Q3 2024 Sitio Royalties Corp Earnings Call
Higher than expected production of nearly 38,600 BOEs per day, of which half was oil.
Our operators today have more scale, financial strength, and flexibility, and are producing from top-tier acreage positions.
An interesting fact is that the average market cap of our top five public company operators on our acreage has more than doubled since the end of 2022. This supports the sustainability of our business model and gives us confidence that our assets will be developed efficiently.
We continue to benefit from E&P consolidation as acreage transitions to better capitalized, more efficient operators, or operators who will develop that acreage sooner.
For example, Permian Resources' acquisition of Oxy's Berea Draw Acreage in the Southern Delaware Basin, where we own 1,800 NRAs, is great for SITIO.
This is an area that wasn't a core focus for Oxy, however, it added more than 200 gross operated locations with high NRIs that immediately compete for capital in the Permian Resources portfolio.
As a minerals owner, accelerated development on this acreage will lead to better returns, more near-term cash flow, and ultimately increased return of capital for our shareholders.
In the DJ Basin Watkins area, Civitas recently completed 13 four-mile lateral wells.
Seven of these wells are in the Sky Ranch unit.
where CITIO owns approximately 240 NRAs. These 13 wells had approximately 5% lower DNC costs per foot than 3-mile laterals and importantly allows CIVITAS to access resource that was stranded due to surface configurations.
which is a great example of how longer laterals are helping operators become more efficient, which in turn benefits mineral owners.
Civitas remains active in this area where CITIO has direct exposure with approximately 1,900 NRAs including 780 NRAs in the Box Elder Cap, an area that was part of the DJ Basin acquisition we closed in April.
Another example of EMP M&A that should benefit CITIO is Apache's acquisition of Callon Petroleum earlier this year.
In 2021, we acquired a 2% overriding royalty interest in approximately 7,200 Callan-operated NRAs in the Delaware Basin.
Apache has a stronger balance sheet than Callan and has stated that they expect to create substantial value on the Callan acreage through improved well performance and capital efficiency.
Apache estimates they can drill a two-mile lateral for approximately $1 million less than what Callan was able to do in 2023. We're excited to see what operational improvements Apache can make on the legacy Callan acreage and the additional value they can create for Setio.
Operational efficiencies across the industry show that operators are achieving more with less. As an example, from the start of 2023 until the most recent quarter, the rig count on our Permian acreage has decreased 17%, while the total lateral feed drilled has increased 5%.
Part of the reason for this is a trend towards longer laterals. Across the same time frame, laterals of three miles or more have doubled and now represent 25% of all wells drilled.
Another trend we've been seeing in the industry is horseshoe-shaped laterals. This allows for the capture of stranded resources due to surface challenges.
We own minerals under several operators who are testing horseshoe laterals and will be closely monitoring results.
For the third quarter, the bulk of activity on Stitio's assets was in the Permian and DJ basins.
We had 7.7 net wells turn in line in the quarter, and a solid 11% increase in our net line-of-sight wells compared to the second quarter. Line-of-sight wells provide us with high confidence in near-term operator activity and the sustainability of our business plan.
Let me quickly close and then open it up for questions.
Situ has a proven model for creating value, which is demonstrated through our strong performance year to date. Our team has developed proprietary software and practices to effectively manage our assets and ensure we get the most value for our owners. We are well positioned to be a leader in this highly fragmented industry as it continues to consolidate.
On the operator side, we continue to see assets roll up under bigger, stronger companies with efficient development practices.
This ultimately enhances our returns at Citio and smooths volatility created by short-term moves in oil and gas prices.
We are highly confident in the strength and sustainability of our model. Our focus today is turning to 2025.
While formal guidance won't be released until early next year, you can count on us to deliver on our strategy.
working to capture high-quality assets where our team can creatively enhance value, maintaining a strong balance sheet that provides access to capital through the cycles, and an ongoing commitment to return capital to shareholders.
Operator, we are now ready to take questions.
Thank you for watching.
Speaker Change: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad.
That's star one on your telephone keypad.
Speaker Change: To withdraw your questions, star followed by two, and please do also remember to unmute your microphone when it is your turn to speak.
Speaker Change: Our first question comes from Neil Dingman from Truist. Neil, your line is now open.
Neil Dingman: Morning guys. Could you just give me a sense of how you see the M&A market if minerals are as open as ever and you know where that sort of plays given your financials? Thank you.
