Viper Energy Partners - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Viper Energy Partners First Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawless, Vice President of Investor Relations.

Thank you. Please go ahead, sir.

Speaker 1

Thank you, Chantelle. Good morning, and welcome to Viper Energy Partners' first quarter twenty twenty one conference call. During our call today, we'll reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO and Kaes VanCoff, President. During this conference call, the participants may make certain forward looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and businesses.

We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non GAAP measures. Reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.

Speaker 2

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' first quarter twenty twenty one conference call. Despite the adversity presented by winter storm Uri in February, Viper produced a strong first quarter with production exceeding expectations and strong realized pricing. As a result, Viper generated almost $55,000,000 in net cash from operating activities, which enabled us to reduce debt by $27,000,000 during the quarter. We have now reduced total debt by over $136,000,000 or roughly 20% over the past twelve months.

As a direct result of this and further supported by our confidence in our forward outlook, we are increasing our distribution to common unitholders to 60% of cash available for distribution for the first quarter of twenty twenty one, which equates to a $0.25 per unit distribution. Looking ahead, Viper also increased its production outlook for the full year 2021, with oil production now 2% higher at the midpoint versus our previous 2021 guidance range. This increased production outlook is predicated primarily on our confidence and in visibility into Diamondback's expected forward development plan, which includes several large pads where Viper will own a significant royalty interest. Beyond our visibility into Diamondback's operations, we continue to have a strong backlog of work in progress and line of sight wells operated by third parties. Despite continued evidence of activity rates normalized in the Permian Basin, we continue to incorporate slower than normal timing assumptions for third party operations in our production guidance.

Based on this updated production guidance, assuming production is held flat at the midpoint of the range, Viper is expected to generate roughly $260,000,000 of free cash flow in 2021, assuming $60 WTI. This equates to an approximately 8% free cash flow yield as a percentage of our enterprise value or almost 10% based on our current market cap. Viper remains in strong financial shape with $535,000,000 of liquidity and will look to continue to decrease leverage while also increasing return of capital to our unitholders over the coming quarters. In conclusion, the 2021 was another strong quarter for Viper that once again highlighted our high quality asset base, best in class cost structure and overall differentiated business model. Coming out of the down cycle of 2020, Viper has emerged in a position of strength and is now situated to capitalize on opportunities as they arise.

We will maintain the financial flexibility to allow for continued debt reduction, distributions that provide a competitive yield and acquisitions either through our unit repurchase program or through the acquisition of private minerals ahead of the Diamondback drill bit. Operator, please open the line for questions.

Speaker 0

Thank you. And your first question will come from the line of Brian Downey with Citigroup.

Speaker 3

Hey, good morning. Thanks for taking my questions. Maybe just on that last comment, I'm curious on how the uses of cash may evolve as the year progresses. You bumped the payout ratio to 60% in the first quarter, and I believe you used approximately 20% of your distributable cash flow towards repurchases. How should we think about continued debt reduction versus payout repurchases and the A and D market opportunities as that revolver balance continues to decline through the rest of the year?

Speaker 4

Yes, Brian, good question. I think it's just pure capital allocation from our perspective, outside of the goal of having our revolver near zero or at zero by year end this year. So I think that's certainly an internal goal. I think we're going to easily get there while still distributing most of our cash in the form of a distribution or a buyback. I think you've seen us cap the distribution a little more this quarter as the stocks recovered and the buyback is less obvious than it was in the fall of last year.

But generally, I think probably twothree to threefour of cash gets distributed in some form or fashion, whether through the buyback or distribution. And the rest, we can retain to pay down debt or buy small deals and then it down right away.

Speaker 3

Great. And then as my follow-up, in your near term net well inventory slide, you explicitly broke out the 57% public and 43% private operator figures of your third party operated inventory. How would you characterize activity levels from your private operator cohort? It seems like private rig count more broadly has grown more quickly versus operator public operators staying more disciplined.

Speaker 4

Yes, that's exactly right. I think it's disappointing for the macro that the privates are growing their activity levels in production as much as they are. But Viper benefits without having much influence on that. I'd say we generally have seen the same things that the public is seeing in terms of activity, particularly on Viper's Midland Basin acreage. So the privates are going to grow.

They don't answer to public shareholders like we get to. Yes, we're certainly seeing it. And it'll be a nice little tailwind for Viper. I just hope it doesn't impact the macro too much.

Speaker 5

Great. I appreciate it.

Speaker 4

Thank you.

