Sitio Royalties Corp. (NYSE:STR) Q3 2023 Earnings Call Transcript November 9, 2023 8:30 AM ET Company Participants Ross Wong - VP, Finance and IR Chris Conoscenti - CEO Conference Call Participants Derrick Whitfield - Stifel Noel Parks - Tuohy Brothers Investment Operator Hello, and welcome to the Sitio Royalties Third Quarter 2023 Earnings Call. My name is Alex, I'll be coordinating the call today. [Operator Instructions] I’ll now hand over to your host, Ross Wong, Vice President of Finance and Investor Re ...

Sitio's financial philosophy and capitalization 9/30/23 Revolving credit facility $601 $381 Total debt $1,006 $981 Liquidity $250 $471 ✓ • Retain up to 35% of Discretionary Cash Flow(1) to protect balance sheet and maintain liquidity ✓ • Maintain conservative and financially flexible capital structure Note: Senior unsecured notes balance is principal only and not net of any fees (1) Discretionary Cash Flow defined as Adjusted EBITDA less cash interest and cash taxes Oil (NYMEX WTI) Bbl per day 3,050 3,300 1 ...

[Glossary of Terms](index=3&type=section&id=Glossary%20of%20Terms) This section defines key terms and abbreviations used in the crude oil and natural gas industry, covering production, reserves, and financial metrics - Key industry terms defined include **'Barrel or bbl'** (**42 U.S. gallons** liquid volume for crude oil), **'BOE'** (one barrel of oil equivalent, calculated at a ratio of **six Mcf of natural gas to one Bbl of crude oil**), and **'Net royalty acres or NRAs'** (mineral ownership standardized to a **12.5%, or 1/8th**, royalty interest)[9](index=9&type=chunk)[10](index=10&type=chunk)[21](index=21&type=chunk) - A **'Royalty'** is defined as an interest in a crude oil and natural gas lease that gives the owner the right to receive a portion of the production revenue without requiring the owner to pay any portion of the production or development costs[28](index=28&type=chunk) [PART I. FINANCIAL INFORMATION](index=7&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Financial Statements (Unaudited)](index=7&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Sitio Royalties Corp.'s unaudited condensed consolidated financial statements, including balance sheets, income, cash flow, and equity statements, with explanatory notes [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents Sitio Royalties Corp.'s financial position as of September 30, 2023, compared to December 31, 2022, detailing assets, liabilities, and equity Balance Sheet Data | Metric | Sep 30, 2023 (Unaudited) (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :----------------------- | :----------- | | **ASSETS** | | | | Cash and cash equivalents | $1,339 | $18,818 | | Accrued revenue and accounts receivable | $116,088 | $142,010 | | Prepaid assets | $13,800 | $12,489 | | Derivative asset | $7,521 | $18,874 | | Total current assets | $138,748 | $192,191 | | Oil and natural gas properties, net | $4,971,147 | $4,948,578 | | Total assets | $5,131,118 | $5,170,902 | | **LIABILITIES** | | | | Accounts payable and accrued expenses | $21,939 | $21,899 | | Warrant liability | — | $2,950 | | Operating lease liability | $1,350 | $1,563 | | Total current liabilities | $23,289 | $26,412 | | Long-term debt | $996,460 | $938,896 | | Deferred tax liability | $333,467 | $313,607 | | Total liabilities | $1,358,312 | $1,284,307 | | **EQUITY** | | | | Total equity | $3,772,806 | $3,886,595 | | TOTAL LIABILITIES AND EQUITY | $5,131,118 | $5,170,902 | [Condensed Consolidated Statements of Income](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) This section illustrates Sitio Royalties Corp.'s financial performance for the three and nine months ended September 30, 2023, compared to 2022, revealing shifts in revenues, expenses, and net income Income Statement Data | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $156,710 | $115,497 | $444,002 | $269,664 | | Total operating expenses | $104,884 | $52,601 | $319,048 | $112,679 | | Net income from operations | $51,826 | $62,896 | $124,954 | $156,985 | | Interest expense, net | $(26,373) | $(14,986) | $(71,735) | $(18,096) | | Commodity derivatives gains (losses) | $(24,125) | $34,613 | $(3,250) | $53,508 | | Net income before taxes | $658 | $71,572 | $51,905 | $184,752 | | Net income | $275 | $69,011 | $45,021 | $179,546 | | Net income attributable to Class A stockholders | $287 | $9,139 | $22,144 | $15,299 | | Basic EPS | $0.00 | $0.70 | $0.26 | $1.19 | | Diluted EPS | $0.00 | $0.70 | $0.26 | $1.19 | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details Sitio Royalties Corp.'s cash generation and usage for the nine months ended September 30, 2023, compared to 2022, showing increased operating cash flows and financing shifts Cash Flow Data | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net income | $45,021 | $179,546 | | Net cash provided by operating activities | $354,818 | $171,075 | | Net cash used in investing activities | $(172,089) | $(569,626) | | Net cash (used in) provided by financing activities | $(200,208) | $396,984 | | Net change in cash and cash equivalents | $(17,479) | $(1,567) | | Cash and cash equivalents, end of period | $1,339 | $10,812 | - Purchases of oil and gas properties, net of post-close adjustments, decreased from **$558.062 million** for the nine months ended September 30, 2022, to **$172.070 million** for the same period in 2023[42](index=42&type=chunk) - Borrowings on credit facilities increased to **$588.500 million** in 2023 from **$196.895 million** in 2022, while repayments on credit facilities also increased from **$147.000 million** to **$497.500 million**[42](index=42&type=chunk) - Distributions to noncontrolling interest and dividends paid to **Class A stockholders** significantly increased in 2023, reaching **$121.924 million** and **$121.555 million**, respectively[42](index=42&type=chunk) [Condensed Consolidated Statements of Equity](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Equity) This section presents changes in Sitio Royalties Corp.'s equity components from January 1, 2023, to September 30, 2023, reflecting net income, share-based compensation, and dividends Equity Statement Data | Metric | Balance at Jan 1, 2023 (in thousands) | Balance at Sep 30, 2023 (in thousands) | | :----------------------------------- | :--------------------- | :---------------------- | | Total Equity | $3,886,595 | $3,772,806 | | Net income (loss) | $47,719 (Q1) | $275 (Q3) | | Share-based compensation | $4,129 (Q1) | $4,368 (Q3) | | Conversion of Class C Common Stock to Class A Common Stock | $(183) (Q1) | $(2,771) (Q3) | | Dividends to Class A stockholders | $(48,107) (Q1) | $(32,705) (Q3) | | Distributions to noncontrolling interest | $(49,206) (Q1) | $(30,762) (Q3) | - During the nine months ended September 30, 2023, the company canceled **633,005 shares** of its **Class A Common Stock** held in treasury[113](index=113&type=chunk) - **1,414,644 Sitio OpCo Partnership Units** were redeemed for shares of **Class A Common Stock**, resulting in the cancellation of an equivalent number of **Class C Common Stock** shares during the nine months ended September 30, 2023[112](index=112&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations for the unaudited condensed consolidated financial statements, covering business, accounting policies, mergers, revenue, debt, equity, and subsequent events [Note 1. Description of Business and Basis of Presentation](index=13&type=section&id=Note%201.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) Sitio Royalties Corp. focuses on consolidating oil and gas mineral and royalty interests across premium U.S. basins, with financial statements reflecting historical and consolidated results post-mergers - **Sitio Royalties Corp.** is focused on large-scale consolidation of high-quality oil and gas mineral and royalty interests across premium basins, including the Permian, Eagle Ford, SCOOP/STACK, DJ, Williston, and Appalachian Basins[48](index=48&type=chunk) - The company consummated the Falcon Reverse Merger on June 7, 2022, and the Brigham Merger on December 29, 2022, which significantly impacted its asset base and financial reporting structure[49](index=49&type=chunk)[52](index=52&type=chunk) - The unaudited condensed consolidated financial statements reflect the historical operating results of Kimmeridge Mineral Fund, LP (Predecessor) prior to June 7, 2022, and the consolidated results of **Sitio Royalties Corp.