Q1 2024 Sitio Royalties Corp Earnings Call

[music].

Good morning, and welcome to D. C to Ilg's first quarter 'twenty 'twenty four earnings conference call. My name is Carla and I will be the operator for the call today. During the presentation. You can I just ask a question by pressing star followed by one on your telephone keypad. If you change your mind.

Operator: Good morning, and welcome to the CTO Royalties fourth quarter 2024 earnings conference call. My name is Carla, and I will be the operator for the call today. During the presentation, you can register to ask a question by pressing the star followed by one on your telephone keypad. If you change your mind, please press star followed by two.

Press Star followed by Q1.

We will now like to hand, the call over to Crosswalk, Vice President of finance and.

Investor Relations to begin Ross. Please go ahead, thanks, operator, hey, good morning, everyone.

Operator: I will now like to hand the call over to Ross Wong, Vice President of Finance and Investor Relations, to begin. Ross, please go ahead. Thanks, operator. Good morning, everyone.

Ross Wong: Welcome to the Citio Royalties first quarter 2024 earnings call. If you don't already have a copy of a recent press release, and that's your presentation, please visit our website at www.cidio.com. We will find it in our investor relations section. I'm here with you today to discuss our first quarter 2024 financial and operating results. Chris Connifenti, our Chief Executive Officer, Kerry Osika, our Chief Financial Officer, and other members of our executive leadership. 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 will turn the call over to Chris.

Crosswalk: Welcome to the city of royalties first quarter 2024 earnings call.

Speaker Change: If you don't already have a copy of our recent press release and updated.

Crosswalk: The investor presentation.

Crosswalk: Please visit our website at Www Dot <unk> dot com.

Crosswalk: Find them on our Investor Relations section.

Chris: With me today to discuss our first quarter 2024 financial and operating results as Chris <unk>, Our Chief Executive Officer Curios Sika.

Chris: Chief Financial Officer, and other members of our executive leadership team.

Chris: Before we start I would like to remind you that our discussion today may contain forward looking statements and non-GAAP measures.

Chris: 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.

Chris: And with that I will turn the call over to Chris.

Chris Sika: Thanks, Ross good morning, everyone and thank you for joining <unk> first quarter 2024 earnings call, we're off to a great start to the year with robust operator activity on our acreage. The recent closing of the DJ Basin acquisition and the commencement of share repurchases in March this quarter with a clear demonstration of the strength of our business model, which is designed.

Chris Connifenti: Thanks, Ross. Good morning, everyone, and thank you for joining CITIO's first quarter 2024 earnings call. We're off to a great start to the year with robust operator activity on our acreage, the recent closing of the DJ Basin acquisition, and the commencement of share repurchases in March. This quarter was a clear demonstration of the strength of our business model, which is designed to be diversified across regions, operators, and commodities and focused on the returns expected from our acquisition underwriting.

Chris: <unk> to be diversified across regions operators and commodities and focused on the returns expected from our acquisition underwriting.

Chris Connifenti: I want to thank our team at Citio, which is driven by our belief in building shareholder value by creating a differentiated company focused on high-rate of return investments and innovating the business of managing a large and complex asset base.

Chris: I want to thank our team at CTO, which is driven by our belief and building shareholder value by creating a differentiated company focused on high rate of return on investments and innovating the business of managing a large and complex asset base.

Chris Connifenti: The robust activity I referred to came from multiple regions, primarily Delaware, Eagleford, and DJ, and multiple operators, both public and private, which turned in 14.3 proforma net wells in the first quarter, resulting in a 3.7% quarterly proforma production growth rate. Our first quarter pro forma production was a company record high of 37,970 BOEs per day, 51% of which was oil. Additionally, approximately 40% of all newly producing wells in the quarter came online in March.

Chris: The robust activity I referred to came from multiple regions, primarily Delaware Eagle Ford and DJ and multiple operators, both public and private which turned in line 14, three pro forma net wells in the first quarter, resulting in a three 7% quarterly pro forma production growth rate.

Chris: Our first quarter pro forma production was a company record high of 37970 Boe per day, 51% of which was oil.

Chris: Additionally, approximately 40% of all newly producing wells in the quarter came online in March. So we expect to see positive impacts from this in our second quarter production. We ended the first quarter with $52 nine pro forma net line of sight wells, which supports our outlook for near term activity. We will continue to monitor operator activity.

