Sitio Royalties' third quarter 2023 earnings call revealed a steady performance despite a slowdown in drilling activity, as reported by CEO Chris Conoscenti. The company maintained average daily oil production of 17,576 barrels and total production of 36,900 BOEs per day. Adjusted EBITDA and discretionary cash flow stood at $142.4 million and $117.3 million respectively. The sale of their Appalachia and Anadarko Basin assets for $117.5 million was also announced, with the transaction expected to close by year-end.
Key takeaways from the call:
- Sitio Royalties maintained a steady production rate despite a drilling slowdown, with 9.5 net wells turned in line during the quarter, primarily in the Permian Basin.
- The company generated $142.4 million of adjusted EBITDA and $117.3 million of discretionary cash flow in the third quarter, indicating a healthy financial performance.
- A consistent dividend payment of $0.49 per share of Class A common stock was declared.
- The sale of the Appalachia and Anadarko Basin assets, which were lower margin and subscale, was announced for $117.5 million in cash. This divestiture is expected to reduce Sitio's total debt to approximately $864 million post-transaction.
- Sitio is investing in automation projects to manage a larger asset base efficiently and remains focused on reducing leverage and pursuing accretive acquisitions.
During the call, Conoscenti also touched on the recent mergers and acquisitions in the E&P industry, stating that the impact on land and royalty accounting varies depending on the specific transaction and the behavior of the companies involved. He noted that recent consolidation activities have been neutral to positive, with companies like Exxon (NYSE:XOM) signaling operational efficiencies and no decrease in activity.
The CEO further elaborated on the sale of the Appalachia and Anadarko assets, stating that the transaction had been in the works for some time and would help fund other acquisitions. The simplification arising from this transaction is seen as a positive move, reducing the workload for the internal team.
The call concluded with an overview of operational efficiencies and revenue remittance among companies in the industry, noting no significant difference in behavior between small private independents and large public companies. The company's focus remains on leveraging recent deals, like those made by Exxon and Pioneer, to maintain capital discipline.
InvestingPro Insights
InvestingPro's real-time data and tips provide additional insights into Sitio Royalties' current financial status and future prospects.
InvestingPro Tip 0 indicates that net income for Sitio Royalties is expected to grow this year, aligning with the company's steady performance despite the drilling slowdown. This is further supported by Tip 1, which anticipates sales growth in the current year.
InvestingPro Tip 5 highlights that Sitio Royalties' liquid assets exceed its short-term obligations. This suggests a healthy financial status, which is in line with the company's reported adjusted EBITDA and discretionary cash flow of $142.4 million and $117.3 million respectively.
Finally, InvestingPro Tip 9 indicates that the company has been profitable over the last twelve months. This is consistent with the company's steady performance and the CEO's positive outlook for the future.
For more detailed insights and additional tips, consider exploring InvestingPro's platform. It includes a wealth of information and over 200 additional tips to help you make informed investment decisions.
Full transcript - STR Q4 2023:
Operator: Hello, and welcome to the Sitio Royalties Third Quarter 2023 Earnings Call. My name is Alex, I'll be coordinating the call today. [Operator Instructions] I’ll now hand over to your host, Ross Wong, Vice President of Finance and Investor Relations. Please go ahead.
Ross Wong: Thanks, operator, and good morning, everyone. Welcome to the Sitio Royalties Third Quarter 2023 Earnings Call. If you don't already have a copy of our recent press release and update investor presentation, please visit our website at www.sitio.com, where you will find them in our Invest Relations section. With me today to discuss third 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 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 will turn the call over to Chris.
