Viper Energy Partners LP (NASDAQ:VNOM) Q3 2023 Earnings Call Transcript

Viper Energy Partners LP (NASDAQ:VNOM) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good day. And thank you for standing by. Welcome to the Viper Energy Partners Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Adam Lawlis: Thank you, Anton [Ph]. Good morning, and welcome to Viper Energy Partners’ Third 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, 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: Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners’ Third Quarter 2023 Conference Call. There were several important updates made yesterday with our earnings announcement, so I will start with our upcoming conversion into a Delaware corporation first. The Board of Directors approved the conversion on November 2 and we expect that it will become effective on November 13. When completed, this conversion will deliver increased corporate governance rights to our limited partners and is intended to position Viper such that the value of our mineral and royalty assets can be fully recognized. Further on that point, we expect the conversion to result in an increase in Viper’s trading liquidity and potential investor universe.

Given Viper’s current status as a partnership, we estimate that approximately 2% of our public float is held by index funds. This compares to a select group of our peers averaging around 30% ownership. Fundamentally, we believe this conversion is the right thing to do for our unitholders and that it will provide numerous benefits, but the foundation of the decision is to fully highlight the advantage nature of mineral ownership and the unique value proposition that Viper presents within the space. As a separate recent event, Viper announced last week the closing of our GRP acquisition. This acquisition was a truly unique opportunity and that it checked all the boxes we look for in an acquisition. A medi-accretion to all relevant financial metrics, substantial undeveloped inventory to support long-term returns and significant scale that results in a pro forma business that is both bigger and better.

What differentiates this acquisition, however, is both the quantity and quality of the undeveloped inventory, particularly in the Northern Midland Basin. Following the closing of this acquisition, Viper now owns roughly 32,000 net royalty acres in the Permian Basin, and our production will be over 25,000 barrels of oil per day. Looking ahead, we have an unparalleled growth runway of high-quality undeveloped acreage and as the largest player in the public minerals market, we expect to play a meaningful role in consolidating the highly fragmented space as high-value proposition opportunities like GRP present themselves. Turning to the results of the business. The third quarter was another strong quarter for Viper as production grew roughly 5% for the second consecutive quarter.

While growth will not always be ratable from quarter-to-quarter, given we own varying interest in what is mostly large-scale development in the Permian Basin. We expect the trend of meaningful growth on an annual basis to continue as evidenced by their preliminary full year 2024 production guidance that we provided. Additionally, during the third quarter, Viper announced an almost $100 million leased bonds which will allow for the future development of deeper zones on certain acreage in the Midland Basin. As mentioned in our rationale for converting into a corporation, there are many structural advantages to mineral ownership beyond just the cost-free royalties, and this significant lease bonus is just one specific example. As owners and lessors of the subsurface property modern lease terms can dictate development requirements of operators.

And when those terms are not met, leases can expire and have the full development rights revert back to us as a mineral owner. As deeper zones are tested throughout the basin, we believe this is an advantage that will only be further highlighted in the years to come. As a final point, Viper remains committed to a sustainable and growing return of capital through cash distributions over the long-term. We have the balance sheet strength, durable cash flow profile and undeveloped inventory base to support many years of significant return of capital through the cycle. Activity on our asset base continues to be strong, and we believe we are positioned to execute on opportunistic M&A to further complement what is already a unique value proposition both in terms of return on and return of capital.

Operator, please open the line for questions.

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Q&A Session

Operator: Thank you.[Operator Instructions] Our first question comes from Neal Dingmann from Truist Securities. Please go ahead.

Neal Dingmann: Morning, guys. Nice quarter. My first question, guys, is just on all these bonuses. That’s the impressive one you all recently received. I’m just wondering, could you speak too, if all that bonus was tied likely to the deeper zones and wondering, do you all believe you have many of your other assets have potential for similar type bonuses, maybe in those type of areas?

Kaes Van’t Hof: Yes, Neil, good question. I’ll answer part of it and give it to Austen to talk about the rest of the asset base. I think high level, we kind of added a slide in the deck to kind of show that even in an area like Spanish Trail, highly developed on the traditional Wolfberry play that we all know, but now moving back in and developing Barnett, Woodford and some of the Wolfcamp D across the position, the mineral honor gets the benefit there, right? They get a lease bonus and they get a royalty on all of the all the new zones. So I think we’re going to be slow to test it. I think it was a convenient time to get that lease done between Diamondback and Viper as it provided a lot of cash to Viper to help close the GRP deal.

But I think just generally, we’re trying to highlight that we own a lot of minerals in the Midland Basin, and there’s a lot left to do in terms of other zones, deeper zones, shallower zones and all of that benefits the mineral owner, whether you can model it today or not. And Austin, do you want to talk about the asset base?

Austen Gilfillian: Yes. No, the monitoring and enforcing these type of returns is a really important part of what we do now, especially kind of where we are in the industry and in these modern leases and some of the terms that they could have. So this specific lease with Spanish Trail represented about 10% of our total net acres. When we kind of go through and look at the lease — specific lease provisions that are included across the acreage that we own. We estimate about 50% of our acreage kind of similar lease language that where if the deeper rights haven’t been developed that, that acreage would kind of fall out and will become available. So I don’t think that’s story for tomorrow, but certainly, as things play out over time and the zone becomes more developed and it kind of expands across the basin. I think it’s something that you’ll see more about going forward.

Neal Dingmann: Yes, I like that upside. Thanks Austen. And then just a quick second one on capital allocation. I’m just wondering, given the current leverage post the deal and obviously, the great production guide for next year. I’m just wondering, any thoughts if capital allocation would change? Or will that payout type continue?

Kaes Van’t Hof: No. It’s a good question, too. I mean I think our payout philosophy is the same. 75% of free cash flow goes to equity, 25% goes to the balance sheet. We know we put a good amount of cash in this GRP deal, but we have the balance sheet capacity to do it. We also have kind of a small balance on our revolver after closing the deal. So that will be easy debt paydown. And kind of strip prices, we’re still going to be likely below one times leverage at the end of 2024, even if we do pay out 75% to equity. I think Viper is kind of gone back and forth on how we’re returning capital to shareholders. I think we’d probably prefer to distribute more cash via the fixed plus variable distribution than buybacks, but there might be opportunities to buy back stock in unique situations over the coming year. But I think our preference on that 75% that gets returned shareholders or unitholders is through the base plus variable dividend.

Neal Dingmann: Appreciate the details. Thanks, guys.

Kaes Van’t Hof: Thanks, Neal.

Operator: Thank you. One moment for our next question. Our next question comes from Derrick Whitfield from Stifel. Please go ahead.

Derrick Whitfield: Hi, good morning. Thanks again for your time. With respect to the recent GRP acquisition, this was one of the first we’ve seen you pursue where there wasn’t a Diamondback angle or immediate Diamondback angle. Thinking about your prepared remarks and consolidation opportunities you’re seeing, could you speak to what you’re seeing in deal flow and the bid-ask spreads for minerals, which could lead to incremental opportunities?

Kaes Van’t Hof: Yes. I’ll talk about the GRP deal and Austen can talk about the market right now. I mean this deal was kind of the one we’ve been waiting for. This team built this asset base over 8 or 10 years. And I think it can be best summed up very unique in that it’d be impossible to build that position today. And so we needed to buy that position. And the reason why we like it is it’s a lot of — the Midland Basin is the core asset. It’s a lot of undeveloped units in the Midland Basin, and it’s all in acreage that we would cover. So while there isn’t a huge Diamondback operated component to it, we put our operator hat on and said, would we like to own exposure to the core of the basin under competent operators like Pioneer, Endeavor, now Exxon, etcetera.

And that is second to none and in our mind, can’t be built through the ground game. And so we used our size and scale to be able to put a good amount of cash in the deal and get it across the finish line.

Austen Gilfillian: Yes Derrick, there’s been quite a few deals that have come to market and have transacted this year. We’ve really been pretty selective in the last couple of years, with the primary focus on Diamondback operated like you mentioned, or secondarily, as Kaes kind of highlighted, if it doesn’t have the high Diamondback operated percentage that is just really high-quality acres with clear undeveloped inventory where we can have that confidence in what the long-term development is going to look like. I think going forward, it’s going to be a similar viewpoint for us, and we see an opportunity for quite a few more deals to come to market. But for us, it’s always a pretty high hurdle given the quality of acres that we have today.

The development that we see going forward, and it kind of has to compete for that, right? Just being accretive day one, not enough for us. We kind of have to have confidence in that development outlook over year 2, year 3, year 4, et cetera. And that’s always the hardest hurdle clear.