Sitio Royalties Corp.

Hello and welcome to the CTO Royalty's third quarter 2023 earnings call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypad. If you'd like to remove your question, you may press star 2. And I'll hand it over to your host, Ross Wong, Vice President of Finance and Investor Relations. Please go ahead.

Thanks, Operator. And good morning, everyone. Welcome to the CTO Royalty's third quarter 2023 earnings call. If you don't already have a copy of our recent press release and update investor presentation, please visit our website at www.cdo.com where you will find them in our investor relations section. With me today to discuss third quarter 2023 financial operating results is Chris Conocenti, our chief executive officer, Kerry Osika, our chief financial officer and other members of our executive 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, and thank you for joining CTO's third quarter 2023 earnings call. We had a very productive third quarter across multiple aspects of our business. Operationally, our assets have continued to perform well, despite the slowdown of drilling and completion activity across the Permian Basin and broader United States, where quarter-over-quarter horizontal rig count was down by 7% and 11%, respectively. For the third quarter, we reported average daily oil production of 17,576 barrels per day and average daily total production of 36,900 BOEs per day. When excluding prior period adjustments, our oil production in period was 18,219 barrels per day or 50% of total volumes, which is in line with both the midpoint of our guidance for implied oil barrels and percent oil. We estimate that during the third quarter, there were 9.5 net wells turned in line on our assets with 72% and 19% of the overall activity in the Permian and DJ basins respectively. This was a shift from second quarter activity where 87% of our turn in line wells were in the Permian Basin and there was minimal activity on our DJ Basin assets. As of September 30th, we had 50.9 net line of site wells and despite healthy development activity across our acreage during the quarter, our net line of site wells remained essentially flat relative to June 30th, implying full replenishment of our line of site inventory. The Permian Basin continues to account for approximately 80% of our total line of sight wells and is where we expect the majority of our operator activity to occur in the next 12 to 16 months. Turning to financial results, we generated $142.4 million of adjusted EBITDA in the third quarter, which was up by 12% relative to the second quarter, primarily due to additional volumes from the five previously announced acquisitions and higher realized unhedged commodity prices. We reported third quarter discretionary cash flow of $117.3 million, which is up by nearly 24% relative to the second quarter. This was driven by the increase in adjusted EBITDA I just commented on and a decrease in cash taxes, which were $7.8 million lower than the second quarter because of a corporate tax credit related to the Brigham merger. Our board declared a third quarter cash dividend of 49 cents per share of Class A common stock based on a 65% payout ratio. The dividend is payable on November 30th to stockholders of record at the close of business on November 21st. This is now the sixth consecutive quarter that we've declared a dividend to shareholders using a 65% payout ratio. And in aggregate, we have declared total dividends per share of $3.42 since we became public in June of 2022, which represents approximately 14% of our 30-day volume-weighted average stock price. Going forward, we plan to use accrued interest expense instead of cash interest expense paid during each quarter in our calculation of discretionary cash flow, which will help smooth out discretionary cash flow because the interest expense on our new notes is paid semiannually. On the strategic front, our four previously announced cash acquisitions closed in July and August. I'm also pleased to announce that we have signed a definitive agreement to sell our entire Appalachia and Anadarko Basin assets, which generated $3.8 million of oil, gas, and NGL revenues in the third quarter for $117.5 million in cash, subject to customary closing adjustments. Our position in each of these basins was subscale relative to our company size, And the margins from these assets are substantially lower than our company average, given the gassier nature of the commodity mix. These assets had 0.7 net line of sight wells as of September 30th. So our line of sight inventory will be 50.2 net wells pro forma for the divestiture. In aggregate for 3Q 2023, Appalachia and Anadarko contributed only 0.4 net wells turn in line out of 9.5. This compares to Appalachia and Anadarko wells turn in line of 0.1 out of 8.1 total in 2Q of 2023. The divestiture has an effective date of September 1st and is expected to close near the end of the year. Pro forma for this divestiture, our total debt as of November 3rd would be approximately $864 million and our liquidity under our reserve-based loan would be approximately $588 million, assuming a flat borrowing base of $850 million. Turning to financing activity during the quarter, we increased our borrowing base from $750 million to $850 million, which is a 13% increase. And we issued $600 million of senior unsecured notes due in 2028, which allowed us to refinance our existing senior unsecured notes, decrease our expected interest expense by $11 million per year, and free up additional liquidity under our revolver. We currently remain focused on reducing our leverage to our long-term target of one times EBITDA or less and working on accretive acquisitions. That concludes my prepared remarks. Operator, please open up the call for questions.