10-Q

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.

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 August 4, 2023, there were 81,664,650 shares of the registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and there were 75,513,142 shares of the registrant’s Class C Common Stock, par value $0.0001 per share, outstanding.

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:

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.

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.

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.

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.

Gross wells. The number of wells, normalized to a 5,000 foot lateral length basis, where we have ownership in a mineral or royalty interest.

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.

Horizontal wells. The number of horizontal wells, normalized to a 5,000 foot lateral length basis, where we have ownership in a mineral or royalty interest.

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

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

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

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).

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.

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.

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

1. Description of Business and Basis of Presentation

Description of Business

Sitio Royalties Corp. (together with its 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 in South Texas, the SCOOP and STACK plays in the Anadarko Basin in Oklahoma, the DJ Basin in Colorado and Wyoming, the Williston Basin in North Dakota, 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 shares of Class C Common Stock and common units representing limited partner interests in Sitio OpCo (the “Sitio OpCo Partnership Units” and, together with the receipt of Class C Common Stock, 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.

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

Brigham Merger

On December 29, 2022, the Company consummated the previously announced merger transactions (the "Brigham Merger") contemplated by the Agreement and Plan of Merger, dated as of September 6, 2022 (the “Brigham Merger Agreement”) by and among STR Sub Inc. (formerly Sitio Royalties Corp.) (“Former Sitio”), MNRL Sub Inc. (formerly Brigham Minerals Inc.) (“Brigham”), Brigham Minerals Holdings, LLC (“Brigham OpCo”), Sitio Royalties Operating Partnership, LP, Sitio Royalties Corp. (formerly Snapper Merger Sub I, Inc.) (“New Sitio”), Snapper Merger Sub IV, Inc. (“Brigham Merger Sub”), Snapper Merger Sub V, Inc. (“Sitio Merger Sub”), and Snapper Merger Sub II, LLC (“Opco Merger Sub”). The Brigham Merger Agreement provided for the acquisition of Brigham by Former Sitio in an all stock transaction. Refer to “Note 3 – Brigham Merger” for further information. The Company completed the acquisition of approximately 86,500 NRAs in the Delaware and Midland Basin in West Texas and New Mexico, the SCOOP and STACK plays in the Anadarko Basin in Oklahoma, the DJ Basin in Colorado and Wyoming and the Williston Basin in North Dakota from Brigham pursuant to the Brigham Merger.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information.

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary for a fair statement of the Company’s financial position as of June 30, 2023, results of its operations for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 30, 2023 and 2022. The condensed consolidated balance sheet as of December 31, 2022 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. Accordingly, the accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto in our Annual Report on Form 10-K filed with the SEC on March 8, 2023 (the “Annual Report”). The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2023. The Company operates in one reportable segment. 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”), immediately prior to our corporate reorganization in connection with the Falcon Merger. Prior to 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. The unaudited 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, which include the results of Brigham following December 29, 2022. The balance sheets as of June 30, 2023 and December 31, 2022 reflect 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 Minerals Corporation measured at fair value as of June 7, 2022 and the assets and liabilities of Brigham measured at fair value as of December 29, 2022. Earnings per share is calculated based on the consolidated results of the Company for the periods subsequent to the Falcon Merger. The Company has acquired additional surface rights in connection with multiple acquisitions subsequent to the Falcon Merger. The results of each subsequent acquisition are included in the consolidated 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited 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 interest in the Company’s unaudited condensed consolidated financial statements represent interests held in the form of Class C Common Stock and Sitio OpCo Partnership Units. See “Note 10 – Noncontrolling Interest” for additional information.

Use of Estimates

The preparation of unaudited 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 unaudited 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.

Significant Accounting Policies

Significant accounting policies are disclosed in the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2022, presented in the Annual Report. There have been no material changes in such policies or the application of such policies during the six months ended June 30, 2023.

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. Royalty revenue 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):


	June 30, 2023		December 31, 2022
Accrued revenue	$	102,451	$	80,406
Accounts receivable		15,925		61,604
Total accrued revenue and accounts receivable	$	118,376	$	142,010

Accounts receivable at June 30, 2023 and December 31, 2022 are primarily composed of accrued revenue acquired in conjunction with the Brigham Merger. Refer to “Note 3 – Brigham Merger” for more information. The Company routinely assesses the recoverability of all material accounts receivable to determine their collectability, and records a reserve for amounts not expected to be fully recovered using a current expected credit loss model. As of June 30, 2023, and December 31, 2022, the Company had no reserves for amounts not expected to be fully recovered.

Accounts Payable and Accrued Expenses

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


	June 30, 2023		December 31, 2022
Ad valorem taxes payable	$	6,392	$	9,209
Brigham Merger accrued expenses		2,964		2,878
General and administrative		2,750		1,931
Payable to seller for pre-effective monies		2,533		2,243
Accrued capital expenditures		1,043		12
Interest expense		626		1,377
Accrued prepaids		905		1,330
Other		93		206
Other taxes payable		—		2,713
Total accounts payable and accrued expenses	$	17,306	$	21,899

Merger-Related Transaction Costs

General and administrative expense of $14.1 million and $6.7 million for the three months ended June 30, 2023 and 2022 included $1.8 million and $2.0 million, respectively, of costs incurred by the Company in connection with the Falcon Merger and the Brigham

Merger. For the six months ended June 30, 2023 and 2022, general and administrative expense of $25.7 million and $10.7 million included $2.6 million and $3.2 million, respectively, of merger-related costs.

See “Note 3 – Brigham Merger” and “Note 4 – Falcon Reverse Merger” for additional disclosures regarding the Brigham Merger and Falcon Merger.

3. Brigham Merger

In December 2022, the Company completed the acquisition of approximately 86,500 NRAs in the Delaware and Midland Basin in West Texas and New Mexico, the SCOOP and STACK plays in the Anadarko Basin of Oklahoma, the DJ Basin Colorado and Wyoming and the Williston Basin in North Dakota from Brigham pursuant to the Brigham Merger. At closing, Former Sitio completed the acquisition of Brigham in an all-stock transaction through: (i) the merger of Brigham Merger Sub with and into Brigham (the “Brigham Sub Merger”), with Brigham surviving the Brigham Sub Merger as a wholly owned subsidiary of New Sitio, (ii) the merger of Sitio Merger Sub with and into Former Sitio (the “Sitio Sub Merger”), with Former Sitio surviving the Sitio Sub Merger as a wholly owned subsidiary of New Sitio, and (iii) the merger of Opco Merger Sub with and into Brigham Opco (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 Brigham Merger Agreement.

Pursuant to the Brigham Merger Agreement, at closing (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 (as defined in the Brigham Merger Agreement) was converted into 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 was converted into 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 was 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, was 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, at the Second Effective Time (as defined in the Brigham Merger Agreement), each Brigham Opco Unit issued and outstanding immediately prior to the Second Effective Time was converted into 1.133 Sitio OpCo Partnership Units. No fractional shares were outstanding following the conversion.

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

The following table summarizes the consideration for the Brigham Merger:


Brigham Common Stock — issued and outstanding as of December 29, 2022:		71,290,265
Class A Common Stock price on December 29, 2022	$	30.15
Total consideration and fair value	$	2,149,401,490

Preliminary Purchase Price Allocation

The Brigham Merger was accounted for as a business combination using the acquisition method 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 Company's determination of the fair value attributable to the identifiable assets acquired and liabilities assumed based on the fair value at the acquisition date is preliminary. 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 year ending December 31, 2023, 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 December 29, 2022 including measurement period adjustments through the six months ended June 30, 2023 (in thousands):


Brigham fair values:	December 29, 2022			Adjustments			June 30, 2023
Cash	$	11,054		$	—		$	11,054
Accrued revenue and accounts receivable		61,745			266			62,011
Prepaid expenses		11,339			15,828			27,167
Unproved oil and gas properties		1,783,162			31,701			1,814,863
Proved oil and gas properties		873,050			—			873,050
Property and equipment		200			—			200
Right-of-use asset		3,209			—			3,209
Other assets		1,064			(1,064	)		—
Current liabilities		(83,425	)		(2,581	)		(86,006	)
Long-term debt		(193,000	)		—			(193,000	)
Long-term operating lease liability		(2,387	)		—			(2,387	)
Deferred tax liability		(316,571	)		(43,050	)		(359,621	)
Other long-term liability		(39	)		(1,100	)		(1,139	)
Total consideration and fair value	$	2,149,401		$	—		$	2,149,401

Transaction costs associated with the Brigham Merger incurred for the three and six months ended June 30, 2023 were $1.7 million and $2.4 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 unaudited condensed consolidated statements of operations. No such costs associated with the Brigham Merger were incurred for the three and six months ended June 30, 2022.

4. Falcon Reverse Merger

In June 2022, the Company completed the acquisition of approximately 34,000 NRAs in the Eagle Ford 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 following table summarizes 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

Purchase Price Allocation

The Falcon Merger was accounted for as a business combination using the acquisition method 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 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. The purchase price allocation was finalized during the year ended December 31, 2022.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed (in thousands):


	June 7, 2022			Adjustments			December 31, 2022
Falcon fair values:
Cash	$	4,484		$	—		$	4,484
Accrued revenue and accounts receivable		12,054			6,696			18,750
Unproved oil and gas properties		495,803			(4,572	)		491,231
Proved oil and gas properties		200,773			—			200,773
Property and equipment		278			—			278
Current liabilities		(22,315	)		(1,106	)		(23,421	)
Long-term debt		(43,105	)		—			(43,105	)
Deferred tax liability		(2,598	)		(1,018	)		(3,616	)
Warrant liability		(6,612	)		—			(6,612	)
Total consideration and fair value	$	638,762		$	—		$	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 the Sitio Revolving Credit Facility (as defined below).

Transaction costs associated with the Falcon Merger incurred for the three months ended June 30, 2023 and 2022 were $67,000 and $2.0 million, respectively. Transaction costs associated with the Falcon Merger incurred for the six months ended June 30, 2023 and 2022 were $166,000 and $3.2 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 unaudited condensed consolidated statements of operations.

Pro Forma Financial Information

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


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2022		2022
Total revenues	$	104,824	$	193,492
Pro forma income available to common stockholders		10,253		16,572

Net income per share:
Basic	$	0.82	$	1.32
Diluted	$	0.12	$	0.20

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, 2022 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.

5. Revenue from Contracts with Customers

Oil, natural gas, and natural gas liquids revenues

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 operators are satisfied at a point in time when control transfers to the operator 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 leasing contracts with operators are standard

industry agreements 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 six months ended June 30, 2023 and 2022, the disaggregated revenues from sales of oil, natural gas and NGLs were as follows (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Crude oil sales	$	111,993	$	64,567	$	229,738	$	113,838
Natural gas sales		8,522		12,250		23,176		20,100
NGL sales		12,052		9,690		25,207		17,520
Total royalty revenues	$	132,567	$	86,507	$	278,121	$	151,458

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 an operator 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 operator. The Company also recognizes revenue from delay rentals to the extent drilling has not started within the specified period and payment has been received to extend the lease term. 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 revenues 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 revenue 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 customer. 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 customer 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 revenues and the actual amounts received for oil and natural gas sales are recorded in the month that the royalty payment is received from the operator. For the three and six months ended June 30, 2023 and 2022, 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.

8. Debt

Sitio Revolving Credit Facility

On February 3, 2023, a Third Amended and Restated Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “Sitio Revolving Credit Facility”) was entered into by Sitio OpCo, as borrower, JPMorgan Chase Bank, N.A., as the administrative agent (as successor administrative agent to Bank of America, N.A.) and as issuing bank, and the lenders and other financial institutions from time to time party thereto. In connection with the amendment and restatement of the Sitio Revolving Credit Facility, the Brigham Revolving Credit Facility (as defined below) was paid off and refinanced in full.

The Sitio Revolving Credit Facility bears interest at a rate per annum equal to, at our option, 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 the Sitio 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, 2.500% to 3.500%. The credit spread adjustment for Term SOFR rate loans 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 the Sitio Revolving Credit Facility in an amount ranging from 0.375% to 0.500% based on utilization of the Sitio Revolving Credit Facility. The Sitio Revolving Credit Facility is subject to other customary fee, interest and expense reimbursement provisions.

As of June 30, 2023 and December 31, 2022, the weighted average interest rate related to our outstanding borrowings under the Sitio Revolving Credit Facility was 8.21% and 7.62%, respectively. As of June 30, 2023 and December 31, 2022, the Company had unamortized debt issuance costs of $11.8 million and $6.0 million, respectively, in connection with its entry into the Sitio 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 June 30, 2023 and 2022, the Company recognized $732,000 and $260,000, respectively, in interest expense related to the amortization of deferred financing costs under the Sitio Revolving Credit Facility. For the six months ended June 30, 2023 and 2022, the Company recognized $1.3 million and $464,000, respectively, in interest expense related to the amortization of deferred financing costs under the Sitio Revolving Credit Facility. In connection with the amendment and restatement of the Sitio Revolving Credit Facility, certain lenders did not elect to remain a party to the Sitio Revolving Credit Facility. As such $783,000 of previously capitalized deferred financing costs were written off during the six months ended June 30, 2023.

The Sitio Revolving Credit Facility matures on the earlier of (i) June 30, 2027 and (ii) the date that is 180 days prior to the final maturity date of the 2026 Senior Notes (as defined below) if any 2026 Senior Notes remain outstanding on such date. Loans drawn under the Sitio 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, subject to compliance with the Sitio Revolving Credit Facility. In addition, Sitio OpCo may permanently reduce or terminate in full the commitments under the Sitio Revolving Credit Facility prior to maturity. Any excess exposure resulting from such permanent reduction or termination must be prepaid and may not be reborrowed. Upon the occurrence of an event of default under the Sitio 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 the Sitio Revolving Credit Facility, provided that such acceleration and termination occurs automatically upon the occurrence of a bankruptcy or insolvency event of default.

certain additional indebtedness. Increases to the borrowing base require unanimous approval of the lenders, while maintenance of the same borrowing base or decreases in the borrowing base only require approval of lenders holding two-thirds of the aggregate commitments at such time. The determination of the borrowing base takes 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 Sitio Revolving Credit Facility is collateralized by substantially all of the assets of Sitio OpCo and its restricted subsidiaries.

As of June 30, 2023, the borrowing base under the Sitio Revolving Credit Facility (the “Sitio Borrowing Base”) was $750.0 million as determined by the lenders and the outstanding balance under the Sitio Revolving Credit Facility was $486.0 million. As of December 31, 2022, the Sitio Borrowing Base was $300.0 million as determined by the lenders and the outstanding balance under the Sitio Revolving Credit Facility was $250.0 million.

The Sitio 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 restrictions on certain investments. The Sitio 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, with cash netting capped at $25.0 million. EBITDA for the period ending on June 30, 2023 is calculated as EBITDA for the period beginning on July 1, 2022 and ending on June 30, 2023. The Company was in compliance with the terms and covenants of the Sitio Revolving Credit Facility at June 30, 2023 and December 31, 2022.

Brigham Revolving Credit Facility

In conjunction with the closing of the Brigham Merger, the Company assumed the credit facility evidenced by that certain Credit Agreement, led by Wells Fargo Bank, N.A. as Administrative Agent, Letter of Credit Issuer, Sole Lead Arranger and Bookrunner, pursuant to which the lenders thereunder provided a senior secured revolving credit facility to Brigham Resources, LLC in an aggregate principal amount of up to $500.0 million (as amended, the “Brigham Revolving Credit Facility”). In connection with the amendment and restatement of the Sitio Revolving Credit Facility, the Brigham Revolving Credit Facility was paid off and refinanced in full, and all obligations arising under the Brigham Revolving Credit Facility were terminated.

2026 Senior Notes

On September 21, 2022, Sitio OpCo, as issuer, and certain subsidiaries of Sitio OpCo, as guarantors, entered into a Note Purchase Agreement (as amended, the “Note Purchase Agreement”) with certain institutional investors 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”) at 99% of par. 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 (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 5.75%, 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 4.75%. 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 aggregate 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 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 June 30, 2023 and December 31, 2022, the Company had $416.3 million and $438.8 million, respectively, of 2026 Senior Notes outstanding. As of June 30, 2023 and December 31, 2022, the weighted average interest rate of the 2026 Senior Notes was 11.14% and 11.23%, respectively. As of June 30, 2023 and December 31, 2022, the Company had unamortized discount of $4.4 million and $5.1 million, respectively, in connection with its issuance of the 2026 Senior Notes. As of June 30, 2023 and December 31, 2022, the Company had unamortized debt issuance costs of $4.2 million and $4.7 million, respectively, in connection with its issuance of the 2026 Senior Notes. Discount and debt issuance costs are reported as a reduction to long-term debt on our unaudited condensed consolidated balance sheets and are amortized over the life of the 2026 Senior Notes. For the three and six months ended June 30, 2023, the Company recognized $716,000 and $1.4 million, respectively, of interest expense attributable to the amortization of discount and issuance costs related to the Note Purchase Agreement. No such expense was recognized for the three and six months ended June 30, 2022.

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 asset sales, restrictions on additional debt and lien incurrence and restrictions on making dividends or distributions and restrictions on certain investments. The Note Purchase Agreement requires Sitio OpCo to maintain a leverage ratio of not more than 3.50 to 1.00, which is tested as of the last day of each fiscal quarter. During the continuance of an event of default, the Holders may take certain actions, including declaring the entire amount of the 2026 Senior Notes and other amounts then outstanding under the Note Purchase Agreement to be due and payable. As of June 30, 2023 and December 31, 2022, Sitio OpCo was in compliance with the terms and covenants of the 2026 Senior Notes.

First Amendment to Note Purchase Agreement

On December 29, 2022, Sitio OpCo and the guarantors entered into that certain First Amendment to Note Purchase Agreement (the “NPA First Amendment”), pursuant to which, among other things, the Note Purchase Agreement was amended to (i) designate certain subsidiaries of Brigham as unrestricted subsidiaries under the Note Purchase Agreement (such designated subsidiaries, the “Specified Brigham Subsidiaries”), (ii) require that the Specified Brigham Subsidiaries become restricted subsidiaries under the Note Purchase Agreement and the Sitio Credit Agreement (as defined in the Note Purchase Agreement) on or before June 30, 2023, (iii) postpone the automatic 0.75% (or, in certain circumstances, 1.75%) reduction of the applicable margin on the 2026 Senior Notes from the date when the Mergers are consummated to the date when the Specified Brigham Subsidiaries are designated as restricted subsidiaries under the Note Purchase Agreement (such date of designation, the “Fold In Date”) and (iv) include restrictions on the amount of debt that can be incurred by the Specified Brigham Subsidiaries before they are designated as restricted subsidiaries under the Note Purchase Agreement.

Guarantor Accession Agreement

On February 3, 2023, (a) the Specified Brigham Subsidiaries were designated as restricted subsidiaries under the Note Purchase Agreement (collectively, the “Designations”) and (b) after such Designations, the Specified Brigham Subsidiaries entered into that certain Guarantor Accession Agreement, pursuant to which, among other things, the Specified Brigham Subsidiaries became guarantors under the Note Purchase Agreement on such date. As a result, the “Fold In Date” under the Note Purchase Agreement occurred on February 3, 2023.

Second Amendment to Note Purchase Agreement

On June 13, 2023, Sitio OpCo and the guarantors entered into that certain Second Amendment to Note Purchase Agreement (the “NPA Second Amendment”), pursuant to which, among other things, the Note Purchase Agreement was amended to allow the repurchase of Sitio OpCo's and the Company's equity interests, provided that (i)(a) no event of default would have occurred and be continuing and (b) liquidity would be equal to or greater than ten percent of the Sitio Revolving Credit Facility loan limit then in effect, (ii) Sitio OpCo and the guarantors maintain a leverage ratio less than or equal to 3.00 to 1.00, and (iii) the amount of all such repurchases shall not exceed $25.0 million.

9. Equity

Class A Common Stock

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 Board.

Class C Common Stock

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 which receive pro rata distributions. 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 canceled. During the six months ended June 30, 2023, 1,316,216 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 canceled.

Treasury Shares

During the six months ended June 30, 2023, the Company canceled 633,005 shares of its Class A Common Stock held in treasury. The treasury shares were recorded at a price of $30.15 upon contribution to the Company as part of the Brigham Merger consideration. As of June 30, 2023, no shares of Class A Common Stock were held in treasury.

During the three and six months ended June 30, 2023, the Company transferred 26,137 shares of its Class C Common Stock to treasury. The treasury shares were recorded at a price of $25.92 upon repurchase by the Company. Holders of Sitio OpCo Restricted Stock Awards forfeited their vested shares for income taxes and the income taxes were paid by the Company. See "Note 11 – Share-Based Compensation" for additional information regarding these awards. As of June 30, 2023, 26,137 shares of Class C Common Stock were held in treasury.

Cash Dividends

The following table summarizes the quarterly dividends related to the Company’s quarterly financial results (in thousands, except per share data):


Quarter Ended	Total Quarterly Dividend per Class A Common Share		Class A Cash Dividends Paid		Payment Date	Stockholder record date
March 31, 2023	$	0.50	$	40,743	May 31, 2023	May 19, 2023
December 31, 2022	$	0.60	$	48,107	March 31, 2023	March 17, 2023
September 30, 2022	$	0.72	$	9,148	November 30, 2022	November 21, 2022
June 30, 2022	$	0.71	$	9,017	August 31, 2022	August 18, 2022

See “Note 18 – 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 June 30,					For the Six Months Ended June 30,
	2023			2022		2023			2022
Numerator:
Net income (loss) attributable to Class A stockholders	$	(796	)	$	6,160	$	21,857		$	6,160
Less: Earnings allocated to participating securities		(383	)		—		(783	)		—
Net income (loss) attributable to Class A stockholders - basic	$	(1,179	)	$	6,160	$	21,074		$	6,160
Plus: net income attributable to temporary equity		—			26,271		—			26,271
Plus: net income (loss) attributable to noncontrolling interest		—			—		—			—
Net income (loss) attributable to Class A stockholders - diluted	$	(1,179	)	$	32,431	$	21,074		$	32,431
Denominator:
Weighted average shares outstanding - basic		81,044			12,522		80,614			12,522
Effect of dilutive securities		—			71,319		—			71,319
Weighted average shares outstanding - diluted		81,044			83,841		80,614			83,841

Net income (loss) per common share - basic	$	(0.01	)	$	0.49	$	0.26		$	0.49
Net income (loss) per common share - diluted	$	(0.01	)	$	0.39	$	0.26		$	0.39

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Warrants		5,312		5,312		5,312		5,312
Unvested share-based compensation awards		1,463		693		1,057		693
Total		6,775		6,005		6,369		6,005

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 June 30, 2023.

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, dated as of June 3, 2018, by and among Falcon and the other parties thereto. 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 $50.00), 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 (noncontrolling interest and additional-paid-in-capital).

11. 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 canceled, 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 Board (the “Compensation Committee”). As of June 30, 2023, a total of 6,881,719 shares of Class A Common Stock remain available for future grant under the Plan.

Share-based compensation expense is included in general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. The following table summarizes the share-based compensation expense recorded for each type of award for the three and six months ended June 30, 2023 and 2022, in thousands.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

RSUs	$	2,226	$	487	$	4,566	$	487
PSUs		2,084		247		3,432		247
DSUs		470		96		818		96
Sitio OpCo Restricted Stock Awards		561		148		1,117		148
RSUs Converted in the Brigham Merger		61		—		122		—
PSUs Converted in the Brigham Merger		20		—		51		—
Total	$	5,422	$	978	$	10,106	$	978

For the three and six months ended June 30, 2023, the Company recognized increases to accumulated deficit of $383,000 and $783,000, respectively, related to DERs. For the three and six months ended June 30, 2022, 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 DERs, which entitle the holder to receive payments as if the unvested awards were shares of Class A Common Stock of record as of the dividend record dates. Such amounts are paid simultaneously with the general dividend to our stockholders.

The Company has granted RSUs to certain employees, which represent the right to receive shares of Class A Common Stock at the end of the service periods in an amount equal to the number of RSUs that vest. The RSUs issued to employees generally vest in one-third increments over a three-year period. RSUs are subject to forfeiture if the award recipient ceases providing services to the Company prior to the date the award vests.

The following table summarizes activity related to unvested RSUs for the six months ended June 30, 2023.


	Restricted Stock Units
	Number of Shares			Grant Date Fair Value
Unvested at January 1, 2023		446,128		$	29.11
Granted		191,158			24.24
Forfeited		(6,471	)		29.92
Vested		(263,307	)		29.12
Unvested at June 30, 2023		367,508		$	26.55

As of June 30, 2023, there was approximately $8.4 million of unamortized equity-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.3 years.

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 service period. DSUs generally vest in equal quarterly installments over the one-year period beginning on the grant date. Any vested DSUs are settled in shares of Class A Common Stock when a recipient’s service relationship is terminated for any reason.

The following table summarizes activity related to unvested DSUs for the six months ended June 30, 2023.


	Deferred Share Units
	Number of Shares			Grant Date Fair Value
Unvested at January 1, 2023		41,724		$	29.12
Granted		93,680			25.38
Forfeited		—			—
Vested		(41,724	)		29.12
Unvested at June 30, 2023		93,680		$	25.38

As of June 30, 2023, there was approximately $2.1 million of unamortized equity-based compensation expense related to unvested DSUs, which is expected to be recognized over a weighted average period of 0.9 years.

Performance Stock Units

In accordance with the Plan, the Compensation Committee is authorized to issue performance stock units (“PSUs”) to eligible employees and directors. The PSUs are eligible to be earned based on achievement of certain pre-established goals for annualized absolute Total Shareholder Return (“TSR”) over a three-year performance period.

The performance targets associated with the PSU awards 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 is based on our 20-day volume weighted average stock price beginning on the applicable grant date or a date specified by the award agreement. The ending price is generally 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 and Sitio. The risk-free interest rate was determined using the yield for zero-coupon U.S. Treasury bills that is commensurate with the performance measurement periods. 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 assumptions used to determine the fair values of the PSUs:


Grant Year	Average Expected Volatility	Risk-Free Interest Rate	Expected Dividend Yield
2022	67.23% - 67.30%	2.89% - 4.18%	0.00%
2023	52.71%	4.60%	0.00%

The following table summarizes activity related to unvested PSUs for the six months ended June 30, 2023.


	Performance Stock Units
	Number of Shares		Grant Date Fair Value
Unvested at January 1, 2023		308,953	$	39.12
Granted		504,041		25.81
Forfeited		—		—
Vested		—		—
Unvested at June 30, 2023		812,994	$	30.87

As of June 30, 2023, there was approximately $19.4 million of unamortized equity-based compensation expense related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.4 years.

Restricted Stock Units Converted in the Brigham Merger

In connection with the Brigham Merger, several legacy Brigham employees joined Sitio. Legacy Brigham RSUs held by such legacy Brigham employees were converted to Sitio RSUs in connection with the Brigham Merger at an exchange ratio of 1.133 Sitio RSUs for each Brigham RSU. These converted RSUs will retain the original vesting schedules of the Brigham RSUs, which vest in one-third increments on the anniversaries of the original grant dates of the Brigham RSUs. The Company estimated the fair value of the converted 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.

The following table summarizes activity related to unvested RSUs converted in the Brigham Merger for the six months ended June 30, 2023.


	Restricted Stock Units Converted in Brigham Merger
	Number of Shares			Grant Date Fair Value
Unvested at January 1, 2023		21,279		$	30.15
Granted		—			—
Forfeited		(3,147	)		30.15
Vested		(7,092	)		30.15
Unvested at June 30, 2023		11,040		$	30.15

As of June 30, 2023, there was approximately $424,000 of unamortized equity-based compensation expense related to unvested RSUs converted in the Brigham Merger, which is expected to be recognized over a weighted average period of approximately 1.7 years.

Performance Stock Units Converted in the Brigham Merger

Brigham PSUs held by legacy Brigham employees who joined Sitio were converted to Sitio PSUs in connection with the Brigham Merger at an exchange ratio of 1.133 Sitio PSUs for each Brigham PSU. The converted PSUs retain and carry over the remainder of the initial vesting periods. The performance targets associated with the Brigham PSUs were deemed to have been achieved at 200% as of the date of the Brigham Merger. Because all performance targets were achieved prior to conversion and the number of Class A Common Shares to be issued upon satisfaction of the service requirements is known, the Company estimated the fair value of the converted PSUs as the closing price of the Company’s Class A Common Stock on the grant date of the awards, which is expensed over the applicable service period.

The following table summarizes activity related to unvested PSUs converted in the Brigham Merger for the six months ended June 30, 2023.


	Performance Stock Units Converted in Brigham Merger
	Number of Shares			Grant Date Fair Value
Unvested at January 1, 2023		10,786		$	30.15
Granted		—			—
Forfeited		(3,148	)		30.15
Vested		—			—
Unvested at June 30, 2023		7,638		$	30.15

As of June 30, 2023, there was approximately $178,000 of unamortized equity-based compensation expense related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.7 years.

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 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 service period.

The following table summarizes activity related to unvested Sitio OpCo RSAs for the six months ended June 30, 2023


	Sitio OpCo Restricted Stock Awards
	Number of Shares			Grant Date Fair Value
Unvested at January 1, 2023		309,527		$	29.12
Granted		—			—
Forfeited		—			—
Vested		(77,382	)		29.12
Unvested at June 30, 2023		232,145		$	29.12

As of June 30, 2023, there was approximately $6.6 million of unamortized equity-based compensation expense related to the unvested Sitio OpCo RSAs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

12. Warrants

The Public and Private Warrants described below will expire in August 2023 or earlier upon redemption or liquidation. 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 June 30, 2023, the exercise price of the Warrants was $44.31 after giving effect to the Reverse Stock Split and after the Extraordinary Dividends that were paid subsequent to the Falcon Merger. 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 Falcon’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 and the Extraordinary Dividends, 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 $44.31 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 unaudited condensed consolidated statements of operations. As of June 30, 2023 and December 31, 2022, there were 13,749,998 Public Warrants outstanding and 7,500,000 Private Placement Warrants outstanding. The fair value of the Public Warrants as of June 30, 2023 and December 31, 2022 was $8,000 and $1.6 million, respectively. See “Note 14 – Fair Value Measurement” for additional information regarding the determination of the fair value of the Public Warrants for the periods presented. 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 June 30, 2023 and December 31, 2022:


	June 30, 2023			December 31, 2022
Stock price	$	26.27		$	28.85
Volatility		35.6	%		47.0	%
Risk-free rate		5.28	%		4.70	%
Dividend yield		7.61	%		6.93	%
Term	0.2 years			0.7 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 six months ended June 30, 2023 (in thousands). There were no warrants outstanding for the Predecessor prior to the date of the Falcon Merger.


	Six Months Ended June 30,
	2023
Balance at January 1, 2023	$	1,369
Decrease in fair value		(1,369	)
Balance at June 30, 2023	$	—

13. 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 unaudited condensed consolidated statements of operations.

The Company may utilize fixed price swaps, basis swaps, and two- and three-way collars to manage commodity price risk. 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 June 30, 2023 are summarized below:


	Oil (NYMEX WTI)
Remaining Term	Bbl per Day		Weighted Average Price per Bbl
July 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
July 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 June 30, 2023 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
July 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 June 30, 2023 and December 31, 2022.

Interest Rate Derivatives

In November 2022, the Company entered into an interest rate swap agreement for an initial notional amount of $225.0 million. Such notional amount decreases by $5.625 million every 91 days. The interest rate swap manages exposure to changes in interest rates from variable rate obligations related to the 2026 Senior Notes. The interest rate swap term expires December 31, 2023. The Company’s interest rate derivative contract has not been designated a hedge for accounting purposes; therefore, all gains and losses on the interest rate swap are recognized in the Company’s unaudited condensed consolidated statements of operations. The interest rate swap was not entered into for trading or speculative purposes.

Financial Summary

The following table presents a summary of the Company’s derivative instruments and where such values are recorded on the unaudited condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023			December 31, 2022
	Balance sheet location	Fair value		Balance sheet location	Fair value
Asset derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current assets	$	25,213	Current assets	$	18,555
Interest rate contracts	Current assets		674	Current assets		319
Commodity contracts	Long-term assets		13,936	Long-term assets		13,379

Total asset derivatives		$	39,823		$	32,253

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

Total liability derivatives		$	—		$	—

Net derivatives		$	39,823		$	32,253

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 balance sheets (in thousands):


	June 30, 2023								December 31, 2022
	Gross Fair Value			Gross Amounts Offset			Net Fair Value		Gross Fair Value			Gross Amounts Offset			Net Fair Value
Commodity derivative assets	$	40,791		$	(1,642	)	$	39,149	$	36,813		$	(4,879	)	$	31,934
Interest rate derivative assets		674			—			674		319			—			319
Commodity derivative liabilities		(1,642	)		1,642			—		(4,879	)		4,879			—

The following table is a summary of derivative gains and losses, and where such values are recorded in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022 (in thousands):


		Three Months Ended				Six Months Ended
	Statement of income location	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Commodity derivative gains	Other income	$	6,112	$	20,010	$	20,875	$	18,895
Interest rate derivative gains	Other income		607		—	$	447	$	—

The fair values of commodity derivative and interest rate derivative instruments were 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 and interest rate derivative counterparties are current lenders under the Sitio Revolving Credit Facility. Accordingly, the Company is not required to provide any credit support to its derivative counterparties other than cross collateralization with the properties securing the Sitio Revolving Credit Facility. The Company’s 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 Sitio Revolving Credit Facility or other general obligations against amounts owed to the Company for derivative contract assets.

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:

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, 2022, 2021, and 2020 in the Annual Report 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, (ii) for periods subsequent to the closing of the Falcon Merger and prior to the Brigham Merger, Sitio Royalties Corp. and its subsidiaries, including Desert Peak but excluding Brigham and (iii) for periods subsequent to the closing of the Falcon Merger and Brigham Merger, Sitio Royalties Corp. and its subsidiaries, including Desert Peak and Brigham, 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 Statement Regarding Forward-Looking Statements.” We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

As of June 30, 2023, we owned mineral and royalty interests representing approximately 263,500 NRAs when adjusted to a 1/8th royalty. For the three months ended June 30, 2023, the average net daily production associated with our mineral and royalty interests was 34,681 BOE/d, consisting of 17,359 Bbls/d of oil, 61,269 Mcf/d of natural gas and 7,110 Bbls/d of NGLs. For the six months ended June 30, 2023, the average net daily production associated with our mineral and royalty interests was 34,561 BOE/d, consisting of 17,506 Bbls/d of oil, 60,830 Mcf/d of natural gas and 6,917 Bbls/d of NGLs. Since our Predecessor’s formation in November 2016, we have accumulated our acreage position by making 188 acquisitions through June 30, 2023. 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 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 six months ended June 30, 2023, our production and ad valorem taxes were approximately $3.33 per BOE, relative to an average realized price of $44.46 per BOE. We do not anticipate engaging in any upstream activities such as drilling and completing oil and natural gas wells that would 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.

