Viper Energy Partners - Earnings Call - Q1 2022

Transcript

Speaker 0

Good day. Thank you for standing by, and welcome to the Viper Energy Partners First Quarter twenty twenty two 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 call is being recorded.

I would now like to hand the conference over to your speaker today, Adam Lowellis, Vice President of Investor Relations. Thank you. Please go ahead.

Speaker 1

Thank you, Cherry. Good morning, and welcome to Viper Energy Partners' first quarter twenty twenty two conference call. During our call today, we will reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO and Kay Svanthoff, 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. The 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 Stasse.

Speaker 2

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' first quarter twenty twenty two conference call. During the first quarter, Viper continued to build on its track record of delivering strong financial and operating results, highlighted by the 43% quarter over quarter increase in our distribution to $0.67 per common unit. This distribution represents approximately 70% of the total cash available for distribution and implies a 9.5% annualized yield based on yesterday's unit closing price. Additionally, we repurchased 1,600,000 common units during the quarter at an average price of $24.84 per unit for a total cost of $39,000,000 Combined with the distribution, this represents a return of approximately 95% of free cash flow to our unitholders.

Looking ahead, we continue to focus on maximizing long term returns to our unitholders and believe we are differentially positioned to do so with our best in class cost structure that enables investors to participate in the recent strength seen in commodity prices via the highest margins in the public oil and gas industry. Importantly, with zero capital requirements and only limited operating costs, Viper will not face the inflationary cost pressures being seen across the industry and broader economy. As a result of the strong production seen during the first quarter, as well as continued strong levels of activity across our acreage position, we have increased our guidance for oil production for the full year by roughly 1.5% at the midpoint. Our 23.5 net wells currently with visibility to development is a company record and underscores our confidence in this forward outlook. This record amount of activity, is enhanced by Diamondback's continued focus on developing our concentrated royalty acreage, demonstrates both the quality of our acreage as well as our ability to grow production without having to spend a single dollar of development or acquisition capital.

Based on the midpoint of this full year 2022 production guidance, Viper is expected to generate over $3.75 per unit in distributable cash flow assuming $95 WTI or a

Speaker 3

greater than

Speaker 2

13. With a 70% payout and an opportunistic unit repurchase program, Viper offers a competitive cash return yield that provides maximum exposure to commodity prices with limited operational risk. In conclusion, the first quarter was an outstanding quarter that was record setting on almost every metric. The record results of our business highlight our quality asset base, best in class cost structure, and overall differentiated business model. Given the strength of our balance sheet, we have evolved our hedging strategy so that we can maximize upside exposure to commodity prices while also protecting against the extreme downside.

We look forward to continuing to generate robust amounts of free cash flow and maximizing returns for our unitholders. Operator, please open the line for questions.

Speaker 0

At this time, I would like to remind everyone Your first question comes from the line of Neil Dingmann from Ruby Securities. Your line is now open.

Speaker 4

Nice results. Case, maybe for you or Travis, just when when for a product like like this, how do you all think about you? I noticed you had a few of the buy a bit of buybacks in there as well as continuing to hit a a what was a record payout on the distribution. So I'm just wondering, how do you sort of think about that differently the mineral business? Or do you think about that any differently on mineral business versus when you're thinking about that diversification on FANG?

Speaker 3

Yes. Good question, Neil. Listen, I think Viper is one of the original cash distribution vehicles in North American oil and gas, right? So if you go back when this business went public in 2014, that was when E and Ps were still spending 100% of cash flow or outstanding cash flow to grow. And Viper was a beneficiary of that while still distributing cash to its investors.

So I think we still have debt. So we're not going to distribute 100% of the cash that we have every quarter. But I think the deal market's tough right now. So there is a lot of extra cash beyond that 70% of free cash being returned via the distribution to pay down debt, get our revolver closer to zero, and then we have discussion on more shareholder returns. I think the buyback authorization has been very positive for the story.

There's been a lot of volatility in this space. So we've had opportunities to buy back shares. Having that out there as a nice defensive mechanism is positive. And Exhibit A is what we did in Q1 with buying out some of the Blackstone units that we gave them in the Swallowtail deal. So generally, 70% is the baseline.