Speaker Change: Good morning, Neal. Thanks for the question. The M&A market remains really exciting for Citio. We have an active effort on the outbound business development efforts, really led by our senior team with DAC and Britain constantly staying in contact with mineral owners.
Speaker Change: and sourcing new ideas for SITIO. We also see all the marketed processes, and there's a very robust flow of those at the moment, and we see several more coming. So it's a very active time in the minerals market, and the most important thing for SITIO remains rate of return.
We focus very closely on near-term accretion and long-term IRRs.
Speaker Change: and that's the biggest driver. And then, you know, we also place a lot of importance on balance sheet strength. So as we look at larger transactions, we were closely focused on
Speaker Change: both the returns I discussed earlier and making sure that the transactions are leveraged neutral or balance sheet enhancing. So we're well positioned with where the balance sheet is today and a lot of opportunities set in front of us.
Thank you for watching!
Speaker Change: Great to hear. Then just secondly, just on solid activity, could you just talk about, it seemed like your line of sight well has increased, and just wonder, was this driven by the Permian and DJ, or what really drove this? Thank you.
Speaker Change: Yeah, it's a good question. I'm glad you asked. It gives us a chance to highlight page six in the investor deck that we posted on our website today.
If you look at the map on page six.
It paints a really exciting picture for Citio.
Speaker Change: And as you recall, the line site wells on our footprint give us visibility into the next 12 to 18 months of development on our asset.
Speaker Change: and a couple important things to note on that map on page six.
Speaker Change: First is just the sheer number of gross wells that have been spud and permitted across our footprint. And the second thing is just the diversity of where those locations are. It is literally across the entire footprint.
Speaker Change: There's no concentration anywhere within or outside. You have Midland Basin, Delaware Basin, you have Texas, you have New Mexico, and yes, you're right to point out there is a fair amount of activity in the DJ Basin as well. I'll turn it over to Jared and see if he has anything to add to the line of sight activity.
Thanks Chris.
Jared: You know, just to put some more color around that, we mentioned on page seven that we have 9,000 gross line-of-sight wells on a normalized basis. So even on a nominal basis, it's about half that. So when you think about our overall asset, which has over 25,000 producing wells,
Speaker Change: on a normalized basis. We have 9,000 of those incoming over the next 12 to 18 months. That has us really excited about the future activity on the asset.
Thank you.
Our next question comes from Gerard Giroux from Stevens.
Gerard, your line is now open.
Hey, good morning, guys.
Gerard: During the quarter, Studio added five acquisitions. You guys added five acquisitions in the DJ this quarter. Over the year, you've added.
Speaker Change: a few deals in the DJ. Are you guys seeing a lot of deal flow there? Are these acquisitions just better value for the company? And with that, in which basins are you seeing the highest deal flow?
Speaker Change: It's a good question, but if you break it down by just the sheer number of acquisition opportunities, the Permian remains the largest opportunity set.
Speaker Change: But when you break it down by rate of return and then organically sourced opportunities, the rate of return opportunities in the DJ basin have been superior recently. So that's why we've directed capital there. And it's really the strength of this business model where we can direct capital to where we get the highest rate of return.
Speaker Change: constrained just to, you know, one sub-basin of the Permian or to the Permian in general, we can really allocate capital elsewhere. We've looked at acquisitions outside of the Permian in BJ2, but again, when we run it through the filter of
Speaker Change: impacts on the balance sheet, impacts on rate of return, and it brings us back to the permanent DJ for the best opportunities for Citio.
Perfect, thank you.
Speaker Change: And then my second question is just about return of capital. I just want to get your thoughts on buybacks versus debt reduction, and then if the current allocation of free cashflow is a good go-buy looking into 2025.
Speaker Change: Yeah, it's a great question because as we have set up our capital allocation strategy,
Speaker Change: balance sheet protection and return of capital are not mutually exclusive in terms of how we return that capital to shareholders. So we've committed to return at least 65 percent discretionary cash flow to our shareholders.
and the remaining...
Speaker Change: 35% is retained for balance sheet protection or opportunistic cash acquisitions. And by the way, that 35% retained by CITIO is the highest percentage retained of any of our minerals peers. And so that demonstrates the priority we place on balance sheet strength.
Speaker Change: as it relates to how we prioritize, how we return capital to shareholders.
Speaker Change: We've committed to return at least 35% of discretionary cash flow in the form of a cash dividend and just to put that in context So for this quarter
That implies a cash dividend yield that's...
