STR - Sitio Royalties: Dividend Should Be Higher During Remainder Of 2023

2023-08-16 10:15:43 ET

Summary

• Sitio Royalties Corp. made a number of Permian Basin acquisitions for $247.9 million.
• It paid for the acquisitions with approximately 2.5 million shares and $181 million in cash.
• Sitio's net debt is temporarily above $1 billion.
• At current strip, Sitio Royalties Corp. can pay a $0.48 per share quarterly dividend during the rest of 2023 at a 65% payout ratio.

Sitio Royalties Corp. ( STR ) had its variable dividend reduced to $0.40 per share in Q2 2023 , but looks capable of offering a $0.48 per share quarterly dividend during the rest of 2023 based on strip prices.

It also made multiple acquisitions that have temporarily boosted its net debt above $1 billion, but also modestly increased its free cash flow per share.

I now value Sitio at $27 per share, slightly lower than what I had estimated for it before. This reduction is due to Sitio's production (excluding its recent acquisitions) trending about 3% lower than previously expected.

Acquisitions

Sitio mentioned that it closed on five mineral and royalty acquisitions between the beginning of April 2023 and August 7, 2023. These acquisitions had a combined purchase price of $247.9 million, consisting of approximately $181 million in cash and 2.5 million shares.

Sitio added 13,862 net royalty acres (99% Permian Basin) with 1,918 BOEPD (approximately 52% oil) in Q2 2023 production. Due to the closing dates of the deals, only 137 BOEPD of that production was reported in Sitio's Q2 2023 results. Sitio is also adding 3.7 net line-of-sight wells from the acquisitions.

Sitio mentioned that the acquisitions should be able to generate over $35 million in the next twelve months EBITDA at strip prices, translating into a less than 7.0x multiple.

Sitio's incremental interest costs from its additional borrowings starts out at around $15 million to $16 million per year.

Production Levels

Sitio reported 34,681 BOEPD (50% oil) in Q2 2023 production. This would have been 34,544 BOEPD without any acquisitions during the quarter, resulting in Sitio's 1H 2023 production averaging approximately 34,500 BOEPD.

Sitio has also provided production guidance of 35,000 BOEPD to 37,000 BOEPD (50% oil) for 2H 2023. This is slightly disappointing given that its recent acquisitions would have closed early in Q3 2023 or before the half. Without the acquisitions, Sitio's 2H 2023 production (at guidance midpoint) would likely be approximately 34,300 to 34,400 BOEPD. This is close to flat production growth compared to 1H 2023 and also leads to full-year 2023 production (without the acquisitions) that is around 3% lower than the 35,500 BOEPD midpoint of its original guidance.

2H 2023 Outlook

At 36,000 BOEPD in average production during 2H 2023, Sitio is projected to generate $314 million in oil and gas revenues at current strip. Sitio's hedges add another $10 million in value, while I've assumed that lease bonuses and other revenues end up at around $7 million during this period.

This results in a projection that Sitio can generate $234 million in free cash flow during the second half of 2023. Sitio's interest costs are substantial as it has over $1 billion in debt with a weighted average interest rate nearing 10%.

Sitio currently has 157.2 million outstanding shares, so it could generate $1.49 per share in free cash flow during the second half of the year.

At a 65% payout ratio, Sitio's quarterly dividend would average approximately $0.48 per share during the second half of 2023, while it would also have $83 million to put towards debt reduction.

Potential 2024 Outlook

I've assumed that Sitio can average 36,500 BOEPD (50% oil) in production during 2024. This would be 0% to 1% production growth compared to 2H 2023 if its acquisitions had closed by the start of July 2023.

Sitio could then generate $648 million in revenues at current 2024 strip, inclusive of hedges.

While Sitio's cash taxes were relatively minimal in 2H 2023, I've assumed that its cash tax rate gets bumped up to around 11% to 13% in 2024, similar to its original guidance for 2023.

Sitio's cash interest is projected to be around $90 million in 2024 if SOFR doesn't change much from current levels.

This results in an estimate that Sitio could generate $450 million in free cash flow in 2024, or $2.86 per share.

At a 65% payout ratio, this would result in a quarterly dividend of $0.465 per share and $158 million in debt paydown during the year.

Sitio would end 2024 with around $815 million in net debt if it doesn't make more acquisitions.

Estimated Valuation

I now estimate Sitio's value at approximately $27 per share with long-term $75 WTI oil and $3.75 NYMEX gas. This is slightly lower than my previous $28 to $29 per share estimate due to Sitio's production (before acquisitions) trending lower than previous estimates.

Sitio's acquisitions should modestly boost its near-term free cash flow per share, but it now also has over $1 billion in net debt and will ideally work on reducing its net debt over the next couple years.

Conclusion

Sitio Royalties now expects around 36,000 BOEPD in production after making a number of Permian Basin acquisitions that will increase its total production by around 5% to 6%.

At current strip prices, I estimate that Sitio can offer a $0.48 per share quarterly dividend during the rest of 2023, and a $0.465 per share quarterly dividend during 2024.

Sitio's production (without acquisitions) is trending a bit lower than I previously expected though, so I've trimmed its estimated value to $27 per share.

For further details see: