Sitio Royalties Corp.

Ladies and gentlemen, welcome to the CTO Royalties Third Quarter 2022 Earnings Call. My name is Glenn, and I'll be monitoring today's call. If you would like to ask questions during the presentation, you may do so by pressing star 1 on the telephone keypad. I will now hand you over to your host, Ross Wong, Senior Director of Corporate Finance and Investor Relations, to begin. Ross, please go ahead.

Thanks, Operator, and good morning, everyone. Welcome to the CTO Royalties Third Quarter 2022 Earnings Call. If you don't already have a copy of our recent press release and updated investor presentation, please visit our website at www.fideo.com where you will find them in our investor relations section. With me today to discuss third quarter 2023 financial and operating results is Chris Conocenti, our chief executive officer, Kerrio Cephas, our chief financial officer, and other members of our executive leadership team. Before we start, I would like to remind you that our discussions today may contain forward-looking statements and non-GAAP measures. These 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'll turn the call over to Chris.

Thanks, Ross. Good morning, everyone, and thank you for joining FITCIO's third quarter 2022 earnings call. we had another great quarter as we continued to execute on our large-scale consolidation strategy. We also refinanced our bridge loan with a flexible capital solution and made progress like we have done every quarter, developing our team and improving our processes to enhance the scalability of our business model. Despite a double-digit percentage decrease in realized commodity prices for the third quarter versus the second quarter, we are increasing our dividend from $0.71 per share for the second quarter to 72 cents per share for the third quarter. This is a clear demonstration of the accretive nature of the transactions we have closed this year. The highlight of the quarter was the announcement of our all-stock at-market transactions with Brigham Minerals, which was the largest ever public merger in the mineral sector. This transaction brings additional high-quality assets into our company, dramatically increases the public float of our stock, reduces our leverage statistics, and has the significant benefit of giving us the opportunity to bring additional talented employees to CITIO. Since announcing the transaction, we have spent a significant amount of time with the Brigham employees to identify where their skills intersected with our needs today and our plans for future growth. We are excited to announce that Zach McDavid, who is currently Brigham's SVP of Exploration, will be joining CITIO after the transaction closes in the newly created role of EVP of Corporate Development. Many of you know Dax already. He is a geologist by background and has built an impressive network of relationships throughout the upstream oil and gas and mineral and royalty sectors. In his new role, Dax will be responsible for leveraging these relationships and his technical expertise as they continue to consolidate high-quality minerals and royalties assets. He will also work closely with our technical, land, and corporate finance team to develop new ways to differentiate FIFIO from other minerals companies. In addition to that, we have identified 13 other Brigham professionals across every functional group in the company, including geology, engineering, land, GIS, and accounting, who plan on staying with Citio post-close, which will bring our total headcount to 49 employees. On October 11th, we filed a merger proxy with the SEC, and we are currently working through their review process and expect to respond to the SEC's first set of comments soon. There will not be a proxy meeting for CTO shareholders since the transaction was already supported by CTO's three largest shareholders who own approximately 84% of the equity. There will be a proxy meeting for Brigham shareholders, however. Exact timing of that meeting will be determined by the length of the SEC review process. Upon closing of the Brigham transaction, we plan to put a new revolving credit facility in place that is appropriately sized for the combined company. While the new revolver size still needs to be determined by going through a syndication process with our bank group, I can provide some context to help frame the situation. Currently, on a combined basis, Cateo and Brigham standalone revolvers have a borrowing base of $590 million, which has not been adjusted upward for recent acquisitions, including foundation, Momentum, and Avant. In aggregate, these acquisitions added more than 35,000 net royalty acres for an aggregate purchase price of more than $650 million and should add a meaningful amount of reserves to support an increased borrowing base. In late July, we closed on the acquisition of more than 12,200 NRAs from Momentum Minerals, which is turning out to be one of our best acquisitions to date and is already outperforming our underwritten production forecast. These assets, in combination with the minerals and royalties acquired from Foundation Minerals in June, have strong visibility for near-term activity and comprise approximately 32% of our line-of-sight wells as of September 30th. We funded both acquisitions primarily with proceeds from a $425 million bridge loan. We evaluated a wide range of alternatives to refinance the bridge loan and are pleased to have identified a solution that met all of our needs, including a competitive cost of capital, no impact on our existing ability to continue to pay our dividend, even in lower commodity price scenarios, and structural flexibility. On September 21st, we issued $450 million of senior insured notes to a small group of private lenders and used the proceeds to fully retire the first loan. We negotiated the terms of these notes to ensure they were tailored for our business and structured as the best solution for our company at the time. It is important for us to maintain a large amount of prepayable debt because of how much cash flow our business generates. And the notes allow for up to 10% amortization of the initial principal per year at par, which we plan to take full advantage of. The notes also only have a one-year non-call period and lower call pricing than traditional public bonds, which provides the flexibility to refinance as early as September of next year if credit markets are in a better state. Our third quarter financials included a full quarter of results, from the acquired second minerals and foundation minerals assets and roughly two-thirds of a quarter of results from the momentum minerals acquisition which closed in late July. Since this was the first full quarter with several of our newly acquired assets, we had many record high metrics including average daily production of 18,000 DOEs per day, adjusted EBITDA of $106.3 million and discretionary cash flow of $93.4 million. On a pro forma basis, including a full quarter of production volumes from the momentum acquisition, our third quarter production would have been 18,571 DOEs per day. While these headline numbers are notable and a reminder of how rapidly we have been executing on our large scale consolidation strategy, I think it's most important to look at some of the key metrics that drive shareholder value and future growth. First, we declared third quarter dividend of 72 cents per share based on a 65% payout ratio of our discretionary cash flow. This represents a 1 cent increase relative to our second quarter dividend, even though average unhedged realized prices were down 14% from $76.65 to $65.71, or nearly $11 per BOE. We also had $2.7 million in realized hedging gains during the quarter, which was a direct result of the commodity hedging we put in place related to the four cash acquisitions we made earlier this year. In hedging, we don't try to predict future commodity prices, but instead hedge multiple years of expected production on cash acquisitions when we are in a third mid-cycle pricing environment to protect returns we are underwriting. This is the perfect example of this philosophy at work. As a reminder, Our oil hedges are at a weighted average price of $106.31 per barrel for the remainder of this year and are $93.71 per barrel for 2023. Second, we recorded third quarter lease bonus of $6.7 million, which is $5.4 million greater than lease bonus in the second quarter and more than our lease bonus for the entire first half of the year. We don't underwrite any lease bonus activity on acquisitions. but have been very focused on increasing our leasing activities to get the most productivity out of our assets. So it's nice to see this showing up in our results. On the cost front, at $2.80 per BOE, we recorded the lowest annualized cash G&A per BOE in our company's history and broke the $3 per BOE barrier for the first time. This highlights the scalability of our business model and demonstrates one of the reasons why we continue to pursue large-scale acquisitions. Each acquisition drives down our cashed G&A per-year lead, since we don't need to increase cashed G&A linearly, which directly improves our discretionary cash flows and dividends to our shareholders. We expect this metric to improve over time as the business grows. Using the bookends of annual cashed G&A guidance and combined 3Q actual production for CITIO and Brigham, including a full quarter for Momentum, Third quarter cash G&A per BOE would have been in the $1.80 to $1.88 range for the combined company. Activity and line-of-sight activity on our assets remains robust, with 4.1 net wells turned in line during the third quarter and nearly 27 line-of-sight wells as of September 30th, which is near our historic company highs. For a full quarter of Momentum Minerals assets, our third quarter production was 18.6 thousand VOEs per day, which is above the midpoint of our second half 2022 guidance for standalone CISIO. We have strong visibility to a few high-interest pads in the Permian Basin that have been spud and are expected to come online in late 4Q 2022 or early 1Q 2023. These pads represent more than two net wells and are a catalyst for continued near-term growth trajectory of our Pornian assets. On a combined basis and including a full quarter of momentum, Scythia and Brigham's assets produced an average of 33.6 thousand BOEs per day in the third quarter, which is above the midpoint of the average daily production guidance range released at merger announcement for the 12 months ended June 30, 2023. Given these results, we are increasing the average daily production range for the combined company to 32,750 BOEs per day to 34,250 BOEs per day, which is a 250 BOE per day increase at the midpoint. We are looking forward to continuing to execute on our differentiated large-scale consolidation strategy at the combined company and are doing all we can to ensure that closing the program transaction is completed in a timely manner. That concludes my prepared remarks. I'd like to open up the call for questions.