STR Sub Inc. - Quarter Report: 2022 September (Form 10-Q)

ROC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38158

Sitio Royalties Corp.

(Exact Name of Registrant as Specified in its Charter)


Delaware	82-0820780
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1401 Lawrence Street, Suite 1750 Denver, CO	80202
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (720) 640-7620

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.0001 per share	STR	New York Stock Exchange
Warrants to purchase Class A common stock	STR WS	NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 3, 2022, there were 12,706,082 shares of the registrant’s Class A Common Stock, par value $0.0001 per share, issued and outstanding and there were 71,134,752 shares of the registrant’s Class C Common Stock, par value $0.0001 per share, issued and outstanding.

Table of Contents


		Page
	Glossary of Terms	1
PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Equity	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54

PART II.	OTHER INFORMATION	54

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 6.	Exhibits	58
Signatures		60

Glossary of Terms

The following are abbreviations and definitions of certain terms used in this document, which are commonly used in the crude oil and natural gas industry:

ABR or Alternate Base Rate. A fluctuating borrowing rate per annum equal to the greatest of (a) the Prime Rate in effect on such day as publicly announced from time to time by the Administrative Agent, (b) the Federal Funds Rate in effect on such day plus one half of 1.0% and (c) Term SOFR plus 1.00% and (d) 1.00%.

Barrel or bbl. Stock tank barrel, or 42 U.S. gallons liquid volume, used in this quarterly report in reference to crude oil or other liquid hydrocarbons.

Basin. A large natural depression on the earth’s surface in which sediments generally brought by water accumulate.

Bbl/d. Bbl per day.

Board. The Sitio Royalties Corp. Board of Directors.

BOE. One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of crude oil. This is an energy content correlation and does not reflect a value or price relationship between the commodities.

BOE/d. BOE per day.

British Thermal Unit or Btu. The quantity of heat required to raise the temperature of one pound of water by one-degree Fahrenheit.

Completion. The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.

Crude oil. Liquid hydrocarbons retrieved from geological structures underground to be refined into fuel sources.

Development costs. Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing crude oil, natural gas and NGLs. For a complete definition of development costs, refer to the SEC’s Regulation S-X, Rule 4-10(a)(7).

Development project. The means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.

Differential. An adjustment to the price of crude oil, natural gas or natural gas liquids from an established spot market price to reflect differences in the quality and/or location of crude oil or natural gas.

Drilled but uncompleted well or DUC. A well that an operator has spud but has not yet begun hydraulic fracturing or
completion operations.

Dry hole. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Economically producible. The term economically producible, as it relates to a resource, means a resource that generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. For a complete definition of economically producible, refer to the SEC’s Regulation S-X, Rule 4-10(a)(10).

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations. For a complete definition of field, refer to the SEC’s Regulation S-X, Rule 4-10(a)(15).

Formation. A layer of rock that has distinct characteristics that differs from nearby rock.

GAAP. Generally accepted accounting principles in the United States.

Gross acres or gross wells. The total acres or wells, as the case may be, in which a mineral or royalty interest is owned.

Horizontal drilling. A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle within a specified interval.

MBbl. Thousand barrels of crude oil or other liquid hydrocarbons.

MBOE. One thousand BOE.

Mcf. One thousand cubic feet of natural gas.

Mcf/d. Mcf per day.

MMBtu. One million British thermal units.

MMcf. One million cubic feet of natural gas.

Natural Gas Liquids or NGLs. Hydrocarbons found in natural gas that may be extracted as liquefied petroleum gas and natural gasoline.

Net revenue interest. The net royalty, overriding royalty, production payment and net profits interests in a particular tract or well.

Net royalty acres or NRAs. Mineral ownership standardized to a 12.5%, or 1/8th, royalty interest.

Net wells. The number of wells net to our mineral and royalty interests. A net well is deemed to exist when the sum of fractional mineral and royalty interest in gross wells equals one. The number of net wells is the sum of the fractional mineral and royalty interests in gross wells.

Operator. The individual or company responsible for the development and/or production of a crude oil or natural gas well or lease.

Overriding Royalty Interests or ORRIs. Royalty interests that burden working interests and represent the right to receive a fixed percentage of production or revenue from production (free of operating costs) from a lease. Overriding royalty interests remain in effect until the associated leases expire.

Play. A geographic area with hydrocarbon potential.

Production costs. Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating expenses of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. For a complete definition of production costs, refer to the SEC’s Regulation S-X, Rule 4-10(a)(20).

Prospect. A specific geographic area that, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved reserves. Those quantities of crude oil, natural gas and NGLs that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the E&P operator must be reasonably certain that it will commence the project within a reasonable time. For a complete definition of proved crude oil and natural gas reserves, refer to the SEC’s Regulation S-X, Rule 4-10(a)(22).

Proved undeveloped reserves or PUDs. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that such locations are scheduled to be drilled within five years, unless specific circumstances justify a longer time.

Realized price. The cash market price less all expected quality, transportation and demand adjustments.

Reasonable certainty. A high degree of confidence that quantities will be recovered. For a complete definition of reasonable certainty, refer to the SEC’s Regulation S-X, Rule 4-10(a)(24).

Reserves. Estimated remaining quantities of crude oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering crude oil and natural gas or related substances to market and all permits and financing required to implement the project. Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Resources. Quantities of crude oil, natural gas and NGLs estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.

Royalty. An interest in a crude oil and natural gas lease that gives the owner the right to receive a portion of the production from the leased acreage (or of the proceeds from the sale thereof), but does not require the owner to pay any portion of the production or development costs on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

SEC. U.S. Securities and Exchange Commission.

SOFR or Term SOFR Rate. A borrowing rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York.

Spot market price. The cash market price without reduction for expected quality, transportation and demand adjustments.

Standardized measure. Discounted future net cash flows estimated by applying year end prices to the estimated future production of year-end proved reserves. Future cash inflows are reduced by estimated future production and development costs based on period-end costs to determine pre-tax cash inflows. Future income taxes, if applicable, are computed by applying the statutory tax rate to the excess of pre-tax cash inflows over our tax basis in the crude oil, natural gas and NGL properties. Future net cash inflows after income taxes are discounted using a 10% annual discount rate.

Unit. The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.

Working interest. The right granted to the lessee of a property to develop, produce and own crude oil, natural gas, NGLs or other minerals. The working interest owners bear the exploration, development and operating expenses on either a cash, penalty or carried basis.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Sitio Royalties Corp.

Condensed Consolidated Balance Sheets

(In thousands, except par and share amounts)


	September 30,			December 31,
	2022			2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	10,812		$	12,379
Accrued revenue and accounts receivable, net		83,514			36,202
Prepaid assets		1,297			235
Derivative asset		22,531			—
Total current assets		118,154			48,816

Property and equipment
Oil and natural gas properties, successful efforts method:
Unproved properties		1,473,142			817,873
Proved properties		1,042,257			447,369
Other property and equipment		3,201			8,187
Accumulated depreciation, depletion and amortization		(186,004	)		(121,536	)
Net oil and gas properties and other property and equipment		2,332,596			1,151,893

Other long-term assets
Long-term derivative asset		28,888			—
Deferred financing costs		6,131			2,145
Other long-term assets		648			—
Total long-term assets		35,667			2,145

TOTAL ASSETS	$	2,486,417		$	1,202,854

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and accrued expenses	$	15,877		$	4,140
Due to affiliates		—			442
Warrant liability		2,770			—
Derivative liability		150			—
Total current liabilities		18,797			4,582

Long-term liabilities
Long-term debt		666,834			134,000
Deferred tax liability		4,782			—
Deferred rent		1,138			1,129
Total long-term liabilities		672,754			135,129

Total liabilities		691,551			139,711

Commitments and contingencies (see Note 15)

Temporary equity		1,573,201			—
Equity
Class A Common Stock, par value $0.0001 per share; 240,000,000 shares authorized; 12,706,082 and 0 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		1			—
Class C Common Stock, par value $0.0001 per share; 120,000,000 shares authorized; 71,134,752 and 0 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		7			—
Additional paid-in capital		221,819			—
Accumulated deficit		(162	)		—
Partners’ Capital		—			560,622
Noncontrolling interests		—			502,521
Total equity		221,665			1,063,143

TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY	$	2,486,417		$	1,202,854

The accompanying notes are an integral part of these condensed consolidated financial statements.

Sitio Royalties Corp.

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue:
Oil, natural gas and natural gas liquids revenues	$	108,761		$	33,152		$	260,219		$	69,221
Lease bonus and other income		6,736			557			9,445			1,207
Total revenues		115,497			33,709			269,664			70,428

Operating expenses:
Management fees to affiliates		—			1,870			3,241			5,610
Depreciation, depletion and amortization		32,005			12,813			67,302			28,614
General and administrative		13,381			954			24,043			2,232
General and administrative - affiliates		—			1,686			74			4,903
Severance and ad valorem taxes		7,215			2,192			18,019			4,766
Total operating expenses		52,601			19,515			112,679			46,125

Net income from operations		62,896			14,194			156,985			24,303

Other income (expense):
Interest expense, net		(14,986	)		(276	)		(18,096	)		(800	)
Change in fair value of warrant liability		536			—			3,842			—
Loss on extinguishment of debt		(11,487	)		—			(11,487	)		—
Commodity derivatives gains		34,613			—			53,508			—
Income before income tax expense		71,572			13,918			184,752			23,503

Income tax expense		(2,561	)		(143	)		(5,206	)		(233	)

Net income		69,011			13,775			179,546			23,270
Net income attributable to Predecessor		—			(13,775	)		(78,104	)		(23,270	)
Net income attributable to temporary equity		(59,872	)		—			(86,143	)		—
Net income attributable to Class A stockholders	$	9,139		$	—		$	15,299		$	—

Net income per Class A common share
Basic	$	0.70			—		$	1.19			—
Diluted	$	0.70			—		$	1.19			—

Weighted average Class A common shares outstanding
Basic		12,703			—			12,665			—
Diluted		12,703			—			12,665			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

Sitio Royalties Corp.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net income	$	179,546		$	23,270
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		67,302			28,614
Amortization and write off of deferred financing costs and long-term debt discount		5,419			247
Share-based compensation		4,947			—
Change in fair value of warrant liability		(3,842	)		—
Loss on extinguishment of debt		11,487			—
Commodity derivative gains		(53,508	)		—
Net cash received for derivative settlements		2,239			—
Deferred tax expense		2,645			—
Change in operating assets and liabilities:
Accrued revenue and accounts receivable, net		(29,785	)		(13,606	)
Other prepaid assets		(1,903	)		(187	)
Other long-term assets		(115	)		—
Accrued expenses and other liabilities		(12,986	)		451
Due to affiliates		(380	)		1,810
Other long-term liabilities		9			(36	)
Net cash provided by operating activities		171,075			40,563

Cash flows from investing activities:
Acquisition of Falcon, net of cash		4,484			—
Predecessor cash not contributed in the Falcon Merger		(15,229	)		—
Purchases of oil and gas properties		(558,062	)		(26,834	)
Proceeds from sales of oil and gas properties		—			(103	)
Purchases of other property and equipment		(819	)		—
Net cash used in investing activities		(569,626	)		(26,937	)

Cash flows from financing activities:
Borrowings on Revolving Credit Facility		196,895			20,000
Repayments on Revolving Credit Facility		(147,000	)		(41,600	)
Borrowings on Bridge Loan Facility		425,000			—
Repayments on Bridge Loan Facility		(425,000	)		—
Bridge Loan Facility issuance costs		(14,909	)		—
Borrowings on 2026 Senior Notes		444,500			—
2026 Senior Notes issuance costs		(4,169	)		—
Issuance of equity in consolidated subsidiary		—			1,467
Capital contributions		—			8,000
Distributions to noncontrolling interests		(13,318	)		—
Dividends paid to Class A stockholders		(9,017	)		—
Distribution paid to Temporary Equity		(50,510	)		—
Dividend equivalent rights paid		(283	)		—
Payments of deferred financing costs		(3,964	)		(195	)
Deferred initial public offering costs		(61	)		(179	)
Other		(1,180	)		—
Net cash provided by (used) in financing activities		396,984			(12,507	)

Net change in cash and cash equivalents		(1,567	)		1,119
Cash and cash equivalents, beginning of year		12,379			7,531
Cash and cash equivalents, end of period	$	10,812		$	8,650

Supplemental disclosure of non-cash transactions:
Increase (decrease) in current liabilities for additions to property and equipment:	$	(163	)	$	909
Oil and gas properties acquired through issuance of Class C Common Stock and common units in consolidated subsidiary:		692,197			—
Oil and gas properties acquired through issuance of equity in consolidated subsidiary:		—			571,166
Oil and gas properties acquired through deemed distribution in connection with common control transaction:		—			37,459
Temporary equity cumulative adjustment to redemption value:		153,086			—

Supplemental disclosure of cash flow information:
Cash paid for income taxes:	$	1,866		$	32
Cash paid for interest expense:		13,389			634

The accompanying notes are an integral part of these condensed consolidated financial statements.

Sitio Royalties Corp.

Condensed Consolidated Statements of Equity

(In thousands, except per share amounts)

(Unaudited)


	Predecessor Equity					Stockholders’ Equity
						Class A				Class C
						Common Stock				Common Stock
				Non-										Additional
	Partners’ Capital			controlling interests		Shares		Amount		Shares		Amount		Paid-in Capital		Accumulated Deficit		Total Equity

Balance at January 1, 2021	$	562,397		$	—		—	$	—		—	$	—	$	—	$	—	$	562,397

Net income		4,476			—		—		—		—		—		—		—		4,476

Balance at March 31, 2021	$	566,873		$	—		—	$	—		—	$	—	$	—	$	—	$	566,873

Issuance of equity by consolidated subsidiary	$	59,237		$	261,453		—	$	—		—	$	—	$	—	$	—	$	320,690

Excess of consideration paid over the carrying value of oil and gas properties purchased from entity under common control		(37,459	)		37,459		—		—		—		—		—		—		—

Net income		4,991			28		—		—		—		—		—		—		5,019

Balance at June 30, 2021	$	593,642		$	298,940		—	$	—		—	$	—	$	—	$	—	$	892,582

Capital contributions	$	8,000		$	—		—	$	—		—	$	—	$	—	$	—	$	8,000

Issuance of equity by consolidated subsidiary		6,625			245,317		—		—		—		—		—		—		251,942

Net income		7,561			6,214		—		—		—		—		—		—		13,775

Balance at September 30, 2021	$	615,828		$	550,471		—	$	—		—	$	—	$	—	$	—	$	1,166,299

Sitio Royalties Corp.

Condensed Consolidated Statements of Equity (Continued)

(In thousands, except per share amounts)

(Unaudited)


	Predecessor Equity						Stockholders’ Equity
							Class A				Class C
							Common Stock				Common Stock
				Non-												Additional
	Partners’ Capital			controlling interests			Shares		Amount		Shares			Amount		Paid-in Capital			Accumulated Deficit			Total Equity
Balance at January 1, 2022	$	560,622		$	502,521			—	$	—		—		$	—	$	—		$	—		$	1,063,143

Net income		19,280			19,242			—		—		—			—		—			—			38,522

Balance at March 31, 2022	$	579,902		$	521,763			—	$	—		—		$	—	$	—		$	—		$	1,101,665

Capital distribution	$	—		$	(13,318	)		—	$	—		—		$	—	$	—		$	—		$	(13,318	)

Net income attributable to Predecessor from April 1, 2022 through June 6, 2022		20,213			19,369			—		—		—			—		—			—			39,582

Balance prior to Falcon Merger	$	600,115		$	527,814			—	$	—		—		$	—	$	—		$	—		$	1,127,929

Falcon Merger Transaction (effected for 1-for-4 reverse stock split)	$	(600,115	)	$	(527,814	)		12,089	$	1		71,752		$	7	$	352,019		$	—		$	(775,902	)

Share-based compensation		—			—			—		—		—			—		830			—			830

Conversion of Class C Common Stock to Class A Common Stock		—			—			612		—		(612	)		—		11,909			—			11,909

Net income attributable to stockholders from June 7, 2022 through June 30, 2022		—			—			—		—		—			—		—			6,160			6,160

Adjustment of temporary equity to redemption amount		—			—			—		—		—			—		(248,208	)		(6,160	)		(254,368	)

Balance at June 30, 2022	$	—		$	—			12,701	$	1		71,140		$	7	$	116,550		$	—		$	116,558

Net income attributable to stockholders	$	—		$	—			—	$	—		—		$	—	$	—		$	9,139		$	9,139

Share-based compensation		—			—			—		—		—			—		3,401			—			3,401

Conversion of Class C Common Stock to Class A Common Stock		—			—			5		—		(5	)		—		124			—			124

Deferred tax asset arising from conversion of shares of Class C Common Stock to Class A Common Stock		—			—			—		—		—			—		462			—			462

Dividend equivalent rights paid		—			—			—		—		—			—		—			(284	)		(284	)

Dividends to Class A stockholders ($0.71 per share)		—			—			—		—		—			—		—			(9,017	)		(9,017	)

Adjustment of temporary equity to redemption amount		—			—			—		—		—			—		101,282			—			101,282

Balance at September 30, 2022	$	—		$	—			12,706	$	1		71,135		$	7	$	221,819		$	(162	)	$	221,665

The accompanying notes are an integral part of these condensed consolidated financial statements.

Sitio Royalties Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Description of Business

Sitio Royalties Corp. (together with its wholly owned subsidiaries, the “Company” or “Sitio”) was incorporated in Delaware. The Company is focused on large-scale consolidation of high-quality oil and gas mineral and royalty interests across premium basins. The Company’s portfolio is comprised of mineral and royalty interests in the Permian Basin in West Texas and southeastern New Mexico, the Eagle Ford Shale in South Texas, and the Appalachian Basin in Pennsylvania, Ohio and West Virginia.

Falcon Reverse Merger Transaction

On June 7, 2022 (the “Closing Date”), the Company, consummated the previously announced merger transactions contemplated by the Agreement and Plan of Merger, dated as of January 11, 2022 (the “Falcon Reverse Merger Agreement”), by and among the Company, Sitio Royalties Operating Partnership, LP, a Delaware limited partnership (formerly known as Falcon Minerals Operating Partnership, LP) (“Sitio OpCo”), Ferrari Merger Sub A LLC, a Delaware limited liability company (“Falcon Merger Sub”), and DPM HoldCo, LLC, a Delaware limited liability company (“Desert Peak”), pursuant to which Falcon Merger Sub merged with and into Desert Peak (the “Falcon Merger”), with Desert Peak continuing as the surviving entity in the Falcon Merger as a wholly owned subsidiary of Sitio OpCo.

Prior to the effective time of the Falcon Merger (the “Falcon Merger Effective Time”), on June 3, 2022, the Company filed with the Secretary of State of the State of Delaware the Third Amended and Restated Certificate of Incorporation to effect the previously announced four-to-one reverse stock split (the “Reverse Stock Split”) for all of the Company’s issued and outstanding shares of common stock and outstanding equity awards. As a result of the Reverse Stock Split, every four shares of the Company’s issued and outstanding Class C Common Stock, par value $0.0001 per share (“Class C Common Stock”), were automatically converted into one share of Class C Common Stock, without any change in the par value per share, and every four shares of the Company’s Class A Common Stock, par value $0.0001 per share (“Class A Common Stock” and, together with the Class C Common Stock, the “Common Stock”) were automatically converted into one share of Class A Common Stock, without any change in the par value per share. No fractional shares were outstanding following the Reverse Stock Split. In lieu of any fractional share, any holder of Class C Common Stock who would have otherwise received less than one share of Class C Common Stock received cash equal to the fair value of such holder’s fractional share as determined by the Board. In lieu of any fractional share of Class A Common Stock, the transfer agent for the Class A Common Stock, as exchange agent, aggregated and sold all fractional interests and paid to stockholders that would have been entitled to such fractional shares their pro rata share of the net proceeds derived from the sale of such fractional interests. Additionally, as a result of the Reverse Stock Split, the Company’s outstanding warrants (the “Warrants”) were adjusted such that four whole Warrants became exercisable for one share of Class A Common Stock at an exercise price of $44.84 per share of Class A Common Stock.

Pursuant to the terms of the Falcon Reverse Merger Agreement, at the Falcon Merger Effective Time and following effectiveness of the Reverse Stock Split, the limited liability company interests in Desert Peak issued and outstanding immediately prior to the Falcon Merger Effective Time were converted into the right to receive an aggregate of (a) 61,905,339 shares of Class C Common Stock and (b) 61,905,339 common units representing limited partner interests in Sitio OpCo (the “Sitio OpCo Partnership Units”) (the total amount under clauses (a) and (b), the “Falcon Merger Consideration”).

The Company’s stockholders immediately prior to the closing of the Falcon Merger continued to hold their shares of Class A Common Stock immediately after the closing of the Falcon Merger, subject to the Reverse Stock Split. As a result of the Falcon Merger, immediately following the Closing, (a) Chambers DPM HoldCo, LLC, a Delaware limited liability company (“Chambers”), and KMF DPM HoldCo, LLC, a Delaware limited liability company (“KMF” and, together with Chambers, “Kimmeridge”), together own approximately 43.5% of the issued and outstanding Common Stock, (b) Source Energy Leasehold, LP, a Delaware limited partnership (“Source”), and Permian Mineral Acquisitions, LP, a Delaware limited partnership (“Permian” and, together with Source, the “Source Stockholders”), together own approximately 15.4% of the issued and outstanding Common Stock, (c) Rock Ridge Royalty Company, LLC, a Delaware limited liability company (“Rock Ridge”), and Royal Resources L.P., a Delaware limited partnership (“Royal Resources” and, together with Rock Ridge, “Blackstone”), together own approximately 25.0% of the issued and outstanding Common Stock and (d) the Company’s remaining stockholders own approximately 16.1% of the issued and outstanding Common Stock. Following the Falcon Merger and the Reverse Stock Split, there were 12,088,546 shares of Class A Common Stock outstanding, 71,752,285 shares of Class C Common Stock outstanding and 5,312,499 shares of Class A Common Stock issuable upon exercise of outstanding Warrants. There was no change to the number of authorized shares of Common Stock.

Shortly prior to the Closing Date, the Company changed its name from “Falcon Minerals Corporation” to “Sitio Royalties Corp.”

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC applicable to interim financial information.

These unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. Accordingly, the accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 2021, 2020, and 2019 of the Predecessor included in the Current Report on Form 8-K filed with the SEC on June 10, 2022. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of September 30, 2022 and December 31, 2021, its results of operations for the three and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2022. The company operates in one segment: oil and gas mineral and royalty interests. The Company has no items of other comprehensive income or loss; therefore, its net income or loss is equal to its comprehensive income or loss. Certain prior period amounts have been reclassified to conform to the current period presentation.