Speaker Change: three and a half times greater than the S&P 500. So just even the minimum
Speaker Change: 35% cash dividend this quarter would be three and a half times the S&P 500.
Speaker Change: dividend yield. And then the other 30% of cash returned to shareholders is either in the form of dividends and or share buybacks. And in this past quarter, we bought back about $29 million of shares.
That's awesome. Thank you, guys.
Thank you.
Speaker Change: Our next question comes from Betty Yang from Barclays. Betty, your line is now open.
Betty Yang: Hi, good morning, everyone. So I want to ask about slide 10, where you guys look at the look back on your prior acquisition, specifically on the cumulative production outperformance.
Speaker Change: look interesting to see that these results in that can you talk about which region and assets specifically that's driving that where you have seen the most outperformance?
Speaker Change: And then if I looked at the comparison of this slide versus the last time you updated, that these numbers improved as well. So, maybe some color on recent deals of what's been outperforming relative to your underwriting assumptions. Thanks.
Speaker Change: Thanks for the question, Betty. We're really proud of the results on page 10 because we have a pretty rigorous look-back analysis on our acquisitions to see if we need to tweak any of our underwriting assumptions.
Thank you. Thank you.
Speaker Change: view success in our underwriting as being right around the low single-digit percentage positive on that graph on the top right of page 10. And what that tells us is that the acquisitions are performing in line or better
Speaker Change: than what we underwrote them for the first six months of ownership, or 12 months of ownership, or 18 months of ownership. But I'll let Jarrett comment a bit on the rest of your question.
Jarrett: Thanks, Chris. Betty, when we look back at our acquisitions, really the two things that we focus on are
Jarrett: Are the wells performing better or worse than our underwriting assumptions, or is it a timing, meaning like the future wells that we're assuming are coming online, are they coming online sooner or later than our assumptions? And those are really the two things that really drive these big differences.
Speaker Change: And I'll tell you, really, on the well-performance side, everything is right down the middle. We don't really see any outperformance or underperformance that's material on that metric. But really, when we think about acquisitions,
Speaker Change: We make sure that what we are underwriting the asset can deliver and that's what we're showing in these charts So even though we don't have the luxury of controlling the drill bit We've spent a lot of time modeling our own asset and assets were acquiring to understand
Speaker Change: on the acquisition front is also reflected in, for example, we're enhancing our guidance today and we underwrite our acquisitions largely exactly the same way that we underwrite and guide to our own assets. So I think you'll see a reflection.
of our acquisitions coming through also in our own asset.
Speaker Change: That's a really helpful color. Thank you for that. A housekeeping item as a follow-up. So cash tax guidance has varied quite a bit this year. You lowered the last quarter and now raised it. Just what's driving those changes and how should we be thinking about that number going forward? Thanks.
Speaker Change: Sure. Hi, Betty. Good morning. Thanks for the question. So, last quarter, our projections utilized estimates from not-yet-filed tax returns. We've filed those tax returns, so we're now using updated tax information in our forecast.
Speaker Change: You may recall in the past we've talked about the carryover credit related to our corporate merger with Brigham in 2022, which added some complexities to our forecasting this year. With that said, I do expect us to exhaust that credit this year, so next year should be a lot more straightforward. As you look into 2025, I think it's probably best to revert to kind of the estimated tax rates method in your model. So, you know, if the all in statutory rates are, you know, 21% on the federal rates plus, you know, 1.5% for Texas margin tax.
Speaker Change: I would take that all-in statutory rate, and based on the complexion of our shareholder base, I would say, you know, 52-ish percent of that all-in rate should, you know, guide you in the right direction as to how to think about the future estimated tax rate going forward.
Thank you.
Sounds good. Thank you for that.
Thank you.
Thank you.
Speaker Change: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: Our next question comes from Noel Parks from Hewitt Brothers Investment.
Now we'll go live, so I'll open.
Noel Parks: Hi, good morning. I was real interested to hear your comments on Apache and the Kallen assets and it got me thinking...
Speaker Change: Is it fair to assume that when you have an asset portfolio that has gone through several hands, you know, been sort of cobbled together by deals over, I guess we're going into the past decade now.
