Sitio Royalties Q1 2025 Earnings Call Transcript

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May 8, 2025

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for attending today's CTO Royalties First Quarter twenty twenty five Earnings Call. My name is Ada, and I will be your operator today. All lines will be muted during the presentation of the call. There's an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Alisa Stevens, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, operator. Good morning, and welcome to our first quarter twenty twenty five 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. I'm joined this morning by our CEO, Chris Connofenti and our CFO, Carrie Ossica.

Speaker 1

After our brief prepared remarks, Chris, Carrie and other members of our leadership team will be available to take your questions. 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 release, investor presentation and publicly filed documents for additional information regarding such forward looking statements and non GAAP measures. I will now turn the call over to Carrie to review our first quarter results.

Speaker 2

Thanks, Alyssa, and welcome, everyone. First, I'll touch briefly on the new reporting format we rolled out this quarter. On April 15, we issued our inaugural quarterly preview featuring key operational and financial metrics are available shortly after quarter end. Prior to availability of full financials, metrics such as production, net wells turned in line, net line of sight 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.

Speaker 2

Moving now to our results. The first quarter of twenty twenty five marked another record quarter of production for CityO, supported by robust drilling and completion activity across our properties. Net wells turned in line were up 34% from 4Q twenty twenty four, with the majority of the increase coming from the Delaware Basin. In addition, we closed on over $20,000,000 of acquisitions that added thirteen fifty net royalty acres. Total production was up 3% quarter over quarter, averaging over 42,000 BOE per day.

Speaker 2

Adjusted EBITDA was $142,000,000 which was 1% higher than the prior quarter and reflected strong production as well as expenses in line with or better than the midpoint of our full year guidance ranges. Net income of $26,000,000 was up 36% over the same time period. From production down to net income, our first quarter results beat consensus estimates. Based on these results, our Board declared a first quarter cash dividend of $0.35 per share payable on May 30. And during the first quarter, we repurchased 1,100,000.0 shares for $22,000,000 equating to $0.15 per share in repurchases.

Speaker 2

In total, this represents a return of capital of $0.50 per share for the first quarter. Effective May 7, our Board extended our buyback plan and authorized an additional $300,000,000 of share repurchases. Through May 2, in the second quarter, we bought back approximately 487,000 additional shares for $8,000,000 bringing current remaining buyback capacity to approximately $350,000,000 Turning now to the balance sheet. We had $1,100,000,000 of debt outstanding with $439,000,000 of availability under our revolving credit facility as of March 31. Holding that debt flat quarter over quarter, we used our organic cash flow to fund over $20,000,000 of accretive acquisitions plus pay annual expenses such as ad valorem and federal taxes.

Speaker 2

As of March 31, our adjusted net debt to free cash flow was approximately half of our peer group average. Lastly, we are updating our full year 2025 estimated cash taxes guidance to reflect lower anticipated commodity prices than originally forecasted. At the midpoint, current estimated cash taxes for 2025 are $23,000,000 5 million dollars less than the original estimate. With that, I'll hand the call to Chris to discuss our current positioning and future outlook.

Speaker 3

Thanks, Carey, and good morning, everyone. We're pleased with our solid momentum exiting the first quarter and Sytio's positioning in the current market environment. 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 Sifyo's business specifically. Within the oil and gas value chain, minerals and royalties assets represent the highest margin investment opportunity. With the exception of gathering and transportation costs on some, but not all of our leases, our interests are non cost bearing.

Speaker 3

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 and importantly have no direct exposure to tariffs and act as a natural hedge to inflation. Based on Sitio's lean cost structure, LTM adjusted EBITDA margins were 90%. Referencing slide six of our supplemental earnings presentation, I'd note that based on consensus estimates, twenty twenty five free cash flow margins on a per unit of production basis are more than three times that of the average E and P peer. As such, our business looks materially different in a downside price environment as compared to E and P companies. Even at much lower commodity prices and slow development pace, we continue to generate meaningful free cash flow.

Speaker 3

Following the much more dramatic downturn in 2020, we paid down our debt and emerged well positioned to capitalize on the M and A opportunities that followed in 2021 and 2022 rebound. On slide seven, we reference ten year cumulative free cash flow to enterprise value as estimated by Texas Capital Equity Research for their oil and gas coverage universe. 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 ten years, while the next best performing group, the Bellwether Oil Group, is estimated to return less than 50% of the current enterprise value in ten years. The banded outcomes for minerals businesses is much tighter. That is just one perspective on a forward outlook.

