Sitio Royalties (STR) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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] - 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][72][73] - 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][76] - 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][184] - 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][116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes production growth to acquisitions, though lower commodity prices impacted profitability, while liquidity remains strong Results of Operations 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] - 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] Liquidity and Capital Resources 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] 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - A $0.10 per Mcf change in realized natural gas price would have changed H1 2023 natural gas revenues by $1.1 million[303] - 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] - 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] Item 4. Controls and Procedures 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] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2023[310] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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][311] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 5. Other Information 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] Item 6. Exhibits 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]