Chris Connifenti: So we expect to see positive impacts from this in our second quarter production. We ended the first quarter with 52.9 pro forma net line-of-sight wells, which supports our outlook for near-term activity. We will continue to monitor operator activity, the macroenvironment, and industry trends and will update our 2024 guidance accordingly if our outlook differs materially from our previously issued guidance. On the M&A front, the DJA Basin acquisition closed on April 4, and the acquired assets produced over 2,600 BOEs per day and had asset-level cash flow of $8.5 million during the first quarter.

Chris: The macro environment and industry trends and we will update our 2024 guidance accordingly, if our outlook differs materially from our previously issued guidance on the M&A front. The DJ Basin acquisition closed on April 4th and the acquired assets produced over 2600, Boe's per day and had asset level cash flow of $8 5 million.

Chris: During the first quarter.

Chris Connifenti: These assets had consistent operator activity throughout the quarter with an estimated 1.2 net wells turn in line, all from Chevron, Oxy, and Civitas. Since the DJ Basin acquisition closed on April 4th, our first quarter reported financials do not include any impacts from these assets. However, our financials will have 88 days of contribution from these assets in the second quarter. Our minerals M&A pipeline remains strong, and we are evaluating acquisition opportunities of all sizes and across all of our regions with a continued focus on rate of return. With that, I'll now turn the call over to Kerry to provide an update on our quarterly financial results and return of capital. Thanks, Chris.

Chris: These assets had consistent operator activity throughout the quarter with an estimated one two net wells turned in line all from Chevron and oxy in civitas.

Chris: Since the D. J Basin acquisition closed on April 4th our first quarter reported financials do not include any impacts from these assets. However, our financials. We will have 88 days of contribution from these assets in the second quarter.

Chris: Our minerals M&A pipeline remains strong and we are evaluating acquisition opportunities of all sizes and across all of our regions with a continued focus on rate of return.

Chris: With that I'll now turn the call over to Kerry to provide an update on our quarterly financial results in a return of capital.

Kerry Osika: Thanks, Chris, and good morning, everyone. We reported first-quarter pro forma discretionary cash flow of $118 million and pro forma adjusted EBITDA of $144 million, which includes first-quarter cash flow from the DJ Basin acquisition. Our board approved a total return of capital equal to 65% of pro forma first quarter DCS, which on a per share basis is equal to $0.49 per share in total, comprised of a dividend of $0.41 per share of Class A common stock and share repurchases of $13 million, or $0.08 per share.

Kerry: Thanks, Chris and good morning, everyone. We reported first quarter pro forma discretionary cash flow of $118 million and pro forma adjusted EBITDA of $144 million, which includes first quarter cash flow from the DJ Basin acquisition.

Kerry: Our board approved total return of capital it will be 65% of pro forma first quarter, DCF, which on a per share basis is equal to <unk> 49 per share in total comprised of a dividend of <unk> 41 per share of class, a common stock and share repurchases of $13 million or <unk> <unk> per share.

Kerry Osika: As a reminder, our return on capital framework provides a minimum dividend equal to 35 percent of DCF and allocates at least 30 percent of DCF to additional cash dividends, share repurchases, or a mix of both. We started buying back shares in March, and throughout the month, we repurchased over 545,000 shares of Class A common stock at an average price of $23.77, which represents all of the share buybacks we executed in the first quarter.

Kerry: As a reminder, our return of capital framework provides a minimum dividend equal to 35% of DCF and allocates at least 30% DCF to additional cash dividend share repurchases or a mix of both.

Kerry: We started buying back shares in March and throughout the months, we repurchased over 545000 shares of class a common stock at an average price of $23 77.

Kerry: Which represents all of the share buybacks, we executed in the first quarter in April we continued buying back shares in the open market and also privately negotiated a block trade in which we repurchased approximately 2 million shares from two of our largest class b holders are not affiliated with our financial sponsors we're optimistic about.

Kerry Osika: In April, we continued buying back shares in the open market and also privately negotiated a block trade in which we repurchased approximately 2 million shares from two of our largest Class B holders that are not affiliated with our financial sponsors. We're optimistic about the outlook for the rest of 2024 and look forward to continuing to execute on our strategy and create long-term shareholder value through accretive acquisitions, proactively managing our minerals, and fostering a culture of continuous innovation. That concludes our prepared remarks. Operator, please open up the call for questions.

