Sitio Royalties Corp. (NYSE:STR) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good morning and thank you for attending Sitio Royalties First Quarter 2023 Earnings Call. My name is Felicia, and I’ll be your operator today. All lines will be muted during the presentation portion of the call with an opportunity to question-and-answer at the end. I would now like to pass the conference over to your host, Ross Wong, Vice President of Finance and Investor Relations. You may proceed.

Ross Wong : Thanks, operator. And good morning, everyone. Welcome to Sitio Royalties’ first quarter 2023 earnings call. If you don’t already have a copy of a 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 our first quarter 2023 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’d 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.

Chris Conoscenti: Thanks, Ross. Good morning, everyone. And thank you for joining Sitio’s first quarter 2023 earnings call. There’s one word that captures the theme from this quarter, uneventful. For the first time in two years, we did not announce or close any acquisitions during the quarter. And for the first time since becoming public, there are no pro formas or partial period results in our reported financials. Integration of the Brigham assets and personnel is complete with nothing unexpected to note. During the first quarter production associated with Sitio’s assets averaged 34,440 barrels of oil equivalent per day, which is comparable to the 34,424 BOEs per day produced from these assets in the fourth quarter of 2022.

First quarter production volumes were in line with our expectations and we are reaffirming Sitio’s full year 2023 production guidance range of 34,000 to 37,000 BOEs per day. We estimate that in the first quarter, there were 7.3 new net wells that started producing on Sitio’s acreage, more than 95% of which are in the Permian Basin. These new net wells represent Sitio’s interest in wells publicly known to have come online during the quarter, plus sitios interest in net wealth still identified as spud in public data sources, but are estimated to have started producing during the quarter based on market intelligence and our forecasting methodology. As of March 31, we had 42.8 net line of sight wells, which implies steady operator activity over the next 12 to 15 months on our assets, particularly relative to the cumulative total of 141.3 net wells that have come online since the beginning of 2019.

The first quarter of 2023 demonstrated quite different M&A dynamics in the past three years. During the first quarter, we evaluated multiple acquisitions, totaling approximately 50,000 net royalty acres in aggregate, but were unable to find any opportunities that met our returns criteria. Buyers and sellers are still transacting, but at different underwriting assumptions and returns threshold Sitio’s. We remain focused on achieving a minimum of mid-teens unlevered returns using strict pricing and future development assumptions aligned with actual operator behaviors. I will provide you with one recent example of a private buyer and private seller. The market clearing purchase price in this example was approximately two times the price that Sitio could have paid using our returns parameters.

The only way we could have justified paying the same purchase price would have been to either assume a near term production profile of four times to five times our base case production assumptions, or an average oil price of approximately $140 per barrel in perpetuity, using our production assumptions. In this example, paying the market clearing purchase price whatever resulted in mid-single-digit returns for our shareholders, which clearly does not meet our hurdle rate. We believe attractive consolidation opportunities exist with mineral owners we know and have been pursuing for years and we will continue to be disciplined and good stewards of capital. Now turning to some key financial metrics for the quarter. Overall, our financials came in as expected, and were within the range of our full year of 2023 guidance metrics with the exception of our implied cash tax rate, which I will describe in more detail later.

Our average hedged realized price per BOE for the first quarter was $48.87, which was $8.61 or 15%, below the fourth quarter of 2022. And we reported adjusted EBITDA of $140 million and discretionary cash flow of $120 million. First quarter cash G&A was $6.1 million, a $2.2 million increase relative to 4Q 2022, since this was the first full quarter with former Brigham employees on the Sitio payroll. However, we achieved a significant milestone with 1Q ’23 Cash G&A of $1.97 per BOE, the lowest ever in Sitio’s history and the first quarter, in which cast G&A per BOE has been below $2. Another important point on the G&A topic is the magnitude of the absolute G&A savings that have been achieved through the 2022 combination of Desert Peak and Falcon to form Sitio and Sitio’s merger with Brigham.

If you add up the cash G&A from the first quarter of last year, when all three of those companies were independent of each other, the total cash G&A was $11.3 million, compare that to our first quarter 2023 cash G&A. And you can see that we have reduced the absolute amount of cash G&A from all three entities by 46%. This is a great illustration of the scalability of our business model, and of the value to be created for our shareholders by consolidating this highly fragmented industry. Due to timing differences, cash taxes in our financials can be somewhat confusing relative to our guidance. So I wanted to go over this in more detail. 1Q’23 cash taxes reported in our financials represent the cash taxes paid in the first quarter, not the taxes payable related to taxable income for the first quarter.

In January, we made a cash tax payment of $550,000 for income taxes related to taxable income in the fourth quarter of 2022. This was the only cash tax paid during 1Q’23. So the implied reported cash tax rate is 1% for the first quarter. Similarly, in April, we made a cash tax payment of $5.9 million for income taxes related taxable income in the first quarter of 2023. So the first quarter of 2023 estimated cash tax rate would have been 11% without timing differences. In addition to the $5.9 million of cash taxes that was paid in April, we plan to make another cash tax payment during the second quarter related to income taxes due for 2Q, 2023, which we expect to be approximately 11% to 13% of second quarter pre-tax income. Our board declared a dividend of $0.50 per share using a payout ratio of 65% for the first quarter of 2023, which will be paid on May 31.

Two recordholders at the close of business on May 19. This dividend is down by $0.10 per share relative to the dividend in the fourth quarter of 2022. So I wanted to provide some details to help explain the variance. Lower commodity prices decrease the dividend by roughly $0.11, lower production volumes driven by two fewer days in the quarter decrease the dividend by another $0.016 cents. And the combination of lower release bonus higher cash G&A and higher cash interest decreased the dividend by $0.018. These decreases were partially offset by an increased dividend of $0.026 cents due to lower cash taxes and the combination of lower severance and [Indiscernible] taxes, lower gathering and transportation expenses and higher realized hedging gains, which added another $0.018 to the dividend.

Our first quarter dividend of $0.50 per share benefited from paying cash taxes related to the first quarter in April and if all income taxes have been paid in the quarters that they were related to our first quarter dividend would have been approximately $0.47 per share. Moving on to the balance sheet. At the end of March, we made another amortization payment at par of $11.25 million on our unsecured notes bringing the remaining amount outstanding principle to $427.5 million. We also paid down our credit facility balance by $23 million during the first quarter. On April 28, our lenders reaffirmed our $750 million borrowing base. And as of May 5, 2023, we had reduced the outstanding balance on our credit facility to $441 million, which is an additional $46 million reduction since the end of the first quarter, providing liquidity of approximately $315 million, including $6 million of cash and $309 million of remaining availability on our credit facility.

I want to remind shareholders that we filed our 2023 Proxy Statement on March 31, and that our virtual annual investor meeting is scheduled for Tuesday, May 16, 2023 at 11 am Central time, whether or not you plan to attend the annual meeting, it is important that your shares be represented. So I highly encourage all shareholders to vote. I’m proud of the differentiated business that we have built and think the proxy statement does a good job highlighting the accomplishment of the company and our best-in-class governance model, which provides strong alignment between the board, management team and shareholders to drive long-term value. That concludes my prepared remarks. Operator, please open up the call for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a third question from Tim Rezvan of KeyBanc Capital Markets. Please go ahead, sir. Your line is now open.

Operator: Next question, we have come from TJ Schultz from RBC Capital Markets. Please go ahead.

Q&A Session

Operator: The next question, we have come from John Annis from Stifel. Please go ahead.

Operator: Next question we have comes from Noel Parks from Tuohy Brothers.

Operator: [Operator Instructions] Since we have no further questions registered, this concludes today’s call. Thank you all for attending. You may now disconnect your lines.