Prior to the closing of the Falcon Merger, the Company’s financial statements that were filed with the SEC were derived from the accounting records of Falcon Minerals Corporation. The Falcon Merger was accounted for as a reverse merger and a business combination for accounting purposes using the acquisition method of accounting with Desert Peak as the accounting acquirer. As such, the historical consolidated financial statements included in this report are based on the financial statements of Desert Peak’s predecessor, Kimmeridge Mineral Fund, LP (“KMF” or the “Predecessor”), prior to our corporate reorganization. Prior the Falcon Merger, Desert Peak was consolidated into the results of KMF. KMF’s surface rights, which generate revenue from the sale of water, payments for rights-of-way and other rights associated with the ownership of the surface acreage, are included in our historical financial statements. The assets contributed by KMF in the Falcon Merger did not include KMF’s surface rights. See “Note 6 – Acquisitions” for additional information. The condensed consolidated financial statements included in this report reflect the historical operating results of KMF prior to June 7, 2022 and the consolidated results of the Company following June 7, 2022. The balance sheet reflects the assets and liabilities of the Company, which include the assets and liabilities of KMF Land, LLC (a subsidiary of the Predecessor) (“KMF Land”) at their historical costs and the assets and liabilities of Falcon Mineral Corporation measured at fair value as of June 7, 2022. Earnings per share is calculated based on the consolidated results of the Company for the period June 7, 2022 through September 30, 2022. Subsequent to the Falcon Merger, the Company has acquired additional surface rights in connection with multiple acquisitions. The results of each subsequent acquisition are included in the combined company results for the period following the consummation of such acquisition.

Except as otherwise indicated or required by the context, all references in this quarterly report to the “Company,” “Sitio,” “we,” “us,” “our” or similar terms refer to (i) for periods prior to the closing of the Falcon Merger, Desert Peak and its subsidiaries and (ii) for periods subsequent to the closing of the Falcon Merger, Sitio Royalties Corp. and its subsidiaries, including Desert Peak. All references in this Quarterly Report on Form 10-Q to “Falcon” refer to Sitio Royalties Corp. and its subsidiaries for periods prior to the Falcon Merger.

JOBS Act

The Company is an “emerging growth company” (“EGC”) as defined by the JOBS Act. The JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of this exemption and, as a result, its financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that the Company can elect to opt out of the extended transition period at any time, which election is irrevocable. The Company will lose its status as an EGC on December 31, 2022, which is the fiscal year following the fifth anniversary of the date of Falcon’s initial public offering.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries and any entities in which the Company owns a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation. Noncontrolling interests in the Company’s condensed consolidated financial statements represented the ownership interests in a subsidiary of the Predecessor which were owned by outside parties. Noncontrolling interests in consolidated subsidiaries was included as a component of equity in the Company’s condensed consolidated balance sheets. As a result of the Falcon Merger, the Company no longer has noncontrolling interests.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The Company’s estimates and classification of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering, and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon several variable factors and assumptions. These factors and assumptions include historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future oil and natural gas prices. For these reasons, estimates of the economically recoverable quantities of expected oil and natural gas and estimates of the future net cash flows may vary substantially.

Any significant variance in the assumptions could materially affect the estimated quantity of reserves, which could affect the carrying value of the Company’s oil and natural gas properties and/or the rate of depletion related to oil and natural gas properties.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, which requires all leasing arrangements to be presented on the balance sheet as liabilities along with a corresponding asset. ASU 2016-02 does not apply to leases of mineral rights to explore for or use crude oil and natural gas. The ASU will replace most existing lease guidance in GAAP when it becomes effective. In January 2018, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842, to provide an optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which provides for another transition method, in addition to the existing transition method, by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (i.e. comparative periods presented in the financial statements will continue to be in accordance with current GAAP (Topic 840, Leases)). The Company will adopt the new standard during the fiscal year ended December 31, 2022. The primary effect of adoption will be to record right-of-use assets and lease liabilities for office leases currently accounted for as operating leases under Topic 840.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which amends current impairment guidance by adding an impairment model (known as the current expected credit loss model (“CECL”)) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods. The Company is currently evaluating the impact of adoption of this standard but does not believe it will have a material impact on the Company’s financial statements.

Cash and Cash Equivalents

The Company considers all highly-liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash and cash equivalents in bank deposit accounts which, at times, may exceed the federally insured limits. The Company has not experienced any significant losses from such investments.

Accrued Revenue and Accounts Receivable

Accrued revenue and accounts receivable represent amounts due to the Company and are uncollateralized, consisting primarily of royalty revenue receivable. Royalty revenue receivable consists of royalties due from operators for oil, natural gas and NGL volumes sold to purchasers. Those purchasers remit payment for production to the operator of the properties and the operator, in turn, remits payment to the Company. Receivables from third parties for which we did not receive actual production information, either due to timing delays or due to the unavailability of data at the time when revenues are recognized, are estimated.

The Company’s accrued revenue and accounts receivable consisted of the following as of the dates indicated (in thousands):


	September 30, 2022		December 31, 2021
Accrued revenue	$	82,099	$	36,177
Accounts receivable		1,415		25
Total accrued revenue and accounts receivable, net	$	83,514	$	36,202

The Company routinely assesses the recoverability of all material accounts receivable to determine their collectability. The Company accrues a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. As of September 30, 2022, and December 31, 2021, the Company had no reserves for uncollectible amounts or deemed any amounts to be uncollectible.

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and natural gas producing properties, as further defined under ASC 932, Extractive Activities - Oil and Natural Gas. Under this method, costs to acquire mineral interests in oil and natural gas properties are capitalized. The costs of non-producing mineral interests and associated acquisition costs are capitalized as unproved properties pending the results of leasing efforts and drilling activities of Exploration and Production (“E&P”) operators on our interests. As unproved properties are determined to have proved reserves, the related costs are transferred to proved oil and gas properties. Capitalized costs for proved oil and natural gas mineral interests are depleted on a unit-of-production basis over total proved reserves. For depletion of proved oil and gas properties, interests are grouped in a reasonable aggregation of properties with common geological structural features or stratigraphic conditions.

Impairment of Oil and Gas Properties

The Company evaluates its producing properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When assessing proved properties for impairment, the Company compares the expected undiscounted future cash flows of the proved properties to the carrying amount of the proved properties to determine recoverability. If the carrying amount of proved properties exceeds the expected undiscounted future cash flows, the carrying amount is written down to the properties’ estimated fair value, which is measured as the present value of the expected future cash flows of such properties. The factors used to determine fair value include estimates of proved reserves, future commodity prices, timing of future production, and a risk-adjusted discount rate. There was no impairment of proved properties for the three and nine months ended September 30, 2022 and 2021. The proved property impairment test is primarily impacted by future commodity prices, changes in estimated reserve quantities, estimates of future production, overall proved property balances, and depletion expense. If pricing conditions decline or are depressed, or if there is a negative impact on one or more of the other components of the calculation, we may incur proved property impairments in future periods.

Unproved oil and gas properties are assessed periodically for impairment of value, and a loss is recognized at the time of impairment by charging capitalized costs to expense. Impairment is assessed when facts and circumstances indicate that the carrying value may not be recoverable, at which point an impairment loss is recognized to the extent the carrying value exceeds the estimated recoverable value. Factors used in the assessment include but are not limited to commodity price outlooks and current and future operator activity in the respective Basins. The Company recognized no impairment of unproved properties for the three and nine months ended September 30, 2022 and 2021.

Other Property and Equipment

Other property and equipment, which includes leasehold improvements, is recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the lease term or the useful lives of the assets. The Company recorded approximately $156,000 and $147,000 in depreciation for other property and equipment for the three months ended September 30, 2022 and 2021, respectively and $487,000 and $441,000 for the nine months ended September 30, 2022 and 2021, respectively.

Additionally, we evaluate our other property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset that has been placed in service may not be recoverable. No impairment charge was recorded for the three and nine months ended September 30, 2022 and 2021.

Asset Acquisitions

The Company generally accounts for acquisitions of mineral and royalty interests as asset acquisitions, through which it allocates the purchase price between proved and unproved properties, with no recognition of goodwill. The Company may use different techniques to determine the allocation, including the discounted net present value of estimated future net cash flows and market prices (where available).

Business Combinations

The Company accounts for all business combinations, including the Falcon Merger, using the acquisition method, which involves the use of significant judgement. Under the acquisition method, a business combination is accounted for based on the fair value of the consideration given. The assets acquired and liabilities assumed are measured at fair value and the purchase price is allocated to the assets and liabilities based on these fair values. The excess of the cost of an acquisition, if any, over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. The excess of the fair value of assets acquired and liabilities assumed over consideration given for an acquisition, if any, is recognized immediately in earnings as a gain. Determining the fair values of the assets and liabilities acquired involves the use of judgment as fair values are not always readily determinable. Different techniques may be used to determine fair values, including market prices (where available), comparisons to transactions for similar assets and liabilities and the net present value of estimated future cash flows, among others.

Derivative Financial Instruments

In order to manage its exposure to oil, natural gas, and NGL price volatility as well as interest rate volatility, the Company may periodically enter into derivative transactions, which may include commodity swap agreements, basis swap agreements, two- and three-way collars, and other similar agreements which help manage the price risk associated with the Company’s production. From time to time, the Company may periodically enter into various interest rate derivative contracts to manage exposures to changes in interest rates from variable rate obligations. These derivatives are not entered into for trading or speculative purposes. To the extent legal right of offset exists with a counterparty, the Company reports derivative assets and liabilities on a net basis. The Company has exposure to credit risk to the extent that the counterparty is unable to satisfy its settlement obligations. The Company actively monitors the creditworthiness of the counterparty and assesses the impact, if any, on its derivative positions. All commodity derivative counterparties are current lenders under the Company’s Revolving Credit Facility (defined below). Accordingly, the Company is not required to provide any credit support to its commodity derivative counterparties other than cross collateralization with the properties securing the Revolving Credit Facility.

The Company records derivative instruments on its condensed consolidated balance sheets as either assets or liabilities measured at fair value and records changes in the fair value of derivatives in current earnings as they occur. Changes in the fair value of commodity derivatives, including gains or losses on settled derivatives, are classified as other income or loss on the Company’s condensed consolidated statements of income. The Company’s derivatives have not been designated as hedges for accounting purposes.

Accounts Payable and Accrued Expenses

The Company’s accounts payable and accrued expenses consisted of the following as of the dates indicated (in thousands):


	September 30, 2022		December 31, 2021
Ad valorem taxes payable	$	5,348	$	1,750
General and administrative		4,066		904
Payable to seller for pre-effective monies		2,438		104
Deferred financing costs		1,348		13
Other taxes payable		1,224		529
Interest expense		742		274
Capital expenditures		290		391
Other		421		175
Total accounts payable and accrued expenses	$	15,877	$	4,140

Warrant Liability

Falcon issued the Public Warrants and Private Placement Warrants (both defined below) in connection with its initial public offering in 2017. The Warrants remain outstanding following the Falcon Merger. Warrants are accounted for in accordance with applicable accounting guidance provided in ASC 815-40 – Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815”), as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. The Warrants were classified as liabilities and recorded at fair value at the time of the Falcon Merger and are subject to remeasurement at the end of each reporting period. Any change in fair value is recorded in our statements of income.

Deferred Rent

Under ASC 840 – Leases (“ASC 840”), the Company recognizes rental expense for operating leases on a straight-line basis over the term of the lease agreements. The deferred rent liability on the Company’s condensed consolidated balance sheets is attributable to

the difference between rental expense (recognized on a straight-line basis) and the variable lease payments over the terms of the agreements. The Company leases office space under three operating leases. In December 2021, the Predecessor entered into a sublease of one of its office spaces with an unaffiliated third-party.

Temporary Equity

The Company accounts for the interests attributable to Class C Common Stock and Sitio OpCo Partnership Units as temporary equity as a result of certain redemption rights held as discussed in “Note 9 – Temporary Equity.” As such, the Company adjusts temporary equity to its maximum redemption amount at the balance sheet date, if higher than the carrying amount. Changes in the redemption value are recognized immediately as they occur, as if the end of the reporting period was also the redemption date for the instrument, with an offsetting entry to retained earnings or if a retained deficit, to additional paid-in capital. Temporary equity is reclassified to permanent equity upon conversion of Class C Common Stock (and an equivalent number of Sitio OpCo Partnership Units) or when holders of the Class C Common Stock no longer effectively control the Company’s determination of whether to make a cash payment upon the Sitio OpCo Partnership Unit holder’s exercise of its Redemption Right.

See “Note 9 – Temporary Equity” for additional information.

Revenue Recognition

Mineral and royalty interests represent the right to receive revenues from the sale of oil, natural gas and NGL, less production taxes and post-production expenses. The prices of oil, natural gas, and NGL from the properties in which we own a mineral or royalty interest are primarily determined by supply and demand in the marketplace and can fluctuate considerably. As an owner of mineral and royalty interests, we have no working interest or operational control over the volumes and methods of sale of the oil, natural gas, and NGL produced and sold from our properties. We do not explore, develop, or operate the properties and, accordingly, do not incur any of the associated costs.

Oil, natural gas, and NGL revenues from our mineral and royalty interests are recognized when control transfers at the wellhead.

The Company also earns revenue related to lease bonuses. The Company earns lease bonus revenue by leasing its mineral interests to E&P companies. The Company recognizes lease bonus revenue when the lease agreement has been executed and payment is determined to be collectible.

See “Note 4 – Revenue from Contracts with Customers” for additional disclosures regarding revenue recognition.

Concentration of Revenue

Collectability of the Company’s royalty revenue is dependent upon the financial condition of the Company’s operators, the entities they sell their products to, as well as general economic conditions in the industry.

Although the Company is exposed to a concentration of credit risk, the Company does not believe the loss of any single operator or entity would materially impact the Company’s operating results as crude oil, natural gas and NGL are fungible products with well-established markets and numerous purchasers. If multiple entities were to cease making purchases at or around the same time, we believe there would be challenges initially, but there would be ample markets to handle the disruption.

Share-Based Compensation

The Company recognizes share-based compensation expense associated with restricted stock units, deferred share units, and restricted stock awards which are time-based awards and performance stock units, which are performance-based awards. The Company accounts for forfeitures of share-based compensation awards as they occur. Share-based compensation expense for all awards is recognized based on the estimated grant date fair value of the award. See “Note 10 – Share-Based Compensation” for additional information.

Merger-Related Transaction Costs

General and administrative expense of $13.4 million and $24.1 million for the three and nine months ended September 30, 2022 included $3.6 million and $6.8 million, respectively, of costs incurred by the Company in connection with the Falcon Merger and the Brigham Merger (defined below). No such expense was recognized for the three and nine months ended September 30, 2021.

See “Note 6 – Acquisitions” for additional disclosures regarding the Brigham Merger.

Income Taxes

The Company, under ASC 740 – Income Taxes (“ASC 740”), uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (a) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (b) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future periods when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance will be provided for deferred tax assets if it is more likely than not the deferred tax assets will not be realized.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits (if any) as income tax expense. No amounts were accrued for the payment of interest and penalties at September 30, 2022 and December 31, 2021.

Texas imposes a franchise tax, commonly referred to as the Texas margin tax, which is considered an income tax, at a rate of 0.75% on gross revenues less certain deductions, as specifically set forth in the Texas margin tax statute. A significant portion of our mineral and royalty interests are located in Texas. As such, the Company recognized approximately $474,000 and $143,000, respectively, for the three months ended September 30, 2022 and 2021 and $1.4 million and $233,000, respectively, for the nine months ended September 30, 2022 and 2021, of state income tax expense, primarily attributable to the Texas margin tax.

The Company’s ASC 740 balances and income tax expense reporting is significantly affected by the portion of the Company’s consolidated net income attributable to the holders of Sitio OpCo Partnership Units, which is not taxable income to the Company. Since the Company’s ownership interest in Sitio OpCo is 15.2%, only tax attributes allocated to the Company are recorded at this level, except for Texas Gross Margins tax which is imposed on Sitio OpCo and reported herein.

3. Falcon Reverse Merger

In June 2022, the Company completed the acquisition of approximately 34,000 NRAs in the Eagle Ford Shale and Appalachian Basin from Falcon Minerals Corporation in a reverse merger. At closing, subject to the terms and conditions of the Falcon Reverse Merger Agreement, Falcon merged with and into Desert Peak, with Desert Peak continuing as the surviving entity in the Falcon Merger as a wholly owned subsidiary of Sitio OpCo. On June 3, 2022, prior to the consummation of the Falcon Merger, Falcon effected the four-to-one Reverse Stock Split. As a result of the Reverse Stock Split, every four shares of the Company’s issued and outstanding Class C Common Stock were automatically converted into one share of Class C Common Stock, without any change in the par value per share, and every four shares of the Company’s Class A Common Stock were automatically converted into one share of Class A Common Stock, without any change in the par value per share. No fractional shares were outstanding following the Reverse Stock Split. Additionally, as a result of the Reverse Stock Split, the Warrants were adjusted such that four whole Warrants became exercisable for one share of Class A Common Stock at an exercise price of $44.84 per share of Class A Common Stock.

Pursuant to the terms of the Falcon Reverse Merger Agreement, following the closing of the Falcon Merger and the Reverse Stock Split, the issued and outstanding limited liability company interests in Desert Peak were converted into the right to receive aggregate Falcon Merger Consideration of (a) 61,905,339 shares of Class C Common Stock and (b) 61,905,339 Sitio OpCo Partnership Units.

The Falcon Merger was accounted for as a business combination and, therefore, the acquired interests were recorded based on the fair value of the total assets acquired and liabilities assumed on the acquisition date.

The following table summarized the consideration for the Falcon Merger:


Falcon Common Stock — issued and outstanding as of June 7, 2022:		21,935,492
Class A Common Stock price on June 7, 2022	$	29.12
Total consideration and fair value	$	638,761,527

Preliminary Purchase Price Allocation

The Falcon Merger was accounted for as a business combination using the acquisition method. The Company completed the determination of the fair value attributable to the identifiable assets acquired and liabilities assumed based on the fair value at the acquisition date. Certain data necessary to complete the purchase price allocation is subject to change, and includes, but is not limited to, settlement of pre-acquisition working capital balances and assessments of deferred tax assets and liabilities acquired. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed on June 7, 2022 (in thousands):


Falcon fair values:
Cash	$	4,484
Accrued revenue and accounts receivable		17,526
Unproved oil and gas properties		491,424
Proved oil and gas properties		200,773
Property and equipment		278
Current liabilities		(23,408	)
Long-term debt		(43,105	)
Deferred tax liability		(2,598	)
Warrant liability		(6,612	)
Total consideration and fair value	$	638,762

In connection with the Falcon Merger, the Company assumed, and immediately repaid, $43.1 million of borrowings under Falcon’s credit facility. The repayment of Falcon’s long-term debt was funded using cash on hand and borrowings on our Revolving Credit Facility, see “Note 7 – Debt” for further information.

Transaction costs associated with the Falcon Merger incurred for the three and nine months ended September 30, 2022 were $166,000 and $3.4 million, respectively. These costs, which are comprised primarily of advisory, legal, and other professional and consulting fees, are included in General and administrative expense on our condensed consolidated statements of income.

Pro Forma Financial Information

The unaudited pro forma financial information for the three and nine months ended September 30, 2022 and 2021, respectively, gives effect to the Falcon Merger as if it had occurred on January 1, 2021 (in thousands, except per share amounts):


	Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Total revenues	$	115,497	$	52,923	$	308,989	$	118,308
Pro forma income available to common stockholders		12,230		3,785		28,802		6,362

Net income per share:
Basic	$	0.96	$	0.30	$	2.27	$	0.50
Diluted	$	0.96	$	0.30	$	2.25	$	0.50

The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Falcon Merger been completed as of January 1, 2021 and should not be taken as indicative of the Company’s future combined results of operations. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.

4. Revenue from Contracts with Customers

Oil and natural gas sales

Oil, natural gas and NGL sales revenues are generally recognized when control of the product is transferred to the customer, the performance obligations under the terms of the contracts with customers are satisfied and collectability is reasonably assured. All of the Company’s oil, natural gas and NGL sales are made under contracts with customers (operators). The performance obligations for the Company’s contracts with customers are satisfied at a point in time when control transfers at the wellhead, at which point payment is unconditional. Accordingly, the Company’s contracts do not give rise to contract assets or liabilities. The Company typically receives payment for oil, natural gas and NGL sales within 30 to 90 days of the month of delivery after initial production from the well. Such periods can extend longer due to factors outside of our control. The Company’s contracts for oil, natural gas and NGL sales are standard industry contracts that include variable consideration based on the monthly index price and adjustments that may include counterparty-specific provisions related to volumes, price differentials, discounts and other adjustments and deductions.

During the three and nine months ended September 30, 2022 and 2021, the disaggregated revenues from sales of oil, natural gas and NGLs were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Crude oil sales	$	79,333	$	24,199	$	193,171	$	49,040
Natural gas sales		19,086		4,827		39,186		11,118
NGL sales		10,342		4,126		27,862		9,063
Total royalty revenues	$	108,761	$	33,152	$	260,219	$	69,221

Lease bonus and other income

The Company also earns revenue from lease bonuses, delay rentals, and right-of-way payments. The Company generates lease bonus revenue by leasing its mineral interests to E&P companies. A mineral lease agreement represents our contract with a customer and generally transfers the rights, for a specified period of time, to explore for and develop any oil, natural gas and NGL discovered, grants us a specified royalty interest in the hydrocarbons produced from the leased property, and requires that drilling and completion operations commence within a specified time period. The Company recognizes lease bonus revenues when the lease agreement has been executed and payment is determined to be collectible. At the time the Company executes the lease agreement, the lease bonus payment is delivered to the Company. Upon receipt of the lease bonus payment, the Company will release the recordable original lease documents to the customer. The Company also recognizes revenue from delay rentals to the extent drilling has not started within the specified period and payment has been received. Right-of-way payments are recorded when the agreement has been executed and payment is determined to be collectable. The assets contributed by our Predecessor in the Falcon Merger did not include the Predecessor’s surface rights. Subsequent to the Falcon Merger, the Company has acquired additional surface rights in connection with multiple acquisitions. Payments for lease bonus and other income become unconditional upon the execution of an associated agreement. Accordingly, the Company’s lease bonus and other income transactions do not give rise to contract assets or liabilities.

