Sitio Royalties Corp. (NYSE: NYSE:STR) has announced a significant increase in operational and financial performance for the second quarter of 2024. The company reported a record high in oil production and adjusted EBITDA, alongside a substantial 45% increase in return of capital per share from the previous quarter. Sitio Royalties also highlighted the closure of six acquisitions, adding over 2,100 net royalty acres to their expansive portfolio, primarily in the productive Permian and DJ Basins. The company has raised its full-year production guidance and lowered its cash tax guidance, while also maintaining a focus on returning a substantial portion of discretionary cash flow to shareholders without compromising its balance sheet strength.
Key Takeaways
- Sitio Royalties achieved record oil production and adjusted EBITDA of $151.6 million.
- The company increased return of capital per share by 45% compared to the previous quarter.
- Six acquisitions were closed for a total of $38.5 million, adding over 2,100 net royalty acres.
- Full-year 2024 production guidance raised to 36,000 to 38,000 barrels of oil equivalent per day (BOEs/day).
- Cash tax guidance for the year lowered to $9 to $15 million.
- Repurchased 3.1 million shares as part of capital return strategy.
- Focus on returning at least 65% of discretionary cash flow to shareholders, with no trade-off between buybacks and debt reduction.
Company Outlook
- Sitio Royalties expects to continue its growth trajectory with increased production guidance.
- The company remains committed to strategic acquisitions in a competitive market.
- Management is confident in the stability of its operator base, with a shift towards larger operators.
Bearish Highlights
- The minerals and royalties market remains highly competitive, potentially impacting future acquisitions.
- Line of sight wells have seen a decrease but are partially recovering, with no significant expected decline.
Bullish Highlights
- Record high production and financial results demonstrate strong operational performance.
- Successful closing of multiple acquisitions indicates a robust growth strategy.
- The company is well-positioned with a strong balance sheet and a focus on shareholder returns.
Misses
- No specific misses were discussed in the earnings call.
Q&A Highlights
- Chris Conoscenti clarified the company's strategy on allocating cash between buybacks, debt reduction, and dividends, emphasizing a balanced approach without sacrificing one for the other.
- The rig count is used as a proxy for activity, and despite a sequential decrease in line of sight wells, recovery is underway with activity expected to align with historical averages.
Sitio Royalties Corp. continues to navigate a competitive market landscape with a strategy focused on operational excellence, strategic acquisitions, and shareholder value enhancement. The company's robust financial position and commitment to capital discipline underscore its resilience and potential for sustained growth in the dynamic energy sector.
InvestingPro Insights
Sitio Royalties Corp. (NYSE: STR) has showcased a strong performance in the second quarter of 2024, with significant operational and financial achievements. To further understand the company's position and future potential, let's delve into some key metrics and insights from InvestingPro.
InvestingPro Data reveals that Sitio Royalties Corp. has a market capitalization of $3.48 billion USD. Despite a negative P/E ratio of -105.82 indicating that the company has not been profitable over the last twelve months, there is an expectation of a turnaround with an adjusted forward P/E ratio of 50.79, which suggests that analysts believe the company will become profitable within the year. Additionally, the company's dividend yield stands at an attractive 7.37%, reflecting its commitment to returning value to shareholders.
InvestingPro Tips highlight that analysts are predicting net income growth for Sitio Royalties this year, which aligns with the company's reported increase in production and adjusted EBITDA. Moreover, the company operates with a moderate level of debt and has liquid assets that exceed its short-term obligations, indicating a strong balance sheet. These factors are crucial for investors considering the company's ability to sustain growth and manage financial obligations effectively.
For investors looking for further insights, there are additional InvestingPro Tips available at https://www.investing.com/pro/STR, which can provide a more comprehensive view of the company's financial health and market potential.
Full transcript - Sitio Royalties Corp (STR) Q2 2024:
Operator: Hello everyone, and a warm welcome to the Sitio Royalties Second Quarter 2024 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: Thanks operator and good morning everyone. Welcome to the Sitio's Royalties second quarter 2024 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.cydio.com or you will find them in our regressive 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'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 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 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 TJ 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 (NYSE:F) production of 20,991 BOEs per day and 4061 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 turn 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 AMD (NASDAQ:AMD) 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 six acquisitions during the quarter for an aggregate purchase price of $38.5 million. These six acquisitions added over 2100 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 six small acquisitions we completed in two q 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: 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 share for the second quarter, comprised of share, cash, dividend and stock repurchases equating to 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 had 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 nine 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. [Operator instructions]. Our first question today comes from Neal Dingmann with Truist Securities. Please go ahead.
