Viper Energy Partners LP

NASDAQ:VNOM

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Viper Energy Partners Third Quarter 2018 Earnings Conference Call. At this time all participants are in a 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 call is being recorded.

I would now like to introduce your host for today’s conference call Adam Lawlis, Director, Investor Relations. You may begin sir.

[Adam Lawlis, Head of Investor Relations]

Thank you, Chris. Good morning, and welcome to Viper Energy Partners Third Quarter 2018 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; Tracy Dick, CFO; 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, Chief Executive Officer]

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners Third Quarter 2018 Conference Call.

2018 has been an exceptional year so far for Viper and the third quarter was no exception. We acquired over 4,000 net loyalty acres through the first three quarters of the year giving us over 1 billion of closed acquisitions since our IPO just four years ago. As a direct results of these accretive acquisitions as well as continued organic growth on our legacy assets, Viper once again delivered significant quarter-over-quarter production growth. We completed our first dropdown transaction from Diamondback during the quarter and looking ahead to 2019 we are excited about the opportunity for further dropdowns given the sizable mineral inventory currently held by Diamondback.

Viper is unmatched in terms of size, scale and expertise when it comes to the minerals market in the Permian Basin. And we believe this will allow us to continue to execute on our differentiated acquisition strategy. We continue to maintain over 90% margins through as the pricing environment in the Permian Basin improves, our production growth will lead directly to distribution growth. Given the active visible development on our existing acreage, we are initiating average production guidance for the fourth quarter of 2018 and first quarter of 2019, of 18,500 to 20,000 BOEs per day as well as raising full year 2018 production guidance to 16,750 to 17,250 BOEs a day. Our full year 2018 production guidance now implies 54% year-over-year production growth.

I’ll now turn the call over to Kaes.

[Kaes Van't Hof, President]

Thank you, Travis. Turning to Slide five, we saw year-over-year growth on several key financial metrics as well as give an update on our rolling six months and annual production guidance. Importantly, we saw a range of our annualize distribution using our rolling six month production guidance in a range of realized oil prices. Our realized oil price for the third quarter was $54.51 per barrel, roughly in line with the average Midlands spot price for the quarter which we expect to improve in the fourth quarter given the current pricing environment.

Flipping ahead to Slide seven, we illustrate Viper’s position as an industry leader in both return on and return of capital. Since going public Viper has distributed $5.23 in aggregate to unit holders, our distribution has now tripled in the last nine quarters. During the third quarter, we maintained an average return on average capital employed well in access of our estimated cost of capital and delivered the second highest distribution in our company history.

On Slide eight, we highlight our focus on per unit returns. In the third quarter we were able to grow production per million units by 3% despite our July equity offering at 10 million units. Speaking to the immediate embedded accretion of our acquisitions.

Slide nine is important in that it illustrates the unique value proposition that Viper now presents to a much larger investor base. Viper is expected to return 14% of its current market cap to unit holders simply by holding our third quarter 2018 distribution flat and the assuming consensus 2019 estimates while not spending any capital.

Slide 10 through 12 highlight the success of our acquisition machine. As shown in slide 10, since our IPO in late 2014 Viper has now closed over $1 billion in acquisitions across 273 transactions. The opportunity set for acquisitions in the Permian Basin remains extremely robust and we believe Viper is in a unique position to continue to accumulate Tier 1 acreage through immediately accretive transactions given our unmatched size, scale and expertise.

Slide 11 summarizes the acquisitions that we have made through the first three quarters of 2018 and highlights our focus on visible active development leading to immediate production growth.

Next 12, details our slip to pad development through the Permian Basin has impacted mineral owners by providing better visibility to development and a higher ratio permits to completed wells. This timeline is the baseline for Viper’s rolling six months and annual guidance.

Moving to slide 14, we provide an update on the remaining dropdown inventory at Diamondback and Energen. Diamondback still owned almost 1,200 net royalty acres in the Southern Delaware Basin, 85% of which are operated by Diamondback. In the Midland Basin, Diamondback increased its mineral ownership in the third quarter to a large override acquisition across Ajax resources assets. Additionally, the pending Diamondback acquisition at Energen resources will provide an 250 of net royalty acres of minerals and more importantly a significant amount of production and associated cash flow that qualifies for a dropdown to Viper. With these comments are now complete, I’ll turn the call over to Tracy.

