Q4 2023 Sitio Royalties Corp Earnings Call

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Operator: Hello everyone, and welcome to the Sitio Royalties Q4 2023 earnings call. My name is Chats, and I'll be the coordinator for this call. After the presentation, there'll be a Q&A session where you'll have the opportunity to ask questions by pressing star 4 by 1 on your telephone. If you change your mind, please press star four again. I'd now like to hand over to Ross Wong, Vice President of Finance and Investor Relations, to begin. Ross, please go ahead.

Hello, everyone and welcome to the city of royalties key for 2023 earnings Cool My name is chat to not be the coordinator for this call today. After the presentation there'll be a Q&A session, while you'll have the opportunity to ask questions by pressing style followed by one on your telephone keypad. If you change your mind.

Police presta full by two now.

Now I'd like to have a bunch of Roswell, Vice President of finance and Investor Relations to begin Russ. Please go ahead.

Ross Wong: Good morning, everyone. Welcome to the Sitio Royalties fourth quarter and full year 2023 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.sitio.com, or you will find them in our investor relations section. With me today to discuss fourth quarter and full year 2023 financial and operating results are Chris Conoscenti, our Chief Executive Officer, Carrie Osicka, our Chief Financial Officer, and Dax McDavid, our EVP of Corporate Development 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 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. Good morning, everyone.

Is it morning, everyone.

Could you just give me your royalties fourth quarter and full year 2023 earnings call.

If you don't already have a copy of a recent press release, an updated and rest of your presentation.

Please visit our website www dot <unk> dot com.

Or you will find an investor relations section.

With me today to discuss fourth quarter and full year of 2023 financial lot for your results as Chris put us on our Chief Executive Officer curiosity are.

Our Chief Financial Officer, and Dr. David R. E D C of corporate development and other members of exactly what are your symptoms.

Before we start I would like to remind you that our discussion today may contain forward looking statements and now I've got measures.

Please refer to our earnings press release Investor presentation, and publicly filed documents for additional information regarding such forward looking statements.

And I've got measures.

That I will turn the call over to Chris.

Thanks Roth good morning, everyone and thank you for joining <unk> fourth quarter and full year of 2023 earnings call before discussing fourth quarter results I want to provide an update on a return of capital framework, which going forward will include dividends and the ability to layer in share repurchases and I would like to share some exciting news regarding our.

Christopher L. Conoscenti: And thank you for joining Sitio's fourth quarter and full year 2023 earnings call. Before discussing fourth quarter results, I want to provide an update on our return of capital framework, which, going forward, will include dividends and the ability to layer in share repurchases. And I would like to share some exciting news regarding our first acquisition of 2024. Regarding repurchases, our board has authorized a $200 million share buyback program, which provides an additional avenue to maximize long-term value for our shareholders.

First acquisition of 2024.

Regarding repurchases are board is authorized a 200 million dollar share buyback program.

Which provides an additional avenue to maximize longterm value for our shareholders. We remain confident in the outlook for our business and believe there was a compelling opportunity to repurchase our shares given this outlook.

Christopher L. Conoscenti: We remain confident in the outlook for our business and believe there is a compelling opportunity to repurchase our shares given this outlook. Under this updated framework, which is effective immediately and applies starting with the first quarter of 2024, we still plan to return at least 65% of discretionary cash flow to our shareholders and to retain up to 35% of discretionary cash flow for balance sheet management and opportunistic cash acquisitions. However, instead of allocating the full 65% of discretionary cash flow exclusively to cash dividends, as we've done historically, we intend to pay a minimum dividend equal to 35% of discretionary cash flow and allocate at least 30% of discretionary cash flow to additional cash dividends, share repurchases, or a mix of both.

Under this updated framework, which is effective immediately and applies starting with the first quarter of 2024, we still plan to return at least 65 per cent of discretionary cash flow to our shareholders and to retain up to 35 per cent of discretionary cash flow for balance sheet management and opportunistic cash acquisitions. However, instead of allocating the full <unk>.

65% of discretionary cash flow exclusively the cash dividend like we've done historically, we intend to pay a minimum dividend equal to 35% of discretionary cash flow and allocate at least 30 per cent of discretionary cash flow two additional cash dividend share repurchases or a mix of both.

Christopher L. Conoscenti: Committing to a minimum dividend equal to 35% of discretionary cash flow provides our shareholders with the certainty of a minimum cash dividend that is a compelling size while avoiding the pitfalls of setting a minimum dollar amount of dividends. History has shown that fixed minimum dividends expressed in a set dollar amount for a cyclical, commodity-exposed business turn out to be variable in a commodity price down cycle when companies inevitably cut their so-called fixed dividends. This introduces the risk of the company buying back more stock when it has more discretionary cash flow above the fixed dollar dividend, which happens when commodity prices and stock prices are high.

Committing to a minimum dividend equal to 35 per cent of discretionary cash flow provides our shareholders with the certainty of a minimum cash dividend that has a compelling size, while avoiding the pitfalls of setting a minimum dollar amount of dividends.

History has shown that fixed minimum dividends expressed in a set dollar amount for a cyclical commodity expose business.

It turned out to be variable and a commodity price downcycle when companies inevitably cut their so called dividend.

This introduces the risk of the company buying back more stock when it has more discretionary cash flow above the fixed dollar dividend, which is mine commodity prices and stock prices are high our strategy is designed to avoid having to cut a minimum dollar amount of dividends during cyclical downturns and to avoid the pro cyclical and potentially value destructive behavior of Alex.

Christopher L. Conoscenti: Our strategy is designed to avoid having to cut a minimum dollar amount of dividends during cyclical downturns and to avoid the pro-cyclical and potentially value-destructive behavior of allocating additional capital to repurchases during cyclical upturns. If our new return of capital framework had been applied to the fourth quarter of 2023, our minimum dividend would have been 27 cents per share, which implies an approximate 5% dividend yield. This would have been roughly 300 basis points higher than the dividend yields for E&P companies and approximately 350 basis points higher than the S&P 500 yield over the last 12 months.