Neal Dingmann: Morning guys. Thanks for the time. My first question, Chris, is on your activity specifically. I'm just wondering. 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 way to ask that is your line of sight. Well, still as strong as ever.
Chris Conoscenti: Good morning, Neil. 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 operators doing more with less. So the migration of assets into larger operators hands 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 draw longer laterals and enhance completion design. We are seeing sort of a flattish rig count, flat to down-ish, fracked through count. But it isn't really meaningfully impacting the number of wells getting turned in line, which tells us that operators are continuing to achieve the efficiencies that we like to see in terms of the line in sight wells. Yes, we did see a decrease in the net line of sight wells, but gross activity has remained relatively constant.
Neal Dingmann: Great details. And my second question is just on M&A, just wondering what, you know, when you look at deals out there right now, is there any one area that's more active right now than others? Thank you.
Chris Conoscenti: The most active areas for us continue to be the Permian Basin and the DJ Basin. From a rated 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, relationship driven approach. And in the DJ basin there's some really 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: Hi, good morning. 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 heading further South in the Delaware, for instance, where the prolific tend to be gassier. 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 just curious about your current thoughts.
Chris Conoscenti: 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 it by 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 Hainesville. If the opportunity presented itself at the appropriate rate of return for us.
Noel Parks: Great, fair enough. And also, as you mentioned a little bit earlier, just operators doing more with less and that general tend of greater sort of capital efficiency. And I just wondered if you had, if there with that trend hasn't gone on as long as it has, do you feel like operators pretty uniformly in your basin are sort of headed in the right direction with that? Or I wonder if, for instance, you're seeing much in the way of private operators being more aggressive, ramping up production, potentially within 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 appear to 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 of paying and so forth.
Chris Conoscenti: 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 tag in mind, and they don't get rattled by some volatility that can be short term. So we like that stability in the operator base as our asset has evolved over time. You've seen our operator mix shift from a lot of private, a lot of Smith cap names to really the largest of the large from Chevron (NYSE:CVX), Exxon (NYSE:XOM), Oxy, Conical, Phillips, Diamondback (NASDAQ:FANG), etcetera. 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. Great.
Operator: The next question comes from Tim Rezvan with KeyBanc. Please go ahead.
John Vinh: Hi, this is John on for Tim. Thanks for taking our questions. 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?
Carrie Osicka: Good morning, 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 these larger acquisitions are going to be more episodic, and they tend to be years in the making instead of a quick one or two week turnaround, as we see 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 on the larger acquisitions is just not as good just because they take longer to develop. But we're working on transactions of all sizes, and really it's just going to depend on where we can allocate the capital to get the best rate of return.
John Vinh: 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 we just want to see how the board's currently thinking about this.
Carrie Osicka: 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 pre payable debt and to preserve maximum balance sheet flexibility so that we can take advantage of cash acquisition. 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 pre payable 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 one times so that we have the balance sheet flexibility to make a large cash acquisition on the future.
Operator: Thank you. Our next question comes from Betty Zhang with Barclays (LON:BARC). Please go ahead.
Betty Zhang: Good morning. Thanks for taking my questions. Maybe I'll start with buyback. And that's a good follow up from the last question. Just given second quarter, we actually see pretty outsized buyback and including some in the open market. Wondering your thoughts around that buyback against debt reduction from uses of cash going forward? Thanks.
Chris Conoscenti: Yes, thanks for the question, Betty. I'm glad you asked. We just, we actually got an email from a shareholder asking the same question about the thought process on the allocation between dividends and buybacks and debt pay down, so 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. I 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 this past quarter and in the first quarter, to repurchase stock well below what we believe is 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 used 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 make the buyback or do we pay down debt? Oh, got it. That makes sense.
Betty Zhang: And follow up practice on the line of sight activity as line of set backlog. Understand that the second quarter line of sight is down from one q and that is reflecting the very high number of tills in one. So looking forward, just wondering your thoughts about the net line of sight activity across the portfolio against the historical trends that you haven't seen? And I really appreciate the additional disclosure on tail counts as well. Thanks.
Chris Conoscenti: Sure. I'll make a quick comment and I'll turn it over to Jared 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 was slightly above the 2023 historical average where second quarter, we had about 8.5 net deals in the quarter. And I think you're referring to the first quarter, which was a bit of an anomaly. So I'll let Jared cover the rest.
Carrie Osicka: Sure. Hi Bettyev, 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 gross 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 it 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 our historical averages.
Operator: Thank you. [Operator instructions]. As we have no further questions registered. This concludes today's.
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