Q2 2023 Sitio Royalties Corp Earnings Call
Good morning, and thank you for joining the Cta royalties second quarter 2023 earnings call. My name is call out and I will be the operator of todays co. If you wish to ask a question for the Q&A portion of the call. Please press star followed by one on your telephone keypad when asking your question. Please ensure you tell.
And as Amit said likely tariff hike. Your question you can press star followed by Jay.
I would now like to pass the conference over to our host Rosewall, Vice President of Finance and Investor Relations Ross. Please go ahead, when you're ready.
Thanks, Operator, hey, good morning, everyone.
Welcome to the city of royalties second quarter 2023 earnings calls.
If you don't already have a copy of our recent press release and updated Investor presentation. Please visit our website at Www Dot <unk> Dot Com, where you will find that on our Investor Relations section.
With me today to discuss second quarter, 2023 financial and operating results as Chris kind of Saatchi.
Our Chief Executive Officer.
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Chief Financial Officer, Derek <unk>, our EVP of engineering and acquisitions.
Other members of our executive leadership team.
Before we start I would like to remind you that our discussion today may contain forward looking statements and non-GAAP measures.
Please refer to our earnings 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.
Thanks, Ross good morning, everyone and thank you for joining <unk>.
Second quarter 2023 earnings call.
Following a quiet first quarter of this year.
We are excited to share some success, we had with recent acquisition in the past two months, we have closed on five accretive acquisition in the Permian basin for aggregate consideration of approximately $248 million. We funded one of these transactions with approximately $2 5 million shares of city of dock in June .
In July and August we signed and closed the remaining four acquisitions with $181 million in cash representing 27% equity and 73% cash in total these.
These transactions were with sellers that we know well and have had relationships with for a number of years and the stock transaction in June with a seller that has taken our equity in exchange for assets before.
This relationship based approach to generating and executing on minerals acquisition is a true differentiator and that's been a staple of our growth strategy for many years. We acquired these assets for less than seven times next 12 month cash flow and in aggregate I expect them to be approximately 6% accretive to our second half 2023.
Discretionary cash flow per share at current strip pricing and a payout ratio of 65%.
The acquired assets are highly complementary to our existing portfolio as you can see on page seven of our earnings presentation and in total added 13705.
Or 7% to our Permian basin position with 82% of the <unk> in the Delaware Basin and 18% in the Midland Basin.
The acquired assets also had $2 six net spuds and one one net permits for a total of $3 seven net line of sight wells as of June 30.
In aggregate the acquired assets produced an estimated 1918 boe's per day during the second quarter and have a similar mix of existing production and remaining locations as our legacy Permian basin assets.
Although we were successful recently in closing these five deals we still see the M&A environment is extremely competitive.
During the second quarter of 2023 50 was assets averaged a record high of 34681 BOE per day, which included 17 days of production from the stock acquisition that closed on June <unk>.
Production from city of mineral and royalty assets has grown each quarter. Since we became public last June including a full quarter of production from all of the recently acquired assets City. Our second quarter production would have been 36462 boe's per day or 1781 Boe's per day higher.
<unk> been reported.
We estimate that pro forma for these newly acquired assets. There were eight one net wells turned in line during the quarter and an all time company high of 58 net line of sight wells as of June 30.
From a geographic perspective, our pro forma net line of sight, well increase came from 61% in the Delaware basin, 16% in the Midland Basin and 23% in the Eagle Ford with the rest of our basis relatively flat on a combined basis I would now like to turn the call over to Jarrett marcoux to make some comments on the macro backdrop.
And activity on our assets.
Thanks, Chris as Chris just mentioned, we have 58 net line of sight wells $47, one of which are from our asset excluding the acquisitions. Just discussed. This compares to 42 eight net line of sight wells at the end of Q1 on a like for like basis this quarter over quarter organic <unk>.
Kris of 10% and net line of sight wells is encouraging for near term production visibility. Despite a material slowdown in rig counts over the last quarter across the U S and in the Permian basin of 12% and 8% respectively.
