Viper Energy Partners LP

NASDAQ:VNOM

Earnings Call Analysis

Production Growth and Dividend Increase at Viper Energy

In the second quarter of 2024, Viper Energy reported a 4% increase in oil production and a 9% increase in cash available for distribution. The company raised its full-year production guidance and announced a 1.5% growth target for Q3. Additionally, Viper's Board approved an 11% increase in the annual base dividend. The company has maintained strong cash margins and an 80% free cash flow conversion, ensuring the sustainability of the dividend. Converting to a Delaware Corporation has also expanded Viper’s investor base and improved trading liquidity, positioning the firm strategically within the energy sector.

Introduction and Performance Overview

During Viper Energy's second quarter of 2024, the company saw a significant boost in both operational and financial performance. Oil production grew approximately 4% quarter-over-quarter, while cash available for distribution increased by nearly 9%. This robust performance led to an upward revision of the production guidance for the full year.

Strategic Growth and Guidance

Due to the positive production results in the first half of the year, Viper Energy has updated its full-year production guidance for 2024. Additionally, they provided guidance for the third quarter, projecting a 1.5% growth relative to the second quarter, even after divesting non-Permian assets which reduced quarterly production by about 150 barrels of oil per day【7:2†source】.

Dividend Increase

Viper's Board of Directors approved an 11% increase in the annual base dividend, reflecting their confidence in the company's ability to maintain and grow this dividend. This increase is particularly noteworthy given that oil production per share has grown by 14% over the past year, while maintaining cash margins and an impressive free cash flow conversion rate of around 80%.

Financial Stability and Market Position

The company boasts a strong balance sheet and a durable cash flow profile. The increased dividend represents roughly 50% of the expected free cash flow at $50 WTI and is protected even below $30 WTI. Viper's conversion to a Delaware Corporation and subsequent inclusion in several notable indices, such as the Russell 1000, have expanded its investor base and enhanced trading liquidity.

Operational Efficiency and Future Activity

Despite a drop in the rig count, Viper has maintained a high level of production due to efficiency gains and strong activity levels on its acreage. The company highlighted its confidence in continued production growth into the next year, driven by an increase in efficiency and a high number of work-in-progress and line-of-sight wells【7:2†source】【7:4†source】.

Capital Allocation and Strategic Focus

Viper continues to balance cash distributions with growth investments. The feedback from investors and the Board supports a strategy of prioritizing base and variable dividends. Share buybacks are considered on an opportunistic basis, particularly during times of industry stress, but the preference remains for a high distribution model.

Market Landscape and Competitive Position

Viper Energy has positioned itself as a key player in the Permian Basin, focusing on consolidating opportunities and monetizing non-core assets for quick gains. The company is poised to be the 'buyer of choice' for large packages with substantial visibility and upside potential.

Looking Forward

As Viper Energy moves forward, the emphasis will be on maintaining its robust dividend policy, leveraging operational efficiencies, and capitalizing on strategic acquisition opportunities. The company is well-positioned to drive sustainable growth while delivering value to shareholders.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Viper Energy Second Quarter 2024 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, executive]

Thank you, Jill. Good morning, and welcome to Viper Energy's Second Quarter 2024 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 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, executive]

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's Second Quarter 2024 Conference Call. The second quarter was a strong quarter for Viper with oil production growing roughly 4% quarter-over-quarter and our cash available for distribution increasing by almost 9% over the same period.

As a result of the production outperformance we have seen during the first half of the year, as well as an increase in expectations for the remainder of 2024, we have increased our production guidance for the full year 2024. In addition to updating our full year guidance range, we've also provided guidance for Q3 that implies 1.5% growth relative to Q2 despite losing roughly 150 barrels of oil per day of quarterly production from the non-Permian assets we divested during the second quarter.

Overall, we continue to see strong activity levels across our acreage position and benefit from Diamondback's continued large-scale development of Viper's high-concentration royalty acreage.

In addition to the strong operational and financial results announced yesterday, we also announced that Viper's Board of Directors has approved an 11% increase in our annual base dividend, which highlights the Board's belief in a sustainable and growing base dividend, can be maintained through the cycle. This belief and commitment to our shareholders is supported by Viper's strong balance sheet and durable cash flow profile. Relative to a year ago, when we last increased our base dividend, Viper has grown oil production per share by 14%, while maintaining our cash margins and free cash flow conversion at around 80%.

Importantly, at current production levels, the annual fixed amount of the increased base dividend represents roughly 50% of the expected free cash flow at $50 WTI and is fully protected down to below $30 WTI. Bigger picture, the second quarter was also an important quarter strategically for Viper. Following our conversion to a Delaware Corporation late last year, we were added to several notable indices during the second quarter, including the Russell 1000.

In addition to the increased governance rights that this conversion provided for our shareholders, it has so far also delivered on our expectations of providing an expanded investor base and improved trading liquidity. Fundamentally, we believe this conversion is just one step in the process of fully highlighting the advantaged nature of mineral ownership and the unique value proposition that Viper presents within space as well as in the energy complex more broadly.