Chris Conoscenti: Thanks, Ross. Good morning, and thank you for joining Sitio's third quarter 2023 earnings call. We have a very productive third quarter across multiple aspects of our business. Operationally, our assets have continued to perform well, despite the slowdown of drilling and completion activity across the Permian Basin and broader United States, where quarter-over-quarter horizontal rig count was down by 7% and 11%, respectively. For the third quarter, we reported average daily oil production of 17,576 barrels per day and average daily total production of 36,900 BOEs per day. When excluding prior period adjustments, our oil production in period was 18,219 barrels per day or 50% of total volumes, which is in line with both the midpoint of our guidance for implied barrels and percent oil. We estimate that during the third quarter, there were 9.5 net wells turned in line on our assets with 72% and 19% of the overall activity in the Permian and DJ Basins, respectively. This was a shift from second quarter activity where 87% of our turn in line wells were in the Permian Basin and there was minimal activity on our DJ Basin assets. As of September 30th, we had 50.9 net line of site wells and despite healthy development activity across our acreage during the quarter, our net line of site wells remained essentially flat relative to June 30, implying full replenishment of our line of site inventory. The Permian Basin continues to account for approximately 80% of our total line of site wells and is where we expect the majority of our operator activity to occur in the next 12 months to 16 months. Turning to financial results, we generated $142.4 million of adjusted EBITDA in the third quarter, which was up by 12% relative to the second quarter, primarily due to additional volumes from the five previously announced acquisitions and higher realized unhedged commodity prices. We reported third quarter discretionary cash flow of $117.3 million, which is up by nearly 24% relative to the second quarter. This was driven by the increase in adjusted EBITDA I just commented on and the decrease in cash taxes, which were $7.8 million lower than the second quarter because of a corporate tax credit related to the Brigham merger. Our board declared a third quarter cash dividend of $0.49 per share of Class A common stock based on a 65% payout ratio. The dividend is payable on November 30th to stockholders of record at the close of business on November 21st. This is now the sixth consecutive quarter that we've declared a dividend to shareholders using a 65% payout ratio. And in aggregate, we have declared total dividends per share of $3.42 since we became public in June of 2022, which represents approximately 14% of our 30 day volume weighted average stock price. Going forward, we plan to use accrued interest expense instead of cash interest expense paid during each quarter in our calculation of discretionary cash flow, which will help smooth out discretionary cash flow because the interest expense on our new notes is paid semi-annually. On the strategic front, our four previously announced cash acquisitions closed in July and August. I'm also pleased to announce that we have signed a definitive agreement to sell our entire Appalachia and Anadarko Basin assets, which generated $3.8 million of oil, gas, and NGL revenues in the third quarter for $117.5 million in cash, subject to customary closing adjustments. Our position in each of these basins was subscale relative to our company size, and the margins from these assets are substantially lower than our company average, given the gassier nature of the commodity mix. These assets had 0.7 net line of site wells as of September 30th, so our line of site inventory will be 50.2 net wells pro forma for the divestiture. In aggregate for 3Q 2023, Appalachia and Anadarko contributed only 0.4 net wells turn in line out of 9.5. This compares to Appalachia and Anadarko wells turn in line of 0.1 out of 8.1 total in 2Q of 2023. The divestiture has an effective date of September 1st and is expected to close near the end of the year. Pro forma for this divestiture, our total debt as of November 3rd would be approximately $864 million, and our liquidity under our reserve-based loan would be approximately $588 million, assuming a flat borrowing base of $850 million. Turning to financing activity during the quarter, we increased our borrowing base from $750 million to $850 million, which is a 13% increase. And we issued $600 million of senior unsecured notes due in 2028, which allowed us to refinance our existing senior unsecured notes, decreased our expected interest expense by $11 million per year, and free up additional liquidity under our revolver. We currently remain focused on reducing our leverage to our long-term target of one-times EBITDA or less and working on accretive acquisitions. That concludes my prepared remarks. Operator, please open up the call for questions.
Operator: Thank you. [Operator Instructions] Our first question for today comes from Derrick Whitfield Stifel. Your line is now open. Please go ahead.
Derrick Whitfield: Good morning, all.
Chris Conoscenti: Good Morning, Derrick.
Derrick Whitfield: For my first question, I wanted to focus on your Q3 production and your six to 12 month production trajectory. Regarding the quarter, we've heard from several operators in industry that they've experienced production impacts from elevated temperatures and brownouts in the Delaware. I wanted to ask if you're seeing evidence of that in your data? And then regarding your trajectory, your implied Q4 guide at the midpoint and your line of sight activity versus maintenance activity, both incurred meaningful production growth. How would you frame your production trajectory over the next several quarters?
Chris Conoscenti: Thanks for the question. Just first on the Q3 production question, we heard some of the same comments, but fortunately with an asset base like ours, which is much more diversified, any impacts like that are going to be far less pronounced than for somebody with a much more concentrated asset base. And given that we have assets across the entire Permian Basin and several other basins, localized issues like the ones you described, just don't show up in a meaningful way in our results. So that's the power of diversification across our asset base. Your second part of your question about the production trajectory. You're correct. The line of sight inventory of 50.9 net wells or 50.2 pro forma for the divestiture we announced is a healthy volume of line of sight wells. And as we look at our wells required to keep the production flat on our asset base, it's in the high single digit net wells per quarter. And so, with 50.2, that's above that high single digits per quarter. On average, if these wells are getting turned in line in the next 12 to 16 months. So it does imply some growth from where we are today. Again, given how diversified our asset base is, you should expect the growth of our assets to reflect the broader Permian Basin. And Permian Basin is not growing at double digits. It's growing at single digits, and that's what our line of sight inventory implies and what our guidance implies.
Derrick Whitfield: Terrific. And for my follow-up, I wanted to ask if you could elaborate on some of the technical projects you referenced in your prepared remarks and the impact they could have on your organization?
