Viper Energy Partners LP

NASDAQ:VNOM

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Viper Energy Partners First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Thank you. Please go ahead, sir.

[Adam Lawlis, VP, IR]

Thank you, Chantel. Good morning, and welcome to Viper Energy Partners’ First Quarter 2021 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; and Kaes Van’t Hof, 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, CEO]

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners’ first quarter 2021 conference call. Despite the adversity presented by winter storm Uri in February, Viper produced a strong first quarter with production exceeding expectations and strong realized pricing.

As a result, Viper generated almost $55 million in net cash from operating activities, which enabled us to reduce debt by $27 million during the quarter. We have now reduced total debt by over $136 million, or roughly 20%, over the past 12 months.

As a direct result of this, and further supported by our confidence in our forward outlook, we are increasing our distribution to common unitholders to 60% of cash available for distribution for the first quarter of 2021, which equates to a $0.25 per unit distribution.

Looking ahead, Viper also increased its production outlook for the full year 2021, with oil production now 2% higher at the midpoint versus our previous 2021 guidance range. This increased production outlook is predicated primarily on our confidence and in visibility into Diamondback’s expected forward development plan which includes several large pads where Viper will own a significant royalty interest.

Beyond our visibility into Diamondback’s operations, we continue to have a strong backlog of work-in-progress and line-of-sight wells operated by third parties. Despite continued evidence of activity rates normalized in the Permian Basin, we continue to incorporate slower-than-normal timing assumptions for third-party operations in our production guidance.

Based on this updated production guidance, assuming production is held flat at the midpoint of the range, Viper is expected to generate roughly $260 million of free cash flow in 2021, assuming $60 WTI. This equates to an approximately 8% free cash flow yield as a percentage of our enterprise value or almost 10% based on our current market cap.

Viper remains in strong financial shape with $535 million of liquidity, and we’ll look to continue to decrease leverage while also increasing return of capital to our unitholders over the coming quarters.

In conclusion, the first quarter of 2021 was another strong quarter for Viper that, once again, highlighted our high-quality asset base, best-in-class cost structure and overall differentiated business model.

Coming out of the down cycle of 2020, Viper has emerged in a position of strength and is now situated to capitalize on opportunities as they arise. We will maintain the financial flexibility to allow for continued debt reduction, distributions that provide a competitive yield and acquisitions either through our unit repurchase program or through the acquisition of Private Minerals ahead of the Diamondback drill bid.

Operator, please open the line for questions.

[Operator]

[Operator Instructions] And your first question will come from the line of Brian Downey with Citigroup.

[Brian Downey, Citigroup]

Maybe just on that last comment, I’m curious on how the uses of cash may evolve as the year progresses. You bumped the payout ratio to 60% in the first quarter, and I believe you used approximately 20% of your distributable cash flow towards repurchases. How should we think about continued debt reduction versus payout repurchases and the A&D market opportunities as that revolver balance continues to decline through the rest of the year?

[Kaes Van’t Hof, President]

Yes, Brian, good question. I think it’s just pure capital allocation from our perspective outside of the goal of having our revolver near 0 or at 0 by year-end this year. So I think that’s certainly an internal goal. I think we’re going to easily get there while still distributing most of our cash in the form of a distribution or a buyback. I think you’ve seen us cap the distribution a little more this quarter as the stocks recovered and the buyback is less obvious than it was in the fall of last year.

But generally, I think probably 2/3 to 3/4 of cash gets distributed in some form or fashion, whether through the buyback or distribution. And the rest, we can retain to pay down debt or buy small deals, then pay it down right away.

[Brian Downey, Citigroup]

Great. And then as my follow-up, in your near-term net well inventory slide, you explicitly broke out the 57% public and 43% private operator figures of your third-party operated inventory. How would you characterize activity levels from your private operator cohort? It seems like private rig count more broadly has grown more quickly versus operator -- public operators staying more disciplined.

[Kaes Van’t Hof, President]

Yes, that’s exactly right. I think it’s disappointing for the macro that the privates are growing their activity levels in production as much as they are. But Viper benefits without having much influence on that. I’d say we generally have seen the same things that the public is seeing in terms of activity, particularly on Viper’s Midland Basin acreage. So the privates are going to grow. They don’t answer to public shareholders like we get to. But yes, we’re certainly seeing it. And it will be a nice little tailwind for Viper. I just hope it doesn’t impact the macro too much.

[Operator]

And your next question will come from the line of Chris Baker with Credit Suisse. And that question has been withdrawn. Your next question will come from the line of Neal Dingmann with Truist Securities.