Speaker 3

Actual historical results are just as impressive. In less than three years as a public company, Sifyo has returned over 35% of our current equity value to shareholders. And we still have over a decade of drilling inventory remaining just in areas that are being economically developed today. In many ways, our business is like that of a financial asset manager, in our case, managing a diverse portfolio of perpetual real assets. Portfolio construction remains top of mind for us, and we've been intentional about how we've grown our position over time.

Speaker 3

Underwriting superior rates of return is the North Star that guides our portfolio construction priorities. Priority number one is asset quality. Highest quality assets will be the last to see rigs and frac crews drop in lower commodity price environments. Our near term line of sight well count fluctuates quarter to quarter, but the average has remained consistent since closing of the Brigham merger in late twenty twenty two. This quarter, line of sight 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 3

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. Based on twenty twenty four operator drilling activity, including continued success across the Midland Basin in the Lower Wolfcamp and further delineation of the Upper Bone Spring benches in the Northern Delaware Basin, 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. As a reminder, we did not underwrite any of these locations when we acquired these assets.

Speaker 3

This is another demonstration of the unrecognized value in our asset base. Priority number two is operator quality. We have intentionally built our position 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, Conoco and Oxy. These companies are not highly sensitive to a 10% to 15% move in crude prices and have historically had some of the most durable and consistent capital programs.

Speaker 3

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. No single operator represents more than 10% of our line of sight wells. And we have balanced basin and commodity exposure. Our LTM production was comprised of approximately 48% crude, 29% natural gas and 23% NGLs.

Speaker 3

These three priorities asset quality, operator strength and asset and operator diversification underpin our acquisition underwriting in pursuit of the highest possible rates of return we can achieve with our shareholders' money. Minerals and royalties are highly fragmented generational assets and we are in the early stages of consolidation. We are constantly evaluating consolidation opportunities of all sizes and across multiple regions. Our goal is to maximize our risk adjusted rate of return every time we allocate capital. Since becoming public, through operator drilling as well as acquisitions, we've grown production per debt adjusted share by more than 56, representing a 17% compounded annual growth rate.

Speaker 3

In our view, this is one of

Speaker 4

the best metrics for our report card and evidences our discipline and the sustainability of our model.

Speaker 3

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. We've been consistently active in the M and A market every quarter since inception and deal flow remains robust even as oil prices have pulled back recently. As we allocate capital, we compare acquisition opportunities to the intrinsic value of our own stock. Our buyback program has given us the opportunity to repurchase our shares and increase our remaining shareholders' interest in Sitio's high quality assets. Through our buyback program, we have repurchased over 4% of our stock over the last fourteen months.

Speaker 3

As Kerry noted, our Board has authorized an additional $300,000,000 of share repurchases. We have continued repurchasing shares throughout the last month capitalizing on the market volatility bringing our total remaining buyback capacity to $350,000,000 You

Speaker 5

can

Speaker 3

count on us to continue to be prudent stewards of your capital as we evaluate uses for cash flow in this environment. In closing, we are optimistic about the quality of our assets and their ability to compete for operator 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 are now ready to take questions.

Operator

Thank We now have our first question from Derek Withdue from Texas Capital. Please go ahead.

Speaker 4

Good morning all and congrats on a strong quarter across the board.

Speaker 3

Thanks Derrick. Good morning.

Speaker 4

For my first question, I wanted to focus on the resiliency of your business and your more immediate outlook. Referencing Slides eight and 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, is it safe to assume you feel relatively good about your production trajectory for the next two quarters?

Speaker 3

Yes. 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 the extreme case where people will drill wells and not complete them. We haven't seen that sort of behavior yet.

Speaker 3

We're very early into this, 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 4

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 and A opportunities that you're seeing in the market today?

Speaker 3

Yes. There's a good balance of both. I'd say that it's a tremendous opportunity in our stock and we're very excited to have the buybacks program and the increased authorization from our Board. The M and A environment, we remain active there and we do see opportunities. It's a little different than prior cycles.

