On Wednesday, Barclays (LON:BARC) initiated coverage on Sitio Royalties Corp (NASDAQ:NYSE:STR) with an Underweight rating, setting a price target of $26.00. The firm acknowledges Sitio Royalties as a high-quality diversified mineral company but points out that the distribution yield is not sufficiently attractive compared to Exploration & Production (E&P) companies.
Sitio Royalties offers investors an opportunity to invest in the energy sector without the risks associated with cost inflation and greenhouse gas emissions. The company boasts high EBITDA margins and is not burdened by operating costs, development capital expenditures, or abandonment liabilities.
Despite these advantages, Barclays notes that mineral companies like Sitio Royalties lack control over the timing and pace of development. The firm suggests that this risk can be mitigated by owning minerals in the most economically viable resource areas and partnering with Tier 1 operators.
Sitio Royalties owns 33,170 net royalty acres across prime regions such as the Permian, Denver-Julesburg (DJ), Eagle Ford (NYSE:F), and Williston basins, with the Permian Basin being a key area for long-term growth.
However, Barclays expresses concern over the reduced organic activity visibility on Sitio Royalties' assets, citing a decline in the US rig count in 2023, including in the Permian Basin.
The firm points out that the number of rigs on Sitio Royalties' mineral acreage at year-end was lower than the previous year. Adjusting for the DJ acquisition with an effective date of October 2023 and considering the production of 2.6 million barrels of oil equivalent per day, the 2024 volume forecast would have shown a slight decrease despite acquisitions in the Permian last year.
Barclays predicts that while total volumes may increase due to gas and natural gas liquids (NGL) production, Sitio Royalties' oil production will likely remain flat at 17.6-17.8 million barrels per day over the next three years, falling below consensus estimates. The firm also compares Sitio Royalties' cash return yield with its E&P peers, noting that Sitio Royalties' projected 7.2% cash return yield for 2024 and 2025 does not stand out, especially given the greater uncertainty around production and cash flow outcomes.
Lastly, Barclays highlights Sitio Royalties' above-average leverage, which could restrict the company's ability to engage in cash-heavy deals until its debt levels become more manageable. The $26 price target reflects a targeted multiple based on a 6.75% expected cash payout yield for 2025, which includes a 50 basis points premium over Viper Energy Partners (NASDAQ:VNOM).
InvestingPro Insights
In light of Barclays' assessment of Sitio Royalties Corp (NASDAQ:STR), it is pertinent to consider additional financial metrics and analyst insights that can provide a more comprehensive understanding of the company's performance and potential. According to InvestingPro data, Sitio Royalties has a market capitalization of $4.07 billion and has demonstrated a substantial revenue growth of 60.53% over the last twelve months as of Q1 2023. This growth is reflective of the company's strategic acquisitions and asset quality.
Despite the company not being profitable over the last twelve months, with a negative P/E ratio of -114.57, analysts are optimistic about Sitio Royalties' future. Two analysts have revised their earnings upwards for the upcoming period, indicating a potential turnaround in profitability. Moreover, the company's strong dividend yield of 7.99% is noteworthy for income-focused investors, especially since it pays a significant dividend to shareholders, as highlighted by one of the InvestingPro Tips.
For investors seeking more detailed analysis and additional insights, there are 11 more InvestingPro Tips available for Sitio Royalties on InvestingPro. To access these tips and a wealth of other financial information, consider subscribing to InvestingPro. Use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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