Executive Summary / Key Takeaways

• Sitio Royalties operates a high-margin, non-cost bearing mineral and royalty model, generating significant free cash flow with LTM Adjusted EBITDA margins of 90%.
• Proprietary asset management technology and AI are key differentiators, enabling the recovery of millions in missing revenue and enhancing operational efficiency and scalability.
• A disciplined acquisition strategy, focused on high-return opportunities across premier basins, complements organic growth and benefits from E&P operator consolidation and efficiency gains.
• The company maintains a strong balance sheet with ample liquidity and is committed to returning substantial capital to shareholders through dividends and opportunistic share repurchases, targeting at least 65% of discretionary cash flow.
• Despite commodity price volatility and macro uncertainties, Sitio's diversified portfolio, high-quality operators, and efficient operations support a resilient outlook, with 2025 production guidance projecting modest growth.

The High-Margin Engine of the Energy Value Chain

Sitio Royalties Corp. ($STR) occupies a unique and advantageous position within the energy value chain. As an owner of mineral and royalty interests across some of the most prolific basins in the United States, including the Permian, Eagle Ford, DJ, and Williston, Sitio is entitled to a fixed percentage of the revenue generated from the production of oil, natural gas, and natural gas liquids (NGLs) on its acreage. Crucially, this model is largely non-cost bearing; unlike traditional exploration and production (E&P) companies, Sitio is not obligated to fund the significant capital expenditures associated with drilling, completion, or ongoing lease operating expenses. This fundamental difference translates directly into a high-margin business profile, a core tenet of the investment thesis.

The competitive landscape in the energy sector is multifaceted, encompassing large integrated players like Occidental Petroleum (OXY), major independent E&P companies such as APA Corporation (APA), Devon Energy Corp (DVN), and EOG Resources Inc (EOG), as well as other mineral and royalty aggregators. While E&P companies compete for acreage and production volumes, Sitio competes primarily in the acquisition of mineral rights and the efficient management of its existing portfolio. Compared to integrated E&P giants like OXY, Sitio operates on a vastly different scale, with a market capitalization significantly smaller than its multi-billion dollar peers. However, Sitio's specialized royalty model allows for superior operating margins. While E&P companies like OXY, APA, DVN, and EOG face operating expenses tied to production, Sitio's expenses are primarily general and administrative and production taxes. This is reflected in Sitio's LTM Adjusted EBITDA margin of 90%, significantly higher than the operating margins typically seen in E&P businesses (e.g., OXY TTM Operating Margin: 21%, APA TTM Operating Margin: 33%, DVN TTM Operating Margin: 23%, EOG TTM Operating Margin: 35%). This margin advantage underscores the inherent profitability of the royalty model.

Sitio's strategic positioning is further bolstered by its focus on high-quality assets developed by well-capitalized, efficient operators. The company's portfolio is intentionally built around the most active and capable players in the industry, many of whom are large public companies whose average market cap on Sitio's acreage has more than doubled since the end of 2022. This concentration with strong operators provides greater stability in development plans compared to smaller, less financially robust entities.

A Technological Edge in Asset Management

A key differentiator for Sitio Royalties is its investment in proprietary technology and data management systems. The company has developed custom-built asset management applications and utilizes AI models to process and analyze the vast amounts of revenue data received from operators. This technology allows Sitio to automatically process over 99% of incoming revenue check data, significantly reducing manual review and enhancing efficiency.

The tangible benefits of this technological edge are quantifiable and directly impact the bottom line. In 2024, Sitio captured $19 million in missing revenue payments identified through its systems, effectively offsetting over two-thirds of its cash general and administrative expenses for the year. Over the 12 months ending in the third quarter of 2024, this figure totaled approximately $25 million. This capability not only maximizes the value extracted from existing assets but also provides a scalable platform to seamlessly integrate additional acreage acquired through acquisitions, supporting cost-effective growth and maintaining high margins. This technological moat provides a competitive advantage over less sophisticated mineral owners or aggregators who may lack the systems to identify and recover such discrepancies.

Building Value Through Disciplined Acquisition and Portfolio Evolution

Sitio's history since its predecessor's formation in 2016 is marked by a consistent and disciplined approach to growth through acquisitions. By March 31, 2025, the company had completed 212 transactions, strategically accumulating mineral and royalty interests across premium basins. This strategy is not merely about increasing acreage but is guided by a strict underwriting process focused on achieving superior risk-adjusted rates of return, targeting unlevered IRRs in the mid to high teens and next 12 months cash flow yields exceeding 25% for its 2024 deals.

The company actively evaluates a robust pipeline of potential deals, screening hundreds of thousands of net royalty acres annually but executing only on a small percentage (e.g., acquired 4% of screened NRAs in 2024), demonstrating a high degree of selectivity. This disciplined approach ensures that acquisitions are accretive to key per-share metrics, such as production per debt-adjusted share, which has grown by over 50% (a 20% compounded annual growth rate) since Sitio became a public company in mid-2022.