Is it the case that you're more likely to see
Speaker Change: a lot of room for improvement, low-hanging fruit when the assets do get consolidated up. And I'm thinking in contrast to some of the sort of huge, early leasing that was done in the Permian and where it seems that
Speaker Change: And we've seen a lot of deals with assets like that where it seems that there isn't anything really dramatic happening except maybe just
Speaker Change: scale efficiencies as far as, you know, the progress that they make on productivity.
Speaker Change: So, um, is my perception right that you kind of have more ragged sets of assets and then more sort of, um, you know, sort of cleanly developed sets of assets and they're sort of in separate camps?
Speaker Change: Hey Noel, good morning. Thanks for the question. I'll just make one blanket comment about the the operators and I'll ask Dax to...
to answer the rest of your question.
Speaker Change: But the thing we're really happy about what our operators said is how it's migrated over time and the strength of these operators today is light years ahead of where it was even four or five years ago.
Speaker Change: What we really see now is a set of operators that are large enough that
Speaker Change: you know, changes in commodity prices don't whipsaw around their CapEx budgets.
Speaker Change: These are people that set up their capital plans under commodity price sensitivities and they stick to those plans through cycle. Typically, it takes a very dramatic move in commodity prices for them to alter their capital plans. That provides more visibility to the mineral owners.
Dax: and more sustainability to our program as well. So with that, I'll turn it over to Dax for some additional comments.
Dax: Yeah, thanks Chris. What we're seeing in general is as these assets change hands, they become more of a priority for
Dax: the operator that acquired those assets, and that's what Chris got a pair of remarks on.
Speaker Change: the transfer of the Eborrhea Draw from oxy to Permian resources. This is something that is...
Speaker Change: not unique just to the Permian. We're seeing this in all basins.
bring value forward for us and for the operator.
Speaker Change: So it's a good thing that we're seeing. Also, some of those positions are very legacy for the operators that are selling them. And there's been a lot of improvements in drilling and completion technology since those original wells were drilled. That's why we kind of mentioned the horseshoe laterals, for example.
Speaker Change: in our prepared remarks. I mean, these wells are cheaper to drill, they're more efficient, and they're able to capture stranded acreage. That was
Speaker Change: They make the unlocking value again, and the cheaper and more efficiently they can do that, the better for them and the middle owner.
Speaker Change: It's pretty exciting. I'm just wondering, turning specifically to the Permian again, just your thoughts on infrastructure in the Permian, associated gas,
and we're still seeing all these productivity gains happening here.
Speaker Change: larger and larger wolves being turned online, although fewer of them sometimes.
Speaker Change: and against this backdrop of still a couple of tough winters and gas prices not being that exciting, especially in regional hubs.
So, um, do, do...
Speaker Change: an ongoing issue in the basin with what comes to mind is Matterhorn has come online and we've heard or people observed that it helped Waha for a short time and then sent it back into into a negative direction.
I kind of wonder if that's...
Speaker Change: if that's ultimately irrelevant to the play, just with oil prices where they are, or if at some point it really does sort of wind up being more of an effective ceiling for the play, unless a lot more pipeline capital comes into it.
Speaker Change: Yeah, I think the bigger governor on activity is really capital discipline by the operators.
Speaker Change: That feels like it's ingrained in them in their DNA now. It's not something that they're just giving lip service to. So I don't see that changing regardless of commodity prices. I think the operators are going to be disciplined around their capital budgets, around their return of capital strategies.
Speaker Change: And so I think that's going to be the bigger constraint on supply growth from areas like the Permian.
Speaker Change: The other comment I'll make is around the midstream companies themselves. I think they've done a much, much better job in the last four or five years about anticipating these types of needs and planning out new pipelines, reaching FID.
and signing up new shippers for their volumes and capacity.
That results in...
You know
Speaker Change: that result in these layers of midstream capacity being added over time. And so just as you commented with Matterhorn coming into service in September and ramping up its utilization since then, the midstream companies are already talking about Blackcomb behind it, which is another large capacity.
Speaker Change: natural gas pipeline that's going to take gas from the Permian to the coast. And so the operators, the midstream companies are already seeing this dynamic in the basin, and they're already responding to it. They're not waiting until a couple years down the road when
Speaker Change: when differentials really gap out further and then decide to do something, then it's a waiting period from there. These plans are already in the works today. So I really wanna recognize the work that the midstream companies are doing as well.
Okay, great. Thanks a lot.
Thank you.
Speaker Change: We currently have no further questions, so this concludes today's call. Thanks everyone. Thank you for joining. You may now disconnect.
Thank you.