Q4 2022 Sitio Royalties Corp Earnings Call
Hello, everyone and welcome to the city, a royalties fourth quarter 2022 earnings call. My name is not yet and I will be coordinating the call today.
I would like to ask a question at the end of the presentation. Please press star followed by one on your telephone keypad I went out how diverse your highest Roswell Vice president of finance and Investor Relations to begin. Please go ahead.
Thanks, operator, and good morning, everyone.
Welcome to the city of royalties fourth quarter and full year 2022 earnings call.
Don't already have a copy of our recent press release and updated investor presentation.
Please visit our website at Www Dot City O Dot Com, where you will find them in our Investor Relations section.
With me today to discuss fourth quarter and full year 2022 financial and operating results as Chris <unk>, Our Chief Executive Officer, <unk>, 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.
Thanks Ross.
Morning, everyone and thank you for joining <unk> fourth quarter and full year 2022 earnings call. We had a tremendous 2022 and demonstrated strong execution on our large scale minerals consolidation strategy through a series of transactions that transformed us from a private company with approximately 106000 net royalty acres in the Permian basin.
At the beginning of the year to one of the largest publicly traded oil and gas mineral and royalty companies in the U S. Upon completion of the breakup merger in December .
Closing two corporate mergers and two large cash acquisitions within a calendar year is an impressive feat and I would like to thank the CTO team and our board members for their dedication and hard work to get us to this point.
We now own 260000, net royalty acres across seven of the premier oil and gas basins in the country and have exposure to over 170 operators of horizontally drilled wells based on fourth quarter 2022 production.
The oil and gas minerals and royalty sector remains highly fragmented and we're well positioned to be the natural consolidator with our proven returns focused and large scale consolidation strategy in.
In addition to meaningfully scaling our business impressive returns were generated for investors.
All shareholders, regardless of whether they originally owned stocking or Brigham experienced total returns in 2020 to an excess of 60%.
Now turning to our fourth quarter results due to lower commodity prices sit here average realized unhedged revenue per barrel of oil equivalent was down 17% from $65.71 per Boe in the third quarter to $54 68 per Boe.
In the fourth quarter.
This was partially offset by a quarterly increase in average daily production of 935 barrels of oil equivalent per day, which generated an incremental $5 $8 million in revenues in the fourth quarter.
<unk> generated adjusted EBITDA of $93 $1 million and discretionary cash flow of $77 $5 million in the fourth quarter, which both included three days of contribution from the Brigham assets since that transaction closed on December 29.
Quarterly adjusted EBITDA was down sequentially by 12%, primarily due to lower commodity prices quarterly discretionary cash flow was down sequentially by 17% as a result of weaker commodity prices and increased cash interest partially offset by a reduction in cash taxes.
Cash interest expense was higher by $4 $1 million compared to the third quarter due to higher debt levels from refinancing the $425 million bridge loan with $450 million senior unsecured notes and higher interest rates on all of our debt because of the rising sofa curve.
Our cash taxes paid decreased by $1 $4 million relative to the third quarter. However, some of this was due to timing because of tax payments for the fourth quarter of approximately half a million dollars was made in January of this year.
For the fourth quarter, we are declaring a dividend of <unk> 60 per share. This is based on a full quarter of discretionary cash flow from citgo and Brigham of $144 3 million, assuming the Brigham transaction had closed on October one 2022.
This dividend per share amount is down 12, or nearly 17% from our third quarter dividend per share of 72 cents.
I wanted to provide some color to help explain that change.
On a standalone basis as if the Brigham merger had never occurred and at our standard 65% payout ratio.
Fourth quarter dividend would have been 58 per share.
Lower commodity prices accounted for a 12 cent per share decrease higher interest expense lower lease bonus activity and higher severance and AD valorem taxes accounted for a five cent per share decrease.
Lower cash G&A, lower cash taxes, and hedge impacts accounted for a three cent per share increase in the fourth quarter dividend.
Outperformance at the Brigham assets created a <unk> <unk> per share accretion versus city on a standalone basis, increasing in the fourth quarter declared dividend of <unk> 60 per share.
