8-K: Sitio Royalties and Viper Energy Announce All-Equity Merger to Form New Royalty Powerhouse

Sitio Royalties Corp. and Viper Energy, Inc. have entered into an all-equity merger agreement, creating a new combined entity where Sitio stockholders will own approximately 20% and Viper stockholders approximately 80% of the outstanding shares.

Summary

• Sitio Royalties Corp. (Sitio) and Viper Energy, Inc. (Viper) have signed an Agreement and Plan of Merger, an all-equity transaction.
• The transaction involves three mergers: Viper Merger Sub into Viper, Scorpion Merger Sub into Sitio, and Sitio Opco into Viper Opco, all resulting in a new parent company, New Cobra Pubco, Inc., which will operate under the name Viper Energy, Inc. post-closing.
• Each share of Sitio's Class A common stock will be converted into the right to receive 0.4855 shares of New Parent Class A Common Stock.
• Each share of Viper's Class A common stock will be converted into one share of New Parent Class A Common Stock.
• Sitio's Class C common stock will be cancelled without consideration.
• Sitio Opco Units will convert into 0.4855 Viper Opco Units and 0.4855 shares of New Parent Class B Common Stock.
• Post-closing, Sitio stockholders will own approximately 20% of the outstanding shares of New Parent Common Stock, and Viper stockholders will own approximately 80%.
• Sitio's Board of Directors unanimously approved the merger, deeming it fair and in the best interests of its stockholders, and recommends stockholder approval.
• Viper's Board of Directors also unanimously approved the merger and recommended stockholder approval.
• All outstanding Sitio RSU, DSU, and PSU awards will immediately vest in full and convert into New Parent Class A Common Stock based on the exchange ratio, plus accrued cash dividend equivalents.
• Sitio Opco Unit Awards will immediately vest and be treated as unrestricted units, converting into Viper Opco Units and New Parent Class B Common Stock, plus accrued cash distributions.
• The merger is subject to customary conditions, including stockholder approvals from both Sitio and Viper, HSR Act clearance, absence of prohibitive governmental orders, effectiveness of New Parent's S-4 registration statement, and Nasdaq listing for New Parent Class A Common Stock.
• Certain Sitio equityholders, representing approximately 48% of Sitio Common Stock, have entered into voting and support agreements to approve the transactions.
• Viper's majority stockholder (Diamondback Energy, Inc. and affiliates) has also entered into a support agreement, approving the merger and agreeing to a 90-day post-closing transfer restriction on New Parent Common Stock and Viper Opco Units.
• The transaction is intended to qualify for specific tax treatments under Section 351 and/or Section 368(a) of the Code for the Pubco Mergers, and as a partnership merger under Treasury Regulations Section 1.708-1(c)(3)(i) for the Opco Merger.

Sentiment

Score: 8

Explanation: The sentiment is highly positive due to the unanimous board approvals, the strategic nature of the all-equity merger, and the strong support from major stockholders, indicating a high likelihood of successful completion and potential for long-term value creation through scale and synergy. The tax-efficient structure further enhances the positive outlook.

Positives

• The merger is an all-equity transaction, which typically minimizes immediate cash outflow and dilutes existing shareholders less than a cash acquisition.
• Both Sitio's and Viper's Boards of Directors unanimously approved the merger, indicating strong internal support for the transaction.
• Significant Sitio equityholders (approximately 48% of common stock) have committed to vote in favor of the merger through voting and support agreements, increasing the likelihood of stockholder approval.
• Viper's majority stockholder has also committed to support the transaction, further solidifying the path to closing.
• The transaction is structured to qualify for tax-free treatment under Section 351 and/or Section 368(a) of the Code for the Pubco Mergers, and as a partnership merger for the Opco Merger, which could be beneficial for tax purposes for the entities and their equityholders.
• Sitio's equity awards (RSU, DSU, PSU, Opco Unit Awards) will immediately vest in full upon the merger, providing immediate liquidity or conversion for award holders.

Negatives

• Sitio stockholders will become minority owners, holding approximately 20% of the combined entity, which could reduce their influence.
• The merger involves complex multi-step transactions (multiple mergers and conversions of different share classes and units), which can introduce execution risks.
• A termination fee of $89.6 million (or $44.8 million under certain conditions) is payable by Sitio to Viper if the agreement is terminated under specific circumstances, which could be a significant cost if the merger fails.
• The non-solicitation clause restricts Sitio's ability to seek or engage with alternative proposals, potentially limiting opportunities for a higher offer, though exceptions for 'Company Superior Proposal' exist.

