Sitio Royalties: DJ Basin Acquisition Boosts FCF, But May Delay An Increased Payout Ratio

seekingalpha04-27

Sitio made a $150 million cash DJ Basin acquisition at a 4.0x multiple to asset level cash flow.The low purchase price multiple appears to be due to a high base decline rate and limited inventory....

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This acquisition involves a relatively low 4.0x multiple to asset-level cash flow, which appears to be explained by limited inventory and a high base decline rate. The acquisition may also delay an increase in Sitio's payout ratio due to the additional debt. Barclays had noted Sitio's 65% payout ratio as a negative factor compared to its peers. I now estimate Sitio's value at around $27 per share. This is a $1 decrease from when I last looked at Sitio. The decrease is mostly due to Sitio's 2024 production guidance for its legacy assets coming in several percent lower than what I expected. DJ Basin Acquisition At the end of February, Sitio announced that it had previously signed an agreement in January to acquire 13,062 Net Royalty Acres in the DJ Basin for $150 million in cash. After closing adjustments, Sitio may end up paying around $130 million to $135 million due to the effective date of the transaction being October 2023. Sitio also received $114 million in cash from its Appalachia and Anadarko Basin divestitures after closing adjustments. This would cover most of its DJ Basin acquisition cost. Sitio indicated that the acquired DJ Basin assets averaged 2,609 BOEPD (41% oil) in Q4 2023, producing asset level cash flow of $8.6 million. The asset level cash flow for the 12 months ending September 2024 was expected to be around $37.5 million. Based on that number, I estimate that the DJ Basin assets may average around 2,900 BOEPD in production for the 12 month period ending September 2024. Sitio also mentioned that the acquired DJ Basin acreage has seen its production increase by 89% from December 2022 to December 2023. This large amount of recent development will also translate into a high base decline rate. As a result I believe there is only around three to four years of inventory left if production is maintained around 2,900 BOEPD. Updated 2024 Outlook Sitio (at the midpoint of its guidance) expects to average 36,500 BOEPD (50% oil). This is roughly in-line with its Q4 2023 production, pro forma for its acquisitions and divestitures. It also appears to be several percent lower than its proforma Q3 2023 production. At current strip prices of roughly $81 WTI oil and $2.35 NYMEX gas in 2024, Sitio is now projected to generate $650 million in revenues after hedges.   Type Barrels/Mcf Realized $ Per Barrel/Mcf Revenue ($ Million)   Oil (Barrels) 6,661,250 $79.00 $526   NGLs (Barrels) 2,864,338 $20.50 $59   Natural Gas [MCF] 21,781,475 $1.60 $36   Lease Bonus and Other Revenues     $20   Hedge Value     $9   Total     $650   Click to enlarge Sitio mentioned that its cash G&A has been going up due to a 25% increase in headcount since 2022 and investments in technology. Sitio is thus projected to generate $433 million in 2024 free cash flow at current strip prices or approximately $2.75 per share.     $ Million   Production Taxes $53   Gathering And Transportation $20   Cash G&A $32   Cash Interest $75   Cash Taxes $37   Total Expenses $217   Click to enlarge Return Of Capital Sitio is aiming to put 35+% of its discretionary cash flow towards dividends, another 30+% to a combination of dividends and share repurchases (with its recently authorized $200 million share repurchase program). The remaining up to 35% is allocated towards debt reduction and cash acquisitions. This would result in Sitio putting around $152 million towards dividends, another $130 million towards dividends and/or share repurchases and $151 million towards debt reduction and/or cash acquisitions. If Sitio puts all $151 million towards debt reduction, I estimate it will end 2024 with around $845 million in net debt. Sitio's dividend may range from approximately $0.97 per share (a quarterly dividend of a bit over $0.24 per share) to $1.79 per share (a quarterly dividend of just under $0.45 per share). Valuation I now estimate Sitio's value at approximately $27 per share, a decrease of $1 from my last estimate. This is based on long-term (after 2024) $75 WTI oil and $3.75 NYMEX gas. While the DJ Basin acquisition appears to be positive overall, Sitio's 2024 legacy production expectations were lower than I expected. I had previously thought that Sitio could end up with 2024 production slightly higher than Q3 2023 levels. It now expects its 2024 production to be several percent lower than its proforma Q3 2023 production. As well, Sitio's additional debt from its DJ Basin acquisition may lead it to keep its payout ratio at 65% during 2025. I previously anticipated Sitio increasing its payout ratio during 2025. Conclusion Sitio's DJ Basin acquisition helps its near-term free cash flow, but its legacy production may decline slightly from Q3 2023 levels. As a result of the lowered production expectations, I now estimate Sitio's value at approximately $27 per share.  Sitio looks capable of generating around $2.75 per share in free cash flow in 2024, but may only put around 35% to 65% of that towards dividends. Sitio may also repurchase shares, while it is also putting money towards debt reduction. At the current time, I am now looking towards 2026 for a potential increase in Sitio's payout ratio to around 80%.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430161794"}