Viper Energy Partners LP

NASDAQ:VNOM

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen and welcome to the Viper Energy Partners’ Second Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Adam Lawlis, Vice President of Investor Relations. Mr. Lawlis, you may begin, sir.

[Adam Lawlis, VP, IR]

Thank you, Maeve [ph]. Good morning and welcome to the Viper Energy Partners’ second quarter 2019 conference call. During our call today, we will reference an updated investment 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’ second quarter 2019 conference call. To begin, I want to highlight the unparalleled total return and value proposition Viper Energy Partners’ presents today. Not only versus our peers in the energy sector but also versus the broader investment universe.

First, Viper offers high margin growth with zero capital expenditures required to achieve that growth, a combination which leads directly to unmatched corporate returns and free cash flow. Viper has now in aggregate distributed over $6.50 per unit since our IPO. Our operators have significant inventory and undeveloped resource remaining on Viper’s current asset base providing years of embedded organic growth at no additional capital cost to Viper.

Looking at traditional investment metrics such as earnings’ growth, margins, return on capital, free cash flow yields and leverage. Viper transcends other potential investments vehicles in offering a strong combination of each. Second, I would like to narrow in on our second quarter results and the announced Drop Down transaction from Diamondback. Both of which reinforced Viper’s differentiated position in the mineral space and increase our high degree of confidence in generating continued per unit volume and distribution for many years at almost any commodity price.

Looking at our second quarter results specifically. Viper experienced record levels of growth activity across our acreage position as represented by the nearly 200 wells that were turned to production. This activity speaks to the quality of Viper’s premium acreage position in the Permian and is highlighted by 20% year-over-year production growth in the second quarter versus 2018. It is important to note that Viper likes to take concentration risk in core areas of the Permian that enable long lateral development. We believe this concentrated acreage will continue to lead to outsized growth overtime as it should be developed first in operators drilling plans.

Lastly, Viper announced yesterday it had entered into a definitive agreement to acquire certain mineral and royalty interest from Diamondback our sponsor, through a Drop Down transaction. This transaction will be immediately accretive to Viper on a cash flow per share production per million units and net asset value per share. Equally as important, this acquisition adds substantial scale to Viper and increases total acreage operated by Diamondback at Viper by roughly 80% to more than 50% overall. This line of sight to future development on our acreage and alignment with our sponsor, Diamondback only further distinguishes Viper’s business model versus our peers.

In closing, I want to highlight that our business development operation continues to consolidate the fragmented private minerals market in the Permian having completed 74 transactions for $127 million during the first half of the year. Our focus on accretive acquisitions combined with our best-in-class cost structure will enable continued distribution growth in the coming quarters with strong organic growth in the back half of 2019 to be driven by large, high interest pads completed by Diamondback in Spanish Trial and the addition of a Drop Down production in the fourth quarter.

To close, Viper continues to grow production reserves, acreage and net asset value on a per unit basis leading to high return on capital and a growing distribution. Operator, please open the line for questions.

[Operator]

[Operator Instructions] our first question comes from [indiscernible] of SunTrust. Your line is open.

[Unidentified Analyst]

Congrats on the dually accretive Drop Down.

[Travis Stice, CEO]

Thank you, Wells [ph].

[Unidentified Analyst]

My first question is, on cash taxes. Does the Drop Down pushed out forward maybe early 2021 and have you guys thought about extending the NOL agreement with Diamondback and if so, whether any consideration will be given?

[Travis Stice, CEO]

Wells [ph] we’re long leg from that NOL agreement running out. I don’t think the drop down impacts it much. There’s a significant amount of factor that go into that agreement and NOLs are calculated nearly based on production, oil prices, amount of acquisitions we do. There’s a significant amount of items that go into that, so I don’t think that’s an issue we need to think about today. I think we have a lot of running room left to go. I think as you think about Diamondback and Viper have worked symbiotically over the past four, five years. We expect that relationship to continue and to do the right thing for both shareholders.

[Unidentified Analyst]

Okay, perfect. No that makes sense. And then, we’ve seen – I guess a pretty mild slow down especially in the core areas on the rig count in the Permian. Can you talk to the mineral market now? Has it seen any softening from that slowdown or is it still pretty hot in the areas you guys are active?

[Travis Stice, CEO]

Yes, I’ve seen prices have softened a little bit. Mineral prices are pretty sticky relative to oil price or activity levels. Mineral doesn’t have to sell the minerals. So there’s not a forced sale there, so they can be pretty sticky with the price expectations. For us, we just have to stay disciplined. We’ve got a lot of competition per cup over the last four, five years and I think we have a very defined strategy and that separates us from some of these peers that either private or now becoming public.

[Unidentified Analyst]

Okay, perfect and then just one last one and this one seems extremely cut and dry. But I just want to clarify because we keep getting question. The roll up of this [indiscernible] fund that has zero effect on the JV and zero effect on the mineral acres etc that’s a correct interpretation, isn’t it?

[Travis Stice, CEO]

Yes, that’s correct.

[Unidentified Analyst]

Okay, perfect. Thanks, that’s all I had.

[Operator]

Our next question comes from Tim Howard of Stifel. Your line is open.

[Tim Howard, Stifel]

Could you speak to the financing of the Drop Down, the mix of debt and equity and maybe to the long-term leverage target Viper rate as you kind of increase your scale?

[Travis Stice, CEO]

Tim, from a long-term perspective whether it’s Diamondback, Viper, Rattler were consolidated we’re never going to go above two times debt to EBITDA whether that’s on a consolidated basis or each at of the subs. Now I think what this Drop Down, what’s unique about it is, is the amount of cash flow that we add to our next 12 months and 20/20 projections at Viper and now Viper is in a position to probably put some permanent financing, maybe a turn a leverage of permanent financing given the size and scale that we’ve achieved at the business. Now it’s very important that the parent borrowing costs have come down, Diamondback we feel is an investment grade company and on its way and that will naturally bring down the bar in cost of the subs. So as we thought about the debt and equity split. I think the Diamondback Board really likes owning a lot of Viper and this brings Diamondback’s ownership and Viper up to 60% and it also gives some cash consideration to Diamondback without needing to fund this deal with equity.

[Tim Howard, Stifel]

That’s helpful. Thanks. And then pivoting to the organic growth profile and in kind of 2020 beyond. How are you guys thinking about that?

[Travis Stice, CEO]

Well I think what’s great here Tim, is that doing this deal which is a massive deal for Viper increases the Diamondback operated position by 80% and it’s all in areas where Diamondback is operating, so I think because if you think about the long-term growth rate of Viper. The two business Diamondback and Viper should grow almost in concert. Now Viper will have the benefit of doing some acquisitions on third party acreage which should drive that growth rate up a little bit over the long-term as well.

[Tim Howard, Stifel]

Okay, got it. And then as it relates to third party M&A, is it more on an opportunistic basis or do you have a target every quarter or a year?

[Travis Stice, CEO]

Yes, I don’t like putting out targets. I mean we certainly have goals to continue to consolidate the private minerals market. We’ve set our machine up at Viper on a very unique way and that we can, we have a ground game. We can close 40 acquisitions in a quarter even if they’re small check sizes. So I think we’re set up to do a $700 million drop down but today we’re closing $200,000 and $300,000 deals with that add up and make a big difference especially under Diamondback operated acreage.

[Tim Howard, Stifel]

Got it. Thanks and congrats on the deal.

[Operator]

Our next question comes from Gail Nicholson of Stephens. Your line is open.

[Gail Nicholson, Stephens]

With the rollercoaster oil prices that we’ve experienced over the last 12 months. I just wanted to get some incremental color on your thoughts, on hedges and how you guys would perceive maybe in 2020 [indiscernible] to protect that downside of oil in order to make sure the cash distribution continues to be healthy as you move through time.

[Travis Stice, CEO]

Gail, there’s a lot of discussions internally on hedging. Right now we’re an un-hedged vehicle I don’t think – I think it’s up to the board to decide what we’re going to from a hedging philosophy because it would be a big shipment strategy. If we were to do anything it would be some downside protection giving leaving all upside for our investors.

[Gail Nicholson, Stephens]

Great. Thank you.

[Operator]

Your next question comes from Tim Rezvan of Oppenheimer. Your line is open.

[Q –Tim Rezvan]

First question, does this drop now sort of wipe all of the legacy Diamondback and Energen Minerals are they’ve all now have been moved down or is it still kind of potential queue?

[Travis Stice, CEO]

Yes for all intents and purposes, Tim. This is it. There’s a some overrides that remain in the Southeast – Mexico staff but we have those out and I guess we continue to look for ways to create value on that acreage, but this essentially it.

[Tim Rezvan, Oppenheimer]

Okay. Thank you. And then the move – obviously the drop is impactful Diamondback now controls greater than 50% in Viper royalties, was that sort of just kind of happy coincidence or is there an idea that you want to control a great part to have more visibility on growth?

[Travis Stice, CEO]

Yes, I think that’s been an ongoing part of our strategy as we’ve executed acquiring these minerals case just talked about the machine we have in place and we still like to differentially focus on acquiring minerals under down or back operated properties. I think if you look at the other mineral companies out there. This remains a clear differentiator the fact of relationship that Viper has with its sponsor Diamondback and that ability to operate at the Diamondback level and forecast future cash flows is truly unique in this Viper vehicle.

[Kaes Van’t Hof, President]

Yes, Tim – we’d love to own every mineral under Diamondback acreage unfortunately not all of them are all for sale. So we’re going to keep looking to acquire minerals under Diamondback but we also have a machine now where we’re buying third party minerals with clear visibility at good prices.

[Tim Rezvan, Oppenheimer]

Okay, that’s helpful and then just one last one, if I can. You nudged up sort of the midpoint of 2019 production guidance, is that because of activity you’re seeing in the field now and well productivity or is that because of the acquisition and then can you give kind of any ballpark on the anticipated closing date?

[Travis Stice, CEO]

Yes, Tim I think it’s fair to assume that the deal closes right at the beginning of the quarter. Certainly we had to raise production guidance for Q4 when that drop down closers and add to the production of Viper in the fourth quarter. We’re going to see a pretty significant jump excluding a drop down from Q2 to Q3 and then some organic growth on top of that into Q4 with the drop down adding significant amount of growth over 4,000 barrels a down top of that.

[Tim Rezvan, Oppenheimer]

Okay, thanks that’s all I had.

[Operator]

The next question comes from [indiscernible] Scotia Howard and Weil. Your line is open.

[Unidentified Analyst]

Congrats on getting the deal announced. We appreciate the incremental data point on Slide 8 of the investor deck particularly the anticipated gross completions in 2020 and 2021. Given that you’re contemplating the net revenue interest going up in 2021, does that imply that kind of incremental wells that will be completed over the 2020 level will primarily be in kind of Spanish Trial north and the Midland area that you’ve identified on that map.

[Travis Stice, CEO]

Neil [ph], there’s some details beyond that. For instance you see that in 2019, we only have 30 to 35 wells completed in the rest of the year but at the beginning of the year. We completed two almost 25% NRI, 10,000 foot wells in Delaware so we have pockets of acreage that is very, very concentrated and has in significant NRI and you’ll see that, we talk about that on the one of the later page on Page 14 of our deck some very high interest wells that are going to be developed in 2020, naturally given consolidated capital allocation we’re going to keep pushing to do the higher interest pads first, but there will be some interest stuff in 2019 and 2020 and then significant amount into 2021.

[Unidentified Analyst]

Good deal [ph], I appreciate the color there. And then wondered if we could circle back on the Eagle Ford it’s been a while since we’ve gotten a material update there obviously it’s very small and kind of the grand scheme of things for the overall Viper picture. But just kind of curious I think you guys have had that acreage for about 18 months now just kind of curios how you view that deal now looking back on it and if you see any similar opportunities in the Eagle Ford or potentially in the Bakken or other oily kind of lower 48 basins that are kind of peaking your interest right now.

[Travis Stice, CEO]

I mean we timed that deal very well. It’s performed at and above our expectations. I think prices performed above our expectations, volume has been at our expectations and about 1,000 barrels a day pretty consistently. There’s been some pretty positive data points from the major operators Conoco, Deven [ph] and a little bit EOG [ph] and then picking up some activity in the back half of the year. But for us that’s probably going to move 1,000 barrels a day up 1,000 or 1,200 barrels a day so won’t make a huge impact on Viper overall. Now talking to the Eagle Ford or the Bakken or other plays that are pretty unique deal and a one off deal. I think all of our G&A today is dedicated to the Permian Basin and if an extraordinary opportunity comes up outside the basin and we’ll think about it, but really the acquisition machine has become so fluid here in the Permian that we haven’t had a reason to leave.

[Unidentified Analyst]

All right guys, makes sense. I appreciate the time.

[Operator]

Your next question comes from Jason Wangler of Imperial Capital. Your line is open.