Kerry Osika: The outlook for the rest of 2024 and look forward to continuing to execute on our strategy and create long term shareholder value through accretive acquisitions proactively managing our minerals and fostering a culture of continuous innovation that concludes our prepared remarks, operator, please open up the call for questions.

Speaker Change: Thank you Jerry.

Operator: If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. If you're preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Neil Digman from Truce Securities.

Kerry Osika: If you would like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by <unk>.

Neil Digman: Greg asked your question. Please ensure your devices locally.

Neil Digman: Our first question comes from Neal Dingmann from <unk> Securities.

Neil Digman: Good morning, guys nice quarter.

Neil Digman: First question.

Neil Digman: Good morning.

Neil Digman: I want to get to the next question. Morning, and nice quarter. My first question is on something you're just talking about. When you look at capital, I'm just wondering how you all think about the allocation of that versus acquisitions out there today.

Neil Digman: Quarter. My first question is on something you were just talking about when you look at capital.

Neil Digman: Allocation I'm just wondering how do you all think about I love. The buybacks you recently did from a large hold there, but I'm just wondering how you think about that.

Neil Digman: The allocation of that versus acquisitions out there today.

Neil Digman: Yes, thanks, Neil good morning.

Ross Wong: Yeah, thanks, Neil. Good morning.

Ross Wong: We think about the buyback in the context of.

Ross Wong: The businesses ability to return capital to shareholders. So the buyback is.

Ross Wong: We think about the buyback in the context of the business's ability to return capital to shareholders. So the buyback has been done in the context of the 65% that we're returning to shareholders regardless. And so we don't view acquisitions and share buybacks as mutually exclusive. That's the strength of that strategy. So we're able to continue evaluating acquisitions and returning capital to shareholders through dividends and buybacks within this framework.

Ross Wong: Haven't done in the context of the 65% of our returning capital to shareholders, regardless and so we don't view acquisitions and share buybacks as mutually exclusive.

Ross Wong: The strength of that strategy. So we are able to continue evaluating acquisitions and return capital to shareholders through dividends and buybacks.

Ross Wong: Brendan.

Neil Digman: Yeah, I'm glad. I'm glad you said that.

Speaker Change: Yes, I am glad that I'm glad you said that I really like to see both and then.

Speaker Change: Just lastly on the line of sight Wells I'm, just wondering again, what kind of confidence does that give you I mean, it seems like you continue to.

Neil Digman: Those keep improving.

Neil Digman: Obviously.

Neil Digman: Almost through the remainder of the year into next year, maybe can you just give me a little more color and what you think that will lead into as far as volume growth.

Speaker Change: You're right.

Chris Connifenti: I really like to see both. And then, just lastly, on the line of sight, Wells, I'm just wondering, again, what kind of confidence that gives you. I mean, it seems like you continue to keep improving and, you know, obviously, you know, almost through the remainder of the year and the next year. Maybe you could just give me a little more color and, you know, what you think that will lead to as far as volume goes?

Chris Connifenti: Level absolute level of the last night.

Chris Connifenti: Near company recognize the key with these.

Chris Connifenti: You're right. The level, absolute level of the Alliance Site Wells is near company record highs. The key with these is always just timing and when they get converted to turn in line. And obviously, we don't control that, but the first quarter was a very good one for us in terms of conversion. So we saw four very large pads come on line in March by four different operators across three different regions, so again demonstrating the power of diversification across our asset base.

Chris Connifenti: Timing and when they get converted to turn in line and obviously, we don't control that but the first quarter was a very good one for us in terms of conversion. So we saw.

Chris Connifenti: For very large.

Chris Connifenti: <unk> turn in lines in March and by four different operators across three regions. So again, demonstrating the power of diversification across our asset base.

Chris Connifenti: But the absolute level of Alliance Site Wells is important to give us that visibility into the next 12 months because that's typically the timeframe we see the most conversion from that population of Alliance Site Wells.

Chris Connifenti: Jim.

Chris Connifenti: Absolute level.

Chris Connifenti: Well, it's important to give us that visibility into the next 12 months because thats typically the timeframe, we see the most conversion from that population of last nine wells.

Neil Digman: Agreed. A great story. Thanks, guys.

Speaker Change: Great. Thanks, guys.

Speaker Change: Thanks Neil.

Operator: Our next question comes from Nate Belmonton from Stifle.