The E&P industry's ongoing consolidation also benefits Sitio. As acreage transitions from smaller or less focused operators to larger, better-capitalized companies, development activity often accelerates or becomes more efficient. For instance, the acquisition of Oxy's Barilla Draw acreage by Permian Resources (PR) or Apache's acquisition of Callon Petroleum (CPE) assets, where Sitio holds interests, are expected to lead to improved operational performance and potentially faster development timelines, enhancing returns for Sitio. Operational efficiencies like longer laterals and innovative drilling techniques employed by these sophisticated operators further contribute to the value of Sitio's underlying mineral interests.

Financial Performance and Capital Allocation Strength

Sitio's financial performance reflects the advantages of its business model and strategic execution. For the three months ended March 31, 2025, total revenues increased by 8% year-over-year to $163.5 million. This growth was primarily driven by an 18% increase in production volumes, stemming from both recent acquisitions and existing interests. While average realized crude oil prices decreased by 8%, leading to a 6% decline in oil revenue, this was more than offset by significant increases in natural gas and NGLs revenue. Natural gas revenue surged by 182%, fueled by a 100% increase in the average realized price (benefiting from improved Permian pipeline capacity) and a 41% increase in production volumes. NGLs revenue also saw a substantial 51% increase, driven by both volume and price gains.

Operating expenses, while increasing in absolute terms (Total operating expenses up 5% to $106.2 million in Q1 2025), remained relatively low compared to revenue, contributing to a healthy income from operations of $57.3 million. The increase in depreciation, depletion, and amortization expense was primarily tied to higher production volumes, although the depletion rate decreased due to reserve additions and lower acquisition costs per BOE in 2024. General and administrative expenses increased due to higher employee compensation and share-based compensation, reflecting investments in the team and incentive programs.

Sitio maintains a strong balance sheet, a critical component of its strategy to weather commodity cycles and capitalize on acquisition opportunities. As of March 31, 2025, the company reported liquidity of $440.5 million, comprising $1.7 million in cash and $438.8 million available under its $925 million revolving credit facility. Total long-term debt stood at approximately $1.08 billion, including the revolving credit facility balance and $600 million in 2028 Senior Notes. The company remains in compliance with its debt covenants, and its adjusted net debt to free cash flow ratio is approximately half of its peer group average, indicating a conservative leverage profile.

A core pillar of Sitio's value proposition is its commitment to returning capital to shareholders. The company targets returning at least 65% of its discretionary cash flow through a combination of cash dividends and opportunistic share repurchases. For the first quarter of 2025, the Board declared a cash dividend of $0.35 per share. Sitio also actively utilizes its share repurchase program, authorized for $200 million in February 2024 and extended by an additional $300 million in May 2025, bringing the total authorization to $500 million with approximately $350 million remaining as of early May 2025. The company views repurchasing its stock as a compelling investment opportunity, akin to buying a long-term call option on commodity fundamentals in a high-margin business, often at valuations perceived as below intrinsic value. This balanced approach to capital allocation, retaining a higher percentage of DCF than peers for balance sheet strength and acquisitions while still offering a robust return of capital, is central to its strategy.

Outlook and Risk Considerations

Looking ahead, Sitio's outlook for 2025 is supported by visibility into operator activity on its acreage. The company's guidance for full-year 2025 projects average daily production just under 40,000 BOE per day at the midpoint, including 18,500 barrels per day of oil, representing a modest 3% increase over reported full-year 2024 production. This guidance is primarily underpinned by existing producing wells and wells that have already been spud or permitted, providing a degree of confidence in near-term volumes. Management expects activity levels to remain consistent with the prior year, although they are monitoring the impact of recent commodity price movements and plan to revisit guidance later in the year as more data becomes available. The outlook for cash taxes in 2025 is estimated at $23 million at the midpoint, updated to reflect lower anticipated commodity prices.

Despite the positive outlook, Sitio is exposed to several key risks inherent in the energy sector. Commodity price volatility remains a primary concern, directly impacting royalty revenues. While the non-cost bearing model offers some insulation from operational cost inflation, revenue is directly tied to realized prices. Changes in regulatory environments, particularly in basins like the DJ where state-level rules are evolving, could impact operator activity and development timelines on Sitio's acreage. Geopolitical events and broader macroeconomic conditions can also influence global energy demand and prices. Counterparty risk exists with both derivative counterparties and the EP operators who pay royalties, though Sitio mitigates this by focusing on high-credit-quality entities.

Conclusion

Sitio Royalties presents a compelling investment case built on the inherent advantages of the mineral and royalty model. Its high-margin, non-cost bearing structure provides significant free cash flow generation capabilities. The company leverages proprietary technology to enhance operational efficiency and maximize revenue capture, creating a scalable platform for future growth. A disciplined and opportunistic acquisition strategy, coupled with the benefits derived from E&P operator consolidation and efficiency gains, fuels per-share value creation. Supported by a strong balance sheet and a clear commitment to returning substantial capital to shareholders, Sitio is well-positioned to navigate the dynamic energy market. While exposed to commodity price and regulatory risks, the company's diversified portfolio, focus on high-quality operators, and operational efficiencies underpin a resilient business model capable of delivering value through cycles.