[Q –Jason Wangler]

Was just curious and you talked a little bit about it already. But do you expect – you obviously had the visibility of Diamondback, but as you look at the second half of the year. Do you expect the slowdown in completion in drilling in the Permian to kind of impact your numbers and does that kind of baked into the guidance that you’ve put out?

[Travis Stice, CEO]

Yes our guidance has everything, we can see baked into it. If you look at our – we released some new numbers this quarter which is essentially our net debts and net wells in progress and that number continues to grow for us. I think Diamondback is going to pack the nail for Viper in the back half of the year in a lot way or any potential slowdown you might see from another operator. As you think about how Viper buys deals under other operators, we buy based on lease requirements. So I don’t think operators given up leases at this time, Vipers four production is protected by what the lease requires that operator to drill – pay us an extension or we can potentially lease that acreage to Diamondback, if we wanted to.

[Q –Jason Wangler]

Okay, that’s helpful. And just curious, I mean obviously gas prices have been toast [ph] in the Permian. Is there anything much to do to mitigate that on your end or is it just simply that it’s just going to have to be something the headwind until more pipes comes in and hopefully get the better price.

[Kaes Van’t Hof, President]

Yes. I think this is going to be a headwind for the Permian for the next three or four years. There’s going to be pockets of tightness certainly the Henry Hub price hasn’t helped but the different on top of it, is hurting now. Viper posted a negative number for the quarter. There’s a little bit of noise in that number and that Viper takes all the realized price, we don’t take out gathering processing and transportation as a separate cost item so that would have decrease our negative number a bit. But as an un-hedged vehicle this is what we’re living with, right now.

[Q –Jason Wangler]

I appreciate the color. Thank you.

[Operator]

Your next question comes from William Samson of [indiscernible].

[Unidentified Analyst]

So Travis, you gave some help for visibility on production expectations on the drop down overall and Slide 8 suggest the ramp of activity on legacy Energy and Spanish trump north through 2021. I recognized we’re front running the Diamondback earnings here’s and plans are maybe in influx. But I just want to get us a bit of sense on Diamondback’s activity plan on 2020. Correct me if I’m wrong, [indiscernible] latest comment of in that thing would add about up to one to two rigs in 2020. Has anything changed your mind given the global demand concerns and investors prior to free cash flow over growth?

[Travis Stice, CEO]

Yes, William we’ve got a week before Diamondback releases its earnings and we’ll be able to talk about all that in detail at that time.

[Unidentified Analyst]

All right, let me try something different. How do you think your third party activities? You think third party activities snapped back in early 2020 following year end budget exhaustion. I mean based on recount data, we pulled some of your peers continue drop rates below expected levels and land and rig contractors pay some bleak outlook so, obviously your rig count is about six months ahead of production, just curious how you think some of your peers operate in 2020?

[Travis Stice, CEO]

Well I think Kaes laid out a pretty succinct response to that because we’re not forecasting Viper’s volumes based on their rig count. What we’re looking at is the lease requirements and we know that with high degree of confidence that these third party operators and [indiscernible] let their leases expire and then the unusual pace that they do to that, actually is a win for Viper because we can either release it or release it to Diamondback or in the other option. So I don’t think any of those scenarios William are going to impact the way that we forecast the future for Viper.

[Unidentified Analyst]

Okay and maybe one more for me. Just on oil price realization came at the high end of guidance range. You reiterated the 88% to 90% range for the full year, I recognized the Spanish Trail sale agreements improve again in early 2020, but where are the puts and takes and kind of high end and low end of that range for the remainder of the year.

[Kaes Van’t Hof, President]

Yes, I think the more Spanish Trail production there is, the lower we’ll be on that range so Spanish Trail is going to pick up in Q3 and Q4 with these large pads coming on. So we’ll probably be closer to midpoint of that range for the rest of the year. then as you think about 2020, Spanish Trail deal significant improves along with a lot of the other Diamondback operated deals which Viper participates in and so you know we expect to be at 100% of WTI or greater in 2020.

[Unidentified Analyst]

All right, helpful color. Thank you.

[Operator]

I’m showing no further questions at this time. I would now like to turn our conference back to Mr. Travis Stice, CEO.

[Travis Stice, CEO]

Thanks again to everyone participating in today’s call. If you have any questions please contact us using the contact information provided.

[Operator]

Ladies and gentlemen. This concludes today’s conference.