Speaker 0

Thank you, Brian. And your next question will come from the line of Chris Baker with Credit Suisse. Chris, your line is open. If your phone is unmuted, could you please unmute your line? And that question has been withdrawn.

Your next question will come from the line of Neal Dingmann with Choice Securities.

Speaker 5

First, could you look at, I just noticed on Slide 10, I like that, where you talk about still having a significant amount of undeveloped acreage. I'm just wondering, do you have a sense of timing when you could potentially see, you think, at least 50% of that Midland royalty acreage developed? I mean, is that quarters, years? Would any thoughts there?

Speaker 4

Yes, Neil. I mean, I think years if you're making conservative spacing assumptions and timing assumptions. Generally, we completed or brought on 2.5 net wells in Q1 twenty twenty one. I think we'll start to see that accelerate a little bit in the back half of the year. But that's a pace where there's significant inventory runway.

And I think what's important for Viper is that while Spanish Trail, which is, you know, Viper's bread and butter, is getting more and more developed. You know, the rest of the position now has areas where we have significant mineral interests, at at Viper under Diamondback and and also the new, you the new acreage position, the new playground for the Viper team to buy under is really good rock that has some good mineral acquisition opportunities.

Speaker 5

No. It makes sense. And then just lastly, just case going forward, you guys are in a strong position, very strong now. Thoughts on the hedging going forward? Thank you.

Speaker 4

I think we've been discussing a similar strategy at Viper to Diamondback where maybe there is some hedging that gets layered on six to twelve months in advance just to protect the extreme downside. I think it's either the form of buying puts or doing wide two way collars where at the low end, our investors still receive a large distribution. The debt doesn't blow out, and we sleep better at night. So I think that's probably where we're headed. We had a lot of 'twenty one hedges put on this year that are unfortunately underwater because of the recovery.

But I think as you think about 'twenty two and beyond, putting some sort of floor under the low end of distributable cash flow is something we're thinking about.

Speaker 5

Very good. Thank you.

Speaker 4

Thank you, Neil.

Speaker 0

And your next question will come from the line of Gail Nicholson with Stephens.

Speaker 6

Good morning. I'm looking at Slide nine. It looks like the fourth quarter has a heavy TIL count expected, at least on the

Speaker 0

Diamondback

Speaker 6

operated acreage. When we look at volumes going forward based on FANG's kind of runway line of sight that you guys have, do you think that you can keep those 4Q 'twenty one volume levels flat, or do you kind of view 22 forward as a more keeping 21, average flat?

Speaker 4

You know, I I think generally, Gail, if if trend continues, you know, with rig count where it is, you know, maybe improves a little bit in the macro in in 2022, you probably see a little bit of growth at Viper as a result of that higher activity levels. And I think we see we certainly are excited about the back half of the year. I think going into 'twenty one, we were kind of hinting that Q1 and Q2 would be the lows production wise. Q1 surprised the upside, and we're getting a little more confidence in Q2. But generally, the back half should see activity levels that are strong that follows through on on production and kind of the q four time frame.

Austin, anything you wanna add there? No. That's good. And

Speaker 6

then just looking at the net undeveloped locations remaining, do you know what percent of those locations are on FANG's acreage?

Speaker 4

Yeah. I mean, it it was a pretty high level formulaic approach. So you can just just use, you know, the percent owned by FANG, maybe just a little bit less. But, you know, Diamondback, you know, is about two thirds of Viper's production and a little over half the the acreage. So, you know, might be a little more developed, but but, generally, I

Speaker 2

think you're you're pretty close between the two.

Speaker 4

Yeah. If you have on five six on five six scale, we have the, net producing horizontal locations by Diamondback and third party split between, the basins as well. So you can kinda back into the math through through that information.

Speaker 0

And your next question will come from the line of Chris Baker with Credit Suisse.

Speaker 7

Hey, guys. Can you hear me?

Speaker 4

Yeah. We got you, Chris.

Speaker 7

Okay. Yeah. Not sure what happened earlier. Apologies if this was asked, but I was just curious, beyond the near term focus on debt reduction, how are you guys thinking about balancing return of capital versus potentially funding accretive smaller scale acquisition opportunities? Just curious if the goal sort of longer term is to essentially internally fund, that activity, next year and beyond.

Speaker 4

Yes. No, I think you're thinking about it the same way we are. The smaller deals will be funded internally with internally generated cash flow. I think I kind of referenced earlier in the call kind of a seventy-thirty or a 70 five-twenty five split between distributions or returns and balance sheet or deals. And I'd say that probably rings true for the foreseeable future outside of if a large unicorn type deal came about, then we'd have to think about funding that differently.