Allocation of transaction price to remaining performance obligations

Oil and natural gas sales

The Company’s right to royalty income does not originate until production occurs and, therefore, is not considered to exist beyond each day’s production. Therefore, there are no remaining performance obligations under any of our royalty income contracts.

Lease bonus and other income

Given that the Company does not recognize lease bonus or other income until an agreement has been executed, at which point its performance obligation has been satisfied, the Company does not record revenue for unsatisfied or partially unsatisfied performance obligations as of the end of the reporting period.

Prior-period performance obligations

The Company records revenue in the month production is delivered to the purchaser. As a royalty interest owner, the Company has limited visibility into the timing of when new wells start producing as production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded within accrued revenue and accounts receivable in the accompanying condensed consolidated balance sheets. The difference between the Company’s estimates of royalty income and the actual amounts received for oil and natural gas sales are recorded in the month that the royalty payment is received from the customer. For the three and nine months ended September 30, 2022 and 2021, revenue recognized related to performance obligations satisfied in prior reporting periods was primarily attributable to production revisions by operators or amounts for which the information was not available at the time when revenue was estimated.

5. Oil and Gas Properties

The Company has been and is actively engaged in the purchase of mineral rights in the Permian Basin in West Texas and southeastern New Mexico. Additionally, the Company owns mineral rights in the Eagle Ford Shale in South Texas and the Appalachian Basin in Pennsylvania, Ohio and West Virginia. The following is a summary of oil and natural gas properties as of September 30, 2022 and December 31, 2021 (in thousands):


Oil and natural gas properties:	September 30, 2022			December 31, 2021
Unproved properties	$	1,473,142		$	817,873
Proved properties		1,042,257			447,369
Oil and natural gas properties, gross		2,515,399			1,265,242
Accumulated depletion and impairment		(184,989	)		(118,175	)
Oil and natural gas properties, net	$	2,330,410		$	1,147,067

As presented in the condensed consolidated statements of cash flows for the nine months ended September 30, 2022, the Company paid $558.1 million for mineral acquisition costs. Additionally, the Company acquired mineral and royalty interests of $692.2 million through issuance of Class C Common Stock as a result of the Merger. Please see “Note 3 – Falcon Reverse Merger” for additional information regarding the Merger.

As presented in the condensed consolidated statements of cash flows for the nine months ended September 30, 2021, the Predecessor paid $26.8 million for mineral acquisition costs and paid $103,000 related to purchase price adjustments from prior property sales. Additionally, the Predecessor acquired mineral and royalty interests of $571.2 million in three separate transactions in exchange for equity interests in a subsidiary of the Predecessor. Please see “Note 6 – Acquisitions” for additional information regarding these transactions.

The Company uses the successful efforts method of accounting for its oil and gas properties. Capitalized costs are depleted on a unit of production basis based on proved oil and natural gas reserves. Depletion expense was $31.8 million and $12.7 million for the three months ended September 30, 2022 and 2021, respectively. Depletion expense was $66.8 million and $28.2 million for the nine months ended September 30, 2022 and 2021, respectively.

6. Acquisitions

Brigham Merger

On September 6, 2022, Sitio, Sitio OpCo, Snapper Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of Sitio (“New Sitio”), Snapper Merger Sub IV, Inc., a Delaware corporation and wholly owned subsidiary of New Sitio (“Brigham Merger Sub”), Snapper Merger Sub V, Inc., a Delaware corporation and wholly owned subsidiary of New Sitio (“Sitio Merger Sub”), and Snapper Merger Sub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sitio OpCo (“Opco Merger Sub LLC”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Brigham Minerals, Inc., a Delaware corporation (“Brigham”) and Brigham Minerals Holdings, LLC, a Delaware limited liability company and subsidiary of Brigham (“Brigham Opco”).

Pursuant to the terms of the Merger Agreement, Sitio will acquire Brigham in an all-stock transaction through: (i) the merger of Brigham Merger Sub with and into Brigham (the “Brigham Subsidiary Merger”), with Brigham surviving the Brigham Subsidiary Merger as a wholly owned subsidiary of New Sitio, (ii) the merger of Sitio Merger Sub with and into Sitio (the “Sitio Merger”), with Sitio surviving the Sitio Merger as a wholly owned subsidiary of New Sitio, and (iii) the merger of Opco Merger Sub LLC with and into Brigham Opco (the “Opco Merger,” and, together with the Brigham Subsidiary Merger and the Sitio Merger, the “Brigham Merger”), with Brigham Opco surviving the Opco Merger as a wholly owned subsidiary of Sitio Opco, in each case on the terms set forth in the Merger Agreement. The Sitio Merger and the Brigham Subsidiary Merger shall become effective concurrently (such time as the Sitio Merger and the Brigham Subsidiary Merger become effective, the “First Effective Time”), and the Opco Merger shall become effective immediately following the First Effective Time (such time as the Opco Merger becomes effective, the “Second Effective Time”).

On the terms and subject to the conditions set forth in the Merger Agreement, (i) at the First Effective Time, (A) each share of Brigham’s Class A common stock, par value $0.01 per share, issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 1.133 fully-paid and nonassessable shares of Class A common stock, par value $0.0001 per share, of New Sitio (the “New Sitio Class A Common Stock”), (B) each share of Brigham’s Class B common stock, par value $0.01 per share, issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 1.133 fully-paid and nonassessable shares of Class C common stock, par value $0.0001 per share, of New Sitio (the “New Sitio Class C Common Stock”), (C) each share of Class A Common Stock issued and outstanding immediately prior to the First Effective Time will be converted into

one share of New Sitio Class A Common Stock and (D) each share of Class C Common Stock issued and outstanding immediately prior to the First Effective Time, will be converted into one share of New Sitio Class C Common Stock, in each case, excluding shares owned by Sitio, Brigham or any wholly owned subsidiary of Sitio or Brigham and, to the extent applicable, shares owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to the Delaware General Corporation Law (the “DGCL”) and, (ii) at the Second Effective Time, each Brigham Opco Unit issued and outstanding immediately prior to the Second Effective Time will be converted into the right to receive 1.133 Sitio Opco Partnership Units.

As a result of the Brigham Merger and as of the closing of the Brigham Merger (the “Closing”), Sitio stockholders immediately prior to the First Effective Time will own approximately 54% of the outstanding shares of New Sitio, and Brigham stockholders immediately prior to the First Effective Time will own approximately 46% of the outstanding shares of New Sitio. Following the Closing, New Sitio will operate under the name “Sitio Royalties Corp.”

Momentum Acquisition

On July 26, 2022, the Company acquired approximately 12,200 net royalty acres from Momentum Minerals Operating, LP, Momentum Minerals Operating II, LP, Momentum Minerals Nominee, Inc., Momentum Minerals Nominee II, Inc. and Athene Annuity & Life Assurance Company (collectively, “Momentum”) for a purchase price of $213.3 million, net of customary closing adjustments (the “Momentum Acquisition”). The Momentum Acquisition was funded through borrowings under the Bridge Loan Agreement and borrowings under the Revolving Credit Facility, in addition to cash on hand.

The Momentum Acquisition was accounted for as an asset acquisition and, therefore, the acquired interests were recorded based on the fair value of the total assets acquired on the acquisition date. Based on the estimated fair values of the assets received, the Company recorded $51.5 million of the total consideration as unproved oil and gas property and $161.8 million as proved oil and gas property. Additionally, $0.7 million of transaction costs were capitalized related to the Momentum Acquisition.

Foundation Acquisition

In June 2022, the Company completed the acquisition of approximately 19,700 NRAs in the Permian Basin from Foundation Minerals, LLC (“Foundation”) for $320.6 million, net of customary closing adjustments, funded primarily by proceeds
from the Bridge Loan Facility (defined below) as well as borrowings under our Revolving Credit Facility (defined below) and cash on hand.

The Foundation acquisition was accounted for as an asset acquisition and, therefore, the acquired interests were recorded based on the fair value of the total assets acquired on the acquisition date. Based on the estimated fair values of the assets received, the Company recorded $189.3 million of the total consideration as unproved oil and gas property and $131.3 million as proved oil and gas property. Additionally, $0.8 million of transaction costs were capitalized related to the transaction.

Falcon Acquisition

In June 2022, the Company completed the acquisition of approximately 34,000 NRAs in the Eagle Ford Shale and Appalachian Basin from Falcon in a reverse merger. Refer to “Note 3 – Falcon Reverse Merger” for further information.

Source Acquisition

In August 2021, the Predecessor completed the acquisition of approximately 25,000 NRAs in the Midland and Delaware Basins from the Source Stockholders. At closing, subject to the terms and conditions of the transaction agreement, the Source Stockholders contributed their mineral and royalty interests to the Predecessor and in consideration for the contribution, Kimmeridge affiliates caused DPM HoldCo (a subsidiary of the Predecessor) to issue equity interests in DPM HoldCo to Source for total consideration of $252.9 million.

The Source acquisition was accounted for as an asset acquisition and, therefore, the acquired interests were recorded based on the fair value of the total assets acquired on the acquisition date. Based on the estimated fair values of the assets received, the Predecessor recorded $183.2 million of the total consideration as unproved oil and gas property and $69.7 million as proved oil and gas property. Additionally, $3.5 million of transaction costs were capitalized related to the transaction.

Rock Ridge Acquisition

In June 2021, the Predecessor completed the acquisition of approximately 18,700 NRAs from Rock Ridge. At closing, subject to the terms and conditions of the transaction agreement, Rock Ridge contributed its mineral and royalty interests to the Predecessor and

in consideration for the contribution, Kimmeridge affiliates caused DPM HoldCo to issue equity interests in DPM HoldCo to Rock Ridge for total consideration of $258.6 million.

The Rock Ridge acquisition was accounted for as an asset acquisition and, therefore, the acquired interests were recorded based on the fair value of the total assets acquired on the acquisition date. Based on the estimated fair values of the assets received, the Predecessor recorded $190.3 million of the total consideration as unproved oil and gas property and $68.3 million as proved oil and gas property. Additionally, $1.1 million of transaction costs were capitalized related to the transaction.

Delaware Basin ORRIs Acquisition

In October 2020, a partnership owned and managed by Kimmeridge, (“Fund V”), acquired a 2.0% (on an 8/8ths basis) overriding royalty interest in all of Callon Petroleum Company’s (“Callon”) operated assets in the Delaware Basin of which Fund V held an 84% interest proportionately reduced to Callon’s net revenue interest (the “Chambers ORRI”).

In June 2021, the Predecessor entered into a definitive agreement to acquire 84% of the Delaware Basin portion of the Chambers ORRI from Chambers Minerals, LLC, a subsidiary of Fund V (the “Chambers Acquisition”). Immediately following the consummation of the contributions of assets to the Predecessor, Chambers HoldCo, LLC (the managing member of Chambers Minerals, LLC) was issued equity in DPM HoldCo. As the general partner of Fund V and the General Partner of the Predecessor were affiliated, the transaction was approved by the Predecessor’s Limited Partner Advisory Committee in June 2021.

The Chambers Acquisition was accounted for as an asset acquisition. The Chambers Acquisition was also accounted for as a transaction between entities under common control; the controlling ownership and management of the general partner of Fund V and the general partner of the Predecessor had significant overlap, including responsibility for the management, control, and direction of the business affairs of the respective entities. As the Predecessor and Fund V were entities under common control, the Predecessor recorded the acquisition utilizing the properties’ net book value. The properties acquired by the Predecessor had a historical net book value to Fund V at the time of sale of approximately $60.6 million ($45.3 million was allocated to unproved property and $15.3 million was allocated to proved property). Accordingly, the $37.5 million excess of the fair value of the properties above their net book value was recorded as a decrease to the Predecessor’s partners’ capital at the date of the transaction. Refer to “Note 16 – Related Party Transactions” for further discussion.

7. Debt

As of September 30, 2022, the borrowing base was $300.0 million as determined by the lenders and the outstanding balance under our Revolving Credit Facility was $227.0 million. As of December 31, 2021, the borrowing base was $150.0 million as determined by the lenders and the outstanding balance under our Revolving Credit Facility was $134.0 million.

The Revolving Credit Facility bears interest at a rate per annum equal to, at our option, at an adjusted Term SOFR rate or a base rate, plus an applicable margin and credit spread adjustment. The applicable margin is based on utilization of our Revolving Credit Facility and ranges from (a) in the case of adjusted base rate loans, 1.500% to 2.500% and (b) in the case of Term SOFR rate loans and letters of credit, from 2.500% to 3.500%. The credit spread adjustment ranges from 0.100% to 0.250% depending on the applicable interest rate and interest rate period. Sitio OpCo may elect an interest period of one, three or six months. Interest is payable in arrears at the end of each interest period, but no less frequently than quarterly. A commitment fee is payable quarterly in arrears on the daily undrawn available commitments under our Revolving Credit Facility in an amount ranging from 0.375% to 0.500% based on utilization of our Revolving Credit Facility. The Revolving Credit Facility is subject to other customary fee, interest and expense reimbursement provisions.

As of September 30, 2022 and December 31, 2021, the weighted average interest rate related to our outstanding borrowings under the Revolving Credit Facility was 6.11% and 3.36%, respectively. As of September 30, 2022 and December 31, 2021, the Company had unamortized debt issuance costs of $6.1 million and $2.1 million, respectively, in connection with its entry into the Revolving Credit Facility, including amendments. Such costs are capitalized as deferred financing costs within other long-term assets and are amortized over the life of the facility. For the three months ended September 30, 2022 and 2021, the Company recognized $353,000 and $106,000, respectively, in interest expense related to the amortization of deferred financing costs under the Revolving Credit Facility. For the nine months ended September 30, 2022 and 2021, the Company recognized $817,000 and $247,000, respectively, in interest expense related to the amortization of deferred financing costs.

Our Revolving Credit Facility matures in June 2026. Loans drawn under our Revolving Credit Facility may be prepaid at any time without premium or penalty (other than customary breakage costs for Term SOFR rate loans) and must be prepaid in the event that exposure exceeds the lesser of the borrowing base and the elected commitments of the lenders at such time. The principal amount of loans that are prepaid are required to be accompanied by accrued and unpaid interest and fees on such amounts. Loans that are prepaid may be reborrowed. In addition, Sitio OpCo may permanently reduce or terminate in full the commitments under our Revolving Credit Facility prior to maturity. Any excess exposure resulting from such permanent reduction or termination must be prepaid. Upon the

occurrence of an event of default under our Revolving Credit Facility, the administrative agent acting at the direction of the lenders holding a majority of the aggregate commitments at such time may accelerate outstanding loans and terminate all commitments under our Revolving Credit Facility, provided that such acceleration and termination occurs automatically upon the occurrence of a bankruptcy or insolvency event of default.

Our Revolving Credit Facility is subject to a borrowing base established by the lenders to reflect the loan value of our oil and gas mineral interests. The borrowing base under our Revolving Credit Facility is redetermined by the lenders on a semi-annual basis. Additionally, lenders holding two-thirds of the aggregate commitments are able to request one additional redetermination each year. Sitio OpCo could also request one additional redetermination each year, and such other redeterminations as appropriate when significant acquisition opportunities arose. The borrowing base is subject to adjustments for asset dispositions, material title deficiencies, certain terminations of hedge agreements and issuances of certain additional indebtedness. Increases to the borrowing base required unanimous approval of the lenders, while maintenance of the same borrowing base or decreases in the borrowing base only required approval of lenders holding two-thirds of the aggregate commitments at such time. The determination of the borrowing base took into consideration the estimated value of the Company’s oil and gas mineral interests in accordance with the lenders’ customary practices for oil and gas loans. The Revolving Credit Facility is collateralized by substantially all of the assets of Sitio OpCo and its subsidiaries.

Our Revolving Credit Facility contains customary affirmative and negative covenants, including, without limitation, reporting obligations, restrictions on asset sales, restrictions on additional debt and lien incurrence and restrictions on making dividends or distributions, restrictions on paying other debt and restriction on certain investments. Our Revolving Credit Facility requires us to maintain (a) a current ratio of not less than 1.00 to 1.00 and (b) a ratio of total net funded debt to consolidated EBITDA of not more than 3.50 to 1.00. EBITDA for the period ending on September 30, 2022 is calculated as EBITDA for the period beginning on July 1, 2022 and ending on September 30, 2022 multiplied by four. The Company was in compliance with the terms and covenants of the Revolving Credit Facility at September 30, 2022 and December 31, 2021.

First Amended and Restated Credit Agreement

KMF Land was party to a credit agreement with a syndicate of banks led by Bank of America N.A. as Administrative Agent, Issuing Bank and Syndication Agent (the “Predecessor Revolving Credit Facility”).

In October 2021, KMF Land, as borrower and Desert Peak, as parent, entered into the Amended and Restated Credit Agreement with a syndicate of banks led by Bank of America N.A. as Administrative Agent, Issuing Bank and Syndication Agent, pursuant to which the lenders thereunder made loans and extensions of credit to the borrower thereunder (the “A&R Credit Agreement”). The A&R Credit Agreement amended, restated and refinanced the Predecessor's Revolving Credit Facility in full.

Falcon Credit Agreement

On the Closing Date and in connection with the closing of the Falcon Merger, the Company repaid the outstanding borrowings under the Credit Agreement, dated as of August 23, 2018 (the “Falcon Credit Agreement”), among Falcon Minerals Operating Partnership, LP, as the borrower, the lenders from time to time party thereto, Citibank, N.A., as administrative agent and collateral agent for the lenders from time to time party thereto and each other issuing bank from time to time party thereto and terminated the Falcon Credit Agreement.

Second Amended and Restated Credit Agreement

Upon closing of the Falcon Merger on the Closing Date, the A&R Credit Agreement was amended, restated, and refinanced in its entirety pursuant to the Second Amended and Restated Credit Agreement (the “Credit Agreement”), led by Bank of America N.A. as Administrative Agent, Issuing Bank and Syndication Agent. Pursuant to the terms and conditions of the Revolving Credit Facility, the Lenders committed to provide a senior secured revolving credit facility to Sitio OpCo in an aggregate principal amount of up to $750.0 million (as amended or otherwise modified from time to time the “Revolving Credit Facility”). The availability under the Revolving Credit Facility, including availability for letters of credit, is generally limited to a borrowing base, which is determined by the required number of lenders in good faith by calculating a loan value of the proved reserves of Sitio OpCo and its subsidiaries and elected commitments provided by the Lenders. As of the Closing Date, the Revolving Credit Facility has a $300.0 million borrowing base and $300.0 million elected commitment amount. As part of the aggregate commitments under the revolving advances, the Revolving Credit Facility provides for letters of credit to be issued at the request of the borrower in an aggregate amount not to exceed $15.0 million.

First Amendment to Second Amendment and Restated Credit Agreement

On June 24, 2022, Sitio OpCo and the other guarantors party thereto entered into the First Amendment to Credit Agreement (the “RBL First Amendment”). The RBL First Amendment, among other things, amended the Revolving Credit Facility to permit the borrowings under the Bridge Loan Agreement, defined below, and permitted the transactions contemplated by the Bridge Loan Agreement and the Foundation Acquisition described in “Note 6 – Acquisitions.” The RBL First Amendment waived the borrowing

base reduction that would otherwise apply to the incurrence of permitted additional debt up to an aggregate amount of $400.0 million incurred prior to the next borrowing base redetermination.

Second Amendment to Second Amended and Restated Credit Agreement

On July 8, 2022, Sitio OpCo and the other guarantors party thereto entered into the Second Amendment to Credit Agreement (the “RBL Second Amendment”), pursuant to which the Revolving Credit Facility was amended to permit the additional borrowings under the Bridge First Amendment and permit the transactions contemplated by the Bridge First Amendment. The RBL Second Amendment waives the borrowing base reduction that would otherwise apply to the incurrence of Permitted Additional Debt (as defined in the RBL Second Amendment) for an additional amount of $50.0 million, up to an aggregate amount of $450.0 million, if incurred within 30 days of the closing of the RBL Second Amendment to fund a portion of the purchase price of the Momentum Acquisition described in “Note 6 – Acquisitions.”

Third Amendment to Second Amended and Restated Credit Agreement

On September 21, 2022, Sitio OpCo and the other guarantors party thereto entered into the Third Amendment to Credit Agreement (the “RBL Third Amendment”), pursuant to which the Revolving Credit Facility was amended to permit the issuance of the 2026 Senior Notes and the transactions contemplated by the Note Purchase Agreement.

2026 Senior Notes

On September 21, 2022, Sitio OpCo, as issuer, and certain subsidiaries of Sitio OpCo, as guarantors, entered into the Note Purchase Agreement (the “Note Purchase Agreement”) with certain institutional investors party thereto as holders (the “Holders”) and U.S. Bank Trust Company, National Association, as agent for the Holders (the “Agent”).

Pursuant to the Note Purchase Agreement, Sitio OpCo issued senior unsecured notes to the Holders in an aggregate principal amount of $450.0 million (the “2026 Senior Notes”). Sitio OpCo used $425.0 million of the proceeds from the 2026 Senior Notes to repay in full all amounts outstanding under the Bridge Loan Facility (as defined below) with the remainder used for general corporate purposes. The 2026 Senior Notes mature on September 21, 2026.

Sitio OpCo may elect, at its option, to prepay the 2026 Senior Notes in whole or in part at any time, subject to (except as described below) payment of a premium determined in accordance with the table below based on the length of time between the issuance date and the prepayment date:


Period	Premium
Months 0 - 12	Customary “make-whole” premium plus 3.00%
Months 13 - 24		3.00	%
Months 25 - 36		1.00	%
Months 37 - 48		0.00	%

Interest accrues on the 2026 Senior Notes at an adjusted Term SOFR rate (including a 0.150% spread adjustment) for a three-month period plus a margin of 6.50%, unless the Agent determines that adequate and reasonable means do not exist for ascertaining the Term SOFR rate or the Requisite Holders (as defined in the Note Purchase Agreement) determine that the Term SOFR rate will not reflect the cost of maintaining their 2026 Senior Notes for the relevant period, in which case the 2026 Senior Notes will bear interest at a base rate (defined on the basis of the prime rate) plus a margin of 5.50%. From and after the closing date of the Brigham Merger, the applicable margin will be reduced to 5.75% for 2026 Senior Notes bearing interest based on the adjusted Term SOFR rate and to 4.75% for 2026 Senior Notes bearing interest based on the base rate. Interest payments on the 2026 Senior Notes are due quarterly.