That's the cash number. I think as long as the balance sheet continues to improve and the unit price continues to rise, then we'll be aggressive with continuing to distribute more than that on a quarterly basis.

Speaker 4

Okay. And then just lastly, on the confidence on boosting the production, is that just on the visibility you're seeing mostly on I mean, you know what, of course, Diamondback's going do on third party? Or there's nothing assumed in there. I assume you have any dropdowns left remaining that you could do from Diamondback. Is it just primarily third party upside for the rest of the year?

Speaker 5

Yes. That's right, Neil. For the most part, you know, it's just having that increased visibility to the non op side. We we don't like to be too aggressive in making assumptions with timing that we can't control. So typically, we do put out that rolling six month guidance because that's that's a rough timeline for when

Speaker 3

a well gets spud to when

Speaker 5

it gets through to production. So as we fast forward through the year and activity remains strong, we just have further visibility to the back half of the year, and that that gave us the confidence to increase that outlook.

Speaker 4

Awesome. Thanks, Austin.

Speaker 3

Thank you.

Speaker 0

Your next question comes from the line of Chris Baker from Credit Suisse. Your line is now open.

Speaker 6

Hey, guys. Congrats on the quarter. Solid cash flow and and cash return update. If I could ask sort of a similar question, maybe perhaps a different angle here. So last year, it looks like the buyback plus the variable dividend returned roughly 80% of cash available.

I'm just wondering if that's a fair baseline trying to think about the pace of the buyback for the rest of the year.

Speaker 3

Yeah. I still think that the buyback, Chris, is going to be opportunistic. So I don't want to say that we're going to hit a certain amount of units a month or a trading day or a quarter. Kind of like we said on the Diamondback call earlier today, this market's provided us a lot of opportunities to buy back shares opportunistically. And I think we're going to have that opportunity at Viper.

But we do want to adhere to a top. But I think right now, where Viper's trading, we're going to have chances to buy back shares. I think it would be fair to say 80% or 85% of total cash gets returned through dividend plus the buyback. But if we get another opportunity to buy a big chunk of stock, like we did with the Blackstone trade in Q1, we'll entertain that opportunity if it presents itself.

Speaker 6

Great. Yes, that makes a lot of sense. And as a follow-up, I appreciate the additional color in the deck around the Bang operated inventory. I'm just curious, how many third party locations would you add on top of there? And sort of on a related, if I could squeeze one third one in, how many net completions do you view needing to generate, say, mid single digit oil CAGR?

I mean, sounds like maybe north of twenty years. But just curious how you would frame that up on the inventory side. Well,

Speaker 3

think the inventory question, you can take the Diamondback inventory and assume most operators in the basin are using similar spacing and economic zones to Diamondback. So you could gross that up on the non op side. We certainly have a lot more confidence in the pace of development on the Diamondback side, and we can get those net wells drilled faster. So your pace will flow on the non op piece, but the inventory wise, it's still there. And then on growth, I think we're projecting some growth this year.

Obviously, the front floor visibility is as high as it's ever been. And growth is doubtful of that. Don't know, Austin, how many net wells a year keeps you growing?

Speaker 5

Yeah. So this year, we're kinda looking at something like 11 to 12 net wells, from the Diamondback side and and maybe five to six on on the on the non op side. And if you look at where we exited last year, pro form a for the Swallowtail acquisition, I would say that, you know, call it ballpark 17 net wells will will give you what's looking like 5% organic growth. You know, I think our base decline has come down a little bit too, since since activity slowed down a bit over the past couple of quarters. So, when you fast forward to 2023, I would put us somewhere in the 16 or so net wells a year, kind of maintain production flat.

And with our current activity levels and what the forward outlook looks like, you're probably getting some growth with that.

Speaker 6

Great. Thanks. Yeah, it sounds like definitely a differentiated inventory depth. Appreciate the update, guys.

Speaker 3

Yeah. The only thing I'll add on that is as the small cell deal gets developed, that confidence in the Diamondback growth is only enhanced. I think when we announced the deal, we said we would get to 5,000 barrels a day net by 2025. And that looks on track. So that's going to

Speaker 2

help the growth profile of rest of the business.

