Viper Energy Partners - Q4 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Viper Energy fourth quarter 2023 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer 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 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Adam Lawlis (VP of Investor Relations)

Thank you, Victor. Good morning, and welcome to Viper Energy's fourth quarter 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 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 Stice (CEO)

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's fourth quarter 2023 conference call. The fourth quarter wrapped up a milestone year for Viper. For the full year, average oil production increased 13% compared to previous year, while our average share count was reduced by 1% over the same period. As a result of continued strong organic production growth, creative acquisitions, and an opportunistic share repurchase program, the fourth quarter represented the eighth consecutive quarter of increased production per share for Viper. For our return of capital for the fourth quarter, we've declared a $0.29 variable dividend to Class A shareholders to go along with our $0.27-based dividend. Importantly, this variable dividend is the same that we would have paid with a 75% payout ratio, assuming we did not repurchase any shares during the quarter.

However, inclusive of the 28.7 million in shares that we repurchased during the quarter, our effective payout ratio for Q4 is 97%. Our rationale for excluding the share repurchases done during the quarter and calculating our variable dividend is that we view this buyback, which was done during the secondary offering related to our GRP acquisition, as an extension of the financing of the deal. Additionally, we've already received $10 million in post-effective cash flow that is applied as a reduction to the purchase price and does not show up in our reported financials for the quarter. Looking back on the year as a whole, there were several strategic initiatives completed during 2023 that marked important steps in the growth and evolution of Viper. Our GRP acquisition, which closed in the fourth quarter, clearly laid out the framework that we look for in large-scale M&A.

First, it must be accretive on all relevant financial measures. Second, there must be high-quality, undeveloped inventory that supports our long-term growth profile and provides clear visibility to future development. And third, the acquisition must provide significant scale that results in a pro forma business that is built bigger and better. Separately, Viper also completed its conversion into a Delaware corporation during the fourth quarter. We believe this conversion has delivered increased governance rights for our shareholders and positions Viper to grow our business and fully highlight the advantaged nature of mineral and royalty ownership. Looking ahead to 2024, we've initiated production guidance for both Q1 and the full year.

While Q1 is expected to be the weakest quarter of the year, primarily as a result of the timing of large pads, we continue to see strong activity levels across our acreage position and expect significant growth to occur throughout the year, with Q4 2024 production expected to be at or above the high end of our guidance range. This continued production growth, along with our best-in-class cost structure, 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)

Thank you. 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. Please stand by. We'll compile the candidate roster. One moment for our first question. Our first question will come from the line of Neal Dingmann from Truist. Your line is open.

Neal Dingmann (Analyst)

Morning, team. And hey, supporters. My first question is on valuation. Just maybe broadly, it seems to me the market's still not appropriately valuing Viper's growth and, you know, the continued acquisitions and distribution. So, you know, Kaes, for you and the team, I'm just wondering, do you all believe this is still more of a broader issue with the minerals group in general, or is it more, you know, the market not appreciating Viper's future value creation?

Kaes Van’t Hof (President)

Yeah, Neil. I mean, I listen, I think the market's starting to wake up to the VNOM story, you know, as well as the minerals story. You know, I think generally, you know, the conversion that we did to a C-Corp has opened up a broader investor universe. It's allowed us to, you know, take meetings with shareholders that or prospective shareholders that, you know, hadn't been able to buy the stock in the past. I think it's good to see some index ownership. It's good to see the float pick up.

You know, and I think as you think about as we think about the vision for this business, you know, as you continue to see consolidation in the E&P space, you know, we think Viper will offer a unique opportunity and a unique, you know, investment case in the pure-play Permian E&P or minerals business, however you want to look at it. I mean, I think generally, as we continue to grow this business and it grows production, you can do that at Viper without, you know, even if the parent company's not growing. So, you know, generally, I think the market's waking up to the story. I mean, this business is going to grow 14%, you know, grow oil 14% quarter-over-quarter, Q4 2024-Q4 2023. That's a pretty impressive growth rate.

And it's not, you know, impacting, you know, overall macro as much as it was upstream.

Neal Dingmann (Analyst)

Yeah, I would agree. And then just second quick one on capital allocation. Given your low leverage, will I assume you'll continue or will you continue to pay out the 90% plus cash available for distribution? And, you know, would you consider leaning more into the buybacks?

Kaes Van’t Hof (President)

You know, listen, we did a unique deal in Q4 to buy back 1 million units from what, you know, what was given to GRP, seller financing. You know, I think that's a unique opportunity to buy back a lot of shares at one time. Viper shareholders have been rewarded for that, you know, from a returns perspective. I think generally, you know, we still believe minerals should be distribution vehicles. You know, we have a fixed distribution that's grown in the last couple of years. We have a variable distribution that's probably our second call on, you know, payout. And then behind that's probably repurchases. I think there will be opportunities to repurchase shares in the future, but right now, the priority feels to be, shifted more towards the base plus variable unless there was a unique event like a large shareholder selling.

Neal Dingmann (Analyst)

Great. Thanks for the time.

Kaes Van’t Hof (President)

Thanks, Neil.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Derrick Whitfield from Stifel. Your line is open.

Derrick Whitfield (Analyst)

Good morning, all.

Kaes Van’t Hof (President)

Hey, Derrick.

Derrick Whitfield (Analyst)

Wanted to circle back on a topic that came up earlier on your Diamondback call today. Regarding the increased inclusion of Wolfcamp D in 2024, is that development focused in your Spanish Trail area or more broadly integrated across your stack development?

Kaes Van’t Hof (President)

You know, it's more broadly integrated across the portfolio, but there is a lot of undeveloped opportunity in Spanish Trail. You know, we signed a big lease last year for Deep Rights, which included a little bit of Wolfcamp D, but mainly Barnett and Woodford across that Spanish Trail position. You know, I think there's a couple of wells coming on this year in the Wolfcamp D, which just opens up, you know, the next leg of the stool when it comes to, you know, mineral ownership. I mean, when we first bought Spanish Trail, you know, 10 years ago, it was focused on single-bench Wolfcamp D development, maybe some more vertical wells. And now here we are developing, you know, five or six benches and upside, you know, in the deeper zone.

So, you know, at the end of the day, it's always good to be the mineral owner in Texas. You know, Viper being a large mineral owner with a well-funded parent operator is in a very good position. And you'll often lay out in slide 12 of the deck, you know, what that looks like and what the benefit has been to the Viper shareholders in Spanish Trail from a deal that started with a $400 million purchase 10 years ago.

Derrick Whitfield (Analyst)

I agree. Quite amazing. Maybe kind of bridging from that topic, like with potential inclusion of Endeavor, are you guys aware of any leases or ranches with materially higher NRIs like Spanish Trail, or is it just uniformly higher from your perspective?

Kaes Van’t Hof (President)

Yeah, there's certainly some opportunities. You know, there's the Guinn Ranch, which we had a little discussion about with Endeavor a few years ago, and they got title to the ranch. But, you know, we know the mineral owner there who owns a significant amount of minerals and someone we should be talking to. But, I think those are all kind of opportunities that will open up as we get to work with the Endeavor team on what they have and what we have. And putting together will truly be a kind of world-class resource at the upstream angle and the downstream angle or the, sorry, the mineral angle.

Derrick Whitfield (Analyst)

That's terrific. Thanks for your time.

Kaes Van’t Hof (President)

Thanks, Derek.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Paul Diamond from Citi. Your line is open.

Paul Diamond (Analyst)

Good morning, all. Thanks for taking my call. Just a quick one on kind of the run rate cadence. If we take those 13.4 net wells in active development and kind of run that out, on our numbers, we get to, you know, pretty close to the high-end of guidance pretty quickly for 2024. Should we kind of view that as, you know, just building a bit of conservatism into it, or is it more just, you know, accounting for ongoing volatility in pricing and just operational cadence across the market?

Austen Gilfillian (VP)

Yeah, Paul, a lot of it's just timing-related. So if you think about Q1, right, it's kind of in the lower end of the range, mainly as a result of the lower well count that we saw turn to production in Q4 carrying into the year. So when you think about the full year, we've obviously had this range of 25.5-27.5 on oil out there since September of last year when we announced the GRP deal. As we've kind of rolled forward a couple of months and you look at our net well counts with current activity, things have picked up a little bit. So I think that probably biases things maybe a little bit higher than we previously thought in the back half of the year. But we're typically pretty conservative when it comes to converting permits to production.

You know, I kind of push some of that activity that you see there into the 2025 timeline. But if things stay, you know, current with current or with operators' pace of development, then potentially there could be a little bit of upside to our guidance. But, you know, we just guide to what we can see and be very confident in today.

Kaes Van’t Hof (President)

Yeah, the beginning of the year is the toughest part for us on giving a full-year guide, particularly on the non-op side. I mean, we know the op side very, very well, and, you know, that moves around slightly. But I think generally, we're a little more conservative in what we think gets popped in the second half of the year on the non-op piece.

Paul Diamond (Analyst)

Got it. Understood. And, just a quick follow-up. Given the kind of proliferation of, you know, M&A across both the mineral side as well as the non-op and just the operators more broadly, has that really shifted your guys' mind as where you see as the most attractive deal size? You know, post-GRP, has it gotten a little bit bigger because you guys are a bit bigger, or has it still kind of run the gamut of different scale and geographies?

Kaes Van’t Hof (President)

I think, you know, I think generally, you know, a deal like GRP showed our advantaged position because we could do a deal of that size with a significant amount of cash. You know, it's still a knife fight in the basin for smaller deals and, you know, probably the sub what's called sub-$20 million, sub-$10 million dollar deal market. Really, you know, I think we still look at that market, but it's just not a huge piece of our business anymore. I think generally, minerals have consolidated into funds that are sizable that we'll need to monetize at some point. Viper should be, you know, the buyer of those larger positions rather than, you know, the blocking and tackling, you know, making a big difference in the story.

You know, I think also, Paul, you know, minerals are in our mind, you know, well behind E&Ps in terms of consolidating. There's going to be a, you know, probably more mineral consolidation in the next few years and more names that sell than upstream. I mean, upstream's been consolidating very rapidly. But there's going to be a solid wave of mineral positions that monetize big or small. And, you know, we want to be positioned to buy the best rock with the best visibility. And that, in our mind, is mainly Permian, if not mainly Midland Basin.

Paul Diamond (Analyst)

Got it. Appreciate your time. I'll leave it there.

Kaes Van’t Hof (President)

Thanks, Paul.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Leo Mariani from Roth. Your line is open.

Leo Mariani (Analyst)

Hi. Appreciate some of the commentary there on your expectations for the minerals market to consolidate. Obviously, I think you guys laid out on the Endeavor acquisition call that Endeavor has roughly a portfolio that's two-thirds the size of VNOM currently, which obviously is very, very significant. Would you guys be able to kind of just give us a little bit of a high-level plan in terms of how you see that maybe playing out over time, you know, to the benefit of VNOM? Certainly, it seems like there's significant drop-down potential. Is that something you think you could evaluate and kind of do multiple deals over kind of a handful of years? I mean, what do you think kind of the high-level game plan is?

Kaes Van’t Hof (President)

Yeah, Leo. I mean, you know, we gave some high-level information on the potential opportunity in the merger deck. You know, I'll say that we can't really say much today on timing or sizing. But, you know, very clearly, it's a meaningful position that would differentiate Viper if we could get a deal done at the right time. But, you know, I think we're going to have to leave it up to the pro forma board to decide and get the deal closed. And as you know, we don't move slowly, so we'll get working on it quickly but can't really give you much until that time comes.

Leo Mariani (Analyst)

Okay. Just in terms of some of the numbers here, I certainly noticed that your G&A is kind of going up, you know, per barrel by a fair amount. I'm assuming that's really just the conversion of the C-Corp and the additional costs that sort of come on that end?

Kaes Van’t Hof (President)

Yeah, I think that's fair, Leo. We're not adding a ton of people or anything. You know, we run this business pretty lean, but there are some added costs as we now allocate fully between the two, the parent and the sub.

Leo Mariani (Analyst)

Okay. Thanks.

Kaes Van’t Hof (President)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Tim Rezvan from KeyBanc Capital Markets. Your line is open.

Tim Rezvan (Analyst)

Good morning, folks, and thanks for taking my question. I have two questions that are sort of related following up on what's been discussed here. Is it fair to say that despite the Endeavor opportunity coming around the end of 2024, that you are open and willing to transact in third-party minerals this year? I know in the past, the Diamondback history, you haven't been afraid to stack deals when you see opportunities. So are you sort of continuing to be on the prowl, you know, now and through 2024?

Kaes Van’t Hof (President)

Yeah. Listen, Tim, I think we want to be selective, but certainly, something that looks like GRP like we did last year would be very interesting to us. I mean, I think although that deal didn't have all Diamondback operations, there was actually a lot of Endeavor permits and units under it, but that visibility and that quality of remaining units in the Midland Basin to us has a lot of value. If there are deals with a lot of undeveloped value, not just near-term free cash flow accretion, that's something we're going to look at. I just don't have direct visibility into what that is today.

Tim Rezvan (Analyst)

Okay. Okay. That's helpful. And then related to that, and as you think longer-term on Endeavor, if you bake in the legacy, the acquired add-on on GRP, leverage looks like a little bit over one times and hard to see a lot of organic deleveraging in a low-$70s oil world. So what are your thoughts on the balance sheet and where you are today and maybe where you'd want to be over the medium term to sort of be able to take down bigger opportunities as they come up? Thank you.

Kaes Van’t Hof (President)

Yeah. I think a path towards one times, no matter what the deal looks like, is the right way to look at it. You know, we are distributing 75% of free cash, so there is a more limited amount of free cash to go to the balance sheet on a quarterly basis. But generally, we've proven that the mineral business can de-lever very quickly. It doesn't mean we're going to lever it up by any means. But security of pure free cash flow, almost regardless of commodity price, is a pretty unique way to think about leverage in an oil or commodity-based business.

Tim Rezvan (Analyst)

Thank you.

Operator (participant)

Thank you. I'm not showing any further questions in the queue. I'd like to now turn you back to Travis Stice, our CEO, for any closing remarks.

Travis Stice (CEO)

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

Operator (participant)

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.