Viper Energy Partners - Q1 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Viper Energy Q1 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question, you will need to press star one one on your telephone keypad. At this time, I would like to turn the conference over to Mr. Adam Lawlis, Vice President of Investor Relations. Sir, please begin.

Adam Lawlis (VP of Investor Relation)

Thank you, Howard. Good morning, and welcome to Viper Energy's Q1 2024 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, Kaes Van't Hof, President, and Austen Gilfillian, Vice 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 Stice.

Travis D. Stice (CEO)

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's Q1 2024 conference call. The Q1 was a strong start to the year for Viper, and the period which uniquely highlighted the benefits of Viper's business model and high-quality assets. Despite commodity prices declining during the quarter, Viper's continued production growth, along with our best-in-class cost structure, allowed for us to increase our cash available for distribution per share quarter over quarter. Importantly, as a result of our strong financial and operational results, our board has declared a combined base plus variable dividend for the Q1 of $0.59 a share. Looking specifically at operations, both activity and well productivity trends across our acreage position continue to be encouraging.

As a result, we have initiated production guidance for the Q2 that implies over 3% growth relative to the Q1. It is important to note that this guidance takes into account the divestiture of our non-Permian assets and losing their production contribution for two months of the quarter. On a pro forma basis, so including the loss of roughly 450 barrels of oil per day from the divestiture, our true organic growth quarter-over-quarter is expected to be almost 5%. Additionally, we have also provided updated production guidance for the full year 2024. While the midpoint of this guidance range has been reduced by 250 barrels of oil per day versus our previous guidance range, that loss is entirely attributable to the loss of the production contribution from the non-Permian assets for the remaining seven months of 2024.

As a further point on the continued strong activity levels across our acreage position, the implied average production for the second half of 2024 represents a roughly 2% increase relative to the midpoint of our Q2 production guidance range. Looking more long term at potential inventory expansion, during the Q1, Diamondback completed its first test of the Wolfcamp D in Spanish Trail, with two wells being turned to production. Of these two wells, only 1 was developed under an existing Wolfcamp B well as to test the vertical communication between the two zones. To date, we have seen similar performance between the two wells and therefore believe that there's enough vertical separation between the two zones to limit the parent-to-child effect.

The initial takeaway is that the Wolfcamp D and Spanish Trail can be effectively developed below existing Wolfcamp B wells. While they are not the highest returning projects in Diamondback's portfolio, they can compete for capital over the next several years, especially inclusive of Viper's high NRI and the existing infrastructure that's in place. This test de-risks a substantial amount of net inventory for Viper and, as a result, gives confidence to an extended outlook for potential organic production growth. Separately, we have increased our guidance for Cash G&A slightly as the result of increased costs associated with our conversion to a corporation, but we continue to run our business extremely efficiently and with peer-leading per-unit costs.

Our continued best-in-class cash margins and free cash flow generation, along with the previously detailed organic production growth, should enable Viper to continue to return a substantial amount of capital to our shareholders, primarily through our base plus variable dividend. Operator, please open the line for questions.

Operator (participant)

Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star one one again. Once again, if you have a question or comment at this time, please press star one one on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Neal Dingmann from Truist Securities. Your line is open.

Neal Dingmann (Managing Director)

Morning, Travis and team, and congrats on another nice quarter. Travis, my first question is on capital allocation for your case, specifically your thoughts on potentially lowering the payout ratio until the leverage declines as you did over at FANG. I'm just wondering, maybe secondly there, how in the future you all would view buybacks versus divs in this vehicle, as you know, I know some mineral investors continue to prefer more exclusively dividends.

Kaes Van't Hof (President)

Yeah, good question, Neil. Welcome to the call. I think, you know, for us, the capital allocation philosophy at Viper remains, you know, a focus on cash distribution over a buyback. You know, I think there have been times of stress over the past few years where we've allocated much more capital to the buyback versus the cash distribution, and that has been a very value accretive deal for Viper shareholders. You know, listen, the stock's performed well. You know, we still think there's a lot of value to be earned on the mineral business, but, you know, right now, we're probably leaning more towards cash versus buybacks, as you can see in the Q1.

You know, I think we're also, you know, continuing to try to grow that base distribution consistently, you know, on a kind of a semiannual basis, and, you know, that will continue as well. You know, going to your question on, on debt reduction and the percent of free cash returned, you know, the business on the mineral side can generate, you know, generates pure free cash flow, so it's very easy to delever. And I think, you know, generally, the, the Q1 had some working capital headwinds, as well as, you know, we did a couple small deals in the, in the Permian. Q2 should see net debt go down pretty significantly with free cash generation, as well as, you know, the sale of the non-Permian assets.

So, you know, I think we comfortably see this business near net zero leverage at, at year-end. I think eternal leverage for a mineral business is a very conservative funding structure. I think but the part of the job of our team over the course of this year and into next is, as this business gets bigger, you know, we should try to earn a lower cost of capital with, you know, the public bond investors, you know, and the rating agencies as they start to understand the pure free cash flow nature of this business.

Neal Dingmann (Managing Director)

Great details. Then, just a quick follow-up on your mineral position. I was looking at the slides, continue to notice the dominant position you have in Martin County. So my question there is just when you take over, once you take over the Endeavor acreage, will activity there stay relatively the same? I mean, given what you'll have under the, you know, pro-forma company, or do you anticipate potentially a little bit of change there? I just trying to figure out how much really you have just in Diamondback exclusively versus sort of what you'll have with the combination.

Kaes Van't Hof (President)

Yeah, I mean, I think for Viper, you know, that exposure to that area is going to be huge for, you know, the future growth profile of the business. You know, that area, obviously some of the best rock in the United States, continues to get better, you know, continues to add more zones. You know, that's kind of where we've been seeing really good Wolfcamp D results. You know, I think pro-forma with Endeavor, you know, the combination there is gonna be one of the best places to drill for oil in the United States, you know, with some combination of longer laterals, big pads, high mineral interests. You know, that's gonna be kind of the focal point where we're gonna have a majority of our rigs in that Martin County area.

Neal Dingmann (Managing Director)

Yeah, that's what I was wondering. I mean, I guess there is potential for lease bonuses and all that, just for something down the future, right?

Kaes Van't Hof (President)

Yeah, well, I mean, listen, I think there's potential for lease bonuses across Viper's position. You know, we've seen that a bit with the Barnett and Woodford, leasing taking off. You know, there's been some Wolfcamp D leasing taking off, you know, because that's not always been held, from the old vertical Wolfberry days. And just, you know, it talks about the benefits of the mineral business. If you own minerals, you own every, you know, a piece of every barrel of oil produced in that, in that, section or unit forever, regardless of if it's, you know, primary development, secondary zones. Who knows what happens, you know, down the road? That's just the beauty of being a mineral owner.

Neal Dingmann (Managing Director)

Great point. Thank you all.

Kaes Van't Hof (President)

Thanks, Neil.

Operator (participant)

Thank you. Our next question or comment comes from the line of Chris Baker from Evercore ISI. Mr. Baker, your line is now open.

Chris Baker (Director, E&P Equity Research)

Good morning, guys. Just was hoping you could talk a little bit more about the Wolfcamp D. Just any additional color you can share on early results, plans for testing, and, you know, maybe just how that fits into sort of the broader organic inventory, opportunity set that you guys see today.

Travis D. Stice (CEO)

Yeah, Chris, we're gonna let Al Barkmann, our Chief Engineer, respond to that question.

Al Barkmann (Chief Engineer)

Yeah, Chris, you know, this was a test, our first test of the WD in Spanish Trail. Like we mentioned in the opening remarks, we kinda wanted to test the performance of the D under existing Wolfcamp B wells, and then without that. And, you know, really pleased with the initial performance here. Both of those wells, IP'd above 1,000 barrels a day, and, you know, really kind of tracking on top of each other. So, you know, we don't think we're seeing any degradation from the Wolfcamp B wells, being on top. And, you know, I think that's something that the returns are obviously uplifted with the Viper ownership at the same level. And so I think that's something that we'll continue to delineate across that position.

Chris Baker (Director, E&P Equity Research)

Great, thanks. And then just as a follow-up, the other question I think we keep getting is just, realizing it's early days, but, maybe just frame up, the opportunity set on the M&A front, realizing there's, you know, likely a big drop-down coming, a little bit more visibility in terms of, when that deal will close. But just, can you just remind us in terms of just big picture, sort of check the box type, you know, data points in terms of leverage and just how to think about that, at least, you know, from where we, if possible?

Kaes Van't Hof (President)

Yeah, Chris, I mean, you know, listen, you know, I think we're obviously disappointed that the Diamondback Endeavor deal has been delayed a bit, but we still have a lot of confidence it's going to close in Q4. You know, that probably puts the discussions between Viper and Diamondback or Viper and pro-forma Diamondback into kind of early 2025. But as you know, we like to move quickly and get things done. I think we're very excited about the opportunity set to put the mineral business from Endeavor with combined with Viper's business and create kind of a true category killer in the mineral space with size and scale that really hasn't been seen to date.

You know, I think on top of that, you know, if we did do that deal, we're certainly not looking to lever up the mineral business at the expense of the upstream business. We've never done that. So we expect that trend to continue. And, you know, in the interim, we're still looking at deals at Viper. There's been a few packages out there of size that have interested us. We've looked, you know, pretty closely and, you know, I think we'll continue to be in the fight on those deals.

But, you know, as you think about the next three to five years of the Viper business model, it's really to be competitive in the, you know, 10-figure plus deals that, you know, we tend to be in, in a league of our own on that size.

Chris Baker (Director, E&P Equity Research)

All right, thanks. Appreciate the color.

Kaes Van't Hof (President)

Thanks, Chris.

Operator (participant)

Thank you. Our next question or comment comes from the line of Betty Jiang from Barclays. Ms. Jiang, your line is now open.

Betty Jiang (Managing Director)

Good morning, Travis Stice. May I follow up on the Endeavor drop-down opportunity. I guess given the materiality of the EBITDA on that asset you outlined at the time of the acquisition and just the variety types of mineral interests that's sitting within Endeavor, how should we be thinking about the size of the drop? Would it be one drop or multiple tranches?

Kaes Van't Hof (President)

Yeah. Well, first of all, welcome back, Betty. It's good to hear your voice and look forward to you continuing to cover Viper. You know, I think I can't make any promises, right? We got two boards. We got to have discussions and look at this deal, you know, post-close. I think our intention is probably, you know, given the amount and size, to do this all in one fell swoop. And I think that generally means, you know, more exposure to a consistent development plan for a longer period of time. But again, it's not completely my decision, so we'll see what everyone decides, but that kind of be our preference to tell the cleanest story possible.

Betty Jiang (Managing Director)

Right. And then one of the key advantages of the Endeavor merger is the increased visibility on Viper's activity. Can you remind us what's Viper's current exposure to Endeavor's development program, and if you are able to make any headways to increase your exposure to their activity through just organic leasing and other smaller, mineral pickups?

Kaes Van't Hof (President)

Yeah, I think it'd be hard to do anything material to continue to improve, you know, that exposure. You know, high level, right now, about 55% of our production comes from Diamondback. I don't know, I would probably say less than 10, probably 7% or 8% of our production comes from Endeavor. You know, I do think, you know, deals like the GRP deal had a lot of exposure to both Endeavor and Pioneer units on top of Diamondback. So, you know, I think just generally, you know, exposure to ourselves is what we prefer, but second to that would be exposure to, you know, good operators like Endeavor, like Pioneer, in areas with really good rock and really good line of sight to development.

Betty Jiang (Managing Director)

Great. Makes sense. Thank you.

Kaes Van't Hof (President)

Thanks, Betty.

Operator (participant)

Thank you. Our next question or comment comes from the line of Paul Diamond from Citi. Mr. Diamond, your line is now open.

Paul Diamond (Equity Research Analyst)

Gears a bit in the M&A dialogue to kind of the opportunity set you're seeing in third parties, kind of the smaller deals. I know with the volatility, we've seen some disparity in the bid-ask spreads. Just didn't know if you could comment on what you all are seeing?

Kaes Van't Hof (President)

Yeah, Paul. I mean, Paul, I missed the first part of the question. I think it's kind of talking about the overall M&A environment, and I'll let Austin kind of talk about what we've been seeing.

Austen Gilfillian (VP)

Yeah, I think it's still pretty competitive on what we call the ground game, with the smaller deals, you know, call it $50 million and below, really, especially in the kind of $5 million-$10 million range and below. I think what we've seen is an evolution in the minerals market, right? I mean, six or seven years ago, a lot of private equity money came into the space, and that's kind of where the knife fight was, and you go organically put together a position. But as the industry has matured a little bit, you know, you have bigger funds involved now, and kind of all of that capital is rolling up.

So we're not seeing a ton of deals transact, right, directly to the owner anymore, so it just brings more competition on what's available. You know, we were able to get a couple of smaller deals done in the Q1, and that's kind of the benefit we have of our relationships out here. But like he's mentioned before, you know, I think where we see our strategic advantage going forward from an M&A standpoint, it's gonna be on the bigger deals, where we can kind of leverage the size and cost of capital that we have.

Paul Diamond (Equity Research Analyst)

Understood. Thanks for the clarity. Just one quick follow-up. Of the 13.8 wells in active development, if we try to run-rate that out, you know, we're starting to push the higher ends of production guidance. Just didn't know if there's anything you guys are seeing in, you know, timing or cadence that would shift that, you know, potentially up or down, just given basically running it out.

Austen Gilfillian (VP)

Yeah, I mean, we continue to be pretty conservative with the timing assumptions on the third-party side, right? I mean, we've got great visibility on the Diamondback side, and that's what kind of drives a lot of growth into the second half of the year. The big bump that we're gonna see from Q1 to Q2 here really is gonna come from the third-party side and a lot of the high concentration activity that we had underwritten in the GRP deal. But look, I mean, what we have contemplated right now for the rest of the year is third-party wells only being turned production that have currently been spud, not making any assumptions on permits.

So if activity continues to trend at, like, normal pace, maybe there can be some upside there, but what we really want to guide to what we can see and what we can control.

Paul Diamond (Equity Research Analyst)

Understood. Makes perfect sense. Thanks for your time.

Austen Gilfillian (VP)

Thanks, Paul.

Operator (participant)

Thank you. Our next question or comment comes from the line of Derek Whitfield from Stifel. Mr. Whitfield, your line is now open.

Derrick Whitfield (Managing Director)

Thank you. Good morning, all, and thanks for your time.

Austen Gilfillian (VP)

Hey, Derek.

Derrick Whitfield (Managing Director)

For my first question, I wanted to focus on your expected 2024 production profile. After adjusting for the GRP non-core divestiture, your Q2 guide suggests modest upside versus consensus. Is this the production profile you were expecting in your initial 2024 guidance, or is there possibly some upside now based on the efficiencies you're experiencing at Diamondback?

Austen Gilfillian (VP)

Yeah, I would just say, the timing, I mean, the general profile still looks similar to what we expected coming into the year. You know, I mean, I think a little bit of activity was brought forward, and Q1 outperformed a bit and kind of normalizing for the divestiture, maybe Q2 looks a little bit better than expected. I mean, sitting here at May first, trying to, you know, make assumption on what's gonna happen in the back half of the year with the third-party side, like, that's just not somewhere we want to get super aggressive. But I mean, in a general sense, I would say activity has been brought forward a little bit relative to where it was two months ago. And the current backlog of activity wells is really strong.

So, I mean, it's gonna support some healthy growth throughout the year. We'll just kind of see where the exact numbers shake out as the year plays out.

Kaes Van't Hof (President)

Yeah, I would just say, Derek, you know, non-op, we always are pretty conservative at the beginning of the year. It seems like there's been some non-op brought forward in the model versus original expectations, and the same piece is kind of right, right on line within, you know, within a month of our expectations.

Derrick Whitfield (Managing Director)

Terrific. With the understanding that your revenues are dominated by oil, and we're operating in a depressed, low gas price environment based on pipeline maintenance and tight egress conditions in general, do your leases protect you against negative gas realizations experienced with third parties?

Austen Gilfillian (VP)

Yeah. So we won't have negative realizations passed back to us, you know. And historically, if you just look at, like, our realizations relative to Diamondback, for example, typically better across the three products, as a lot of our leases have cost-free royalties baked in there, and there's some of those operating expenses that kind of can't be passed back to the lease owner. So, I mean, it's certainly not good on the gas side, but, you know, we wouldn't expect negative realizations for Viper.

Kaes Van't Hof (President)

It's good to be the mineral owner, Derek.

Derrick Whitfield (Managing Director)

Terrific. Great update, guys.

Kaes Van't Hof (President)

Thank you.

Austen Gilfillian (VP)

Thanks, Derek.

Operator (participant)

Thank you. Our next question or comment comes from the line of Leo Mariani from Roth MKM. Mr. Mariani, your line is now open.

Leoi Mariani (Managing Director, Senior Research Analyst)

I just wanted to follow up quickly on this cash G&A, you know, guidance here. You kind of bumped it up versus where you guys were in kind of, you know, mid to late February when you came out with it originally. Were some of these just, you know, public, you know, sort of new kind of organizational structure costs just - they just come in a little higher than expected as you guys kind of work through the accounting? Just curious as to kind of why it was, you know, tweaked only kind of a handful of months later.

Kaes Van't Hof (President)

Yeah, I mean, we're just, you know, we're moving into this public C-Corp world, and there's been more expenses that, you know, are going to Viper today. You know, at the end of the day, it's a real number on a percentage basis, but, you know, $0.20 on a business doing, you know, $200 million a quarter of cash flow is minimal. We just want to get it right, the allocation between parent and sub, particularly as the sub continues to grow and get investor attention and likely, you know, continue to stand on its own two feet.

Leoi Mariani (Managing Director, Senior Research Analyst)

Okay. I appreciate that. And then just, you know, obviously, I know you guys have to get the Endeavor deal closed, and it sounds like obviously a larger transaction could be coming here for Viper. Maybe it's early next year. I guess we'll wait on the timing. But how do you think about kind of potential, you know, funding for that? You talked about kind of 1.0x leverage really being, you know, a sweet spot, you know, for Viper. Would you kind of go above that temporarily to do kind of a major drop down, you know, from the Endeavor Fang combination? And if so, would you kind of prioritize, you know, maybe more debt paydown?

Just can you kind of talk us through kind of the high level, how you're thinking about kind of the funding part and kind of the limits on leverage?

Kaes Van't Hof (President)

Yeah, I just think in a world where we see parent and sub consolidated, you know, levering up the sub at the expense of the parent doesn't make a ton of sense. You know, we look at leverage consolidated. You know, certainly there's gonna be a lot of cash flow that comes with whatever asset, you know, does end up in - if it does end up in Viper's hands. You know, I just think we're gonna be responsible stewards of capital, both our upstream business and our, our mineral business.

Leoi Mariani (Managing Director, Senior Research Analyst)

Okay, thanks.

Kaes Van't Hof (President)

Thank you, Leo.

Operator (participant)

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Viper CEO, Mr. Travis Stice.

Travis D. Stice (CEO)

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

Operator (participant)

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.