Sitio Royalties Corp.

Hello, everyone, and welcome to the CTO Royalty's third quarter 2024 earnings conference call. My name is Bruno, and I'll be your operator for today. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I'll now hand over to your host, Ross Long, Vice President of Finance and Investor Relations. Please go ahead.

Thanks, operator. Good morning, and welcome to the City of Royalty's third quarter conference call. We appreciate your interest in our story. By now, it is our hope that you have been through our materials. You can find our recent news release and some supplemental slides on our website under the investor relations section. I'm joined this morning by our CEO, Chris Conocenti, and our CFO, Kerry Osika. After our brief prepared remarks, Chris, Kerry, and other members of our leadership team will be available to take your questions. 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 release, investor presentation, and publicly filed documents for additional information regarding such forward-looking statements and non-GAAP measures. I will now turn the call over to Chris.

Thanks, Ross. Good morning, everyone, and thanks for dialing in today. Citio is performing exceptionally well, and we continue to show that our proven business model is sustainable and differentiates us from other investment options you have in the energy and minerals ownership sectors. We offer a unique and compelling value proposition today. Before I cover our third quarter highlights, I want to address what we call the Citio advantage. It is important that you understand how we run our business and why we think our proven practices will add tremendous value for our owners. There are four key things you need to know. First, Situ has a proven track record of identifying, underwriting, and capturing value-adding acquisitions. The mineral sector remains highly fragmented, and we benefit from robust deal flow. Our high-quality, diverse assets provide exposure to both oil and gas, as well as to the top-producing basins in the U.S. This asset diversity gives us the unique ability to allocate capital to acquisitions with the highest expected returns, regardless of location. Additionally, our thorough and disciplined underwriting process that targets unlevered IRRs in the mid to high teens perfectly aligns management and shareholder incentives, ensuring that we focus on both near-term accretion and long-term value. Second, we actively manage our resources using proprietary systems and highly skilled teams. This is a core competency at Citio. We are far from passive owners, and our people continually seek avenues to capture higher revenues and returns through our discipline management of our quality minerals. One recent example is how we utilized our proprietary data management systems to track missing payments by operator, well, production month, and commodity. This has allowed us to recover approximately $25 million in missing payments over the last 12 months, which nearly covers Citio's cash G&A for a full year. Third, we have a strong capital structure and our commitment to a healthy balance sheet is unwavering. Over the last quarter, we reduced total debt by nearly $60 million. Our interest expense on a barrel of oil equivalent basis is 18% lower than it was one year ago today. Our well-capitalized balance sheet allows us to weather the inevitable commodity price cycles and provides access to capital at competitive rates. In today's deck, we show some interesting comparisons of adjusted net debt to free cash flow, both inside and outside the minerals subsector. which highlights that on a free cash flow basis, CITIO's metrics are competitive with public E&Ps. As we said before, for a large acquisition, we would target a leverage neutral to deleveraging consideration mix to strengthen our capital structure further. Lastly, we understand the importance of returning meaningful capital to shareholders. Our business plan balances disciplined acquisitions with a commitment to return capital through cash dividends and opportunistic share buybacks. Including the third quarter, our return of capital has totaled more than $765 million since becoming a public company in June of 2022. Let me shift gears and talk about our recent financial and operating results. Our third quarter performance was solid and marked the third consecutive quarter we have topped our full year guidance estimates. Over the last quarter, we closed on five new acquisitions totaling approximately $22 million. These deals add over 2,300 NRAs, all in the DJ basin. Strong performance on our legacy assets and our third quarter acquisitions have allowed us to enhance our 2024 outlook again and raise the midpoint of our production guidance by 1,000 BOEs per day. By all accounts, 2024 is shaping up to be an excellent year for CITIA. Financial results for the third quarter were robust, and we view this momentum as sustainable and related to several key factors. First, we saw higher than expected production of nearly 38,600 BOEs per day, of which half was oil. Our operators today have more scale, financial strength and flexibility, and are producing from top tier acreage positions. An interesting fact is that the average market cap of our top five public company operators on our acreage has more than doubled since the end of 2022. This supports the sustainability of our business model and gives us confidence that our assets will be developed efficiently. We continue to benefit from EMP consolidation as acreage transitions to better capitalized, more efficient operators or operators who will develop that acreage sooner. For example, Permian Resources' acquisition of Oxy's Berea Draw Acreage in the Southern Delaware Basin, where we own 1,800 NRAs, is great for CITIO. This is an area that wasn't a core focus for Oxy. However, it added more than 200 gross operated locations with high NRIs that immediately compete for capital in the Permian Resources portfolio. As a minerals owner, accelerated development on this acreage will lead to better returns, more near-term cash flow, and ultimately increased return of capital for our shareholders. In the DJ Basin Watkins area, Civitas recently completed 13 four-mile lateral wells. Seven of these wells are in the Sky Ranch unit. where CTO owns approximately 240 NRAs. These 13 wells had approximately 5% lower DNC costs per foot than three-mile laterals, and importantly, allows Civitas to access resource that was stranded due to surface configurations, which is a great example of how longer laterals are helping operators become more efficient, which in turn benefits mineral owners. Sivitas remains active in this area where Citio has direct exposure with approximately 1,900 NRAs, including 780 NRAs in the box elder cap, an area that was part of the DJ Basin acquisition we closed in April. Another example of EMP M&A that should benefit Citio is Apache's acquisition of Callan Petroleum earlier this year. In 2021, we acquired a 2% overriding royalty interest in approximately 7,200 Callan-operated NRAs in the Delaware Basin. Apache has a stronger balance sheet than Callan and has stated that they expect to create substantial value on the Callan acreage through improved well performance and capital efficiency. Apache estimates they can drill a two-mile lateral for approximately $1 million less than what Callan was able to do in 2023. We're excited to see what operational improvements Apache can make on the legacy Callan acreage and the additional value they can create for CITIO. Operational efficiencies across the industry show that operators are achieving more with less. As an example, from the start of 2023 until the most recent quarter, the rig count on our Permian acreage has decreased 17%, while the total lateral feed drilled has increased 5%. Part of the reason for this is a trend towards longer laterals. Across the same time frame, laterals of three miles or more have doubled and now represent 25% of all wells drilled. Another trend we've been seeing in the industry is horseshoe-shaped laterals. This allows for the capture of stranded resources due to surface challenges. We own minerals under several operators who are testing horseshoe laterals and will be closely monitoring results. For the third quarter, the bulk of activity on CITIO's assets was in the Permian and DJ basins. We had 7.7 net wells turned in line in the quarter and a solid 11% increase in our net line of sight wells compared to the second quarter. Line of Sight Wells provide us with high confidence in near-term operator activity and the sustainability of our business plan. Let me quickly close and then open it up for questions. CITIO has a proven model for creating value, which is demonstrated through our strong performance year to date. Our team has developed proprietary software and practices to effectively manage our assets and ensure we get the most value for our owners. We are well positioned to be a leader in this highly fragmented industry as it continues to consolidate. On the operator side, we continue to see assets roll up under bigger, stronger companies with efficient development practices. This ultimately enhances our returns at Citio and smooths volatility created by short-term moves in oil and gas prices. We are highly confident in the strength and sustainability of our model. Our focus today is turning to 2025. While formal guidance won't be released until early next year, you can count on us to deliver on our strategy. working to capture high-quality assets where our team can creatively enhance value, maintaining a strong balance sheet that provides access to capital through the cycles, and an ongoing commitment to return capital to shareholders. Operator, we are now ready to take questions.