Speaker 3

You look at 2020 and in that environment, the M and A environment completely seized up and nobody wanted to transact because it was such a rapid deterioration in commodity prices. The difference between now and then though, we're five years on in this journey towards basin wide development and 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 the underwriting is less opaque than it was five years ago. I think that helps to give people confidence that whatever environment they're in, they're getting a fair look at valuation on an M and A basis.

Speaker 3

When it comes to our stock, it's a really unique value proposition for a number of reasons. Like if you were to go to your commodities derivatives desk there at your bank and ask for a thirty or forty year call option on oil or natural gas, it just doesn't exist. Like there's no other way in this kind of high margin business to get that sort of call option on the long term demand fundamentals for oil and natural gas. And we provide that opportunity and our stock presents that opportunity. And we see a really compelling valuation here to buy that call option by repurchasing our stock.

Speaker 3

And even if you could get that kind of call option, you wouldn't get a yield on it. Return of capital yield today is 11.5. So there's a lot of things that are really compelling about the buyback.

Speaker 4

Terrific. And one more if I could, Chris. So Diamondback provided a less constructive outlook for the sector earlier this week, highlighting their expectation for severe contraction or more severe contraction based on prices and geologic headwinds. Did you guys perform look backs on your past acquisitions? Are you sensing any material change in the productivity of wells relative to underwritten assumptions?

Speaker 3

Yes. We do these look backs. I'll have Jarrod comment a bit on well performance. But one of the comments I'll make just about the operator comments that we've heard so far in this earnings cycle. First of all, we're not completely through the earnings cycle.

Speaker 3

But the one of the things we've heard is people reducing capital or reducing operating costs, but either increasing number of wells turned 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 the impacts on the production profiles. But the one cautionary note I would give you is don't bet against U. S. E and P companies to continue to innovate and to drive capital efficiency.

Speaker 3

It's happened time and again and we're very excited to be leasing our minerals to the best operators in this business. But Jared, I'll turn it to you to comment on any well performance.

Speaker 5

Yes. Sure, Derek. I saw the same

Speaker 6

comment as you that Diamondback made on the the geologic headwinds. One thing that we think about internally is, number one, we're not the operator. And number two, we're looking backward at the things that have happened and have been achieved. And when we look at the projections on our asset on a go forward basis, we're taking into account already the current geologic facts that are out there and what horizons are being drilled. So we take a very granular approach to our forecast.

Speaker 6

So we're not thinking about and we're not baking in future improvements. We're 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. So we feel good about our our future projections based on that fact.

Speaker 4

That's great and very helpful. So I'll pass it back to the operator. Thanks.

Operator

Our next question comes from Gerald Ju from Stephens. Please go ahead.

Speaker 7

Good morning and thanks for taking my question. So my first question relates to 1Q production and the '25 production guide. 1Q production was above the high end of guidance yet full year guide was unchanged implying declining volumes throughout the year. First, is declining volumes throughout the year the correct way to look at it? And second, based on operators earnings calls this quarter and what you're hearing in the market, is the unchanged guidance baking in some slowdown from operators?

Speaker 7

Thanks.

Speaker 3

Thanks, Jared. Appreciate the questions. First of all, just on first quarter, we're thrilled with how production came in the first quarter, our guidance and consensus. And last year we revisited our guidance in after the second quarter and I would expect us to do the same thing here. Again, we're six weeks into this commodity price environment.

Speaker 3

So it's a little reactionary to be making any drastic changes at this point. Again, there's no real data in terms of spuds or permits or wells turn in line just yet. We'll have a lot more data in a few months and we can make the call at that point about what's appropriate to do with guidance. But we feel really happy to have a solid foundation from the first quarter.

Speaker 7

Perfect. Thank you. And then my second one is just kind of back to share repurchases. So 1Q repurchases increased to 20% of discretionary cash flow compared to 11% in 4Q. Do you expect this trend of a higher percentage of share repurchases to continue with volatility on commodities putting pressure on stock prices?

Speaker 7

Thanks.

Speaker 3

Yes, 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 with buyback programs are more successful when they're in the market sort of through cycle. But having a steep buyback grid meaning you buy back more at lower prices is an important component of ours.

