Sitio Royalties Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Insitio Royalties 4th 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 star followed by 1 on your telephone keypad. I would now like to hand the call over to Ross Wong, Vice President of Finance and Investor Relations to begin. Ross, please go ahead.

Speaker 1

Thanks, operator, and good morning, everyone. Welcome to the City of Royalty's Q1 2024 Earnings Call. If you don't already have a copy of our recent press release and updated investor presentation, please visit our website atwww.cidio.com, where you will find them in our Investor Relations section. With me today to discuss our first quarter 2024 financial and operating results is Chris Conoscente, our Chief Executive Officer Kari Ocica, our Chief Financial Officer and other members of our 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.

Speaker 1

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 2

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. I want to thank our team at complex asset base.

Speaker 2

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 form a net wells in the 1st quarter, resulting in a 3.7% quarterly pro form a production growth rate. Our first quarter pro form a 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 Q2 production. We ended the Q1 with 52.9 pro form a net line of sight wells, which supports our outlook for near term activity.

Speaker 2

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 and 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 $8,500,000 during the Q1. 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 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 2nd quarter.

Speaker 2

Our minerals M and 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 Keri to provide an update on our quarterly financial results and return of capital.

Speaker 3

Thanks, Chris, and good morning, everyone. We reported 1st quarter pro form a discretionary cash flow of $118,000,000 and pro form a adjusted EBITDA of $144,000,000 which includes 1st quarter cash flow from the DJ Basin acquisition. Our Board approved total return of capital equal to 65% of pro form a 1st 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 $13,000,000 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 Q1.

Speaker 3

In April, we continued buying back shares in the open market and also privately negotiated a block trade in which we repurchased approximately 2,000,000 shares from 2 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

Thank you, Our first question comes from Neal Dingmann from Trust Securities.

Speaker 4

Good morning, Hassane. 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?

Speaker 5

Yes. Thanks, Neil. Good morning. We think about the buyback in the context of the business' 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.

Speaker 5

And so we don't view acquisitions and share buyback as mutually exclusive. So 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.

Speaker 4

Yes. 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?

Speaker 5

You're right. The level absolute level of the Alliant 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 Q1 was a very good one for us in terms of conversion. So we saw 4 very large pads turn in line in March by 4 different operators across 3 different regions.

Speaker 5

So again, demonstrating that's the power of diversification across our asset base. But 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 time frame we see the most conversion from that population of line of sight wells.

Speaker 4

Agree. Great story. Thanks guys.

Speaker 5

Thanks Neil.

Operator

Our next question comes from Nate Belderton from Stifel.

Speaker 6

Good morning. Congrats on the 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?

Speaker 5

Hi, Nick. 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.

Speaker 5

When you think about it, we get checks from we get about 2 25 checks a month, and each of those checks has over 6,000 rows of data, and 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

Speaker 2

on operator activity, and

Speaker 5

it helps us to be smarter on acquisitions as well as we leverage that data. So, yes, 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 CITIO.

Speaker 6

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?

Speaker 5

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.

Speaker 2

We have made offers on Eagle

Speaker 5

Eagle Ford assets, but nothing that has cleared the market at our rate of return thresholds. 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

Speaker 4

in the DJ Basin. It was

Speaker 5

a very competitive rate of return, very good asset. They were put together by a very good team. We knew what they were doing when they were putting the asset 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 our shareholders from a rate of return.

Speaker 7

Got it. Thanks for taking

Speaker 6

my questions.

Speaker 5

You bet.

Operator

And our next question comes from Tim Rezvan from KeyBanc Capital Markets.

Speaker 7

Hey, it's John Mardini on for Tim. We want to ask about the Q2 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 and A?

Speaker 5

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 on capital framework. So our framework has never been strictly 65%. It has been at least 65%.

Speaker 5

And as you heard Carey 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 1st 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 Q2. And you guys 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.

Speaker 7

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 2,000,000 shares that were repurchased in early April? Or will it reflect the post repurchase share count?

Speaker 5

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

Speaker 7

Okay, got it. That's all I had. Thanks for your time.

Speaker 6

Thank you.

Operator

We currently have no further questions. Thank you for joining today's call. You may now disconnect your lines.

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