Q1 2025 Sitio Royalties Corp Earnings Call
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Thank you very much.
Ada: Ladies and gentlemen, thank you for attending today's Sitio Royalties, first quarter 2025 earnings call, my name is Ada and I will be your operator today. Orleans will be muted during the presentation of the call, design opportunities for questions and answers at the end. If you would like to ask a question, please press star one on your telephone key path. I would now like to pass a conference over to our host.
Vest President of Investor Relations, please go ahead.
Thank you for your time.
Speaker Change: Thanks operator. Good morning and welcome to our first quarter 2025 conference call. By now it is our hope that you've been through our materials. You can find our recent news release and some supplemental slides on our website under the investor relations section.
Speaker Change: and join this morning by our CEO , Chris Conoscenti, and our CFO , Carrie Osicka. After our brief prepared remarks, Chris, Carrie and other members of our leadership team will be available to take your questions.
Speaker Change: Before we start, I'd like to remind you that our discussion today may contain forward-looking statements and non-gotten measures.
Speaker Change: Please refer to our earnings release, investor presentation, and publicly filed documents for additional information regarding such four-looking statements and non-gat measures. I will now turn the call over to Carrie to review our first quarter results.
Carrie Osicka: Thanks, Alyssa, and welcome everyone. First, I'll touch briefly on the new reporting format we rolled out this quarter.
Carrie Osicka: On April 15, we issued our inaugural quarterly preview featuring key operational and financial metrics that are available shortly after quarter end, prior to availability of full financials.
Carrie Osicka: Metrics such as production, net wells turned in line, net line of site wells, acquisition activity, and share buyback activity. Our aim is to accelerate the market's access to this data and enhance visibility to our results each quarter.
Carrie Osicka: Moving now to our results, the first quarter of 2025 marks another record quarter of production for Citio, supported by robust drilling and completion activity across our properties.
Carrie Osicka: Netwell's turned in line, worked up 34% from 4K 2024, with the majority of the increase coming from the Delaware Basin. In addition, we closed on over 20 million of acquisitions that added 1,350 net royalty acres.
Carrie Osicka: Total production was up 3% quarter-over-quarter, averaging over 42,000 BLE per day.
Carrie Osicka: Adjusted EBITDA was $142 million, which was 1% higher than the prior quarter and reflected trunk production as well as expenses in line with or better than the midpoint of our full
Carrie Osicka: Net income of 26 million was up 36% over the same time period. From production down the net income, our first quarter results de-consensus estimates.
Carrie Osicka: In total, this represents a return of capital of $0.50 per share for the first quarter.
Carrie Osicka: Effective May 7, our board extended our by-back plan and authorize an additional 300 million of share repurchases.
Carrie Osicka: Through May 2nd, in the second quarter, we brought back approximately $487,000 additional shares for $8 million, bringing current remaining by-backed capacity to approximately $350 million.
Carrie Osicka: Bernie now to the balance sheet. We had $1.1 billion of debt outstanding with $439 million of availability under our revolving credit facility as of March 31st.
Carrie Osicka: Hoping that depth slide porter over quarter, we use our organic cash flow to fund over $20 million of accretive acquisitions, but pay annual expenses such as ad valorm and federal taxes.
Carrie Osicka: As of March 31st, our adjusted net debt to free cash flow was approximately half of our peer group average
Carrie Osicka: Lastly, we are updating our full year 2025 estimated cash taxes guidance to reflect a lower anticipated commodity prices than originally forecasted. At the midpoint, current estimated the cash taxes for 2025 are $23 million, $5 million less than the original estimate.
Carrie Osicka: With that, I'll hand the call to Chris to discuss our current positioning and future outlook.
Chris Conoscenti: Thanks, Carrie, and good morning everyone. We're pleased with our solid momentum exiting the first quarter and sit you as positioning in the current market environment.
Speaker Change: With all eyes on actions from Washington and OPEC, and uncertainty the only constant over the last month, I wanted to spend a few minutes highlighting the unique advantages of minerals and royalties as an asset class and Sitio's business specifically.
Speaker Change: Within the oil and gas value chain, minerals and royalties assets represent the highest margin investment opportunity.
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Speaker Change: with the exception of gathering and transportation costs on some but not all of our leases.
Speaker Change: Our interests are non-cost bearing. Minerals and royalty assets have no direct operating costs or obligatory capital spending and thus no exposure to fluctuating oilfield services costs or raw material costs.
Speaker Change: and importantly have no direct exposure to tariffs and act as a natural hedge to inflation.
Speaker Change: Based on Sitio's lean cost structure, LTM, Adjusted EBITDA margins were 90%. Refreshing slide six of our supplemental earnings presentation, I'd note that based on consentment estimates.
Speaker Change: 2025 free cash flow margins on a per unit of production basis are more than three times that of the average E&D peer. As such, our business looks materially different in a downside price environment as compared to E&D companies.
Speaker Change: Even at much lower commodity prices and slow development pace, we continue to generate
Speaker Change: Following the much more dramatic downturn in 2020, we've paid down our debt and emerged well-positioned to capitalize on the M&A opportunities that followed in 2021 and 2022 rebound.
Speaker Change: On 5-7, we reference 10-year cumulative free cash flow to enterprise value as estimated by Texas Capital Equity Research for their oil and gas coverage universe.
Speaker Change: I'll note that in a $50 crude and $2.25 natural gas environment, the minerals peer group is still estimated to return over 90% of current enterprise value in 10 years.
Speaker Change: While the next best performing group, the Bellweather Oil Group, is estimated to return less than 50% of the current enterprise value in 10 years.
The band of outcomes for minerals businesses is much tighter.
Speaker Change: That is just one perspective on a forward outlook. Actual historical results are just as impressive. And less than three years as a public company.
Speaker Change: Sitio has returned over 35% of our current equity value to shareholders. We still have over a decade of drilling inventory remaining, just in areas that are being economically developed today.
Speaker Change: In many ways, our business is like that of a financial asset manager, in our case, managing a diverse portfolio of perpetual real assets.
Speaker Change: Portfolio construction remains top of mind for us and we've been intentional about how we've grown our position over time. Underwriting superior rates of return is the North Star that guides our Portfolio construction priorities. Priority number one is at the quality.
Speaker Change: Highest quality assets will be the last to see rakes and frat crews drop in lower commodity price environments.
Speaker Change: Our near-term line-of-side well count fluctuates quarter to quarter, but the average has remained consistent since closing of the Brigham merger in late 2022.
Speaker Change: This quarter, limestone wells were up 8% sequentially to 48.6 net wells, indicating that our assets offer compelling drilling economics and continue to be prioritized for development by our operators.
Speaker Change: From an asset duration standpoint, we are a derivative of the inventory positions of our operators who are amongst the surviving consolidators with the greatest depth of inventory in the Permian. These operators continue to have success delineating these additional targets.
Speaker Change: based on 2024 operator drilling activity, including continued success across the Midland Basin in the lower wolf camp and further delineation of the upper bone spring benches in the northern Delaware Basin.
Speaker Change: We have increased our inventory estimate by 40 additional net normalized locations. This represents a 10% quarter over quarter increase in net normalized inventory and equates to a little more than a year of drilling at current average drilling pace.
Speaker Change: As a reminder, we did not underwrite any of these locations when we acquired these assets.
Speaker Change: This is another demonstration of the unrecognized value in our asset base.
Priority number two is operator quality.
Speaker Change: We have intentionally built our positions around the most active, most efficient and well-capitalized operators. The majority of our future drilling activity will be performed by companies like Exxon, Chevron, Tomaco, and Oxy.
Speaker Change: These companies are not highly sensitive to a 10 to 15% move in crew prices and have historically had some of the most durable and consistent capital programs.
Speaker Change: And priority number three is asset and operator diversity. We have an average net royalty interest of less than 1% across nearly 50,000 wells in five basins.
Speaker Change: Every time, we allocate capital since becoming public through operator drilling as well as acquisitions, we've grown production for debt adjusted share by more than 56%, representing a 17% compounded annual growth rate.
Speaker Change: And our view this is one of the best metrics for our report card and evidences our discipline and a sustainability of our model. We could have very easily built much more scale by paying more for properties that were ultimately bought by others, but our per share metrics would not be as compelling as they are today.
Speaker Change: You are buyback program, we have repurchased over 4% of our stock over the last 14 months as Kerry noted our board has authorized an additional $300 million of share repurchases would have continued repurchasing shares throughout the last month capitalizing on the market.
Speaker Change: Bringing our total remaining buyback capacity to $350 million you can count on us to continue to be prudent stewards of your capital as we evaluate uses for cash flow in this environment includes.
Speaker Change: Greater capital in any commodity price environment, the consolidation opportunities ahead of us and the platform. We've built to manage our growing portfolio operator, we're now ready to take questions.
Speaker Change: Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad to remove your question. Please press star.
Speaker Change: We now have our first question from Derrick with you from Texas Capital. Please go ahead.
Speaker Change: Good morning, all and congrats on a strong quarter across the board. Thanks, Derek Good morning.
Derrick: For my first question I wanted to focus on the resiliency of your business and your more immediate outlook referencing slides eight nine you're arguably in as good of a situation as you have been over the last two years other than another leg down in price and the curtailment of completion activity safe.
Derrick: Relatively good about your production trajectory for the next two quarters.
Speaker Change: [noise] yeah. The the bulk of 2025 is really underpinned by existing producing wells and wells that have been spud and so there's typically not a lot of risk to wells that have been spud. There's there's the extreme case, where people will drops and not.
Speaker Change: We haven't seen that sort of behavior, yet we're very early into this so whatever you want to call. It this reaction or environment that we're in right now, but we have not seen people not complete wells that they have drilled.
Speaker Change: Terrific and then with regard to your share repurchase program, how would you compare the value of buying your stock versus the value of M. A opportunities that you're seeing in the market today.
Speaker Change: Yeah, there's a there's a good balance of both I'd say, the it's a tremendous opportunity in our stock and we're very excited to have the buyback program and increase authorization from our board the M a environment.
Speaker Change: Remain active there and we do see opportunities, it's a little different than prior cycles, you look at 2020 and in that environment. The M. A environment completely seized up and nobody wanted a transaction because it was such a rapid.
Speaker Change: The difference between now and then though we're five years on in this journey towards basin wide development and there's there's less mystery in the minds of mineral owners about how and when their assets will get developed there's been a tremendous amount of development since 2020 and so.
Speaker Change: Is less opaque than it was five years ago, and I think that helps to give people confidence that you know whatever environment, they're in they're getting a fair look at valuation when it comes to our stock you know, it's a really unique value proposition for reasons.
Speaker Change: Go to your commodities derivatives desk, there at your bank and and ask for a a 30 or 40 year call option on oil or natural gas. It just it just doesn't exist like there's no other way in in this kind of high margin business to get that sort of.
Speaker Change: Long term demand fundamentals for oil and natural gas and we provide that opportunity in our stock presents that opportunity and we see really compelling valuation here to to buy that call option by repurchasing our stock and.
Speaker Change: Even if you could get that kind of call option, you wouldn't get a yield on it or a return of capital yield today is 11.5%. So there's a lot of things that are really compelling about about the buyback.
Speaker Change: Terrific in one more five I could Chris So diamond back provided a less constructive outlook for the sector earlier this week highlighting their expectation for severe contraction based on prices and geography.
Speaker Change: So you guys perform look backs on your pass acquisitions are you sensing any material change in the productivity of wells relative to underwritten assumptions.
Speaker Change: Yeah. We do these look back so I'll have jarrett come in a bit on well performance, but one of the comments I'll make just about you know the operator comments that we've heard so far in this earnings cycle first of all we're we're not completely through the earnings cycle, but the one of the things we've heard is people.
Speaker Change: Capital or reducing operating costs, but either increasing number of wells turn in line or not reducing production guidance. So there's a bit of a mix in terms of how different operators are approaching their capital discipline and any impacts on the product.
Speaker Change: But the one cautionary I know I would give you is don't bed against us EP companies to continue to innovate and to drive capital efficiency. It's happened time, and again and we're very excited to be leasing our minerals to the best operators in this business, but Gerald.
Speaker Change: The projections on our asset on a go forward basis, we're taking into account already the current geological facts that are out there and what horizons are being drilled so we take a very granular approach to our forecast. So we're not we're not thinking about and we're not.
Speaker Change: Looking at what has already been achieved and what is already being drilled so when we think about go forward. We're we're really not baking in any future efficiency improvements.
Speaker Change: So we feel good about our our future projections based on that fact.
Speaker Change: That's great and very helpful. So I'll pass it back to the operator thanks.
Speaker Change: Our next question comes from Gerald Ju from Stephens. Please go ahead.
Gerald Ju: Good morning, and thanks for taking my question to my first question relates to one Q production and the 25 production guide one Q production was above the high end of guidance you have full year guide was unchanged implying declining volumes throughout the year first is declining throughout the year.
Speaker Change: Got it and second.
Speaker Change: Son operators earnings calls this quarter and what you're hearing in the market is the unchanged guidance baking in some slowdown from operators. Thanks.
Speaker Change: Thanks, Jared I appreciate the questions first of all just on first quarter. Yeah. We're thrilled with how production came in in the first quarter exceeded our our guidance and consensus and you know we last year, we revisited our guidance in after the second quarter and.
Speaker Change: Few months and we can make the call at that point about what's appropriate to do with with guidance, but and we feel really.
Speaker Change: Happy to have a solid foundation from the first quarter.
Speaker Change: Perfect. Thank you and then my second one is just kind of back to share repurchases. So one Q repurchases increase the 20% of discretionary cash flow compared to 11 and four Q you expect this trend of a higher percentage of Nanim.
Speaker Change: With volatility on commodities, putting pressure on stock prices. Thanks.
Speaker Change: Yeah. It's a good question our buyback program is designed to take advantage of price dislocations. So we tend to get more aggressive on the buyback at lower prices. The data has shown that companies would buyback programs are more successful when they're in the market sort of through cycle.
Speaker Change: Having a a steep buyback grid, meaning you buy back more at a lower prices is an important component of ours and and you saw that in full display where we bought back nearly half a million shares in in the month of April compared to just over a million shares.
Speaker Change: It's a good observation and and good expectation.
Speaker Change: Perfect. Thank you congrats on the strong quarter. Thank you.
Speaker Change: Next question comes from Tim Redfin from Keybanc capital markets. Please go ahead.
Speaker Change: You want to folks thanks for taking my my questions. One was already just asked so I just have one for you can you give a little more context on on this inventory increase of a 40 net locations is this just a new success.
Speaker Change: Facing assumption just trying to kind of wrap my head around what exactly you saw to report that.
Speaker Change: Eight M. Thanks for the question. This is Dax, we're excited to add those net inventory locations. This quarter that was pretty much split 50 50 between the Delaware and the Midland Basin. These so.
Speaker Change:
Speaker Change: I have a process when we look at geological Prospectivity and well results and in these cases it was very easy to make these adds this was in Midland for example, an expansion of the lower Wolfcamp Wolfcamp B formation, where we've seen a lot of great well.
Speaker Change: But on the Delaware side as Chris mentioned, it was an increase to the northern Delaware specifically in the bone spring sections and these were under operators like permanent resources, Tonico, Devin and Muber and we were happy to see recently this quarter that resources made the.
Speaker Change: R.
Speaker Change: In most cases minerals are owned from the surface of the Earth to the sinner of the Earth and a lot of our minerals are owned in that way and it just speaks to the Optionality. We have on the geologic column and as Chris mentioned many of these zones or several of these zones were not underwritten.
Speaker Change: It's it's raybee really two R. Two our evaluation.
Speaker Change: Okay. That's helpful. That's all I had thank you.
Speaker Change: Next question comes from Noil Arks from TUI brothers investment.
Noil Arks: Hi, Good morning, you know sort of using your your like unique insights from just being involved with so many operators I just wondering I know, it's early days, yet, but you mentioned.
Noil Arks: Undertaking at this stage in the cycle.
Noil Arks: You know December slowing down activity, some not so much somewhere changing what they're doing with their tills or their their duck comps and but are you sensing any patterns as far as strategy for managing their base decline I I have heard some companies where it sounds kind of like they.
Noil Arks: Into next year, so lower at lower you know drill that activity lower capex. This year, but it seems pretty clear that they're going to have to to you know intensify activity needing next year or the year after.
Noil Arks: And I don't know if that kind of carries the embedded assumption that this oil downtown town is gonna be you know sort of short term, but you have any observations on that.
Noil Arks: Yeah. Good morning, Noel Thanks for the question, Yeah, I think the what you're pointing out is the ultimately over some time period. The self correcting nature of this industry. So low prices tend to cause a reduction activity, which is a reduction in.
Noil Arks: And we're seeing that play out here with the operator's curtailing capex, so, but as I pointed out you've seen oxy cut capex, but increase the number of wells. They plan to bring online you've seen conico announced cut in capex, but maintain their production guidance.
Noil Arks: And then you've seen other different approaches from from some smaller operators. So I think it's just going to be very operator specific and how they approach it but regardless that you're not seeing anybody grow at any measure in this point in the cycle and demand is continuing to grow so.
Noil Arks: Those those two things are gonna have to correct, where you have increasing demand and and no increase in supply from the lower 48. So we're bullish about the long term outlook and again as I said these are a multidecade call on oil and natural gas so.
Noil Arks: The near term, but we own these assets forever, they're perpetual assets and so for us.
Noil Arks: We're going to be we're going to own these assets a year from now five years from now in two decades from now so we're going to benefit as and when the cycle adjusts.
Noil Arks: Right absolutely and.
Noil Arks: I was wondering again trying to sort of think about ripple effects from sort of this this turn in the cycle and.
Noil Arks: Is as far as IND I'm wondering is this a point where perhaps through the degree you might have things that you'd be inclined to sell.
Noil Arks: Is this a point, where maybe an operator would be more willing to pay a premium to to sort of buy in mineral royalty interest just because of the way. It can it can sort of you know juice their returns sort of you know using the same logic that.
Noil Arks: That you used as far as you're just the strength of returns of the model.
Noil Arks: Yeah. It's a good question because it's it's to me surprising that more operators don't have a very defined and front footed mineral strategy just give them what I can do for their business both from a margin standpoint, and strategically so you point out.
Noil Arks: But.
Noil Arks: I I think the the point in the cycle. We're at right now I think operator is going to be very cautious around capital discipline, and I think they're gonna be preserving whatever capital that they they can further for their drilling opportunities instead of deploying it on on minerals at this point.
Speaker Change: Right totally makes sense. So thanks a lot.
Speaker Change: Of the remainder Lady sent gentlemen, if you if you would like to ask a question. Please press star follow by one on your telephone keypad to remove your question. Please press star.
Speaker Change: G.
Speaker Change: There are no questions waiting at this time. This concludes today's today's call. Thank you for joining you may now disconnect your lines.
Speaker Change: