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spk01: Good morning, and thank you for attending CTO Royalty's first quarter 2023 earnings call. My name is Felicia, and I'll be your operator today. All lines will be muted during the presentation portion of the call with an opportunity to questions and answers at the end. I would now like to pass the conference over to your host, Ross Wong, Vice President of Finance and Investor Relations. You may proceed.
spk02: Thanks, operator, and good morning, everyone. Welcome to Cideo Royalty's first quarter 2023 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.cideo.com, where you will find them in our investor relations section. With me today to discuss our first quarter 2023 financial and operating results is Chris Conocenti, our Chief Executive Officer, Harry Osica, our Chief Financial Officer, and other members of our executive leadership team. Before we start, I would 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.
spk04: Thanks, Ross. Good morning, everyone, and thank you for joining FITIO's first quarter 2023 earnings call. There is one word that captures the theme from this quarter. For the first time in two years, we did not announce or close any acquisitions during the quarter. And for the first time since becoming public, there are no pro formas or partial period results in our reported financials. Integration of the Brigham assets and personnel is complete with nothing unexpected to note. During the first quarter, production associated with CITIO's assets averaged 34,440 barrels of oil equivalent per day, which is comparable to the 34,424 BOEs per day produced from these assets in the fourth quarter of 2022. First quarter production volumes were in line with our expectations, and we are reaffirming FITIO's full year 2023 production guidance range of 34 to 37,000 BOEs per day. We estimate that in the first quarter, there were 7.3 new net wells that started producing on FITIO's acreage, more than 95% of which are in the Permian Basin. These new net wells represent CTO's interest in wells publicly known to have come online during the quarter, plus CTO's interest in net wells still identified as spuds in public data sources, but are estimated to have started producing during the quarter based on market intelligence and our forecasting methodology. As of March 31st, we had 42.8 net line-of-sight wells, which implies steady operator activity over the next 12 to 15 months on our assets, particularly relative to the cumulative total of 141.3 net wells that have come online since the beginning of 2019. The first quarter of 2023 demonstrated quite different M&A dynamics than the past three years. During the first quarter, we evaluated multiple acquisitions, totaling approximately 50,000 net royalty acres in aggregate, but were unable to find any opportunities that met our returns criteria. Buyers and sellers are still transacting, but at different underwriting assumptions and returns thresholds and sitios. We remain focused on achieving a minimum of mid-teens unlevered returns using strip pricing and future development assumptions aligned with actual operator behaviors. I will provide you with one recent example of a private buyer and private seller. The market clearing purchase price in this example was approximately two times the price that FITIO could have paid using our returns parameters. The only way we could have justified paying the same purchase price would have been to either assume a near-term production profile of four times to five times our base case production assumptions, or an average oil price of approximately $140 per barrel in perpetuity using our production assumptions. In this example, paying the market clearing purchase price would have resulted in mid single digit returns for our shareholders, which clearly does not meet our hurdle rate. We believe attractive consolidation opportunities exist with mineral owners we know and have been pursuing for years, and we will continue to be disciplined and good stewards of capital. Now, turning to some key financial metrics for the quarter. Overall, our financials came in as expected and were within the range of our full year 2023 guidance metrics, with the exception of our implied cash tax rate, which I will describe in more detail later. Our average hedged realized price per BOE for the first quarter was $48.87, which was $8.61, or 15% below the fourth quarter of 2022. And we reported adjusted EBITDA of $140 million and discretionary cash flow of $120 million. First quarter cash G&A was $6.1 million, a $2.2 million increase relative to 4Q 2022, since this was the first full quarter with former Brigham employees on the CTO payroll. However, we achieved a significant milestone with 1Q23 cash G&A of $1.97 per BOE, the lowest ever in CTO's history, and the first quarter in which cash G&A per BOE has been below $2.00. Another important point on the G&A topic is the magnitude of the absolute G&A savings that have been achieved through the 2022 combination of Desert Peak and Falcon to form Citio and Citio's merger with Brigham. If you add up the cash G&A from the first quarter of last year, when all three of those companies were independent of each other, the total cash G&A was $11.3 million. Compare that to our first quarter 2023 cash G&A, And you can see that we have reduced the absolute amount of cash G&A from all three entities by 46%. This is a great illustration of the scalability of our business model and of the value to be created for our shareholders by consolidating this highly fragmented industry. Due to timing differences, cash taxes in our financials can be somewhat confusing relative to our guidance, so I wanted to go over this in more detail. 