Getting additional capital repurchases during cyclical upturns.

If our new return of capital framework had been applied to the fourth quarter of 2023, our minimum dividend would have been 27 cents per share, which implies an approximate five per cent dividend yield.

This would have been roughly 300 basis points higher than the dividend yields for E&P companies and approximately 350 basis points higher than the S&P 500 yield over the last 12 months.

Christopher L. Conoscenti: Turning to the acquisition I mentioned earlier, in January, we signed a definitive agreement to acquire over 13,000 net royalty acres in the DJ Basin for $150 million, which enhances our overall DJ footprint and exposure to areas with higher levels of activity relative to our legacy assets in the area. As with most of our acquisitions, this deal originated through a relationship with a seller we've known for a while. The seller did an outstanding job of piecing together a differentiated asset base concentrated in the best parts of the DJ base. This transaction highlights our proactive approach to portfolio management and prudent capital allocation. By selling smaller-scale declining assets in Appalachia and the Anadarko Basin at a nearly six times next 12 months cash flow multiple and acquiring higher growth DJ Basin assets at a four times next 12 months cash flow multiple, we continue to focus on optimizing capital allocation and generating strong shareholder return. I'd now like to turn the call over to Dax McDavid, our EVP of Corporate Development, to discuss the highlights of the Thanks, Chris, and good morning, everyone.

Turning to the acquisition I mentioned earlier in January we signed a definitive agreement to acquire over 13000, net royalty acres and the DJ basin for $150 million, which enhances our overall DJ footprint and exposure to areas with higher levels of activity relative to our legacy assets in the area.

As with most of our acquisition. This deal originated through a relationship with a seller we've known for awhile. The seller did an outstanding job of piecing together, a differentiated asset base concentrated in the best parts of the DJ Basin.

This transaction highlights are proactive approach to portfolio management and prudent capital allocation by selling smaller scale declining assets in Appalachia and the Anadarko basin at nearly six times next 12 months casual multiple and acquiring higher growth DJ based on assets at a four times next 12 months cash flow.

People would continue to focus on optimizing capital allocation and generating strong shareholder returns.

I'd now like to turn the call over to <unk> MC David R. AVP corporate development to discuss the highlights of the DJ based on the acquisition and provide an update on other acquisition activities.

Thanks, Chris I'm, good morning, everyone not thrilled to kick off of 2024 with a compelling acquisition, which we hope is a sign of a more transactable middle market.

Dax McDavid: We're thrilled to kick off 2024 with a compelling acquisition, which we hope is a sign of a more transactable mineral market. This deal is highly accretive on both a near-term cash flow and NAB basis and checks all the boxes for what we look for in an attractive acquisition. The acreage has terrific geology, competitive well economics, and is under well-capitalized operators with great line of sight for future development. The primary operators are Chevron, Oxy, and Civitalk, who, in aggregate, were responsible for more than 95% of the production on these assets in 2023. In the fourth quarter, these assets produced approximately 2,600 DOE a day with 41% oil and generated $8.6 million of asset-level cash flow.

This deal is highly accretive on both a near term cash flow in nabb basis and checks all the boxes for what we look for in an attractive acquisition.

The acreage has terrific geology competitive well economics.

And is under well capitalised operators with great line of sight for future development.

The primary operators are chevron oxygen for the talk to an aggregate we're responsible for more than 95 per cent of the production on these assets in 2023.

And the fourth quarter. These assets produce approximately 2600, <unk> with 41 per cent oil and generated $8.6 million up at that level of cash flow.

Dax McDavid: As Chris mentioned earlier, this acquisition has a more growth-oriented production profile relative to our recently divested assets. From December 2022 to December 2023, monthly production on these assets grew by 89%, a stark contrast to the approximate 7% decline over the same period on the assets we divested in December 2023. At year-end, there were approximately 5.1 net line-of-sight wells and 9.6 net remaining locations, 73 percent of which were in the Greater Wattenberg Field, providing visibility and running room for future development.

Chris mentioned earlier this acquisition has a more growth oriented production profile relative to our recently divested assets from December 2022 to December of 2023 monthly production on these assets rude about 89% a stark contrast to the approximate 70 per cent decline over the same period.

These assets, we divested in December of 2023.

A year and there were approximately 5.1 net line of sight wells and 9.6 and that remaining location, 73% of which were in the greater wattenburg field, providing visibility and running room for future development.

Dax McDavid: We were able to underwrite future DJ Basin activity with more certainty relative to other areas in the United States because of Comprehensive Area Plans, or CAPs, and Oil and Gas Development Plans, or OGDPs, which are filed with the Colorado Energy and Carbon Management Commission and must be approved before development can take place. The DJ Basin Acquisition Acreage has exposure to several multi-year caps and OGDPs, which contain 26% of remaining inventories and represent a total of approximately 2,700 NRAs and 2.5 net remaining locations as of December 31st. These CAFs and OJDPs don't guarantee operator activity, but administratively, it is challenging for operators to deviate from these plans once they are approved.

We were able to underwrite feature deejay based on activity with more certainty relative to other areas of the United States, because the comprehensive area plans or cats, and oil and gas development plans or O G. P's, which are filed with the Colorado energy and carbon management Commission and must be approved before development can take place.

D J based on the acquisition acreage has exposure to several multiyear cast an agent fees, which contained 26 per cent of remainder of inventory and represent a total of approximately 2000 702.5.

Location as of December 31, please.

<unk> don't guarantee operate activity that administratively it is challenging for operators to deviate from these plans once they are approved.

Dax McDavid: As you can see on slide 9 in our earnings presentation, the D.J. Basin acquisition acreage is in the core of the play and expands our D.J. Basin NRA by 52 percent from approximately 25,000 NRAs to over 38,000 NRAs. On a pro forma combined basis, our assets cover approximately 810,000 gross acres, or 49% of the entire DJ. and 57% of the greater Wattenberg Field, which contains the best rock and is under the most active operators in the basin. These assets are prospective for the Niobrara and Codell, both of which are being co-developed across most of the A-group.

So you can see on five nine and our earnings presentation.

Okay based on acquisition acreage is in the core of the play inexperience R. D. J <unk> by 52% from approximately 25000, Monterey whoever 38000 that arise.

On a pro forma combined basis or assets cover approximately 810000 gross acres or 49% of the entirety database and 57 per cent of the greater Wattenburg field, which contains the best rock and is under the most active operators in the basin.

These athletes are perspective for the neighbor Aaron Caudell, both of which are being co developed a cough most of the acreage.

Recent public commentary from Chevron <unk> regarding the DJ basin has been quite positive, indicating that their assets are hardly economic.

They have also emphasize commitments to deploy capital and great production in 2024, and beyond with Cats and I G. D PS.

Dax McDavid: Recent public commentary from Chevron, Oxy, and Civitas regarding the D.J. Basin has been quite positive, indicating that their assets are highly economical. They have also emphasized commitments to deploy capital and grow production in 2024 and beyond with CAHPS and OGDP. Chevron has underscored their dedication to the D.J. Basin

<unk> has underscored their medications a D J basin comedy that their acreage of high castle margin low breakeven barrels and has permits that extend the late 20th 29.

I've seen recently recently highlighted several positive aspects about three D. J based on the access as well, including a 32 per cent improvement in well productivity from 2022, 2023, and 11% implied annual production growth for the Rockies. Another segment based on the mid point of the 2024 guidance.

Dax McDavid: Basin, commenting that their acreage has a high cash flow margin, low break-even barrels, and has permits that extend through the late 2029. I have recently highlighted several positive aspects of the D.J. Basin's assets as well, including a 32% improvement in well productivity from 2022 to 2023 and 11% implied annual production growth for the Rockies and other segments based on the midpoint of their 2024 guidance. Cititas recently disclosed that their 2024 DGA Basin Development Plan is focused on the highly prolific Watkins area, a region that contains Box Elder, one of the larger caps on the DGA Basin Acquisition Agreement.

So the past recently disclose with their twenties twenty-four DJ Basin development plan.

This in the highly prolific Watkins area or region that contains box elder one of the larger cats DJ based on acquisition acreage.

Does the cough highlighted must improve productivity and the Watkins area in 2023 relative to 2022, resulting in a 10% higher eur's and 40 per cent higher returns as of February 1975 per cent of the rigs running the entire D. J basin. We're on our performer physician an increase of three <unk> relatively <unk> legacy assets.

The race on our pro forma acreage are exposed to 100 per cent of Cvs <unk> and her dad's total rig activity in the basin.

In addition to the D. J based on acquisition, we'd acquired over 500 Permian Basin erase the new Mexico in exchange for classy shares of our stock in December.

Dax McDavid: The task highlighted much improved productivity in the Watkins area in 2023 relative to 2022, resulting in 10% higher EURs and 40% higher returns. As of February 19th, 75% of the rigs running the entire DGA Basin were on our performer position, an increase of 3X relative to the rigs on Sitio's legacy assets. The rigs on our proforma acreage are exposed to 100% of CVX, Oxy, and Verdad's total rig activity in the basin.

This transaction was with one of our long standing relationships and if someone from whom we required F. S. In the past.

Arkansas Nations strategy continues to be focused on executing relationship driven deals versus broad option processes, which we believe differentiate video from any of our peers.

Oh, no I'll turn the call over to curiosity are CFO to discuss fourth quarter of 2020 the results.

Thank you that our assets continue to perform consistently with protection from our royalty interest producing an average of 35770 6K in the fourth quarter and 36338 Bowie a date for the second half of 2023, which is just about the mid point of our second half 2020.

Carrie L. Osicka: In addition to the DJ Basin acquisition, we acquired over 500 Permian Basin NRAs in New Mexico in exchange for CLAXSE shares of our stock in December. This transaction was with one of our longstanding relationships and is someone from whom we've acquired assets in the past. Our consolidation strategy continues to be focused on executing relationship-driven deals versus broad option processes, which we believe differentiates video from many of our peers. I'll now turn the call over to Carrie Osicka, our CFO, to discuss fourth quarter 2023 results. Thank you, Dax. Our assets continue to perform consistently, with production from our royalty interest producing an average of $35,776 BOE a day in the fourth quarter and $36,338 BOE a day for the second half of 2023, which is just above the midpoint of our second half 2023 guidance. Our reported results included 82 days of contribution from our Appalachian and Anadarko assets because the divestiture closed on December 22nd The reported fourth quarter production was 47% oil. However, when excluding prior period adjustments, fourth quarter production was 49% oil.

Three guidance range are reported results included 82 days contribution from our Appalachia and Anadarko assets because of divestiture closed on December 22nd.

Reported fourth quarter production with 47% oil however, when excluding prior prior adjustments fourth quarter production with 49% while on a pro forma basis, our fourth quarter production was 36623.

A day, including a full quarter of production from the D. J basin in December Permian acquisitions in excess bleeding production from the divested assets.

Donald rig count and the Permian basin in the overall U S. During the fourth quarter, but down by 4.2% and 3.8 per cent, respectively. We estimate that seven seven that wells returned in line on our acreage during the fourth quarter down from the estimated 9.5 that both turned in mind during the third quarter. We ended the year.

With an all time company high of 53.4 pro forma net line of sight, well, including approximately 5.1 that well it's from the D. J thing, it's an acquisition the number of <unk> as a per cent of total net lineup tight while it shifted from 59% at the end of third quarter, 264% at year end, which is.

Carrie L. Osicka: On a pro forma basis, our fourth-quarter production was 36,623 BOE a day, including a full quarter of production from the DJ Basin and December Permian acquisitions and excluding production from the divested assets. Horizontal rig count in the Permian Basin in the overall U.S. during the fourth quarter was down by 4.2% and 3.8%, respectively. We estimate that 7.7 net wells were turned in line on our acreage during the fourth quarter, down from the estimated 9.5 net wells turned in line during the third quarter. We ended the year with an all-time company high of 53.4 pro forma net line-of-sight wells, including approximately 5.1 net wells from the D.J. Basin acquisition. The number of net spuds as a percent of total net line-of-sight wells shifted from 59% at the end of the third quarter to 64% at the year end, which is usually an indicator of increased near-term activity. We reported pro forma fourth quarter discretionary cash flow of $124 million, which included $8.7 million of incremental post-October 1st effective date cash flows from the D.J.

Usually get an indicator of increase near term activity.

We reported pro format fourth quarter discretionary cash flow of $124 million, which included 8.7 million of incremental <unk> October for effective date cash flows from the D. J Nathan and for me an acquisition and benefited from a 21 per cent increase in interest expense versus the third quarter in 2023.

Our board declared a fourth quarter catch dividend at 51 cents per share a common stock based on 65% payout ratio a pro forma D. C. F, which included an uplift of approximately four cents per share from D. J based on acquisition and for me an acquisition Cashwell in the fourth quarter similar to the dividend.

<unk> for the fourth quarter of 2023, we expect included posted effective date cash flow from the D. J V. It's an acquisition in our calculation a first quarter of 2024 D. C F.

We ended 2023 with an $850 million powering bass for about three and liquidity of 588 million as a result of the enhancements to our capital structure made during 2023, we have better access to capital in are much better position to finance acquisitions going far apart and.

Carrie L. Osicka: Basin and Permian acquisitions and benefited from a 21% decrease in interest expense versus the third quarter of 2020. Our board declared a fourth quarter cash dividend of $0.51 per share of Class A common stock based on a 65% payout ratio of pro forma DCF, which included an uplift of approximately $0.04 per share from DJ Basin Acquisition and Permian Acquisition cash flow in the fourth quarter. Similar to the dividend calculation for the fourth quarter of 2023, we expect to include post-effective date cash flow from the DJ Basin Acquisition in our calculation of first quarter 2024 DCF. We ended 2023 with an $850 million borrowing-based revolver and liquidity of $588 million.

Included in yesterday's earnings press release, we release, our full year 2024 guidance are 20th 24 at outlook underpinned by the record number of line of sight wells on our property contribution from the D. J based in acquisition properties and the cap and O G D. B at the accident and some higher interest as well as our in process of being completed.

We're off to a fantastic start to the year with the announced highly of frequency database and acquisition and I'm optimistic about improving trends in the minerals M&A market for 2024 that concludes our prepared remarks, operator, please open up the call for questions.

Thank you Kerry if you'd like to ask a question. Please press stop sort of buy one when you're trying to think he passed now if you change your mind. Please pester 19, when preparing to ask a question it tastes and show your spine is unlimited lately.

Operator: As a result of the enhancements to our capital structure made during 2023, we have better access to capital and are much better positioned to finance acquisitions going forward. In yesterday's earnings press release, we released our full year 2024 guidance. Our 2024 outlook is underpinned by the record number of line-of-sight wells on our properties, plus contribution from the DJ Basin Acquisition Properties and the CAPs and OGBBs that Dax mentioned, and some higher interest wells are in the process of being completed. We're off to a fantastic start to the year with the announced highly accretive DJ Basin Acquisition, and I'm optimistic about improving trends in the minerals M&A market for 2024. That concludes our prepared remarks. Operator, please open up the call for questions. Thank you, Carrie. If you'd like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2.

Oh first question today comes from <unk> from Keybanc capital markets. Please go ahead.

Good morning folks I hope you all got some sleep last night.

My first question.

I wanted to ask you know with the D. J based on our position you know.

When you look at things outside Permian.

Is there a higher hurdle rate given sort of west industry activity with just a simple sort of arbitrage saw being able to buy it at four times cash flow.

Thanks Sandwich bags, <unk> Wheatley underwrites, the returns and we're able to technically underwriting a lot of and all and.

And all that.

This is out there.

So it was that I always forget about that okay.

We do see increase actually from the the offers I mentioned.

Earlier in the DJ Medicine, we see an increase in activity and we do see them that has been cancelled that makes them and we'll see that basin continued with returns on magenta you got it right.

Timothy A. Rezvan: When preparing to ask a question, please ensure your phone is unmuted locally. Our first question today comes from Tim Rezvan from KeyBank Capital Markets. Please go ahead. Good morning, folks. I hope you all got some sleep last night.

Okay. Okay.

Okay, I understand I guess visibility activities was what matters. Okay. Thank you.

If I could pick it up this is more for for Chris as as a board member.

Timothy A. Rezvan: My first question... I wanted to ask, you know, with the DJ base and acquisition, when you look at things outside the premium, is there a higher hurdle rate, you know, given sort of less industry activity, or was this a simple sort of arbitrage you saw being able to buy it at four times cash flow? Thanks, Sam. No, there's not.

Or for Kerry Uhm.

I was curious you know with this pretty significant change in a cast returned framework.

I've ordered you could talk about you know engagement with with shareholders in the last few months as as you came to this decision.

Or did you do you think shareholders kind of wanted this or is this more of an idea of the board feeling compelled to to step in with shares.

Dax McDavid: We underwrite to get returns, and we're able to technically underwrite a lot of, in all the basins out there, there's not. So I know we can forget about that, but we do see an increase, actually, from the operators I mentioned earlier in the BJ Basin. We see an increase in activity, and we do see them dedicating capital to that basin, and we see that basin competing with returns on engaging the other basins that they have an opportunity to drill in. Okay. Okay. I understand. I guess visibility and activities are what matters. Okay. Thank you. If I could pivot, I don't know if this is more for Chris as a board member or for Carrie.

Where they were to to support the equity I'm, just curious kind of what would eventually got got the board to agree to make this change.

Hey, good morning feminist groups.

I would say this is not a trade refunding makes us because we think the stock as cheap as really fundamentally underpinned by our outlook for the business going forward. We did engage with several shareholders. Every time, we <unk> we have some questions about the capital return framework. So.

This was an ongoing dialogue with with your orders and at the board level, it's been going on for months and.

A lot of sophomore conditions.

Christopher L. Conoscenti: I was curious, you know, with this pretty significant change in your cash returns framework. I wonder if you could talk about, you know, engagement with shareholders in the last few months as you came to this decision, you know, as the board did. Do you think shareholders kind of wanted this, or was this more an idea of the board feeling compelled to step in with shares, you know, where they were to support the equity? I'm just curious about what eventually got the board to agree to make this change. Hey, good morning, Attendant Scripps.

We're excited about it because.

When you look at the way the.

Coming to get into this year's the security measures and you're looking at getting out of the castle <unk> and the VJ.

He looked at our record level from one of my balance overall and and then.

Recovering trends and activity in the <unk> in the fourth quarter.

Particularly in October onwards that gives us a lot of comfort leading into 2024 and the other thing that we like about 22004, two unlike 2023.

These components.

Christopher L. Conoscenti: I would say this is not a trade we're trying to make just because we think the stock is cheap. It's really fundamentally underpinned by our outlook for the business going forward. We did engage with several shareholders. Every time we meet with shareholders, we ask them questions about the capital return framework.

The acquisition market and you can see that evidence by the activism went out. This morning. So we're hopeful that there'll be more of them this year as well.

Okay. Okay I appreciate that that color if I could take one one last one in it's made me more for for Kerry, we sort of baked this last acquisition to the model.

Christopher L. Conoscenti: So, this was an ongoing dialogue with shareholders and at the board level. It had been going on for months and had incorporated a lot of thought from all the participants. We're excited about it because, as Carrie mentioned, you look at activity under the caps and OGEPs in the DJ. You look at our record level of line and site wells overall, and in the recovering trend in activity in the Permian in the fourth quarter, particularly in October onwards, that gives us a lot of comfort leading into 2024. The other thing that we like about 2024, too, unlike 2023, is that we're seeing some fundamental shifts in the acquisition market, and you can see that evidenced by the acquisition coming out this morning. So we're hopeful that there'll be more of those this year as well. Okay, okay, I appreciate that. If I can take one last one in, this may be more for Carrie.

<unk> net debt you know a little shy of of $1 billion leverage still kind of north of one uhm given the successful refinancing of your debt.

What are your updated thoughts on target that target leverage and how do you think about that 65 per cent pay out it may be closing the gap with with public appears that pay a higher rate.

Thank you.

[noise] sure heighten this is Kerry yeah, we continue to target low leverage you right, where we're sitting at about a little bit about one times leverage that we target that blood leverage to preserve our financial flexibility and our ability to be opportunistic on cash acquisitions uhm at the cash acquisitions, we're gonna continue to pay down that prepayable.

<unk> to maintain that flexibility.

As far as the 65% payout goes I'd like could speak a little bit more about this but we we don't intend to change that that pay out right. This second other than <unk>.

Carrie L. Osicka: You know, as we sort of baked this last acquisition in the model, you see net debt, you know, a little shy of $1 billion, leverage still kind of north of one. Given that the successful refinancing of your debt, what are your updated thoughts on target debt and target leverage? And how do you think about that 65% payout and maybe closing the gap with public peers that pay a higher rate?

Capital return is going to work, we're going to continue to pay down that debt and keep that opportunistic flexibility on on the dead.

As soon as breath on this and then I'll leave it to our viewers to comment on there ma'am once these for US we just don't in our company Say's broke risks.

Carrie L. Osicka: Thank you. Carrie Osicka, Ross Wong, Jeanine Wai, Nathaniel Pendleton, Jarret Marcoux, Sitio Royalties We're going to continue to pay down that debt and keep that opportunistic flexibility on the debt. If Tim is correct, I'll just add that I'll leave it to our peers to comment on their payout philosophies. For us, we just felt at our company size that it's appropriate to have the amount of cash retained that we do to manage the balance sheet to recycle and protect those companies. So other companies can make their own decisions. But at our size, we feel that 65% is an appropriate amount of cash flow to return to shareholders. As we grow, that number may grow, but we're still far too small to call that time right now.

The amount of cash remain that we do to manage the balance sheet suicidal and protecting what's coming to instead of other companies going to make your own decisions, but in our side, we built a new spot.

Corporate amount of cash flow to return to shareholders as we grow that number may grow, but we're still murphy smaller to fall back on right now.

Okay. Okay, and then do you have a leveraged target is at 0.75 do you just wanna be sustainably under one times I'm trying to think about what a steady state.

A level would be.

Yeah I mean.

<unk>, we want to have low level. So we can be optimistic when opportunities present themselves and so it's not a big numbers ma'am, it's really just.

Carrie L. Osicka: Okay, okay. And then do you have a leveraged target? Is it 0.75?

We'll take them a little bit of leverage on the balance sheet and the revolver for Catholic physician and then we're paying down after those acquisitions and then we'll go to the back up and lay down and repeat.

Carrie L. Osicka: Do you just want to be sustainably under one time? I'm trying to think about what a steady state and a level would be. I think Carrie's remarks. Carrie was right, we want to have low leverage so we can be opportunistic when opportunities present themselves. And so it's not a fixed number, Tim, it's really just, you know, we'll take on a little bit of leverage on the balance sheet and the revolver for cash acquisitions, and then we'll pay it down after those acquisitions, and we'll build it back Okay, okay.

Okay. Okay I appreciate it thanks, everyone.

Thank you.

The next question on the line <unk> <unk>. Please go ahead.

Thanks for the time, but first question is on the expected activity specifically I'm just wondering given you a great line of sight you touch what all the line of sight Wells and then if you look at sort of the current rig count out there and maybe conversation you all happened with your operators I'm. Just wanted if you maybe in broad terms you are <unk> could you speak to you.

Neil Dingman: Appreciate it, thanks everybody. Thank you. The next question on the line is from Neil Dingman from Truist. Please go ahead. Hi Mornell, thanks for the time.

<unk>, but it's in the continued solid activity you know I would call it well in the next year, if you're anticipating that.

Neil Dingman: My first question is about the expected activities. Specifically, I'm just wondering, given your great line of sight, you talked about all the line-of-sight wells, and then if you look at sort of the current rig count out there and maybe conversations you all have with your operators, I'm just wondering if, maybe, in broad terms, your deck could just speak to your confidence in the continued solid activity, you know, I would call it well in the next year if you' Sure, Neil. Good morning.

Sure Neil Good morning, I'll make a couple of comments and turn it over to that so just want at a macro level. We did see the breakdown decline during the year on a rabbit and broadly across the U S.

But.

That decline, Vermont, and the Permian starting June and confusion about October whereas it started to rebuild so we thought activity unwrap the continuing rebound through the end of the year and that's how we end of 2024 alternatives <unk> issue a specific comments.

Christopher L. Conoscenti: I'll make a couple of comments and turn over to DAX. So, just at a macro level, we did see the rig count decline during the year on our asset and broadly across the US, but that decline for us in the Permian started in June and continued until about October, where it started to rebound. So we saw activity on our asset continue to rebound through the end of the year, and that's how we entered 2024. I'll turn it over to DAX for any more specific comments. Thank you, Chris.

No. Thank you Chris.

This one with a side of our D. J, a physician I mean, especially in the back while the reasons off the top charity from the media outrage.

Yeah.

I'm 49.

That Microsoft Sidewalls, Brian.

<unk> some of them are back of operators on that <unk> <unk> and Chevron. So we have 9.6 inventory wells might be home at 2.5.

Would you like to pay for these taxes fees, which gives you one yep.

Dax McDavid: You know, that's why I'm excited about our DJ acquisition. I mean, especially on the back of all the recent positive top carry from the DJ operators in the basin. You know, the activity is driven by 5.9 net line side wells running some of the most active operators in that basin, Citipas, Oxy, and Chevron. So, you know, again, we have 9.6 inventory wells, 2.5 of which are located in these caps in those GPs, which give you, you know, you have a better line of sight to activity on those inventory wells. So, no, we're excited about that.

Nine Q activity on those inventory well so.

No.

<unk> on that.

Great Great update and then Uhm just by second quick one on the M&A physically active until you and Chris just wondering you know we don't see near like you all do the deal flow just wandered based on what you see it out there.

Mineral deal flow still is as active as ever and you know is that the price is still you know get obviously fantastic price on your D. J. So I'm just let it or are they are rational other sort of price tag that's out there that you could add chili shape.

The key question for 2024 meal.

Neil Dingman: Great, great update. And then just my second quick one on M&A. Physically, you know, Dak, maybe for you and Chris, just wondering, you know, we don't see the deal flow nearly as much as you all do.

<unk> <unk> <unk>.

Q for were brought auction processes, failing and we like to see that because number one were rarely ever successful and burn off some policies, but number two what it does is it tends to reset expectations with those and so does the multiple brought options for the order is really encouraging.

Christopher L. Conoscenti: I'm just wondering, based on what you're seeing out there, is the mineral deal flow still as active as ever? And, you know, is the price still, you know, again, obviously, a fantastic price for your DJ. So I'm just wondering, are there any other sort of price tags that's out there that you potentially see? That's the key question for 2024, Neal.

For for 2024.

We as a company in our history.

Executed on probably less than.

93, plus acquisition drew brought off processes. Most of what we do is negotiate a transaction like you did with the VJ maiden transactions, we not this morning.

Christopher L. Conoscenti: The optimistic signs we saw in Q4 were broad auction processes failing, and we like to see that because, number one, we're rarely ever successful at broad auction processes, but number two, what it does is it tends to reset expectations from sellers. And so to see multiple broad auctions fail in the fourth quarter is really encouraging for 2024. Now, as I said, we, as a company, in our history, have executed on probably less than 10 out of our 193 plus acquisitions through broad auction processes. Most of what we do is through negotiated transactions, like we did with the BJ Mason transaction that we announced this morning. We tend to have more success engaging with people directly and finding solutions, and those conversations take years to evolve. Exactly when those will culminate in a transaction, but we have multiple conversations like that ongoing right now, and we're encouraged for 2024. Great details.

We tend to have more.

Engaged with people directly and find solutions.

And those conversations.

<unk> and <unk>.

Definitely when those will.

Culminating in a transaction, but we have multiple multiple conversations like that ongoing right now and we're encouraged for 24.

Great details. Thank you all.

<unk>.

The next question on the line, it's been directly from Cecil. Please go ahead.

Good morning, <unk> Congrats on your D J acquisition in return of capital initiatives.

Thank you Sir.

For my first question I wanted to focus on your 2024 guidance is outline your guidance implies maintenance level activity versus Q4, <unk> site activity implies <unk> how.

How would you frame your production trajectory for 2024 are you guys expecting heavier tables in the second half based on Kerry's commentary.

Sure. So I'll I'll take that person Gary feel free to.

Supplement with any kind of do you have.

So when we look at the.

Neil Dingman: Thank you all. Thank you. The next question on the line is from Derrick Whitfield from C4, please go ahead. Good morning, all.

The line of my well.

Clearly the record levels for the company, but the key is gonna be the conversions until.

Derrick Lee Whitfield: Congratulations on your DJ acquisition and return of capital. Thank you. For my first question, I wanted to focus on your 2024 guidance. Is your guidance implying maintenance level activity versus Q4 while a lot of site activity implies growth? How would you frame your production trajectory for 2024? Are you guys expecting heavier kills in the second half based on Carrie's commentary?

So what we saw in the fourth quarter about some dumb Manuel has turned on line.

Download <unk> four last year and I've been active as it rebounded during the fourth quarter, we expect that to start to roll through the first part of this year.

Right on.

Multiple wells for example.

