STR - Sitio Royalties: 2023 Dividends Expected To Be Around $1.80 Per Share At Strip

2023-05-18 21:15:38 ET

Summary

• Sitio is now expected to generate around $2.78 per share in free cash flow in 2023 at the current low-$70s WTI strip.
• At a 65% payout ratio, this would allow it to pay $1.81 per share in dividends while putting approximately $150 million toward debt reduction.
• Sitio's production in Q1 2023 was in-line with expectations, while its cost performance was good.
• I believe Sitio's value to be around $28 to $29 per share with long-term $75 WTI oil and $3.75 NYMEX gas.

Sitio Royalties ( STR ) has seen its stock price go up approximately +32% since I believed it was a strong buy in March 2023. Sitio has since reported Q1 2023 production in-line with expectations, while its cost performance has been pretty good. The strip for 2023 has slightly improved since March, so I now expect it to pay out approximately $1.81 per share in dividends related to 2023 results and a 65% payout ratio. Sitio's Q1 2023 dividend was $0.50 per share, so its remaining quarterly dividends for 2023 may be slightly lower based on strip.

Due to its strong share price performance over the last couple month, Sitio does not appear to be quite as good a value as before. I still believe that it has some upside though, and estimate its value at $28 to $29 per share based on my long-term commodity price expectations of $75 WTI oil and $3.75 NYMEX gas.

Q1 2023 Results

Sitio Royalties averaged 34,440 BOEPD (51% oil) in production during Q1 2023, roughly the same as the 34,424 BOEPD proforma production it averaged during Q4 2022. Sitio indicated that its Q1 2023 production was in-line with its expectations and it continues to expect to average between 34,000 BOEPD to 37,000 BOEPD for the full year.

Sitio's cost performance was pretty good during the quarter as its gathering and transportation costs averaged $1.24 per BOE, around the low-end of its full-year guidance range of $1.25 to $1.75 per BOE. As well, cash G&A ended up at $6.1 million for the quarter, around 23.5% of its full-year guidance midpoint total of $26 million.

Sitio was also able to pay down its long-term debt by $33.7 million during Q1 2023, while also paying out a $0.60 per share dividend at the end of the quarter. That dividend was related to Q4 2022 results, and Sitio declared a $0.50 per share dividend for Q1 2023 payable at the end of May 2023 to stockholders of record at the close of business on May 19th.

2023 Results At Current Strip

I am maintaining my model for Sitio at 35,500 BOEPD of average production during 2023 with a 50% oil cut. The current strip for 2023 is around $73 WTI oil and $2.75 NYMEX gas.

At those commodity prices, I project Sitio to generate $620 million in revenues inclusive of its hedges. Sitio's lease bonuses and other income ended up at $5.3 million in Q1 2023, which was more than I expected, although that is subject to significant quarter-to-quarter variability.

I have kept Sitio's modeled gathering and transportation costs at $1.50 per BOE for now, although that ended up a decent amount lower in Q1 2023.

This leads to a projection that Sitio can now generate $430 million in free cash flow during 2023 based on current strip prices. Sitio had 154.5 million shares outstanding as of May 2023, so its 2023 free cash flow would be around $2.78 per share.

At a 65% payout ratio, this would be approximately $1.81 per share in dividends related to 2023 results. Sitio's quarterly dividend for the remainder of 2023 may be a bit lower than its $0.50 per share dividend for Q1 2023 due to modestly lower average commodity prices.

Valuation

I have modified my long-term commodity price expectations to a combination of $75 WTI oil and $3.75 NYMEX gas. This compares to the $70 oil and $4 gas prices I was using before. At $75 WTI oil and $3.75 NYMEX gas, I now estimate Sitio's value at around $28 to $29 per share, which is a $1 increase compared to mid-March.

Sitio's share price has gone up around $6 since I looked at it in March though, so I now consider it to be a buy instead of a strong buy.

Conclusion

Sitio looked like an excellent value at under $20 per share in mid-March. Its share price has gone up over 30% since then, but I still believe it has a bit more upside (to a range of $28 to $29 per share) at my long-term commodity price expectations of $75 WTI oil and $3.75 NYMEX gas.

Sitio looks capable of generating around $2.78 per share in free cash flow at current strip for 2023 (which is a bit lower than my long-term commodity price expectations). It has a 65% payout ratio for now, which would result in it being able to declare $1.81 per share in dividends related to 2023 results, while also working on paying down some of its debt.

For further details see: