Sitio Royalties Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 5 speakers on the call.

Operator

And welcome to

Speaker 1

the Citiya Royalties Third Quarter 2023 Earnings Call. My name is Alex. I'll be coordinating the call today. And I hand over to your host, Ross Wong, Vice President of Finance and Investor Relations. Please go ahead.

Speaker 2

Thanks, operator, and good morning, everyone. Welcome to the Sidio Realty's 3rd quarter 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.sidio.com, where you will find them in our Investor Relations section. With me today to discuss Q3 2023 financial and operating results is Chris Conisenti, our Chief Executive Officer Kari Ocica, our Chief Financial Officer and other members of our executive team. Before we start, I'd like to remind you that our discussion today may contain forward looking statements And non GAAP measures.

Speaker 2

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.

Speaker 3

Thanks, Ross. Good morning and thank you for joining Citeo's Q3 2023 earnings call. We have a very productive Q3 across multiple aspects of our business. Operationally, our assets have continued to perform well despite the slowdown of drilling and completion activity across the Permian Basin and broader United States where quarter over quarter horizontal rig count was down by 7% and 11%, respectively. For the 3rd quarter, we reported average daily oil production 17,576 barrels per day and average daily total production of 36,900 BOEs per day.

Speaker 3

When excluding prior period adjustments, our oil production in period was 18,200 and barrels per day or 50 percent of total volumes, which is in line with both the midpoint of our guidance for implied oil barrels and percent oil. We estimate that during the Q3, there were 9.5 net wells turned in line on our assets with 72% 19% of the overall activity in the Permian and DJ Basins respectively. This was a shift from 2nd quarter activity where 87% Our turn in line wells were in the Permian Basin and there was minimal activity on our DJ Basin assets. As of September 30, We had 50.9 net line of sight wells. And despite healthy development activity across our acreage during the quarter, our net line of sight wells remained Essentially flat relative to June 30, implying full replenishment of our line of sight inventory.

Speaker 3

The Permian Basin continues to account for approximately 80% of our line of sight wells and is where we expect the majority of our operator activity to occur in the next 12 to 16 months. Turning to financial results. We generated $142,400,000 of adjusted EBITDA in the 3rd quarter, Which was up by 12% relative to the 2nd quarter, primarily due to additional volumes from the 5 previously announced acquisitions And higher realized unhedged commodity prices. We reported 3rd quarter discretionary cash flow of $117,300,000 Which is up by nearly 24% relative to the 2nd quarter. This was driven by the increase in adjusted EBITDA I just commented on And a decrease in cash taxes, which were $7,800,000 lower than the 2nd quarter because of a corporate tax credit related to the Brigham merger.

Speaker 3

Our Board declared a 3rd quarter cash dividend of $0.49 per share of Class A common stock based on a 65% payout ratio. The dividend is payable on November 30 to stockholders of record at the close of business on November 21. This is now the 6th Consecutive quarter that we've declared a dividend to shareholders using a 65% payout ratio and in aggregate, we have declared total dividends Per share of $3.42 since we became public in June of 2022, which represents approximately 14% of our 30 day volume weighted average stock price. Going forward, we plan to use accrued interest expense instead of cash interest expense paid during each quarter in our calculation of discretionary cash flow, which will help smooth out discretionary cash flow because the interest expense on our new notes is paid semiannually. On the strategic front, our 4 previously announced cash acquisitions closed in July August.

Speaker 3

I'm also pleased to announce that we have signed a definitive agreement to sell our entire Appalachia and Anadarko Basin assets, Which generated $3,800,000 of oil, gas and NGL revenues in the 3rd quarter for $117,500,000 in cash, Subject to customary closing adjustments. Our position in each of these basins was subscale relative to our company size And the margins from these assets are substantially lower than our company average given the gassier nature of the commodity mix. These assets had 0.7 net line of sight wells as of September 30. So our line of sight inventory will be 50.2 net wells pro form a for the divestiture. In aggregate for 3Q 2023, Appalachia and Anadarko contributed only 0.4 net wells Turn in line out of 9.5.