** following June 7, 2022, which include the results of Brigham following December 29, 2022[55](index=55&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=14&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines Sitio Royalties Corp.'s significant accounting policies, including consolidation principles, use of estimates, and policies for accrued revenue, accounts receivable, and accounts payable - The unaudited condensed consolidated financial statements include the accounts of the company's wholly-owned subsidiaries and any entities in which it owns a controlling interest, with all intercompany accounts and transactions eliminated[57](index=57&type=chunk) - The company's estimates and classification of oil and natural gas reserves are projections based on geologic and engineering data, with inherent uncertainties that could materially affect the carrying value of properties and the rate of depletion[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk) Accrued Revenue and Accounts Receivable | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :----------- | :----------- | | Accrued revenue | $115,029 | $80,406 | | Accounts receivable | $1,059 | $61,604 | | Total accrued revenue and accounts receivable | $116,088 | $142,010 | Accounts Payable and Accrued Expenses | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :----------- | :----------- | | Ad valorem taxes payable | $8,808 | $9,209 | | Brigham Merger accrued expenses | $2,281 | $2,878 | | Deferred financing costs and debt issuance costs | $1,903 | $206 | | General and administrative | $4,083 | $1,931 | | Payable to seller for pre-effective monies | $2,766 | $2,243 | | Other taxes payable | $1,036 | $2,713 | | Interest expense | $822 | $1,377 | | Other | $240 | $12 | | Accrued prepaids | — | $1,330 | | Total accounts payable and accrued expenses | $21,939 | $21,899 | [Note 3. Brigham Merger](index=18&type=section&id=Note%203.%20Brigham%20Merger) In December 2022, Sitio Royalties Corp. acquired Brigham Minerals Inc. in an all-stock transaction, adding approximately 86,500 net royalty acres and accounted for as a business combination - The Brigham Merger, completed in December 2022, involved an all-stock acquisition of Brigham Minerals Inc., adding approximately **86,500 NRAs** in the Delaware and Midland Basin, SCOOP and STACK plays, DJ Basin, and Williston Basin[52](index=52&type=chunk)[69](index=69&type=chunk) - Following the merger, Sitio stockholders owned approximately **54%** and Brigham stockholders owned approximately **46%** of the outstanding shares of New Sitio[71](index=71&type=chunk) Brigham Merger Consideration | Metric | Value (in thousands) | | :----------------------------------- | :---------------- | | Brigham Common Stock — issued and outstanding as of December 29, 2022: | 71,290,265 | | Class A Common Stock price on December 29, 2022 | **$30.15** | | Total consideration and fair value | **$2,149,401,490** | Brigham Merger Purchase Price Allocation | Asset/Liability | Dec 29, 2022 (in thousands) | Adjustments (in thousands) | Sep 30, 2023 (in thousands) | | :-------------------------------- | :----------- | :---------- | :----------- | | Cash | $11,054 | — | $11,054 | | Accrued revenue and accounts receivable | $61,745 | $266 | $62,011 | | Prepaid expenses | $11,339 | $15,828 | $27,167 | | Unproved oil and gas properties | $1,783,162 | $31,701 | $1,814,863 | | Proved oil and gas properties | $873,050 | — | $873,050 | | Property and equipment | $200 | — | $200 | | Right-of-use asset | $3,209 | — | $3,209 | | Other assets | $1,064 | $(1,064) | — | | Current liabilities | $(83,425) | $(2,581) | $(86,006) | | Long-term debt | $(193,000) | — | $(193,000) | | Long-term operating lease liability | $(2,387) | — | $(2,387) | | Deferred tax liability | $(316,571) | $(43,050) | $(359,621) | | Other long-term liability | $(39) | $(1,100) | $(1,139) | | Total consideration and fair value | $2,149,401 | — | $2,149,401 | - Transaction costs associated with the Brigham Merger were **$122,000** for the three months ended September 30, 2023, and **$2.5 million** for the nine months ended September 30, 2023, recorded in General and administrative expense[73](index=73&type=chunk) [Note 4. Falcon Reverse Merger](index=19&type=section&id=Note%204.%20Falcon%20Reverse%20Merger) In June 2022, Sitio acquired Falcon Minerals Corporation via a reverse merger, adding approximately 34,000 net royalty acres and involving a four-to-one reverse stock split - The Falcon Reverse Merger in June 2022 resulted in the acquisition of approximately **34,000 NRAs** in the Eagle Ford and Appalachian Basin[74](index=74&type=chunk)[98](index=98&type=chunk) - Prior to the merger, a **four-to-one reverse stock split** was effected for all issued and outstanding shares of common stock and equity awards[74](index=74&type=chunk) Falcon Merger Consideration | Metric | Value (in thousands) | | :----------------------------------- | :---------------- | | Falcon Common Stock — issued and outstanding as of June 7, 2022: | 21,935,492 | | Class A Common Stock price on June 7, 2022 | **$29.12** | | Total consideration and fair value | **$638,761,527** | Falcon Merger Purchase Price Allocation | Asset/Liability | June 7, 2022 (in thousands) | Adjustments (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :----------- | :---------- | :---------------- | | Cash | $4,484 | — | $4,484 | | Accrued revenue and accounts receivable | $12,054 | $6,696 | $18,750 | | Unproved oil and gas properties | $495,803 | $(4,572) | $491,231 | | Proved oil and gas properties | $200,773 | — | $200,773 | | Property and equipment | $278 | — | $278 | | Current liabilities | $(22,315) | $(1,106) | $(23,421) | | Long-term debt | $(43,105) | — | $(43,105) | | Deferred tax liability | $(2,598) | $(1,018) | $(3,616) | | Warrant liability | $(6,612) | — | $(6,612) | | Total consideration and fair value | $638,762 | — | $638,762 | - Transaction costs associated with the Falcon Merger were **$1,000** for the three months ended September 30, 2023, and **$167,000** for the nine months ended September 30, 2023[80](index=80&type=chunk) [Note 5. Revenue from Contracts with Customers](index=20&type=section&id=Note%205.%20Revenue%20from%20Contracts%20with%20Customers) Sitio Royalties Corp. recognizes revenue from oil, natural gas, and NGL sales upon control transfer at the wellhead, and from lease bonuses upon agreement execution, with estimates adjusted upon payment - Oil, natural gas, and NGL sales revenues are generally recognized when control of the product is transferred to the customer at the wellhead, with payment typically received within **30 to 90 days**[82](index=82&type=chunk)[83](index=83&type=chunk) - Lease bonus revenue is recognized when the lease agreement has been executed and payment is determined to be collectible, with these transactions not giving rise to contract assets or liabilities[86](index=86&type=chunk) Royalty Revenue by Type | Revenue Type | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Crude oil sales | $129,705 | $79,333 | $359,442 | $193,171 | | Natural gas sales | $9,569 | $19,086 | $32,745 | $39,186 | | NGL sales | $13,492 | $10,342 | $38,700 | $27,862 | | Total royalty revenues | $152,766 | $108,761 | $430,887 | $260,219 | [Note 6. Oil and Natural Gas Properties](index=23&type=section&id=Note%206.%20Oil%20and%20Natural%20Gas%20Properties) Sitio Royalties Corp. owns mineral rights across multiple U.S. basins, using the successful efforts method, and recognized a $25.6 million impairment charge on Appalachian Basin proved properties - The company owns mineral rights across the Permian Basin, Eagle Ford, SCOOP and STACK plays, DJ Basin, Williston Basin, and Appalachian Basin[90](index=90&type=chunk) Oil and Natural Gas Properties Summary | Property Type | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------- | :----------- | :----------- | | Unproved properties | $3,009,429 | $3,244,436 | | Proved properties | $2,431,742 | $1,926,214 | | Oil and natural gas properties, gross | $5,441,171 | $5,170,650 | | Accumulated depletion and impairment | $(470,024) | $(222,072) | | Oil and natural gas properties, net | $4,971,147 | $4,948,578 | - Purchases of oil and gas properties were **$172.1 million** for the nine months ended September 30, 2023, compared to **$558.1 million** for the same period in 2022[90](index=90&type=chunk) - Depletion expense was **$222.3 million** for the nine months ended September 30, 2023, a significant increase from **$66.8 million** for the same period in 2022[91](index=91&type=chunk) - An impairment charge of **$25.6 million** was recognized related to Appalachian Basin proved properties during the nine months ended September 30, 2023[92](index=92&type=chunk) [Note 7. Acquisitions](index=23&type=section&id=Note%207.%20Acquisitions) This note details Sitio Royalties Corp.'s significant acquisitions, including Brigham Merger (December 2022), Momentum Acquisition (July 2022 for $213.3 million), Foundation Acquisition (June 2022 for $320.6 million), and Falcon Acquisition (June 2022), which collectively expanded the company's net royalty acres across various basins - The Brigham Merger in December 2022 involved the acquisition of approximately **86,500 NRAs** across multiple basins[93](index=93&type=chunk) - In July 2022, the Momentum Acquisition added approximately **12,200 net royalty acres** for a purchase price of **$213.3 million**, funded through credit facilities and cash on hand[94](index=94&type=chunk) - The Foundation Acquisition in June 2022 involved the acquisition of approximately **19,700 NRAs** in the Permian Basin for **$320.6 million**, funded primarily by the Bridge Loan Facility and **Sitio Revolving Credit Facility**[96](index=96&type=chunk) - The Falcon Acquisition in June 2022, a reverse merger, added approximately **34,000 NRAs** in the Eagle Ford and Appalachian Basin[98](index=98&type=chunk) [Note 8. Debt](index=24&type=section&id=Note%208.%20Debt) Sitio OpCo's debt includes the Sitio Revolving Credit Facility, amended in 2023 to $850.0 million, and 2026 Senior Notes, which were subsequently redeemed in October 2023 - The **Sitio Revolving Credit Facility** was amended and restated on February 3, 2023, and further amended on September 22, 2023, increasing the borrowing base to **$850.0 million**[99](index=99&type=chunk)[102](index=102&type=chunk) - As of September 30, 2023, the outstanding balance under the **Sitio Revolving Credit Facility** was **$601.0 million**, with a weighted average interest rate of **8.42%**[102](index=102&type=chunk)[104](index=104&type=chunk) - The company had **$405.0 million** of **2026 Senior Notes** outstanding as of September 30, 2023, bearing interest at an adjusted Term SOFR rate plus a 5.75% margin. These notes were subsequently redeemed on October 3, 2023[108](index=108&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) - The company was in compliance with the terms and covenants of the **Sitio Revolving Credit Facility** at September 30, 2023, and December 31, 2022, maintaining a current ratio of not less than **1.00 to 1.00** and a total net funded debt to consolidated EBITDA ratio of not more than **3.50 to 1.00**[105](index=105&type=chunk) [Note 9. Equity](index=26&type=section&id=Note%209.%20Equity) This note details Sitio Royalties Corp.'s equity structure, including Class A and Class C Common Stock, treasury shares, cash dividends, and earnings per share calculation using the two-class method - Holders of **Class A Common Stock** are entitled to one vote per share and ratably receive dividends when declared by the Board[111](index=111&type=chunk) - Shares of **Class C Common Stock** are non-economic but entitle the holder to one vote per share and are redeemable on a one-for-one basis for shares of **Class A Common Stock**; **1,414,644 Sitio OpCo Partnership Units** were redeemed during the nine months ended September 30, 2023[112](index=112&type=chunk) - During the nine months ended September 30, 2023, the company canceled **633,005 shares** of **Class A Common Stock** held in treasury and transferred **26,137 shares** of **Class C Common Stock** to treasury[113](index=113&type=chunk)[114](index=114&type=chunk) Class A Cash Dividends Paid | Quarter Ended | Total Quarterly Dividend per Class A Common Share ($) | Class A Cash Dividends Paid (in thousands) | | :---------------- | :------------------------------------------ | :-------------------------- | | June 30, 2023 | **$0.40** | **$32,705** | | March 31, 2023 | **$0.50** | **$40,743** | | December 31, 2022 | **$0.60** | **$48,107** | | September 30, 2022 | **$0.72** | **$9,148** | | June 30, 2022 | **$0.71** | **$9,017** | Earnings Per Share Calculation | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to Class A stockholders - basic | **$88** | **$8,855** | **$21,161** | **$15,015** | | Weighted average shares outstanding - basic | **81,712** | **12,703** | **80,984** | **12,665** | | Basic EPS | **$0.00** | **$0.70** | **$0.26** | **$1.19** | | Diluted EPS | **$0.00** | **$0.70** | **$0.26** | **$1.19** | [Note 10. Noncontrolling Interest](index=29&type=section&id=Note%2010.%20Noncontrolling%20Interest) Noncontrolling interest represents the 48.0% economic interest in Sitio OpCo not owned by Sitio, held as Class C Common Stock and Sitio OpCo Partnership Units, redeemable for Class A stock or cash - Noncontrolling interest represents the **48.0%** economic interest of the units of Sitio OpCo not owned by Sitio, held in the form of **Class C Common Stock** and **Sitio OpCo Partnership Units**[121](index=121&type=chunk) - Each **Sitio OpCo Partnership Unit** holder has a redemption right to cause Sitio to acquire all or a portion of its units for either shares of **Class A Common Stock** or an equivalent amount of cash[121](index=121&type=chunk) Noncontrolling Interest Reconciliation | Metric | Amount (in thousands) | | :------------------------------------------ | :----------- | | Balance – December 31, 2022 | **$2,164,228** | | Net income | **$22,877** | | Share-based compensation | **$1,684** | | Conversion of Class C Common Stock to Class A Common Stock | **$(40,819)** | | Distributions to noncontrolling interest | **$(121,924)** | | Issuance of Class C Common Stock in connection with acquisition | **$66,525** | | Balance – September 30, 2023 | **$2,092,571** | [Note 11. Share-Based Compensation](index=29&type=section&id=Note%2011.%20Share-Based%20Compensation) Sitio Royalties Corp. grants various share-based compensation awards under its Long Term Incentive Plan, with total expense for the nine months ended September 30, 2023, at $14.474 million - The company's Long Term Incentive Plan permits the grant of stock options, RSUs, PSUs, DSUs, and other awards, with **6,872,320 shares** of **Class A Common Stock** remaining available for future grant as of September 30, 2023[123](index=123&type=chunk) Share-Based Compensation Expense | Award Type | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | RSUs | **$1,008** | **$1,988** | **$5,574** | **$2,475** | | PSUs | **$2,107** | **$988** | **$5,539** | **$1,235** | | DSUs | **$598** | **$425** | **$1,416** | **$521** | | Sitio OpCo Restricted Stock Awards | **$567** | **$568** | **$1,684** | **$716** | | RSUs Converted in the Brigham Merger | **$62** | — | **$184** | — | | PSUs Converted in the Brigham Merger | **$26** | — | **$77** | — | | Total | **$4,368** | **$3,969** | **$14,474** | **$4,947** | - As of September 30, 2023, unamortized equity-based compensation expense was approximately **$7.7 million** for unvested RSUs (expected to be recognized over **2.0 years**), **$1.5 million** for unvested DSUs (**0.6 years**), and **$17.3 million** for unvested PSUs (**2.1 years**)[129](index=129&type=chunk)[132](index=132&type=chunk)[136](index=136&type=chunk) [Note 12. Warrants](index=33&type=section&id=Note%2012.