Sitio Royalties Corp.

Hello everyone and welcome to the City of Royalty's fourth quarter 2022 earnings call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Ross Wong, Vice President of Finance and Investor Relations to begin. Ross, please go ahead.

Thanks operator and good morning everyone. Welcome to the City of Royalty's fourth quarter and full year 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.cidio.com, where you will find them in our investor relations section. With me today to discuss fourth quarter and full year 2022 financial and operating results is Chris Conocenti, our chief executive officer, Kerry Osika, our chief financial officer, and other members of our executive leadership team. Before we start, I'd like to remind you that our discussion today may contain forward-looking statements and non-GAAP measures. Please 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 will turn the call over to Chris.

Thanks, Ross. Good morning, everyone, and thank you for joining CTO's fourth quarter and full year 2022 earnings call. We had a tremendous 2022 and demonstrated strong execution on our large scale minerals consolidation strategy through a series of transactions that transformed us from a private company with approximately 106,000 net royalty acres in the Permian Basin at the beginning of the year to one of the largest publicly traded oil and gas mineral and royalty companies in the U.S. upon completion of the Brigham merger in December. Closing two corporate mergers and two large cash acquisitions within a calendar year is an impressive feat, and I would like to thank the CITIO team and our board members for their dedication and hard work to get us to this point. We now own 260,000 net royalty acres across seven of the premier oil and gas basins in the country and have exposure to over 170 operators of horizontally drilled wells based on fourth quarter 2022 production. The oil and gas minerals and royalty sector remains highly fragmented, and we're well positioned to be the natural consolidator with our proven returns-focused and large-scale consolidation strategy. In addition to meaningfully scaling our business, impressive returns were generated for investors. All shareholders, regardless of whether they originally owned Falcon or Brigham, experienced total returns in 2022 in excess of 60%. Now, turning to our fourth quarter results. Due to lower commodity prices, CTO's average realized unhedged revenue per barrel of oil equivalent was down 17% from $65.71 per BOE in the third quarter to $54.68 per BOE in the fourth quarter. This was partially offset by a quarterly increase in average daily production of 935 barrels of oil equivalent per day. which generated an incremental $5.8 million in revenues in the fourth quarter. CTO generated adjusted EBITDA of $93.1 million and discretionary cash flow of $77.5 million in the fourth quarter, which both included three days of contribution from the Brigham assets since that transaction closed on December 29th. Quarterly adjusted EBITDA was down sequentially by 12%, primarily due to lower commodity prices. Quarterly discretionary cash flow was down sequentially by 17% as a result of weaker commodity prices and increased cash interest, partially offset by a reduction in cash taxes. Cash interest expense was higher by $4.1 million compared to the third quarter due to higher debt levels from refinancing the $425 million bridge loan with $450 million of senior unsecured notes and higher interest rates on all of our debt because of the rising SOFR curve. Our cash taxes paid decreased by $1.4 million relative to the third quarter. However, some of this was due to timing because a tax payment for the fourth quarter of approximately half a million dollars was made in January of this year. For the fourth quarter, we are declaring a dividend of 60 cents per share. This is based on a full quarter of discretionary cash flow from Citio and Brigham of $144.3 million. assuming the Brigham transaction had closed on October 1st, 2022. This dividend per share amount is down 12 cents or nearly 17% from our third quarter dividend per share of 72 cents. So I wanted to provide some color to help explain that change. On a standalone basis, as if the Brigham merger had never occurred and at our standard 65% payout ratio, CTO's fourth quarter dividend would have been 58 cents per share. Lower commodity prices accounted for a $0.12 per share decrease. Higher interest expense, lower lease bonus activity, and higher severance and ad valorem taxes accounted for a $0.05 per share decrease. Lower cash G&A, lower cash taxes, and hedge impacts accounted for a $0.03 per share increase in the fourth quarter dividend. Outperformance of the Brigham assets. created a $0.02 per share accretion versus Citio on a standalone basis, increasing the fourth quarter declared dividend to $0.60 per share. Our business generates an incredible amount of cash, and assuming that Citio and Brigham had been combined since July 1 of 2022, we have declared or distributed approximately $200 million in aggregate dividend for the second half of 2022, which is more than any other U.S. publicly traded minerals company over this time period. This aggregate dividend amount is also competitive with exploration and production companies, with only three publicly traded ENPs in the US that have declared more aggregate dividends over the same period and have a market cap of less than $20 billion. To make things simple, all metrics I refer to from here on will be on a pro forma basis as if Citio and Brigham were combined for the entire fourth quarter, because we believe it is most relevant for investors, particularly This is how results will be reported in future quarters. Operators remained active on the acreage underlying our minerals, turning in line 1,200 gross wells normalized to 5,000-foot laterals, which equated to 7.3 net normalized wells. Fourth quarter net production volumes of 34,424 BOEs per day outperformed our expectations and were above the top end of the range of our combined company guidance. partly due to approximately 16,000 BOEs per day from the Brigham asset, which continued to outperform what we underwrote for the merger. Now that the Brigham merger is behind us and the 2022 books are closed, we have issued full year 2023 guidance. Our line of site inventory of 47.9 net normalized spud and permitted wells, which on average typically come online within 12 months, remains near record high levels and provides visibility into near-term production growth, particularly when compared to the 128.1 net normalized wells that were turned in line on our acreage over the past four years combined. The Delaware, Midland, and DJ basins continue to be the most meaningful and active areas in our portfolio, accounting for 94% of net wells turned in line during the fourth quarter and 92% of our net line-of-sight wells at year-end. We expect these three basins to have higher near-term growth than the other geographies in our portfolio due to the mix of operators, resilient well economics, and robust levels of remaining inventory. Our 2023 guidance includes a production guidance range of 34,000 to 37,000 DOEs per day, with a range of 49% to 51% for oil as a percent of production. The midpoint of this production guidance range is up by 6% relative to the midpoint of the previous guidance issued in November for the 12 months ending June 30, 2023. We also provided an annual cash G&A guidance range of $25 to $27 million, which implies cash G&A of $2.01 per BOE, a $0.26 per BOE reduction versus CITIO on a standalone basis for the fourth quarter of 2022. The rest of our full year 2023 guidance metrics are relatively in line with our prior guidance. Now, transitioning to the balance sheet, we inherited Brigham's revolving credit facility when we closed the merger, resulting in us having both Citio's revolver and Brigham's revolver on our balance sheet at year end. In January, we launched a syndication for a new revolving credit facility, which closed and became effective on February 3rd with elected commitments of $750 million from a 15-member bank group. I would like to thank all of the banks who supported us throughout this process and helped syndicate one of the largest revolvers in the oil and gas, minerals and royalty sector, providing the company with additional liquidity and financial flexibility to help run our business efficiently. As of March 3rd, we had $407 million drawn on our newly syndicated revolving credit facility, down from $510 million in credit facility debt at December 31st. At the end of December, we made our first quarterly amortization payment at par of $11.25 million on our senior unsecured notes, reducing the outstanding principal from $450 million to $438.75 million. The senior unsecured notes prohibit us from making stock repurchases, which we would like to be able to opportunistically do with the 35% of our discretionary cash flow that we don't distribute as a quarterly dividend. We are monitoring market conditions for an opportunity to refinance these notes, either after the first call date on September 21st of this year, or sooner if warranted to provide our company the appropriate amount of capital allocation flexibility. Regarding our outlook for additional large-scale acquisitions, we remain focused on our underwriting discipline and believe that there will be fewer opportunities that meet our returns criteria in 2023 compared to 2022. There is still a large opportunity set of high-quality and sizable minerals positions to consolidate, and we have made several offers to acquire additional mineral assets this year, but the bid-ask spread has been too wide. If attractive consolidation opportunities do not materialize, we will continue to focus on strengthening the balance sheet by paying down our prepayable debt and building liquidity for when market conditions normalize. In 2023, we will also be acutely focused on gaining additional efficiencies and implementing new technologies to help us continue to scale and provide competitive advantages that will allow us to replace less effective third-party vendors. Professional management of oil and gas minerals is still a relatively new concept, and we believe there is a large opportunity to transform the industry, which currently uses many outdated methods and tools. Technological advances geared specifically for the challenges of an independent mineral owner are in their very early stages of development, and we are piloting a number of new efficiency tools. We also see a large opportunity to fundamentally improve the relationship between operators and mineral owners while saving money and time on both sides and eliminating inefficiencies in the system from duplicative work done by hundreds of operators and tens of thousands of mineral owners. That concludes my prepared remarks. Operator, please open up the call for questions.