Release Date: November 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sitio Royalties Corp (STR, Financial) has a proven track record of identifying, underwriting, and capturing value-adding acquisitions, benefiting from a highly fragmented mineral sector.
- The company actively manages its resources using proprietary systems, recovering approximately $25 million in missing payments over the last 12 months.
- STR has a strong capital structure, reducing total debt by nearly $60 million in the last quarter, and lowering interest expenses by 18% compared to the previous year.
- The company has returned more than $765 million in capital to shareholders since becoming public in June 2022, balancing acquisitions with cash dividends and share buybacks.
- STR's third quarter performance exceeded full-year guidance estimates, with higher-than-expected production and successful acquisitions enhancing their 2024 outlook.
Negative Points
- The mineral sector remains highly fragmented, which can pose challenges in consistently identifying and capturing value-adding acquisitions.
- Despite strong performance, the company faces the inevitable volatility of commodity price cycles, which can impact financial stability.
- The company's focus on maintaining a strong balance sheet may limit flexibility in pursuing larger acquisitions or aggressive growth strategies.
- There is a reliance on external operators for asset development, which can lead to uncertainties in production timelines and efficiency.
- The company's cash tax guidance has varied significantly throughout the year, indicating potential challenges in forecasting and financial planning.
Q & A Highlights
Q: Could you give me a sense of how you see the M&A market for minerals and where that plays given your financials?
A: The M&A market remains exciting for Sitio. We have an active business development effort led by our senior team, constantly staying in contact with mineral owners and sourcing new ideas. The market is very active, and we focus on rate of return, near-term accretion, and long-term IRRs. We also prioritize balance sheet strength, ensuring transactions are leverage-neutral or balance sheet enhancing.
Q: Could you talk about the increase in your line of sight wells and what drove this?
A: The increase in line of sight wells is driven by activity across our entire footprint, including the Midland Basin, Delaware Basin, Texas, New Mexico, and the DJ Basin. Our line of sight wells provide visibility into the next 12 to 18 months of development, and we have 9,000 gross line of sight wells on a normalized basis, which excites us about future activity.
Q: Sitio added five acquisitions in the DJ Basin this quarter. Are you seeing a lot of deal flow there, or are these acquisitions just better value for the company?
A: The Permian remains the largest opportunity set by sheer number of acquisition opportunities. However, the rate of return opportunities in the DJ Basin have been superior recently, which is why we've directed capital there. Our business model allows us to allocate capital to where we get the highest rate of return.
Q: Can you discuss your thoughts on buybacks versus debt reduction and if the current allocation of free cash flow is a good guide for 2025?
A: Our capital allocation strategy prioritizes balance sheet protection and return of capital. We've committed to returning at least 65% of discretionary cash flow to shareholders, with 35% retained for balance sheet protection or opportunistic acquisitions. We prioritize cash dividends and share buybacks, and in the past quarter, we bought back about $29 million of shares.
Q: On slide 10, you show cumulative production outperformance. Can you talk about which region and assets are driving this outperformance?
A: We have a rigorous look-back analysis on our acquisitions to ensure they perform in line or better than our underwriting assumptions. The performance is driven by wells performing as expected and the timing of future wells coming online. Our underwriting success is reflected in our enhanced guidance and acquisition performance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