Sitio OpCo may elect, at its option, to prepay the 2026 Senior Notes on the last business day of each calendar quarter in an amount equal to 2.50% of the initial principal amount of all the 2026 Senior Notes issued under the Note Purchase Agreement, which prepayments will not require the payment of any premium (each, an “Optional Quarterly Payment”). If Sitio OpCo does not make an Optional Quarterly Payment on any quarterly payment date, the applicable margin on the 2026 Senior Notes will increase to 9.50% for 2026 Senior Notes bearing interest based on the adjusted Term SOFR rate and 8.50% for 2026 Senior Notes bearing interest based on the base rate. Subsequent to the closing of the Brigham Merger, if an Optional Quarterly Payment is not made, the margin will increase to 7.75% for 2026 Senior Notes bearing interest based on the adjusted Term SOFR rate and 6.75% for 2026 Senior Notes bearing interest based on the base rate. The increased margin will apply until the earlier of the date on which Sitio OpCo makes such Optional Quarterly Payment or the next quarterly payment date.

As of September 30, 2022, the weighted average interest rate of the 2026 Senior Notes was 10.14%. As of September 30, 2022, the Company had unamortized debt issuance costs of $4.7 million in connection with its issuance of the 2026 Senior Notes. Such costs are reported as a reduction to long-term debt on our condensed consolidated balance sheets and are amortized over the life of the 2026 Senior Notes.

The Note Purchase Agreement includes, among other terms and conditions, a maximum leverage ratio covenant, as well as customary mandatory prepayments, representations, warranties, covenants and events of default, including, among others, a change of control event of default and limitations on the incurrence of indebtedness and liens, new lines of business, mergers, transactions with affiliates and burdensome agreements. During the continuance of an event of default, the Holders may take a number of actions, including, among others, declaring the entire amount of the 2026 Senior Notes and other amounts then outstanding under the Note Purchase Agreement to be due and payable. The Note Purchase Agreement requires Sitio OpCo to maintain a leverage ratio as of the last day of each fiscal quarter (beginning December 31, 2022) of not more than 3.50 to 1.00. As of September 30, 2022, Sitio OpCo was in compliance with the terms and covenants of the 2026 Senior Notes.

364-Day Bridge Loan Agreement

The Bridge Loan Agreement and Bridge First Amendment provide for a 364-day term loan credit facility (the “Bridge Loan Facility”) in the aggregate principal amount of $425.0 million. The Bridge Loan Facility was fully repaid and extinguished on September 21, 2022 using proceeds from the issuance of the 2026 Senior Notes. Upon the closure of the Bridge Loan Facility, the Company recognized a loss on extinguishment of debt of $11.5 million, associated with unamortized debt issuance costs and other fees incurred in connection with the payoff.

For the three and nine months ended September 30, 2022, the Company recognized $3.3 million and $3.4 million, respectively, of interest expense related to the amortization of issuance costs under the Bridge Loan Agreement. No such expense was recognized for the three and nine months ended September 30, 2021.

8. Equity

Prior to the effective time of the Falcon Merger, on June 3, 2022, Falcon filed with the Secretary of State of the State of Delaware the Third Amended and Restated Certificate of Incorporation to effect the previously announced four-to-one Reverse Stock Split for all of Falcon’s, and subsequently the Company’s, issued and outstanding shares of common stock and outstanding equity awards. As a result of the Reverse Stock Split, every four shares of the Company’s issued and outstanding Class C Common Stock were automatically converted into one share of Class C Common Stock, without any change in the par value per share, and every four shares of the Company’s Class A Common Stock were automatically converted into one share of Class A Common Stock, without any change in the par value per share. No fractional shares were outstanding following the Reverse Stock Split.

Class A Common Stock

The Company had 12,706,082 shares of its Class A Common Stock outstanding as of September 30, 2022. Holders of Class A Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and are entitled to ratably receive dividends when and if declared by the Company’s Board of Directors.

Class C Common Stock

The Company had 71,134,752 shares of its Class C Common Stock outstanding as of September 30, 2022. Shares of Class C Common Stock are non-economic but entitle the holder to one vote per share. Current holders of Class C Common Stock also hold an equivalent number of Sitio OpCo Partnership Units. Sitio OpCo Partnership Units are redeemable on a one-for-one basis for shares of Class A Common Stock at the option of the holder. Upon the redemption by any holder of Sitio OpCo Partnership Units for shares of Class A Common Stock, a corresponding number of shares of Class C Common Stock held by such holder will be cancelled. During the nine months ended September 30, 2022, 617,530 Sitio OpCo Partnership Units were redeemed for shares of Class A Common Stock, and an equivalent number of shares of Class C Common Stock were cancelled.

Cash Dividends

On August 31, 2022, the Company paid a cash dividend of $0.71 per share of Class A Common Stock, totaling $9.0 million. The dividend related to the quarter ending June 30, 2022 and was paid to stockholders of record on August 18, 2022. See “Note 17 – Subsequent Events” for additional information regarding cash dividends.

Earnings per Share

Earnings per share is computed using the two-class method. The two-class method determines earnings per share of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Participating securities represent certain equity-based compensation awards in which the recipients have non-forfeitable rights to dividend equivalents during the performance period.

The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2022			2021		2022			2021
Numerator:
Net income attributable to Class A stockholders	$	9,139		$	—	$	15,299		$	—
Less: Earnings allocated to participating securities		(284	)		—		(284	)		—
Net income attributable to Class A stockholders - basic	$	8,855		$	—	$	15,015		$	—
Plus: net income attributable to temporary equity		—			—		—			—
Net income attributable to Class A stockholders - diluted	$	8,855		$	—	$	15,015		$	—
Denominator:
Weighted average shares outstanding - basic		12,703					12,665
Effect of dilutive securities		—					—
Weighted average shares outstanding - diluted		12,703					12,665

Net income per common share - basic	$	0.70				$	1.19
Net income per common share - diluted	$	0.70				$	1.19

The Company had the following shares that were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive for the periods presented but could potentially dilute basic earnings per share in future periods (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2022		2021	2022		2021
Warrants		5,312			5,312
Unvested share-based compensation awards		704			702
Total		6,016			6,014

Diluted net income per share also excludes the effects of Sitio OpCo Partnership Units (and related Class C Common Stock) associated with the earn-out, which are convertible into Class A Common Stock, because they are considered contingently issuable shares and the conditions for issuance were not satisfied as of September 30, 2022.

Earn-Out

Contributors of Falcon’s initial assets in 2018 will be entitled to receive earn-out consideration to be paid in the form of Sitio OpCo Partnership Units (with a corresponding number of shares of Class C Common Stock) if the volume-weighted average price of the trading days during any thirty (30) calendar days (the “30-Day VWAP”) of the Class A Common Stock equals or exceeds certain hurdles set forth in the Contribution Agreement. If the 30-Day VWAP of the Class A Common Stock is $50.00 or more per share (on a split-adjusted basis) at any time within the seven years following the 2018 closing, the contributors will receive (a) an additional 2.5 million Sitio OpCo Partnership Units (and an equivalent number of shares of Class C Common Stock), plus (b) an amount of Sitio OpCo Partnership Units (and an equivalent number of shares of Class C Common Stock) equal to (i) the amount by which annual cash dividends paid on each share of Class A Common Stock exceeds $2.00 in each year between the closing and the date the first earn-out is achieved (with any dividends paid in the stub year in which the first earn-out is achieved annualized for purposes of determining what portion of such dividends would have, on an annual basis, exceeded $2.00), multiplied by 2.5 million, (ii) divided by $50.00. If the 30-Day VWAP of the Class A Common Stock is $60.00 or more per share (on a split-adjusted basis) at any time within the seven years following the closing (which $60.00 threshold will be reduced by the amount by which annual cash dividends paid on each share of Class A Common Stock exceeds $2.00 in each year between the closing and the date the earn-out is achieved, but not below $60.00), the contributors will receive an additional 2.5 million Sitio OpCo Partnership Units (and an equivalent number of shares of Class C Common Stock). Upon recognition of the earn-out, as there is no consideration received, the Company would record the payment of the earn-out as adjustments through equity (temporary equity and additional-paid-in-capital).

Partners’ Capital

Committed Capital

As of September 30, 2022, as a result of the Falcon Merger, the Company no longer had any Partners’ Capital.

As of December 31, 2021, the Predecessor had aggregate capital commitments (the “Committed Capital”) of $618.4 million from Limited Partners and $8.0 million from the General Partner. At December 31, 2021, approximately $29.5 million of this Committed Capital remained available to call for purposes of satisfying investment commitments, management fees, and expenses over the remaining life of the Predecessor. Through December 31, 2021, the Predecessor’s contributed capital as a percentage of total Committed Capital was approximately 95%.

Distributions

In June 2022 prior to the Falcon Merger, DPM HoldCo distributed $13.3 million to its outside owners, including $1.9 million to an affiliate Kimmeridge fund.

In October 2021, DPM HoldCo distributed $60.9 million to its outside owners, including $8.7 million to an affiliate Kimmeridge fund. In November 2021, the Predecessor made a distribution of $67.5 million to its partners, comprised of approximately $66.6 million to Limited Partners and $0.9 million to its General Partner.

9. Temporary Equity

Temporary equity represents ownership interests held in the form of Class C Common Stock and Sitio OpCo Partnership Units. Pursuant to the Falcon Reverse Merger Agreement, Desert Peak became a subsidiary of Sitio OpCo Partnership. In connection with the Falcon Merger, the Predecessor’s equity holders received 62 million shares of the Company’s Class C Common Stock and a corresponding number of Sitio OpCo Partnership Units. In connection with the Falcon Merger, a prior Class C common stockholder in Falcon received 10 million Class C shares and a corresponding number of Sitio OpCo Partnership Units.

Class C Common Stock is classified as temporary equity in the consolidated balance sheet as the redemption rights of each holder of Sitio OpCo Partnership Units for either shares of Class A Common Stock or an equivalent amount of cash is not solely within the Company’s control. This is due to the fact that the holders of Class C Common Stock control a majority of the votes of the board of directors through ownership of a majority of the voting stock, which allows the holders of Class C Common Stock to effectively control the determination of whether a redemption would be settled in shares of Class A Common Stock or an equivalent amount of cash. Temporary equity is recorded at the greater of the carrying value or redemption amount with a corresponding adjustment to retained earnings or if a retained deficit to additional paid-in capital. From the date of the Falcon Merger through September 30, 2022, the Company recorded adjustments to the value of temporary equity as presented in the table below (in thousands):


	Temporary equity adjustments
Balance – June 7, 2022(1)	$	1,395,799
Share-based compensation		148
Conversion of Class C Common Stock to Class A Common Stock		(11,909	)
Net income attributable to temporary equity		26,271
Adjustment of temporary equity to redemption amount (2)		254,368
Balance – June 30, 2022	$	1,664,677
Share-based compensation	$	568
Conversion of Class C Common Stock to Class A Common Stock		(124	)
Distributions to holders of temporary equity		(50,510	)
Net income attributable to temporary equity		59,872
Adjustment of temporary equity to redemption amount (3)		(101,282	)
Balance – September 30, 2022	$	1,573,201

(1) Based on 71,752,285 shares of Class C Common Stock outstanding at June 7, 2022.

(2) Based on 71,140,064 shares of Class C Common Stock outstanding and Class A Common Stock 5-day volume-weighted average price of $23.40 at June 30, 2022.

(3) Based on 71,134,752 shares of Class C Common Stock outstanding and Class A Common Stock 5-day volume-weighted average price of $22.12 at September 30, 2022.

10. Share-Based Compensation

In connection with the Falcon Merger, the Company adopted the Sitio Royalties Corp. Long Term Incentive Plan (the “Plan”). An aggregate of 8,384,083 shares of Class A Common Stock are available for issuance under the Plan. The Plan permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), stock awards, dividend equivalents, other stock-based awards, cash awards, and substitute awards. Shares that are cancelled, forfeited, exchanged, settled in cash or otherwise terminated will be available for delivery pursuant to other awards. Dividend equivalent rights (“DERs”) are also available for grant under the Plan, either alone or in tandem with other specific awards, which will entitle the recipient to receive an amount equal to dividends paid on a Class A Common Stock. Dividends paid in connection with the DERs are accounted for as a reduction in retained earnings for those awards that are expected to vest. Awards that are forfeited could cause a reclassification of any previously recognized DERs payments from a reduction in retained earnings to additional compensation cost. The Plan is administered by the Compensation Committee of the Sitio Board of Directors (the “Compensation Committee”). As of September 30, 2022, a total of 7,673,641 shares of Class A Common Stock remain available for future grant under the Plan.

For the three and nine months ended September 30, 2022, the Company incurred $4.0 and $4.9 million, respectively, of share-based compensation which is included in general and administrative expense in the accompanying condensed consolidated statements of income. There was no share-based compensation expense recognized for the three and nine months ended September 30, 2021. For the three and nine months ended September 30, 2022, the Company paid $284,000, respectively, related to DERs. For the three and nine months ended September 30, 2021, no DERs were paid.

Restricted Stock Units

In accordance with the Plan, the Compensation Committee is authorized to issue RSUs to eligible executive officers and employees. The Company estimates the fair value of the RSUs as the closing price of the Company’s Class A Common Stock on the grant date of the award, which is expensed over the applicable service period. RSUs granted by the Company include dividend equivalent rights.

In connection with the Falcon Merger, the Board granted one-time equity-based awards to our executive officers and employees under the Plan, consisting of RSUs subject to a vesting period of one year. The Board also granted an annual equity-based award to our executive officers under the Plan, which consists of RSUs that vest in equal installments on the first three anniversaries of June 7, 2022.

The following table summarizes activity related to unvested RSUs for the nine months ended September 30, 2022.


	Restricted Stock Units
	Number of Shares			Grant Date Fair Value
Unvested at January 1, 2022		—		$	—
Granted		347,291			29.04
Forfeited		(348	)		29.12
Vested		—			—
Unvested at September 30, 2022		346,943		$	29.04

For the three and nine months ended September 30, 2022, the Company recognized $2.0 million and $2.5 million, respectively, of share-based compensation expense related to RSUs. As of September 30, 2022, there was approximately $7.6 million of unamortized equity-based compensation expense related to unvested RSUs. That expense is expected to be recognized over a weighted average period of approximately 1.5 years. As of and for the three and nine months ended September 30, 2021 there was no share-based compensation expense and no unamortized expense related to RSUs.

Deferred Share Units

In accordance with the Plan, the Compensation Committee is authorized to issue deferred share units (“DSUs”) to our non-employee directors. The Company estimates the fair value of the DSUs as the closing price of the Company’s Class A Common Stock on the grant date of the award, which is expensed over the applicable vesting period.

In connection with the Falcon Merger, the Board granted awards of DSUs under the Plan to each of our non-employee directors. The DSUs are expected to vest in equal quarterly installments over the one-year period beginning on June 7, 2022.

The following table summarizes activity related to unvested DSUs for the nine months ended September 30, 2022.


	Deferred Share Units
	Number of Shares		Grant Date Fair Value
Unvested at January 1, 2022		—	$	—
Granted		62,586		28.80
Forfeited		—		—
Vested		—		—
Unvested at September 30, 2022		62,586	$	28.80

For the three and nine months ended September 30, 2022, the Company recognized $425,000 and $521,000, respectively, of share-based compensation expense related to DSUs. As of September 30, 2022, there was approximately $1.3 million of unamortized equity-based compensation expense related to unvested DSUs. That expense is expected to be recognized over a weighted average period of 0.7 years. For the three and nine months ended September 30, 2021 there was no share-based compensation expense and no unamortized expense related to DSUs.

Performance Stock Units

In accordance with the Plan, the Compensation Committee is authorized to issue performance stock units (“PSUs”) to eligible employees and directors.

In connection with the Falcon Merger, the Board granted an annual equity-based award (“2022 Annual Equity Award”) to our executive officers under the Incentive Plan, which consisted of PSUs. The PSUs will be eligible to be earned based on achievement of certain pre-established goals for annualized absolute Total Shareholder Return (“TSR”) over a three-year period following the consummation of the Falcon Merger.

The performance targets associated with the PSU award structure are outlined below:


	Annualized Absolute TSR Goal			Percentage of Target PSUs Earned
Base of Range	Less than 0%				0	%
Threshold		0	%		50	%
Target		10	%		100	%
Maximum		20	%		200	%

For purposes of determining our annualized absolute TSR over the performance period, the beginning stock price will be based on our 20-day volume weighted average stock price beginning on June 8, 2022 and the ending price will generally be based on the 20-day volume weighted average stock price ending on the last day of the performance period. PSU payouts for results that fall in between a stated threshold will be interpolated linearly.

The grant date fair values of the PSUs were determined using Monte Carlo simulations, which use a probabilistic approach for estimating the fair value of the awards. The expected volatility was derived from the historical volatility of Falcon. The risk-free interest rate was determined using the yield for zero-coupon U.S. Treasury bills that is commensurate with the performance measurement period. The PSU award agreements provide that TSR will be calculated assuming dividends distributed will be reinvested over the performance period. As such, we have applied a dividend yield of 0.00%, which is mathematically equivalent to reinvesting dividends.

The following table summarizes the weighted average fair value of the PSUs and the assumptions used to determine the fair value:


	2022
Volatility		67.23	%
Risk-free rate		2.89	%
Dividend yield		0.00	%
Weighted average fair value	$	39.11

The following table summarizes activity related to unvested PSUs for the nine months ended September 30, 2022.


	Preferred Stock Units
	Number of Shares		Grant Date Fair Value
Unvested at January 1, 2022		—	$	—
Granted		300,913		39.11
Forfeited		—		—
Vested		—		—
Unvested at September 30, 2022		300,913	$	39.11

For the three and nine months ended September 30, 2022, the Company recognized $988,000 and $1.2 million, respectively, of share-based compensation expense related to PSUs. As of September 30, 2022, there was approximately $10.5 million of unamortized equity-based compensation expense related to unvested PSUs. That expense is expected to be recognized over a weighted average period of 2.7 years. For the three and nine months ended September 30, 2021 there was no share-based compensation expense and no unamortized expense related to PSUs.

Sitio OpCo Restricted Stock Awards

In connection with the Falcon Merger, legacy Desert Peak owners (the “Falcon Merger Sponsors”), desired to assign, transfer and convey their rights to receive a portion of their Falcon Merger Consideration to our executive officers as an incentive to continue to serve as executive officers following the Falcon Merger. The Falcon Merger Consideration consists of units of Sitio Royalties OpCo Partnership Units and an equal number of shares of Class C Common Stock. The conveyance of Falcon Merger Consideration, which consists of Class C Common Stock, is deemed to be a grant of restricted stock awards (each, an “RSA”) to our executive officers. Each Sitio OpCo RSA is expected to vest in equal installments on the first four anniversaries of June 6, 2022. The Company estimated the fair value of the RSAs as the closing price of the Company’s Class A Common Stock on the grant date of the award, which is expensed over the applicable vesting period.

The following table summarizes activity related to unvested Sitio OpCo RSAs for the nine months ended September 30, 2022


	Sitio OpCo Restricted Stock Awards
	Number of Shares		Grant Date Fair Value
Unvested at January 1, 2022		—	$	—
Granted		309,527		29.12
Forfeited		—		—
Vested		—		—
Unvested at September 30, 2022		309,527	$	29.12

For the three and nine months ended September 30, 2022, the Company recognized $568,000 and $716,000, respectively, of share-based compensation expense related to the Sitio OpCo RSAs. As of September 30, 2022, there was approximately $8.3 million of unamortized equity-based compensation expense related to the unvested Sitio OpCo RSAs. That expense is expected to be recognized over a weighted average period of approximately 3.7 years. As of and for the nine months ended September 30, 2021 there was no share-based compensation expense and no unamortized expense related to the Sitio OpCo RSAs.

11. Warrants

In July 2017, Falcon consummated its IPO of units, each consisting of one share of Class A Common Stock and one-half of one warrant (the “Public Warrants”). As a result of the Falcon Merger, the Company’s warrants were adjusted such that four whole Public Warrants became exercisable for one share of Class A Common Stock at an exercise price of $44.84 per share of Class A Common Stock. Pursuant to the Warrant Agreement, to the extent that any common stock dividend paid by the Company, when combined with other common stock dividends paid in the prior 365 days, exceeds $2.00, it is categorized as an Extraordinary Dividend. Extraordinary Dividends reduce, penny for penny, the exercise price of the Warrants. As of September 30, 2022, the exercise price of the Warrants was $44.73 after giving effect to the Reverse Stock Split and after the Extraordinary Dividend that was paid in August 2022. The Public Warrants will expire in August 2023 or earlier upon redemption or liquidation. The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public Warrant holders. However, this redemption right can only be exercised if the last sale price of the Class A Common Stock equals or exceeds $72.00 per share, after giving effect to the Reverse Stock Split, for any 20 trading days within a 30-day trading period ending three business days before we send the notice of redemption to the Public Warrant holders.

Upon closing of the Company’s IPO, Osprey Sponsor, LLC (the “IPO Sponsor”) purchased an aggregate of 7,500,000 warrants (the “Private Placement Warrants”) at a price of $1.00 per warrant. As a result of the Falcon Merger, the Company’s Private Placement Warrants were adjusted such that four Private Placement Warrants are exercisable for one share of Class A Common Stock at an exercise price of $44.73 per share of Class A Common Stock. The Private Placement Warrants are identical to the Public Warrants discussed above, except (a) they will not be redeemable by the Company so long as they are held by the IPO Sponsor and (b) they may be exercisable by the holders on a cashless basis.

The Company accounted for the Public Warrants and Private Placement Warrants in accordance with ASC 815 – Derivatives and Hedging (“ASC 815”). ASC 815 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815, including any freestanding financial instrument that is potentially settled in an entity’s own stock.

Due to certain circumstances that could require the Company to settle the Warrants in cash, the Warrants have been classified as derivative liabilities, as opposed to an equity contract. Therefore, the Warrants were recorded at fair value at the time of the Falcon Merger and are remeasured at each reporting period with the change in fair value recorded in the statements of income. As of September 30, 2022, there were 13,749,998 Public Warrants outstanding and 7,500,000 Private Placement Warrants outstanding. There were no Warrants outstanding for the Predecessor as of December 31, 2021. The fair value of the Public Warrants was determined using the readily observable publicly traded price (Level 1) as of the end of the reporting period. The fair value of the Public Warrants as of September 30, 2022 was $2.3 million. The fair value of the Private Placement Warrants was estimated utilizing a Black-Scholes model using the following range of significant unobservable inputs (Level 3) as of September 30, 2022:


Stock price	$	22.11
Volatility		46.4	%
Risk-free rate		3.98	%
Dividend yield		9.05	%
Term	0.9 years

The following is a reconciliation of the beginning and ending balance for the Private Placement Warrant liability measured at fair value using significant unobservable inputs (Level 3) during the three months ended September 30, 2022 and from the date of the Falcon Merger through September 30, 2022 (in thousands). There were no warrants outstanding for the Predecessor prior to the date of the Falcon Merger.