[Teresa Dick, Chief Financial Officer]

Thank you, Kaes. Viper’s third quarter 2018 consolidated net income was $50.8 million, our operating income for the quarter was $78.6 million up 4% from $75.4 million in the second quarter of 2018. Viper’s average realized price per BOE for the third quarter was $43.98 an increase of 21% year-over-year. During the quarter, our cash G&A cost was $0.52 per BOE while non cash G&A cost was $0.25 per BOE.

As shown on Slide 17, Viper ended the third quarter with a cash balance of $70 million and liquidity of $195 million in connection with our fall redetermination that closed in October Viper’s volume base increased to $555 million from $475 million prior. Performance for this increase in borrowing availability Viper has $259 million available under its revolving credit facility and $275 million in liquidity. Also on Slide 17, we provide our updated production guidance for the next six months as well as full year 2018 as Travis discussed earlier in the call as well as updated for the cost guidance for the year. With these comments complete, I’ll turn the call over back over to Travis.

[Travis Stice, Chief Executive Officer]

Thank you, Tracy. In closing I am extremely proud of our organization for all of the hard work and success we have achieved in our short period as a public company as represented by closing over $1 billion in acquisitions. We’re excited about the organic growth profile of our legacy assets as well as the continued execution of our acquisition strategy including further dropdowns from Diamondback. Going forward, we look to continue to be the industry leader in terms of return on and return of capital and look forward to continuing to grow our distributions, production and reserves on a per unit basis.

Operator, please open the line for questions.

[Operator]

Thank you [Operator Instructions] And our first question comes from Neal Dingmann with SunTrust. Your line is now open.

[Neal Dingmann, SunTrust Robinson Humphrey]

Good morning, guys. Travis, question for you or Kaes, just wondering have you seen more of the not just public but even private sort of royalty companies come out there now since you guys really were at the forefront couple of years ago. Does that make the M&A market any more difficult than you guys continuing to not cut acreage I just don’t know if you’re seeing more challenges in that area or just sort of the same as always?

[Travis Stice, Chief Executive Officer]

Neal, I think the challenges that are in M&A market really pertained to kind of the smaller side of deals where perhaps the competition is a little greater, the size of the deals that Viper is looking at, I think we really have the stage pretty much all to ourselves. It is a competitive environment out there, but the way that Diamondback I am sorry -- the way that Viper has continue to execute on our acquisition strategy, I think that gives us a pretty unique leverage when it comes to doing certainly large M&A deals and the pipeline is full and we’re excited about the other runway in front of us sort of continue to grow this vehicle. Kaes, you want follow up on that.

[Kaes Van't Hof, President]

I'd agree, I mean it’s a competitive market in the Permian, there is lot of players, but there always has been shifting from private metal owners to private equity, but like Travis said not many other mineral peers can write $50 million plus checks for deals we’re we’ve been successful on some larger trades.

[Neal Dingmann, SunTrust Robinson Humphrey]

And are you able to say at this point guys as far as dropdowns versus more just internal acquisitions which of those could be more -- I mean again I see that obviously that breakout on page 14, of the slides I am just wondering from a larger standpoint would we see more dropdowns then in the next year or so doing external deals or is it too difficult to tell that?

[Travis Stice, Chief Executive Officer]

Well that’s a pretty difficult way to forecast that but I will tell you the reason that we spent so much time in the deck outlining what the dropdowns pertains to lose because we know that those were out there and while that’s best going to be a 2019 event maybe even in the late half of late back half of 2019, I still think though that we’ve got kind of internal goal of process and a certain amount of deals on a quarterly basis that are sourced from external deals as well.

[Neal Dingmann, SunTrust Robinson Humphrey]

And lastly sorry just back to the 14, Kaes and you’re talking about that are there sort of plans or is there any time as far as you’ve a lot of different obviously potential dropdowns there, where it does as far as the order there does that make a big difference and how you sort of see the queue in the next year or so?

[Kaes Van't Hof, President]

No I mean we could really only speak for what Diamondback owns today post the Energen transaction we certainly take a very close look at those assets and when they came to be dropped down but really our plan is to drop down remaining [indiscernible] mineral assets and the assets that we’ve in the Midland Basin sitting at the Diamondback level today some time in 2019 kind of like how we did it this year over the summer.

[Operator]

Thank you. And our next question comes from Jeff Grampp with Northland Capital. Your line is now open.

[Jeff Grampp]

Just sticking on the topic of dropdowns here, was just kind of curious if we just take a step back and think about the longer term opportunities that there -- can you guys give any frame of reference on cadence of dropdowns should we expect it to be systematic over the next several years is it dependent on third-party opportunities at all or is it just purely an analysis of -- is it NAV yield, etc. accretive to Viper and will move forward down on that basis?