Risks

• The risk associated with Sitio's ability to obtain the required approvals from its stockholders to consummate the Mergers.
• Risks related to the timing of the closing of the Mergers, including the risk that the conditions to the Mergers are not satisfied on a timely basis or at all, or the failure of the Mergers to close for any other reason or to close on the anticipated terms, including the anticipated tax treatment.
• The risk that any regulatory approval, consent or authorization that may be required for the Mergers is not obtained or is obtained subject to conditions that are not anticipated.
• The post-combination company's ability to successfully integrate Sitio's and Viper's businesses and technologies.
• The risk that the expected benefits and synergies of the Mergers may not be fully achieved in a timely manner, or at all.
• The risk that Sitio or Viper will not, or that following the Mergers, the post-combination company will not, be able to retain and hire key personnel.
• Unanticipated difficulties or expenditures relating to the Mergers, the response of business partners and retention as a result of the announcement and pendency of the Mergers.
• Viper's ability to finance the combined company on acceptable terms or at all.
• Uncertainty as to the long-term value of the post-combination company's common stock.
• The diversion of Sitio's and Viper's management's time on transaction-related matters.
• Changes in general economic conditions, securities markets, credit markets, currency markets, or other financial markets.
• Changes in commodity prices, general market prices, and regulatory changes affecting the industry.
• Political conditions or acts of war, sabotage, or terrorism.
• Natural disasters or public health crises.
• Changes in Law or other legal or regulatory conditions, or the interpretation thereof, or changes in GAAP or other accounting standards.
• Any Proceedings made or brought by current or former stockholders against the companies or their directors/officers arising out of the Mergers.

Future Outlook

The combined entity, operating as Viper Energy, Inc., aims to integrate the businesses and technologies of Sitio and Viper. The parties intend for the Pubco Mergers to qualify as a tax-free transaction under Section 351 and/or a reorganization under Section 368(a) of the Code, and the Opco Merger to be treated as a partnership merger for tax purposes. The long-term value of the post-combination company's common stock is subject to various factors, including successful integration and market conditions.

Management Comments

• Sitio's Board of Directors unanimously determined that the Merger Agreement and the contemplated transactions are fair to, and in the best interests of, Sitio and its stockholders, and recommended stockholder approval.
• Viper's Board of Directors also unanimously determined that the Merger Agreement and the contemplated transactions are fair to, and in the best interests of, Viper and its stockholders, and recommended stockholder approval.

Industry Context

This all-equity merger represents a significant consolidation within the oil and gas mineral and royalty interest sector. By combining Sitio Royalties Corp. and Viper Energy, Inc., the new entity will likely achieve greater scale, potentially leading to enhanced operational efficiencies, a more diversified asset base, and stronger market positioning within the non-operated oil and gas royalty space. This trend of consolidation is common in mature industries seeking to optimize portfolios and achieve cost synergies.

Management Changes

Corporate Governance

Legal Proceedings

• The agreement includes provisions for handling 'Transaction Litigation' (stockholder litigation challenging the merger), requiring prompt notification, reasonable opportunity for the other party to participate in defense/settlement, and a prohibition on settlement without prior written consent (not unreasonably withheld, conditioned, or delayed).

Related Party Transactions

• Diamondback Energy, Inc. (Lead Parent Majority Stockholder), Diamondback E&P LLC, and Endeavor Energy Resources, L.P. (collectively, the Parent Majority Stockholder) entered into a Parent Support Agreement with Sitio, Viper, and New Parent. This agreement ensures the Parent Majority Stockholder's approval of the merger and includes a 90-day post-closing transfer restriction on their New Parent Common Stock and Viper Opco Units, subject to certain exceptions.

Stakeholder Impact

• **Shareholders (Sitio):** Will receive shares in the new combined entity (New Parent) based on an exchange ratio, becoming minority owners (approx. 20%). Their equity awards will vest and convert.
• **Shareholders (Viper):** Will receive shares in the new combined entity (New Parent) on a one-for-one basis, becoming majority owners (approx. 80%). Their equity awards will convert to New Parent awards on similar terms.
• **Employees (Sitio):** Company Employees who remain employed by the combined entity will receive base compensation no less favorable, and substantially comparable employee benefits and target incentive compensation opportunities for 12 months post-closing. Their equity awards will vest and convert. Severance benefits are outlined for eligible employees terminated without cause or for good reason during a 12-month transition period.
• **Creditors:** The Company is required to facilitate the termination and repayment of its existing credit facility and may be requested to commence consent solicitations or tender/exchange offers for its existing notes, with Parent responsible for associated expenses and indemnification.
• **Management:** New Parent will operate with the same board of directors and executive officers as Viper had prior to the merger, implying changes for Sitio's current management team.

Next Steps

• New Parent will file a registration statement on Form S-4 with the SEC, which will include a proxy statement for Sitio and an information statement for Viper.
• Sitio will convene a meeting of its stockholders to obtain the Company Stockholder Approval.
• Viper's majority stockholder will deliver an irrevocable written consent to approve the merger.
• New Parent will obtain Nasdaq listing authorization for its Class A Common Stock.
• The parties will work towards the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
• The closing of the Mergers will occur three business days following the satisfaction or waiver of all closing conditions, expected by June 2, 2026.
• Sitio will cooperate with Parent to delist its shares from the NYSE and deregister them under the Exchange Act as promptly as practicable after the Effective Time.
• New Parent will file a registration statement on Form S-8 for converted equity awards as soon as reasonably practicable after closing.
• Parent will offer to enter into a Registration Rights Agreement with holders of Scorpion Opco Units at least 15 days prior to closing.

Key Dates

Recommendation

Keywords

Merger Agreement, All-Equity Transaction, Oil and Gas Royalties, Mineral Interests, Corporate Acquisition, SEC Filing, Stockholder Approval, Regulatory Approval, Viper Energy, Sitio Royalties, Energy Sector, Consolidation