Sitio Royalties Inventory: DJ Basin Acquisition Might Delay An Elevated Payout Ratio (NYSE:STR)

Sitio Royalties (NYSE:STR) just lately made a $150 million DJ Basin acquisition that helps enhance its near-term free money move. This acquisition entails a comparatively low 4.0x a number of to asset-level money move, which seems to be defined by restricted stock and a excessive base decline charge.

The acquisition may additionally delay a rise in Sitio’s payout ratio because of the further debt. Barclays had noted Sitio’s 65% payout ratio as a detrimental issue in comparison with its friends.

I now estimate Sitio’s worth at round $27 per share. This can be a $1 lower from after I last looked at Sitio. The lower is usually because of Sitio’s 2024 manufacturing steerage for its legacy property coming in a number of p.c decrease than what I anticipated.

DJ Basin Acquisition

On the finish of February, Sitio introduced that it had beforehand signed an settlement in January to accumulate 13,062 Internet Royalty Acres within the DJ Basin for $150 million in money. After closing changes, Sitio could find yourself paying round $130 million to $135 million because of the efficient date of the transaction being October 2023. Sitio additionally obtained $114 million in money from its Appalachia and Anadarko Basin divestitures after closing changes. This might cowl most of its DJ Basin acquisition value.

Sitio indicated that the acquired DJ Basin property averaged 2,609 BOEPD (41% oil) in This autumn 2023, producing asset stage money move of $8.6 million. The asset stage money move for the 12 months ending September 2024 was anticipated to be round $37.5 million. Primarily based on that quantity, I estimate that the DJ Basin property could common round 2,900 BOEPD in manufacturing for the 12 month interval ending September 2024.

Sitio additionally talked about that the acquired DJ Basin acreage has seen its manufacturing improve by 89% from December 2022 to December 2023. This huge quantity of current growth may even translate right into a excessive base decline charge. Because of this I imagine there may be solely round three to 4 years of stock left if manufacturing is maintained round 2,900 BOEPD.

Up to date 2024 Outlook

Sitio (on the midpoint of its steerage) expects to common 36,500 BOEPD (50% oil). That is roughly in-line with its This autumn 2023 manufacturing, professional forma for its acquisitions and divestitures. It additionally seems to be a number of p.c decrease than its proforma Q3 2023 manufacturing.

At present strip costs of roughly $81 WTI oil and $2.35 NYMEX gasoline in 2024, Sitio is now projected to generate $650 million in revenues after hedges.

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Sitio talked about that its money G&A has been going up because of a 25% improve in headcount since 2022 and investments in know-how.

Sitio is thus projected to generate $433 million in 2024 free money move at present strip costs or roughly $2.75 per share.

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Return Of Capital

Sitio is aiming to place 35+% of its discretionary money move in the direction of dividends, one other 30+% to a mixture of dividends and share repurchases (with its just lately approved $200 million share repurchase program). The remaining as much as 35% is allotted in the direction of debt discount and money acquisitions.

This might end in Sitio placing round $152 million in the direction of dividends, one other $130 million in the direction of dividends and/or share repurchases and $151 million in the direction of debt discount and/or money acquisitions.

If Sitio places all $151 million in the direction of debt discount, I estimate it would finish 2024 with round $845 million in web debt.

Sitio’s dividend could vary from roughly $0.97 per share (a quarterly dividend of a bit over $0.24 per share) to $1.79 per share (a quarterly dividend of slightly below $0.45 per share).

Valuation

I now estimate Sitio’s worth at roughly $27 per share, a lower of $1 from my final estimate. That is primarily based on long-term (after 2024) $75 WTI oil and $3.75 NYMEX gasoline. Whereas the DJ Basin acquisition seems to be constructive total, Sitio’s 2024 legacy manufacturing expectations had been decrease than I anticipated. I had beforehand thought that Sitio may find yourself with 2024 manufacturing barely larger than Q3 2023 ranges. It now expects its 2024 manufacturing to be a number of p.c decrease than its proforma Q3 2023 manufacturing.

As nicely, Sitio’s further debt from its DJ Basin acquisition could lead it to maintain its payout ratio at 65% throughout 2025. I beforehand anticipated Sitio rising its payout ratio throughout 2025.

Conclusion

Sitio’s DJ Basin acquisition helps its near-term free money move, however its legacy manufacturing could decline barely from Q3 2023 ranges. On account of the lowered manufacturing expectations, I now estimate Sitio’s worth at roughly $27 per share.

Sitio appears able to producing round $2.75 per share in free money move in 2024, however could solely put round 35% to 65% of that in the direction of dividends. Sitio may additionally repurchase shares, whereas it is usually placing cash in the direction of debt discount. On the present time, I’m now wanting in the direction of 2026 for a possible improve in Sitio’s payout ratio to round 80%.