The rigs on our acreage during the same timeframe had been flat. However, we believe that rig count on our acreage will eventually moderate if rigs continue to be dropped overall.
Well production rates are in line with our expectations and our PDP decline rate over the next 12 months is 32, 4% pro forma for the recent acquisitions. This is comparable to our decline rate of 32, 7% prior to the acquisitions.
According to EIA estimates ducks in the Permian are down by 73 from 930 to 857 between March and June of 2023 and in what their lowest level. Since July of 2014, this quarter over quarter drawdown of 73 docs as the lowest amount since the DUC drawdown began in the fall of 2020, when there was an average.
Teams of 384 Ducks a quarter.
There were 3519 docks at the peak of the duct buildup in July of 2020, so the current level of 857 Ducks.
Nearly a quarter of that high Mark these.
These data points give us confidence that the DUC drawdown is nearly over and that future production from our assets will be tied more directly to rig activity compared to the past couple of years, which was somewhat misleading due to the tailwind from the DUC drawdown.
Our second half guidance, which Chris will discuss in a moment are informed by these macro as well as asset level trends.
Now I'll turn it back over to Chris to discuss <unk> financial results and second half 2023 guidance.
Thanks, Jarrett moving onto our financial results, we reported second quarter, adjusted EBITDA of $127 million and discretionary cash flow of $95 million, which were down by 9% and 21% respectively relative to the first quarter of 2023 much of these variances were driven by pricing as our average hedged.
Realized price per BOE for the second quarter was $44 and 45, 9% decrease compared to <unk> 23.
Orderly cash G&A was up by just over half a million dollars, primarily due to salary expenses and the timing of vendor payments for the first half of 2023, our cash G&A was $12 $8 million, which is tracking just below the midpoint of our full year guidance, assuming a run rate of $13 million for half a year.
Our second quarter discretionary cash flow was impacted by changes in cash taxes and cash interest paid during the quarter cash taxes were up $7 $7 million relative to the first quarter, primarily due to $5 $9 million of taxes that were paid in April but related to the first quarter quarter over quarter cash interest was up by $4 five.
Million dollars, which was driven by a $2 7 million interest payment related to the first quarter borrowing that was paid in the second quarter and also due to higher silver rates.
Our board declared a dividend of <unk> 40 per share of class a common stock for the second quarter, which will be paid on August 30, <unk> to record holders at the close of business on August 18th this dividend is down by <unk> 10 per share relative to the prior quarter, primarily due to the factors I mentioned during my discussion of our financial results, our second quarter dividend.
One five.
<unk> share higher than it otherwise would have been due to the inclusion of a full quarter of cash flow from a stock acquisition that closed in June providing immediate accretion for our shareholders.
Regarding the balance sheet at the end of June we made our third consecutive amortization payment at par of 11 $5 million on our unsecured notes, reducing the remaining principal to $416 3 million.
Our ending credit facility balance on June 30 was $486 million, which was comparable to the amount drawn at the end of the first quarter, even though we drew on the <unk> in June to fund a portion of the cash acquisitions that closed in July and August . Since then we have funded the remainder of our recent cash acquisition using our revolver and cash from op.
Operations as of August 7th we had an outstanding revolver balance of $605 million.
Our issuing new operational and financial guidance for the second half of 2023 to reflect the impact of our recent acquisitions and the macro backdrop that Jarrett discussed earlier compared.
Compared to our previous guidance for the full year of 2023, we are increasing our production guidance for the second half to 35000 to 37000 Boe's per day, and reducing our gathering and transportation guidance range. We have also been advised by our tax consultants that we should expect minimal cash tax payments for the rest of the year.
Due to a tax benefit from 2022. Therefore, we have provided a cash tax guidance range of 2% to 4% of pretax income for the second half of the year. We expect this benefit to last through calendar year 2023, and for cash tax rate to shift back to the normal 11% to 13% range afterwards.
All other guidance metrics remain in line with prior full year 2023 guidance.
That concludes our prepared remarks, operator, please open up the call for questions.
Thank you if you'd like to ask a question you may do so by question installs followed by one on your telephone keypad, Gary I think your question. Please press star followed by <unk>.