[Travis Stice, Chief Executive Officer]

I’ll take that in two steps, I think the from the third party acquisitions standpoint Viper is capable of funding those acquisitions itself and continues to do that if you look at what we’ve done this year excluding the one dropdown we’ve done 330 million of acquisitions at the Viper level with Viper funding in itself, regarding dropdowns we don’t want to be buying minerals at the Diamondback level it's just that with some of these acquisitions minerals happen to come with the acquisition or NRI greater than 75% comes with the acquisition and the natural home of those -- that cash flow stream is in the Viper entity, so really it’s a matter of development and visibility on a forward basis and dropping that acquisition down and accretive multiple like we did this summer with the first drop-down.

[Jeff Grampp]

Okay, that's really helpful, appreciate that. For my follow-up can you guys give us a sense of possible what percent of Viper’s Permian oil is not exposed to Midland pricing right now and might that change at all with the new capacity coming on in the back half of ’19 or should we generally think about Viper’s Permian oil being kind of exposed to Midland now and for the foreseeable future?

[Travis Stice, Chief Executive Officer]

I’d say on a Q4 forward basis out of Diamondback's production or that the production that Diamondback has that Viper receives payments on about two-thirds of that will be exposed to the NEH market or Brent market at a fixed differential. And then as we move towards 2019, when rail can epic are fully operational I would say the vast majority 75% plus or 80% plus of Viper’s Diamondback related production will receive at Gulf Coast price.

[Jeff Grampp]

Okay. Perfect. Very helpful.

[Travis Stice, Chief Executive Officer]

The other 40% of our production will still be exposed to the Midland market given the operators in the basin.

[Jeff Grampp]

Okay. Got it. Really helpful. Appreciate the time guys.

[Operator]

Thank you. And our next question comes from Tim Rezvan with Oppenheimer, your line is now open.

[Tim Rezvan, Oppenheimer]

Hi. Good morning folks. I had a question regarding the table on Slide four and I guess the map on the mineral assets. I just wanted to make sure I understood the grey part with on the pending Fang acquisitions. Are those just the Energen kind of Ajax minerals or is there anything else that have been brought at the Diamondback level. And I know that Kaes just mentioned that it's not the optimal kind of purchase procedure. So I’m just kind of curious what those the grey acreage represents in that chart?

[Travis Stice, Chief Executive Officer]

The grey acreage just represents the pending Energen acquisition and I know just move to yellow if the deal closes. So just shows where we have the ability to buy minerals that Diamondback operates.

[Tim Rezvan, Oppenheimer]

Okay. Okay. That’s always as estimate. So going forward given the Viper has been active at their level the plan would be all new leases to come through Viper directly?

[Travis Stice, Chief Executive Officer]

Yeah. Exciting part is that Diamondback has increased its acreage position by almost 200,000 acres and that gives the Viper team a new program for buying minerals and a big one of that.

[Tim Rezvan, Oppenheimer]

Yeah. That make sense. Okay. That’s all I had. Thank you.

[Unidentified Company Representative]

Thanks, Tim.

[Operator]

Thank you. And our next question comes from Jason Wangler with Imperial Capital. Your line is now open.

[Jason Wangler, Imperial Capital]

Hi. Good morning everybody. Wanted to ask on, obviously had a little bit of time now with the Eagle Ford assets that you guys picked up. Just kind of your thoughts on how those are going out of thing pretty well given where the production levels are overall, but if that’s kind of going as according to plan and maybe you’re seeing any other opportunity in that area?

[Kaes Van't Hof, President]

Jason, we’re really pleased with the entry into the Eagle Ford and we were opportunistic when we did that trade and while we would continue to be opportunistic if other trades look like that in Eagle Ford, the vast majority of our time energy and focus still remains out in the Permian Basin.

[Jason Wangler, Imperial Capital]

Okay. And then maybe Travis, as you think about there is obviously not much debt on the books, but obviously you still want to remain pretty active on the M&A market and obviously you spoke much of the dropdowns as well earlier on the call. I mean is there a someone or is there a level we should think about as far as where you want to be on that level, whether it’s a metric or something else in the business because obviously you have multiple levers you can pull in through the funding. So just curious how we should think about that capital structure?

[Travis Stice, Chief Executive Officer]

Sure. I think having discussions for good use of proceeds including that's not something that scares us, but I think it has to be a right sized deal and there has to be some strategy behind doing it.

