Viper Energy Partners - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Viper Energy Partners Q2 2023 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 during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawlis, VP Investor Relations. Please go ahead.

Adam Lawlis (VP of Investor Relations)

Thank you, Abigail. Good morning, and welcome to Viper Energy Partners Q2 2023 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 Gilfillan, General Manager. 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 Stice (CEO)

Thank you, Adam. Welcome, everyone, thank you for listening to Viper Energy Partners' Q2 2023 conference call. Starting first with operations, the results from the Q2 demonstrate the high-quality nature of Viper's royalty assets, as well as the advantage to relationship we have with Diamondback. In the broader landscape of relatively flat production in the Permian Basin, Viper's oil production increased 5% quarter-over-quarter and set a fifth consecutive company record. Looking ahead, we expect Diamondback to continue to focus on their large-scale development on Viper's high concentration royalty acreage, as a result, we have initiated production guidance for the Q3 that implies roughly 4% oil growth relative to the Q2.

Importantly, as assumed in our updated guidance, it is expected that Viper's Diamondback-operated net oil volumes will increase over 15% for the full year 2023, with a further increase of roughly 10% expected for the full year 2024. With Diamondback doing almost exclusively large-scale development and with Viper owning varying interests across the different developments, this growth will not always be ratable from quarter-to-quarter, but we expect the trend of meaningful growth on an annual basis to continue. On the return of capital front, Viper announced an 8% increase to its annual base distribution, now up to $1.80 per common unit. This increase is a natural progression of our enhanced return of capital program that was implemented with the Q2 earnings last year.

Over the past year, we have further improved our balance sheet, grown oil production by 7%, and reduced our unit count by over five million units. With the increased base currently representing over a 4% annualized yield, Viper has the balance sheet strength and durable cash flow profile to support this level of committed return of capital through the cycle. This base distribution represents approximately 50% of estimated free cash flow at $55 WTI and is protected all the way down to $30 oil. While we still plan to opportunistically repurchase units, this increase to our base distribution highlights our commitment to a sustainable and growing return of capital through cash distributions over the long term. Viper also announced yesterday our intent to convert our legal status from a Delaware Limited Partnership into a Delaware Corporation.

In connection with the conversion, which is expected to be completed by year-end, Viper intends to adopt a corporate governance structure designed to meet the eligibility requirements for certain indices and benchmarks. Because Viper is already treated as a corporation for federal income tax purposes, the conversion is not expected to impact the current tax treatment for our existing unitholders. Just as with our increased base distribution, this announcement is an important step in the growth and evolution of Viper. Simply put, this conversion will deliver increased corporate governance rights to our current investors and is intended to position Viper such that the value of our mineral and royalty assets can be fully recognized. We believe that having a structure that will enable index inclusion will further broaden our investor base and improve our trading liquidity. Operator, please open the line for questions.

Operator (participant)

Thank you. At this time, we will conduct the Q&A session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while we compile the Q&A roster. Our first question comes from the line of Neal Dingmann with Truist Securities. Your line is open.

Neal Dingmann (Managing Director)

Morning all. Thanks for the time. Travis, for you or Kaes, my first question is just, it was exciting to, to hear about the, and see about the new structure. You all mentioned, I think, there'll be no tax changes, just wondering, is there any other maybe things we should be aware of, it being cost or are there any other particular changes we should be aware of? Then, what impact do you think this will have on you, particularly getting picked up by maybe the, the various indices out there?

Kaes Van't Hof (President)

Yeah, Neal, good, good question. You know, we, we studied this a lot and clearly didn't want to impact either the, you know, public unitholders or Diamondback's tax position, and we think that this conversion does just that. You know, we were a taxable partnership before. We're basically moving to a, a corporation, kind of an Up-C structure. The rules for index inclusion have seemed to have loosened to allow a lot more Up-Cs into various indices. You know, I, I don't know exactly how long it's gonna take to get in all those indices, but, you know, certainly seeing some higher index ownership from some of our peers, you know, gave us the, the idea to do this. You know, Viper only has about 1% index ownership, and, you know, someone like Diamondback has 30%, right?

I mean, These are big numbers. There's gonna be a lot of improvement in liquidity, and also I think, you know, for unitholders becoming shareholders, you know, governance is important and moving their direction as well. You know, Diamondback still plans to be a large holder of Viper. You know, we haven't sold any shares that we own at Diamondback, but I think this allows for future consolidation, growth opportunities, and more volume and more flow for this business.

Neal Dingmann (Managing Director)

Yeah, no, it'll be exciting to see that opportunity. My second question is on the CAP allocation. Specifically, can you speak to how you think about maybe the debt repayment versus dividends versus buybacks? I'm just wondering, you know, sort of looking at it with if, you know, wondering a lot, if you think be better off focusing more on debt repayment, given, you know, in the near term, given I think it's, what, about 9% of interest expense goes towards earnings? Just wondering how you think about those three potential outcomes?

Kaes Van't Hof (President)

Yeah, I mean, I, we don't quite think about interest expense as a percent of, of earnings. You know, it, it is, you know, cost of capital has gone up for, you know, the minerals business and for our revolver. We certainly want to get that revolver, you know, closer to zero than where it is today. You know, we also don't want to sacrifice getting dollars back to our, our unitholders. You know, at the end of the day, you know, this is a, a return of capital business. You know, we think allocating 75% of our free cash to equity, is, is a good number, with 25% going to the balance sheet and being able to do, you know, small deals.

Yeah, I mean, while, while, while the interest expense has, has gone up because of interest rates, you know, we don't want to sacrifice returns for the equity holders.

Neal Dingmann (Managing Director)

That makes sense. Thank you.

Kaes Van't Hof (President)

Neal, you know, the last thing, you know, that's really the only, one of the only major costs of this business, right? I mean, this business runs, you know, at a 90% EBITDA margin, no CapEx. you know, the only other expenses are G&A, which is, you know, $6 million to 8 million a year of cash G&A, and, you know, severance taxes, which is 7% to 8% of, of revenue. It's a pretty incredible business. You know, we wanna keep it lowly levered, so that we can keep distributing cash to equity holders.

Neal Dingmann (Managing Director)

Great point. Thanks, Kaes.

Operator (participant)

As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. That concludes the Q&A session. At this time, I would like to turn it back to Travis Stice, CEO, for closing remarks.

Travis Stice (CEO)

Thanks again for everyone that was listening in on today's call. If you've got any questions, please reach out, using the information we previously provided. Have a great day. Thank you.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.