1Q23 cash taxes reported in our financials represent the cash taxes paid in the first quarter, not the taxes payable related to taxable income for the first quarter. In January, we made a cash tax payment of $550,000 for income taxes related to taxable income in the fourth quarter of 2022. This was the only cash tax paid during 1Q23, so the implied reported cash tax rate is 1% for the first quarter. Similarly, in April, we made a cash tax payment of $5.9 million for income taxes related to taxable income in the first quarter of 2023. So the first quarter 2023 estimated cash tax rate would have been 11% without timing differences. In addition to the $5.9 million of cash taxes that was paid in April, we plan to make another cash tax payment during the second quarter related to income taxes due for 2Q2023. which we expect to be approximately 11% to 13% of second quarter pre-tax income. Our board declared a dividend of 50 cents per share using a payout ratio of 65% for the first quarter of 2023, which will be paid on May 31st to record holders at the close of business on May 19th. This dividend is down by 10 cents per share relative to the dividend in the fourth quarter of 2022, so I wanted to provide some details to help explain the variance. Lower commodity prices decreased the dividend by roughly 11 cents. Lower production volumes, driven by two fewer days in the quarter, decreased the dividend by another 1.6 cents. And the combination of lower lease bonus, higher cash GNA, and higher cash interest decreased the dividend by 1.8 cents. These decreases were partially offset by an increased dividend of 2.6 cents due to lower cash taxes and the combination of lower severance and ad valorem taxes, lower gathering and transportation expenses, and higher realized hedging gains, which added another $0.08 to the dividend. Our first quarter dividend of $0.50 per share benefited from paying cash taxes related to the first quarter in April, and if all income taxes had been paid in the quarters that they were related to, our first quarter dividend would have been approximately $0.47 per share. Moving on to the balance sheet, at the end of March, we made another amortization payment at par of $11.25 million on our unsecured notes. bringing the remaining amount outstanding principal to $427.5 million. We also paid down our credit facility balance by $23 million during the first quarter. On April 28th, our lenders reaffirmed our $750 million borrowing base, and as of May 5th, 2023, we had reduced the outstanding balance on our credit facility to $441 million, which is an additional $46 million reduction since the end of the first quarter. providing liquidity of approximately $315 million, including $6 million of cash and $309 million of remaining availability on our credit facility. I want to remind shareholders that we filed our 2023 proxy statement on March 31st and that our virtual annual investor meeting is scheduled for Tuesday, May 16th, 2023 at 11 a.m. Central Time. Whether or not you plan to attend the annual meeting, it is important that your shares be represented. So I highly encourage all shareholders to vote. I'm proud of the differentiated business that we have built and think the proxy statement does a good job highlighting the accomplishment of the company and our best-in-class governance model, which provides strong alignment between the board, management team, and shareholders to drive long-term value. That concludes my prepared remarks. Operator, please open up the call for questions.
spk01: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star followed by one. We have a first question from Tim Resvin from KeyBank Capital Markets. Please go ahead, sir. Your line is now open.
spk07: Good morning, everybody. Thank you for taking my question. The first question I had is on the payout ratio. You know, you paid out 65% again. I believe that's the sort of the near-term target given work on the balance sheet. I was wondering, Chris, if you could, you know, talk from either your seat as CEO or as a member of the board on kind of how folks are thinking about intensity uh the former repayment you know our uh our repurchases being considered and um you know what level of of leverage or debt reduction would cause you to reconsider that 65 payout ratio thanks hey good morning tim thanks for the questions
spk04: Yeah, as a board, we do talk about repurchases. As I mentioned last quarter, though, unfortunately, we're a bit hamstrung by the unsecured notes that are in place right now that have a limitation on what we can do in terms of return of capital to shareholders. As a team, we've been prioritizing that dividend. We've committed to paying out 65% of discretionary cash flow in the form of a dividend, and we don't want to cannibalize any of that for buybacks right now. I think when the time comes when it's appropriate to refinance those unsecured notes and we put a different structure in place that allows for buybacks, it'll become a more vibrant conversation. And I think you'll see us put something in place at that time. In terms of your second question, the sort of metrics that would allow us to do that, I think there's two things. It's one, it's the company size. And then two is, as you mentioned, the leverage. Company size, as we think about, as we get larger and that 35% retained cash flow becomes a larger number. And then second, when the leverage starts to drift down towards that target we have for long-term leverage of one times or less, that's when we start to get really interested in returning more capital than the 65% we're already committed to returning to shareholders. We'd love to be in a position to do that, but unfortunately with the notes we have today, we're just not.
spk07: Okay, so we should look for that potential refinancing as a first step on other changes. Okay. Correct. I appreciate that color. And then just final one, you know, on the M&A comments, I appreciate them and your prepared statements. And it's pretty clear you're trying to get a message out, you know, in the actual release. You know, I'm trying to get a little more color. Are you sort of frustrated? Do you think the market's going to kind of normalize as maybe some of this private capital dries up? Or how do you see the landscape playing out? Or how do you hope it kind of plays out over the next year or two to allow you to get more scale?
spk04: Yeah, I wouldn't describe it as frustrated. I think different people have different underwriting discipline and requirements and different costs of capital. And so there's different drivers for everybody. I wouldn't describe it as frustrated. We're going to just focus on what we do. We've seen this before. We saw it in 2020 when we were trying to make a lot of acquisitions and the sellers weren't willing to transact. We kept at it and kept those relationships warm. When the timing lined up and we were able to act, we did in 2021 and 2022. It just feels like we're in a period here where it's going to be a bit more challenging to reach a bid ask that makes sense for our shareholders. We're making some progress, but clearly nothing in the first quarter, and we're pretty deep into the second quarter right now and haven't announced anything yet. So I think it's going to be one of those years where it's going to be a bit lumpy relative to the past couple of years.
spk07: Okay, thanks for the comments.
spk01: The next question we have comes from TJ Schultz from RBC Capital Market. Please go ahead.
spk05: Hey, good morning. I guess first on the 50,000 NRAs you looked at, where were you focused? And I guess just from a commodity perspective, have lower natural gas prices changed at all the focus for you on where you want to transact or the conversations with sellers? I'll just leave it there.
spk04: Thanks, TJ. Good morning. So the bulk of what we looked at in the first quarter was in the Permian Basin. We did look at a couple things in the DJ Basin, and then one or two things that were more diversified. We really haven't looked at anything that's just purely gas-focused, meaning anything in the Haynesville or anything in Appalachia. But that day may come, but we found we have just a bit of a you know, more localized knowledge and skill set in areas where we currently have assets. And so when we look at things in the Permian and DJ, we feel like we have a better grasp on the underwriting. And candidly, that's where we feel like there's the most remaining inventory that's economic today. And so for us, acquiring these minerals and not having to deploy additional capital for additional production in the future, there's the greatest potential for that in the Permian Basin and the DJ Basin relative to some of these other places. I don't think the gas price softness of the past six months plus has really impacted us in terms of M&A. Or in terms of seller mindset, really the natural gas is a bit of a byproduct in the Permian, and people don't get very anchored on gas prices when they think about monetizing assets. So it hasn't really played a role there. It has played a role, I think, in some of the transactions we've been watching, not evaluating ourselves, but we've seen some transactions that have been pulled or had trouble getting financed in other purely gas basins.
spk05: Okay, makes sense. And then we've seen some recent deals get done with a mix of stock and cash. When you're looking at deals, how are you considering the financing mix and how high are you willing to take that leverage to transact on M&A? Thanks.
spk04: So we do consider different consideration mixes. It's really driven by the sellers and what they're open to taking in terms of consideration. So it's not really our decision to dictate. We can express a preference, but ultimately if the seller needs or wants one form of consideration, that's going to drive the conversation. We're open to using the stock, but it has to be accretive. Just like it would have to be accretive in a cash situation. But we've used stock in the past for the Brigham transaction, Falcon, Rockridge, Source. So the bulk of what we've done in the past has been for stock. And we're willing to do it again, but it just has to meet those accretion metrics that we've used in the past.
spk05: Okay, thank you.
spk01: The next question we have comes from John Anis from CFO. Please go ahead.
spk03: Hey, good morning, all, and thanks for taking my questions. For my first question, I wanted to focus on a bigger picture question for the Permian and activity within the Permian. If we were to assume strict pricing, do you think we've seen peak activity for at least the immediate term, given that privates generally have less quality inventory depth and are more likely exposed to weaker gas pricing?
spk04: I think you're seeing the continued discipline by operators. So I think the basin certainly is capable of running at higher activity levels. But if we're assuming current commodity prices, current capital discipline, then yeah, I think we're sort of steady state. I think that's what our guidance suggests in terms of volumes for our company. And if you look at our footprint, you know, if you look at just gross DSU acreage within our footprint, it covers about one-third of the entire Permian Basin. So when you look at our production volume cadence, it really reflects that of the broader basin. And so with the guidance we put out there, it doesn't suggest anything beyond single digit growth, which is what we'd expect for operators at this time. I do think that there are private operators that do have a lot of tier one remaining inventory. I look at folks like Endeavor and Crown Quest Newborn and others that have really fantastic assets. You know, I think some of the later stage private equity backed companies that are looking to sell, maybe trying to, you know, had tried to ramp up production ahead of a sale so they could have some better metrics for the buyers and make it a more appealing asset for buyers. That may be what you're referring to, but there are still a lot of privates that do have a lot of remaining tier one inventory.
spk03: Makes sense. And for my follow-up, in reference to slide seven, where you highlight the synergies achieved to date from your past transactions, can you comment on whether there's still more runway to achieving further synergies or have the lion's share of those gains already been realized?
spk04: So in terms of the assets we have today, I think there are opportunities for additional synergies. And we talked a little bit about it on last quarter's call. We've had some third-party vendors that we've worked with, data providers that are trying to gouge us on pricing, and they have not been really rational with respect to how they're approaching pricing. And so we're looking for alternatives and some things just doing things on a proprietary basis that will eliminate those costs altogether. And so we're making some modest investments this year as we look to just eliminate those line items. I wouldn't look at those as multiple millions of dollars in terms of savings, but they matter and they're in perpetuity. So they're investments we make today and benefit from for the rest of the company's life. So we're excited about those. We get excited about our data and ways to access it and work with it. So it's important to us and the real focus for this year in terms of personnel, we're still investing in people. We find ways that even adding people can add efficiencies. So we're looking at some of those alternatives as well. I think the bigger gains to come are from further consolidation, though. I think as you see us continue to add assets and not have to scale the headcount linearly with the asset growth, that's where you're going to see additional cost savings on a dollar-per-BOE basis and on an absolute dollar basis.
spk03: Terrific. Thanks again for taking my questions.
spk05: Thank you.
spk01: The next question we have comes from Noel Park from Toohey Brothers. Please go ahead.
spk06: Hi, good morning. Good morning. Just a couple of things. I was thinking about the acquisition path that you've gone along with Brigham being the biggest and most recent. What hurdles would a new entrant into the royalties market have to overcome in order to attempt to follow your strategy or mimic your strategy realistically today?
spk04: So one would be finding high quality opportunities like we have in the past. Two would be access to sufficient capital to replicate what we've done. But I think one of the bigger challenges is, candidly, that the people and systems that we've built, and that's very difficult to replicate. From the outside looking in, it can appear that the minerals business is a very easy one. But to manage it optimally, it requires the right people and the right systems to really extract the most value for shareholders. And that's taken us quite a while to build, and we're still investing every day in that. I think that's where we have a real advantage over anybody just starting today.
spk06: Great. Thanks. As you look at the different basins, we've had this fairly steady oil environment now for over a year, mostly 70-plus for WTI, and then tremendous volatility in NatGas. I wonder as you look at the, at the various basins, it, it seems like some of them are at different stages of life cycle, I guess. I don't know if I call it consolidation, but like on a land, uh, management basis, there, there are some basins where there's a lot of trading of, of interest, non-operated interest, um, you know, trying to, to block up acreage and so forth. And, um, I assume that situations like that might, you know, the opportunities might jar some things loose. And then there seem to be other basins where they're just not in that sort of stage right now. I was wondering if on sort of a land management basis, if you're noticing any particular trends with the different basins.
spk04: We make the same observation you do about the relative maturity of different basins. It feels like places like the Eagleford and the Williston have a lot less remaining organic growth, and they may be more of in maintenance mode or in slight decline. And that leads to a different opportunity set for operators in terms of, you know, who's going to be the ultimate holder of those assets longer term. Now, for the mineral owners, for us, as we look at these opportunities, we like a balance of current production plus remaining development potential. And so, when we look at opportunities that were, let's say, just Eagleford or just Wilson Basin compared to something that's just in the Permian or just in the DJ Basin, it's a harder comparison for us to make the same sort of underwriting assumptions about future growth just because we know that there's less remaining running room in those places. So that's why you see us continue to come back to places like the Permian and the DJ.
spk05: Sure.
spk04: Fair enough.
spk06: Okay.
spk05: Thanks a lot. Thank you.
spk01: As a reminder, ladies and gentlemen, to ask any further questions, please press star followed by one on your telephone keypad. since we have no further questions registered. This concludes today's call. Thank you all for attending. You may now disconnect your line.
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