	Three Months Ended September 30,
	2022
Balance at June 30	$	694
Decrease in fair value		(263	)
Balance at September 30	$	431


	Nine Months Ended September 30,
	2022
Balance at June 7	$	2,213
Decrease in fair value		(1,782	)
Balance at September 30	$	431

12. Derivative Instruments

Commodity Derivatives

The Company may enter into commodity derivative contracts to manage its exposure to oil and gas price volatility associated with its production. These derivatives are not entered into for trading or speculative purposes. While the use of these instruments limits the downside risk of adverse commodity price changes, their use may also limit future cash flows from favorable commodity price changes. Depending on acquisitions consummated, changes in oil and gas futures markets, and management’s view of underlying supply and demand trends, the Company may increase or decrease its derivative positions. The Company’s commodity derivative contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses on commodity derivatives are recognized in the Company’s statement of income.

The Company may utilize fixed price swaps, basis swaps, and two- and three-way collars to manage commodity price risks. The Company may enter into these contracts when management believes that favorable future sales prices for the Company’s production can be secured and acquisitions consummated are accretive. Under fixed price swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty. When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from the counterparty. The Company may also enter into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price that is representative of the price received by many of our operators. Under collar agreements, the Company receives the difference between the published index price and a floor price if the index price is below the floor price or the Company pays the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index is between the floor and the ceiling. By utilizing a collar, the Company has fixed the minimum and maximum prices received on the underlying production.

The Company’s oil and gas swap contracts as of September 30, 2022 are summarized below:


	Oil (NYMEX WTI)
Remaining Term	Bbl per Day		Weighted Average Price per Bbl
October 2022 - December 2022		2,200	$	106.31
January 2023 - December 2023		3,050	$	93.71
January 2024 - December 2024		3,300	$	82.66
January 2025 - June 2025		1,100	$	74.65


	Gas (NYMEX Henry Hub)
Remaining Term	MMBtu per Day		Weighted Average Price per MMBtu
October 2022 - December 2022		500	$	4.63
January 2023 - December 2023		500	$	3.83
January 2024 - December 2024		500	$	3.41

The Company’s oil and gas two-way commodity collar contracts as of September 30, 2022 are summarized below:


	Oil (NYMEX WTI)
Remaining Term	Bbl per Day		Weighted Average Floor Price per Bbl		Weighted Average Ceiling Price per Bbl
January 2025 – June 2025		2,000	$	60.00	$	93.20


	Gas (NYMEX Henry Hub)
Remaining Term	MMBtu per Day		Weighted Average Floor Price per MMBtu		Weighted Average Ceiling Price per MMBtu
October 2022 - December 2022		6,000	$	6.00	$	9.69
January 2023 - December 2023		8,500	$	4.82	$	7.93
January 2024 - December 2024		11,400	$	4.00	$	7.24
January 2025 – June 2025		11,600	$	3.31	$	10.34

The Company was not party to any basis swaps or three-way collar contracts as of September 30, 2022. The Company was not party to any derivative contracts as of December 31, 2021.

Financial Summary

The following table presents a summary of the Company’s derivative instruments and where such values are recorded on the condensed consolidated balance sheet as of September 30, 2022 (in thousands):


	September 30, 2022
	Balance sheet location	Fair value
Asset derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current assets	$	22,531
Commodity contracts	Long-term assets		28,888

Total asset derivatives		$	51,419

Liability derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current liabilities	$	150
Commodity contracts	Long-term liabilities		—

Total liability derivatives		$	150

Net derivatives		$	51,269

The following table presents the gross fair values of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented on the condensed consolidated balances sheet (in thousands):


	September 30, 2022
	Gross Fair Value			Gross Amounts Offset			Net Fair Value
Commodity derivative assets	$	58,531		$	(7,112	)	$	51,419
Commodity derivative liabilities	$	(7,262	)	$	7,112		$	(150	)

The following table is a summary of derivative gains and losses, and where such values are recorded in the condensed consolidated statements of income for the nine months ended September 30, 2022 and 2021 (in thousands):


		Three Months Ended				Nine Months Ended
	Statement of income location	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Commodity derivative gain	Other income	$	34,613	$	—	$	53,508	$	—

The fair value of commodity derivative instruments was determined using Level 2 inputs.

Credit Risk in Derivative Instruments

The Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above. All commodity derivative counterparties are current lenders under our Revolving Credit Facility. Accordingly, the Company is not required to provide any credit support to its commodity derivative counterparties other than cross collateralization with the properties securing the Revolving Credit Facility. The Company’s commodity derivative contracts are documented with industry standard contracts known as a Schedule to the Master Agreement and International Swaps and Derivative Association, Inc. Master Agreement (“ISDA”). Typical terms for each ISDA include credit support requirements, cross default provisions, termination events, and set-off provisions. The Company has set-off provisions with its lenders that, in the event of counterparty default, allow the Company to set-off amounts owed under the Revolving Credit Facility or other general obligations against amounts owed to the Company for commodity derivative contract assets.

13. Fair Value Measurement

The Company is subject to ASC 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price

information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to management’s perceived risk of that instrument.

Level 1 – Fair values are based on unadjusted quoted prices in active markets that are accessible at the measurement date of identical, unrestricted assets.

Level 2 – Fair values are based on quoted prices for markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 – Inputs that are unobservable and significant to the overall fair value measurement and include situations where there is little, if any, market activity for the asset or liability.

The Company’s proved oil and gas properties are assessed for impairment on a periodic basis. If the Company’s proved properties are determined to be impaired, the carrying basis of the properties is adjusted down to fair value. This represents a fair value measurement that would qualify as a non-recurring Level 3 fair value measurement. The fair value represents management’s best estimate using the inputs available as of September 30, 2022 and December 31, 2021. No impairment of proved properties was recorded for the nine months ended September 30, 2022 and 2021.

The fair value of the Company’s derivative instruments (Level 2) was estimated using quoted forward prices for commodities, discounted cash flows and credit risk adjustments. See “Note 12 – Derivative Instruments” for further information on the fair value of the Company’s derivative instruments.

The fair value of the Company’s Public Warrants was determined using readily observable, publicly-traded prices (Level 1) for the warrants as of September 30, 2022. The fair value of the Company’s Private Placement Warrants were estimated utilizing a Black-Scholes model using a range of significant unobservable inputs (Level 3). See “Note 11 – Warrants” for further information on the fair value of the Company’s Public Warrants and Private Placement Warrants.

The carrying values of cash, accrued revenue, accounts receivable, and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments. The carrying amount of debt outstanding pursuant to our 2026 Senior Notes and Revolving Credit Facility approximates fair value as the borrowings bear interest at variable rates and are reflective of market rates (Level 2).

Certain nonfinancial assets and liabilities, such as assets and liabilities acquired in a business combination, are measured at fair value on a nonrecurring basis on the acquisition date and are subject to fair value adjustments under certain circumstances. Inputs used to determine such fair values are primarily based upon internally-developed engineering and geology models, publicly-available drilling disclosures, a risk-adjusted discount rate, and publicly-available data regarding mineral transactions consummated by other buyers and sellers (Level 3).

Mineral assets not acquired through a business combination are measured at fair value on a nonrecurring basis on the acquisition date. The original purchase price of mineral assets is allocated between proved and unproved properties based on the estimated fair values. Inputs used to determine such fair values are primarily based upon internally-developed engineering and geology models, publicly-available drilling disclosures, a risk-adjusted discount rate, and publicly-available data regarding mineral transactions consummated by other buyers and sellers (Level 3).

14. Income Taxes

The Company uses the asset and liability method for accounting for income taxes and updates its annual effective income tax rate on a quarterly basis. Under this method an estimated annual effective rate is applied to the Company’s year-to-date income but for discrete items which are recorded when settled. Our effective tax rate may vary quarterly because of the mix and timing of our actual earnings compared to annual projections which may affect periodic comparisons.

Income tax expense was $2.6 million and $5.2 million for the three and nine months ended September 30, 2022, respectively, resulting in an effective tax rate of 3.6% and 2.8% for the three and nine months ended September 30, 2022, respectively.

Total income tax expense for the three and nine months ended September 30, 2022 differed from amounts computed by applying the U.S. federal statutory tax rate of 21% to pre-tax book income for those periods principally because of the Company’s temporary equity.

15. Commitments and Contingencies

The following table is a schedule of future minimum lease commitments for leases of office space under operating leases as of September 30, 2022 (in thousands):


Year	Total
Remainder of 2022	$	183
2023		741
2024		758
2025		653
2026		643
2027		658
Thereafter		875
Total	$	4,511

Legal Proceedings

From time to time, the Company may be involved in various legal proceedings, lawsuits, and other claims in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Management does not believe that the resolution of these matters will have a material adverse impact on our financial condition, cash flows or results of operations.

16. Related Party Transactions

The Predecessor was founded by Kimmeridge Energy Management Company, LLC (collectively with its affiliates, “Kimmeridge” or the “Manager”).

Common Control Transaction

The Predecessor had acquired oil and gas properties from separate limited partnerships whereby the general partner of the Predecessor and the general partner of the separate limited partnerships were affiliated. These transactions were accounted for as a reduction to partners’ capital as the affiliated entities were under common control. The following transaction was completed during the year ended December 31, 2021:

Delaware Basin ORRIs Acquisition

In October 2020, another partnership owned and managed by Kimmeridge acquired a 2.0% (on an 8/8ths basis) overriding royalty interest in all of Callon’s operated assets in the Delaware Basin, proportionately reduced to Callon’s net revenue interest.

In June 2021, the Predecessor entered into a definitive agreement to acquire 84% of the Delaware Basin portion of the Chambers ORRI from Chambers Minerals, LLC, a subsidiary of Fund V. Immediately following the consummation of the contributions of assets to the Predecessor, Chambers HoldCo, LLC (the managing member of Chambers Minerals, LLC) was issued equity in DPM HoldCo. As the general partner of Fund V and the General Partner of the Predecessor were affiliated, the transaction was required to be and was subsequently approved by the Predecessor’s Limited Partner Advisory Committee in June 2021.

The Chambers Acquisition was accounted for as an asset acquisition. The Chambers Acquisition was also accounted for as a transaction between entities under common control; the controlling ownership and management of the general partner of Fund V and the general partner of the Predecessor had significant overlap, including responsibility for the management, control, and direction of the business affairs of the respective partnerships. As the Predecessor and Fund V are entities under common control, the Predecessor recorded the acquisition utilizing the properties’ net book value. The properties acquired by the Predecessor had a historical net book value to Fund V at the time of sale of approximately $60.6 million ($45.3 million was allocated to unproved property and $15.3 million was allocated to proved property). Accordingly, the $37.5 million excess of the fair value of the properties above their net book value was recorded as a decrease to partners’ capital at the date of the transaction.

Predecessor Management Fees

The Predecessor entered into a management services arrangement with the Manager. For the three months ended September 30, 2021, the Manager earned and was paid approximately $1.9 million in management fees relating to management services, respectively. No such fees were earned or paid for the three months ended September 30, 2022. For the nine months ended September 30, 2022 and 2021 the Manager earned and was paid approximately $3.2 million and $5.6 million in management fees relating to management services, respectively. This arrangement terminated in connection with the Falcon Merger.

Cost Reimbursements and Allocations from Affiliates

General and administrative expenses and certain capitalizable costs are not directly associated with the generation of the Predecessor’s revenues and include costs such as employee compensation, office expenses and fees for professional services. These costs were allocated on a “time spent” basis, a pro rata basis, or by another manner which was designed to be fair and equitable. Some of those costs were incurred on the Predecessor’s behalf and allocated to the Predecessor by the Manager and its affiliates and reimbursed by the Predecessor. These costs may not be indicative of costs incurred by the Predecessor had such services been provided by an unaffiliated company during the period presented. We have not estimated what these costs and expenses would be if they were incurred by the Predecessor on a standalone basis as such estimate would be impractical and lack precision. We believe the methodology utilized by Kimmeridge Operations, LLC (a subsidiary of the Manager, “Kimmeridge Operations”) and the Manager for the allocation of these costs to be reasonable.

From time to time, the Predecessor reimbursed Kimmeridge Operations and the Manager for general and administrative expenses. Kimmeridge Operations staff performed land and administrative services on behalf of the Predecessor and the Predecessor reimbursed the Manager for investment and expenses prefunded on behalf of the Predecessor. For the three months ended September 30, 2021, the Predecessor reimbursed approximately $1.1 million for these costs. No such costs were reimbursed for the three months ended September 30, 2022. For the nine months ended September 30, 2022 and 2021, the Predecessor reimbursed approximately $105,000 and $3.5 million related to these services. As of September 30, 2022 there were no amounts due to Kimmeridge Operations or the Manager. As of December 31, 2021, approximately $142,000 was due to the Manager.

17. Subsequent Events

Management has evaluated all subsequent events from the balance sheet date through the date these financial were available to be issued for disclosure or recognition within these financial statements and no items requiring disclosure were identified except for the events identified below.

Cash Dividends

On November 8, 2022, the Company declared a cash dividend of $0.72 per share of Class A Common Stock with respect to the third quarter of 2022. The dividend is payable on November 30, 2022 to the stockholders of record at the close of business on November 21, 2022.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal securities laws. All statements, other than statements of present or historical fact, included in this quarterly report concerning, among other things, strategy, future operations, financial condition, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. Words such as “could,” “should,” “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” the negative of such terms and other similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. Such forward-looking statements, can be affected by assumptions used or by known or unknown risks or uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of oil, natural gas and NGLs. Consequently, no forward-looking statements can be guaranteed.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. Factors that could cause actual results to differ materially from the results contemplated by such forward-looking statements include, but are not limited to, the following risks and uncertainties:

•

the timing of and our ability to consummate the Brigham Merger;

•

our ability to identify, complete and integrate operations or realize any anticipated benefits, savings or growth of acquisitions of properties or businesses, including the pending Brigham Merger;

•

our ability to execute our business strategy;

•

changes in general economic, business or industry conditions, including the material and adverse negative consequences of the COVID-19 pandemic and its unfolding impact on the global and national economy, the continued impact of inflation and associated monetary policy and/or as a result of the armed conflict in Ukraine and associated economic sanctions on Russia;

•

the actions of the Organization of Petroleum Exporting Countries (“OPEC”) and other significant producers and governments, including the armed conflict in Ukraine and the potential destabilizing effect such conflict may pose for the global oil and natural gas markets, and the ability of such producers to agree to and maintain oil price and production controls;

•

the effect of change in commodity prices, including the volatility of realized oil and natural gas prices, as a result of the Russian invasion of Ukraine that has led to significant armed hostilities and a number of severe economic sanctions on Russia or otherwise;

•

the level of production on our properties;

•

overall and regional supply and demand factors, delays, or interruptions of production;

•

our ability to replace our oil and natural gas reserves;

•

competition in the oil and natural gas industry;

•

conditions in the capital markets and our ability, and the ability of our operators, to obtain capital or financing on favorable terms or at all;

•

title defects in the properties in which we invest;

•

risks associated with the drilling and operation of crude oil and natural gas wells, including uncertainties with respect to identified drilling locations and estimates of reserves;

•

the availability or cost of rigs, equipment, raw materials, supplies, oilfield services or personnel;

•

restrictions on the use of water;

•

the availability of pipeline capacity and transportation facilities;

•

the ability of our operators to comply with applicable governmental laws and regulations and to obtain permits and governmental approvals;

•

the impact of environmental, health and safety and other governmental regulations and of current or pending legislation, including federal and state legislative and regulatory initiatives relating to hydraulic fracturing and the impact of the Inflation Reduction Act of 2022 (the “IRA 2022”) and any related legislation, regulations or changes in policy;

•

future operating results;

•

risk related to our hedging activities;

•

exploration and development drilling prospects, inventories, projects, and programs;

•

the impact of reduced drilling activity in our focus areas and uncertainty in whether development projects will be pursued;

•

operating hazards faced by our operators;

•

technological advancements;

•

weather conditions, natural disasters and other matters beyond our control; and

•

certain risk factors discussed elsewhere in this quarterly report.

Should one or more of the risks or uncertainties described in this quarterly report, our Annual Report or any of our other SEC filings, occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We caution that the foregoing list of factors is not exclusive. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time, and we may be subject to currently unforeseen risks that may have a materially adverse effect on our company. All subsequent written and oral forward-looking statements concerning our company, or any person acting on our behalf, are expressly qualified in their entirety by the cautionary statements above. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this quarterly report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Reserve engineering is a process of estimating underground accumulations of oil, natural gas and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could impact our strategy. Accordingly, reserve estimates may differ significantly from the quantities of oil, natural gas and NGLs that we expect our operators to ultimately recover. Should one or more of the risks or uncertainties described under “Risk Factors” in this quarterly report occur, Sitio’s actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this quarterly report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. The forward-looking statements speak only as of the date made and, other than as required by law, we do not undertake any obligation to update publicly or revise any of these forward-looking statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2021, 2020, and 2019 of Kimmeridge Mineral Fund, L.P. in the Current Report on Form 8-K filed with the SEC on June 10, 2022 and interim unaudited condensed consolidated financial statements of Sitio Royalties Corp. and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise indicated or required by context, references to (a) the “Company,” “Sitio,” “we,” “us,” “our” or similar terms refer to (i) for periods prior to the closing of the Falcon Merger, Desert Peak and its subsidiaries and (ii) for periods subsequent to the closing of the Falcon Merger, Sitio Royalties Corp. and its subsidiaries, including Desert Peak and (b) “KMF,” “KMF Land,” “Desert Peak,” or similar terms, when used in a historical context refer to our “Predecessor,” Kimmeridge Mineral Fund, LP, for financial reporting purposes.

The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors which include, but are not limited to market prices for oil, natural gas and NGLs, production volumes, estimates of proved reserves, capital for mineral acquisitions, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Overview

As of September 30, 2022, we owned mineral and royalty interests representing approximately 174,000 NRAs when adjusted to a 1/8th royalty. For the three months ended September 30, 2022, the average net daily production associated with our mineral and royalty interest was 17,990 BOE/d, consisting of 9,192 Bbls/d of oil, 31,694 Mcf/d of natural gas and 3,515 Bbls/d of NGLs. For the nine months ended September 30, 2022, the average net daily production associated with our mineral and royalty interests was 13,950 BOE/d, consisting of 7,211 Bbls/d of oil, 23,741 Mcf/d of natural gas and 2,782 Bbls/d of NGLs. Since our Predecessor’s formation in November 2016, we have accumulated our acreage position by making 185 acquisitions. We expect to continue to grow our acreage position by making acquisitions that meet our investment criteria for geologic quality, operator capability, remaining growth potential, cash flow generation and, most importantly, rate of return.

Our mineral and royalty interests entitle us to receive a fixed percentage of the revenue from crude oil, natural gas and NGLs produced from the acreage underlying our interests. We are not obligated to fund drilling and completion costs, plugging and abandonment costs or lease operating expenses associated with oil and gas production and we incur only our proportionate share of production and ad valorem taxes and, in some cases, gathering, processing and transportation costs which reduce the amount of revenue we recognize. For the nine months ended September 30, 2022, our production and ad valorem taxes were approximately $4.73 per BOE, relative to an average realized price of $68.33 per BOE. We do not anticipate engaging in any activities, other than acquisitions, that will incur capital costs. We believe our cost structure and business model will allow us to return a significant amount of our cash flows to stockholders.

Recent Developments

Brigham Merger

On September 6, 2022, Sitio, Sitio OpCo, New Sitio, Brigham Merger Sub, Sitio Merger Sub, and Opco Merger Sub LLC entered into the Merger Agreement with Brigham and Brigham Opco, pursuant to which, Sitio will acquire Brigham in an all-stock transaction through: (i) the Brigham Subsidiary Merger, with Brigham surviving the Brigham Subsidiary Merger as a wholly owned subsidiary of New Sitio, (ii) the Sitio Merger, with Sitio surviving the Sitio Merger as a wholly owned subsidiary of New Sitio, and (iii) the Opco Merger , with Brigham Opco surviving the Opco Merger as a wholly owned subsidiary of Sitio OpCo, in each case on the terms set forth in the Merger Agreement. The Sitio Merger and the Brigham Subsidiary Merger shall become effective concurrently at the First Effective Time, and the Opco Merger shall become effective immediately following the First Effective Time at the Second Effective Time.

On the terms and subject to the conditions set forth in the Merger Agreement, (i) at the First Effective Time, (A) each share of Brigham’s Class A common stock, par value $0.01 per share, issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 1.133 fully-paid and nonassessable shares of New Sitio Class A Common Stock, (B) each share of the Brigham’s Class B common stock, par value $0.01 per share, issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 1.133 fully-paid and nonassessable shares of New Sitio Class C Common Stock, (C) each share of Class A Common Stock, issued and outstanding immediately prior to the First Effective Time will be converted into one share of New Sitio Class A Common Stock and (D) each share of Class C Common Stock issued and outstanding immediately prior to the First Effective Time, will be converted into one share of New Sitio Class C Common Stock, in each case, excluding shares owned by

Sitio, Brigham or any wholly owned subsidiary of Sitio or Brigham and, to the extent applicable, shares owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to the DGCL and, (ii) at the Second Effective Time, each Brigham Opco Unit issued and outstanding immediately prior to the Second Effective Time will be converted into the right to receive 1.133 Sitio OpCo Partnership Units.

As a result of the Brigham Merger and as of the Closing, Sitio stockholders immediately prior to the First Effective Time will own approximately 54% of the outstanding shares of New Sitio, and Brigham stockholders immediately prior to the First Effective Time will own approximately 46% of the outstanding shares of New Sitio. Following the Closing, New Sitio will operate under the name “Sitio Royalties Corp.”

Credit Facility

On September 21, 2022, Sitio OpCo and the other guarantors party thereto entered into the RBL Third Amendment, pursuant to which the Revolving Credit Facility was amended to permit the issuance of notes and the transactions contemplated by the Note Purchase Agreement.

2026 Senior Notes

On September 21, 2022, Sitio OpCo, as issuer, and certain subsidiaries of Sitio OpCo, as guarantors, entered into the Note Purchase Agreement with the Holders.