Your question. Please ensure your phone is on mute it lately.
Our first question comes from Tim <unk> from Keybanc capital markets. Your line is now open Tim. Please go ahead.
We wanted to to the team there.
I guess, Chris My first question.
Trying to kind of make sense of the production impact any earnings impact from acquisitions.
And sort of the updated guide it looks like you're adding about 6% reduction in EBITDA from these deals.
We thought we might see a little more of an uptick.
In the guidance and.
You talk about the accretion so is there sort of a timing factor with sort of a line of sight wells. This is more of a fourth quarter 2024.
Benefit that you see I wonder if you could kind of talk through the dynamics on the production guide to the acquisitions.
Yeah. Good morning, Tim Thanks for the questions.
Good news is we're not seeing any degradation and timing for spud to turn in line or permit to spud to turn in line.
That has remained relatively constant for those timelines.
But we did look at our prior guidance, which had a midpoint of 35500 Boe's per day and if you just look at that relative to the first half of the year.
And ask yourself, what would you have to believe for the back half of the year you'd have to see greater than 5% growth in the back half of the year and on the base asset. We just as you can look across the entire Permian basin, we just arent seeing that kind of growth it's more.
Flat or low single digit kind of growth on the base assets.
The good news on the acquisitions is high.
A higher.
But activity and visible near term development on those so yes, we do see the accretion around 6% from the acquisitions, we're excited about that.
And the valuation at which we got them was very compelling at less than seven times next 12 months cash flow. So we'll have to be excited about around the acquisitions and filling in some more growth in the back half of the year.
Okay I appreciate the context and then.
Just.
I was wondering if viper came out on their call financing.
The change in the governance structure to allow for broad index inclusion I know that's something that you know.
Management and the board has been thinking about so just curious kind of what your thoughts are on that.
Potential for studio in the future.
Right. So since it was already a C corp. So we're already index eligible.
And.
Viper and we just we don't know the timing of when any index inclusion could come.
The other development that happens in the last few months.
I'm sure you saw was the.
S&P indices now allow for companies like ours that have an up C structure to be included in the indices.
<unk>, we were ineligible from index inclusion in the S&P indices because of our up sea structure.
But they recognize that the class a and class b shares have equal voting rights and equal economic rights in the dividends as the class a shareholders.
They now allow for index inclusion for companies like ours, but we don't have to change our structure or anything we were already a C Corp.
So we didn't have to convert from a partnership.
Okay. Thanks, I wasn't aware that last piece on the S&P. So I appreciate you clarifying that that's all I had thanks.
Thanks, Tim.
Thanks, Tim Our next question comes from T J Schultz from RBC capital.
Your line is now open. Please go ahead.
Hey, good morning.
First on the <unk>.
M&A on the five deals you transacted.
The last couple of months.
Let's talk about the largest I know you've indicated in the past obviously more impact from from larger type.
These actions so just how would you bracket what you characterize as larger deals is it $100 million plus and then how many of those.
Packages do you think are out there.
Chris I think you commented that it's still fairly competitive so if you could just.
Give some color on how you expect that to transpire for the rest of the year.
Sure. Thanks T J good morning.
These stock transaction was not the largest individually of the five but on its own the stock deal as you probably saw from the filings that the.
The seller made it was about $65 million.
With the stock price at closing there so.
The meaningful deal, but I wouldn't call. It large large for us gets north of a few hundred million dollars.
So we would characterize all of these individually is relatively small but impactful as you can see from the accretion and the valuation at which we were able to acquire them.
You asked how many were out there and what the competitive dynamic looks like.
A very large transactions are the ones that are sort of.
Ballpark of $1 billion or larger I would say theres a couple of dozen for the ones that are $500 to 1 billion range.
There you are talking literally dozens and dozens so we see a lot of opportunity. There. We are in discussions with a lot of those owners like we have been for years and Thats exactly how these transactions played out this past three months these were.
Several of these were ones, where we'd been talking to the owners for upwards of four years. So.
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Relationships take a long time to cultivate and we have to find that right time, when the seller is ready and when the evaluation is right for us.