Our business generates an incredible amount of cash and assuming that since you and Brigham had been combined since July one of 2022, we have declared or distributed approximately $200 million in aggregate dividend for the second half of 2022, which is more than any other U S publicly traded minerals company over this time period.
This aggregate dividend amount is also competitive with exploration and production companies with only three publicly traded e&ps in the U S that have declared more aggregate dividends over the same period and have a market cap of less than $20 billion.
To make things simple all metrics I referred to from here on will be on a pro forma basis as it sits here and break them were combined for the entire fourth quarter. Because we believe it is most relevant for investors, particularly since this is how our results will be reported in future quarters.
Operators remained active on the acreage underlying our minerals turning in line 1200, gross wells normalized to 5000 foot laterals, which equated to seven three net normalized wells.
Fourth quarter net production volumes of 34424 Boe's per day outperformed our expectation and we're above the top end of the range of our combined company guidance, partly due to approximately 16000 boe's per day from the Brigham assets, which continue to outperform what we underwrote for the merger.
Now that the Brigham merger is behind Us and the 'twenty 'twenty. Two books are closed we have issued full year 2023 guidance.
Our line of sight inventory up 47.9, net normalized spud and permitted wells, which on average typically come on line within 12 months remained near record high levels and provides visibility into near term production growth, particularly when compared to the $128. One net normalize wells that were turned in la.
<unk> on our acreage over the past four years combined.
The Delaware Midland and DJ basins continued to be the most meaningful and active areas in our portfolio accounting for 94% of net wells turned in line during the fourth quarter and 92% of our net line of sight wells at year end.
We expect these three basins to have higher near term growth than the other geographies in our portfolio due to the mix of operators resilient, well economics and robust levels of remaining inventory.
Our 2023 guidance includes the production guidance range of 34 to 37000 Boe's per day with a range of 49% to 51% for oil as a percent of production the.
The midpoint of this production guidance range is up by 6% relative to the midpoint of our previous guidance issued in November for the 12 months ending June 32023. We also provided an annual cash G&A guidance range of $25 million to $27 million, which implies cash G&A of $2 one.
<unk> per Boe.
A 26 cents per BOE, a reduction versus <unk> on a standalone basis for the fourth quarter of 2022.
The rest of our full year 2023 guidance metrics are relatively in line with our prior guidance.
Now transitioning to the balance sheet, we inherited brigham's revolving credit facility. When we closed the merger, resulting in us having both the <unk> revolver and brigham's revolver on our balance sheet at year end in January we launched our syndication for a new revolving credit facility, which closed and became effective on February 3rd with elected commitments of 700.
$50 million from a 15 member Bank group I.
I would like to thank all of the banks, who supported us throughout this process and help to syndicate, one of the largest revolvers in the oil and gas minerals and royalty sector, providing the company with additional liquidity and financial flexibility to help run our business efficiently.
As at March 3rd we had $407 million drawn on our newly syndicated revolving credit facility down from $510 million and credit facility debt at December 31.
At the end of December we made our first quarterly amortization payment at par of 11, two $5 million on our senior unsecured notes, reducing the outstanding principal from $450 million to $438 $75 million.
The senior unsecured notes prohibit us from making stock repurchases, which we would like to be able to opportunistically do with 35% of our discretionary cash flow that we don't distribute as a quarterly dividend. We are monitoring market conditions for an opportunity to refinance these notes either after the first call date on September 21st of this year or soon.
And or if warranted to provide our company the appropriate amount of capital allocation flexibility.
Regarding our outlook for additional large scale acquisitions, we remain focused on our underwriting discipline and believe that there'll be fewer opportunities that meet our returns criteria in 2023 compared to 2022.
There is still a large opportunity set of high quality and sizable minerals position to consolidate and we have made several offers to acquire additional mineral assets. This year, but the bid ask spread has been too wide.
It's attractive consolidation opportunities do not materialize, we will continue to focus on strengthening the balance sheet by paying down our pre payable debt and building liquidity for when market conditions normalize.
In 2023, we will also be acutely focused on gaining additional efficiencies and implementing new technologies to help us continue to scale and provide competitive advantages that will allow us to replace less effective third party vendors.