Pursuant to the Note Purchase Agreement, Sitio OpCo issued the 2026 Senior Notes to the Holders in an aggregate principal amount of $450.0 million. Sitio OpCo used $425.0 million of the proceeds from the 2026 Senior Notes to repay in full all amounts outstanding under the Bridge Loan Facility with the remainder used for general corporate purposes. The 2026 Senior Notes mature on September 21, 2026.

Sitio OpCo may elect, at its option, to prepay the 2026 Senior Notes in whole or in part at any time, subject to payment of a premium determined in accordance with the table below based on the length of time between the issuance date and the prepayment date:


Period	Premium
Months 0 - 12	Customary “make-whole” premium plus 3.00%
Months 13 - 24		3.00	%
Months 25 - 36		1.00	%
Months 37 - 48		0.00	%

364-Day Bridge Loan Agreement

On June 24, 2022, Sitio OpCo, a wholly owned subsidiary of Sitio Royalties Corp, as borrower, entered into the Bridge Loan Agreement with Bank of America, N.A. as Administrative Agent for the Lenders, BofA Securities, Inc., as joint lead arranger and sole bookrunner, and Barclays Bank PLC and KeyBank National Association, as joint lead arrangers. The Bridge Loan Agreement provides for a 364-day term loan credit facility in the aggregate principal amount of $425.0 million. The Bridge Loan Facility was fully repaid and extinguished on September 21, 2022 using proceeds from the issuance of the 2026 Senior Notes. Upon closure of the Bridge Loan Facility, the Company recognized a loss on extinguishment of debt of $11.5 million associated with unamortized debt issuance costs and other fees incurred in connection with the payoff.

Acquisitions

As of September 30, 2022, we have evaluated over 1,000 potential mineral and royalty interest acquisitions and completed 185 acquisitions from landowners and other mineral interest owners. We intend to capitalize on our management team’s expertise and relationships to continue to make value-enhancing mineral and royalty interest acquisitions in premier basins designed to increase our cash flows per share.

On July 26, 2022, the Company acquired approximately 12,200 net royalty acres from Momentum for a purchase price of $213.3 million, net of customary closing adjustments. The Momentum Acquisition was funded through the Bridge Loan Facility and the Revolving Credit Facility, in addition to cash on hand.

Production and Operations

Our average daily production during the three months ended September 30, 2022 and 2021 was 17,990 BOE/d (51% crude oil) and 7,810 BOE/d (51% crude oil), respectively. For the three months ended September 30, 2022, we received an average of $93.81 per Bbl of crude oil, $6.55 per Mcf of natural gas and $31.98 per Bbl of NGLs, for an average realized price of $65.71 per BOE. For the three months ended September 30, 2021, we received an average of $66.61 per Bbl of crude oil, $3.74 per Mcf of natural gas and $29.43 per Bbl of NGLs, for an average realized price of $46.14 per BOE.

Our average daily production during the nine months ended September 30, 2022 and 2021 was 13,950 BOE/d (52% crude oil) and 6,012 BOE/d (48% crude oil), respectively. For the nine months ended September 30, 2022, we received an average of $98.12 per Bbl of crude oil, $6.05 per Mcf of natural gas and $36.68 per Bbl of NGLs, for an average realized price of $68.33 per BOE. For the nine months ended September 30, 2021, we received an average of $62.63 per Bbl of crude oil, $3.43 per Mcf of natural gas and $28.31 per Bbl of NGLs, for an average realized price of $42.11 per BOE.

As of September 30, 2022, we had 15,933 gross (127.4 net) producing horizontal wells on our acreage. Additionally, as of September 30, 2022, there were 3,002 gross (15.9 net) horizontal wells in various stages of drilling or completion and 2,417 gross active horizontal drilling permits on our acreage.

Economic Indicators

The economy is experiencing elevated inflation levels as a result of global supply and demand imbalances, where global demand continues to outpace current supplies. The BLS Consumer Price Index for all urban consumers increased 8% from September 2021 to September 2022 as compared to the average annual increase of 3% over the previous 10 years. In order to manage the inflation risk currently present in the United States’ economy, the Federal Reserve has utilized monetary policy in the form of interest rate increases in an effort to bring the inflation rate in line with its stated goal of 2% on a long-term basis.

The global economy also continues to be impacted by the effects of the COVID-19 pandemic and global events, among other factors. These events have often caused global supply chain disruptions with additional pressure due to trade sanctions on Russia and other global trade restrictions, among others. As we do not explore, develop or operate on our oil and gas properties, we have not experienced any significant supply chain interruptions as a result of the COVID-19 pandemic or global supply and demand imbalances. However, our operators may experience supply chain disruptions which could impact their ability to develop our properties.

Inflationary pressures could result in increases to our operating expenses that are not fixed such as personnel retention, among other things. Increases in interest rates as a result of inflation and a resulting potentially recessionary economic environment in the United States could also have a negative effect on the demand for oil and natural gas, as well as our borrowing costs.

COVID-19 Pandemic

The initial outbreak of COVID-19 caused a disruption to the oil and natural gas industry and to our business by, among other things, contributing to a significant decrease in global crude oil demand and the price for oil in 2020. This disruption was somewhat alleviated in 2021 and 2022, with the increase in domestic vaccination programs and reduced spread of the COVID-19 virus contributing to an improvement in the economy and higher realized prices for commodities. Since mid-2020 through mid-2022, oil prices have generally improved, with demand steadily increasing despite the uncertainties surrounding the COVID-19 variants, which have continued to inhibit a full global demand recovery. However, the current price environment remains uncertain as responses to the COVID-19 pandemic and newly emerging variants of the virus continue to evolve. Many operators have resumed or increased drilling and completion activities compared to activity levels in 2020 in connection with the increase in commodity prices since mid-2020. Given the dynamic nature of these events, the Company cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist and the impacts on our business from the COVID-19 pandemic, efforts to fight the pandemic and other market events.

The impact of recent developments in Ukraine

In February 2022, Russia launched a large-scale invasion of Ukraine that has led to significant armed hostilities. As a result, the United States, the United Kingdom, the member states of the European Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, has contributed to significant increases and volatility in the price for oil and natural gas, with the posted price for WTI reaching a high of $123.64 per barrel in March 2022. This volatility could negatively impact commodity prices and cause rising inflation that could impact demand for refined products. Given the uncertain timing of a return of refined product demand to historical levels, the extent these events will have an impact on our results of operations is unclear. The geopolitical and macroeconomic consequences of this invasion and associated sanctions cannot be predicted, and such events, or any further hostilities in Ukraine or elsewhere, could severely impact the world economy and may adversely affect our financial condition. The Russian conflict with Ukraine continues to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.

Regulatory Update

Proposed SEC Climate Disclosure Rules

On March 21, 2022, the U.S. Securities and Exchange Commission proposed new rules relating to the disclosure of a range of climate-related risks. We are currently assessing the rule, but at this time we cannot predict the costs of implementation or any potential adverse impacts resulting from the rule. To the extent this rule is finalized as proposed, we or our operators could incur increased costs relating to the assessment and disclosure of climate-related risks. We may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders restricting or seeking more stringent conditions with respect to their investments in certain carbon-intensive sectors.

How We Evaluate Our Operations

We use a variety of operational and financial measures to assess our performance. Among the measures considered by management are the following:

•

volumes of oil, natural gas and NGLs produced;

•

number of producing wells, spud wells and permitted wells;

•

commodity prices; and

•

Adjusted EBITDA.

Volumes of Oil, Natural Gas and NGLs Produced

In order to track and assess the performance of our assets, we monitor and analyze our production volumes from our mineral and royalty interests. We also regularly compare projected volumes to actual reported volumes and investigate unexpected variances.

Producing Wells, Spud Wells and Permitted Wells

In order to track and assess the performance of our assets, we also constantly monitor the number of permitted wells, spud wells, completions, and producing wells on our mineral and royal interests in an effort to evaluate near-term production growth.

Commodity Prices

Historically, oil, natural gas and NGL prices have been volatile and may continue to be volatile in the future. During the past five years, the posted price for WTI has ranged from a low of negative ($36.98) per barrel in April 2020 to a high of $123.64 per barrel in March 2022. The Henry Hub spot market price for natural gas has ranged from a low of $1.33 per MMBtu in September 2020 to a high of $23.86 per MMBtu in February 2021. Lower prices may not only decrease our revenues, but also potentially the amount of oil, natural gas and NGLs that our operators can produce economically.

Oil. The substantial majority of our oil production is sold at prevailing market prices, which fluctuate in response to many factors that are outside of our control. The majority of our oil production is priced at the prevailing market price with the final realized price affected by both quality and location differentials.

The chemical composition of crude oil plays an important role in its refining and subsequent sale as petroleum products. As a result, variations in chemical composition relative to the benchmark crude oil, usually WTI, will result in price adjustments, which are often referred to as quality differentials. The characteristics that most significantly affect quality differentials include the density of the oil, as characterized by its API gravity, and the presence and concentration of impurities, such as sulfur.

Location differentials generally result from transportation costs based on the produced oil’s proximity to consuming and refining markets and major trading points.

Natural Gas. The New York Mercantile Exchange, Inc. (“NYMEX”) price quoted at Henry Hub is a widely used benchmark for the pricing of natural gas in the United States. The actual prices realized from the sale of natural gas differ from the quoted NYMEX price as a result of quality and location differentials.

Quality differentials result from the heating value of natural gas measured in Btus and the presence of impurities, such as hydrogen sulfide, carbon dioxide and nitrogen. Natural gas containing ethane and heavier hydrocarbons has a higher Btu value and will realize a

higher volumetric price than natural gas that is predominantly methane, which has a lower Btu value. Natural gas with a higher concentration of impurities will realize a lower price due to the presence of the impurities in the natural gas when sold or the cost of treating the natural gas to meet pipeline quality specifications.

Natural gas, which currently has a limited global transportation system, is subject to price variances based on local supply and demand conditions and the cost to transport natural gas to end-user markets.

NGLs. NGL pricing is generally tied to the price of oil, but varies based on differences in liquid components and location.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP supplemental financial measure used by our management and by external users of our financial statements such as investors, research analysts and others to assess the financial performance of our assets and their ability to sustain dividends over the long term without regard to financing methods, capital structure or historical cost basis.

We define Adjusted EBITDA as net income (loss) plus (a) interest expense, (b) provisions for taxes, (c) depreciation, depletion and amortization, (d) non-cash share-based compensation expense, (e) impairment of oil and natural gas properties, (f) gains or losses on unsettled derivative instruments, (g) change in fair value of warrant liability, (h) write off of deferred offering costs, (i) management fee to affiliates, (j) loss on extinguishment of debt (k) one-time transaction costs and (l) write off of financing costs. Adjusted EBITDA is not a measure determined by GAAP.

This non-GAAP financial measure does not represent and should not be considered an alternative to, or more meaningful than, its most directly comparable GAAP financial measure or any other measure of financial performance presented in accordance with GAAP as measures of our financial performance. Non-GAAP financial measures have important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measure. Our computation of Adjusted EBITDA may differ from computations of similarly titled measures of other companies.

Sources of Revenue

Our revenues are primarily derived from mineral and royalty payments received from our E&P operators based on the sale of crude oil, natural gas and NGLs production from our interests. Our revenues may vary significantly from period to period because of changes in commodity prices, production mix and volumes of production sold by our E&P operators. For the nine months ended September 30, 2022 and 2021, mineral and royalty revenue made up 96% and 98%, respectively, of our total revenue. As a result of our royalty income production mix, our income is more sensitive to fluctuations in crude oil prices than it is to fluctuations in natural gas or NGLs prices. Crude oil, natural gas and NGL prices have historically been volatile, and we expect this volatility to continue. Additionally, we earn lease bonus income by leasing our mineral interests to exploration and production companies and income from delay rentals and easements.

The following table presents the breakout of our revenues for the following periods:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Crude oil sales		69	%		72	%		72	%		70	%
Natural gas sales		17	%		14	%		15	%		16	%
NGL sales		8	%		12	%		9	%		12	%
Lease bonus and other income		6	%		2	%		4	%		2	%
Total revenues		100	%		100	%		100	%		100	%

Principal Components of Our Cost Structure

The following is a description of the principal components of our cost structure. As a mineral and royalty owner, we incur only our proportionate share of production and ad valorem taxes and, in some cases, gathering, processing and transportation costs, which reduce the amount of revenue we recognize. Unlike E&P operators and owners of working interests in oil and gas properties, we are not obligated to fund drilling and completion costs, plugging and abandonment costs or lease operating expenses associated with oil and gas production.

Production and Ad Valorem Taxes

Production taxes are paid at fixed rates on produced crude oil and natural gas based on a percentage of revenues from products sold, established by federal, state or local taxing authorities. The E&P companies who operate on our interests withhold and pay our pro rata

share of production taxes on our behalf. We directly pay ad valorem taxes in the counties where our properties are located. Ad valorem taxes are generally based on the appraised value of our crude oil, natural gas and NGLs properties.

Gathering, Processing and Transportation Costs

Gathering, processing and transportation costs are representative of the costs to process and transport our respective volumes to applicable sales points. The terms of the lease with the applicable E&P operator on our interests determines if the operator is able to pass through these costs to us by deducting a pro rata portion of such costs from our production revenues.

General and Administrative

General and administrative expenses consist of costs incurred related to overhead, including executive and other employee compensation and related benefits, office expenses and fees for professional services such as audit, tax, legal and other consulting services. Some of those costs were incurred on our behalf by the Predecessor’s general partner and its affiliates and reimbursed by the Predecessor. For example, the Predecessor reimbursed an affiliate of our general partner for personnel costs on our behalf. As a result of the Falcon Merger, we incur incremental general and administrative expenses relating to SEC reporting requirements, including annual and quarterly reports, tax return preparation expenses, Sarbanes-Oxley Act compliance expenses, expenses associated with listing our common stock, independent auditor fees, legal expenses and investor relations expenses. These incremental general and administrative expenses are not reflected in the Predecessor financial statements.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization (“DD&A”) is the systematic expensing of capitalized costs. Under the successful efforts method of accounting, capitalized costs of our proved crude oil, natural gas and NGLs mineral interest properties are depleted on a unit-of-production basis based on proved crude oil, natural gas and NGLs reserve quantities. Our estimates of crude oil, natural gas and NGLs reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production. Any significant variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect the rate of depletion related to our crude oil, natural gas and NGLs properties. DD&A also includes the expensing of office leasehold costs and equipment.

Interest Expense

We finance a portion of our working capital requirements and acquisitions with borrowings under our Revolving Credit Facility and 2026 Senior Notes. As a result, we incur interest expense that is affected by both fluctuations in interest rates and our financing decisions. We reflect interest paid to the lenders under our Revolving Credit Facility and 2026 Senior Notes and amortization of debt issuance costs in interest expense on our statements of income.

Income Tax Expense

As a result of the Falcon Merger, we are subject to U.S. federal and state taxes as a corporation. We are also subject to the Texas margin tax, which is a state franchise tax, and certain state income taxes.

Factors Affecting the Comparability of Our Financial Results

Our future results of operations may not be comparable to our Predecessor’s results of operations for the periods presented, primarily for the reasons described below.

Surface Rights

The Predecessor’s historical consolidated financial statements are based on our financial statements prior to the Falcon Merger. The assets acquired in connection with the Falcon Merger do not include the Predecessor’s surface rights, which generate revenue from the sale of water, payments for rights-of-way and other rights associated with the ownership of the surface acreage, which are included in our Predecessor’s historical financial statements but were not contributed to the post-combination company following the closing of the Falcon Merger. Subsequent to the Falcon Merger, we have acquired additional surface rights in connection with multiple acquisitions. As a result, the historical consolidated financial data may not give you an accurate indication of what the actual results would have been if the Falcon Merger had been completed at the beginning of the periods presented or of what our future results of operations are likely to be.

Management Fees

The Predecessor incurred and paid annual fees under an investment management agreement with Kimmeridge Energy Management Company, LLC, an affiliate of Kimmeridge, of which Noam Lockshin, a Director, is a managing member. Fees incurred under the

agreement totaled approximately $3.2 million and $5.6 million for the nine months ended September 30, 2022 and 2021, respectively. We will not incur future expense under the agreement as a result of the Falcon Merger. Additionally, certain other expenses associated with the limited partnership structure of the Predecessor will not be incurred by us in future periods.

Acquisitions

Our Predecessor’s financial statements as of and for the nine months ended September 30, 2021 do not include the results of operations for the assets acquired in the Chambers Acquisition, Rock Ridge Acquisition, Source Acquisition, the Falcon Merger, Foundation Acquisition, and Momentum Acquisition. As a result, our Predecessor’s financial results do not give an accurate indication of what the actual results would have been if such acquisitions had been completed at the beginning of the periods presented or of what our future results are likely to be.

In addition, we plan to pursue potential accretive acquisitions of additional mineral and royalty interests. We believe we will be well positioned to acquire such assets and, should such opportunities arise, identifying and executing acquisitions will be a key part of our strategy. However, if we are unable to make acquisitions on economically acceptable terms, our future growth may be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to pay dividends to stockholders in the short-term.

Debt and Interest Expense

As a public company, we may finance a portion of our acquisitions with borrowings under our Revolving Credit Facility or other debt instruments. As a result, we will incur interest expense that is affected by both fluctuations in interest rates and our financing decisions.

Public Company Expenses

As a result of the Falcon Merger, we incur incremental general and administrative expenses as a result of Kimmeridge no longer providing services to us and as a result of operating as a publicly traded company, such as expenses associated with SEC reporting requirements, including annual and quarterly reports, Sarbanes-Oxley Act compliance expenses, expenses associated with listing our common stock, independent auditor fees, independent reserve engineer fees, legal fees, investor relations expenses, registrar and transfer agent fees, director and officer insurance expenses and director and officer compensation expenses. These incremental general and administrative expenses are not reflected in our Predecessor’s financial statements. Additionally, as a result of the Falcon Merger, we have hired additional employees, including accounting, engineering and land personnel, in order to comply with requirements of being a publicly traded company.

Income Taxes

We are subject to U.S. federal and state income taxes as a corporation. The Predecessor was generally not subject to U.S. federal income tax at the entity level. As such, our Predecessor’s financial statements did not contain a provision for U.S. federal income taxes. The only tax expense that appeared in our Predecessor’s financial statements was the Texas margin tax and certain state income taxes, to which we will continue to be subject as a corporation.

Results of Operations

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Consolidated Results

The following table summarizes our consolidated revenue and expenses and production data for the three months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,
	2022			2021
Statement of Income Data:
Revenue:
Total Revenue	$	115,497		$	33,709
Operating Expenses:
Management fees to affiliates		—			1,870
Depreciation, depletion and amortization		32,005			12,813
General and administrative		13,381			954
General and administrative—affiliates		—			1,686
Severance and ad valorem taxes		7,215			2,192
Total operating expenses		52,601			19,515
Net income from operations		62,896			14,194
Interest expense (net)(1)		(14,986	)		(276	)
Change in fair value of warrant liability		536			—
Loss on extinguishment of debt		(11,487	)		—
Commodity derivatives gains		34,613			—
Net income before income tax expense		71,572			13,918
Income tax expense		(2,561	)		(143	)
Net income		69,011			13,775
Net income attributable to Predecessor		—			(13,775	)
Net income attributable to temporary equity		(59,872	)		—
Net income attributable to Class A stockholders	$	9,139		$	—

(1)

Interest expense is presented net of interest income.


	Three Months Ended September 30,
	2022		2021
Production Data:
Crude oil (MBbls)		846		363
Natural gas (Mmcf)		2,916		1,290
NGLs (MBbls)		323		140
Total (MBOE)(6:1)		1,655		718
Average daily production (BOE/d)(6:1)		17,990		7,810
Average Realized Prices:
Crude oil (per Bbl)	$	93.81	$	66.61
Natural gas (per Mcf)	$	6.55	$	3.74
NGLs (per Bbl)	$	31.98	$	29.43
Combined (per BOE)	$	65.71	$	46.14
Average Realized Prices After Effects of Derivative Settlements:
Crude oil (per Bbl)	$	97.32	$	66.61
Natural gas (per Mcf)	$	6.46	$	3.74
NGLs (per Bbl)	$	31.98	$	29.43
Combined (per BOE)	$	67.36	$	46.14

Revenue

Our consolidated revenues for the three months ended September 30, 2022 totaled $115.5 million as compared to $33.7 million for the three months ended September 30, 2021, an increase of 243%. The increase in revenues was due to an increase of $75.6 million in mineral and royalty revenue and an increase of $6.2 million in lease bonus and other income. The increase in mineral and royalty revenue was primarily due to increased commodity prices, production volumes from our acquisitions of additional mineral and royalty interests, and production volumes from existing interests. Lease bonus and other income is subject to significant variability from period to period based on the particular tracts of land that become available for releasing.

Oil revenue for the three months ended September 30, 2022 was $79.3 million as compared to $24.2 million for the three months ended September 30, 2021, an increase of $55.1 million. An increase of $27.20/Bbl in our average price received for oil production, from $66.61/Bbl for the three months ended September 30, 2021 to $93.81/Bbl for the three months ended September 30, 2022, accounted for an approximate $23.0 million increase in our year-over-year oil revenue. Additionally, we realized a $32.1 million increase in year-over-year oil revenue due to a 133% increase in oil production volumes, which increased from 363 MBbls for the three months ended September 30, 2021 to 846 MBbls for the three months ended September 30, 2022.

Natural gas revenue for the three months ended September 30, 2022 was $19.1 million as compared to $4.8 million for the three months ended September 30, 2021, an increase of $14.3 million. An increase of $2.81/Mcf in our average price received for gas production, from $3.74/Mcf for the three months ended September 30, 2021 to $6.55/Mcf for the three months ended September 30, 2022, accounted for an approximate $8.2 million increase in our year-over-year gas revenue. Additionally, we realized a $6.1 million increase in year-over-year gas revenue due to a 126% increase in gas production volumes, which increased from 1,290 MMcf for the three months ended September 30, 2021 to 2,916 MMcf for the three months ended September 30, 2022.

NGLs revenue for the three months ended September 30, 2022 was $10.3 million as compared to $4.1 million for the three months ended September 30, 2021, an increase of $6.2 million. An increase of $2.55/Bbl in our average price received for NGLs production, from $29.43/Bbl for the three months ended September 30, 2021 to $31.98/Bbl for the three months ended September 30, 2022, accounted for an approximate $825,000 increase in our year-over-year NGLs revenue. Additionally, we realized a $5.4 million increase in year-over-year NGLs revenue due to a 131% increase in NGLs production volumes, which increased from 140 MBbls for the three months ended September 30, 2021 to 323 MBbls for the three months ended September 30, 2022.