Chris Conoscenti: Sure. We're very excited about these investments we're making in our business. And these are all in an effort to be able to manage a much, much larger asset base than we have today without adding to G&A in the future. So we made these initial investments starting years ago when we built our data management system so that our land, engineering and accounting systems all talk to each other automatically every single night. They scrape the public domain every single night for updates on our asset and across assets we don't own. And that allowed us to continue to add more data to our system seamlessly. What we're doing now is investing in automation so that as we see more and more data coming at us every single month on more wells, our people are freed up from doing more manual tasks to doing more interesting things like pursuing missing revenue from operators. So some of the automation projects we've focused on this year are centered around things like revenue and division orders from operators. There's a significant amount of revenue data that comes out every month on over 20,000 gross wells. And we get hundreds of division orders every month. And there's no need for human hands to touch every single one of those pieces of information. Computers are perfectly capable of processing that information with the right systems in place and without losing the granularity of detail that we expect that we need for pursuing missing payments. So when we track our data, we're tracking it at the API level, and we're tracking it by commodity, by production period, and by operator. So in order to do that, you have to have an exceptional level of granularity, and we don't lose that with these automation tools that we're building ourselves.
Derrick Whitfield: It's very helpful. Thanks for your time.
Chris Conoscenti: Thank you.
Operator: Thank you. [Operator Instructions] Our next question comes from Noel Parks of Tuohy Brothers Investment. The line is now open. Please go ahead.
Noel Parks: Hi, good morning.
Chris Conoscenti: Good morning, Noel.
Noel Parks: So, of course, in the last month we've had a couple of big transactors with the majors doing some bulking up again. And I was just curious, in scenarios like that, generally just curious what happens sort of with land and royalty accounting. I could see it either going to the majors being sort of not very attentive to that or possibly having big staffs to throw at that. So I just wondered if that might have any implications for what -- things that might come to the market [indiscernible] sort of rationalized portfolio.
Chris Conoscenti: Yes. So in terms of behavior we've seen in the past, it really varies and it's hard to make any sweeping generalizations across every transaction. Just in terms of activity levels, we've seen mergers among E&P companies in the past that were not good for us. So for example, when Oxy and Anadarko got together, that was bad for us, because they came together at a time of declining commodity prices and they had elevated leverage on a combined basis and they cut their combined capital program. So that was not good for the mineral owners. The more recent vintage of E&P consolidation, I would say, is neutral to positive for the mineral owner, particularly when you look at some of the commentary coming out of folks like Exxon following their Pioneer announcement, where they didn't signal any decrease in activity, which is the most important thing for the mineral owner. And they are actually signaling operational efficiencies, which is positive for us. Now, in terms of the specific question you asked about their focus on us and attentiveness to things like revenue remittance. Again, we don't see any meaningful difference in behavior. There are small private independents that are slow and inattentive. There are large public companies that are slow and inattentive. Likewise, there are large and small companies that are very good at what they do in terms of handling the revenue and division orders. So it just varies by company. And frankly, it varies over time by company, depending on how their focus shifts. So, I really don't have any general observations to make in terms of the attentiveness to the revenue and division order work from consolidation.
Noel Parks: Well, thanks. That was interesting. And you mentioned something that was next on my mind, just that the remark from Exxon was that they didn't seem to be cutting rigs. I understand what you're saying about Oxy, Anadarko having been the exception, but of course, these recent deals are, I think, both all stock. So there are overnight implications for leverage that create pressure on them. So, it would seem like that's a good sign going forward if they're looking to do efficiency kind of operationally instead of just cut rigs to sort of flatten out their group and harvest cash flow.
Chris Conoscenti: Yeah, that's a great point. And the fact that the E&P companies have really made tremendous progress on improving their capitalization and their capital discipline. It's encouraging that these companies are coming together at this time where there are no balance sheet impacts like you described. And [indiscernible] for the specific transaction we're talking about with Exxon and Pioneer. Pioneer has best-in-class assets, best-in-class acreage. And so, it feels like that's going to compete well for capital within Exxon's portfolio, and we're excited about continued exposure there.
Noel Parks: Good deal. And then just my last one, of course, had the transaction announcement today of selling off Appalachia and Anadarko. And I'm just curious how long that was in the works, whether it was something came together pretty easy or kind of a lot of back and forth.
Chris Conoscenti: Yes, these things are never perfectly smooth and there is a lot of back and forth. We want to make sure we're getting the best price for your shareholders. And so it's been in the works for a while now, but what we did is, we looked at the money we were spending for the acquisitions we made this year for cash. And this was a nice way to try to fund a portion of that and it fit nicely in the capital program this year.
Noel Parks: Right, right. The simplification certainly must be welcomed to some degree. It makes the story and your focus a little bit more contained.
Chris Conoscenti: Yes, our land and accounting folks are doing cartwheels. It's an interesting dynamic when you have assets in a region that are small relative to other regions that we have. And so just having subscale positions in these basins required a disproportionate amount of attention from the internal team. So it does simplify our work quite a bit.
Noel Parks: Right, right. Kind of what I was thinking. Okay, well thanks so much. Thanks for the time.
Chris Conoscenti: Thank you.
Operator: Thank you. [Operator Instructions] Okay. At this time we currently have no further questions, so that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
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