Q3 2022 Sitio Royalties Corp Earnings Call

Ladies and gentlemen, welcome to the secure royalties from quarter to neutral to earnings call. My name is Glenn and I'll be monitoring todays call.

If you'd like to ask questions. During the presentation you may do so by pressing star one or a type of keybanc.

Now I'll hand, you over to your host Roselawn senior director of corporate Finance and Investor Relations to begin Ross. Please go ahead. Thanks, operator, good morning, everyone.

Welcome to the third.

Third quarter of 2020 earnings Paul.

You don't already have a popular way possible.

I believe you have the presentation. Please visit our website at www.

Paul.

Yes.

Okay.

With me today, its best third quarter in 2020 financial and operating results.

Our Chief Executive Officer, Harry as people, our Chief Financial Officer, and other members of our executive leadership team.

We start.

While we don't have as much.

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 that's cool.

Thanks, Ralph Good morning, everyone and thank you for joining <unk> third.

<unk> third quarter 2022 earnings call.

Had another great quarter as we continued to execute on a large scale consolidation strategy.

Also refinanced our bridge loan flexible capital solutions and make progress like we have done every.

Every quarter, developing ethane and improving our processes to enhance the scalability of our business model.

Despite a double digit percentage decrease in realized commodity prices for the third quarter versus the second quarter, we are increasing our dividend from <unk> 71 per share for the second quarter at <unk> 72 per share for the third quarter.

Clear demonstration of the accretive nature of the transactions we have closed this year.

The highlight of the quarter was the announcement of our off box at market transactions with Brigham minerals.

Which was our largest ever public merger and the mineral sector. This transaction brings additional high quality assets into our company dramatically increases the public float of our stock.

This is our leverage statistics and has a significant benefit of giving us the opportunity to bring additional talented employees to Cynthia.

Since announcing the transaction we have spent a significant amount of time with the board and employees to identify where their skill with respected with our needs today and our plans for future growth.

Excited to announce the Dax Mcdavid, who is currently SVP of exploration will be joining as CEO . After the transaction closes in the newly created role of EVP of corporate development.

Many of you know that already is a geologist by background and has built an impressive network of relationships throughout the upstream oil and gas and mineral and royalty sectors in his new role Dax will be responsible for leveraging these relationships and technical expertise as we continue to consolidate high quality mineral and royalty assets.

He will also work closely with our technical land and corporate finance team to develop new ways to differentiate <unk>.

From other minerals company.

In addition to that we have identified 13 other program professionals across every functional group on the company, including geology Engineering land, Gis and accounting who plan on staying with shipyard post close which will bring our total head count to 49 employees.

On October 11, we filed a merger proxy with the SEC and we are currently working through their review process and expect to respond to the FCC first set of comments.

There will not be approximating presidio shareholders. Since the transaction was already supported by city or three largest shareholders, who own approximately 84% of the equity.

There will be approximating for premium shareholders. However, exact timing of that meeting will be determined by the length of the SEC review process.

Upon closing of the Brigham transaction, we plan to put a new revolving credit facility in place that is appropriately sized for the combined company.

While the new revolver side that needs to be determined by going through our syndication process with our bank group I can provide some context for how frame situations.

Currently on a combined basis <unk> and <unk>.

Standalone revolvers have a borrowing base of $590 million, which has not been adjusted upward for recent acquisitions, including foundation momentum in Nevada and aggregate. These acquisitions added more than 35000 net royalty acres for an aggregate purchase price of more than 650.

Yeah.

And should add a meaningful amount of reserves to support an increased borrowing base.

In late July we closed on the acquisition of more than 12200, NRA from momentum minerals, which is turning out to be one of our best acquisitions to date and is already outperforming our underwritten production forecast.

These assets in combination with our minerals and royalty acquired from foundation minerals in June had strong visibility to near term activity and comprised approximately 32% of our line of sight wells as of September 30.

We funded both acquisitions, primarily with proceeds from a $425 million bridge loan we evaluated a wide range of alternatives to refinance the bridge loan and I'm pleased to have identified a solution that met all of our needs, including a competitive cost of capital no impact on our existing ability to continue to pay our dividend even in low.

Commodity price scenarios and structural flexibility.

On September 20, <unk>, we issued $450 million of senior unsecured notes to a small group of private lenders and used the proceeds to fully retired a bridge loan.

We negotiated the terms of these notes to ensure they were tailored for our business and structured as the best solution for our company at the time.

It is important for us to maintain a large amount of pre payable debt because of how much cash flow our business generates and the notes allow for up to 10% amortization of the initial principal per year at par, which we plan to take full advantage of.

The notes also only have a one year non call period, and lower coal pricing than traditional public bonds, which provides the flexibility to refinance as early as September of next year, if credit markets are in a better state.

Our first quarter financials included a full quarter of results from the acquired bucket minerals and foundation minerals assets and roughly two thirds of a quarter of results from our momentum minerals acquisition, which closed in late July .

Since this was the first full quarter with several of our newly acquired assets.