As of June 30, 2023, we have evaluated over 1,000 potential mineral and royalty interest acquisitions and completed 188 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 flow per share.

Our average daily production during the three months ended June 30, 2023 and 2022 was 34,681 BOE/d (50% crude oil) and 12,402 BOE/d (52% crude oil), respectively. For the three months ended June 30, 2023, we received an average of $70.90 per Bbl of crude oil, $1.53 per Mcf of natural gas and $18.63 per Bbl of NGLs, for an average realized price of $42.01 per BOE. For the three months ended June 30, 2022, we received an average of $109.87 per Bbl of crude oil, $6.55 per Mcf of natural gas and $42.29 per Bbl of NGLs, for an average realized price of $76.65 per BOE.

As of June 30, 2023, we had 36,010 gross (266.4 net) producing horizontal wells on our acreage. Additionally, as of June 30, 2023, there were 4,056 gross (25.2 net) horizontal wells in various stages of drilling or completion and 3,053 gross (22.6 net) active horizontal drilling permits on our acreage.

The economy is experiencing elevated inflation levels as a result of global supply and demand imbalances, where global demand continues to outpace current supplies and services. 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 decrease inflation on a long-term basis. These interest rate increases generally impact our borrowing costs as borrowings on the Sitio Revolving Credit Facility and our 2026 Senior Notes are variable rates which fluctuate with broader interest rates in the market.

The global economy also continues to be impacted by the February 2022 launch of a large-scale invasion of Ukraine by Russia, and also has been impacted by, among other events, the collapse of certain financial institutions and uncertainty regarding global central bank monetary policy. The geopolitical and macroeconomic consequences of the invasion and associated sanctions, the financial institution collapses and the uncertainty regarding central bank monetary policy cannot be predicted, and such events, or any escalation of hostilities in Ukraine or further hostilities elsewhere, could severely impact the world economy and may adversely affect our financial condition. The oil and natural gas industry has also been recently impacted by announcements of voluntary production cuts by OPEC and others. These events and their impacts on the global economy continue 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. That said, 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 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 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.

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.

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 did 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.

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, Sitio's Chairman, is a managing member. Fees incurred under the agreement totaled approximately $1.4 million and $3.2 million for the three and six months ended June 30, 2022, respectively. This agreement was terminated in connection with the Falcon Merger and we will not incur future expense under the agreement. Additionally, certain other expenses associated with the limited partnership structure of the Predecessor will not be incurred by us in future periods.

Our Predecessor’s financial statements as of and for the six months ended June 30, 2022 do not include the results of operations for the assets acquired in the Falcon Merger, Foundation Acquisition, Momentum Acquisition, and Brigham Merger prior to the respective dates of 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.

As a public company, we may finance a portion of our acquisitions with borrowings under the Sitio 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.

We incur incremental general and administrative expenses 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 and Brigham Mergers, we have hired additional employees, including accounting, engineering and land personnel, in order to comply with requirements of being a publicly traded company.

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, which we will continue to be subject to as a corporation.

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

The following table summarizes our consolidated revenue and expenses and production data for the three months ended June 30, 2023 and 2022 (in thousands):

Our consolidated revenues for the three months ended June 30, 2023 totaled $136.5 million as compared to $87.8 million for the three months ended June 30, 2022, an increase of 55%. The increase in revenues was due to an increase of $46.1 million in mineral and royalty revenue and an increase of $2.6 million in lease bonus and other income. The increase in mineral and royalty revenue was primarily due to increased 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 June 30, 2023 was $112.0 million as compared to $64.6 million for the three months ended June 30, 2022, an increase of $47.4 million. We realized a $109.0 million increase in year-over-year oil revenue due to a 169% increase in oil production volumes, which increased from 588 MBbls for the three months ended June 30, 2022 to 1,580 MBbls for the three months ended June 30, 2023. This was offset by a $61.6 million decrease in our year-over-year oil revenue due to a decrease of $38.97/Bbl in our average price received for oil production, which declined from $109.87/Bbl for the three months ended June 30, 2022 to $70.90/Bbl for the three months ended June 30, 2023.

Natural gas revenue for the three months ended June 30, 2023 was $8.5 million as compared to $12.2 million for the three months ended June 30, 2022, a decrease of $3.7 million. We realized a $24.3 million increase in year-over-year gas revenue due to a 198% increase in gas production volumes, which increased from 1,871 MMcf for the three months ended June 30, 2022 to 5,575 MMcf for the three months ended June 30, 2023. This was offset by a $28.0 million decrease in our year-over-year gas revenue due to a decrease of $5.02/Mcf in our average price received for gas production, which declined from $6.55/Mcf for the three months ended June 30, 2022 to $1.53/Mcf for the three months ended June 30, 2023.

NGLs revenue for the three months ended June 30, 2023 was $12.1 million as compared to $9.7 million for the three months ended June 30, 2022, an increase of $2.4 million. We realized a $17.7 million increase in year-over-year NGLs revenue due to a 183% increase in NGLs production volumes, which increased from 229 MBbls for the three months ended June 30, 2022 to 647 MBbls for the three months ended June 30, 2023. This was offset by a $15.3 million decrease in our year-over-year NGLs revenue due to a decrease of $23.66/Bbl in our average price received for NGLs production, which declined from $42.29/Bbl for the three months ended June 30, 2022 to $18.63/Bbl for the three months ended June 30, 2023.

Lease bonus revenue for the three months ended June 30, 2023 was $3.7 million as compared to $0.7 million for the three months ended June 30, 2022. 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 June 30, 2023 were $0.2 million as compared to $0.5 million for the three months ended June 30, 2022, which include payments for right-of-way and surface damages, which are also subject to significant variability.

The Predecessor entered into a management services arrangement with Kimmeridge Energy Management Company, LLC. Management fees paid to the Predecessor’s affiliates was $1.4 million for the three months ended June 30, 2022. No such expense was incurred for the three months ended June 30, 2023 as the Company is no longer subject to the management services arrangement subsequent to the Falcon Merger.

Depreciation, depletion and amortization expense was $74.2 million for the three months ended June 30, 2023 as compared to $19.9 million for the three months ended June 30, 2022, an increase of $54.3 million, or 273%. The increase was due to a 180% increase in year-over-year production, which was primarily due to increased production volumes from our acquisitions of additional mineral and royalty interests and production volumes from existing interests, and a higher depletion rate, which increased from $17.48 per BOE for the three months ended June 30, 2022 to $23.48 per BOE for the three months ended June 30, 2023.

General and administrative expense was $14.1 million for the three months ended June 30, 2023 as compared to $6.7 million for the three months ended June 30, 2022, an increase of $7.4 million, or 110%, primarily due to $4.4 million of additional share-based compensation expense, $1.7 million of additional employee compensation and benefits due to increased headcount, and $0.7 million of additional other professional services recognized in the second quarter of 2023.

Severance and ad valorem taxes were $10.3 million for the three months ended June 30, 2023 as compared to $7.0 million for the three months ended June 30, 2022, an increase of $3.3 million or 49%. The increase was primarily due to the year-over-year increase in mineral and royalty revenues from our acquisitions of additional mineral and royalty interests and existing interests.

Impairment of oil and natural gas properties was $25.6 million for the three months ended June 30, 2023, whereas there was no impairment of oil and natural gas properties recognized for the three months ended June 30, 2022. During the three months ended June 30, 2023, the Company recognized impairment expense of $25.6 million attributable to its proved properties in the Appalachian Basin due to a decrease in natural gas and NGLs prices.

Interest expense of $23.2 million and $1.9 million during the three months ended June 30, 2023 and 2022, respectively, relates to interest incurred on borrowings under the Sitio Revolving Credit Facility and 2026 Senior Notes. The increase in interest expense was due to higher average borrowings during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 related to funding the Falcon Merger, Brigham Merger and other acquisitions in 2022, as well as higher interest rates during the three months ended June 30, 2023.

The fair value of the warrant liability decreased by $584,000 during the three months ended June 30, 2023, as compared to a decrease of $3.3 million from the date of the Falcon Merger through June 30, 2022. The change during the three months ended June 30, 2023 is attributable to a decrease in the fair value of both the Public Warrants and Private Placement Warrants.

Commodity derivatives gains totaled $6.1 million for the three months ended June 30, 2023 as compared to $20.0 million for the three months ended June 30, 2022. In 2022, we entered into oil and gas fixed price swaps and two-way collars to manage commodity price risks associated with production from certain of our acquisitions.