Operator, please open the line for questions.

[Operator]

[Operator Instructions] The first question comes from Neal Dingmann with Truist.

[Neal Dingmann, analyst]

Fantastic results. Travis, my first question is on your 2024 guided production bump. Specifically, you all seem be expecting some really notable upside, especially when you capture that asset -- some of the asset sales, so I'm just wondering, are you assuming much [ deal ] kind of on a go forward or with this forecast, are you assuming much change in rig count? Or we can maybe assume the majority of this upside is coming from the operational efficiencies like we're seeing over thing?

[Kaes Van't Hof, executive]

Yes. Good question, Neal. I think high level, as you think about when we start the year, we don't have as much visibility on nonpaying operated properties and as the year goes on, that visibility increases. I think part of it is the efficiency piece. I think we always kind of expected a pretty big ramp in the back half of the year with some significant [ paying wells or paying pads ] coming on and that gives us a lot of confidence in the third quarter. And then we're starting to see more near-term activity, visibility in the fourth quarter, showing that we're going to keep growing this business organically in the second half of the year versus the first half. Austen, do you want to add anything to add?

[Austen Gilfillian, executive]

Yes, on the divestiture, as a reminder, that was doing about 450 barrels oil per day, and that divestiture closed May 1. So we've got one month of contribution in the second quarter, but have updated the full year guidance to reflect the loss of that production contribution. And to Kaes' point, we only guide to what we can see. So we have pretty good visibility through the back half of the year on the non-op side. On the Diamondback operated side, halfway through the year, we've only had about 40% to 45% of the net Diamondback locations turned to production. So we'll see a pretty significant ramp in activity and production there as we kind of progress through the next 2 quarters.

[Travis Stice, executive]

Neal, you -- since you listened to the Diamondback call, you heard the commentary around improved efficiencies and -- that's obviously a direct read-through for operators that are developing Viper's minerals. But also your Diamondback talk about these additional zones that we didn't formally think were Tier 1 zones at the Diamondback level, but now we're confident in the Upper Spraberry and the Wolfcamp D that those zones are going to start contributing as well, too.

All of those are positive read-throughs for Viper. And again, and I emphasized it in my prepared remarks, that with Viper having below a $30 WTI breakeven price, that's a pretty stunning statistic.

[Neal Dingmann, analyst]

Great addition that Travis. And then my second question is just on capital allocation. Specifically, do you view VNOM's payout maybe for Kaes'options as opportunistic as paying? Or given the mineral structure, are you more inclined to stick with the base of variable dividends?

[Kaes Van't Hof, executive]

Yes. I think the feedback from investors and our Board has been to lean more towards the cash distribution model, but also continuing to grow that base dividend. I think we moved to this base plus variable model 2 years ago now, and it's been a positive development. I think buybacks aren't out of the question at Viper, but there are probably 1/3 behind base dividend, variable dividend and then buybacks kind of the opposite at Diamondback. But there will be times of stress in this very cyclical industry where buybacks make a ton of sense, like when we started buying back shares at the end of 2020 and into 2021. But right now, we're very comfortable with the high distribution model.

[Operator]

Next question comes from Betty Jiang with Barclays.

[Wei Jiang, analyst]

Actually, I have a follow-up. I would love to get more color on the visibility on the activity trends that you're seeing. We did note that the rig count on the mineral portfolio is down quarter-over-quarter, but the well backlog is still flattish. So clearly, we're hearing from the and the backhaul that there's an uptick in efficiency gains, but are you seeing more activity conversion from less equipment basically not just from the Diamondback operated assets, but also on non-op. Maybe asked another way, like can you maintain this level of activity at a portfolio level even at a lower rig count?

[Austen Gilfillian, executive]

Yes. That's a good question, Betty. I mean we obviously track the rig count, but much more important for us is the work in progress and line-of-sight wells. And then when you look at what percentage of those are converted and then also kind of the cycle times to be converted. So the rig count will fluctuate day by day, week by week, but we haven't really seen any change in the conversion rates at the cycle times. So with those work in progress and line-of-sight wells kind of staying at all-time highs, we still feel really confident that that's going to lead to some production growth in the back half of the year and into the beginning of part of next year.

[Kaes Van't Hof, executive]

Yes. I think the other thing to think about, Betty, is also net rigs, right? I mean we really look at -- you could have a lot of grocery exposure at 0.5% interest across 100 wells. But if you think about the exposure we have to the Diamondback development plan, that's where your net rigs and your net work in progress wells that we have a differential line of sight to really give us an advantage.

[Wei Jiang, analyst]

No, that makes a lot of sense. And then just a follow-up on the Diamondback portion of the percentage of total activity, 2Q is a bit light on the Diamondback side. So going forward, the backlog Diamondback accounts for roughly 50% of the backlog. So should that -- should we expect that to revert higher back to that 50% level?