Neil Digman: Our next question comes from Nathan Jones from Stifel.

Nate Belmonton: Good morning, that's a strong quarter. For my first question, in the past, your team has outlined your ability to leverage technology to find some production that was not being reported. Now that you have the DJ base and assets in your portfolio, how has that integration been, and are there opportunities to add that production that may not have been considered in the purchase?

Nate Belmonton: Good morning, welcome strong quarter for my first question in the past your team has outlined your ability to leverage technology to find some production that was not being reported now.

Nate Belmonton: The DJ basin assets in your portfolio.

Nate Belmonton: How is that integration been and are there opportunities to add that production that may not have been considered in the purchase.

Chris Connifenti: Hi Nate, good morning. Thanks for the question. So the technology we're using is really leveraging the data that we have and building systems that just don't exist for minerals companies. So there's just no off-the-shelf platform that can then just run a minerals business. When you think about it, we get checks from, we get about 225 checks a month, and each of those checks has over 6,000 rows of data. We get 12 checks a year.

Speaker Change: Hi, good morning, Thanks for the question so.

Chris Connifenti: The technology, we're using is really leveraging the data that we have and billing systems that just don't exist for minerals companies. So there's just no off the shelf platform that segment, just running and minerals business. When you think about it again.

Chris Connifenti: From.

Chris Connifenti: We get about 225 months and each of those checks has over 6000 rows of data we get 12 months next few years.

Chris Connifenti: So yeah, you're talking millions and millions of rows of data that we have to manage and mine for information. That gives us good intelligence on well performance, it gives us good intelligence on operator activity, and it helps us be smarter on acquisitions as well as we leverage that data. So yeah, this is all custom-built by our team here. I'm really proud of our data team that we've built up here and the innovation they've demonstrated and how it's helping to differentiate CISIO.

Chris Connifenti: We're talking millions and millions of rows of data on it yet.

Chris Connifenti: Managed mined for information that gives us good intelligence on well performance gives us good intelligence on operator activity.

Chris Connifenti: And it helps us be smarter on an.

Chris Connifenti: On acquisitions as well as we leverage that data so.

Chris Connifenti: It is all custom built by our team here I'm really proud of our data team that we built up here and the innovation they have demonstrated and how it is helping to differentiate.

Chris Connifenti: Thanks for that. And for my follow-up, historically you've taken an active management approach to your portfolio. Can you speak to the role that you see for Eagleford going forward on slide four? Is it a place where you'd be interested in adding more depth, or would you consider monetizing that asset given the right price?

Speaker Change: Thanks for that.

Chris Connifenti: Follow up historically, you are taking an active management approach to your portfolio can you speak to the role that you see for the Eagle Ford going forward on slide four is at a place where you'd be interested in adding more depth or would you consider monetizing that asset given the right price.

Chris Connifenti: So we look at everything through the lens of rate of return, and we have monetized assets in the past. We are not looking to monetize assets in our existing portfolio, but, you know, if there are opportunities that come along in Eagleford that are competitive on a rate of return basis with other opportunities, then we absolutely consider them. We have made offers on Eagleford assets, but nothing that has cleared the market at our rate of return threshold.

Chris Connifenti: So we look at everything through the lens of rate of return and we have monetized assets in the past we are not looking to monetize assets from our existing portfolio.

Chris Connifenti: Yes.

Chris Connifenti: If there are opportunities that come along in Eagle Ford that are competitive on a rate of return basis.

Chris Connifenti: Opportunities and we absolutely consider them we have made offers on Eagle Ford assets.

Chris Connifenti: But nothing that has cleared the market at all.

Chris Connifenti: Our rate of return thresholds.

Chris Connifenti: So we just haven't transacted there in quite a while, but we're open to it. It's just a matter of it has to be competitive, and that's exactly why we made the acquisition in the D.J. Basin. It was a very competitive rate of return, very good assets that were put together by a very good team. We knew what they were doing when they were putting the assets together, so, you know, we look for opportunities like that that fit in well with the portfolio, not because they fit some geographic narrative but more because they're good for our shareholders from a rate of return.

Chris Connifenti: We just haven't transactions there in quite a while but we are open to us. It's just a matter of has to be competitive.

Chris Connifenti: That's why we made the acquisition in the DJ Basin was a very competitive rate of returns very good assets that are put together about very good team.

Chris Connifenti: We knew what they were doing when you were putting the assets together so.