Christopher L. Conoscenti: Sure, so I'll take that first, and Carrie, feel free to add any comments you have. So when we look at the line-of-sight, well, as I said, clearly it's at record levels for the company. But the key is going to be just converting to TIL.

In line just in March here. So there are specific instances, where we have some.

<unk> to to Muslim in specific timing on specific interests that we have.

Christopher L. Conoscenti: And what we saw in the fourth quarter, about 7.7 net wells coming in line, down a little bit from the third quarter last year. As I said, activity on our asset rebounded through the fourth quarter, and we expect that to start to roll through the first part of this year. We have a line of sight on multiple wells, for example, coming in line just in March here.

But for the most part we look at 2024.

Really.

<unk> put it on hold and called you down for operators really got into flatness, mostly religion tightened Rosen Herman and become <unk> covers about 35% of the Brian Mason you should expect our assets Samir pretty closely within 10 to sign up for me is Nathan done and and that is not.

Christopher L. Conoscenti: So there are specific instances where we have some ability to model in specific timing on specific interests that we have. But, you know, for the most part, we look at 2024, and it's really. You've heard it on all the calls you've been on; we're operating really guiding to flat-hitch to low single-digit type of growth in the Permian. And because our asset covers about 35% of the Permian Basin, you should expect our asset to mirror pretty closely what the Texas side of the Permian Basin does. And that is not growing at double digits, but it's still showing good sustainable production and, in some cases, some modest growth, and that's what we expect ours to do as well, or if they can... Yeah, the only other thing I'll add to that... Sorry, I was just going to add one other thing.

Throwing in double digits, but it is still showing <unk> production in some cases, some modest road and that's what we say in order to do as well.

Sure. If you can get the only other thing I'll add to that.

Sorry, I just add one other thing the only other <unk> to remember to you. It's just that development on our app that can affect the annual production rates.

Wow activity can be constant it just depends on what you <unk> get developed.

It makes sense, then maybe you're looking at it a little bit longer term in perspective, given the considerable M&A, we witness across it for me and over the last six months with Exxon on Etsy and Diamond back what did to ask for your thoughts on the net impact you can have on your business and pace of development as those transactions were Texas heavy.

Christopher L. Conoscenti: The only other nuance to remember is just how net development on our asset can affect annual production rates. While activity can be constant, it just depends on which, you know, NRIs get developed. Thanks, guys.

Yeah, that's a good question the.

Derrick Lee Whitfield: And maybe looking at it a little bit longer term in perspective, given the considerable M&A we've witnessed across the Permian over the last six months with Exxon, Oxy, and Diamondback, I wanted to ask for your thoughts on the net impact it could have on your business and pace of development as those transactions were Texas-heavy. That's a good question. The operator mix for our business has really changed over the last several years. If you just rewind the clock a couple years, you would have seen Callen, PDC, Noble, Pioneer, and Darko in our top ten.

The operator mixed of our business has really changed over the last several years used for one o'clock a coupla years, you would've been <unk>.

Talon, PDC noble pioneer Anadarko and or talk to him and and now is.

Building with the Exxon Chevy oxygen capacity, Diamondback, and others, who have been active in the consolidation business and really when it's done.

It should be effective putting our minerals being operated in the hands of a bigger better capitalised operators, who have more sustainable program through cycle. So I think in fact number one is slightly less volatility in activity overtime and.

Christopher L. Conoscenti: And now it's building with Exxon, Chevron, Oxy, Apache, Diamondback, and others who have been active in the consolidation business. And really, what it's done is it's had the effect of putting our minerals being operated in the hands of bigger, better-capitalized operators who have more sustainable programs to recycle. So I think impact number one is slightly less volatility in the activity over time.

And and and what we hope to do is.

In terms of engagement with operators hopefully changing the conversation between operator mineral and we're over time as we have fewer operators to manage those relationships with we can hopefully just have a more directly sonship with them.

Christopher L. Conoscenti: And what we hope, too, is in terms of engagement with operators, hopefully changing the conversation between operator and mineral owner over time as we have fewer operators to manage those relationships with. We can hopefully just have a more direct relationship with them and get better information as we grow. Chris, if I could ask one more question, with regard to the $200 million share repurchase program. How would you compare the value of buying your stock today versus the value of M&A opportunities that are available or are available in the foreseeable future? Yeah, it's an exercise we go through with every single acquisition evaluation we do. We look at the sensitivities of the potential returns of the acquisitions we're evaluating and compare them against our stock.

They get better information as we grow.

Chris if I could ask one more just with regards to the 200 million share repurchase program.

How would you compare the value of buying your stock today versus the value of the many opportunities that are available.

Are available in the foreseeable future.

Yeah.

As an exercise we go through and every single acquisition valuation, we do we look at the the sensitivities of the potential returns on the acquisition Grovelling me names and compare it against our song and so should we make the acquisition, we're contemplating or should we make the acquisition borrow mills environment stock and so it is an analysis we've done.

Christopher L. Conoscenti: And so, should we make the acquisition we're contemplating, or should we make the acquisition of our own minerals and buy our own stock? And so, it's an analysis we've done over time in our business, and we look at it now and say it's a really compelling opportunity based on the dynamics in the market today and also with the outlook we have going forward. The other nuance here is that this is not an either-or decision. We can have compelling acquisition opportunities in front of us, and we can execute on the share purchase and buy our own stock, effectively buying our own minerals, because the return of capital program is set up such that the buyback is happening within the framework of the 65% return of capital to our shareholders. Very helpful, Chris.

Throughout time on our on our business and we look at it now they really compelling opportunity.

Based on the dynamic in the market today and also with that almost we have going forward.

Nuance here does that this is not a an either or does this we can have compelling acquisition opportunities in front of us and we can execute on certain purchases and <unk> essentially buying our own minerals.

Because the return of capital partners.

Buyback is happening within the framework of the 65% return on capital to our shareholders.

Very helpful. Chris Thanks for your time.

Thank you.

