Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sitio Royalties Corp (STR, Financial) achieved record high production volumes of 39,231 BOEs per day in the second quarter, marking a 3% increase from the first quarter.
- The company successfully closed on acquisitions of approximately 15,000 net royalty acres, enhancing its portfolio.
- A return of capital of $0.71 per share was announced, representing a 45% increase compared to the first quarter.
- Record high adjusted EBITDA of $151.6 million and discretionary cash flow of $129.3 million were generated in the second quarter.
- The company raised its full-year 2024 pro forma average daily production guidance range to 36,000 to 38,000 BOEs per day, indicating confidence in future performance.
Negative Points
- The minerals market remains competitive, with many deals not meeting Sitio Royalties Corp (STR)'s underwriting criteria.
- Net debt has increased to over $1 billion, with leverage ticking higher, raising concerns about financial stability.
- The company has seen a decrease in net line-of-sight wells, although gross activity remains constant.
- The Permian Basin remains highly competitive, requiring a differentiated and relationship-driven approach to acquisitions.
- Despite strong production, the company faces challenges in maintaining a balance between dividends, buybacks, and debt paydowns.
Q & A Highlights
Q: Given the increased commodity volatility, have you seen any changes in operator activity, and is your line-of-sight well still strong?
A: (Christopher Conoscenti, CEO) We haven't seen any meaningful change in activity. Operators are achieving greater efficiencies, doing more with less. The rig count and frac-through count are flat, but the number of wells turned-in-line remains constant, indicating continued efficiency. While there's a decrease in net line-of-sight wells, gross activity is stable.
Q: What areas are most active for M&A, and are there any specific regions more active than others?
A: (Christopher Conoscenti, CEO) The Permian Basin and the DJ Basin remain the most active areas. The Permian is very competitive, requiring a relationship-driven approach. In the DJ Basin, we've acquired good collections of assets and continue to see success.
Q: How do you view the valuation of gas optionality, especially in gassier areas like the Southern Delaware Basin?
A: (Christopher Conoscenti, CEO) We are commodity agnostic and returns-driven. We are open to acquiring more gas assets at the right price. Our current assets have embedded gas, so we don't need to go to pure gas basins for exposure. We are open to opportunities in areas like the Southern Delaware Basin or Haynesville if they offer appropriate returns.
Q: In the absence of large-scale M&A, is the pattern of small acquisitions repeatable?
A: (Christopher Conoscenti, CEO) We see opportunities of all sizes and evaluate many small acquisitions daily. Larger acquisitions are more episodic and take longer to develop. We have better visibility on smaller deals and expect to continue making them, while larger deals depend on capital allocation for the best returns.
Q: How does the company view buybacks versus other uses of cash, given the recent outsized buyback activity?
A: (Christopher Conoscenti, CEO) We focus on returning at least 65% of discretionary cash flow to shareholders, deciding between dividends and buybacks. When opportunities arise to repurchase stock below intrinsic value, we take advantage. In Q2, we paid the minimum cash dividend and used the rest for NAV accretive buybacks.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