Speaker 3

This compares to Appalachia and Anadarko well turn in line of 0.1 out of 8.1 total in 2Q of 2023. The divestiture has an effective date of September 1 and is expected to close near the end of the year. Pro form a for this divestiture, our total debt as of November 3 would be approximately $864,000,000 and our liquidity under our Reserve based loan would be approximately $588,000,000 assuming a flat borrowing base of $850,000,000 Turning to financing activity during the quarter, we increased our borrowing base from $750,000,000 to $850,000,000 which is a 13% increase. And we issued $600,000,000 of senior unsecured notes due in 2028, which allowed us to refinance our existing senior unsecured notes, Decrease our expected interest expense by $11,000,000 per year and free up additional liquidity under our revolver. We currently remain focused on reducing our leverage to our long term target of 1 times EBITDA or less and working on accretive acquisitions.

Speaker 3

That concludes my prepared remarks. Operator, please open up the call for questions.

Speaker 1

Thank you. Our first question for today comes from Derrick Whitfield of Stifel. Your line is now open. Please go ahead.

Speaker 4

Good morning, all.

Speaker 3

Good morning, Derek.

Speaker 4

For my first question, I wanted to focus on your Q3 production and your 6 12 month production trajectory. Regarding the quarter, we've heard from several operators in the industry But they've experienced production impacts from elevated temperatures and brownouts in the Delaware. I wanted to ask if you're seeing evidence of that in your data? And then regarding your trajectory, your implied Q4 guide at the midpoint and your line of sight activity This is maintenance activity both in for meaningful production growth. How would you frame your production trajectory over the next several quarters?

Speaker 3

Just first on the Q3 production question. We heard some of the same comments, but fortunately with an asset base like ours, which is much more diversified, Any impacts like that are going to be far less pronounced than for somebody with a much more concentrated asset base. And given that we have assets across the entire Permian Basin and several other basins, localized issues like the ones you described Just don't show up in a meaningful way in our results. So that's the power of diversification across our asset base. Your second part of your question about the For production trajectory, the you're correct.

Speaker 3

The line of sight inventory of 50.9 net wells or 50 point To pro form a for the divestiture we announced is a healthy volume of line of sight wells. And as we look at our wells required to keep the production flat on our asset base, it's In the high single digit net wells per quarter. And so with 50.2, that's above that High single digits per quarter. On average, if these wells are getting turned in line in the next 12 to 16 months, so it does imply Some growth from where we are today. Again, given how diversified our asset base is, you should expect the growth of our asset to reflect the broader Permian Basin.

Speaker 3

And Permian Basin is not growing at double digits. It's growing at single digits and that's what our line of sight inventory implies and what our guidance implies.

Speaker 4

Terrific. And for my follow-up, I wanted to ask if you could elaborate on some of the technical Projects you referenced in your prepared remarks and the impact they could have on your organization?

Speaker 3

Sure. We're very excited about these investments Making in our business and these are all in an effort to be able to manage a much, much larger asset base than we have today Without adding to G and A in the future, so we made these initial investments starting years ago when we built our data management system so that our Land, Engineering and Accounting Systems all talk to each other automatically every single night. They scrape the public domain every single night for updates on our asset and across What we're doing now is investing in automation so that as we see more and more data coming out of every single month on more wells, Our people are freed up from doing more manual tasks to doing more interesting things like pursuing missing revenue from operators. So some of the automation projects we focused on this year are centered around things like revenue and division orders from operators. There's a significant amount of revenue data that comes out of every month on over 20,000 gross wells And we get hundreds of division orders every month and there's no need for human hands to touch every single one of those pieces of information.

Speaker 3

Computers are Perfectly capable of processing that information with the right systems in place and without losing the granularity of detail that we expect that we need for pursuing missing payments. So when we track our data, we're tracking it at the API level and we're tracking it by commodity, By production period and by operator. So in order to do that, you have to have an exceptional level of granularity and we don't lose that with these automation tools that we're building ourselves.