So in terms of the competitive dynamic.
Obviously, we see the most heated competition in those.
Situations that are broadly.
Options and Thats why we have very very limited success in those situations. We tend to do a lot better where we have a relationship with sellers and can align ourselves better on data and talk directly with them and figure out a solution that works best for both parties in terms of valuation consideration mix et cetera.
So we continue to focus there and we do look at some of these auctions, but we have been unsuccessful in this year and these broad auction processes you can see in some of the things that have transacted.
Ben off by between 15, and 100% on some of the things that have transacted this year. So.
We're going to continue to focus on our relationship based approach.
Okay.
Makes sense.
I guess, just lastly on the tax guidance.
Maybe just for a color on what caused that change for this year.
Is there a catch up next year and does any of the M&A transacted this year pushed it out any further.
Sure, Yes, Carrington supplement what I say here, but effectively it was a tax benefit that resulted from from Brigham and it carried over to this year and our tax advisors have informed us that the back half of this year should should result in minimal to know better.
Income taxes for us because of the credit from 2022.
That's correct, Chris we will still have state income tax margin tax.
Other than that yes, we don't expect to be paying federal taxes.
<unk> payments until next year again.
Okay.
I guess, just one more just to kind of clarify again on the production guidance for the back half of the year I think in some of the macro comments you all made.
You mentioned that rigs on your acreage has held in better than kind of what we're seeing on some of that.
Headline numbers so your rigs are.
Holding an about flat just to be clear your assumptions kind of driving.
Production ranges assuming that rig.
Rig activity on your acreage normalize is closer to what some of our clients have seen is that fair and then I think.
You're indicating that.
It should correlate more closely too.
Rig activity just given what we've seen on the DUC drawdowns am I framing that right.
I'll make a couple comments, there and ask jarrod to share his thoughts.
Historically, what we've told you is that relying on.
Gross rig activity can be very deceptive and misleading just given one you don't know.
<unk> of the wells being drilled and.
Two you don't know where and what basins.
Those rigs are active.
So well.
Well in Appalachia is going to be.
Impact on a well in the heart of the Midland Basin. So few key things to pay attention to there.
But I'll, let Derek chime in on his thoughts on the trending in the rig count and impacts on our asset base in the future.
Yes, Thanks, Chris.
T J as far as the rigs are concerned like we mentioned in the comments, let's take Permian for example, the rigs are down just below 8% over the last quarter and typically when the rigs pullback in these in these type of macro environment.
Pull back from the edges of the basin as you imagine the basis. These big <unk>, they kind of get smaller most of our acreage is concentrated in the heart of the basin and especially our higher our higher concentration of our acres in that gross footprint is towards the fairways of the basin. So if rigs are down 8% we.
We expect moderation on our asset going forward, but probably not to the extent that it's happening in the basin for the reasons I just mentioned so when we think about the macro backdrop.
We don't believe that we're going to get.
Zero effect of the macro backdrop, but we think it will be.
Not not directly correlated to what's happening.
And the rig count.
Okay, no that makes sense. Thank you.
Thanks T. J. Our next question comes from Nathan Pendleton from Cta royalties Nathan Your line is now open. Please go ahead.
Hi, This is Nathan <unk> from Stifel.
Thanks for taking my questions for my first question can you provide any color on how the current commodity price environment is impacting your team's outlook for acquisitions.
Good morning, Nathan Thanks for the question.
The short answer is not very impactful in terms of how we look at acquisitions, we underwrite acquisitions and a <unk>.
<unk> case looking at the strip and we don't pretend like where any smarter than the strip, we do sensitize it down but.
Our underwriting standards remain the same regardless of the commodity price environment.
Got it thanks and for my follow up regarding return of capital can you discuss some of your considerations. When you are assessing the right longer term mix now that your unsecured notes have been amended.
That's a good question, we did have some success with our unsecured noteholders and securing an amendment that would allow us to to buy back $25 million.
Stock above and beyond our 65% dividend payout our board has not yet authorized that buyback program, we're watching closely.