Interest rate derivative gains totaled $607,000 for the three months ended June 30, 2023, whereas there were no interest rate derivative gains or losses for the three months ended June 30, 2022. In November 2022, we entered into an interest rate swap to manage exposures to changes in interest rates from variable rate borrowings.

Income taxes changed from an expense of $2.3 million for the three months ended June 30, 2022 to a benefit of $683,000 for the three months ended June 30, 2023. This was primarily due to a recognition of a net loss before taxes for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

The following table summarizes our consolidated revenue and expenses and production data for the six months ended June 30, 2023 and 2022 (in thousands):

Our consolidated revenues for the six months ended June 30, 2023 totaled $287.3 million as compared to $154.2 million for the six months ended June 30, 2022, an increase of 86%. The increase in revenues was due to an increase of $126.7 million in mineral and royalty revenue and an increase of $6.4 million in lease bonus and other income. The increase in mineral and royalty revenue was

primarily due to increased 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 six months ended June 30, 2023 was $229.7 million as compared to $113.8 million for the six months ended June 30, 2022, an increase of $115.9 million. We realized a $207.4 million increase in year-over-year oil revenue due to a 182% increase in oil production volumes, which increased from 1,123 MBbls for the six months ended June 30, 2022 to 3,169 MBbls for the six months ended June 30, 2023. This was offset by a $91.5 million decrease in our year-over-year oil revenue due to a decrease of $28.87/Bbl in our average price received for oil production, which declined from $101.37/Bbl for the six months ended June 30, 2022 to $72.50/Bbl for the six months ended June 30, 2023.

Natural gas revenue for the six months ended June 30, 2023 was $23.2 million as compared to $20.1 million for the six months ended June 30, 2022, an increase of $3.1 million. We realized a $42.0 million increase in year-over-year gas revenue due to a 209% increase in gas production volumes, which increased from 3,565 MMcf for the six months ended June 30, 2022 to 11,010 MMcf for the six months ended June 30, 2023. This was offset by a $38.9 million decrease in our year-over-year gas revenue due to a decrease of $3.54/Mcf in our average price received for gas production, which declined from $5.64/Mcf for the six months ended June 30, 2022 to $2.10/Mcf for the six months ended June 30, 2023.

NGLs revenue for the six months ended June 30, 2023 was $25.2 million as compared to $17.5 million for the six months ended June 30, 2022, an increase of $7.7 million. We realized a $32.8 million increase in year-over-year NGLs revenue due to a 187% increase in NGLs production volumes, which increased from 436 MBbls for the six months ended June 30, 2022 to 1,252 MBbls for the six months ended June 30, 2023. This was offset by a $25.1 million decrease in our year-over-year NGLs revenue due to a decrease of $20.03/Bbl in our average price received for NGLs production, which declined from $40.17/Bbl for the six months ended June 30, 2022 to $20.14/Bbl for the six months ended June 30, 2023.

Lease bonus revenue for the six months ended June 30, 2023 was $8.5 million as compared to $2.0 million for the six months ended June 30, 2022. 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 six months ended June 30, 2023 were $677,000 as compared to $732,000 for the six months ended June 30, 2022, which include payments for right-of-way and surface damages, which are also subject to significant variability.

The Predecessor entered into a management services arrangement with Kimmeridge Energy Management Company, LLC. Management fees paid to the Predecessor’s affiliates was $3.2 million for the six months ended June 30, 2022. No such expense was incurred for the six months ended June 30, 2023 as the Company is no longer subject to the management services arrangement subsequent to the Falcon Merger.

Depreciation, depletion and amortization expense was $142.0 million for the six months ended June 30, 2023 as compared to $35.3 million for the six months ended June 30, 2022, an increase of $106.7 million, or 302%. The increase was due to a 191% increase in year-over-year production, which was primarily due to increased production volumes from our acquisitions of additional mineral and royalty interests and production volumes from existing interests, and a higher depletion rate, which increased from $16.24 per BOE for the six months ended June 30, 2022 to $22.66 per BOE for the six months ended June 30, 2023.

General and administrative expense was $25.7 million for the six months ended June 30, 2023 as compared to $10.7 million for the six months ended June 30, 2022, an increase of $15.0 million, or 140%, primarily due to $9.1 million of additional share-based compensation expense, $3.2 million of additional employee compensation and benefits due to increased headcount, and $1.1 million of additional other professional services recognized in 2023.

Severance and ad valorem taxes were $20.8 million for the six months ended June 30, 2023 as compared to $10.8 million for the six months ended June 30, 2022, an increase of $10.0 million or 93%. The increase was primarily due to the year-over-year increase in mineral and royalty revenues from our acquisitions of additional mineral and royalty interests and existing interests.

Impairment of oil and natural gas properties was $25.6 million for the six months ended June 30, 2023, whereas there was no impairment of oil and natural gas properties recognized for the six months ended June 30, 2022. During the six months ended June 30, 2023, the Company recognized impairment expense of $25.6 million attributable to its proved properties in the Appalachian Basin due to a decrease in natural gas and NGLs prices.

Interest expense of $45.4 million and $3.1 million was recognized during the six months ended June 30, 2023 and 2022, respectively, related to interest incurred on borrowings under the Sitio Revolving Credit Facility and 2026 Senior Notes. The increase in interest expense was due to higher average borrowings during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 related to funding the Falcon Merger, Brigham Merger and other acquisitions in 2022, as well as higher interest rates during the six months ended June 30, 2023.

The fair value of the warrant liability decreased by $2.9 million during the six months ended June 30, 2023, as compared to a decrease of $3.3 million from the date of the Falcon Merger through June 30, 2022. The change during the six months ended June 30, 2023 is attributable to a decrease in the fair value of both the Public Warrants and Private Placement Warrants.

Commodity derivatives gains totaled $20.9 million for the six months ended June 30, 2023 as compared to $18.9 million for the six months ended June 30, 2022. In 2022, we entered into oil and gas fixed price swaps and two-way collars to manage commodity price risks associated with production from certain of our recent acquisitions. The increase in commodity derivatives gains is due to a larger decrease in commodity prices during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

Interest rate derivative gains totaled $447,000 for the six months ended June 30, 2023, whereas there were no interest rate derivative gains or losses for the six months ended June 30, 2022. In November 2022, we entered into an interest rate swap to manage exposures to changes in interest rates from variable rate borrowings.

Income tax expense increased from $2.6 million for the six months ended June 30, 2022 to $6.5 million for the six months ended June 30, 2023. 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 six months ended June 30, 2022.

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 the Sitio Revolving Credit Facility. After the closing of the Falcon Merger, cash flows from operations, borrowings under the Sitio Revolving Credit Facility, and the issuance of our 2026 Senior Notes have been our primary sources of liquidity. 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 the Sitio 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 June 30, 2023, our liquidity was $264.3 million, comprised of $348,000 of cash and cash equivalents and $264.0 million of availability under the Sitio Revolving Credit Facility.

Cash Flows for the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022 (in thousands):

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 six months ended June 30, 2023 were $232.7 million as compared to $88.4 million for the six months ended June 30, 2022, primarily as a result of increases in our royalty revenue.

Cash flows used in investing activities totaled $12.3 million for the six months ended June 30, 2023 as compared to $390.6 million for the six months ended June 30, 2022. During the six months ended June 30, 2023, we received $6.1 million attributable to post-close adjustments from acquisitions completed in 2022, which was offset by expenditures for purchases of oil and gas properties of $0.4 million and advance deposits of $17.9 million for acquisitions of crude oil and gas properties. During the six months ended June 30, 2022, we made advance deposits of $22.4 million for acquisitions of crude oil and gas properties. Such deposits are reclassified to oil and gas properties upon closure of the acquisition. During the six months ended June 30, 2022, our expenditures for purchases of oil and gas properties were $356.8 million. During the six months ended June 30, 2022, we also realized a net decrease in cash of $10.7 million associated with the Falcon Merger and certain assets not contributed by our Predecessor. During the six months ended June 30, 2023, we purchased other property and equipment for $19,000 as compared to $676,000 during the six months ended June 30, 2022.

