Sitio Royalties Corp (NYSE:STR) (ticker not provided) has commenced the year with a record high first quarter pro forma production and has successfully closed its DJ Basin acquisition. During the Q1 2024 earnings call, the company announced robust operator activity, significant pro forma production growth, and the start of share repurchases. With a diversified business model and a focus on high-return investments, Sitio is positioned for continued success.
The company’s financials reflect a pro forma discretionary cash flow of $118 million and pro forma adjusted EBITDA of $144 million, including contributions from the recent acquisition. The board approved a return of capital totaling 65% of pro forma first quarter DCF, translating to $0.49 per share.
Key Takeaways
- Sitio Royalties started share repurchases in March and reported a 3.7% quarterly pro forma production growth rate.
- The first quarter pro forma production reached a company record of 37,970 BOEs per day, with oil comprising 51%.
- The DJ Basin acquisition, closed on April 4, contributed over 2,600 BOEs per day with $8.5 million in asset-level cash flow in Q1.
- Sitio's board approved a return of capital equal to 65% of pro forma DCF, with a dividend of $0.41 per share and share repurchases of $13 million.
- The company's M&A pipeline remains strong, with a focus on rate of return across all regions.
Company Outlook
- Sitio Royalties expects the positive impact from new wells to reflect in Q2 production.
- The company will continue to monitor operator activity, macro environment, and industry trends to update 2024 guidance as needed.
- Sitio remains optimistic about the outlook for the rest of 2024 and plans to create long-term shareholder value through accretive acquisitions and continuous innovation.
Bearish Highlights
- There were no specific bearish highlights mentioned in the earnings call summary.
Bullish Highlights
- Sitio reported a strong start to 2024 with record production levels and robust operator activity across multiple regions.
- The company's diversified business model across regions, operators, and commodities is a key strength.
- Sitio's M&A strategy is focused on acquisitions with high rates of return.
Misses
- The summary did not indicate any specific misses in the earnings call.
Q&A Highlights
- The company views share buybacks in the context of returning capital to shareholders and does not see acquisitions and share buyback as mutually exclusive.
- Sitio leverages technology and data to gain intelligence on well performance and operator activity, which aids in making more informed acquisition decisions.
- The company takes an active management approach to its portfolio, with no current plans to monetize existing assets but remains open to acquisitions in regions like the Eagle Ford (NYSE:F) if they meet return thresholds.
Sitio Royalties continues to demonstrate a robust financial and operational performance as it leverages its diversified asset base and strategic acquisitions to drive growth and shareholder value. The company's commitment to returning capital to shareholders through dividends and share repurchases reflects confidence in its business model and outlook for the future.
InvestingPro Insights
Sitio Royalties Corp has shown a strong commitment to returning capital to shareholders, and this is reflected in its significant dividend yield, which stands at a healthy 8.83% as of the first quarter of 2024. This aligns with the company's announcement of returning 65% of its pro forma discretionary cash flow to shareholders. The robust dividend is one of the InvestingPro Tips, indicating that Sitio not only pays a significant dividend but also has a focus on high-return investments.
Another key financial metric for Sitio is its market capitalization, which currently stands at $3.63 billion USD. This valuation comes at a time when the company is experiencing a revenue growth of 30.8% over the last twelve months as of Q1 2024, signaling strong operational performance and a positive outlook.
Investors looking at the company's valuation multiples will note that the P/E ratio is at -61.46, suggesting that the market may be expecting future earnings growth. This is supported by another InvestingPro Tip which states that net income is expected to grow this year, and two analysts have revised their earnings upwards for the upcoming period.
For investors seeking more in-depth analysis and additional InvestingPro Tips, there are more tips available on the InvestingPro platform. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking further insights that could help in making more informed investment decisions.
Full transcript - Sitio Royalties NYQ (STR) Q1 2024:
Operator: Good morning, and welcome to the Sitio Royalties Q1 2024 Earnings Call. My name is Carla, and I'll be the operator for this call today [Operator Instructions]. I'd now like to hand over to Ross Wong, Vice President of Finance and Investor Relations, to begin. Ross, please go ahead.
Ross Wong: Thanks operator and good morning, everyone. Welcome to the Sitio Royalties first 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 Web site at www.sitio.com or you will find them in our Investor Relations section. With me today to discuss first quarter 2024 financial and operating results is Chris Conoscenti, our Chief Executive Officer; Carrie Osicka, our Chief Financial Officer; and other members of executive leadership team. Before we start, I would like to remind you that our discussion today may contain forward-looking statements and non-GAAP measures. Please refer to our earnings 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.
