Viper Energy Partners - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered higher production and operating income with strong cash generation; EPS spiked on a one-time $155.9m deferred tax valuation allowance reversal, lifting diluted EPS to $2.04 versus $0.70 YoY and $0.52 QoQ; adjusted diluted EPS was $1.93, better reflecting run-rate performance.
• Cash available for distribution rose to $89.0m ($0.86/share), with total base+variable dividend of $0.65/share (base $0.30, variable $0.35) and 75% return of capital; variable dividend increased versus Q3’s $0.31/share.
• Management initiated Q1 2025 production guidance of 30–31 Mbo/d (54–56 Mboe/d) and, assuming a Q2 close of the Diamondback “Drop Down,” expects 47–49 Mbo/d run-rate for the balance of 2025; net interest expense guidance was lowered materially, reflecting balance sheet strength.
• Strategic catalysts: pending Drop Down and Quinn Ranch acquisition support scale, alignment with Diamondback, and production visibility; leadership transition to CEO Kaes Van’t Hof underscores continuity; management emphasized 75% payout, base dividend growth, and flexible buybacks as potential volatility response.

What Went Well and What Went Wrong

• What Went Well
  • Organic production growth and operating income increased: oil volumes averaged 29,859 bo/d (up QoQ and YoY), combined volumes 56,109 boe/d; total operating income reached $228.7m in Q4.
  • Capital return strengthened: cash available for distribution of $89.0m ($0.86/share); variable dividend lifted to $0.35/share, total $0.65/share; return of capital was 75% of cash available.
  • Strategic visibility: initiated Q1 2025 guidance and provided post-Drop Down 2025 run-rate outlook (47–49 Mbo/d) with substantial WIP and line-of-sight wells (867 active dev wells; 1,191 LOS wells).
  • Quote: “The fourth quarter concluded a landmark year… we continue to be excited about the transformative Drop Down… and the unmatched forward outlook Viper will be provided upon that closing” – Kaes Van’t Hof.
• What Went Wrong
  • Commodity price headwinds: combined realized price fell to $43.56/boe (vs $50.20 YoY and $45.83 QoQ); natural gas price declined to $0.84/Mcf YoY/QoQ.
  • Higher depletion and interest burden QoQ: depletion rose to $12.51/boe (QoQ +$0.50/boe); net interest expense guidance is lowered for Q1 2025 but Q4’s interest per boe remained elevated at $3.70.
  • EPS inflated by non-recurring tax benefit ($155.9m), complicating comparability; adjusted diluted EPS of $1.93 provides a cleaner signal for operating trends.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Viper Energy Fourth Quarter 2024 earnings call. At this time, all participants are in a 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 11 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, Chip Seale, Director of Investor Relations. Please go ahead.

Chip Seale (Director of Investor Relations)

Thank you, Lauren. Good morning and welcome to Viper Energy's Fourth Quarter 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 Kaes Van't Hof, CEO, and Austen Gilfillian, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial conditions, 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 will now turn the call over to Kaes.

Kaes Van’t Hof (CEO)

Thank you, Chip. I'd like to also note that Travis Stice, our outgoing CEO, is joining us for one more Viper call here, so it's good to have him in the room as well. But welcome, everyone. Thanks for listening to our Fourth Quarter 2024 conference call. The Fourth Quarter concluded as a landmark year for Viper. For the full year, we continued to deliver strong organic production growth on our legacy assets and successfully executed on our differentiated acquisition strategy. Looking ahead, we continue to be excited about the transformative dropdown transaction between Viper and Diamondback that was previously announced, and we recently closed the separate Quinlan Ranch acquisition a couple of Fridays ago.

On the dropdown specifically, this transaction is unique in its value proposition to Viper, given the alignment it provides with Diamondback's expected development over the years to come and the resulting organic growth that can be driven by Diamondback's drill bit. Further on this point, on a pro forma basis, Viper expects to own an interest in approximately 75% of Diamondback's expected completions over the next five years, with an average 6% NRI within those wells. This is greater alignment than we have realized over the past eight years on average and is now going to be applied on a much larger scale. Looking at the forward outlook in more detail, we have initiated average daily production guidance for Q1 of 2025 of 30,000-31,000 barrels of oil per day.

Upon the assumed closing of the dropdown expected in Q2 of 2025, we expect run rate daily average oil production of 48,000 barrels of oil a day. Importantly, we also have the unique visibility to further growth in 2026, as our Diamondback operated production is expected to increase to approximately 31,000 barrels a day, up from approximately 27,000 barrels a day in 2025. Of note, this production growth does not take into account the expected accelerated development of Diamondback's Southern Midland Basin acreage that was agreed to in the recent Double Eagle acquisition at the Diamondback level. The pending dropdown includes a substantial amount of royalty acreage in Reagan County, mostly via concentrated interests and completely undeveloped units, so this acceleration would bring forward significant NAV for Viper.

In conclusion, we continue to believe that Viper presents a differentiated investment opportunity with zero capital and operating costs, alignment with our parent operating company that has helped us deliver consistent organic growth, and a current size and scale that positions us to be the consolidator of choice in what we feel remains a highly fragmented minerals market, particularly in the Permian Basin. Pro forma for the dropdown, Viper will rank amongst the largest U.S. independent E&Ps, and we believe the unique attributes of this business model will continue to be recognized by the market over time as our durable cash flow profile becomes increasingly differentiated. Operator, please open the line for questions.

Operator (participant)

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Neil Dingmann with Truist Securities. Your line is now open.

Neil Dingmann (Managing Director)

Morning, guys. Kaes has already congratulated you, so I just want to congratulate Austen. Nice. Well thought of. My first question, guys, is just on the announced carry with Double Eagle. You mentioned this morning, I think, on the Venom or, I'm sorry, on the Diamondback call, is that I think you said, Kaes, maybe around 50% of this plan could benefit Venom. I'm just wondering, could you discuss maybe anything around potential timing and just what you were meaning by the potential upside from this for Venom?

Kaes Van’t Hof (CEO)

Yeah. We're still working out all the details and timing. It's going to be dependent upon where the rigs get moving down there in the southern portion of our acreage. But high level, we expect at least $50 million of upside to Viper from a cash flow perspective. I'll call it $70 oil in 2026. I expect that number probably grows a bit in the coming years. But as we start to get more clarity on timing and interest, we'll update the market. I think we have an opportunity also to buy a lot of minerals down there in Reagan County. It seems to be an emerging part of the basin where there hasn't been as many deals today. So Austen and his team are actively looking at opportunities down there.

Neil Dingmann (Managing Director)

Thank you, Kaes. So then maybe, Travis, since your last call, I'd just love to hear from your last on this one. If you still believe sort of the post-large dropdown and just all the acquisitions you guys have been successful, I was just wondering, when you still look at Venom, do you still believe that the opportunities are as good as ever? And maybe what other incremental accomplishments do you think still lies ahead for Austen and the team?

Travis Stice (Outgoing CEO)

Yeah. It's almost an embarrassment of riches of mountain of talent that's assembled on this Viper team. But what's even more exciting than that is just the runway in front of these guys. When we took this company public, gosh, it's been a long time ago, now, 10, 11 years. We always had a vision that it could be in the situation we're in today. It just took us a while to figure out what was the right structure to be able to get it there. But I think this is a category-killing company, and it's refreshing to see talent and opportunity coincide in the way that it's doing here at Viper Energy Partners. Thank you, Neil, for giving me the chance to mention that.

Neil Dingmann (Managing Director)

I couldn't agree more. Thank you all.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Neil Mehta with Goldman Sachs & Co. Your line is now open.

Neil Mehta (Managing Director)

Yeah. Twice in a day. Lucky me here. So, Kaes, Travis, I'm just curious for your perspective on the payout. So you've got the guide for 75%-100%. And just your perspective, given the strength of the balance sheet, where do you see the likely payout over the next couple of years? And what are the parameters that you're watching to be on the lower end or the higher end of that range?

Kaes Van’t Hof (CEO)

Yeah. Neil, that's a great question because when we started this business, it was 100% pass-through, and we distributed every dollar we made every quarter. What happened with that situation is that that made us rely on the capital markets for doing deals, right? So we had to do equity deals. We had to lean on the balance sheet anytime we wanted to do tuck-in acquisitions. And now, since we've gone back to 75% of free cash returned, it's still a very high number, but for a mineral business, I think it makes a lot of sense. But that leaves 25% of our free cash flow, a number that's now growing pretty significantly with the dropdown, to continue to do deals, the little deals that add up under the Diamondback drill bit, so we don't have to go do a big marketed trade to get those deals done.

So I really like 75% for Viper. I mean, we've certainly been vocal that the base dividend needs to grow, and we're prioritizing the variable dividend over repurchases. But there have been times over the past 10 years where repurchases made a lot of sense for Viper. So we have that ability. And in my mind, that would be an ability to lean in above 75% if there was extreme volatility in the market. So really a very flexible business model. I think after the large equity raise for the dropdown, the balance sheet's in a really, really good position to either grow the business or keep returning more capital.

Neil Mehta (Managing Director)

Okay. Thanks, guys. And then, obviously, the Double Eagle transaction done on the other side of the house, will that create some opportunities for potential dropdowns here into Viper?

Austen Gilfillian (President)

Yeah. The dropdown opportunity is probably small on that. I think they have a 76% effective NRI, so we could do what we did with Endeavor, where we do carve out the excess NRI and create an override for Viper. So I would say it's a small opportunity. What's more exciting probably for us is the Reagan County opportunity that Kaes outlined with the accelerated development of the large overrides we got from the dropdown, and then also kind of having a new playground down there to go poke around and try to buy some minerals where there hasn't been much activity or buying over the course of the last, really, the history of the Permian with the horizontal development that's occurred down there.

Neil Mehta (Managing Director)

All right. Thanks, Austen. Thanks, team.

Kaes Van’t Hof (CEO)

Thanks, Neil.

Operator (participant)

Thank you. Our next question comes from the line of Kalei Akamine with Bank of America. Your line is now open.

Kalei Akamine (Senior Equity Research Analyst)

Hey, good morning, guys. Just one for me here. Kind of thinking about your data center plans, and that development is currently taking place at Fang. But wondering if you think that's the right vehicle to maximize the value of that development. When you kind of look at your peers in the royalty space, it seems like royalty with surface rights seems to be a business model that the market really likes here. Any thoughts on dropping that piece down in Venom?

Kaes Van’t Hof (CEO)

Yeah. We're certainly not blind to what's going on in the market on the surface side. We kind of said it on the Diamondback call. In my mind, the surface is the smallest piece of the value chain of a data center developer in the basin. But I think the market certainly has a different view. I think for us, there's more value in surface being in the operator's hands and being able to move things around and not worry about intercompany relationships when trying to develop our assets. So it probably stays in Diamondback for now, and we keep Viper as a pure-play royalty company. We went to three public snake companies once before, and I think we're good at two. So we'll probably stay with Viper and Diamondback for now.

Neil Mehta (Managing Director)

Got it. Thanks, Kaes.

Kaes Van’t Hof (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Paul Diamond with Citi. Your line is now open.

Paul Diamond (Equity Research Analyst)

Thank you. Good morning, Austen. Thanks for taking the call. I just want to get an idea of where you guys kind of think about the right level and the split between Fang versus other operators in your long-term operational profile. Any shift in that after the recent dropdowns, or is it still pretty much opportunistic?

Kaes Van’t Hof (CEO)

Yeah. The Fang relationship is certainly what differentiates Viper, and it got significantly larger with the dropdown. I think we want to continue to grow the Viper business, which is what we would like to do. It's naturally going to be harder to do it 100% under the Fang drill bit. But I think, generally, we'll always have the support system of knowing where the majority of our development is coming from and the timing of that development, which is, I think, the key differentiator at Viper. But I think, over time, some of these larger packages that might come available in the basin will have a piece of operations through Diamondback, but not the majority like the dropdown. So I think, over time, it probably dissipates a bit, but that also means the multiple we should be paying for those assets is probably lower.

Paul Diamond (Equity Research Analyst)

Understood. Makes perfect sense. And actually, just to kind of pour tension in my second question, given increased scale, how do you all think about or has there been any evolution in how you think about kind of the correct balance sheet? Any interest in deleveraging quickly or more comfortable taking on a bit more debt? Just your thoughts around that.

Kaes Van’t Hof (CEO)

Yeah. I think the mineral business certainly has the capacity to take on more leverage. I just don't think the market or the rating agencies have come around to that idea. So I think we're still going to run the business fairly lowly levered. I think Viper's kind of cost of capital overall has come down significantly. The fact that we're able to do a $1.2 billion follow-on deal at Viper when five or six years ago we could barely raise $100 million has helped us a lot. And so leverage plays a part, but we need the rating agency support to keep moving up the rating scale and have access to that capital while not getting over our skis on leverage.

Paul Diamond (Equity Research Analyst)

Understood. Thanks for your time. I'll leave it there.

Operator (participant)

Thank you. Our next question comes from the line of Derrick Whitfield with Texas Capital. Your line is now open.

Derrick Whitfield (Managing Director)

Okay. Good morning again, guys. Travis, Kaes, again, congrats on what you've built at Diamondback and Viper, and congrats Austen on the opportunity you have ahead of you. For my first question, really wanted to kind of think through some of the deeper intervals and opportunities that you guys have across the basin. While clearly the dropdowns and Double Eagle acceleration are going to drive the near-term growth for Venom, could you comment on how close the returns are with these deeper intervals versus the more traditional Wolfcamp and Spraberry zones? And further, are there leasing and activity tailwinds over the next two years that you see forming?

Travis Stice (Outgoing CEO)

Yeah, Derrick. I think when you think about the resource expansion story at Viper, we definitely view that as a compelling story over the next few years. Looking at the returns kind of at the parent company, I think we've moved in the right direction on the cost side. And probably in the next two to three years, we think it's going to be pretty competitive with the core development that we're doing today.

Austen Gilfillian (President)

Yeah. And, Derrick, on the leasing front, it's definitely something that we've kind of seen across our acreage position. We signed a big lease on the deep rights with Diamondback for Spanish Trail a couple of years ago. That was certainly unique given we owned 100% of the minerals, and it was such a contiguous block of acreage. Kind of what we've seen now is operators leasing the acreage or putting it together on an as-needed basis. Not too many people want to get too much acreage aggregated and have the clock running with the lease expirations and such on that front, so I think it'll be a story that we see play out over the next couple of years.

The lease bonus that we have with the modern-day lease clauses will just kind of be a slight tailwind to the story and the normal royalty stream that we receive.

Kalei Akamine (Senior Equity Research Analyst)

And then on my follow-up, and I'm going to perhaps reframe the previous surface question. What are your thoughts on the opportunity in the Midland Basin for surface ownership where you have material upstream water and royalty assets? And while surface ownership definitely helps from a leasing perspective with data centers, the bigger opportunity that we see on the Delaware Basin side is really on the water sourcing and royalty on water handling.

Kaes Van’t Hof (CEO)

Yeah. I mean, I think it's certainly another leg of the stool that people are playing in the basin. It's good to see the water business get probably more attention than it used to get. We used to have a public subsidiary that was a water business that we had a hard time getting people on the calls for. But I think it's just natural that as the working interest gets consolidated, the minerals get consolidated, people start to look for opportunities on the surface, and royalties play an important part of that.

Austen Gilfillian (President)

Derrick, for us, I think the important part of the business for us is to own the best rock and let activity and capital come to us as a result of that, right? So I think you can have the argument of being able to provide the water or the surface kind of help here on the mineral side. And maybe that's true to an extent. But for us, with the relationship with Diamondback and then just trying to own the highest quality rock in the basin, I think we feel very confident in the activity levels that we're going to generate just by focusing on that element.

Derrick Whitfield (Managing Director)

Thanks. Great update, guys.

Austen Gilfillian (President)

Thanks, Derek.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Our next question comes from the line of Tim Rezvan with KeyBanc Capital Markets. Your line is now open.

Tim Rezvan (Managing Director)

Good morning, folks, and thanks for taking my question. And also congrats to everybody on the news, on the promotions, and on the retirement, Travis. I wanted to ask Kaes on repurchases. You have over $400 million of capacity. I would argue you're basically going to be there on the leverage side by the middle of 2025. So amid a pretty tough tape for a lot of energy companies, Viper trading down to the mid-40s, kind of what are the thoughts on repurchases? And if we see more of a downdraft in the stock for macro reasons, are you incentivized to get active?

Kaes Van’t Hof (CEO)

Yeah. Tim, good question. I think the repurchase plan is still there. There's still a lot of capacity, especially for Viper's size. I think we still have to see some weakness or continued weakness to move away from the priority of returning cash to shareholders through the base plus variable. But it's there for a reason, and capital allocation is something we pride ourselves on. And I think we have a—I don't know. I wouldn't call it a short-term holder in EnCap that may monetize at some point, and you'd expect us to participate in that deal. So the repurchase plan is there. We haven't really thought about it for a while, Viper, but it's certainly something to dust off if we continue to see weakness across the space.

Kalei Akamine (Senior Equity Research Analyst)

Okay. Appreciate that response. And then on my follow-up, Kaes, on the Fang call and in prepared comments, you've talked about a greater opportunity for consolidation in minerals versus E&Ps. There's been a lot of chatter in the mineral space about large packages kind of on the market. So I was curious kind of what you're seeing from your seat that kind of drove that commentary. And is it fair to say Viper is going to be as active as anybody at this point?

Kaes Van’t Hof (CEO)

Yeah. I think Viper's in a really good position. In the last two years, we've done $1 billion deals that I think surprised the market, or not the public market, but our competitors, one of which had a lot of Diamondback activity that we could, through our drill bit, buy down the multiple. And I think what we did in that deal was we put a pretty unique structure by giving them OpCo units to defer their tax liability. And that structure got a lot of attention from a lot of mineral portfolios around the basin that hadn't really thought about that as their potential exit. So I think what Viper offers now is an ability to give someone a significant amount of cash without compromising our balance sheet.

But also, if we do give out equity, it could be in the form of a deferred tax format through the Opco structure.

Austen Gilfillian (President)

No, that's right. And I think the lucky position that we're in, Tim, is that we also don't have to buy every deal. There are quite a few sizable packages. We've seen the size of packages get bigger over the last couple of years. But we've been opportunistic, and we've been able to buy packages that are free of day one, but also add duration to kind of the cash flow profile as we see it. So given the organic growth that we see for the next couple of years, mainly driven through the Diamondback drill bit, certainly don't feel the need to do anything. And with the balance sheet where it is today, that just allows us to be opportunistic for the right opportunity when it comes available.

Tim Rezvan (Managing Director)

Okay. Thanks for the comments.

Kaes Van’t Hof (CEO)

Thanks, Tim.

Operator (participant)

Thank you. Our next question comes from the line of Leo Mariani with ROTH. Your line is now open.

Leo Mariani (Managing Director)

Hi, guys. Maybe just wanted to kind of ask the M&A question a little bit differently here. So do you see maybe kind of significant opportunities out there today in the space? And do you still see the minerals landscape as just incredibly fragmented? Obviously, as you've pointed out, there's been significant consolidation on the upstream operator side. But just trying to get a little better sense of the landscape there. I mean, are we kind of like 5% into the consolidation, and are there still just a lot of smaller kind of owners of minerals kind of running around there that you guys see as an opportunity? And obviously, you've got a very strong balance sheet right now, as you pointed out.

Kaes Van’t Hof (CEO)

Yeah. Leo, I think from an innings perspective, if you think about Viper, pro forma for the dropdown, Viper is going to do about round numbers, 50,000 barrels of oil per day of production. If the Permian is producing six million barrels a day of production at a 25% royalty, there's 1.5 million barrels per day of royalty barrels available to be consolidated. We're the largest public mineral holder from a production perspective, and we're only 3.3% of the total Permian. So there's certainly some minerals that will never sell or never turn over. But if you just think about the size of the prize there just in this basin, there's significant opportunity ahead. Whereas on the upstream side, if you add the top five or six operators together from a gross production perspective, you're getting closer to 60, 65, 70% of the total production in the basin.

Leo Mariani (Managing Director)

Okay. Those were very helpful stats. Really much appreciate that. And obviously, you folks are getting the Endeavor deal, I'm sure, prosecuted right now, anticipating a second quarter close. Certainly, that deal is pretty creative. As I'm looking at the dividend for the company, if we assume that oil prices don't really change much, call them $70, I mean, it looks to me like we should get some nice accretion on the dividend post the close of that deal. Is that generally how you guys are looking at it as well?

Kaes Van’t Hof (CEO)

Yeah. We agree. I think kind of the next goal for Viper is on a normalized price basis is, can we get to $1 per share of distributable cash flow each quarter? And I think with the dropdown as well as the expected organic growth, I think that's a near-term possibility. And 75% of that going back to shareholders is a nice yield today.

Leo Mariani (Managing Director)

Very good. Thank you.

Kaes Van’t Hof (CEO)

Thanks, Leo.

Operator (participant)

Thank you. This concludes the question and answer session. I would now like to turn it back to Kaes Van't Hof, CEO, for closing remarks.

Kaes Van’t Hof (CEO)

Thank you, guys, for joining the Viper call today. If you have any questions, you know where to find us, and I appreciate the time.

Operator (participant)

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