Viper Energy Partners LP (NASDAQ:VNOM) Q1 2023 Earnings Call Transcript

Viper Energy Partners LP (NASDAQ:VNOM) Q1 2023 Earnings Call Transcript May 2, 2023

Viper Energy Partners LP beats earnings expectations. Reported EPS is $0.53, expectations were $0.41.

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

Adam Lawlis: Thank you, Chris. Good morning, and welcome to Viper Energy Partners’ First 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’ First Quarter 2023 Conference Call. The first quarter was a strong start for the year as Viper’s oil production set a company record for a fourth consecutive quarter. The advantaged nature of this royalty business model was highlighted during the quarter as we maintained our strong free cash flow conversion despite the volatility in commodity prices. Further on that point, Viper’s low operating costs and 0 capital requirements allow us to convert over 80% of our operating cash flow into free cash flow during the quarter. This measure compares favorably to many operators at around a 40% free cash flow conversion and insulates Viper’s free cash flow profile in return of capital during times of commodity price volatility.

Additionally, Viper announced it completed the drop-down transaction of certain royalty interests from Diamondback on operated properties located in Ward County. This transaction was a $75 million acquisition of an overriding royalty interest, representing 660 net royalty acres that will provide high NRI exposure to Diamondback’s expected development plan in the Southern Delaware Basin. Production on the acquired asset was roughly 300 barrels of oil per day during the first quarter and is expected to increase through the remainder of the year to average over 500 barrels of oil per day for the full year 2023. Looking ahead, we have initiated average production guidance for Q2 and Q3 2023 that implies over 8% growth relative to the first quarter.

Importantly, on an organic basis, so excluding the impact of the drop-down acquisition, production is growing at over 5% in this period, primarily as a result of large Diamondback operated ads with high Viper NRIs being turned to production. On the capital return front, Viper took advantage of the volatility experienced during the quarter due to our flexible return of capital program by opportunistically repurchasing over 1 million units. Since the inception of our unit repurchase program, we have now repurchased over 11 million units for an aggregate of roughly $250 million, reflecting an average price of under $23 per unit. In addition to the unit repurchases, our return of capital program during the quarter is going to also deliver a distribution that represents a roughly 5% annualized yield at today’s price.

In conclusion, the first quarter was an outstanding quarter for Viper and the forward outlook continues to improve as our high-quality asset base continues to attract outsized activity levels. Viper remains differentially positioned to grow production without having to spend a single dollar capital and with only limited operating costs. And as a result, we look forward to continuing to efficiently return substantial amounts of capital back to our unitholders. Operator, please open the line for questions.

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Q&A Session

Operator: . Our first question will come from Neal Dingmann of Truist Securities.

Neal Dingmann: My first question is on future activity specifically. Can you remind maybe just in really broad terms how much of your acreage has what I would call maybe more relatively virgin units where we could see continued large pad boosting the already record volumes versus a lot of the other acreage out there, I know, is more on what I would call developed assets where we’re seeing more child type wells.

Kaes Van’t Hof: Yes. Good question, Neal. I mean, I would say almost all of the Diamondback operated position that we bought from Swallowtail is still — or the vast majority of it is still completely undeveloped. I mean we haven’t even brought on our first pad yet in the Robertson Ranch area, where we own essentially half the minerals at Viper. So I think what’s fundamentally misunderstood on Viper’s growth profile is that this growth profile is not going to be a flash in the pan over the next couple of quarters. I think this business can grow significantly over the next few years, even with the E&P business growing slower or in some cases, in maintenance mode. So that’s the benefit of this mineral business. There’s a lot of growth to be had because when we allocate capital on the drilling side of Diamondback, we take into account the 58% ownership of Viper into those economics.

Neal Dingmann: Great point. Okay. And then second question, just on capital allocation of the shareholder return. Just wondering, while I know asked earlier, I know at FANG the allocation decision is largely driven by how you view your share price versus the assumed value based on mid-cycle prices. And I’m just wondering if you think about that the same way the Viper, and obviously, with oil down today now approaching , is there any change to your thinking?

Kaes Van’t Hof: Yes. Let me say a couple of things about mineral valuations because this is important and why we changed our capital allocation philosophy at Viper to not just distribute every dollar we make. We wanted to retain some flexibility between a buyback of units and a variable dividend. Now we have a higher base dividend Viper, so that was put in place for a reason. But I think generally, the public markets are fundamentally mispricing mineral interest relative to upstream assets. Therefore, we’ve allocated a lot more capital to own more of the mineral business. And if the market continues to miss price mineral values and not understand the benefit of a mineral versus an upstream asset, we’ll just simply own more and more of this business like we did in Q1.

Second to that, we do look at our NAV at Viper. We’re significantly undervalued relative to our NAV at a mid-cycle deck and mid-cycle at Viper is $60 a barrel, just like it is at Diamondback. And the other validation we have in the mineral market, while I’m not going to hang our hat on 100% of this, but we are getting blown out in the private market, absolutely blown out on deals in the private market. We’re losing deals by 50%, 60%, 70%, and these deals, Neal, are much lower quality than the acreage position that Viper has today. So — well, that’s an anecdote, and we don’t base our business on where third-party deals are trading. If third-party deals are going to continue trading at 50% to 70% above where we’re trading, we’re going to buy back a lot of units.

Neal Dingmann: Yes, I agree. Glad to see you all lean into the unit repurchase.