Speaker 0

Your next question comes from the line of Derrick Whitfield from Stifel. Your line is now open.

Speaker 6

Good morning, Hey, Derrick.

Speaker 7

With my first question, I wanted to touch on the Ward County acquisition that Diamondback announced yesterday. In light of its elevated NRI and the premium paid for, is the incremental NRI with that asset something that you'd envision dropping down at some point to Viper?

Speaker 3

Yeah. I think that's logical to have that discussion. We're doing our work now. I don't think there's a rush necessarily, given that Diamondback is just starting developing that position. So you won't see much production until the end of the year or next year.

But there's probably a time where Viper and Diamondback can get together to get a deal done here. It's just not priority number one today in Q2.

Speaker 7

That makes sense. And then kind of looking out over the balance of the year and even further out into 2023, how should we think about your cash tax exposure for distributions in light of the current higher prices that we're seeing?

Speaker 3

Yeah. So just to wind back the history books here, when Viper converted to a taxable partnership from an MLP, We did a deal with Diamondback to shield those investors' potential cash tax burden when the conversion happened. And there was a big special allocation of income that helped that shield. With commodity prices where they are, that shield's gonna run out this year. So outside of depletion protection, it's likely that Viper becomes a significant cash taxpayer in 2023 and beyond.

Austin, do want add anything to that?

Speaker 5

Yes. Derek, what's important for this year is we put out that guidance of 10% to 15% effective tax rate, but that's only for the income that's retained at the Viper LP level. So as Keith outlined, we still have that special allocation of income going at the Diamondback. So if you look at it this quarter, 85% of the the pretax income went at the Diamondback, and and they paid the taxes at that level. And then only 15% remains at the Viper LP level, which is then subject to that tax rate that we put out guidance for.

Going ahead next year, you know, Diamondback will just get their pro rata ownership, you know, 54 to 55% of the pretax income. So there'll be more absolute dollars at the LP level, and we'll probably pay a pay a slightly higher rate on that as well.

Speaker 7

That's great. Thanks again for your time, guys.

Speaker 3

Thanks, Jared.

Speaker 0

Your next question comes from the line of Jean Y from Barclays. Your line is now open.

Speaker 8

Hi. Good morning. Good afternoon. Thanks for taking our questions.

Speaker 5

Of course, Jean.

Speaker 8

Hello. Our first question, maybe just hitting back on the minerals market. You mentioned there may not be as many deals out there as there was before, so that skews the cash distribution higher, which is terrific. But can you just provide a little bit more color on what's going on out there in the market, in particular for differently sized deals?

Speaker 3

Yeah. You know, it's just it's just tough. You know, there's been a lot of consolidation in in the mineral space. And, you know, as commodity prices rise, particularly on the front end, you know, mineral owners are are receiving massive checks on a monthly basis. Us as a buyer, staying disciplined, aren't going to pay for that strip little old strip, but certainly not front month type multiples.

I we'll still be very competitive in larger packages like the Swallowtail deal. It's just that we haven't had a lot of success doing significant transactions in 2022 yet. Austin, what else do you want to add to that? No. That's all fair.

Speaker 5

I mean, we're still seeing things transact, even with the the higher commodity prices. But the most of the deals are packages that have visibility, whether it be through through ducks or permits. And, you know, given that most of that production is gonna come online with the higher prices, which you would assume with with where the strip is today, you know, we're we're still underwriting lower price decks. So we haven't been ever ever competitive on those. And, you know, also, we're we're not incentivized necessarily to, you know, be trying to look at near term.

We're trying to look a little longer term. So we're we're trying to get creative, and and we're working with Diamondback for what what development plan is gonna look like in the next two, three, even four years out, and try to add some inventory on the back there where we can also underwrite a little bit lower price deck. We're you having to be patient and be creative, but I think there's potentially some small deals to be done here and there.

Speaker 8

Okay. Great. And then for a follow-up question, I apologize for hitting back on cash returns again, but maybe following up on Neil and Chris' question. In terms of the expanded buyback program, can you just talk a little bit more about how you decide between the buyback and the payout ratio? I know at Fang, you talk a lot about mid cycle pricing.

It's not necessarily about intrinsic value, relative value. You're looking at the track record of buybacks in the industry. It's not so great, and you guys want to buck that trend. So can you just talk a little bit more about how you're thinking about that for Venom?

Speaker 3

Yeah. I mean, Viper, you know, the the the 70% is is, you know, there. Right? So that's coming out in terms of in in a fixed not fixed, but a variable distribution. In the rest, you know, I I think we, you know, we have an internal view of of NAV at Viper.

We also look at what can we buy minerals in the market in the stock market through Viper stock versus in the private market. And I think the private market is very, very hot. And therefore, the stock and the implied dollar per net net acre for what is better acreage with higher visibility is lower than that. So that gives us confidence that we can buy reserves through our stock, through our unit price rather than, you know, through deals in the ground.

Speaker 8

Great. Thank you.

Speaker 3

Thanks, Jeanine.

Speaker 0

Your next question comes from the line of Kyle May from Capital One Securities. Your line is now open.

Speaker 3

Hey. Good morning, everyone. Just a quick question looking at at unit costs. It looks like in the first quarter, unit costs were lower versus your guidance. So just kind

Speaker 6

of curious how we should be thinking about those trending through the year.

Speaker 3

I think we're in good shape. There's a little bit of noise in G and A throughout the year. So I think we feel like we're going to hit those numbers there. Now if we're able to continue to pay down interest expense or pay down our revolver aggressively, then we could be towards the lower end of our interest expense guidance, you know, throughout the year.

Speaker 5

Yeah. The good thing, Kyle, is most of those cost items are pretty sticky. You know, we're we're not being faced with inflation here. So, hopefully, if if performance continues to outperform, they they trend lower on a dollar per BOE basis. But, you know, generally, if you model them on an absolute basis, I think that'll be pretty fair.

Speaker 3

Okay. Great. That's helpful. And also on the hedging front, it looks like you removed the oil collars that were in place for 2Q. Just want to

Speaker 6

get your latest thinking around hedging at Viper.

Speaker 3

Yeah. It's of evolving to a similar story for, as I said, to do at the Diamondback level, buying plus and protecting that extreme downside. We certainly don't want to go back to a world where we have to think about our distribution policy changing. And so buying $50 $55 puts, protecting that extreme downside means in a draconian world, leverage doesn't blow out. And we're still paying significant distributions and trying to maximize upside exposure by buying puts rather than the wider callers.

Speaker 6

Okay. Great. Appreciate the time.

Speaker 3

Thanks, Kyle.

Speaker 0

Your next question comes from the line of Leo Mariani from KeyBanc.

Speaker 3

Wanted to follow-up on one

Speaker 9

of the prepared comments here. Obviously, you all bought a nice chunk of stock from Blackstone in the first quarter. Just so I heard you right, it sounds like you guys would be very open to doing more deals like that if the opportunity presents itself.

Speaker 3

Yes. But price sensitive, Leo, we're not looking to just blow through our buyback program just to do it. We got to take advantage of pullbacks in the market. And I think we've had opportunities here over the last couple of months to do so. Got it.

Speaker 9

Okay. And then just lastly, just wanted to clarify on cash taxes, if I heard it right. Certainly, sounds like you would expect the rate to be up next year and then your cash tax shield, roughly speaking, I think you guys said was something around 55%. Just wanted to maybe understand that part. And I guess that's maybe the ownership interest of FANG, essentially.

Speaker 3

Yes. Basically, level, the shielded income from the parent company to the public unitholders is going away next year. This is the last year of it. And you know, small amount of cash taxes this year, but stepping up pretty meaningfully next year.

Speaker 1

Okay. Thanks.

Speaker 0

Again, everyone, if you have questions, please press one. Alright. I'm showing no further questions at this time. I would now like to turn the conference back to Travis Theiss.

Speaker 2

Thank you again to everyone for participating in today's call. If you've got any questions, please reach out using the contact information provided.

Speaker 0

This concludes today's conference call. Thank you all for your participation. You may now disconnect.