Professional management of oil and gas minerals is still a relatively new concept and we believe there is a large opportunity to transform the industry, which currently uses many outdated methods and tools technological.
Chicle advances geared specifically for the challenges of an independent mineral owner are in their very early stages of development and we are piloting a number of new efficiency tools.
We also see a large opportunity to fundamentally improve the relationship between operators and mineral owners, while saving money and time on both sides and eliminating inefficiencies in the system from duplicative work done by hundreds of operators and tens of thousands of mineral owners.
That concludes my prepared remarks, operator, please open up the call for questions.
Of course, if you would like to ask a question today. Please press star followed by one on your telephone keypad.
Oh a question. Please press star followed by case when the parents Ross. Your question. Please ensure your statement sent me to lately of course, you just abatement.
Our first question today goes to timber REIT then of Keybanc capital markets 10. Please go ahead. Your line is open.
Yeah.
Okay. Thanks, and good morning, everybody I appreciate you taking my questions.
First question just Chris you gave a line of sight information 47.9 wells at year end.
Now almost 10 weeks into the year, there's a lot of concerns about a potential slowdown in industry wide.
Good activity can you give any insight on what that line of sight information. It is now or just generally can you talk about the pace of activity you've seen year to date.
Good morning, Tim Thanks for the question.
So given data lag, it's hard to give real time updates on exactly what is happening at this moment, but what we have seen over the past several months has been a trend of increasing spud activity and plateauing permitting activity on a gross basis instead of a somewhat different effect on a net basis, there's different things.
As wells drilled within those but a similar trend of increasing net spud activity and a flat ish profile for the net permitting activity, but again, that's maybe current as of January its not really up to date as of March 19.
Okay. Okay I appreciate that.
And if I could switch them places for carrier for you.
At city of works to get leverage down.
Two or below sort of that target one times goal.
Uh huh.
How do you think about you know the the value of your non Permian minerals.
In light of another public minerals company announced.
Our sale of non Permian minerals acreage a couple weeks ago. So just kind of is there something youre considering or is it more of a low likelihood of that.
Well, it's something that we didn't have the luxury to consider this time last year, because we had a 100% Permian portfolio.
But now that we have a broader set of assets. Those are the types of portfolio management opportunities that we do consider.
Now in order to be value additive for the company.
To be a pretty compelling valuation so it's one of those.
It's one of those circumstances, where we are in the business of aggregating and consolidating this business and we have to see a compelling use of the capital deployed elsewhere to consider selling some of our assets today that said Theres places that we look at and we think they are challenged from a growth perspective and a good example is appalachia.
Look at Appalachia, it's unlikely that we're going to see additional long haul pipeline built out of Appalachia and my career, just given the political landscape up there and so that's baked into the effectively capped in terms of production growth.
So when we look at at minerals, there as a mineral owner what you really hope to see is the rapid pace of development healthy operators, good infrastructure, and a stable regulatory environment and and Unfortunately, we just don't have all of that and in Appalachia.
That's just one example of a small segment of our asset.
We're not actively considering selling anything at the moment, but those are the types of criteria, we look at and we consider selling assets.
Okay.
Thanks, and then if I could just sneak one last one in in your prepared comments, Chris you talked about.
In September there's the one year anniversary of senior notes and you could look to refi you did mention maybe refinancing earlier can you just kind of any details on what the terms would be.
Is there some sort of premium if you were to refi earlier.
Would that be in theory like related to some sort of compelling acquisition that you wanted to make and reset the capital structure, just trying to understand that that comment that's all I had thanks.
Yeah.
Sure Tim So at September 21st there is a call premium of one of three and then there's a make whole on top of that to do it prior to September 21.
So it'd be pretty.
Pretty NPV negative trade to do something a lot sooner than September 21, and today's market conditions that can always change, but as we analyze it today, it's not a compelling trade, but you're right. One of the things that can factor into our decision, making could be a compelling cash acquisition and us looking for additional liquidity.
We're going to continue to watch it and look for the flexibility that this company needs. These notes were put into place at a much different time in our company's lifecycle. We were smaller in the capital markets were in a much different position than they were in today and so I think the overall terms will be much more favorable for our company. So there's other factors and then just the NPV that go into it right now.