But generally, the blocking and tackling acquisition, you know, machine is is getting started again. And as long as you have a path towards, you know, a low to no balance on the revolver, then then I think it's it's safe that we can fund, those deals with internally generated cash flow.

Speaker 7

Great. And then just as a follow-up, we've obviously seen a bit of consolidation on the E and P side recently. Just curious if you have any view on what maybe some of the headwinds are, maybe why we haven't seen similar sort of larger scale deals announced on the mineral side over the past few months.

Speaker 4

Yeah. I mean, I I would say, generally, the mineral space probably still needs to get better bigger, in the public sphere. So I think, you know, more consolidation from private to public needs to happen rather than on the on the E and P side, you've seen public to public. I'm just grasping at reasons why we would think that it hasn't happened yet is that traditionally, owners aren't for sellers. E and P, there's so much capital that needs to go into retaining your acreage position and maintaining production that you often have more for sellers than on the mineral side where your check stub is going down for a few months, but you're not spending capital to grow.

Speaker 0

And your next question will come from the line of Kyle May with Capital One.

Speaker 8

Hi. Good morning, everyone. Just wanted to follow-up on some of your capital allocation comments. It was nice to see the distribution payout step up this quarter. But just curious kind of how you're thinking about that longer term and kind of directionally where that's headed.

Speaker 4

Yes. I mean, I think, Kyle, it's directionally headed higher if you know, because, you know, I think Viper's unitholders wanna own Viper for the distribution. You know, I think the the reason for the buyback was so obvious the reason the buyback was so obvious in in November was that, you know, we were selling, you know, undeveloped minerals with no visibility for much higher values than than the stock was trading. So you could buy minerals by buying back the stock cheaper than you could in the public markets or in the private markets. And I won't say that that's flipped, but the gap has certainly narrowed.

So I think overall, more distribution, but also funding some deals with cash flow rather than relying solely on capital markets is where we're headed.

Speaker 8

Got it. That makes sense. And then as a follow-up, you kind of mentioned to the point that the playground for M and A activity has expanded with the recent acquisitions. Just curious kind of where you are in evaluating those opportunities and when Viper may consider getting back to getting involved in the A and D market?

Speaker 4

Yes. We're looking at them right now. We just didn't close any deals in the first quarter. And the secret to the mineral game is to make sure you buy minerals before permits get placed on those units. And our private mineral competitors would love to have that information.

But I think right now, because Diamondback's not growing like we used to and we're a little bit ahead of our schedule, we know where pads are going be placed. And we're going to be able to buy minerals a lot cheaper ahead of that drill bit. So we're doing that now. It's not huge dollars, but being prudent. And we'll probably start adding some acreage here throughout the rest of the year.

Speaker 8

Got it. Case, thanks for taking the questions. You all have a good day.

Speaker 4

Thanks, Kyle.

Speaker 0

And your next question will come from the line of Janine Wye with Barclays.

Speaker 9

Good morning everyone. Thanks for taking our question.

Speaker 4

Hi Jeanine.

Speaker 9

Hi, good morning. Maybe just one for us back to Brian's question on the privates. With the privates being less constrained on reinvestment rates than the publics, we definitely think that private activity could be a meaningful tailwind for Venom this year. So just wondering, you know, how conservative you've been on the timing of the wells that you've put in your guidance for that? And also you commented on overall activity levels increasing for the privates.

But with higher oil prices, are you seeing more wells per section in terms of spacing or zones given higher oil prices? And we love this since you're not burdened by the CapEx, so you could really benefit from this. Maybe that makes you a little bit more neutral in the near term on IRRs per well with the macro aside.

Speaker 4

Yes. I mean, I think generally, entire basin is going wider on spacing. So I wouldn't say I've seen a lot of really tight spacing tests from the privates, but we have seen the privates increase activity levels just like you've observed. Like we were saying earlier, it is a tailwind for Viper, but hopefully, it doesn't screw up the macro because I think this industry is coming out of a pretty tough down cycle. And I think OPEC is watching, and we need to be very mindful of our position in global oil supply and demand, which we probably weren't as an industry going into this down cycle.

Speaker 9

Great. Thank you very much.

Speaker 2

Thanks, Janine.

Speaker 0

I am showing no further questions at this time. I would now like to turn the conference back to Travis Stice, CEO, for closing remarks.

Speaker 2

Thank you again to everyone participating in today's call. If you've got any questions, please contact us at the information provided.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.