Speaker 3

And you saw that in full display where we bought back nearly $05,000,000 shares in the month of April compared to just over 1,000,000 shares in the entire first quarter. So yes, that's a good observation and good expectation.

Speaker 7

Perfect. Thank you. Congrats on the strong quarter.

Speaker 8

Thank you.

Operator

Next question comes from Tim Rezvan from KeyBanc Capital Markets. Please go ahead.

Speaker 8

Good morning, folks. Thanks for taking my questions. One was already just asked. So I just have one for you. Can you give a little more context on this inventory increase of 40 net locations?

Speaker 8

Is this just a new zone that you're seeing success in? Is this a spacing assumption? Just trying to kind of wrap my head around what exactly you saw to report that.

Speaker 9

Tim. Thanks for the question. This is Dax. Yes, we're excited to add those net inventory locations this quarter. That was pretty much split fifty-fifty between the Delaware and the Midland Basin.

Speaker 9

So throughout the year our technical teams have a process where we look at geologic prospectivity, operator activity 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 D formation where we've seen a lot of great well results by great operators like Exxon, Diamondback and Oxy. And on the Delaware side, as Chris mentioned, it was an increase to the Northern Delaware, specifically in the Bone Spring sections. And these are under operators like Permian Resources, Conoco, Devon and Newber.

Speaker 9

And we were happy to see recently this quarter that Permian Resources made the acquisition of Apache up there $600,000,000 and they kind of doubled down on our thoughts on that area. So, yes, great add for us. And it shows that the Permian is constantly giving on inventory. And it also speaks to the advantage asset class that we think minerals are. In most cases, minerals are owned from the surface of the earth to the center of the earth and a lot of our minerals are owned in that way.

Speaker 9

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 to begin with. So it's just it's gravy really to our valuation.

Speaker 8

Okay. That's helpful. That's all I had. Thank you.

Speaker 3

Thanks, Tim.

Operator

Next question comes from Noel Parks from Tuohy Brothers Investment.

Speaker 5

Good morning. Sort of using your unique insights from just being involved with so many operators. I'm just wondering, I know it's early days yet, but you mentioned the different strategies operators are undertaking at this stage in the cycle. Some are slowing down activity, some not so much, some are changing what they're doing with their TILs or their DUC counts. And but are you sensing any pattern as far as strategies for managing their base decline?

Speaker 5

I have heard some companies where it sounds kind of like they're kicking the can into next year, so lower drill bit activity, lower CapEx this year, but it seems pretty clear that they're going to have to intensify activity meaning next year or the year after. And I don't know if that kind of carries the embedded assumption that this oil downtown is going to be sort of short term. But, do you have any observations on that?

Speaker 3

Morning, Noel. Thanks for the question. Yes, I think 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 in activity, which causes a reduction in supply, which causes an increase in prices. And we're seeing that play out here with operators curtailing CapEx.

Speaker 3

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 Conoco announce cutting CapEx but maintaining their production guidance. And then you've seen other different approaches from some smaller operators. So I think it's just going to be very operator specific in how they approach it. But regardless, you're not seeing anybody grow at any measure in this point in the cycle and demand is continuing to grow.

Speaker 3

So ultimately those two things are going to have to correct where you have increasing demand 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 our assets are a multi decade call on oil and natural gas. So of course, we're impacted by the near term, but we own these assets forever. They're perpetual assets.

Speaker 3

And so for us, we're going to own these assets a year from now, five years from now and two decades from now. So we're going to benefit as and when the cycle adjusts.

Speaker 5

Right. Absolutely. And I was wondering again, I'm trying to sort of think about ripple effects from sort of this this turn in

Speaker 4

the

Speaker 5

cycle. And as as far as a and d, I'm wondering, is this a point where perhaps to the degree you might have things that you'd be inclined to sell? Is this a point where maybe an operator would be more willing to pay a premium to sort of buy in mineral royalty interest just because of the way it can sort of juice their returns sort of you know, using the same logic that that that you use as far as, you know, just the the strength of returns, of the model?

Speaker 3

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 given what it can do for their business both from a margin standpoint and strategically. So you point out something that's a bit of an anomaly in the space. But I think the point of the cycle we're at right now I think operators are to be very cautious around capital discipline. And I think they're going to be preserving whatever capital that they can for their drilling opportunities instead of deploying it on minerals at this point.

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