%20Warrants) The company's warrants, classified as derivative liabilities and fair-valued each period, expired in August 2023 and are no longer outstanding - The company's warrants, which were adjusted due to the Falcon Merger, expired in **August 2023** and are no longer outstanding[145](index=145&type=chunk) - Due to certain circumstances that could have required cash settlement, the warrants were classified as derivative liabilities and remeasured at fair value each reporting period[147](index=147&type=chunk) - The fair value of the warrants as of December 31, 2022, was **$3.0 million**[147](index=147&type=chunk) [Note 13. Derivative Instruments](index=33&type=section&id=Note%2013.%20Derivative%20Instruments) Sitio Royalties Corp. uses commodity derivative contracts and an interest rate swap to manage price and interest rate volatility, with all gains and losses recognized in the income statement - The company enters into commodity derivative contracts, such as fixed price swaps, basis swaps, and two- and three-way collars, to manage exposure to oil and gas price volatility, not for trading or speculative purposes[148](index=148&type=chunk)[149](index=149&type=chunk) - An interest rate swap agreement was entered into in **November 2022** to manage exposure to changes in interest rates from variable rate obligations related to the **2026 Senior Notes**, with the term expiring **December 31, 2023**[152](index=152&type=chunk) Derivative Fair Values | Derivative Type | Sep 30, 2023 (Fair Value) (in thousands) | Dec 31, 2022 (Fair Value) (in thousands) | | :-------------------------- | :------------------------ | :------------------------ | | Total asset derivatives | **$10,326** | **$32,253** | | Total liability derivatives | — | — | | Net derivatives | **$10,326** | **$32,253** | Derivative Gains and Losses | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Commodity derivative gains (losses) | **$(24,125)** | **$34,613** | **$(3,250)** | **$53,508** | | Interest rate derivative gains | **$9** | — | **$456** | — | [Note 14. Fair Value Measurement](index=37&type=section&id=Note%2014.%20Fair%20Value%20Measurement) This note describes the fair value hierarchy for financial instruments and nonfinancial assets, highlighting a $25.6 million impairment charge on Appalachian Basin proved properties as a Level 3 measurement - The company applies a fair value hierarchy (Level 1, 2, 3) that prioritizes inputs to valuation techniques, with Level 1 being unadjusted quoted prices in active markets and Level 3 being unobservable inputs[157](index=157&type=chunk)[158](index=158&type=chunk)[159](index=159&type=chunk) - A **$25.6 million** impairment charge was recognized for Appalachian Basin proved properties during the nine months ended September 30, 2023, due to the carrying value exceeding estimated future undiscounted cash flows, qualifying as a non-recurring Level 3 fair value measurement[160](index=160&type=chunk) - Fair values of commodity and interest rate derivative instruments are estimated using Level 2 inputs, while nonfinancial assets acquired in business combinations or mineral assets are measured using Level 3 inputs[161](index=161&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk) [Note 15. Income Taxes](index=39&type=section&id=Note%2015.%20Income%20Taxes) Sitio Royalties Corp. uses the asset and liability method for income tax accounting and is subject to U.S. federal and state income taxes, with effective tax rates influenced by noncontrolling interests - The company uses the asset and liability method for accounting for income taxes and updates its annual effective income tax rate on a quarterly basis[167](index=167&type=chunk) Income Tax Expense and Effective Tax Rate | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | **$383** | **$2,561** | **$6,884** | **$5,206** | | Effective tax rate | **58.2%** | **3.6%** | **13.3%** | **2.8%** | - The effective tax rate is significantly affected by the portion of the company's consolidated net income attributable to the holders of **Sitio OpCo Partnership Units** (noncontrolling interests), which is not taxable income to the company[169](index=169&type=chunk) [Note 16. Commitments and Contingencies](index=39&type=section&id=Note%2016.%20Commitments%20and%20Contingencies) Sitio Royalties Corp. is involved in legal proceedings in the ordinary course of business but does not anticipate a material adverse impact on its financial condition or results of operations - Management does not believe that the resolution of various legal proceedings, lawsuits, and other claims in the ordinary course of business will have a material adverse impact on the company's financial condition, results of operations, or cash flows[170](index=170&type=chunk) [Note 17. Related Party Transactions](index=39&type=section&id=Note%2017.%20Related%20Party%20Transactions) The Predecessor incurred management fees from Kimmeridge Energy Management Company, LLC, totaling approximately $3.2 million for the nine months ended September 30, 2022, which terminated with the Falcon Merger - The Predecessor paid approximately **$3.2 million** in management fees to Kimmeridge Energy Management Company, LLC for the nine months ended September 30, 2022[172](index=172&type=chunk) - This management services arrangement terminated in connection with the Falcon Merger, and no such fees were earned or paid for the three or nine months ended September 30, 2023[172](index=172&type=chunk) [Note 18. Subsequent Events](index=39&type=section&id=Note%2018.%20Subsequent%20Events) Subsequent to September 30, 2023, Sitio Royalties Corp. issued 2028 Senior Notes, declared a Q3 2023 dividend, and agreed to sell Appalachia and Anadarko interests for $117.5 million cash - On October 3, 2023, the company issued **$600.0 million** in **2028 Senior Notes** (**7.875% annual rate**, maturing **November 1, 2028**) to repay and redeem the **2026 Senior Notes** in full and repay outstanding borrowings under the **Sitio Revolving Credit Facility**[174](index=174&type=chunk)[175](index=175&type=chunk)[269](index=269&type=chunk) - On **November 8, 2023**, a cash dividend of **$0.49 per share** of **Class A Common Stock** was declared for the third quarter of 2023[181](index=181&type=chunk) - On November 3, 2023, the company entered into a definitive agreement to sell all of its mineral and royalty interests in the Appalachia and Anadarko Basins for **$117.5 million cash**, expecting a pre-tax loss on sale of approximately **$130.0 million to $140.0 million** for the year ending December 31, 2023[182](index=182&type=chunk)[196](index=196&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Sitio Royalties Corp.'s financial condition and results of operations, including business overview, recent developments, and critical accounting policies [Overview](index=44&type=section&id=Overview) As of September 30, 2023, Sitio Royalties Corp. owned approximately 275,000 net royalty acres and reported average net daily production of 36,900 BOE/d for Q3 2023, growing through acquisitions - As of September 30, 2023, the company owned mineral and royalty interests representing approximately **275,000 NRAs**[193](index=193&type=chunk) Average Daily Production | Period | Total (BOE/d) | Oil (Bbls/d) | Natural Gas (Mcf/d) | NGLs (Bbls/d) | | :-------------------------------- | :-------------- | :----------- | :------------------ | :------------ | | 3 Months Ended Sep 30, 2023 | **36,900** | **17,576** | **67,428** | **8,085** | | 9 Months Ended Sep 30, 2023 | **35,349** | **17,530** | **63,053** | **7,310** | - Since its Predecessor's formation in November 2016, the company has accumulated its acreage position by making **192 acquisitions** through September 30, 2023, and expects to continue growing through acquisitions that meet its investment criteria[193](index=193&type=chunk) - The company's business model involves receiving a fixed percentage of revenue from oil, natural gas, and NGLs production without funding drilling, completion, or lease operating expenses, allowing it to return a significant amount of cash flows to stockholders[194](index=194&type=chunk) [Recent Developments](index=44&type=section&id=Recent%20Developments) Recent developments include the divestiture of Appalachia and Anadarko assets for $117.5 million cash, issuance of 2028 Senior Notes, and an increased Sitio Revolving Credit Facility borrowing base - On November 3, 2023, the company entered into an agreement to sell all of its mineral and royalty interests in the Appalachia and Anadarko Basins for **$117.5 million cash**, with proceeds planned for debt repayment and general corporate purposes[196](index=196&type=chunk) - On October 3, 2023, the company issued **2028 Senior Notes** to repay and redeem the **2026 Senior Notes** in full and repay outstanding borrowings under the **Sitio Revolving Credit Facility**[197](index=197&type=chunk) - On September 22, 2023, the borrowing base under the **Sitio Revolving Credit Facility** was increased to **$850.0 million**[199](index=199&type=chunk) - The company has evaluated over 1,000 potential mineral and royalty interest acquisitions and completed **192**, intending to continue making value-enhancing acquisitions[200](index=200&type=chunk) [Production and Operations](index=45&type=section&id=Production%20and%20Operations) For Q3 2023, average daily production was 36,900 BOE/d, a significant increase from the prior year due to acquisitions, despite lower realized commodity prices, with substantial drilling activity Production and Realized Prices | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Average daily production (BOE/d) | **36,900** | 17,990 | | Crude oil (per Bbl) | **$80.21 ($)** | **$93.81 ($)** | | Natural gas (per Mcf) | **$1.54 ($)** | **$6.55 ($)** | | NGLs (per Bbl) | **$18.14 ($)** | **$31.98 ($)** | | Combined (per BOE) | **$45.00 ($)** | **$65.71 ($)** | - As of September 30, 2023, the company had **37,858 gross (285.2 net) producing horizontal wells**, **4,282 gross (29.9 net) horizontal wells** in various stages of drilling or completion, and **3,434 gross (21.0 net) active horizontal drilling permits** on its acreage[202](index=202&type=chunk) [Economic Indicators](index=45&type=section&id=Economic%20Indicators) The company notes elevated inflation, Federal Reserve interest rate increases impacting borrowing costs, and geopolitical events creating global economic uncertainty, potentially affecting demand and expenses - The economy is experiencing elevated inflation levels, leading the Federal Reserve to increase interest rates, which generally impacts the company's variable borrowing costs on the **Sitio Revolving Credit Facility**[203](index=203&type=chunk) - Geopolitical events, such as the Russian invasion of Ukraine and the conflict in the Israel-Gaza region, contribute to global economic uncertainty, potentially impacting the world economy and the company's financial condition[204](index=204&type=chunk) - Inflationary pressures could result in increases to operating expenses and a negative effect on the demand for oil and natural gas[205](index=205&type=chunk) [Factors Affecting the Comparability of Our Financial Results](index=45&type=section&id=Factors%20Affecting%20the%20Comparability%20of%20Our%20Financial%20Results) The company's financial results are not directly comparable to its Predecessor's due to changes in surface rights, termination of management fees, significant acquisitions, increased debt, and public company expenses - The Predecessor's historical financial statements included revenue from surface rights not contributed in the Falcon Merger, impacting comparability, although the company has since acquired additional surface rights[207](index=207&type=chunk)[208](index=208&type=chunk) - Management fees paid to affiliates by the Predecessor (approximately **$3.2 million** for the nine months ended September 30, 2022) were terminated with the Falcon Merger, eliminating this expense for future periods[209](index=209&type=chunk) - The financial statements for the nine months ended September 30, 2022, do not include the full results of operations for assets acquired in the Falcon Merger, Foundation Acquisition, Momentum Acquisition, and Brigham Merger prior to their respective acquisition dates, limiting comparability[210](index=210&type=chunk) - As a public company, the company incurs incremental general and administrative expenses for SEC reporting, compliance, and other public company operations, and increased debt for acquisitions leads to higher interest expense[212](index=212&type=chunk)[213](index=213&type=chunk) - The company is now subject to U.S. federal and state income taxes as a corporation, unlike the Predecessor which was generally not subject to U.S. federal income tax at the entity level[214](index=214&type=chunk) [Results of Operations](index=47&type=section&id=Results%20of%20Operations) This section compares Sitio Royalties Corp.'s consolidated revenue, expenses, and production for the three and nine months ended September 30, 2023, against 2022, highlighting the impact of increased production volumes from acquisitions, fluctuating commodity prices, and changes in operating and other expenses [Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022](index=47&type=section&id=Three%20Months%20Ended%20September%2030%2C%202023%20Compared%20to%20the%20Three%20Months%20Ended%20September%2030%2C%202022) For Q3 2023, total revenues increased 36% to $156.7 million, driven by higher oil production volumes, despite lower commodity prices, while operating expenses rose 99% due to increased DD&A and taxes Operating Results Comparison (Q3) | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Total revenues | $156,710 | $115,497 | **36%** | | Depreciation, depletion and amortization | $80,716 | $32,005 | **152%** | | General and administrative | $12,044 | $13,381 | -**10%** | | Severance and ad valorem taxes | $12,124 | $7,215 | **68%** | | Total operating expenses | $104,884 | $52,601 | **99%** | | Net income from operations | $51,826 | $62,896 | -**18%** | | Interest expense, net | $(26,373) | $(14,986) | **76%** | | Commodity derivatives gains (losses) | $(24,125) | $34,613 | N/A | | Net income | $275 | $69,011 | -**100%** | Production and Price Comparison (Q3) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Crude oil (MBbls) | 1,617 | 846 | **91%** | | Natural gas (MMcf) | 6,203 | 2,916 | **113%** | | NGLs (MBbls) | 744 | 323 | **130%** | | Total (MBOE) | 3,395 | 1,655 | **105%** | | Average daily production (BOE/d) | **36,900** | 17,990 | **105%** | | Crude oil (per Bbl) | **$80.21 ($)** | **$93.81 ($)** | -**14%** | | Natural gas (per Mcf) | **$1.54 ($)** | **$6.55 ($)** | -**76%** | | NGLs (per Bbl) | **$18.14 ($)** | **$31.98 ($)** | -**43%** | | Combined (per BOE) | **$45.00 ($)** | **$65.71 ($)** | -**32%** | - The increase in mineral and royalty revenue was primarily due to increased production volumes from acquisitions of additional mineral and royalty interests and existing interests, offset by a decrease in average realized prices for oil, natural gas, and NGLs[217](index=217&type=chunk)[219](index=219&type=chunk)[220](index=220&type=chunk)[221](index=221&type=chunk) - Depreciation, depletion and amortization expense increased due to a **105%** increase in year-over-year production and a higher depletion rate, which increased from **$19.24 per BOE** for Q3 2022 to **$23.74 per BOE** for Q3 2023[223](index=223&type=chunk) [Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022](index=51&type=section&id=Nine%20Months%20Ended%20September%2030%2C%202023%20Compared%20to%20the%20Nine%20Months%20Ended%20September%2030%2C%202022) For the nine months ended September 30, 2023, total revenues increased 66% to $444.0 million due to production volume increases, despite lower prices, while operating expenses surged 184% due to DD&A and impairment Operating Results Comparison (9 Months) | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Total revenues | $444,002 | $269,664 | **66%** | | Management fees to affiliates | — | $3,241 | -**100%** | | Depreciation, depletion and amortization | $222,718 | $67,302 | **231%** | | General and administrative | $37,786 | $24,117 | **57%** | | Severance and ad valorem taxes | $32,927 | $18,019 | **83%** | | Impairment of oil and natural gas properties | $25,617 | — | N/A | | Total operating expenses | $319,048 | $112,679 | **184%** | | Net income from operations | $124,954 | $156,985 | -**20%** | | Interest expense, net | $(71,735) | $(18,096) | **296%** | | Commodity derivatives gains (losses) | $(3,250) | $53,508 | N/A | | Net income | $45,021 | $179,546 | -**75%** | Production and Price Comparison (9 Months) | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Crude oil (MBbls) | 4,786 | 1,969 | **143%** | | Natural gas (MMcf) | 17,214 | 6,481 | **166%** | | NGLs (MBbls) | 1,996 | 760 | **163%** | | Total (MBOE) | 9,651 | 3,809 | **153%** | | Average daily production (BOE/d) | **35,349** | 13,950 | **153%** | | Crude oil (per Bbl) | **$75.11 ($)** | **$98.12 ($)** | -**23%** | | Natural gas (per Mcf) | **$1.90 ($)** | **$6.05 ($)** | -**69%** | | NGLs (per Bbl) | **$19.39 ($)** | **$36.68 ($)** | -**47%** | | Combined (per BOE) | **$44.65 ($)** | **$68.33 ($)** | -**35%** | - The increase in mineral and royalty revenue was primarily due to increased production volumes from acquisitions of additional mineral and royalty interests and existing interests, offset by lower average realized prices for oil, natural gas, and NGLs[236](index=236&type=chunk)[237](index=237&type=chunk)[238](index=238&type=chunk)[239](index=239&type=chunk) - Impairment of oil and natural gas properties of **$25.6 million** was recognized for the nine months ended September 30, 2023, attributable to proved properties in the Appalachian Basin due to a decrease in natural gas and NGLs prices[245](index=245&type=chunk) [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) Sitio Royalties Corp.'s liquidity sources include cash flows, the Sitio Revolving Credit Facility, and capital markets, with total liquidity at $250.3 million as of September 30, 2023, reflecting increased operating cash flows - Primary sources of liquidity include cash flows from operations, available borrowing capacity under the **Sitio Revolving Credit Facility**, and access to capital markets[251](index=251&type=chunk) - As of September 30, 2023, total liquidity was **$250.3 million**, comprised of **$1.3 million** of cash and cash equivalents and **$249.0 million** of availability under the **Sitio Revolving Credit Facility**[253](index=253&type=chunk) Cash Flow Summary | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $354,818 | $171,075 | | Net cash used in investing activities | $(172,089) | $(569,626) | | Net cash (used in) provided by financing activities | $(200,208) | $396,984 | | Net decrease in cash and cash equivalents | $(17,479) | $(1,567) | - Cash flows provided by operating activities for the nine months ended September 30, 2023, were **$354.8 million**, primarily due to increases in royalty revenue[255](index=255&type=chunk) - Cash used in financing activities for the nine months ended September 30, 2023, included **$588.5 million** in borrowings and **$497.5 million** in repayments on the **Sitio Revolving Credit Facility**, **$121.6 million** in dividends paid to **Class A stockholders**, and **$121.9 million** in distributions to noncontrolling interest holders[259](index=259&type=chunk)[260](index=260&type=chunk) [Critical Accounting Policies and Related Estimates](index=57&type=section&id=Critical%20Accounting%20Policies%20and%20Related%20Estimates) This section outlines Sitio Royalties Corp.'s critical accounting policies, including estimates for oil and natural gas reserves, successful efforts method, impairment assessments, and revenue recognition, involving significant judgment - The preparation of financial statements requires management to make estimates and assumptions, particularly for oil and natural gas reserves, which are projections based on geologic and engineering data and subject to substantial variability[273](index=273&type=chunk)[274](index=274&type=chunk)[275](index=275&type=chunk)[279](index=279&type=chunk)[280](index=280&type=chunk) - The company uses the successful efforts method of accounting for oil and natural gas producing properties, capitalizing acquisition costs and depleting proved properties on a unit-of-production basis[276](index=276&type=chunk) - Proved properties are evaluated for impairment by comparing expected undiscounted future cash flows to carrying amounts, with impairment recognized if carrying value exceeds fair value. Unproved properties are assessed periodically for impairment based on facts and circumstances[277](index=277&type=chunk)[278](index=278&type=chunk) - Revenue from mineral and royalty interests is recognized when control transfers at the wellhead, and lease bonus revenue is recognized when the lease agreement has been executed and payment is collectible[281](index=281&type=chunk)[284](index=284&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=61&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Sitio Royalties Corp. is exposed to market risks from commodity price volatility and interest rate fluctuations, using derivative instruments to partially mitigate commodity risk and facing credit risk from counterparties - The company's major market risk exposure is in the pricing applicable to the oil and natural gas production of its operators, which is subject to volatility and unpredictability[287](index=287&type=chunk) Commodity Price Sensitivity | Commodity | Price Change | Revenue Impact (9 Months Ended Sep 30, 2023) (in thousands) | | :---------------- | :----------- | :------------------------------------------- | | Oil | **$1.00/Bbl** | **$4.8 million** | | Natural Gas | **$0.10/Mcf** | **$1.7 million** | | NGLs | **$1.00/Bbl** | **$2.0 million** | - The company may enter into derivative instruments (collars, swaps, and basis swaps) to partially mitigate the impact of commodity price volatility and provide increased certainty of cash flows for debt service requirements[289](index=289&type=chunk) - The company is exposed to credit risk from nonperformance by counterparties in derivative contracts and from receivables generated by its operators' production activities[290](index=290&type=chunk)[291](index=291&type=chunk) - Primary exposure to interest rate risk results from outstanding borrowings under the **Sitio Revolving Credit Facility** and **2026 Senior Notes**, both with floating interest rates; a **1.0% increase** in the average interest rate would have resulted in an approximate **$7.1 million** increase in interest expense for the nine months ended September 30, 2023[292](index=292&type=chunk) [Item 4. Controls and Procedures](index=63&type=section&id=Item%204.%20Controls%20and%20Procedures) As of September 30, 2023, Sitio Royalties Corp.'s CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2023, and concluded they were effective[294](index=294&type=chunk) - During the quarter ended September 30, 2023, there have been no changes in the company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[295](index=295&type=chunk) [PART II. OTHER INFORMATION](index=63&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part includes legal proceedings, risk factors, equity sales, defaults, mine safety disclosures, other information, and a list of exhibits [Item 1. Legal Proceedings](index=63&type=section&id=Item%201.%20Legal%20Proceedings) Sitio Royalties Corp. is involved in various legal claims in the normal course of business but does not believe their resolution will have a material adverse impact on its financial condition or results of operations - The company does not believe that the resolution of its various legal claims in the ordinary course of business will have a material adverse impact on its financial condition or results of operations[296](index=296&type=chunk) [Item 1A. Risk Factors](index=63&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in Sitio Royalties Corp.'s Annual Report filed with the SEC on March 8, 2023 - There have been no material changes in the company's risk factors from those previously disclosed in its Annual Report filed with the SEC on March 8, 2023[298](index=298&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=63&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) For July 2023, Sitio Royalties Corp. repurchased 2,002 shares of common stock at an average price of $26.34 per share to satisfy tax withholding obligations for share-based compensation Common Stock Repurchases | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | July 1, 2023 - July 31, 2023 | **2,002** | **$26.34** | | August 1, 2023 - August 31, 2023 | — | — | | September 1, 2023 - September 30, 2023 | — | — | | Total | **2,002** | **$26.34** | - Shares repurchased represent shares of common stock transferred to the company to satisfy tax withholding obligations incurred upon the vesting of share-based compensation awards held by employees[301](index=301&type=chunk) [Item 3. Defaults Upon Senior Securities](index=65&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities reported by Sitio Royalties Corp. during the period - No defaults upon senior securities were reported[302](index=302&type=chunk) [Item 4. Mine Safety Disclosures](index=65&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Sitio Royalties Corp.'s operations - Mine Safety Disclosures are not applicable to the registrant[303](index=303&type=chunk) [Item 5. Other Information](index=65&type=section&id=Item%205.