Viper Energy Partners - Earnings Call - Q3 2021

Transcript

Speaker 0

Good day, and thank you for standing by, and welcome to the Viper Energy Partners Third Quarter twenty twenty one Earnings. At this time, all participants are in a listen only mode. After the speakers' remarks, 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.

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome

Speaker 2

to Viper Energy Partners' third quarter twenty twenty one 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 Dice, CEO and Kate Van Toff, 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 3

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' third quarter twenty twenty one conference call. During the third quarter, Viper saw third party operated net wells turn to production on our acreage rebound to their highest level since the 2020 as a result of our continued strong production and further enhanced by our high margin exposure to increasing commodity prices. Viper's cash available for distribution increased 15% quarter over quarter to $0.54 per common unit. With this strong cash flow, Viper will pay a $0.38 per unit distribution on top of the $14,000,000 we deployed through our unit repurchase program last quarter.

In total, the combined return of capital between the distribution and buyback represents $0.47 per unit or an 8% yield based off yesterday's closing stock price. Following the recent closing of the Swallowtail acquisition, Viper has unprecedented high confidence visibility into Diamondback's forward development plan that is expected to bolster oil production for Viper not only for the next several quarters but also for years to come. More specifically, Diamondback plans to complete over 400 wells on the acquired Swallowtail acreage over the next five years or an amount that represents over 17 net wells for Viper over this period. Looking at near term production, Viper initiated average production guidance for Q4 twenty twenty one and Q1 twenty twenty two that implies over 17,000 barrels per day of production at the midpoint. Additionally, we increased our full year 2021 oil production guide by over 2% at the midpoint.

Based on the average Q4 twenty twenty one and Q1 twenty twenty two production guidance, assuming production is held flat at the stated midpoint of the range, Viper is expected to generate roughly $375,000,000 of annualized free cash flow in the 2021 assuming $75 WTI. Importantly, given these same assumptions, we're expected to generate over $475,000,000 annualized free cash flow in the 2022 as our defensive hedges placed in 2020 roll off. This 2022 free cash flow amount equates to greater than 11% free cash flow yield as a percentage of our enterprise value or almost 13% based on our current market cap. 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. As our balance sheet has continued to strengthen, we have evolved our hedging strategy so that we can maximize upside exposure to commodity prices while also protecting against extreme downside.

With our strong inventory of work in progress and line of sight wells, we look forward to continuing to generate robust amounts of free cash flow and subsequently using that cash to both reduce debt and increase returns to our unitholders. Operator, please open the line for questions.

Speaker 0

Thank you. At this time, we are now taking questions. If you would like to ask a question, please press star then the number one on your telephone keypad. Again, that is star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

We have our first question coming from the line of Neal Dingmann with Truist Security. Your line is open.

Speaker 4

Hey. Good morning, guys. Travis, my first one is just on sort of private activity. I mean, obviously, the bulk, I know, Ben is related to Diamondback and some other public. But there's obviously been a no sort of increase in some of the privates out there.

I'm wondering how that might shape, the profile of Viper, if at all.

Speaker 3

Certainly, the privates have really leaned into this commodity price and their activity levels continue to increase month over month. We try to conservatively take that into account as we forecast future volumes. But volume growth will in no small part be influenced by private operators.

Speaker 4

Got it. And then for you, Okay, it's just nice payout, dollars $0.03 8. I think you talked about being about 70% of cash from distribution being up, I think, almost 15% or more percent. I'm just wondering, is that kind of a good ballpark where you'd like that to continue to float? Or when you think about that payout, what should we think about on a go forward?

Speaker 1

I think we'd like 70%. It's kind of the minimum, Neil, for cash distributions. I think generally, we have the size and scale to take on a little bit of debt, but we want to pay that debt down with free cash flow. And we took on some debt with the Swallowtail acquisition and want to pay that down over the next couple of quarters before we start ratcheting up the 70%. Think we've also talked about more prudent hedging policy where we buy puts to protect the extreme downside, which is kind of two times leverage at the max and therefore still able to distribute a lot of cash and not have the balance sheet blow out.

So 70% is kind of the baseline for now, supplemented with the share repurchase program in times of weakness and the rest of the cash going towards deals or paying down debt.

Speaker 4

Sure. That all makes a lot of sense. Thanks, guys.

Speaker 1

Thanks, Neil.

Speaker 0

We have our next question coming from the line of Chris Baker with Credit Suisse. Your line is open.

Speaker 5

Hey, good morning, guys.

Speaker 1

Good morning, Chris.

Speaker 5

Good morning. Just on just with the improvement in commodity prices and the cash flow outlook, could you just talk a bit about how you're thinking about the fixed debt balance, which I believe becomes callable late next year? And just at this point, how you're thinking about the appropriate level of leverage for the business longer term?

Speaker 1

Yes. I mean, think 2x is the max, Chris. And we've tried to protect that with hedges, we'll continue to do so. The debt that we have or the bond that we have outstanding is callable in about a year from now. And we did take on a revolver balance with the Swallowtail acquisition.

I'd like to, in an ideal world, work that revolver balance down a bit over the next three or four quarters and then be able to refinance all that debt at a lower interest rate. The business has proven that. The bonds have traded well. So we'll see where we stand in the year. But right now, it makes sense to refinance that cheaper if we could.

Speaker 5

Okay, great. And then just as a follow-up, with the release talking about the unprecedented visibility following the Swallowtail acquisition, could you just maybe talk about how that influences your M and A outlook, I guess, if at all, going forward? Yes.

Speaker 1

I mean, I wouldn't say that they're too related. It is pretty unprecedented how much visibility we have given Diamondback's intentions to keep production flat. That kind of means the plan is the plan. And so the projects that are on schedule in 'twenty two and 'twenty three and beyond are more than likely to happen unless we have an experience like we did in 2020, which you know, gives us a lot of confidence in the earnings forecast from the business, you know, probably since we first started in in Spanish Trail back back, you know, five or six years ago, now seven years ago. So it won't impact M and A strategy.

I'd say M and A strategy is still fairly consistent, high high visibility, Diamondback operated properties, and and we're still on the lookout for those. It's just that Swallowtail is an opportunity to get a lot of Diamondback operated properties at one time.

Speaker 0

Thank you. We have our next question coming from the line of Ginnyan Wai with Barclays. Your line is open.

Speaker 6

Hi, good morning everyone. Thanks for taking our questions.

Speaker 1

Hi Jeanine.

Speaker 6

Good morning. Maybe just following up a little bit on Neil and Chris' question. I know you just said your M and A strategy doesn't change. Can you just share your view maybe on the most current acquisition landscape, how you view that? And in particular, if there's any difference in the bid ask spreads between smaller versus larger deals?

Speaker 1

You know, the the the smaller deals are are still very, very competitive in in the Permian, you know, almost almost a knife fight to get the the smaller deals. I'd I'd say we we we have probably a little bit of an advantage on Diamondback on permitted properties, but the permitted small deals are are still very competitive throughout the throughout the basin. You know, what was unique is that, you know, Swallowtail outside of probably the drop down that we did from Diamondback is is probably the largest mineral deal I've seen in in a long time. And and that just highlights the the size and scale we have that that we can put that much cash into a deal and that Blackstone is willing to, you know, own own a good amount of stock in in Viper.

Speaker 6

Okay. Great. Thank you. That's very helpful. Maybe on a slight housekeeping item on cash taxes.

I think there's about $360,000,000 remaining on the tax agreement that you've got with FANG. And given where that agreement was struck and oil prices being a lot higher now, can you just talk about how we should think about the cash tax components for 2022, which might get accelerated and then the trajectory for maybe 2023?

Speaker 1

Yeah. It's a good thing that commodity prices have gone where they've gone. At the time, in 2020, we extended the tax sharing agreement over a period of multiple years anticipating lower for longer oil prices. I think there's probably a conversation to have with the Viper board and the Diamondback board about moving that sharing agreement up into 2022. Just from a PV perspective, probably the best way to utilize our tax base.

But but certainly getting closer to to cash taxes. If we can't get that adjusted in 2022, we'll pay some cash taxes and and more more so in '23 if the if commodities stay where they are.

Speaker 6

Great. Thank you.

Speaker 3

Thanks, Jeanine.

Speaker 0

We have our next question coming from the line of Derre Voigtville with Stifel. Your line is open.

Speaker 1

Good morning, all. Hi, Derek.

Speaker 7

With regard to your six month trajectory, the guidance implies relatively flat bill volumes for Q4 and Q1. As we think about 2022 based on your prepared comments and near term inventory, how should we think about the growth trajectory throughout the year?

Speaker 1

Yes, Derek, I think generally we've been pleasantly surprised with the non volumes we acquired from Swallowtail one month into closing the deal. So that's been very positive. I think as we talked about when the deal was announced, those non op volumes are going to hold us over until Diamondback's sale and Robertson Range development kicks off. And then you'll start to see a significant amount of growth on Diamondback operated properties. So I think the guide that we have out there for Q4 and Q1 'twenty two is a good baseline.

And as that development starts to kick in at the '2 and into 'twenty three, start to see a little bit of growth on the operating side.

Speaker 7

Terrific. And as my follow-up, would it be reasonable to assume the 18 to 19 net near term inventory level referenced on page 10 is a good run rate at current prices based on Diamondback's 2022 outlook and third party activity levels?

Speaker 1

I think so. I mean, I think we're still going to be fairly conservative modeling the non op. But that's kind of a 20% increase in visibility from where we were a quarter ago. And you know, I think I think it's I think that's that's pretty reasonable. You know?

I think the the benefit as we look into the end of 2223, like I just said before, is the the larger, you know, high interest pads on the Diamondback side. But good to see the non op visibility go up 30%, 35% in the quarter.

Speaker 7

Great update. And thanks again for your time.

Speaker 0

Thank you, Derek. Thank you. We have our next question coming from the line of Leo Mariani with KeyBanc. Your line is open.

Speaker 8

Hey, guys. Just wanted to ask about I know it's a difficult question to answer, but you you made some some comments that you you got some some high confidence here in in oil growth, you know, over the longer term. I guess when you when you look at the the composition, of the Viper properties, and I certainly understand there's an increasing emphasis on FANG operated production. But clearly, the operating outlook from a FANG perspective is flat oil. Can you kind of help us at all in terms of what it can look like over the next couple years, you know, for Viper?

Are we talking kind of mid single digit because of the ability of of FANG to kind of focus more, on the the properties that that kind of Viper owns here? Just anything you can kinda help out with, from a longer term perspective.

Speaker 1

Yeah, Matt. I think I think we, you know, we wouldn't be doing our jobs as a combined management team if we weren't looking at combined returns of properties with Viper interests combined with Diamondback interests. You know, Diamondback staying flat, the best capital efficient use of Diamondback's dollars is to stay flat with wells that are drilled on Viper properties. We gave a pretty big number out there for the Swallowtail deal saying that we're going to get to 5,000 barrels a day in five years. Just for reference right now, we're doing 9,000 to 10,000 barrels a day on Diamondback properties.

And so even if there is some natural decline on that, the Diamondback growth itself on the tail on Robinson Ranches is going to outweigh the declines or even anything we see on the non op side. So it's safe to say there's likely growth at Viper even if Diamondback stays flat. Don't want to commit to multiyear guidance here, but that's our intention is to focus on the highest interest and highest consolidated return to our shareholders.

Speaker 8

Okay. That's helpful. And obviously, a very nice increase in the distribution this quarter. Certainly sounds like there's more to come, as hedges roll off as we get into next year. But I also wanted to ask on the buyback side.

Certainly noticed that kind of was a little bit, more of a buyback here, you know, in the third quarter. And you guys also talked about paying off some debt that you brought on the smaller tail deals. So how do you think about kind of buybacks versus debt reduction here as we head into 'twenty two?

Speaker 1

Yeah. Good question. The buyback we have, it goes through the end of this year. And then we have a we need to talk to our board about what to do next on that. But really, the focus is probably debt reduction in the near term over the buyback just because we did we closed up the volatile deal, and the cash has left the system.

We like having a big balance on a revolver. I think paying that balance down a little bit before refinancing our all of our debt, hopefully, in a year, is probably the the best use of capital, without, you know, with still having a buyback there in times of weakness. Okay. Thanks, guys. Thank you, Leo.

Speaker 0

Thank you. There are no further questions at this time. I will now turn the call back over to Travis Stice for any closing remarks.

Speaker 3

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

Speaker 0

This concludes today's conference call. Thank you for participating. You may now disconnect.