As a reminder to ask any further questions. Please Mr. Followed by one when you're trying to think he Pat now.

Derrick Lee Whitfield: Thanks for your time. Thank you. As a reminder, to ask any further questions, please press star forward by one on your telephone keypad now. Our next question is from Noel Parks from Chewy Brothers Investment. Please go ahead.

Next question <unk>. Please go ahead.

Hi, good morning.

We're not.

Noel Augustus Parks: Hi, good morning; weren't all I just had a couple things, um, you know, one thing I was wondering about, uh, since, there is, you know, oil prices haven't been too bad lately, but there does seem to be some macro uncertainty and decisions out there about what the year is going to look like. I just wondered, in terms of visibility on activity levels, are you seeing any oil hedging trends among your operators, either kind of uniformly across all the operators, or I was wondering if you're seeing any divergences, you know, different folks kind of take a different bite at the apples, trying to figure out whether to protect against downside or try to open themselves up more to potential upside from different operators.

I just had a couple of things you know one thing I was wondering about since.

There is oil prices hasn't been.

Been too bad lately, but there there does seem to be some macro uncertainty indecision out there, but what good you're just gonna look like.

[noise] wandered in terms of visibility on activity levels are you seeing any oil hedging trends among your operators either kind of uniformly across across the operators are are is wondering if you're seeing any any divergences differ.

Different froze can I take a different by at the apples you're trying to figure out what it is.

Protect about you know, okay against downside or or try to open themselves up mode of potential upside.

Mmm.

Just from different operators typically it's driven by company size and leverage.

Noel Augustus Parks: Typically, it's driven by company size and leverage. Just broadly speaking, you'll see smaller companies and companies with more leverage and larger capital programs to protect be more active with hedging. And an important nuance to remember is that the hedging program that the operators engage in has no impact on the realized prices for Sitio. So we get the prices at the delivery point that the operator gets. Any sort of financial hedging they do on their side is for their account, and we have the ability to hedge or not hedge on our account.

Broadly speaking, you'll see a smaller companies.

Companies with more leverage and modern download programs to protect <unk>.

Active with with having <unk>.

And the important nuance to remember is that the hedging program that'd be awkward engaging has no impact realized prices recipient.

So we get the prices have been delivered pointed that'd be all for it or against any sort of information do you need.

You want me to sign up for their account and we have the ability to head you're not <unk>.

Christopher L. Conoscenti: Right, absolutely. I guess I'm just, um... As you've discussed, we've had consolidation going on in the Permian, different assets heading into different hands. I guess I'm in the process of trying to sort of picture just what the basin looks like in terms of, you know, just operator behavior going forward. And I. I guess I'm thinking about the cost side and capital discipline. We certainly haven't haven't seen anybody really going crazy with reactivity, either with an established footprint or or or the companies that have been consolidating. And and so I guess I'm curious to the degree you get a feeling from operators about what they think about the inflation outlook. Just also curious if there are any trends you're hearing and whether that's, you know, affecting folks' aggressiveness at all.

Mmm right absolutely.

I guess I just.

You know being as you've discussed we've had consolidation going on in the Permian different assets heading into different hands and.

I I guess I'm <unk> I'm in the process of trying to sort of <unk>.

Picture.

Just what what the base and looks like in terms of you know just operator behavior, you're looking forward and.

I.

<unk>.

I guess I can look at thinking about the cost side.

And capital of discipline, we certainly haven't haven't seen anybody really going crazy with with reactivity, either with an established flip print or or or the companies that have been consolidating.

And.

And so I I, I guess I'm I'm curious to that or do you get a feeling from.

Operators about.

You know what they think about the inflation outlook.

I'm also curious if you're <unk>, you're you're hearing and whether that's affecting folks aggressiveness at all.

Christopher L. Conoscenti: Sure, the couple of trends we're seeing, one is just a continued march towards higher efficiencies for the operators. They continue to get better and more cost efficient at what they do, and so I think even if you see operators announce a slight decrease in rig counts post-acquisition, oftentimes that is compensated for and even potentially increased by efficiency and gain and apply it throughout a larger program. And I could make a comparison back to history; there are good M&A and bad M&A for Sitio when we look at our operator base. The bad M&A for us is where two of our larger operators get together and slash the combined rig program to a fraction of what it was for either one of those companies alone. And that's what happened with, for example, OxyManidarko several years ago.

Sure. The there's a couple of trends. We're seeing one is just just continued march towards higher efficiencies for the operators to continue to get better and more cost efficient at what they do and so I think even and you see operators.

A slight decrease in rig counts post acquisition.

Oftentimes it's.

Compensated for.

And and he didn't and potentially decrease by efficiency gain and apply throughout a larger program and.

I completed embarrassing back in history, there's there's good and bad and named recipient when.

When we look at our offer to face the bad breath is where two of our lawn or are you just get together and and and slash the migraine preventative approximately what it what it was for either one of those companies stand alone and that's what happened with that for example, with occupant in and Darko several years ago. The type of entity is having today is quite good for us we have healthy.

Christopher L. Conoscenti: The type of M&A that's happening today is quite good for us where you have healthy companies getting together, just becoming bigger, making them more efficient and more capital efficient. So for us as a mineral owner, we'd like to see this type of consolidation seen today, and we're encouraged by it for our business. Great, thanks a lot. Thank you. As a final reminder, to ask any further questions, please press star 4 by 1 on your telephone keypad now. It appears we have no further questions, so we will conclude the call now. Thank you for your time today; you may now disconnect your lines and enjoy the rest of your day. 2012 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Creative Services

He's getting together, just becoming bigger helps more efficient and more capital efficient. So Verizon is the mineral or we'd like to see this type of consolidation, saying today and we're encouraged vying for our business.

Great. Thanks, a lot.

Thank you.

As a final reminder to ask any further questions. Please press stop by one on your <unk>. Thank you Pat now.

It appears we have a nice set of questions and they'll they'll complete the call now. Thank you for your time State you may now disconnect your lines and you enjoy the rest of your day.

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