We had many record high metrics, including average daily production of 18000 Boe's per day, adjusted EBITDA of $106 $3 million and discretionary cash flow of $93 $4 million on a pro forma basis, including a full quarter of production volumes from the momentum acquisition, our third quarter.

Production would have been 18571 Boe per day.

All these headline numbers are notable and a reminder of how rapidly we have been executing on our large scale consolidation strategy I think it's most important to look at some of the key metrics that drive shareholder value and future growth.

We declared a third quarter dividend of <unk> 73 per share based on a 65% payout ratio of our discretionary cash flow.

This represents a 1% increase relative to our second quarter dividend, even though average unhedged realized prices were down 14% from $76 55 to $65 71 or nearly $11 per Boe.

We also had $2 $7 million in realized hedging gains during the quarter, which was a direct result of the commodity hedging we put in place related to the four cash acquisitions, we made earlier this year.

And hedging we don't try to predict future commodity prices, but instead had multiple years of expected production on cash acquisitions. When we are in about mid cycle pricing environment to protect returns we are underwriting.

This is the perfect example of this philosophy at work as a reminder, our oil hedges are at a weighted average price of $106 31 per barrel for the remainder of this year and are $93 71 per barrel for 2023.

Second we recorded third quarter lease bonus of $6 7 million.

Which is $5 4 million greater than lease bonus in the second quarter and more than our lease bonus for the entire first half of the year, we don't underwrite any lease bonus activity on acquisition.

<unk> been very focused on increasing our leasing activities to get the most productivity out of our assets.

It's nice to see this showing up in our results on the cost front at $2 80 per BOE, we recorded the lowest annualized cash G&A per Boe in our company's history and broke the $3 per BOE failure for the first time.

This highlights the scalability of our business model and demonstrates one of the reasons why we continue to pursue large scale acquisition.

Each acquisition drives down our cash G&A per Boe.

We don't need to increase cash G&A linearly, which directly improved our discretionary cash flows and dividends to our shareholders.

We expect this metric to improve over time as the business grows using the bookends of annual cash G&A guidance and combined <unk> actual production for CTO and Brigham, including a full quarter for momentum third quarter cash G&A per BOE would have been in the $1 80 to $1 88 range.

The combined company.

Activity in line of sight activity on our assets remains robust with $4. One net wells turned in line during the third quarter and nearly 27 line of site wells as of September 30, which is near our historic company high for.

Our format for a full quarter of momentum minerals assets. Our third quarter production was 18 6000 Boe per day, which is above the midpoint of our second half 2020 guidance for stand alone this year.

We have strong visibility to a few high interest pads in the Permian basin that have been spud and are expected to come online in late <unk> 2022, or early <unk> 2023.

These pads represents more than two net wells and are a catalyst for continued near term growth trajectory of our Permian assets.

On a combined basis and including a full quarter of momentum this.

Since year end Brigham's assets produced an average of $33 6000 Boe per day in the third quarter, which is above the midpoint of the average daily production guidance range released at merger announcements for the 12 months ended June 32023.

These results we are increasing the average daily production range for the combined company to 32750 Boe's per day to 34250 Boe's per day, which is a 250 Boe per day increase at the midpoint.

We are looking forward to continuing to execute on our differentiated large scale consolidation strategy at the combined company and are doing all we can to ensure that closing the Brooklyn transaction is completed in a timely manner that concludes my prepared remarks, I'd like to open up the call for questions.

Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press Star protocol run time from Keybanc.

Thank you Craig to answer your question Im curious, what Lisa Mueller co Cody.

We have our first question comes from Jenny Lai from Barclays. Your line is now open.

Hi, Good morning. This is janine thank you for taking our questions.

Good morning, Jeanine are used as you mentioned.

Good morning doing well thank you.

You mentioned in your prepared remarks that you.

Really want to hone in on what differentiates <unk> from other mineral companies.

Do you think is the most impactful way to do that is it really through the quality of the portfolio or do you think it's more on sheer size and slowed or maybe through your investor conversations or are your outreach is it on just having like a highly competitive cash return I guess, what's your early work on that.

Sure. Thanks, <unk>, So I'd say first of all the advantages of scale, which are manifesting itself in our ability to execute on large scale transactions and really as I said before it's not just size for <unk> sake is really.

<unk> for efficiency and profitability stake and what we mean by that is we get more profitable. The larger we get we continue as we get more scale to refine our internal systems and data management, because really since we don't own pipelines or trucks or rigs or wells we.

We just own data and so for us the larger we get we're just trying to improve how we manage that data and so that's a real benefit of scale is adding efficiencies. The larger we get we can enhance how we manage that data.

Okay, great. Thank you.

We look forward to working with Jackson his new position.

And our second question on AMD based on what you see in the market can you talk about how you view upsides.

Percent of discretionary cash flow and your framework.

At least in the near term here and if theres any read through there on divestitures. Thank you.

Yes, I'll take the second part first.

Divestitures, so up to this point in our company's life really before June of this year, we didn't have many logical opportunities for portfolio management I think as we sit here today and then pro forma for Brigham.