[Austen Gilfillian, executive]

Yes, that's right. I kind of mentioned it on the previous question, but when we look at the Diamondback net completions expected for the year, only about 40% to 45% of those were in the first half and the remainder will be in the second half. And really, you kind of get a little bit of that lumpiness with the large pad sizes. So I mean, right now, we have a 24-well Diamondback pad with 9% to 10% Viper NRI being turned to production. So it's not always ratable, but we do see the big increase coming in the back half of the year, and it will kind of revert being more Diamondback growth driven here now versus the first half having a lot of upside from the third-party piece.

[Operator]

Next question comes from Paul Diamond with Citi.

[Paul Diamond, analyst]

Just a quick one for you is kind of think about portfolio optimization in coming quarters. I guess, where do you all see the kind of the right mix going forward at current and kind of looking into the next year as far as the breakdown between opportunities across, whether it's from within FANG or elsewhere, private in the third-party market.

[Kaes Van't Hof, executive]

Yes. I mean I think we're trying to position ourselves to be the consolidator of choice in the Permian. I think you saw how we treated the noncore or non-Permian assets associated with the GRP deal. We kind of monetize those very quickly for a quick gain. But really, I think, generally, the significant opportunities under Diamondback that would move the needle for Viper production are fewer and further between.

Obviously, the potential drop-down from the Endeavor merger is the biggest and most visible. But on a Diamondback stand-alone basis, there's not a lot of Spanish Trail sitting out there. But that's why we've kind of moved to this portfolio effect of looking at really good rock that we covered at the Diamondback level or the Viper level with deals like GRP and that's a deal that's -- it was a $1 billion deal that's tough to get done in the mineral space today. So I think we're positioning ourselves to be the buyer of choice for those large packages with a lot of visibility, a lot of upside in the basin that we know the best.

[Paul Diamond, analyst]

Understood. Makes perfect sense. And just a quick follow-up, talking about visibility into work in progress wells and cycle time evolution. How do you all see the cycle time have obviously been trending positively. I guess how linear should we expect that to be in coming quarters and years in your view?

[Austen Gilfillian, executive]

We don't really model an improvement from here. So we're constantly watching operators kind of by county or even more precise geographic region than that and then also looking at pad size as well to kind of think about what those permits will look like in terms of being converted to production and driving production growth, so I wouldn't say that we've baked in an improvement in cycle times into our modeling. We've kind of kept the historical average. So I would say as long as we have a steady state of work in progress or line-of-sight wells, and cycle time has improved, that might just be a little bit of upside to the guidance as we currently have a model.

[Operator]

The next question comes from Leo Mariani with ROTH.

[Leo Mariani, analyst]

I just wanted to follow up on some of your comments here just around M&A. You talked about, obviously, the Endeavor drop-down being a big focus. Just wanted to kind of get a sense. I know the deal hasn't closed yet, but -- have you all been able to kind of do some prep work ahead of time to maybe try to get that deal to fruition a little sooner. I know there's kind of a lot of land work that needs to kind of get done in the background? Or do you really have to kind of wait for the deal to close to get on that? And then I guess, just -- is there any kind of high-level expectation on when that might happen? Do you guys anticipate that, that big deal could happen kind of by middle of next year.

[Kaes Van't Hof, executive]

Yes, Leo. This has been a pretty restrictive process with the FTC second request at Diamondback. So we haven't been able to do much if anything at all. We look forward to getting through that very quickly here and then hitting the ground running. I think history is any guide. We are -- we don't move very slow at Viper or Diamondback. And so we'll get to work on it right away. And I think nothing has changed from our perspective on the sizing and potential opportunity set that we put in the merger deck at the Diamondback level.

[Leo Mariani, analyst]

Okay. No, that's helpful. And is it fair to say just based on your kind of prepared comments that you walked through on some of the M&A stuff that the smaller deals, just kind of the little stuff has kind of been a little more competitive and it's really these really big deals that you might see out there that are third party and then in kind of the drop-down here from Endeavor, that's the type of things we should expect VNOM to focus on.

[Kaes Van't Hof, executive]

Yes. I think certainly, from an external perspective, that's what we're focused on. We still try to get the little deals here and there, but I think you'd be shocked to see how many kind of $20 million to $50 million mineral funds there are that you never see on the outside. So those competitors are very aggressive on smaller deals. They probably take a little more risk on undeveloped acreage and timing, and we kind of see our spot in the food chain as being the aggregator of those aggregators and being able to come to an opportunity with real amount of cash, real amount of market access, real amount of liquidity. And so that's why we've been really trying to improve our liquidity and trading volume position over the last 12 months, and it's paid dividends for our unitholders.

[Operator]

This concludes the question-and-answer session. I would now like to turn it back to Travis Stice, CEO, for closing remarks.

[Travis Stice, executive]

Thank you. This call this morning is concluded, and thank you for attending. If you've got any questions, please reach out. Thank you again, and have a great day.

[Operator]

This does conclude the program. You may now disconnect.