Viper Energy Partners LP (NASDAQ:VNOM) Q1 2024 Earnings Call Transcript

Viper Energy Partners LP (NASDAQ:VNOM) Q1 2024 Earnings Call Transcript May 1, 2024

Viper Energy Partners LP  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Viper Energy First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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: Thank you, Howard. Good morning and welcome to Viper Energy’s first 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 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: Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy’s first quarter 2024 conference call. The first quarter was a strong start to the year for Viper in 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 first quarter 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 second quarter that implies over 3% growth relative to the first quarter. It is important to note that this guidance takes into account the divestiture of our non-Permian assets in 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 second quarter production guidance range. Looking more long term at potential inventory expansion. During the first quarter, Diamondback completed its first test of the Wolfcamp D and Spanish Trail with two wells being turned to production. Of these two wells, only one 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-child effect.

The initial takeaway is that the Wolfcamp D and Spanish Trail can be effectively developed below existing Wolfcamp B wells. And while they are not the highest-returning projects in Diamondback’s portfolio, they can’t 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 derisks 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.

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Q&A Session

Operator: [Operator Instructions] Our first question or comment comes from the line of Neal Dingmann from Truist Securities. Your line is open.

Neal Dingmann: 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 on – over at FANG. And I’m just wondering, maybe secondly there, how in the future you all would view buybacks versus divs in this vehicle as I know some mineral investors continue to prefer more exclusively dividends.

Kaes Van’t Hof: Yes. Good question, Neal. Welcome to the call. I think for us, the capital allocation philosophy at Viper remains a focus on cash distribution over buyback. 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. Listen, the stocks performed well. We still think there’s a lot of value to be earned on the mineral business. But right now, we’re probably leaning more towards cash versus buybacks, as you can see in the first quarter. I think we’re also continuing to try to grow that base distribution consistently on kind of a semiannual basis, and that will continue as well.

Going to your question on debt reduction and the percent of free cash returns. The business on the mineral side can generates pure free cash flow. So it’s very easy to delever. I think, generally, the first quarter had some working capital headwinds as well as we did a couple of small deals in the Permian. Second quarter should see net debt go down pretty significantly with free cash generation as well as the sale of the non-Permian assets. So I think we comfortably see this business near one turn of leverage at year-end. I think one turn of leverage for a mineral business is a very conservative funding structure. I think the – but for the – part of the job of our team over the course of this year and into next is as this business gets bigger, we should try to earn a lower cost of capital with the public bond investors and the rating agencies as they start to understand the pure free cash flow nature of this business.

Neal Dingmann: Great details. And then just a quick follow-up on your mineral position. 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 pro forma company? Or do you anticipate potentially a little bit of change? 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: Yes. I mean, I think for Viper, that exposure to that area is going to be huge for the future growth profile of the business. That area, obviously, some of the best rock in the United States, continues to get better, continues to add more zones. That’s kind of where we’ve been seeing really good Wolfcamp B results. I think pro forma with Endeavor, the combination there is going to be one of the best places to drill for oil in the United States with some combination of longer laterals, big pads, high mineral interests. And that’s going to be kind of the focal point, where we’re going to have a majority of our rigs in that Martin County area.

Neal Dingmann: Yes, that’s what I mean. I guess there is potential for lease bonuses and all that just for something down in the future, right?

Kaes Van’t Hof: Yes. Well, I mean, listen, I think there’s potential for lease bonuses across Viper’s position. We’ve seen a bit with the Barnett and Woodford leasing taking off. There’s been some Wolfcamp D leasing taken off because that’s not always been held from those vertical Wolfberry days and just talks about the benefits of the mineral business. If you own minerals, you own every piece of every barrel of oil produced in that section or unit forever regardless of if it’s primary development, secondary zones. Who knows what happens down the road. That’s just the beauty of being a mineral owner.

Neal Dingmann: Great point. Thank you all.

Kaes Van’t Hof: Thanks, Neal.

Operator: 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: 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 maybe just how that fits into sort of the broader organic inventory opportunity set that you guys see today?

Kaes Van’t Hof: Yes. Chris, we’re going to let Al Barkmann, Chief Engineer, respond to that question.

Al Barkmann: Yes, Chris. This was a test – our first test of the WD and Spanish Trail. Like we mentioned in the opening remarks, we kind of wanted to test the performance of the D under existing Wolfcamp B wells and then without that. And really, really pleased with the initial performance here. Both of those wells I feed above 1,000 barrels a day and really kind of tracking on top of each other. So we don’t think we’re seeing any degradation from the Wolfcamp B wells being on top. And 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: 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 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 data point in terms of leverage and just how to think about that, at least from where we are if possible?

Kaes Van’t Hof: Yes, Chris. I mean, listen, I think we’re obviously disappointed that the Diamondback-Endeavor deal has been delayed a bit, but we still have a lot of confidence that’s going to close in Q4. 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 – combine with Viper’s business and create kind of a true category killer in the mineral space of size and scale that really have been seen to date. I think on top of that, if we did do that deal, we’re certainly not looking to lever up the mineral business at the expense of the upstream business.