Sitio Royalties Hits Unusual M&A Wall in Q1

Despite a desire to grow larger in the Lower 48, Sitio Royalties Corp. chose not to execute on M&A in the first quarter.

Sitio evaluated multiple acquisition opportunities totaling about 50,000 net royalty acres in all during the first quarter, CEO Chris Conoscenti said. But the company was unable to find any opportunities that met Sitio’s returns criteria, he said.

“Buyers and sellers are still transacting, but at different underwriting assumptions and returns thresholds than Sitio’s,” Conoscenti said on a May 10 earnings call.

The dealmaking slowdown in the first quarter represented the first time in two years that Sitio and its predecessors did not announce or close any acquisitions during a quarter.

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Balking on bid-ask

Sitio is seeing wider bid-ask spreads on potential deals so far in 2023 compared to previous years. Citing one recent transaction between a private buyer and a private seller, Conoscenti said the market clearing price was about two times the price that Sitio could have paid using its return parameters.

The only way Sitio could have justified paying that same purchase price would have been to assume a near-term production profile of 4x to 5x the company’s base case production assumptions—or for oil prices to average about $140/bbl in perpetuity, he said.

“It feels like we’re in a period here where it’s going to be a bit more challenging to reach a bid-ask that makes sense for our shareholders,” Conoscenti said.

The bulk of the potential deals Sitio evaluated in the first quarter were located in the Permian Basin, but the company also looked at opportunities in the Denver-Julesburg Basin (D-J Basin).

Sitio has a better grasp on underwriting deals in the Permian and the D-J than other basins, and that’s where the company believes most of the remaining economic inventory is located today.

“For us, acquiring these minerals and not having to deploy additional capital for additional production in the future, there's the greatest potential for that in the Permian Basin and the D-J Basin relative to some of these other places,” Conoscenti said.

Instead of pursuing M&A, Sitio prioritized reducing its long-term debt load by $33.7 million over the first quarter.

Sitio had total debts of $868.5 million as of May 5, down from $914.5 million at the end of March.

The Sitio board of directors also declared a first-quarter cash dividend of $0.50 per share, down slightly from the company’s $0.60/share dividend in the previous quarter.

Production associated with Sitio’s assets in the first quarter averaged 34,440 boe/d, compared to 34,424 boe/d in fourth-quarter 2022 on a pro forma basis.

Sitio closed its $4.8 billion merger with Brigham Minerals Inc. on Dec. 29, 2022. The deal expanded the company’s footprint in the Permian’s Delaware and Midland basins, the Oklahoma SCOOP and STACK plays, the D-J Basin and the Williston Basin.

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