On the stock's behavior to see what the right timing is but the other thing we think about in that context is our leverage and liquidity and as you can see from the last six months. We've made some progress chipping away at the pre payable debt balances. We've made several payments at par on our unsecured notes.
And then prior to these <unk>.
Acquisitions in the last two months we.
We were paying down our OBL balance and we'd like to continue doing that and working towards our long term goal of one times or less leverage which will give us not the optimal balance sheet, but adequate liquidity to capitalize opportunistically on cash acquisitions.
I would say stay tuned for more to come on buybacks under.
Under the current unsecured notes and then once we refinance the current unsecured notes will have a different framework altogether.
Thanks, Chris I appreciate the color.
Thanks Nathan.
Thanks, Nathan our next question comes from Noel Parks from <unk>.
Tuohy brothers.
Your line is now open. Please go ahead.
Hi, good morning.
And all.
So once the acquisition.
Is it safe to assume that they fall sort of in your sweet spot of very little additional overhead for the new assets and.
Hopefully some.
Leasing opportunities.
For the mineral.
That's absolutely right. We added no overhead there's actually a fair amount of overlap as you can see from the overlap map in our earnings presentation to our existing assets and yes, we do expect.
Subsequent leasing opportunities and on these assets like we see with all of our acquisitions.
Great and.
And the question of negotiating on.
Different deals.
I talked a bit about.
Structure being something that is.
It is meaningful.
Just are there any sort of patterns you can draw as far as seller motivation.
At this particular juncture how.
How much price is or isn't.
So our overriding factor.
That's a good question the prices is always the primary motivating factor.
But when you look at transaction size when you get to a larger transaction size I think the sellers acknowledged that.
Cash capacity in the minerals market has limitations and therefore there.
There'll be a need to accept buyer stock as consideration one unique exception to that was the stock deal that we did in June I would categorize that as one on the smaller end and happen to be with a seller that had taken our stock in exchange for assets before so somebody that knew our equity understood R. R.
Our strategy and saw the upside in our company and wanted to take equity when they when they clearly could have sold for cash, but they chose our equity instead, so occasionally we see opportunities like that but more frequently we see that at the larger end of the spectrum.
Got it and.
Just sort of a.
A more general question.
I feel like I've been hearing.
Generally more optimism about gas takeaway in the Permian and that.
Fed easing as a potential issue there.
May four.
Drilling activity or current inland activity I was wondering if you had any.
Our perspective on that.
We do if you look at the response that the gas market has had to the infrastructure build out is encouraging.
When you look at Wawa differentials. So if you look at projects that are already underway with Whistler expansion Permian Highway.
With Matterhorn getting <unk> and other projects you have upwards of three six Bcf per day of new capacity coming on over the next year year and a half.
So that sends a strong signal to the gas market that theres egress coming out of the Permian Basin.
In a in a volume that you just can't see in other basins, one because there isn't demand for but two just theres constraints politically geographically et cetera that will prohibit that from happening in other basins, but we're very very fortunate in west, Texas and southeast New Mexico to have a much more constructive regulatory environment.
Great and just one one other detail.
I don't imagine if we're moving it either way, but I was just curious was there any hedging on the acquired properties.
Uh huh.
Helped maybe keep keep activity going.
When things are volatile.
So we did not we did not hedge any volumes from the acquired assets. We do look at hedging when we're within that mid cycle band of 50 to $75.
We discuss it ultimately did not commodity prices are up since then so.
Not saying, we were right or wrong. Its just the approach we take is to consider it when we're in that band and then definitively to hedge when we're above that band.
But the decision was made on these acquisitions not to hedge the cash acquisitions, regardless of what we do on hedging it's not going to encourage or discourage more activity. It's really just to protect the returns that we underwrite and we feel like we had underwritten returns in a manner such that didn't require.
The hedging support within that mid cycle pricing band.
Okay, Great that's all for me.
Thank you.
Thank you there are no further questions registered at this time, so with that we will conclude today's call.
For joining you may now disconnect your lines have a great day.
Thank you for joining you may now disconnect your lines have a great day.