8-K: Sitio Royalties Announces Q4 and Full Year 2023 Results, $150 Million DJ Basin Acquisition, and $200 Million Share Repurchase Program

Sitio Royalties reported its fourth quarter and full year 2023 results, highlighted by a new DJ Basin acquisition, a share repurchase program, and updated return of capital framework.

Summary

• Sitio Royalties Corp. announced its operational and financial results for the fourth quarter and full year of 2023.
• The company has agreed to acquire 13,062 net royalty acres (NRAs) in the DJ Basin for $150 million, with an effective date of October 1, 2023, and expected to close in early Q2 2024.
• A $200 million share repurchase program was authorized, commencing in early March 2024.
• Sitio declared a $0.51 per share dividend for Q4 2023, a 4% increase from the previous quarter.
• The company's pro forma average daily production for Q4 2023 was 36,623 barrels of oil equivalent per day (Boe/d), with 49% oil.
• Sitio reported a net loss of $91.7 million for Q4 2023, primarily due to a $144.5 million non-cash loss on asset sales.
• Adjusted EBITDA for Q4 2023 was $134.9 million, and pro forma Adjusted EBITDA was $143.6 million.
• The company reduced long-term debt by $131.1 million in Q4 2023, resulting in $588.2 million in liquidity as of December 31, 2023.
• Full year 2024 production guidance is set at 35,000 to 38,000 Boe/d, with 49% to 51% oil.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While the company is making strategic moves with acquisitions and a share repurchase program, the net loss and decrease in EBITDA are concerning. The updated return of capital framework and future guidance are positive, but the overall sentiment is cautiously optimistic.

Positives

• The DJ Basin acquisition is expected to be accretive to 2024 return of capital per share by 6%.
• The share repurchase program provides another method to enhance long-term shareholder value.
• The updated return of capital framework provides flexibility to maximize shareholder returns.
• The company reduced long-term debt by $131.1 million in Q4 2023.
• The declared dividend of $0.51 per share represents a 4% increase from the previous quarter.
• Sitio has a strong liquidity position of $588.2 million as of December 31, 2023.
• The company's pro forma net line-of-sight (LOS) wells reached a record high of 53.4 as of December 31, 2023.

Negatives

• Sitio reported a net loss of $91.7 million for Q4 2023.
• The net loss was primarily driven by a $144.5 million non-cash loss on the sale of assets.
• Adjusted EBITDA decreased by 5.3% sequentially from Q3 2023.
• Average daily production volumes decreased by 3.0% in Q4 2023.
• Realized hedged commodity prices decreased by 2.3% per Boe in Q4 2023.

Risks

• Commodity price volatility could impact future financial results.
• Global economic uncertainty and geopolitical events could affect operations.
• The company's ability to execute its share repurchase program depends on various factors, including market conditions and commodity prices.
• The DJ Basin acquisition is subject to customary closing adjustments and may not close as expected.
• The company's future performance is dependent on operator activity on its acreage.

Future Outlook

Sitio expects full year 2024 pro forma average daily production to be between 35,000 and 38,000 Boe/d, with 49% to 51% oil. The company plans to allocate a minimum of 65% of Discretionary Cash Flow to return of capital, with at least 35% to cash dividends and at least 30% to additional cash dividends, share repurchases, or a mix of both.

Management Comments

• Chris Conoscenti, Chief Executive Officer, stated that the company continued to advance its strategic efforts through active portfolio management and returns-focused capital allocation.
• He highlighted the agreement to acquire over 13,000 NRAs in the DJ Basin as a compelling and accretive transaction.
• Conoscenti also expressed excitement about the $200 million share repurchase program as a method to enhance long-term shareholder value.

Industry Context

The acquisition of DJ Basin assets aligns with the industry trend of consolidating high-quality acreage in core producing areas. The divestiture of Anadarko and Appalachian assets and reallocation of capital into the DJ Basin reflects a strategic shift towards higher-returning assets. The share repurchase program and updated return of capital framework are in line with the industry's focus on shareholder returns.

Comparison to Industry Standards

• Sitio's production of 35,776 Boe/d in Q4 2023 is comparable to other mid-sized royalty companies, but the pro forma production of 36,623 Boe/d after acquisitions shows growth.
• The 4.0x purchase multiple for the DJ Basin acquisition based on asset level cash flow is competitive with recent transactions in the sector.
• The company's focus on returning capital to shareholders through dividends and share repurchases is consistent with the practices of other publicly traded royalty companies such as Texas Pacific Land Corporation and Viper Energy Partners.
• The reported net loss of $91.7 million is significant, but the non-cash nature of the loss from asset sales is a common occurrence in the industry due to portfolio management.
• The 5.3% sequential decrease in Adjusted EBITDA is a concern, but the pro forma Adjusted EBITDA of $143.6 million indicates the potential for improved performance with the inclusion of recent acquisitions.

Stakeholder Impact

• Shareholders will benefit from the share repurchase program and updated return of capital framework.
• Employees may see changes due to the 25%+ increase in headcount since the end of 2022.
• Customers and suppliers are not directly impacted by this announcement.
• Creditors will see a reduction in long-term debt.

Next Steps

• The company will close the DJ Basin acquisition in early Q2 2024.
• The share repurchase program will commence in early March 2024.
• Sitio will host a conference call on February 29, 2024, to discuss the results.
• Management will attend investor conferences in March 2024.

Key Dates

Keywords

Royalties, Oil and Gas, DJ Basin, Share Repurchase, Dividends, Production, Acquisition, EBITDA, Return of Capital, Financial Results