Speaker 4

It's very helpful. Thanks for your time.

Speaker 3

Thank you.

Speaker 1

Thank you. Our next question comes from Noel Parks of Tuohy Brothers Investment. Your line is now open. Please go ahead.

Operator

Hi, good morning.

Speaker 4

Good morning, Noel.

Operator

So of course, in the last month, we've had a couple of Big transactions, the majors doing some bulking up again. And I was just curious in scenarios like that, Generally, just curious what happens sort of with land and royalty accounting. I could see it either going To the majors being sort of not very attentive to that or possibly having big staffs to throw at that. So I just wondered if That might have any indications for what things that might come to the market and any sort of rationalized portfolios?

Speaker 3

Yes. So in terms of behavior we've seen in the past, it really varies and it's hard to make any sweeping generalizations across every transaction. Just in terms of activity levels, we've seen mergers Among E and P companies in the past that were not good for us, so for example, when Oxy and Anadarko got together, That was bad for us because they came together at a time of declining commodity prices and they had elevated leverage on a combined basis and they cut their The more recent vintage of E and P consolidation, I would say it's neutral to positive for the mineral owner, particularly when you look at some of the commentary coming out of folks like Exxon following their Pioneer announcement, Where they didn't signal any decrease in activity, which is the most important thing for the mineral owner, and they are actually signaling operational efficiencies, which Positive for us. Now in terms of the specific question you asked about their focus on us and the tenements of things like revenue remittance, Again, we don't see any meaningful difference in behavior. There are small private independents that are slow and inattentive.

Speaker 3

There are large public Companies that are slow and inattentive and likewise, there are large and small companies that are very good at what they do in terms of handling their revenue and division orders. So It just varies by company. And frankly, it varies over time by company depending on how their focus shifts. So Really don't have any general observations to make in terms of the attentiveness to the revenue and division order work from consolidation.

Operator

Well, thanks. That was interesting. And you mentioned something that was Next on my mind, just that the remark from Exxon was that they didn't seem to be cutting rigs. I understand what you're saying about Oxy Anadarko having been the exception. But of course, these recent deals are, I think both all stock.

Operator

So there aren't overnight implications for leverage that create pressure on them. So, it would seem like that's a good sign going forward If they're looking to do efficiency kind of operationally instead of just cut rigs to sort of flatten out their group And how about cash flow?

Speaker 3

Yes. That's a great point. And the fact that the E and P companies have really Made tremendous progress on improving their capitalization and their capital discipline. It's encouraging That these companies are coming together at this time. There are no balance sheet impacts like you described.

Speaker 3

And candidly, for the Specific transaction we're talking about with Exxon and Pioneer, Pioneer has best in class assets, best in class acreage. And so it feels like that's going to compete well for capital within Exxon's portfolio and we're excited about continued exposure there.

Operator

Good deal. And then just my last one, of course, had the transaction announcement today of Showing off Appalachia and the Amadorco. And I was just curious how long that was in the works, whether it was something that came together pretty easy or Kind of a lot of back and forth.

Speaker 3

Yes, these things are never perfectly smooth and there is a lot of back You want to make sure you're getting the best price for your shareholders. And so it's been in the works for a while now. But what we did We looked at the money we were spending for the acquisitions we made this year for cash and this was a nice way to fund a portion of that and it fit nicely in the capital program this year.

Operator

Right, right. I mean the simplification Certainly, must be welcomed to some degree, makes the story and sort of your focus a little bit more contained.

Speaker 3

Yes. Our land and accounting folks are doing cartwheels. It's an interesting dynamic when you have assets In a region that are small relative to other regions that we have. And so just having subscale positions in these basins required a disproportionate amount Attention from the internal team, so it does simplify our work quite a bit.

Operator

Right, right. Kind of what I was thinking. Okay. Well, thanks so much. Thanks for the time.

Speaker 3

Thank

Operator

you.

Speaker 2

Thank you.

Speaker 1

Okay. At this time, we currently have no further questions. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.

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