?

Sorry, I had trouble hearing the question, Neil.

I'm just wondering,most operators have their plans out. And I'm just wondering, Chris, based on sort of expectations, whether it's in the Perm, DJ, you name it where your minerals are -- is activity about as you were expecting sort of start out the year and the way it looks for the remainder of the year?

Good question. Yes. So we've been watching our operator announcements closely and that does inform how we look at our guidance for 2025. The good news is the bulk of our guidance, almost all of it is underpinned by the spud and permits. So activity that's already commenced by the operators. So we don't have to believe a lot about what they're going to do with remaining inventory on our footprint. So in most of the cases, they've are spent some capital dollars to initiate some kind of activity on our minerals. So the guidance you see from us, which shows about a 3% growth year-over-year at the midpoint of our guidance is informed by not only the operator comments they're making but also by the actions they've taken spudding new wells and permitting new wells.

As you think about how it relates to our acquisition program, we don't guide or included in our guidance any contribution from acquisitions. So anything we do with our acquisition program in 2025, will be over and above that organic growth rate. I hope that addresses your question, Neil.

Our next question is from Derrick Whitfield from Texas Capital.

Congrats on a strong year-end closing update. For my first question, I wanted to build on Neal's question on guidance. As outlined, your 2025 guidance implies maintenance level activity versus Q4, while your line of sight activity implies growth. How would you frame your production trajectory and were there any outsized contributions from missing revenue or M&A that led to a stronger-than-expected Q4?

Yes. Thanks. So the missing revenue effort we have is really to collect things that we are already owed, and we already show in our revenue line. So that doesn't result in incremental revenue, but it does result in incremental cash recovered that we are owed and oftentimes require some extraordinary effort to recover. When we think about the 2025 production, we do see contribution from primarily the Permian, some from the DJ Basin as well. A lot of the activity we've done in recent years in the DJ Basin has been skewed more towards line of site development.

So when we think about longer term and more duration, it really is the Permian is where the activity will largely come from. And as we look at our footprint there, if you just exclude New Mexico, we have a lighter footprint that has some specifics that we can share with you on our percentage coverage. Now we talk about the entire Permian Basin. We cover about 36% of the entire Permian Basin. But then when you narrow it down to where our asset concentration is within that, that can cover on or some statistics for us.

Yes. So we have heavily our acreage. USG acreage coverage more percentage in the Texas part of the Delaware Basin up to around 56% and around 16% in New Mexico and with total basin coverage around 36%.

Terrific. And then maybe leaning in on your commentary on the robust fall flow for 2025, your M&A focus in recent quarters has been, as you noted, on the Permian and DJ. First kind of part to this question is, does the more constructive natural gas backdrop change the size of the opportunities that your teams are focus? And then more broadly and thinking about the value of your differentiated AI-driven asset management system, does that system change how you think about buying diversified packages where the market opportunity could be greater for the machine you've built?

Yes. Thanks. So I think the market opportunity for the investments we've made in people and systems really lends themselves to scale. I don't think any particular advantage for greater geographic diversification, it really is just an advantage of scale. So the investments we've made will pay off significantly as we continue to scale this business. It's really remarkable how we can just layer in more ones and zeros into our system that we've built that's scalable. When I think about the natural gas backdrop, I got this question over e-mail from a shareholders as well.

It's pretty favorable when you look at the gas macro. So global gas demand and then you have domestic gas demand from increased power generation needs for the electrification of everything, and then the buzz word lately in the data centers, and that's not a near-term that's probably several years away, but it's a great macro tailwinds for perpetual assets like ours. So when we look at our portfolio, we don't look at ourselves as light on natural gas because we do have quite a bit of natural gas exposure in the Permian and to a lesser extent, in the DJ Basin, just given the relative size of those footprints. Jarret has some statistics that you might find interesting on the trends in natural gas in the Permian that not a lot of people are talking about, but it's a reality. So I'll turn it over to Jarret.

Yes, Derrick, one thing that we've been looking at recently is trends in percent oil across the Permian over time. So we run these numbers internally. We also can find them at the short-term energy outlook at the EIA. If you go back to around 2021, the Permian was around 63% oil. And today, it's around 60% oil. So you're seeing nearly 1% a year of oil dropping in the Permian, and it's more pronounced in the Midland Basin. So that's something that we're looking at that not a lot of people are seeing. And with us having around half of our revenue from the Delaware basin, which has less of this effect compared to the Midland that's good for us, but we obviously have exposure to the Midland Basin.

So we're looking at that not only from an asset management perspective, but also how we think about our guidance. So that's why this year, you'll see a little bit less of the oil percentage for the year, and that's underpinned by the line of sight wells as well as what we're seeing on the PDP base that we already have. And I think your other question you mentioned, I'll just kind of jump in here on the -- on AI and how it affects acquisitions. Our acquisition underwriting is not explicitly exposed to the tools that we built that could utilize AI.

But the great news about that is, and probably one of the funnest parts of our business is once we acquire something, we're able to go back and recover revenue and barrels and dollars that the previous orders were not actively managing it, missed. So the asset management tools that we have are a really great way to improve the management of the acquisitions that we bring in-house. So that's something that for every single acquisition that we do, that we enjoy working on.

And Derrick, one other comment I'll make just on the natural gas pricing part of your question, we're really encouraged to see that the midstream companies is really staying ahead of propensity for the Permian to seeing wider basis differentials. So we're thrilled to see Blackstone and Warrior projects underway and expect to see more announcements like that at least trends that, Derrick, just walked through, continue to manifest themselves into reality.

Our next question is from Jarrod Giroue from Stephens.

First one is another one in regards to natural gas. Some of the Appalachia operators have provided guidance for increased gas production in the basin, whether it be this year over the next few years. Can you provide any color as if you looked at the mineral deals in Appalachia? Or would you see the deal flow in that basin?

Yes. Thanks for the question. We used to own some assets in Appalachia, the particular assets that we own were relatively mature compared to the rest of our portfolio. And we had a pretty unique opportunity to make a high rate of return acquisition. So again, in our position as capital allocators, we decided to target those assets and use those proceeds fund the DJ Basin acquisition we did, we closed on April 4, 2024. So we've been Appalachia before.

We think the world of the region has a geologic province. We're very, very fortunate as a country to have that resource and it's the enormous resource in place. They're very healthy operators in the region. As a mineral owner, there's a unique set of challenges for owning minerals in Appalachia. And a lot of it centers around the land situation. I can turn to Britt James from our VP of Land to describe some of those.

Yes. Thanks, Chris. The challenge that we have from the land side is to guide and share information publicly is that oftentimes the way that operators in space and put their drilling plans in place make it challenging for us to see what is going to happen in future development.

And then my second one is, could you give us some thoughts on strategic priorities for free cash flow allocation 2025 particularly regarding debt reduction, dividends, buybacks and investments in growth opportunities?

Suer. Yes. The first and foremost priority is returning capital to our shareholders is a really powerful business model that's capable of returning a lot of capital to shareholders. In fact, we've returned over $840 million to shareholders through dividends and buybacks just in the short time we've been managing this company. And I would expect this year with the commodity price environment we're in today for that number to exceed $1 billion. So, so far, we've returned approximately 30% of our market cap to our shareholders in a very short period of time.

So it's a really powerful business model to be able to return that much capital to shareholders. That said, there's also a very remarkable opportunity to reinvest. As I mentioned, these acquisition opportunities that are in front of us present really compelling rate of return opportunities for reinvestment. So we do look to use the retained capital for 2 purposes. One is to reinvest in high rate of return accretive acquisitions. And then also maintaining our very strong balance sheet. It is important to note that our cost of capital has turned out to be an advantage for us. And as we look at the bond market and the investors there are speaking with their price action. If you look at the yield on our existing bonds that it's close to 6% and that's a really compelling cost of capital relative to where we were not too long ago when our existing notes back in 2022 yielded in excess of 10%.

So remarkable improvement in our cost of capital. We have a tremendous amount of liquidity, over $400 million of liquidity. Our cash interest expense per BOE is down 17% year-over-year. So the maintenance of a really strong balance sheet is very important for us and reinvesting in high-rate return acquisitions is also important.

[Operator Instructions]

Our next question is from Tim Rezvan from KeyBanc.

First one was the housekeeping one. I was curious if you could provide some color behind the cash G&A increase. It looks like it's up about 25% year-over-year. I don't know if that's just Alyssa doing a good job with contract negotiations or if there's something more there? Any color would be helpful.

Thanks, Tim. I appreciate the question so does Alyssa. I think there's been a couple of things. One is we've made the investments in people and systems that will allow us to scale a lot larger from where we are right now. But the percentage that you mentioned is obviously has been a large percentage, but when we look at the absolute dollar increase year-over-year, you're talking about a $6 million or $7 million increase on a $4 billion enterprise. So I think you're talking about a lot of small numbers. Another interesting fact point is that our cash G&A for the entire year is effectively paid for by the first 3 weeks of royalty revenue for the year. So it's a remarkably scalable business from a G&A standpoint with the investments we've made, we're very optimistic about the future.

That makes sense. As my follow-up, you've got pretty successful play small ball with the nonmarketed deals. What's been interesting is you've had a willingness to go into kind of the DJ Basin, recognizing the strong economics there when you have permitted wells. There's a large operator. There's been discussions about potential mineral sale in that area with chatter around $1 billion. So can you provide any comments on that news or your willingness to go that big for the right deal?

Yes. I think it's less about how big the deal and more about how big the returns are. So risk-adjusted returns have to compensate us for the capital. So we look at large acquisitions all the time, in our existing basins and in other basins, but the risk-adjusted returns have just been better on the deals we've executed on. So that's how we've done it. The small deals that we've done in the DJ Basin in particular, have been heavily skewed towards existing production and spud wells, and then permits that are within the caps that have been approved. So it's -- from our standpoint, a proper risk-adjusted return. And then the Permian program looks a lot like what you've seen from us in prior year. So a good balance of existing production, line of sight wells and years and years of remaining inventory, a lot more duration than we see anywhere else.

And if I could just sneak a follow-up in just kind of close the loop on the acquisitions in the fourth quarter. Your oil SKU went down a bit. Can you just -- it seemed like that was from those acquisitions. Is that what's driving that lower oil SKU? You talked about the maturation of the Midland, but is that acquisition kind of the big driver of that?

Yes, that was definitely a component of it. But I think the important thing to note is that even without the acquisitions, we would have been right around the midpoint of the guidance on oil. So it's not like the oil volumes aren't coming through without acquisition, we're exceeding on oil for the full year from our guidance, but we're exceeding by a wide margin on natural gas for the dynamics that Jarret walked through.

Next question is from Noel Parks from Tuohy Brothers Investment. Please go ahead.

Just a couple. I apologize if you touched on this already. But with the deal environment, if we did have ahead of us a period of sustained higher prices, either for oil or gas, say, capital discipline persists and demand is good on the macro level, and we wind up sort of steadily at the higher end of recent trading ranges. Is that helpful or more hurtful as far as bid asking and getting people to agreement on deals?

It's a really good question because we've looked at this phenomenon of the interplay between commodity price environment or movement, and acquisition activity and sort of the gap between the bid and the ask on acquisitions. What we found is the least constructive environment for us is a rapidly declining price environment. That's why we find it that sellers tend to hold on to price expectations from just recent history.

Stable prices are adequate for us to transact in and rising price environments are as it as well. So I'd say the only one that's unfavorable is a rapidly declining price environment. But as you mentioned, what we've seen for quite a period now, is it's been a healthy, stable environment, maybe trending upward on natural gas more than oil but supportive for M&A activity.

Great. And again, something that we've seen more on the gas side, it's been such a good environment in nat gas. And as we look those -- the gas operators reporting year-over-year numbers, it looks like much better comps compared to the tough winter last year. So we definitely have seen also alongside capital discipline, this greater willingness to use curtailments as a way to address volatility, especially downward volatility, building DUCs and so forth.

And do you sort of see just your diversification by basin and by operator being the best defense against even increased lumpiness when operators react to what they see in the pairing shifts?

Yes, we view the diversification and the strength for a lot of reasons. But if you just look at our revenue for 2024, about 84% of it was oil. So with operators with that economic signal, there's almost not a gas price at which they would set in their oily wells. So we're really not exposed to the types of geographic regions where operators would shut in production because of just the gas prices. Clearly, we like gas prices to be stable and healthy for operators to produce, but we're really not exposed to that kind of environment.

Thank you. This concludes our Q&A session and consequently today's call. Thank you for joining. You may now disconnect your lines.