Viper Energy Partners LP (NASDAQ:VNOM) Q4 2023 Earnings Call Transcript

Viper Energy Partners LP (NASDAQ:VNOM) Q4 2023 Earnings Call Transcript February 21, 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).

Leo Mariani – ROTH: Tim Rezvan – KeyBanc Capital Markets

Operator: Good day, and thank you for standing by. Welcome to the Viper Energy Fourth Quarter 2023 Earnings Call. [Operator Instructions] 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: 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’ll 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 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 the 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 calculated 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 both 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 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 20 — 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.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Neal Dingmann from Truist.

Neal Dingmann: Nice quarter. My first question is on valuation. Just maybe broadly, it seems to me the market is still not appropriately valuing VNOM’s growth and the continued associates and distribution. So case for you and the team, just wondering, do you all believe this is still more of a broader issue with the Minerals group in general? Or is it more the market not appreciating VNOM’s future value creation?

Travis Stice: Yes, Neal, I mean listen, I think the market is starting to wake up to the VNOM story as well as the mineral story. I think generally, the conversion that we did to [indiscernible] has opened up a broader investor universe has allowed us to take meetings with shareholders that — or prospective shareholders that haven’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 pickup. And I think as you think about — as we think about the vision for this business, as you continue to see consolidation in the E&P space, we think Viper will offer a unique opportunity and a unique 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 even if the parent company is not growing. So generally, I think the market is waking up to the story. I mean, this business is going to grow 14% — grow oil 14% quarter-over-quarter, Q4 ’24 to Q4 ’23, that’s a pretty impressive growth rate, and it’s not impacting overall macro as much as it was upstream.

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

Kaes Van’t Hof: We did a unique deal in Q4 to buy back 1 million units from what was given to GRP seller financing in opportunity to buy back a lot of shares at one time. Viper shareholders have been rewarded for that from a returns perspective. I think generally, we still believe minerals should be distribution vehicles. We have a big distribution that’s grown in the last couple of years, we have a variable distribution that’s probably our second call on payout. And then behind that is 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.

Operator: Our next question will come from the line of Derrick Whitfield from Stifel.

Derrick Whitfield: I 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: It’s more broadly integrated across the portfolio, but there is a lot of undeveloped opportunity in Spanish Trail. We signed a big lease last year for deep rice, which included a little bit of Wolfcamp B but mainly Barnett and Woodford across that Spanish Trail position I think there’s a couple of wells coming on this year in the Wolfcamp D, which just opens up the next leg of the stool when it comes to mineral ownership. I mean when we first bought Spanish Trail 10 years ago, it was focused on single bench Wolfcamp B development and maybe some more vertical wells. And now here we are developing 5 or 6 benches and upside in the deeper zones. So at the end of the day, it’s always good to be the mineral owner in Texas and Viper being a large mineral owner with a well-funded parent operator is in a very good position.

And [indiscernible] in Slide 12 of the deck, what that looks like and what the benefit has been to the Viper shareholders in Spanish Trail from a deal that started with the $400 million purchase 10 years ago.

Derrick Whitfield: I agree. Quite amazing. Maybe kind of bridging from that topic, 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: Yes. There’s certainly some opportunities. There’s the Quinn Ranch which we had a little discussion about with Endeavor a few years ago, and they got title to the ranch, but 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 a world-class resource at the upstream angle and the downstream angle — sorry, the mineral angle.

Operator: Next question will come from the line of Paul Diamond from Citi.

Paul Diamond: 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 pretty close to the high end of guidance pretty quickly for ’24. Should we kind of view that as this a bit of conservatism into it? Or is it more just accounted for ongoing volatility in pricing and just operational cadence across the market?