Lease bonus revenue for the three months ended September 30, 2022 was $6.5 million as compared to $487,000 for the three months ended September 30, 2021. When we lease our acreage to an E&P operator, we generally receive a lease bonus payment at the time a lease is executed. These bonus payments are subject to significant variability from period to period based on the particular tracts of land that become available for releasing. Other revenues for the three months ended September 30, 2022 were $253,000 as compared to $70,000 for the three months ended September 30, 2021, which include payments for right-of-way and surface damages, which are also subject to significant variability.

Operating Expenses

The Predecessor entered into a management services arrangement with Kimmeridge Energy Management Company, LLC. Management fees to the Predecessor’s affiliates expense was $1.9 million for the three months ended September 30, 2021, respectively. No such expense was incurred for the three months ended September 30, 2022. The decrease of $1.9 million was due to the Falcon Merger as the Company no longer incurs any management fees.

Depreciation, depletion and amortization expense was $32.0 million for the three months ended September 30, 2022 as compared to $12.8 million for the three months ended September 30, 2021, an increase of $19.2 million, or 150%. The increase was due to a 130% increase in year-over-year production and a higher depletion rate, which increased from $17.63 per BOE for the three months ended September 30, 2021 to $19.24 per BOE for the three months ended September 30, 2022.

General and administrative expense was $13.4 million for the three months ended September 30, 2022 as compared to $954,000 for the three months ended September 30, 2021, an increase of $12.4 million. The increase was primarily due to increased personnel costs due to increased headcount for the three months ended September 30, 2022, public transaction costs related to the Falcon Merger and Brigham Merger, and expenses as a result of operating as a publicly traded company.

General and administrative—affiliates expense was $1.7 million for the three months ended September 30, 2021. We did not incur any General and administrative—affiliates expense for the three months ended September 30, 2022. The decrease was primarily a result of decreased reimbursement to our Predecessor’s general partner for services provided on our behalf, including personnel costs and costs relating to the performance of land and administrative services in respect of our acquisition of mineral and royalty interests. These costs were captured in the General and administrative expense line item for the three months ended September 30, 2022.

On a combined basis, the General and administrative expense and General and administrative expense—affiliates expense was $13.4 million for the three months ended September 30, 2022 as compared to $2.6 million for the three months ended September 30,

2021, an increase of $10.8 million, or 407%, primarily due to $4.0 million of share-based compensation expense, $3.6 million of transaction costs related to the Falcon Merger and Brigham Merger, $0.5 million of additional employee compensation due to increased headcount, and $2.7 million of additional other professional services.

Severance and ad valorem taxes were $7.2 million for the three months ended September 30, 2022 as compared to $2.2 million for the three months ended September 30, 2021, an increase of $5.0 million or 229%. The increase was primarily due to the year-over-year increase in commodity prices and increased production volumes from our acquisitions of additional mineral and royalty interests and existing interests.

Interest expense of approximately $15.0 million and $276,000 during the three months ended September 30, 2022 and 2021, respectively, relates to interest incurred on borrowings under our Revolving Credit Facility, 2026 Senior Notes and Bridge Loan Facility. The increase in interest expense was due to higher average borrowings during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 related to funding the Falcon Merger and other acquisitions in 2022.

The fair value of the warrant liability decreased by $536,000 during the three months ended September 30, 2022, whereas there were no changes to the fair value of the warrant liability for the three months ended September 30, 2021. The change is attributable to a decrease in the market price of both the Public Warrants and Private Placement Warrants.

Commodity derivatives gains totaled $34.6 million for the three months ended September 30, 2022, whereas there were no derivatives gains or losses for the three months ended September 30, 2021. In 2022, we entered into oil and gas fixed price swaps and two-way collars to manage commodity price risks associated with production from our recent acquisitions.

Income tax expense increased from $143,000 for the three months ended September 30, 2021 to $2.6 million for the three months ended September 30, 2022. The increase was primarily due to current and deferred income taxes due to our classification as a taxable corporation subsequent to the Falcon Merger, whereas the Predecessor was not subject to Federal income taxes during the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

Consolidated Results

The following table summarizes our consolidated revenue and expenses and production data for the nine months ended September 30, 2022 and 2021 (in thousands):


	Nine Months Ended September 30,
	2022			2021
Statement of Income Data:
Revenue:
Total Revenue	$	269,664		$	70,428
Operating Expenses:
Management fees to affiliates		3,241			5,610
Depreciation, depletion and amortization		67,302			28,614
General and administrative		24,043			2,232
General and administrative—affiliates		74			4,903
Severance and ad valorem taxes		18,019			4,766
Total operating expenses		112,679			46,125
Net income from operations		156,985			24,303
Interest expense (net)(1)		(18,096	)		(800	)
Change in fair value of warrant liability		3,842			—
Loss on extinguishment of debt		(11,487	)		—
Commodity derivatives gains		53,508			—
Net income before income tax expense		184,752			23,503
Income tax expense		(5,206	)		(233	)
Net income		179,546			23,270
Net income attributable to Predecessor		(78,104	)		(23,270	)
Net income attributable to temporary equity		(86,143	)		—
Net income attributable to Class A stockholders	$	15,299		$	—

(1)

Interest expense is presented net of interest income.


	Nine Months Ended September 30,
	2022		2021
Production Data:
Crude oil (MBbls)		1,969		783
Natural gas (Mmcf)		6,481		3,244
NGLs (MBbls)		760		320
Total (MBOE)(6:1)		3,809		1,644
Average daily production (BOE/d)(6:1)		13,950		6,021
Average Realized Prices:
Crude oil (per Bbl)	$	98.12	$	62.63
Natural gas (per Mcf)	$	6.05	$	3.43
NGLs (per Bbl)	$	36.68	$	28.31
Combined (per BOE)	$	68.33	$	42.11
Average Realized Prices After Effects of Derivative Settlements:
Crude oil (per Bbl)	$	99.48	$	62.63
Natural gas (per Mcf)	$	5.99	$	3.43
NGLs (per Bbl)	$	36.68	$	28.31
Combined (per BOE)	$	68.93	$	42.11

Revenue

Our consolidated revenues for the nine months ended September 30, 2022 totaled $269.7 million as compared to $70.4 million for the nine months ended September 30, 2021, an increase of 283%. The increase in revenues was due to an increase of $191.0 million in mineral and royalty revenue and an increase of $8.3 million in lease bonus and other income. The increase in mineral and royalty revenue was primarily due to increased commodity prices, production volumes from our acquisitions of additional mineral and royalty interests, and production volumes from existing interests. Lease bonus and other income is subject to significant variability from period to period based on the particular tracts of land that become available for releasing.

Oil revenue for the nine months ended September 30, 2022 was $193.2 million as compared to $49.0 million for the nine months ended September 30, 2021, an increase of $144.2 million. An increase of $35.49/Bbl in our average price received for oil production, from $62.63/Bbl for the nine months ended September 30, 2021 to $98.12/Bbl for the nine months ended September 30, 2022, accounted for an approximate $69.9 million increase in our year-over-year oil revenue. Additionally, we realized a $74.3 million increase in year-over-year oil revenue due to a 151% increase in oil production volumes, which increased from 783 MBbls for the nine months ended September 30, 2021 to 1,969 MBbls for the nine months ended September 30, 2022.

Natural gas revenue for the nine months ended September 30, 2022 was $39.2 million as compared to $11.1 million for the nine months ended September 30, 2021, an increase of $28.1 million. An increase of $2.62/Mcf in our average price received for gas production, from $3.43/Mcf for the nine months ended September 30, 2021 to $6.05/Mcf for the nine months ended September 30, 2022, accounted for an approximate $17.0 million increase in our year-over-year gas revenue. Additionally, we realized an $11.1 million increase in year-over-year gas revenue due to a 100% increase in gas production volumes, which increased from 3,244 MMcf for the nine months ended September 30, 2021 to 6,481 MMcf for the nine months ended September 30, 2022.

NGLs revenue for the nine months ended September 30, 2022 was $27.9 million as compared to $9.1 million for the nine months ended September 30, 2021, an increase of $18.8 million. An increase of $8.37/Bbl in our average price received for NGLs production, from $28.31/Bbl for the nine months ended September 30, 2021 to $36.68/Bbl for the nine months ended September 30, 2022, accounted for an approximate $6.4 million increase in our year-over-year NGLs revenue. Additionally, we realized a $12.4 million increase in year-over-year NGLs revenue due to a 137% increase in NGLs production volumes, which increased from 320 MBbls for the nine months ended September 30, 2021 to 760 MBbls for the nine months ended September 30, 2022.

Lease bonus revenue for the nine months ended September 30, 2022 was $8.5 million as compared to $574,000 for the nine months ended September 30, 2021. When we lease our acreage to an E&P operator, we generally receive a lease bonus payment at the time a lease is executed. These bonus payments are subject to significant variability from period to period based on the particular tracts of land that become available for releasing. Other revenues for the nine months ended September 30, 2022 were $985,000 as compared to $633,000 for the nine months ended September 30, 2021, which include payments for right-of-way and surface damages, which are also subject to significant variability.

Operating Expenses

The Predecessor entered into a management services arrangement with Kimmeridge Energy Management Company, LLC. Management fees to the Predecessor’s affiliates expense was $3.2 million and $5.6 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease of $2.4 million was due to the Falcon Merger as the Company will no longer incur any management fees.

Depreciation, depletion and amortization expense was $67.3 million for the nine months ended September 30, 2022 as compared to $28.6 million for the nine months ended September 30, 2021, an increase of $38.7 million, or 135%. The increase was due to a 132% increase in year-over-year production as well as a higher depletion rate, which increased from $17.14 per BOE for the nine months ended September 30, 2021 to $17.54 per BOE for the nine months ended September 30, 2022.

General and administrative expense was $24.0 million for the nine months ended September 30, 2022 as compared to $2.2 million for the nine months ended September 30, 2021, an increase of $21.8 million. The increase was primarily due to increased personnel costs captured here for the nine months ended September 30, 2022, public transaction costs related to the Falcon and Brigham Merger, and expenses as a result of operating as a publicly traded company.

General and administrative—affiliates expense was $74,000 for the nine months ended September 30, 2022 as compared to $4.9 million for the nine months ended September 30, 2021, a decrease of $4.8 million. The decrease was primarily a result of decreased reimbursement to our Predecessor’s general partner for services provided on our behalf, including personnel costs and costs relating to the performance of land and administrative services in respect of our acquisition of mineral and royalty interests. These costs were primarily captured in the General and administrative expense line item for the nine months ended September 30, 2022.

On a combined basis, the General and administrative expense and General and administrative expense—affiliates expense was $24.1 million for the nine months ended September 30, 2022 as compared to $7.1 million for the nine months ended September 30, 2021, an increase of $17.0 million, or 238%, primarily due to $6.8 million of transaction costs related to the Falcon Merger and Brigham Merger, $4.9 million of share-based compensation, $1.2 million of additional employee compensation due to increased headcount, $3.8 million of additional other professional services, and $0.3 million of additional rent expense.

Severance and ad valorem taxes were $18.0 million for the nine months ended September 30, 2022 as compared to $4.7 million for the nine months ended September 30, 2021, an increase of $13.3 million or 278%. The increase was primarily due to the year-over-year increase in commodity prices and increased production volumes from our acquisitions of additional mineral and royalty interests and existing interests.

Interest expense of approximately $18.1 million and $800,000 during the nine months ended September 30, 2022 and 2021, respectively, relates to interest incurred on borrowings under our Revolving Credit Facility, 2026 Senior Notes and Bridge Loan Facility. The increase in interest expense was due to higher average borrowings during the nine months ended September 30, 2022 as compared to nine months ended September 30, 2021 related to funding the Falcon Merger and other acquisitions in the nine months ended September 30, 2022.

The fair value of the warrant liability decreased by $3.8 million from the date of the Falcon Merger through September 30, 2022, whereas there were no changes to the fair value of the warrant liability for the nine months ended September 30, 2021. The change is attributable to a decrease in the market price of both the Public Warrants and Private Placement Warrants.

Commodity derivative gains totaled $53.5 million for the nine months ended September 30, 2022, whereas there were no derivatives gains or losses for the nine months ended September 30, 2021. In 2022, we entered into oil and gas fixed price swaps and two-way collars to manage commodity price risks associated with production from our recent acquisitions.

Income tax expense increased from $233,000 for the nine months ended September 30, 2021 to $5.2 million for the nine months ended September 30, 2022. The increase was primarily due to current and deferred income taxes due to our classification as a taxable corporation subsequent to the Falcon Merger, whereas the Predecessor was not subject to Federal income taxes during the nine months ended September 30, 2021.

Liquidity and Capital Resources

Overview

Prior to the completion of the Falcon Merger, our Predecessor’s primary sources of liquidity were contributions of capital from its limited partners, cash flows from operations and borrowings under our revolving credit facility. After the closing of the Falcon Merger, cash flows from operations and borrowings under our Revolving Credit Facility and 2026 Senior Notes are the primary day-to-day sources of our funds. Future sources of liquidity may also include other credit facilities we may enter into in the future and additional issuances of debt or equity securities. Our primary uses of cash have been, and are expected to continue to be, the acquisition of mineral

and royalty interests, the reduction of outstanding debt balances and the payment of dividends. Our ability to generate cash is subject to several factors, some of which are beyond our control, including commodity prices and general economic, financial, legislative, regulatory and other factors.

We believe internally generated cash flows from operations, available borrowing capacity under our Revolving Credit Facility, and access to capital markets will provide us with sufficient liquidity and financial flexibility to meet our cash requirements, including normal operating needs, debt service obligations and capital expenditures, for at least the next 12 months and allow us to continue to execute our strategy of acquiring attractive mineral and royalty interests that will position us to grow our cash flows and return capital to our stockholders. As an owner of mineral and royalty interests, we incur the initial cost to acquire our interests but thereafter do not incur any development or maintenance capital expenditures, which are entirely borne by the E&P operator and the other working interest owners. As a result, our only capital expenditures are related to our acquisition of additional mineral and royalty interests, and we have no subsequent capital expenditure requirements related to acquired properties. The amount and allocation of future acquisition-related capital expenditures will depend upon a number of factors, including the number and size of acquisition opportunities, our cash flows from operating, investing and financing activities and our ability to integrate acquisitions. We periodically assess changes in current and projected cash flows, acquisition and divestiture activities, and other factors to determine the effects on our liquidity. Our ability to generate cash is subject to a number of factors, many of which are beyond our control, including commodity prices, weather, general economic, financial and competitive, legislative, regulatory and other factors. If we require additional capital for acquisitions or other reasons, we may raise such capital through additional borrowings, asset sales, offerings of equity and debt securities or other means. If we are unable to obtain funds needed or on acceptable terms, we may not be able to complete acquisitions that are favorable to us.

As of September 30, 2022, our liquidity was $83.8 million, comprised of $10.8 million of cash and cash equivalents and $73.0 million of Revolving Credit Facility availability.

Cash Flows Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021 (in thousands):


	For the Nine Months Ended September 30,
	2022			2021
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities	$	171,075		$	40,563
Investing activities		(569,626	)		(26,937	)
Financing activities		396,984			(12,507	)
Net increase (decrease) in cash and cash equivalents	$	(1,567	)	$	1,119

Operating Activities

Our operating cash flows are impacted by the variability in our revenues and operating expenses, as well as the timing of the related cash receipts and disbursements. Royalty payments may vary significantly from period to period as a result of changes in commodity prices, production mix and volumes of production sold by our E&P operators, as well as the timeliness and accuracy of payments from our E&P operators. These factors are beyond our control and are difficult to predict. Cash flows provided by operating activities for the nine months ended September 30, 2022 were $171.1 million as compared to $40.6 million for the nine months ended September 30, 2021, primarily as a result of increases in realized prices and production volumes from our royalty revenue.

Investing Activities

Cash flows used in investing activities totaled $569.6 million for the nine months ended September 30, 2022 as compared $26.9 million for the nine months ended September 30, 2021, an increase of $542.7 million. Our expenditures for purchases of oil and gas properties increased by $531.2 million due to several cash acquisitions completed during the nine months ended September 30, 2022. During the nine months ended September 30, 2022, we purchased other property and equipment for $819,000. During the nine months ended September 30, 2022, we also realized a net decrease in cash of $10.7 million associated with the Falcon Merger and certain cash balances not contributed by our Predecessor.

Financing Activities

Cash flows provided by financing activities for the nine months ended September 30, 2022 totaled $397.0 million as compared to cash flows used in financing activities of $12.5 million for the nine months ended September 30, 2021. Borrowings under the Revolving Credit Facility for the nine months ended September 30, 2022 and 2021 were $196.9 million and $20.0 million, respectively, which were used to fund the Falcon Merger and other acquisitions of mineral and royalty interests. Repayments on our credit facility for the nine months ended September 30, 2022 and 2021 were $147.0 million and $41.6 million, respectively, largely provided by cash flows from operations. During the nine months ended September 30, 2022, we borrowed and repaid $425.0 million under the Bridge Loan

Facility, the proceeds from which were used to fund acquisitions of mineral and royalty interests. During the nine months ended September 30, 2022, we received proceeds of $444.5 million from the issuance of the 2026 Senior Notes, which were used to repay and extinguish the Bridge Loan Facility and for other general corporate purposes. Other financing cash outflows during the nine months ended September 30, 2022, included $14.9 million of costs incurred in connection with our entry into the Bridge Loan Facility, costs of $4.2 million incurred in connection with the issuance of the 2026 Senior Notes, costs of $4.0 million incurred in connection with amendments and restatements to our Revolving Credit Facility, dividends of $9.0 million paid to holders of Class A Common Stock, $50.5 million of distributions paid to temporary equity holders and $13.3 million of distributions paid to noncontrolling interests by our Predecessor. Other financing cash inflows during the nine months ended September 30, 2021 included $1.5 million of contributions by noncontrolling interests in our Predecessor and $8.0 million of partners’ capital contributions to our Predecessor.

Our Revolving Credit Facility

The Predecessor was party to the Predecessor Revolving Credit Facility. In October 2021, KMF Land as borrower, and Desert Peak, as parent, entered into the A&R Credit Agreement.

On the Closing Date, the A&R Credit Agreement was amended, restated, and refinanced in its entirety pursuant to the Credit Agreement. The Credit Agreement has a scheduled maturity date in June 2026. Pursuant to the terms and conditions of the Credit Agreement, the Lenders committed to providing a credit facility to Sitio OpCo in an aggregate principal amount of up to $750 million. The availability under the Credit Agreement, including availability for letters of credit, is generally limited to a borrowing base, which is determined by the required number of lenders in good faith by calculating a loan value of the proved reserves of Sitio OpCo and its subsidiaries and elected commitments provided by the Lenders. As of the Closing Date, the Credit Agreement has a $300 million borrowing base and $300 million elected commitment amount. As part of the aggregate commitments under the revolving advances, the Credit Agreement provides for letters of credit to be issued at the request of the borrower in an aggregate amount not to exceed $15 million. Existing letters of credit in place under the Revolving Credit Facility immediately prior to the Closing Date are continued and now deemed issued under and governed by the terms of the Credit Agreement.

Interest accrues on advances, at the borrower’s option, at an adjusted Term SOFR rate or a base rate, plus an applicable margin and credit spread adjustment. The fees for letters of credit are also based on the applicable margin. The applicable margin used in connection with interest rates and fees is based on the Borrowing Base Utilization Percentage (as defined in the Credit Agreement). The applicable margin for Term SOFR rate loans and letter of credit fees ranges from 2.500% to 3.500%, and the applicable margin for base rate loans ranges from 1.500% to 2.500%. The credit spread adjustment ranges from 0.100% to 0.250% depending on the applicable interest rate and interest rate period. The borrower will also pay a fee based on the borrowing base utilization percentage on the actual daily unused amount of the aggregate revolving commitments ranging from 0.375% to 0.500%.

The borrowings under the Credit Agreement are secured by liens on certain assets of the borrower, the borrower’s subsidiaries and Sitio Royalties GP, LLC, a Delaware limited liability company, and guaranteed by the borrower and the borrower’s subsidiaries. Proceeds from borrowings under the Credit Agreement may be used (a) for working capital, exploration and production operations, and other general company purposes including acquisitions, (b) for dividends to stockholders, (c) for payment of certain transaction fees and expenses, and (d) to repay third party debt of the borrower and its subsidiaries existing prior to the Closing Date.

The Credit Agreement contains customary representations, warranties, covenants and events of default, including, among others, a change of control event of default and limitations on the incurrence of indebtedness and liens, new lines of business, mergers, transactions with affiliates and burdensome agreements. During the continuance of an event of default, the Lenders may take a number of actions, including, among others, declaring the entire amount then outstanding under the Credit Agreement to be due and payable.

The Credit Agreement includes a financial covenant limiting, as of the last day of each fiscal quarter, the ratio of (a) (i) Total Net Debt (as defined in the Credit Agreement) as of such date to (ii) EBITDA (as defined in the Credit Agreement) for the period of four fiscal quarters ending on such day (the “Leverage Ratio”), to not more than 3.50 to 1.00, and (b) (i) consolidated current assets (including the available commitments under the Credit Agreement) to (ii) consolidated current liabilities (excluding current maturities under the Credit Agreement), to not less than 1.00 to 1.00, in each case, with certain rights to cure.

2026 Senior Notes

On September 21, 2022, Sitio OpCo, as issuer, and certain subsidiaries of Sitio OpCo, as guarantors, entered into the Note Purchase Agreement with certain institutional investors party thereto as holders and U.S. Bank Trust Company, National Association, as agent for the Holders.


Period	Premium
Months 0 - 12	Customary “make-whole” premium plus 3.00%
Months 13 - 24		3.00	%
Months 25 - 36		1.00	%
Months 37 - 48		0.00	%

Interest accrues on the 2026 Senior Notes at an adjusted Term SOFR rate (including a 0.150% spread adjustment) for a three-month period plus a margin of 6.50%, unless the Agent determines that adequate and reasonable means do not exist for ascertaining the Term SOFR rate or the Requisite Holders (as defined in the Note Purchase Agreement) determine that the Term SOFR rate will not reflect the cost of maintaining their 2026 Senior Notes for the relevant period, in which case the 2026 Senior Notes will bear interest at a base rate (defined on the basis of the prime rate) plus a margin a of 5.50%. From and after the closing date of the Brigham Merger, the applicable margin will be reduced to 5.75% for 2026 Senior Notes bearing interest based on the adjusted Term SOFR rate and to 4.75% for 2026 Senior Notes bearing interest based on the base rate. Interest payments on the 2026 Senior Notes are due quarterly.