Fairly NPV negative trade.
Okay that makes sense. Thank you.
Thank you.
Thank you. The next question go shoot Jeanine Wai of Barclays. Janine. Please go ahead. Your line is open.
Okay.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning, Jeanine is on productivity I guess.
My first question on productivity the press release site at near record level of line of sight wells such as great. That's a tailwind in 'twenty three.
Continued capital discipline from public E&P operators as a headwind.
On the discipline side is it your sense that companies that they continue to high grade activity within their acreage position.
And a lot of attention on.
Well productivity.
One large cap E&P actually saying that flat productivity at this point would be a win and twenty-three considering just the natural maturation of the industry. So I guess any comments on what you're seeing from your end regarding oil productivity trends and is you know that it's kind of indirect conflict with some of the trends that we're seeing from the E&P.
Readers of doing more co development are exploring.
Deeper zones. So any commentary you have would be.
Very helpful. Thank you.
Sure. Thanks for the questions Janine.
So we are seeing people look around for leases on deeper horizon not in great volumes, but here and there anecdotally we are seeing that and we are seeing wells here and there testing different zones, but again, it's not the lion's share of activity. The lion's share of that activity is still in the most.
Productive and highest IRR known zone.
So not a lot of deviation from a past activity. There we did take a look at some of the performance data on some of the operators that they would report some of those productivity differences versus prior wells.
The mineral owner, we sit here and you know one of our goals is to maximize resource recovery from a drilling unit.
So it's probably less sensitive than an operator is the single well economics, because they're the ones that have to deploy the capital and bear the burden of that capital expense for us what we're hoping to achieve is maximum drainage for many unit. So yes single well economics are important but more important to us is actual.
Maximizing <unk>.
From a given unit. So that's that's the area we're more focused on.
Another structural advantage for minerals.
Or a second question, maybe just going to the deal environment and.
The commentary in the press release indicated that the current environment is looking to have similarities to 2019 and 2020 with I think.
All digit rates of return. So just wondering if you could provide a little more color on what you're seeing and what level of returns do you consider to be acceptable considering that you can hedge some of the commodity price risks. Thank you.
Our our expectations for rates of return haven't wavered since we were a private company with with private equity capital in those types of return requirement. So we still look for mid to high teens to low twenties irr's over the life of the asset and we value these assets at strip pricing and.
When strip pricing is above what we consider mid cycle, which is in today's terms 50 to $75 by our math.
Then we'll hedge and so are our underwriting standards haven't changed.
But we're in a time period right now much like we were in 2020, where commodity prices were much higher not too long ago.
And when that pattern exists you see sellers look for commodity pricing or valuations that reflect prior pricing that current pricing and prior levels of activity in that current levels of activity.
So these things move in cycles, and we're patient and disciplined so we will be here when when the cycle normalizes and we're just going to build liquidity in the meantime.
Great. Thank you.
Thank you as a reminder, if you would like to ask a question. Please press star followed by why don't know telephone keypad and our next question guys. You know hooks to the heat brothers No. Please go ahead. Your line is open.
Hi, good morning.
Good morning, all.
Alright, just a couple of things one thing I noticed is that actually the.
Proved reserve figures came in higher than sort of my back of the envelope estimate.
And I wonder.
Is there anything notable that came from your process of sort of rationalizing.
Oh Desert peak, and then Falcon and then brigham's different reserve policies.
I seem to recall there is some differences as far as pud bookings and also.
Different accounting method change with grid them I believe.
Yeah no. Thanks for the question nothing notable in terms of evolution of of reserves beyond what we were expecting you are correct. There were there was some nuances in how each of the company.
Philosophically approached pud booking.
I would say ours is on the more conservative end of the spectrum, where we only book wells that had been REIT mud as odd wells.
So that's where you're maybe seeing some day rate versus our legacy companies in India.
Acquisition.
Okay.
Okay, good enough and.
You mentioned right at the end of your remarks that you were piloting a number of new efficiency tools.
We're talking in general about professional imagine minerals is still relatively new.
Just curious about some of the things you're experimenting with.
So we're really excited about a couple of the initiatives we have starting this year and.
Sit here in a pretty unique position, where we view ourselves as a permanent owners of these assets and we're.
We're buying assets and people, who maybe aren't necessarily as a permanent owners and that's why they're selling them to us and as the permanent owners, we're going to manage them differently, meaning we're going to make sure. We're getting paid timely on every well every month, making sure that the decimals on which were paid match, that's more one which we believe we own.
And we track these things lately, we prioritize.
The the missing payments that we believe we're owed and pursue them with operators and to do that on a business of our scale with 5000 leases over 25000 wells.
It takes a lot of technology and data management to do it efficiently and so we are developing tools on our own just because there is no suite of software that effectively manages our minerals business. So we spend a lot of time in 2020 building out our data warehouse and data management system and that has allowed us to scale up the way that we have.
<unk>.
And now we're working on ways to make our team more efficient by having them touch fewer of the data points and just automatically process. Some of the data points. So things like revenue or division orders are just begging for efficiency measures that we're working on those things this year.
Okay, Great and then just one housekeeping item.
In the.
Released.
One time transaction costs were broken out which was helpful. And is that is the fourth quarter amount sort of the bulk of what we'll see or do you expect there'll still be some.
Some amazing items in first quarter second quarter.
There were a couple of lingering invoices in January but that's that's it.
Okay.
Great. Thanks, a lot.
Thank you.
Thank you as a final reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
And we have a follow up from Jeanine Wai of Barclays. Please go ahead. Your line is open.
Hi, Thanks for getting me back in the queue. Just a question from US maybe following up on something that will just asked him in terms of new things that you're thinking about doing. So you also mentioned in your prepared remarks doing certain things to improve the relationships between operators and.
Owners, and we found that really intriguing and we know that your tenants are leaving some of the minerals business model here with large scale.
So just any commentary or color on what you meant by improving their relationships and how that will translate into.
Tangible improvement.
Sure. So if you think about the contract we've lived under today, we deal with publicly released information so information that comes through.
Regulatory bodies like the Railroad Commission in Texas.
And check data that we receive from operators, but all of this data comes to us on a lagged basis.
It'd be nice you know one of our more relevance and and at a larger scale with operators to have a more direct line of communication because we think that that can say the operators time and money and also improve the quality of the data we received from them right now that data filters through third party providers and often mistakes are made by those.
Third party providers, and we find ourselves having to correct them and work with your operators again, it just consumers time and resources on both sides.
And so just having a more direct line of communication more standardized output of information.
Those types of things will go a long ways to reducing costs for operators and for mineral owners.
Yes.
Okay great.
And then just one quick one on.
Potential buybacks in the future once you take out those nodes.
We heard some commentary on the E&P earnings calls.
You know they just think that their variable distributions aren't getting enough credit in the market. We've heard this from a couple of operators actually and so.
One of them was moving more towards buybacks in it in a meaningful way and other operators that they were going to go back to their shareholders and kind of take the reins on that so and I think for you guys buybacks has always been part of a broader conversation just wondering as.
You know theres been a change in any of your conversations with your own investors about what they really want you to do on capital allocation of that distribution. Thank you.
We haven't heard any change.
Seen any change from our shareholders and what they're looking for.
As we look at our options here, we still remain committed to our at least 65% payout ratio as a percentage of our discretionary cash flow.
And the current thinking is that if we were to institute a buyback program once we get board authorization and once we.
Refinance these existing unsecured notes for more flexible piece of capital.
Thinking now is that the share repurchases will be done out of the 35% of retained cash flow.
And so we remain committed to that that 65% on a dividend payout, but that's it.
I'm thinking that could always change, but we.
We'll continue to reevaluate that at the time that we have the flexibility to make the repurchases.
Thank you for the time.
Thank you.
Thank you and as a final reminder, if you'd like to ask a question. Please press star followed by one on the telephone keypad now opposed to just a moment.
Thank you. It appears we have no further questions. This now concludes today's call. Thank you. So much for joining you may now disconnect your lines.
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