Chris Connifenti: We look for opportunities like that.

Chris Connifenti: Well in the portfolio not because they fit some geographic narrative, but more because they are good for our shareholders from a rate of return.

Nate Belmonton: All right. Thanks for taking my question.

Speaker Change: Got it thanks for taking my questions.

Speaker Change: You bet.

Operator: And our next question comes from Tim Rezovan of KeyBank Capital Marketing.

Nate Belmonton: And our next question comes from Tim <unk> from Keybanc capital market.

Operator: Okay.

John Mardini: Hey, it's John Mardini. I'll pretend.

Jahmar Danny: Hey, it's jahmar Danny on for Tim.

Chris Connifenti: We wanted to ask about the second quarter distribution, maybe in a little different way. As we try to model it, how should we think about the negotiated repurchases as a component of your cash return framework? Are they a portion of that 65% cash return pay out, or are they one-off spending events like opportunistic M&A?

Tim Rezovan: We want to we want to ask about the second quarter distribution, maybe a little different way.

Chris Connifenti: As we try to model it how should we think about the negotiated repurchases.

Chris Connifenti: A component of your cash return framework are they a portion of that 65% cash return.

Chris Connifenti: Payout or are they one off spending events like opportunistic M&A.

Chris Connifenti: Well, I think it's both really. You have an opportunity to repurchase a large amount of shares at once, but it is, by definition, a return of capital to shareholders. So, we look at it through the lens of the return on capital framework. Hence, our framework has never been strictly 65%. It has been at least 65%, and as you heard Kerry talk about earlier, at least 35% of our discretionary capital is going to be in the form of a dividend.

Chris Connifenti: Well I think it's really you have.

Chris Connifenti: Opportunistic.

Chris Connifenti: Repurchase of large amongst peers once.

Chris Connifenti: It is by definition, a return of capital to shareholders. So we look at it through the.

Chris Connifenti: The return on capital framework. So our framework has never been strictly 65% it had been at least 65%.

Chris Connifenti: As you heard Gary talked about earlier at least 35% of our discretionary cash flow is going to be in the form of a dividend. So when you do the math based on the guidance, we provided and you overlay some.

Chris Connifenti: So, when you do the math based on the guidance we provided and you overlay some pricing that you want to use, whether it's first call consensus or strip pricing, you'll get to a number for discretionary cash flow after you deduct the expenses. And you can come up with a 35% that would be the minimum dividend, and then you can layer in what we've done for repurchases already in the second quarter, and you get to a number above 65%. So, I think it's fair to assume that the second quarter could be above 65% in terms of return on capital.

Chris Connifenti: <unk> do you want to use whether it's first of all consensus strip pricing, you'll get to a number of our discretionary cash flow after deducting expenses and.

Chris Connifenti: As you can come up with a 35% that would be the minimum dividend and then you can layer in what we've done for repurchases already in the second quarter do you guys have a number above 65%. So I think it's fair to assume that the second quarter could.

Chris Connifenti: It could be above 65% in terms of returning capital.

Chris Connifenti: Yeah.

John Mardini: Okay, great. Now, thanks for framing that up. Our follow-up is on... It's just a housekeeping question on modeling. So, when you make that $0.41 dividend, will it include the 2 million shares that were repurchased in early April, or will it reflect the post-repurchase share count?

Speaker Change: Okay, great thanks for bringing that up.

Speaker Change: Follow up is on just a housekeeping question on modeling so when you make that <unk> 41 dividend.

Speaker Change: Will it include the 2 million shares that were repurchased in early April or will it reflect.

Speaker Change: Opposed to repurchase share count.

Chris Connifenti: The post-repurchase share count, so it's going to be shareholders of record in May.

Speaker Change: The net post repurchase share counts. So it is going to be shareholders of record in may.

John Mardini: Okay, I got it. That's all I had. Thanks for your time. Thank you.

Speaker Change: Okay got it.

Speaker Change: Alright, so all I had thanks for your time.

Speaker Change: Thank you.

Operator: As a reminder, to ask a question, please press star followed by one on your telephone keypad. We currently have no further questions. Thank you for joining today's call. You may now disconnect your line.

John Mardini: As a reminder to ask a question. Please press star followed by one of your telephone keypad.

Operator: Yes.

Operator: We currently have no further question.

Operator: Thank you for joining today's call you may now disconnect your lines.

Operator: [music].