Cash flows used in financing activities for the six months ended June 30, 2023 totaled $238.9 million as compared to cash flows provided by financing activities of $305.5 million for the six months ended June 30, 2022. Borrowings under the Sitio Revolving Credit Facility for the six months ended June 30, 2023 were $619.5 million which were used to fund the refinancing and payoff of the Brigham Revolving Credit Facility as well as dividend payments. Borrowings under the Sitio Revolving Credit Facility for the six months ended June 30, 2022 were $156.9 million which were used to fund the Falcon Merger and other acquisitions of mineral and royalty interests. Repayments on the Sitio Revolving Credit Facility for the six months ended June 30, 2023 and 2022 were $643.5 million and $79.0 million, respectively, largely provided by cash flows from operations. Other financing cash outflows during the six months ended June 30, 2023, included costs of $7.9 million incurred in connection with amendments and restatements to the Sitio Revolving Credit Facility, dividends of $88.9 million paid to holders of Class A Common Stock, $91.2 million of distributions paid to noncontrolling interest holders, and repayments of $22.5 million on the 2026 Senior Notes. During the six months ended June 30, 2022, we borrowed $250.0 million under the Bridge Loan Facility, the proceeds from which were used to fund acquisitions of mineral and royalty interests. Other financing cash outflows during the six months ended June 30, 2022 included $6.3 million of costs incurred in connection with our entry into the Bridge Loan Facility, costs of $2.8 million incurred in connection with amendments and restatements to the Sitio Revolving Credit Facility, and $13.3 million of distributions to noncontrolling interests by our Predecessor.

On February 3, 2023, Sitio OpCo entered into the Sitio Revolving Credit Facility with Sitio OpCo, as borrower, JPMorgan Chase Bank, N.A., as the administrative agent (as successor administrative agent to Bank of America, N.A.) and as issuing bank, and the lenders and other financial institutions from time to time party thereto. In connection with the amendment and restatement of the Sitio Revolving Credit Facility, the Brigham Revolving Credit Facility was paid off and refinanced in full.

The Sitio Revolving Credit Facility matures on the earlier of (i) June 30, 2027 and (ii) the date that is 180 days prior to the final maturity date of the 2026 Senior Notes if any 2026 Senior Notes remain outstanding on such date. The Sitio Revolving Credit Facility has a $750 million borrowing base, which was reaffirmed on April 28, 2023.

The Sitio Revolving Credit Facility bears interest at a rate per annum equal to, at our option, 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 the Sitio 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, 2.500% to 3.500%. The credit spread adjustment for Term SOFR loans 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 the Sitio Revolving Credit Facility in an amount ranging from 0.375% to 0.500% based on utilization of the Sitio Revolving Credit Facility. The Sitio Revolving Credit Facility is subject to other customary fee, interest and expense reimbursement provisions.

The Sitio 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 the Sitio 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 between regularly scheduled redeterminations. Sitio OpCo could also request one additional redetermination between regularly scheduled redeterminations, and such other redeterminations as appropriate when significant acquisition opportunities arise. 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 require unanimous approval of the lenders, while maintenance of the same borrowing base or decreases in the borrowing base only require approval of lenders holding two-thirds of the aggregate commitments at such time. The determination of the borrowing base takes 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 Sitio Revolving Credit Facility is collateralized by substantially all of the assets of Sitio OpCo and its restricted subsidiaries.

The Sitio Revolving Credit Facility 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 Sitio Revolving Credit Facility) as of such date to (ii) EBITDA (as defined in the Sitio Revolving Credit Facility) 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 Sitio Revolving Credit Facility) to (ii) consolidated current liabilities (excluding current maturities under the Sitio Revolving Credit Facility), to not less than 1.00 to 1.00, in each case, with certain rights to cure.

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.

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 at 99% of par. 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 redeem 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 redemption date:

Sitio OpCo may elect, at its option, to redeem the 2026 Senior Notes on the last business day of each calendar quarter in an amount equal to 2.50% of the aggregate 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 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.

The Note Purchase Agreement includes, among other terms and conditions, a maximum leverage ratio covenant, as well as customary mandatory redemptions, 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 of not more than 3.50 to 1.00.

Refer to “Recent Accounting Pronouncements” in “Note 2 – Summary of Significant Accounting Policies” to our audited financial statements for the years ended December 31, 2022, 2021, and 2020 within our Annual Report for a discussion of recent accounting pronouncements.

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.

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.

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.

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 net 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 continue to 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.

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. As we do not operate any of the wells for which we receive royalties, we have limited visibility into the timing of when new wells start producing and production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, we are required to estimate the amount of production delivered to the purchaser and the price that we will receive for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded within the Accrued revenue and accounts receivable line item in the accompanying unaudited condensed consolidated balance sheets. Differences between our estimates and the actual amounts received for oil and natural gas sales are recorded in the month that payment is received from the third party.

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.

As of June 30, 2023, we did not have any debt, capital lease obligations, operating lease obligations or long-term liabilities, other than borrowings under the Sitio Revolving Credit Facility, borrowings under the 2026 Senior Notes and operating lease agreements for office space. Please see “—Our Revolving Credit Facility” for a description of the Sitio Revolving Credit Facility, and “—2026 Senior Notes” for a description of the 2026 Senior Notes and “Note 16 – Leases” to our audited financial statements for the years ended December 31, 2022, 2021, and 2020 within our Annual Report for our contractual obligations under the office lease agreements.

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.

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 $3.2 million change in our oil revenues for the six months ended June 30, 2023. A $0.10 per Mcf change in our realized natural gas price would have resulted in a $1.1 million change in our natural gas revenues for the six months ended June 30, 2023. A $1.00 per Bbl change in NGL prices would have resulted in a $1.3 million change in our NGL revenues for the six months ended June 30, 2023. Royalties on oil sales contributed 83% of our mineral and royalty revenues for the six months ended June 30, 2023. Royalties on natural gas sales contributed 8% and royalties on NGL sales contributed 9% of our total mineral and royalty revenues for the six months ended June 30, 2023.

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. Refer to “Note 13 – Derivative Instruments” for further information.

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 the Sitio 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 Sitio 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 the Sitio Revolving Credit Facility lenders that, in the event of counterparty default, allow us to set-off amounts owed under the Sitio 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.

Our primary exposure to interest rate risk results from outstanding borrowings under the Sitio Revolving Credit Facility and 2026 Senior Notes each of which has a floating interest rate. The average annual interest rate incurred on our borrowings under the Sitio Revolving Credit Facility, Brigham Revolving Credit Facility, and 2026 Senior Notes during the six months ended June 30, 2023 and 2022 was 9.18% and 3.69%, respectively. We estimate that an increase of 1.0% in the average interest rate during the six months ended June 30, 2023 would have resulted in an approximately $4.6 million increase in interest expense.

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 Securities Exchange Act of 1934 (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.

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 June 30, 2023. 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.

During the quarter ended June 30, 2023, 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.

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 16 – Commitments and Contingencies” in the notes to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

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 Annual Report filed with the SEC on March 8, 2023. There have been no material changes in our risk factors from those previously disclosed in our Annual Report.

The following table sets forth our share purchase activity for each period presented:

Shares repurchased represent shares of our common stock transferred to us in order to satisfy tax withholding obligations incurred upon the vesting of share-based compensation awards held by our employees.

During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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

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.


Delaware	88-4140242
(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)


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	STRXW	OTC


		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 Operations	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	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46

PART II.	OTHER INFORMATION	46

Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49


	June 30,			December 31,
	2023			2022
.	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	348		$	18,818
Accrued revenue and accounts receivable		118,376			142,010
Prepaid assets		20,704			12,489
Derivative asset		25,887			18,874
Total current assets		165,315			192,191

Property and equipment
Oil and natural gas properties, successful efforts method:
Unproved properties		3,030,334			3,244,436
Proved properties		2,233,885			1,926,214
Other property and equipment		3,440			3,421
Accumulated depreciation, depletion, amortization, and impairment		(390,833	)		(223,214	)
Total property and equipment, net		4,876,826			4,950,857

Long-term assets
Deposits for property acquisitions		17,947			-
Long-term derivative asset		13,936			13,379
Deferred financing costs		11,783			7,082
Operating lease right-of-use asset		4,368			5,679
Other long-term assets		530			1,714
Total long-term assets		48,564			27,854

TOTAL ASSETS	$	5,090,705		$	5,170,902

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and accrued expenses	$	17,306		$	21,899
Warrant liability		8			2,950
Operating lease liability		1,343			1,563
Total current liabilities		18,657			26,412

Long-term liabilities
Long-term debt		893,665			938,896
Deferred tax liability		341,677			313,607
Non-current operating lease liability		4,159			5,303
Other long-term liabilities		1,189			89
Total long-term liabilities		1,240,690			1,257,895

Total liabilities		1,259,347			1,284,307

Commitments and contingencies (see Note 16)

Equity
Class A Common Stock, par value $0.0001 per share; 240,000,000 shares authorized; 81,659,354 and 80,804,956 shares issued and 81,659,354 and 80,171,951 outstanding at June 30, 2023 and December 31, 2022, respectively		8			8
Class C Common Stock, par value $0.0001 per share; 120,000,000 shares authorized; 75,539,279 and 74,347,005 shares issued and 75,513,142 and 74,347,005 outstanding at June 30, 2023 and December 31, 2022, respectively		8			7
Additional paid-in capital		1,783,450			1,750,640
Accumulated deficit		(76,979	)		(9,203	)
Class A Treasury Shares, 0 and 633,005 shares at June 30, 2023 and December 31, 2022, respectively		—			(19,085	)
Class C Treasury Shares, 26,137 and 0 shares at June 30, 2023 and December 31, 2022, respectively		(677	)		—
Noncontrolling interest		2,125,548			2,164,228
Total equity		3,831,358			3,886,595

TOTAL LIABILITIES AND EQUITY	$	5,090,705		$	5,170,902


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenues:
Oil, natural gas and natural gas liquids revenues	$	132,567		$	86,507		$	278,121		$	151,458
Lease bonus and other income		3,899			1,297			9,171			2,709
Total revenues		136,466			87,804			287,292			154,167

Operating expenses:
Management fees to affiliates		—			1,371			—			3,241
Depreciation, depletion and amortization		74,239			19,912			142,002			35,297
General and administrative		14,066			6,675			25,742			10,736
Severance and ad valorem taxes		10,344			6,950			20,803			10,804
Impairment of oil and natural gas properties		25,617			—			25,617			—
Total operating expenses		124,266			34,908			214,164			60,078

Net income from operations		12,200			52,896			73,128			94,089

Other income (expense):
Interest expense, net		(23,159	)		(1,942	)		(45,362	)		(3,110	)
Change in fair value of warrant liability		584			3,306			2,942			3,306
Loss on extinguishment of debt		—			—			(783	)		—
Commodity derivatives gains		6,112			20,010			20,875			18,895
Interest rate derivatives gains		607			—			447			—
Net income (loss) before taxes		(3,656	)		74,270			51,247			113,180

Income tax (expense) benefit		683			(2,257	)		(6,501	)		(2,645	)

Net income (loss)		(2,973	)		72,013			44,746			110,535
Net income attributable to Predecessor		—			(39,582	)		—			(78,104	)
Net income attributable to temporary equity		—			(26,271	)		—			(26,271	)
Net (income) loss attributable to noncontrolling interest		2,177			—			(22,889	)		—
Net income (loss) attributable to Class A stockholders	$	(796	)	$	6,160		$	21,857		$	6,160

Net income (loss) per Class A common share
Basic	$	(0.01	)	$	0.49		$	0.26		$	0.49
Diluted	$	(0.01	)	$	0.39		$	0.26		$	0.39

Weighted average Class A common shares outstanding
Basic		81,044			12,522			80,614			12,522
Diluted		81,044			83,841			80,614			83,841


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


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


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


	Predecessor Equity				Stockholders’ Equity
					Class A					Class C					Additional						Class A						Class C
	Partners’		Noncontrolling		Common Stock					Common Stock					Paid-in			Accumulated			Treasury Shares						Treasury Shares						Noncontrolling			Total
	Capital		Interest		Shares			Amount		Shares			Amount		Capital			Deficit			Shares			Amount			Shares			Amount			Interest			Equity
Balance at January 1, 2023	$	—	$	—		80,805		$	8		74,347		$	7	$	1,750,640		$	(9,203	)		(633	)	$	(19,085	)		—		$	—		$	2,164,228		$	3,886,595
Net income		—		—		—			—		—			—		—			22,653			—			—			—			—			25,066			47,719
Share-based compensation		—		—		—			—		—			—		4,129			—			—			—			—			—			555			4,684
Conversion of Class C Common Stock to Class A Common Stock		—		—		6			—		(6	)		—		183			—			—			—			—			—			(183	)		—
Issuance of Class A Common Stock upon vesting of RSUs, net of shares withheld for income taxes		—		—		6			—		—			—		(44	)		—			—			—			—			—			—			(44	)
Deferred tax asset arising from conversion of shares of Class C Common Stock to Class A Common Stock		—		—		—			—		—			—		36			—			—			—			—			—			—			36
Dividends to Class A stockholders		—		—		—			—		—			—		—			(48,107	)		—			—			—			—			—			(48,107	)
Dividend equivalent rights		—		—		—			—		—			—		—			(400	)		—			—			—			—			—			(400	)
Distributions to noncontrolling interest		—		—		—			—		—			—		—			—			—			—			—			—			(49,206	)		(49,206	)
Cancellation of Treasury Shares		—		—		(633	)		—		—			—		(19,085	)		—			633			19,085			—			—			—			—
Balance at March 31, 2023	$	—	$	—		80,184		$	8		74,341		$	7	$	1,735,859		$	(35,057	)		—		$	—			—		$	—		$	2,140,460		$	3,841,277
Net loss		—		—		—			—		—			—		—			(796	)		—			—			—			—			(2,177	)		(2,973	)
Share-based compensation		—		—		—			—		—			—		4,861			—			—			—			—			—			561			5,422
Conversion of Class C Common Stock to Class A Common Stock		—		—		1,310			—		(1,310	)		—		37,865			—			—			—			—			—			(37,865	)		—
Issuance of Class A Common Stock upon vesting of RSUs, net of shares withheld for income taxes		—		—		166			—		—			—		(2,658	)		—			—			—			—			—			—			(2,658	)
Class C Common Stock withheld for income taxes upon vesting of RSAs and held in treasury		—		—		—			—		—			—		—			—			—			—			(26	)		(677	)		—			(677	)
Deferred tax asset arising from conversion of shares of Class C Common Stock to Class A Common Stock		—		—		—			—		—			—		7,523			—			—			—			—			—			—			7,523
Issuance of Class C Common Stock in connection with acquisition		—		—		—			—		2,508			1		—			—			—			—			—			—			66,525			66,526
Dividends to Class A stockholders		—		—		—			—		—			—		—			(40,743	)		—			—			—			—			—			(40,743	)
Dividend equivalent rights		—		—		—			—		—			—		—			(383	)		—			—			—			—			—			(383	)
Distributions to noncontrolling interest		—		—		—			—		—			—		—			—			—			—			—			—			(41,956	)		(41,956	)
Balance at June 30, 2023	$	—	$	—		81,660		$	8		75,539		$	8	$	1,783,450		$	(76,979	)		—		$	—			(26	)	$	(677	)	$	2,125,548		$	3,831,358


Oil and natural gas properties:	June 30, 2023			December 31, 2022
Unproved properties	$	3,030,334		$	3,244,436
Proved properties		2,233,885			1,926,214
Oil and natural gas properties, gross		5,264,219			5,170,650
Accumulated depletion and impairment		(389,436	)		(222,072	)
Oil and natural gas properties, net	$	4,874,783		$	4,948,578


	Noncontrolling Interest
Balance – December 31, 2022	$	2,164,228
Net income		22,889
Share-based compensation		1,116
Conversion of Class C Common Stock to Class A Common Stock		(38,048	)
Distributions to noncontrolling interest		(91,162	)
Issuance of Class C Common Stock in connection with acquisition		66,525
Balance – June 30, 2023	$	2,125,548


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans		Maximum Number of Shares That May Still be Repurchased as Part of Publicly Announced Plans
April 1, 2023 - April 30, 2023		—		—		—		—
May 1, 2023 - May 31, 2023		—		—		—		—
June 1, 2023 - June 30, 2023		97,711	$	27.19		—		—
Total		97,711	$	27.19		—		—


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 our Predecessor'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 our Predecessor’s Current Report on Form 8-K filed on September 12, 2022).
3.1		Amended and Restated Certificate of Incorporation of the Company, dated as of December 28, 2022, effective as of December 29, 2022 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 29, 2022).
3.2		Amended and Restated Bylaws of the Company, adopted on December 29, 2022 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 29, 2022).
4.1*		Second Amendment to Note Purchase Agreement, dated as of June 13, 2023, 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.
4.2		Registration Rights Agreement, dated as of June 14, 2023, by and among Sitio Royalties Corp., Sierra Energy Royalties, LLC and Source Energy Permian II, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 15, 2023).
10.1		Second Amended and Restated Agreement of Limited Partnership of Sitio Royalties Operating Partnership, LP, dated as of June 7, 2022 (incorporated by reference to Exhibit 10.3 to our Predecessor’s Current Report on Form 8-K filed on June 10, 2022).
10.2		First Amendment to Second Amended and Restated Agreement of Limited Partnership of Sitio Royalties Operating Partnership, LP, dated as of December 28, 2022 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 29, 2022).
10.3		Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Sitio Royalties Operating Partnership, LP, dated as of June 14, 2023 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 15, 2023).
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.
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	SITIO ROYALTIES CORP.

Date: August 8, 2023	By:	/s/ Christopher L. Conoscenti
		Christopher L. Conoscenti
		Chief Executive Officer
		(Principal Executive Officer, Director)

Date: August 8, 2023	By:	/s/ Carrie L. Osicka
		Carrie L. Osicka
		Chief Financial Officer
		(Principal Financial Officer)

Date: August 8, 2023	By:	/s/ Jim Norris
		Jim Norris
		Vice President, Chief Accounting Officer (Principal Accounting Officer)