We'll have the potential for some of that so those are opportunities we are looking at today.

But as far as the payout ratio goes I think it's more going to be driven by what we do with our leverage and how we work that down over time I think the way to think about our payout ratio over time as we grow the business pay down the debt and have excess cash flow, it's our shareholders money and we're going to return it to them. So.

I think the first priority right now is working down debt.

Alright, Thank you Tim.

Thank you.

Thank you.

And our next question comes from John Davis from Stifel. John Your line is now open.

Hey, good morning, all and congrats on the strong quarter.

Thanks, Jonathan question I Wonder if.

For my first question I wanted to focus on slide eight and the impressive backlog of line of sight Wells post. Your recent transactions could you comment on how many net wells are required to hold production flat on a pro forma basis. Thanks.

Yes, so thats, obviously evolved over time it used to be a much smaller number as we were a smaller company, but as we sit here today with.

About 27 line of site well, that's a number that implies.

Organic growth on our asset base today so.

As you as you get to a smaller number of line of sight wells to hold production flat, it's going to be in the teens and so.

It's going to be.

As I said, we continue to grow the company that number is going to continue to grow certainly as we add the Brigham assets, there's going be a step change in what's required to keep the entire production base company flat when you think about it in terms of.

PDP decline rates as another way to frame the conversation and if you look at Citi as Standalone.

PDP decline rate is about 34% and then if you look at the Brigham assets, a hair higher than that so I think companywide it'll it'll tick up maybe a percent or so after the Brigham transaction.

But thats just another way to think about it.

Yes.

That makes sense and then for my follow up and maybe building off of that question.

Could you comment on how we should think about production volumes trending over the next couple of quarters in Q4 and Q1.

Based on your Q3 results in line with tight inventory.

The biggest catalyst for near term production is really going to be a.

The large number of high interest spuds that we see right now so for example pioneers shared wells.

You have some SM wells and a better company.

<unk> City and your auto lease vintage in your store lease so there's a number of high interest wells were.

Whether they come in and <unk> of this year or <unk> of next year is really going to drive what the.

What the cadence looks like for us.

But.

I said the line of sight wells imply some organic growth on our assets.

Timing issue of when news, let me just add demand.

That makes sense, great update and thanks for taking my questions.

Thank you.

Thank you John .

We have our next question is coming from <unk>.

Hey, Brandon.

<unk> is now open.

Thanks, Good morning.

Good morning.

Got a couple of things.

As we're heading into the end of the year.

Wondering.

If you are seeing.

Patterns among operators.

I think we're about what I've heard that some of them are.

More inclined to be a little more aggressive on capex for the sake of hanging on to their rigs and crews.

Any insight you have on on that as far as your activity.

Constant over the year boundary and then maybe any thoughts you have on cost as well.

And also I think we're seeing the same thing you are in terms of what operators are expressing in terms of cost inflation now what we've seen so far is that there is not translating into a reduction in activity.

Causing operators to raise their capital budgets.

And I think.

The read through for US is hopefully the trend continues what we've seen which is sustained levels of high activity from operators and we've seen it from.

Rigs on our asset.

Activity permits wells turned in line have all been pretty healthy and candidates across all different kinds of operators. If you look at the large cap small cap and the privates are all very active private theyre still.

Punching their weight in terms of their activity levels on our asset relative to the amount of acreage that they operate for us. So.

That trend continues.

Okay.

Great.

To the degree that you are.

But a lot of acquisitions already under your belt.

We're still keeping a watch on what might be available out there.

We've had some.

Pretty significant volatility in commodity prices.

Little bit of strengthening in the last maybe month or so and.

Is it really price deck that is.

Is the mainframe that.

Determines bid ask at this point or are people looking for them.

More broadly.

About maybe timing their own fewer concerns about interest rates or their own ability there.

Sustaining capital.

Uh huh.

Alright, well not so much the same capital Brett.

SaaS right whatever thresholds they have for returns.

We found that the price deck is usually the least controversial of the <unk>.

Fluids into any sort of bid ask spreads.

Oftentimes when we do Postmortems on.

In situations, where we were not successful in buying an asset we find that the difference arises from <unk>.

Different assumptions around pace of development.

And sometimes it's around around the margins around remaining inventory. Although if you think about in terms of remaining inventory do you think.

10 wells per section or 15 wells per section those last five wells are so far out in the future that the PV impact is pretty small really the differentiator is pace of development and so oftentimes people have much more aggressive views on future pace of development than we do.

And Thats, what leads to a wider bid ask spread.

Great. Thanks, a lot.

Thank you.

Yes.

Thank you Noel.

As a reminder, ladies and gentlemen to ask any further questions you can press star protocols.

No.

We are preparing to ask your questions. Please make sure you for recent years locally.

We have no more further questions from the line.

Over back to Ross.

Alright, well that concludes our call. Thank you for joining today.

Okay.

Thank you ladies.

Ladies and gentlemen.

This concludes today's call. Thank you for Tony you May now disconnect your lines.