%20Other%20Information) During the three months ended September 30, 2023, no director or officer of Sitio Royalties Corp. adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' - During the three months ended September 30, 2023, no director or officer of the company adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement'[304](index=304&type=chunk) [Item 6. Exhibits](index=66&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including merger agreements, corporate governance documents, credit agreements, and certifications, providing supporting documentation for the report - The exhibits include key agreements such as the Agreement and Plan of Merger for Falcon and Brigham, Amended and Restated Certificate of Incorporation and Bylaws, and the Third Amended and Restated Credit Agreement[307](index=307&type=chunk) - Certifications from the Principal Executive Officer and Principal Financial Officer are filed herewith, as required by the Sarbanes-Oxley Act of 2002[307](index=307&type=chunk) [Signatures](index=67&type=section&id=Signatures) The report is officially signed by Christopher L. Conoscenti (Chief Executive Officer), Carrie L. Osicka (Chief Financial Officer), and Jim Norris (Vice President, Chief Accounting Officer) on November 8, 2023, certifying its submission - The report was signed on **November 8, 2023**, by Christopher L. Conoscenti (Chief Executive Officer), Carrie L. Osicka (Chief Financial Officer), and Jim Norris (Vice President, Chief Accounting Officer)[312](index=312&type=chunk)

Financial Data and Key Metrics Changes - The company reported second quarter adjusted EBITDA of $127 million and discretionary cash flow of $95 million, down by 9% and 21% respectively compared to the first quarter of 2023, primarily driven by pricing changes [20][22][24] - The average hedged realized price per BOE for the second quarter was $44.45, a 9% decrease compared to the first quarter of 2023 [20] - Cash G&A for the first half of 2023 was $12.8 million, tracking just below the midpoint of the full year guidance [21] Business Line Data and Key Metrics Changes - The company closed five accretive acquisitions in the Permian Basin for approximately $248 million, adding 13,705 NRAs, or 7%, to its position [35][36] - The acquired assets produced an estimated 1,918 BOEs per day during the second quarter, contributing to a record high average production of 34,681 BOEs per day [37][15] - The company expects the recent acquisitions to be approximately 6% accretive to discretionary cash flow per share at current strip pricing [86] Market Data and Key Metrics Changes - DUCs in the Permian decreased by 73 from 930 to 857 between March and June 2023, the lowest level since July 2014 [17] - The current level of 857 DUCs is nearly a quarter of the peak of 3,519 DUCs in July 2020, indicating a nearing end to the DUC drawdown [18] Company Strategy and Development Direction - The company emphasizes a relationship-based approach to acquisitions, which has been a key differentiator in its growth strategy [86] - The company is focusing on smaller, impactful acquisitions rather than larger auction-based transactions, which have proven to be less successful [2][44] Management's Comments on Operating Environment and Future Outlook - Management noted that rig activity on their acreage has held steady, contrasting with broader declines in the market [54] - The company expects minimal cash tax payments for the rest of the year due to a tax benefit from 2022, with a shift back to normal tax rates expected in 2024 [28][32] Other Important Information - The board declared a dividend of $0.40 per share for the second quarter, down by $0.10 from the previous quarter [24] - The company has made progress in reducing its unsecured note principal to $416.3 million and is focused on maintaining adequate liquidity for future acquisitions [26][65] Q&A Session Summary Question: Can you provide any color on how the current commodity price environment is impacting your team's outlook for acquisitions? - Management stated that the commodity price environment does not significantly impact their acquisition underwriting standards, which remain consistent regardless of price fluctuations [46] Question: Was the stock deal the largest among the recent acquisitions? - The stock transaction was not the largest; it was approximately $65 million, while larger deals are characterized as being over a few hundred million dollars [42] Question: Can you discuss considerations for return of capital now that unsecured notes have been amended? - The company is monitoring stock behavior for potential buybacks and is focused on reducing leverage while maintaining liquidity for acquisitions [64]

• Employee base and Board reflective of a culture that values diversity • Sitio's differentiated nature of operations results in lower scope 1 and scope 2 emissions than E&P operators(1) • E&P operators bear 100% of the environmental liabilities of operations | --- | --- | --- | --- | --- | --- | --- | --- | --- | |--------------------------------------------------------------------------------------------------------------|-----------|-------------------------------|----------|-------|--------------------- ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=7&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited financials reflect the impact of recent mergers, with lower net income on higher revenue due to commodity prices and expenses [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and liabilities slightly decreased to $5.09 billion and $1.26 billion respectively as of June 30, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $348 | $18,818 | | Total current assets | $165,315 | $192,191 | | Total property and equipment, net | $4,876,826 | $4,950,857 | | **Total Assets** | **$5,090,705** | **$5,170,902** | | Long-term debt | $893,665 | $938,896 | | Total current liabilities | $18,657 | $26,412 | | **Total Liabilities** | **$1,259,347** | **$1,284,307** | | **Total Equity** | **$3,831,358** | **$3,886,595** | [Condensed Consolidated Statements of Operations](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported a Q2 2023 net loss of $3.0 million, a significant shift from prior-year income due to impairment and higher costs Statement of Operations Summary (in thousands) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $136,466 | $87,804 | $287,292 | $154,167 | | Total operating expenses | $124,266 | $34,908 | $214,164 | $60,078 | | Impairment of oil and natural gas properties | $25,617 | $0 | $25,617 | $0 | | Net income (loss) | ($2,973) | $72,013 | $44,746 | $110,535 | | Net income (loss) attributable to Class A stockholders | ($796) | $6,160 | $21,857 | $6,160 | | Diluted EPS | ($0.01) | $0.39 | $0.26 | $0.39 | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow increased significantly to $232.7 million in H1 2023, while investing and financing activities used cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $232,677 | $88,431 | | Net cash used in investing activities | ($12,277) | ($390,648) | | Net cash (used in) provided by financing activities | ($238,870) | $305,456 | | **Net change in cash and cash equivalents** | **($18,470)** | **$3,239** | | Cash and cash equivalents, end of period | $348 | $15,618 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail significant accounting impacts from recent mergers, debt facilities, and a $25.6 million impairment charge - The financial statements reflect the historical results of the Predecessor (Kimmeridge Mineral Fund, LP) prior to June 7, 2022, and the consolidated results of Sitio Royalties Corp. thereafter, including Brigham's results from December 29, 2022[56](index=56&type=chunk) - The Brigham Merger in December 2022 was an all-stock transaction valued at approximately **$2.15 billion**, adding 86,500 NRAs, with a preliminary purchase price allocation[70](index=70&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) - The Falcon Reverse Merger in June 2022 was valued at **$638.8 million** and added approximately 34,000 NRAs in the Eagle Ford and Appalachian Basin[75](index=75&type=chunk)[76](index=76&type=chunk) - A **$25.6 million impairment charge** was recognized in Q2 2023 related to proved properties in the Appalachian Basin due to declining natural gas and NGL prices[93](index=93&type=chunk)[184](index=184&type=chunk) - As of June 30, 2023, the company had **$486.0 million** outstanding under its **$750.0 million** borrowing base revolving credit facility and **$416.3 million** outstanding on its 2026 Senior Notes[107](index=107&type=chunk)[116](index=116&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=50&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes production growth to acquisitions, though lower commodity prices impacted profitability, while liquidity remains strong [Results of Operations](index=54&type=section&id=Results%20of%20Operations) Q2 2023 revenue rose 55% on surging production, but a 45% price decline and higher expenses led to a net loss Q2 2023 vs Q2 2022 Production and Pricing | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Average Daily Production (BOE/d) | 34,681 | 12,402 | +180% | | Average Realized Price (per BOE) | $42.01 | $76.65 | -45% | | Crude Oil Price (per Bbl) | $70.90 | $109.87 | -36% | | Natural Gas Price (per Mcf) | $1.53 | $6.55 | -77% | - The increase in DD&A expense to **$74.2 million** from $19.9 million was due to a **180%** increase in production and a higher depletion rate, which rose from **$17.48/BOE to $23.48/BOE**[240](index=240&type=chunk) - G&A expense increased by **110% to $14.1 million**, primarily due to **$4.4 million** in additional share-based compensation, increased headcount, and higher professional services fees[241](index=241&type=chunk) [Liquidity and Capital Resources](index=60&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity of $264.3 million, primarily from its credit facility, after funding acquisitions and dividends - Total liquidity as of June 30, 2023, was **$264.3 million**, comprising **$348,000** in cash and **$264.0 million** of availability under the Sitio Revolving Credit Facility[269](index=269&type=chunk) Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $232,677 | $88,431 | | Net cash used in investing activities | ($12,277) | ($390,648) | | Net cash (used in) provided by financing activities | ($238,870) | $305,456 | - Financing activities in H1 2023 included **$88.9 million** in dividends to Class A stockholders and **$91.2 million** in distributions to noncontrolling interest holders[273](index=273&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=67&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are commodity price volatility and interest rate changes on its variable-rate debt - A **$1.00 per Bbl** change in realized oil price would have changed H1 2023 oil revenues by **$3.2 million**[303](index=303&type=chunk) - A **$0.10 per Mcf** change in realized natural gas price would have changed H1 2023 natural gas revenues by **$1.1 million**[303](index=303&type=chunk) - The company is exposed to interest rate risk on its variable-rate debt; a **1.0%** increase in the average interest rate would have increased H1 2023 interest expense by an estimated **$4.6 million**[307](index=307&type=chunk) - The company uses derivative instruments like collars and swaps to partially mitigate commodity price risk, but these instruments may also limit potential gains from price increases[304](index=304&type=chunk) [Item 4. Controls and Procedures](index=69&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were **effective** as of June 30, 2023[309](index=309&type=chunk) - **No material changes** to internal control over financial reporting occurred during the quarter ended June 30, 2023[310](index=310&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=69&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal claims not expected to have a material adverse impact - The company states that it **does not believe the resolution of current legal matters will have a material adverse impact** on its financial condition, results of operations, or cash flows[195](index=195&type=chunk)[311](index=311&type=chunk) [Item 1A. Risk Factors](index=69&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors have occurred since the last annual report filing - **No material changes** in risk factors have occurred since the company's Annual Report filed on March 8, 2023[313](index=313&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=69&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 97,711 shares to satisfy tax obligations from vested employee compensation Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 1 - April 30, 2023 | 0 | N/A | | May 1 - May 31, 2023 | 0 | N/A | | June 1 - June 30, 2023 | 97,711 | $27.19 | | **Total** | **97,711** | **$27.19** | - The shares were repurchased to satisfy tax withholding obligations upon the vesting of share-based compensation awards for employees[314](index=314&type=chunk) [Item 5. Other Information](index=70&type=section&id=Item%205.%20Other%20Information) No directors or officers adopted or terminated Rule 10b5-1 trading plans during the quarter - **No director or officer adopted or terminated** a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the second quarter of 2023[317](index=317&type=chunk) [Item 6. Exhibits](index=71&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the report, including amendments and officer certifications - Key exhibits filed with this report include the **Second Amendment to the Note Purchase Agreement** and required **CEO/CFO certifications** (302 and 906)[319](index=319&type=chunk)

Sitio Royalties Corp. (NYSE:STR) Q1 2023 Earnings Conference Call May 10, 2023 8:30 AM ET Company Participants Ross Wong - VP, Finance and IR Chris Conoscenti - CEO Conference Call Participants Tim Rezvan - KeyBanc Capital Markets TJ Schultz - RBC Capital Markets John Annis - Stifel Noel Parks - Tuohy Brothers Operator Good morning and thank you for attending Sitio Royalties First Quarter 2023 Earnings Call. My name is Felicia, and I'll be your operator today. All lines will be muted during the presentati ...

May 9, 2023 1Q 2023 Earnings Presentation Disclaimer FORWARD-LOOKING STATEMENTS INDUSTRY AND MARKET DATA BASIS OF PRESENTATION NON-GAAP MEASURES 2 Record high average quarterly production volume of 34,440 boe/d (51% oil) Reduced long-term debt by $33.7 million 3 This presentation relates to Sitio Royalties Corp. (the "Company" or "Sitio") and contains statements that may constitute "forward-looking statements" for purposes of federal securities laws. Forward-looking statements include, but are not limited t ...

Table of Contents OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-41585 FORM 10-Q (Mark One) UNITED STATES SECURITIES AND EXCHANGE COMMISSION ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 WASHINGTON, DC 20549 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extend ...

Sitio Royalties Corp. (NYSE:STR) Q4 2022 Results Conference Call March 9, 2023 8:30 AM ET Company Participants Ross Wong - Vice President of Finance and Investor Relations Chris Conoscenti - Chief Executive Officer Carrie Osicka - Chief Financial Officer Conference Call Participants Tim Rezvan - KeyBanc Capital Markets Jeanine Wai - Barclays Noel Parks - Tuohy Brothers Operator My name is Nadia, and I'll be coordinating the call today [Operator Instructions]. I will now hand you over to your host, Ross Wong ...