Chris Conoscenti: Thanks, Ross. Good morning, everyone, and thank you for joining Sitio'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. I want to thank our team at Sitio, 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. 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 14.3 pro forma 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, 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 macro environment and industry trends, and we'll 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 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. These assets had consistent operator activity throughout the quarter with an estimated 1.2 net wells turn in line all from Chevron (NYSE:CVX), Oxy and Civitas. Since the DJ Basin acquisition closed on April 4, 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 Carrie to provide an update on our quarterly financial results and return of capital.
Carrie Osicka: 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 Q1 cash flow from the DJ Basin acquisition. Our board approved total return of capital equal to 65% of pro forma first quarter DCF, 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. As a reminder, our return of capital framework provides a minimum dividend equal to 35% of DCF and allocates at least 30% 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. In April, we continued buying back shares in the open market and also privately negotiated a block trade in which we repurchased approximately two million shares from two of our largest Class C 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.
Operator: [Operator Instructions] Our first question comes from Neal Dingmann from Truist Securities.
Neal Dingmann: Good morning. Nice quarter. My first question is on something you were just talking about. When you look at capital allocation, I'm just wondering how do you all think about it? I love the buybacks you recently did from the large holder, but I'm just wondering how you think about the allocation of that versus acquisitions out there today?
Ross Wong: Yes. Thanks, Neal. Good morning. 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 capital to shareholders regardless. And so we don't view acquisitions and share buyback as mutually exclusive, That's the strength of that strategy. So we're able to continue evaluating acquisitions and return capital to shareholders through dividends and buybacks with this framework.
Neal Dingmann: Yeah, I'm glad you said that. 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 does that give you? I mean, it seems like you continue to those keep improving and, obviously, almost through the remainder of the year into next year, maybe can you just give me a little more color in what you think that will lead into as far as volume growth?
Ross Wong: You're right. The level -- absolute level of the alliance type welds 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 turn in line March by four different operators across three different regions. So again demonstrating that the power of diversification across our asset base. But you know the absolute level of line-of-sight 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 line-of-sight wells.
Neal Dingmann: Agree. Great story. Thanks guys.
Operator: Our next question comes from Nathaniel Pendleton from Stifel.
Nathaniel Pendleton: Good morning. Congrats on the strong quarter. 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 Basin assets in your portfolio, how's that integration been and are there opportunities to add that production that may not have been considered in the purchase?
Ross Wong: Hi, Nathan. Good morning. Thanks for the question. So 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. So 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 Sitio.
Nathaniel Pendleton: 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 the Eagle Ford going forward on Slide 4? Is there a place where you'd be interested in adding more depth or would you consider monetizing that asset given the right price? 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. But if there are opportunities that come along in Eagle Ford that are competitive on a rate of return basis and other opportunities, then we absolutely consider them. We have made offers on Eagle Ford assets, but nothing that has cleared the market at our rate of return thresholds. So we just haven't transaction there in quite a while. But we're open to it, it's just a matter of, has to be competitive. And that's exactly why we made the acquisition and the DJ Basin was a very competitive rate of return. Very good assets. They were put together by a very good team. We knew what they were doing when they were putting the assets together. So, we look for opportunities like that that fit in well with the portfolio, not because they fit some geographic narratives, but more because they're good for us here over some rate of return.
Operator: Our next question comes from Tim Rezvan from KeyBanc Capital Markets.
Tim Rezvan: Hey, it's John Mardini on for Tim. We want 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 payout or are they one off spending events like opportunistic M&A?
Nathaniel Pendleton: Well, I think it's both really. You have, an opportunistic, repurchase of 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 other return capital framework. So our framework has never been strictly 65%. It has been at least 55%. And as you heard Carrie talk 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've provided and you overlay some pricing that you want to use, whether it's first call consensus or strip pricing, you'll get to the number for discretionary cash flow as 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. 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 to capital.
Tim Rezvan: Okay, great. Thanks for framing that out. 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?
Nathaniel Pendleton: The post repurchase share count, so it's going to be, shareholders of record in May.
Tim Rezvan: Okay. Got it. That's all I had. Thanks for your time.
Operator: [Operator Instructions]
Operator: We currently have no further questions. [Operator Closing Remarks].
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