[Neal Dingmann, Truist Securities]

First, could you look at -- I just noticed on the Slide 10, I like that, where you talked about still having a significant amount of undeveloped acreage. I’m just wondering, do you have a sense of timing when you could potentially see, you think, at least 50% of that Midland royalty acreage developed? I mean, is that quarters, years? Any thoughts there?

[Kaes Van’t Hof, President]

Yes, Neal, I mean, I think it’s years, if you’re making conservative spacing assumptions and timing assumptions. Generally, we’re -- we completed or brought on 2.5 net wells in Q1 ‘21. I think we’ll start to see that accelerate a little bit in the back half of the year. But that’s a pace where there’s significant inventory runway.

And I think what’s important for Viper is that while Spanish Trail, which is Viper’s bread and butter, is getting more and more developed. The rest of the position now has areas where we have significant mineral interests as Viper under Diamondback. And also the new the new acreage position, the new playground for the Viper team to buy on, there is really good rock that has some good mineral acquisition opportunities.

[Neal Dingmann, Truist Securities]

No, makes sense. And then just lastly, just case going forward, you guys are in a strong position, very strong now. Thoughts on the hedging, going forward?

[Kaes Van’t Hof, President]

I think we’ve been discussing a similar strategy at Viper to Diamondback, where maybe there is some hedging that gets layered on 6 to 12 months in advance, just to protect the extreme downside. I think it’s either the form of buying puts or doing wide 2-way collars where, at the low end, our investors still receive a large distribution, the debt doesn’t blow out and we sleep better at night.

So I think that’s probably where we’re headed. We had a lot of ‘21 hedges put on this year that are, unfortunately, underwater because of the recovery. But I think as you think about ‘22 and beyond, putting some sort of floor under the low end of distributable cash flow is something we’re thinking about.

[Operator]

And your next question will come from the line of Gail Nicholson with Stephens.

[Gail Nicholson, Stephens]

I’m looking at Slide 9, it looks like the fourth quarter has a heavy TIL count expected, at least on the Diamondback operated acreage. When we look at volumes going forward, based on things, kind of runway line of sight that you guys have, do you think that you can keep those 4Q ‘21 volume levels flat? Or do you kind of view ‘22 forward as a more keeping ‘21 average flat?

[Kaes Van’t Hof, President]

I think generally, Gail, if the trend continues with rig count where it is, maybe improves a little bit in the macro in 2022. You probably see a little bit of growth at Viper as a result of that higher activity levels. And I think we see -- we certainly are excited about the back half of the year. I think going into ‘21, we were kind of hinting that Q1 and Q2 would be the lows production wise. Q1 surprised with the upside, and we’re getting a little more confidence in Q2. But generally, the back half should see activity levels that are strong, that follows through on production and kind of the Q4 time frame. Also, anything you want to add there?

[Adam Lawlis, VP, IR]

No. That’s great.

[Gail Nicholson, Stephens]

And then just looking at the net undeveloped locations remaining, do you know what percent of those locations are on FANG’s acreage?

[Kaes Van’t Hof, President]

Yes. I mean, there was a pretty high level formulaic approach. So you can just use the percent owned by FANG, maybe just a little bit less. But Diamondback, there’s about 2/3 of Viper’s production and a little over half the acreage. So it might be a little more developed, but generally, I think you’re pretty close between the two. Yes. And Gail, on Slide 6...

[Gail Nicholson, Stephens]

[Indiscernible]

[Kaes Van’t Hof, President]

On slide 6, Gail, we have the net producing horizontal locations by Diamondback and third-party split between the basins as well. So you can kind of back into the math through that information.

[Operator]

[Operator Instructions] And your next question will come from the line of Chris Baker with Credit Suisse.

[Chris Baker, Credit Suisse]

Can you hear me?

[Adam Lawlis, VP, IR]

Yes, we got you, Chris.

[Chris Baker, Credit Suisse]

Okay. Yes, I’m not sure what happened earlier. Apologies if this was asked, but I was just curious beyond the near-term focus on debt reduction, how are you guys thinking about balancing return of capital versus potentially funding accretive smaller scale acquisition opportunities? Just curious if the goal sort of longer-term is to essentially internally fund that activity next year and beyond?

[Kaes Van’t Hof, President]

Yes. No, I think you’re thinking about it the same way we are, the smaller deals will be funded internally with internally generated cash flow. I think I kind of referenced earlier in the call, kind of a 70-30 or 75%, 25% split between distributions or returns and balance sheet or deals. And that, that probably brings true for the foreseeable future outside of if a large unicorn type deal came about, and we have to think about funding that differently. But generally, the blocking and tackling acquisition machine is getting started again. And as long as you have a path towards a low to no balance on the revolver, then I think it’s safe that we can fund those deals with internally generated cash flow.

[Chris Baker, Credit Suisse]

Great. And then just as a follow-up, we’ve obviously seen a bit of consolidation on the E&P side recently. Just curious if you have any view on what maybe some of the headwinds are, maybe why we haven’t seen similar sort of larger scale deals announced on the mineral side over the past few months.

[Kaes Van’t Hof, President]

Yes. I mean, I would say, generally, the mineral space probably still needs to get bigger in the public sphere. So I think more consolidation from private to public needs to happen rather than on the E&P side. You’ve seen public to public. I’m just grasping as reasons why we would think that it hasn’t happened yet that traditionally mineral owners aren’t forced sellers.

E&P, there’s so much capital that needs to go into retaining your acreage position and maintaining production, but you often have more forced sellers, and on the mineral side, where your checked stuff is going down for a few months, but you’re not spending capital to grow.

[Operator]

And your next question will come from the line of Kyle May with Capital One.

[Kyle May, Capital One]

Just wanted to follow-up on some of your capital allocation comments. It was nice to see the distribution payout step up this quarter. But just curious kind of how you’re thinking about that longer-term and kind of directionally where that’s headed.

[Kaes Van’t Hof, President]

Yes. I mean, I think, Kyle, it’s directionally headed higher. If -- because I think Viper’s unitholders want to own Viper for the distribution, I think the reason for the buyback was so obvious. The reason the buyback was so obvious in November was that we were selling undeveloped minerals with no visibility for much higher values than the stock was trading. So you could buy minerals by buying back the stock cheaper than you could in the public markets or -- sorry, yes, in the private markets.

And that’s I won’t say that that’s flipped, but the gap has certainly narrowed. So I think, overall, more distribution, but also funding some deals with cash flow rather than relying solely on capital markets is where we’re headed.

[Kyle May, Capital One]

Got it. That makes sense. And then as a follow-up, you kind of mentioned to the point that the playground for M&A activity has expanded with the recent acquisitions. Just curious kind of where you are in evaluating those opportunities and when Viper may consider getting back to -- getting involved in the A&D market.

[Kaes Van’t Hof, President]

Yes. We’re looking at them right now. We just didn’t close any deals in the first quarter. And the secret to the mineral game is to make sure you buy minerals before permits get placed on those units. And at our private mineral competitors would love to have that information. But I think right now, because Diamondback is not growing like we used to, and we’re a little bit ahead of our schedule, we know where pads are going to be placed, and we’re going to be able to buy minerals a lot cheaper ahead of that drill bid. So we’re doing that now. It’s not huge dollars, but being prudent. And we’ll probably start adding some acreage here throughout the rest of the year.

[Operator]

[Operator Instructions] And your next question will come from the line of Jeanine Wai with Barclays.

[Jeanine Wai, Barclays]

Maybe just one for us, back to Brian’s question on the privates. With the privates being less constrained on reinvestment rates than the publics, we definitely think that private activity could be a meaningful tailwind for VNOM this year. So just wondering how conservative you’ve been on the timing of the wells that you’ve put in your guidance for that.

And also, you commented on overall activity levels increasing for the privates, but with higher oil prices, are you seeing more wells per section in terms of spacing or zones given higher oil prices? And we love this since you’re not burdened by the CapEx, so you could really benefit from this. And maybe that makes it a little bit more neutral in the near-term in IRRs per well with the macro aside.

[Kaes Van’t Hof, President]

Yes. I mean, I think generally, the entire basin is going lighter on spacing. So I wouldn’t say I’ve seen a lot of really tight spacing tests from the privates, but we have seen the private increase activity levels, just like you’ve observed. Like we were saying earlier, it is a tailwind for Viper, but hopefully, it doesn’t screw up the macro because I think this industry is coming out of a pretty tough down cycle. And I think OPEC is watching, and we need to be very mindful of our position in global oil supply and demand, which we probably weren’t, as an industry, going into this down cycle.

[Operator]

I am showing no further questions at this time. I would now like to turn the conference back to Travis Stice, CEO, for closing remarks.

[Travis Stice, CEO]

Thank you again to everyone participating in today’s call. If you’ve got any questions, please contact us at the information provided.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.