Sitio Royalties Stock Downgraded Due to Leverage, KeyBanc

Source: Investing Published 10/16/2024, 10:23

KeyBanc Capital Markets on Wednesday revised its stance on Sitio Royalties Corp (NYSE:STR), downgrading the stock from “higher weight” to “Sector Weight.” The firm also decided to remove its previous $27 price target on the company’s shares. The move comes after an assessment of Sitio Royalties’ current financial position and market performance.

The KeyBanc analyst noted that Sitio Royalties now appears to be a less attractive investment option compared to its peers. The company has a leverage ratio of 1.7x and offers a trailing twelve-month (NTM) dividend yield of 4.7%. This yield assumes that 30% of the company’s cash returns will come in the form of share repurchases.

Sitio Royalties’ leverage and stock market performance so far this year have been highlighted as a concern by KeyBanc. Despite the outperformance on the month-to-date (MTD) calendar, the overall year-to-date (YTD) results have been disappointing. According to the analyst, these factors reduce the company’s ability to compete effectively on large asset classes, especially against growth-oriented peers in the industry.

The downgrade reflects a revisionist view of the company’s potential to generate shareholder value under current market conditions. The removal of the price target signals a reassessment of the company’s future earnings outlook and growth prospects. Investors will likely continue to monitor Sitio Royalties’ stock performance and financial metrics following these changes.

In other recent news, Sitio Royalties Corp. reported strong growth in its second quarter of 2024 results, with record oil production and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $151.6 million. The company also reported a significant 45% increase in return on equity per share compared to the previous quarter. Additionally, Sitio Royalties successfully closed six acquisitions totaling $38.5 million, adding over 2,100 acres of net royalties to its portfolio.

However, KeyBanc revised its outlook on Sitio Royalties, lowering its price target to $27 from $29 previously, while maintaining an “higher weight” rating. This decision came after a detailed review of Sitio’s second-quarter earnings report and updates.

KeyBanc cited concerns such as interest expense, which was $6.36 per barrel of oil equivalent in the second quarter, negatively impacting unit margins and free cash flow generation.

In terms of future expectations, Sitio Royalties raised its full-year production forecast to 36,000 to 38,000 barrels of oil equivalent per day and lowered its cash tax forecast to $9 million to $15 million. The company also repurchased 3.1 million shares, committing to returning at least 65% of its estimated cash flow to shareholders.

These latest developments point to Sitio Royalties’ continued growth trajectory and its commitment to strategic acquisitions in a competitive market.

InvestingPro Insights

To complement KeyBanc’s analysis, recent data from InvestingPro provides additional context on Sitio Royalties Corp.’s financial position. The company has a market cap of $3.56 billion, with revenue of $626 million for the past twelve months through Q2 2024. Notably, Sitio has shown strong revenue growth, up 24.52% over the same period.

InvestingPro’s advice highlights that Sitio Royalties operates with a moderate level of debt and that its liquid assets exceed its short-term liabilities.

which could provide some financial flexibility despite KeyBanc’s concerns about leverage. Additionally, the stock is generally trading with low price volatility, which could appeal to some investors looking for stability.

However, in line with KeyBanc’s cautious stance, InvestingPro data shows that Sitio has not been profitable over the past 12 months, with a negative P/E ratio of -104.42. This is in line with analysts’ expectations that the company will be profitable this year.

as noted in another InvestingPro tip.

The current dividend yield of 5.19% is higher than KeyBanc’s reported NTM dividend yield.

which could make it an attractive option for income-focused investors. However, it’s worth noting that dividend growth has declined by 40% over the past 12 months.

For investors looking for a more comprehensive analysis.

InvestingPro offers 5 additional tips that can provide further insight into Sitio Royalties’ investment potential.

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