Sitio OpCo may elect, at its option, to prepay the 2026 Senior Notes, on the last business day of each calendar quarter in an amount equal to 2.50% of the initial principal amount of all the 2026 Senior Notes issued under the Notes Purchase Agreement, which prepayments will not require the payment of any premium (each, an “Optional Quarterly Payment”). If Sitio OpCo does not make an Optional Quarterly Payment on any quarterly payment date, the applicable margin on the 2026 Senior Notes will increase to 9.50% for 2026 Senior Notes bearing interest based on the adjusted Term SOFR rate and 8.50% for 2026 Senior Notes bearing interest based on the base rate. Subsequent to the closing of the Brigham Merger, if an Optional Quarterly Payment is not made, the margin will increase to 7.75% for 2026 Senior Notes bearing interest based on the adjusted Term SOFR rate and 6.75% for 2026 Senior Notes bearing interest based on the base rate. The increased margin will apply until the earlier of the date on which Sitio OpCo makes such Optional Quarterly Payment or the next quarterly payment date.

Bridge Loan Facility

On June 24, 2022, Sitio OpCo, as borrower, entered into an unsecured 364-Day Bridge Loan Agreement with Bank of America, N.A. as Administrative Agent for the Lenders, BofA Securities, Inc., as joint lead arranger and sole bookrunner, and Barclays Bank PLC and KeyBank National Association, as joint lead arrangers. The Bridge Loan Agreement provides for a 364-day Bridge Loan Facility in the aggregate principal amount of $250.0 million. The Bridge Loan Facility was fully repaid and extinguished on September 21, 2022 using proceeds from the issuance of the 2026 Senior Notes. Upon the closure of the facility, the Company recognized a loss on extinguishment of debt of $11.5 million associated with unamortized debt issuance costs and other fees incurred in connection with the payoff.

New and Revised Financial Accounting Standards

Refer to “Recent Accounting Pronouncements” in “Note 2 - Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statements for the nine months ended September 30, 2022 and 2021 for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Related Estimates

The discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the facts and circumstances at the time the estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the

preparation of financial statements. There can be no assurance that actual results will not differ from those estimates and assumptions. This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Changes in estimates are accounted for prospectively.

Our estimates and classification of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering, and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions. These factors and assumptions include historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future oil and natural gas prices. For these reasons, estimates of the economically recoverable quantities of expected oil and natural gas and estimates of the future net cash flows may vary substantially.

Any significant variance in the assumptions could materially affect the estimated quantity of reserves, which could affect the carrying value of our oil and natural gas properties and/or the rate of depletion related to oil and natural gas properties.

Oil and Gas Properties

We use the successful efforts method of accounting for oil and natural gas producing properties, as further defined under ASC 932, Extractive Activities—Oil and Natural Gas. Under this method, costs to acquire mineral interests in oil and natural gas properties are capitalized. The costs of non-producing mineral interests and associated acquisition costs are capitalized as unproved properties pending the results of leasing efforts and drilling activities of E&P operators on our interests. As unproved properties are determined to have proved reserves, the related costs are transferred to proved oil and gas properties. Capitalized costs for proved oil and natural gas mineral interests are depleted on a unit-of-production basis over total proved reserves. For depletion of proved oil and gas properties, interests are grouped in a reasonable aggregation of properties with common geological structural features or stratigraphic conditions.

Impairment of Oil and Gas Properties

We evaluate our proved properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When assessing proved properties for impairment, we compare the expected undiscounted future cash flows of the proved properties to the carrying amount of the proved properties to determine recoverability. If the carrying amount of proved properties exceeds the expected undiscounted future cash flows, the carrying amount is written down to the properties’ estimated fair value, which is measured as the present value of the expected future net cash flows of such properties. The factors used to determine fair value include estimates of proved reserves, future commodity prices, timing of future production, and a risk-adjusted discount rate. The proved property impairment test is primarily impacted by future commodity prices, changes in estimated reserve quantities, estimates of future production, overall proved property balances, and depletion expense. If pricing conditions decline or are depressed, or if there is a negative impact on one or more of the other components of the calculation, we may incur proved property impairments in future periods.

Unproved oil and gas properties are assessed periodically for impairment of value, and a loss is recognized at the time of impairment by charging capitalized costs to expense. Impairment is assessed based on when facts and circumstances indicate that the carrying value may not be recoverable, at which point an impairment loss is recognized to the extent the carrying value exceeds the estimated recoverable value. Factors used in the assessment include but are not limited to commodity price outlooks, current and future operator activity, and analysis of recent mineral transactions in the surrounding area.

Crude Oil, Natural Gas and NGLs Reserve Quantities and Standardized Measure of Oil and Gas

Our estimates of crude oil, natural gas and NGLs reserves and associated future net cash flows are prepared by our independent reservoir engineers. The SEC has defined proved reserves as the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. The process of estimating crude oil, natural gas and NGLs reserves is complex, requiring significant decisions in the evaluation of available geological, geophysical, engineering and economic data. The data for a given property may also change substantially over time as a result of numerous factors, including additional development activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, material revisions to existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent

the most accurate assessments possible, the decisions and variances in available data for various properties increase the likelihood of significant changes in these estimates. If such changes are material, they could significantly affect future amortization of capitalized costs and result in impairment of assets that may be material.

There are numerous uncertainties inherent in estimating quantities of proved crude oil, natural gas and NGLs reserves. Crude oil, natural gas and NGLs reserve engineering is a process of estimating underground accumulations of crude oil, natural gas and NGLs that cannot be precisely measured and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify positive or negative revisions of reserve estimates.

Revenue Recognition

Mineral and royalty interests represent the right to receive revenues from the sale of oil, natural gas and NGLs, less production taxes and post-production expenses. The prices of oil, natural gas, and NGLs from the properties in which we own a mineral or royalty interest are primarily determined by supply and demand in the marketplace and can fluctuate considerably. As an owner of mineral and royalty interests, we have no working interest or operational control over the volumes and methods of sale of the oil, natural gas, and NGL produced and sold from our properties. We do not explore, develop, or operate the properties and, accordingly, do not incur any of the associated costs.

Oil, natural gas, and NGLs revenues from our mineral and royalty interests are recognized when control transfers at the wellhead.

We also earn revenue related to lease bonuses by leasing our mineral interests to E&P companies. We recognize lease bonus revenue when the lease agreement has been executed and payment is determined to be collectible.

Contractual Obligations

As of September 30, 2022, we did not have any debt, capital lease obligations, operating lease obligations or long-term liabilities, other than borrowings under our Revolving Credit Facility, borrowings under the 2026 Senior Notes and three operating lease agreements for office space. Please see “—Our Revolving Credit Facility” for a description of our Revolving Credit Facility, “2026 Senior Notes” for a description of the 2026 Senior Notes and “Note 15 – Commitments and Contingencies” to our interim unaudited condensed consolidated financial statements for the nine months ended September 30, 2022 and 2021 for our contractual obligations under the office lease agreements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk, including the effects of adverse changes in commodity prices and interest rates as described below. The primary objective of the following information is to provide quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil, natural gas and NGL prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.

Commodity Price Risk

Our major market risk exposure is in the pricing applicable to the oil and natural gas production of our operators. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices applicable to our natural gas production. Pricing for oil and natural gas production has been volatile and unpredictable for several years and we expect this volatility to continue in the future. The prices that our operators receive for production depend on many factors outside of our or their control.

A $1.00 per Bbl change in our realized oil price would have resulted in a $2.0 million change in our oil revenues for the nine months ended September 30, 2022. A $0.10 per Mcf change in our realized natural gas price would have resulted in a $648,000 change in our natural gas revenues for the nine months ended September 30, 2022. A $1.00 per Bbl change in NGL prices would have resulted in a $760,000 change in our NGL revenues for the nine months ended September 30, 2022. Royalties on oil sales contributed 74% of our mineral and royalty revenues for the nine months ended September 30, 2022. Royalties on natural gas sales contributed 15% and royalties on NGL sales contributed 11% of our total mineral and royalty revenues for the nine months ended September 30, 2022.

We may enter into derivative instruments from time to time, such as collars, swaps and basis swaps, to partially mitigate the impact of commodity price volatility. These hedging instruments allow us to reduce, but not eliminate, the potential effects of the variability in cash flow from operations due to fluctuations in oil, natural gas and NGL prices and provide increased certainty of cash flows for our debt service requirements. However, these instruments provide only partial price protection against declines in oil, natural gas and NGL prices and may partially limit our potential gains from future increases in prices.

Counterparty and Customer Credit Risk

When we enter into them, our derivative contracts expose us to credit risk in the event of nonperformance by counterparties. While we do not require counterparties to our derivative contracts to post collateral, we evaluate the credit standing of such counterparties as we deem appropriate. All counterparties have high credit ratings and are current lenders under our Revolving Credit Facility. For these contracts, we are not required to provide any credit support to our counterparties other than cross collateralization with the properties securing the Revolving Credit Facility. Our derivative contracts are documented with industry standard contracts known as a Schedule to the Master Agreement and ISDAs. Typical terms for the ISDAs include credit support requirements, cross default provisions, termination events, and set-off provisions. We have set-off provisions with our Revolving Credit Facility lenders that, in the event of counterparty default, allow us to set-off amounts owed under the Revolving Credit Facility or other general obligations against amounts owed to the Company for derivative contract assets.

Our principal exposures to credit risk are through receivables generated by the production activities of our operators. The inability or failure of our significant operators to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results.

Interest Rate Risk

Our primary exposure to interest rate risk results from outstanding borrowings under our Revolving Credit Facility, 2026 Senior Notes, and Bridge Loan Facility, each of which has a floating interest rate. The average annual interest rate incurred on our borrowings under the Revolving Credit Facility, 2026 Senior Notes and Bridge Loan Facility during the nine months ended September 30, 2022 and 2021 was 5.54% and 2.59%, respectively. We estimate that an increase of 1.0% in the average interest rate during the nine months ended September 30, 2022 would have resulted in an approximately $2.5 million increase in interest expense.

Item 4. Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2022, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Although we are, from time to time, involved in various legal claims arising out of our operations in the normal course of business, we do not believe that the resolution of these matters will have a material adverse impact on our financial condition or results of operations. Additionally, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any claim or proceeding would not have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly dividends to our stockholders.

For further information regarding legal proceedings, refer to “Note 15 – Commitments and Contingencies” in the notes to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

Factors that could materially adversely affect our business, financial condition, results of operations or liquidity and the trading price of our Class A Common Stock are described under the caption “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q

filed with the SEC on August 8, 2022. Except as supplemented below, there have been no material changes in our risk factors from those previously disclosed in our Quarterly Report on Form 10-Q.

Risks Related to the Brigham Merger

Because the exchange ratio is fixed and will not be adjusted in the event of any change in either Sitio’s stock price or Brigham’s stock price, the value of the shares of New Sitio is uncertain.

Upon completion of the Brigham Merger, (i) each issued and outstanding share of Brigham Class A Common Stock will be converted into the right to receive 1.133 fully-paid and nonassessable shares of New Sitio Class A Common Stock, (ii) each issued and outstanding share of Brigham Class B Common Stock will be converted into the right to receive 1.133 fully-paid and nonassessable shares of New Sitio Class C Common Stock, (iii) each issued and outstanding share of Class A Common Stock will be converted into one share of New Sitio Class A Common Stock and (iv) each issued and outstanding share of Class C Common Stock will be converted into one share of New Sitio Class C Common Stock, in each case, excluding shares owned by Sitio, Brigham or any wholly owned subsidiary of Sitio or Brigham and, to the extent applicable, shares owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to the DGCL. Upon completion of the Opco Merger, each issued and outstanding Brigham Opco Unit will be converted into the right to receive 1.133 Sitio OpCo Partnership Units. These exchange ratios are fixed and will not be adjusted for changes in the market value of the Sitio Common Stock or the Brigham Common Stock. No fractional shares of New Sitio Common Stock or Sitio OpCo Partnership Units will be issued in connection with the Brigham Merger. Instead, a stockholder of Brigham who otherwise would have received a fractional New Sitio share will be entitled to receive, from the exchange agent appointed by New Sitio pursuant to the Merger Agreement, a cash payment in lieu of such fractional shares in accordance with the terms of the Merger Agreement.

The market price of Class A Common Stock has fluctuated since the date of the announcement of the Merger Agreement and will continue to fluctuate from the date of this Quarterly Report on Form 10-Q to the date the Brigham Merger is consummated. The market price of New Sitio Common Stock may continue to fluctuate thereafter.

Stock price changes may result from a variety of factors, including, among others:

•

general market and economic conditions;

•

changes in Sitio’s and Brigham’s respective businesses, operations and prospects;

•

market assessments of the likelihood that the Brigham Merger will be completed;

•

interest rates, general market, industry, economic and geopolitical conditions, including the impact of continued inflation and associated changes in monetary policy, and other factors generally affecting the respective prices of Class A Common Stock and the Brigham Class A Common Stock;

•

federal, state and local legislation, governmental regulation and legal developments in Sitio’s and Brigham’s businesses; and

•

the timing of the Brigham Merger and regulatory considerations.

Sitio stockholders and Brigham stockholders will each have reduced ownership over New Sitio.

Upon consummation of Brigham Merger, each Sitio stockholder will become a stockholder of New Sitio, with a percentage ownership of New Sitio that is smaller than such stockholder’s percentage ownership of Sitio immediately prior to Brigham Merger. Accordingly, Sitio stockholders will have less ownership of New Sitio than they now have of Sitio.

Until the completion of Brigham Merger or the termination of the Merger Agreement in accordance with its terms, Sitio is prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to Sitio and its respective stockholders.

After the date of the Merger Agreement and prior to the effective times of the Brigham Merger, the Merger Agreement restricts Sitio from taking specified actions without the written consent of Brigham (such consent not to be unreasonably withheld, conditioned or delayed) and requires that the business of Sitio and its subsidiaries be conducted in all material respects in the ordinary course of business consistent with past practice. These restrictions may prevent Sitio from making appropriate changes to its businesses or organizational structures or from pursuing attractive business opportunities that may arise prior to the completion of the Brigham Merger and could have the effect of delaying or preventing other strategic transactions. Adverse effects arising from the pendency of the Brigham Merger could be exacerbated by any delays in consummation of the Brigham Merger or termination of the merger Agreement.

There are a number of required approvals and other Closing conditions in addition to stockholder approvals, including regulatory approvals, which may prevent or delay completion of the Brigham Merger.

The Brigham Merger is subject to a number of conditions to Closing as specified in the Merger Agreement, including, among other conditions, (i) the receipt of the required approvals from Sitio’s stockholders; (ii) the expiration or termination of the applicable waiting period under the HSR Act; (iii) the absence of any governmental order or law that makes consummation of the Brigham Merger illegal or otherwise prohibited; (iv) New Sitio’s registration statement on Form S-4 having been declared effective by the SEC under the Securities Act; (v) the shares of New Sitio Class A Common Stock issuable in connection with the Brigham Merger having been authorized for listing on the NYSE, subject to official notice of issuance; (vi) the accuracy of the representations and warranties of the other party to the extent required under the Merger Agreement; (vii) the compliance with, in all material respects, each of the covenants and agreements the other party is required to comply with or perform at or prior to the effective times of the Brigham Merger; and (viii) since the date of the Merger Agreement there must not have occurred any event, circumstance, development, change, occurrence or effect that has had or would reasonably be expected to have, individually or in the aggregate, material adverse effect with respect to the other party.

No assurance can be given that the required stockholder consents and approvals will be obtained or that the required conditions to Closing will be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the consents and approvals. Any delay in completing the Brigham Merger could cause New Sitio not to realize, or to be delayed in realizing, some or all of the benefits that Sitio expects to achieve if the Brigham Merger is successfully completed within its expected time frame.

The Brigham Merger, including uncertainty regarding the Brigham Merger, may cause third parties to delay or defer decisions concerning Sitio and could adversely affect its ability to effectively manage its businesses.

The Brigham Merger will happen only if the stated conditions are met, including the approval of the Merger Agreement by Sitio’s stockholders, among other conditions. Many of the conditions are outside Sitio’s control, and both Sitio and Brigham also have certain rights to terminate the Merger Agreement. Accordingly, there may be uncertainty regarding the completion of the Brigham Merger. This uncertainty may cause others that deal with Sitio to delay or defer entering into contracts with Sitio or making other decisions concerning Sitio or seek to change or cancel existing business relationships with Sitio, which could negatively affect its business. Any delay or deferral of those decisions or changes in existing agreements could have a material adverse effect on Sitio’s business, regardless of whether the Brigham Merger is ultimately completed.

Failure to attract, motivate and retain executives and other key employees could diminish the anticipated benefits of the Brigham Merger.

The success of the Brigham Merger will depend in part on the retention of personnel critical to the business and operations of New Sitio due to, for example, their technical skills or management expertise. Competition for qualified personnel can be intense.

Current and prospective employees of Sitio may experience uncertainty about their future role with New Sitio until strategies with regard to these employees are announced or executed, which may impair Sitio’s ability to attract, retain and motivate key personnel prior to and following the Brigham Merger. Employee retention may be particularly challenging during the pendency of the Brigham Merger, as employees of Sitio may experience uncertainty about their future roles with New Sitio. If Sitio is unable to retain personnel, Sitio could face disruptions in its operations, loss of existing business partners, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs. In addition, the loss of key personnel could diminish the anticipated benefits of the Brigham Merger.

If key employees of Sitio depart, New Sitio may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent relating to Sitio’s business, and New Sitio’s ability to realize the anticipated benefits of the Brigham Merger may be adversely affected. In addition, there could be disruptions to or distractions for the workforce and management associated with integrating employees into New Sitio. Accordingly, no assurance can be given that New Sitio will be able to attract or retain key employees of Sitio to the same extent that Sitio has been able to attract or retain its own employees in the past.

The termination of the Merger Agreement could negatively impact Sitio.

If the Brigham Merger is not completed for any reason, Sitio’s ongoing business may be adversely affected and, without realizing any of the anticipated benefits of having completed the Brigham Merger, Sitio would be subject to a number of risks, including the following:

•

Sitio may experience negative reactions from the financial markets, including negative impacts on its stock or share price;

•

Sitio may experience negative reactions from its business partners, regulators and employees;

•

Sitio will be required to pay certain legal, financing and accounting costs and associated fees and expenses relating to the Brigham Merger, whether or not the Brigham Merger is completed; and

•

matters relating to the Brigham Merger require substantial commitments of time and resources by Sitio’s management, which would otherwise have been devoted to day-to-day operations and other opportunities that could have been beneficial to Sitio as an independent company.

Sitio will incur significant transaction and merger-related costs in connection with the Brigham Merger.

Sitio has incurred and expects to incur a number of non-recurring costs associated with the Brigham Merger. These costs and expenses include fees paid to financial, legal and accounting advisors, potential employment-related costs, filing fees, printing expenses and other related charges. Some of these costs are payable by Sitio regardless of whether the Brigham Merger is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that may or must be integrated in connection with the Brigham Merger and the integration of Sitio’s and Brigham’s businesses. While Sitio has assumed that a certain level of expenses would be incurred in connection with the Brigham Merger and the other transactions contemplated by the Merger Agreement, there are many factors beyond its control that could affect the total amount or the timing of the integration and implementation expenses.

There may also be additional unanticipated significant costs in connection with the Brigham Merger that New Sitio may not recoup. These costs and expenses could reduce the realization of efficiencies, strategic benefits and additional income Sitio and Brigham expect to achieve from the Brigham Merger. Although Sitio expects that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None other than as previously disclosed.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 6. Exhibits.

The following documents are filed as part of this Quarterly Report on Form 10-Q or incorporated herein by reference.


Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of January 11, 2022, by and among Falcon Minerals Corporation, Falcon Minerals Operating Partnership, LP, Ferrari Merger Sub A LLC, and DPM HoldCo, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 12, 2022).
2.2		Agreement and Plan of Merger, dated as of September 6, 2022, by and among Sitio Royalties Corp., Sitio Royalties Operating Partnership, LP, Snapper Merger Sub I, Inc., Snapper Merger Sub II, LLC, Brigham Minerals, Inc. and Brigham Minerals Holdings LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on September 12, 2022).
3.1		Third Amended and Restated Certificate of Incorporation of the Company, dated June 3, 2022 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 6, 2022).
3.2		Amended and Restated Bylaws of Falcon Minerals Corporation (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K/A filed on January 23, 2019).
4.1		Note Purchase Agreement, dated as of September 21, 2022, by and among Sitio Royalties Operating Partnership, LP, as issuer, the subsidiary guarantors party thereto, the financial institutions from time to time party thereto as holders, and U.S. Bank Trust Company, National Association, as agent for the holders (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 23, 2022).
10.1		Second Amendment to Second Amended and Restated Credit Agreement, dated as of July 8, 2022, among Sitio Royalties Operating Partnership, LP, as borrower, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as the administrative agent and issuing bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 13, 2022).
10.2		First Amendment to 364-Day Bridge Term Loan Agreement, dated as of July 8, 2022, among Sitio Royalties Operating Partnership, LP, as borrower, the lenders party thereto and Bank of America, N.A., as the administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2022).
10.3		Third Amendment to Second Amended and Restated Credit Agreement, dated as of September 21, 2022, by and among Sitio Royalties Operating Partnership, LP, as borrower, the guarantors party thereto, the lenders from time to time party thereto as lenders, and Bank of America, N.A. as administrative agent for the lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 23, 2022).
10.4		Support Agreement, dated as of September 6, 2022, by and among Sitio Royalties Corp., BX Royal Aggregator LP, Rock Ridge Royalty Company LLC and Brigham Minerals, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 12, 2022).
10.5		Support Agreement, dated as of September 6, 2022, by and among Sitio Royalties Corp., KMF DPM HoldCo, LLC, Chambers DPM HoldCo, LLC and Brigham Minerals, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 12, 2022).
10.6		Support Agreement, dated as of September 6, 2022, by and among Sitio Royalties Corp., Source Energy Leasehold, LP, Permian Mineral Acquisitions, LP and Brigham Minerals, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 12, 2022).
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith.

** Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SITIO ROYALTIES CORP.

Date: November 8, 2022	By:	/s/ Christopher L. Conoscenti
		Christopher L. Conoscenti
		Chief Executive Officer
		(Principal Executive Officer)

Date: November 8, 2022	By:	/s/ Carrie L. Osicka
		Carrie L. Osicka
		Chief Financial Officer
		(Principal Financial Officer)

Date: November 8, 2022	By:	/s/ Jim Norris
		Jim Norris
		Vice President - Controller (Principal Accounting Officer)