[Kaes Van't Hof, President]

Yes I mean I think we think about leverage on a consolidated basis at both the Diamondback level and then at the individual's subs, so we don’t want to be above two times consolidated or at the sub level with Viper’s revolver growing to 555 million now from 150 million or so two years ago. That gives us a lot more flexibility on buying deals and when to approach the market about the deals we've done but we feel pretty comfortable leaving return on sale of leverage on Viper permanently at this time.

[Operator]

Thank you. [Operator Instructions] And our next question comes from Eli Kantor with IFS Securities.

[Eli Kantor, IFS Securities]

Following up on the line of acquisitions question can you talk about any advantage Viper has in bidding for new deals given Diamondback’s ability to provide surety of development?

[Travis Stice, Chief Executive Officer]

I’d say that remains a really unique part of the uniqueness for the Viper story is the fact that we go in and acquire something at a Viper level, we don’t walk right down the hall and there is a drill schedule meeting and immediately modify the drill schedule to take advantage of minerals that we’ve bought. I think that probably is unique and will remain unique in the Viper story of any of the royalty companies that are out there and then as we’ve a tremendous advantage in being able to do that. I also think from a competitors' perspective they're not looking to buy minerals under Diamondback or Diamondback’s acreage because if we own a section next to them we’re going to drill our stuff first and that kind of gives us a very unique market position in the mineral space.

[Eli Kantor, IFS Securities]

Makes sense. Given the extensive footprint in the Permian basin that you guys have, I am curious if you’re seeing any emerging opportunities in the basin or with regard to specific zones or counties where resource potential is continuous part of the upside?

[Kaes Van't Hof, President]

I mean I think I am most excited about the Ajax acquisition in that area and Northeast Martin -- sorry the Northeast Anders, and Northwest Martin County, three zones with 100% IRRs and we just spot a big override across deposition at the Diamondback level last quarter so that’s going to be a big growth driver for both Diamondback and Viper on a go forward basis.

[Operator]

Thank you. And our next question comes from Nitin Kumar with Wells Fargo. Your line is now open.

[Nitin Kumar, Wells Fargo]

Just one question there’s been a lot of chatter about takeaway constraints in the Permian, you’re diversified at the Viper level, number of operators you deal with as I am looking at your guidance it’s implying on 5% from here until early part of next year any early thoughts on the trajectory of growth at the Viper level for the rest of the year?

[Kaes Van't Hof, President]

Nitin you know, I’d say Q4 we feel really good about and we really only guide to what we can control and in that respect we’ve more visibility into Q4 from a third party perspective and from the Diamondback perspective and when we do into Q1, so in our rolling six months guide we plan to update it again in Q1 but if you look at the history of our own six months guide traditionally that number rolls forward and has some conservatism baked into it. But we’ll say we felt comfortable raising the full year guide to a midpoint of I think 17,000 barrels a day which implies pretty nice number for Q4.

[Nitin Kumar, Wells Fargo]

Got you. And just on the slide 12, the average looks like around eight months right now as you’re showing from permit files and the first production on the site. But you're still showing maybe like three to four well pads as guys move into kind of bigger scale project. Is there a bigger lag coming in yourselves you’ve been doing a little bit bigger pads as well. I’m just trying to see at the basin level again because of the footprint that you have?

[Kaes Van't Hof, President]

Yeah. I mean there could be a little more of the lag, but I think if you think about how Diamondback is going to drill 12 well pads, it’s really two six well pads next to each other. Sometimes we’ll bring in two rigs at once or even three rigs at once. So from a timing perspective overall, it’s like completing four well pads just two completion or three completion crews. So, at the Diamondback level we’re drilling mostly four well pads and some areas two four well pads next to each other which could be called an eight well pad.

[Nitin Kumar, Wells Fargo]

Got it. So, you think, I think the rig activity upfront if I’m understanding correct me, you don’t see the cycle time from permit file to first production increasing dramatically over the next 12 months?

[Kaes Van't Hof, President]

It’s increasing a little bit, but I think what gives us comfort is that we’re seeing 90% plus of our six months permits go from being filed to converted within a year.

[Nitin Kumar, Wells Fargo]

Okay. That’s helpful. Thank you so much.

[Travis Stice, Chief Executive Officer]

Thanks, Nitin.

[Operator]

Thank you. And this does concludes today’s question-and-answer session. I would now like to turn the call back to Travis Stice, CEO for any further remarks.

[Travis Stice, Chief Executive Officer]

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

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. And everyone have a great day.