Q3 2019 Earnings Call
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I would now like to turn the conference over to your host Adam Lawlis, Vice President Investor Relations. Please go ahead Sir.
Thank you Chris Good morning, and welcome to Viper Energy Partners third quarter 2019 conference call.
During our call today, we will reference an updated investor presentation, which can be found them bikers website.
Visiting Viper today are Travis I see okay stay at home President.
During this conference call. The participants may make certain forward looking statements relating to the Companys financial condition results of operations plans objectives future performance in businesses.
We caution you that actual results could differ materially from those that are indicating these forward looking statements due to a variety of factors.
Information concerning these factors can be found in the company's families with FCC.
In addition, we will make reference certain non-GAAP measures reconciliations of the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon, well now turn the color troughs.
Thank you Adam welcome everyone and thank you for listening to Viper Energy partners third quarter 2019 conference call.
During the third quarter Viper continued to expand its footprint in the most attractive areas of the Permian basin. The a multiple large strategic acquisitions after giving pro forma effect to the Santa Lane acquisition, we will have acquired over 9000 metal detectors to date in 2019.
Importantly, what the dropdown transaction from Diamondback closing on October 1st and the saying Elaina acquisition is expected to close tomorrow, Barbara will have materially increased our exposure to dominate back operations in both the Midland and Delaware basins to levels not seen since first going public in 2004.
Our team with our Spanish trail asset.
As a result of these recent acquisitions.
Fiber expects to have exposure to roughly 70% of diamond backs expected.
2020, gross completions with an average net revenue interest of over 5% versus exposure to only 53% Adama Bucks grossly completions.
With a little over 4% net revenue interest so for 2019.
On the operations for Viper experienced near record levels of gross activity across our acreage position during the third quarter as represented by hundred 71 gross wells.
In terms of two production with an average net royalty interest to 2.7%.
This strong activity along with Diamondback, completing a large pad in Spanish trail, resulting in Viper growing organic production, 9% quarter over quarter.
This is particularly noteworthy given the backdrop of over 20% decline in the Permian rig count this year.
This production pro forming for the deals announced or closed in the third quarter was over 27000 be always a day as previously announced due to the flush production acquired in these larger transactions.
When we make acquisitions, we make sure to set the effective dates for these transactions that deliver maximum cash flow to Viper, which reduces the purchase price for the cash flow between effective date and close date.
Activity levels on these four large acquisitions will stay high primarily driven by Diamondback.
But new flush production will not arrive until 2020.
Which is why the third quarter pro forma production number is higher than expectations over the next six months.
Looking ahead, we believe our assets will continue to deliver sustained long term production growth, but our visibility has decreased over the near term.
Due to rig count reductions in budget exhaustion.
Activity on Vipers asset base is expected to be driven primarily by dialing back operations over the next two quarters as activities across the Permian Basin has slowed and third party operators are either dropping rigs or delaying completions due to budget constraints.
There continues to be strong drilling activity across our acreage as represented by the 445 gross wells currently in the process of active development.
But given the lack of clarity on the completion cadence across the basin. We have decided to guide conservatively until we have more visibility to the timing of third party work in progress wells being turned into production.
Looking further out to 2020 and beyond.
After we'll continue to offer a differential value proposition within the minerals sector, given our relationship of Diamondback as our primary operator, who is not planning on slowing down in the current commodity price environment.
Diamondbacks continued focus on developing vipers acreage due to the enhanced consolidated returns underscores our confidence in Viper being able to generate substantial production and distribution growth for the long term.
Moreover.
We will continue to be acted in acquiring diamondback operated acreage headed the drill bit to further enhance the embedded high margin long term growth potential of our asset base that requires zero capex.
Operator, please open the line for questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and Benda number one key honor Touchtone telephone. If your question that's been answered or you wish to remove from the Q. Please press the pound key.
First question comes from Jeff Grampp from Northland Capital. Your line is now open.
Good morning, guys.
Well just was wondering first I'm for Travis or case, and you guys Kinda talk about lack of third party visibility.
I was wondering you know as we look at the guide for the next two quarters and I look at slide nine with the 8.6.
Well for can process can you tell us what of the third party that you guys assume come on and six month guide, our although still assume to come on or is there. Some I guess conservatism in the guide.
Yeah, Jeff I mean, weve pristine visibility on the diamondback side of that page, but on the non op. Ed piece you know what has traditionally been completed in three to six months on average as you know as everyone was humming along in the Permian and a you know the first three quarters of the year, we took that completion cadence as isnt.
Actually gold and that's certainly slipped here in the back half the year. So I'd say, we're hair cutting not by a third do a half from a timing perspective versus what we originally or you know used to guide to on on the third party piece.
Okay, Great really really helpful. For my follow up just kind of sticking on <unk> on that slide if we look at kind of that 18 net wells in in terms of kind of the near term inventory is that kind of a decent run rate or proxy to think about in terms of kind of annual completions for the Viper story, obviously, excluding future acquisitions, but just kind of based on.
You know the current activity levels in the basin is that a decent proxy or or would you guys think about that differently than than that maybe overly simplistic view.
View.
Yeah, I mean, I think what's changed though if you think about you think about next year Diamondback exposure at Viper is a little over 210 wells that a little over 5% you know that's 11 and a half net wells that's going to drive production.
In 2020, you know I'd say.
The third party piece is anyone's guess I you know I don't think the Permian scan a slow much more than it slowed in the back half this year, but but it seems that the frac holiday that we've seen in the past couple of years has gotten a little more significant this year you know I'm very confident that these work in progress wells, they're good wells I'm good location.
And they're going to be completed you know really the the biggest the biggest issue. We're facing is timing and we decided to be very conservative, particularly in Q4 on that timing you know I'm confident some frac spreads will pick up and operators will restart their budgets and 2020, ER and you'll see some completion activity.
But Q4.
I was just something we've seen frac schedule slip into the right versus the original expectations.
Yeah understood on that and I appreciate the time guys.
Good job.
Our next question comes from Gail Nicholson from Stephens. Your line is now open.
I'm good morning, everybody.
In regards to realized pricing for oil next year, we should see a nice uptick and well price realizations can you talk about the mechanisms that drive that improvement next year versus 19, and then also just kind of your outlook on NGL and gas price elevations of 2020.
Yes, thanks guilt, so the big movement.
You'll see from Q4 2019 to Q1 2020.
Is that Spanish trail is going to get about a 10 dollar benefit.
From a realize perspective from Q4 to Q1, so as you look back to 18 months ago in the Permian take away crisis of 2018.
We decided to sign some fixed differential deals at the done back level.
That you know essentially we're out of the money or take away capacity came on but we didn't we didnt sacrifice the long term. So as you think about Spanish trail.
Pricing calm 2020 and beyond January 1st that number goes to you know any h. minus about 250, plus some gathering so a significant bump versus versus the back half of 29 team.
Also the rest of Vipers production, whether it be on the graph pipeline or the epic pipeline should participate in the upside presented by those two pipelines coming online in a in early 2020 as well.
Great and then is there.
From a portfolio construct is there anything in the portfolio that might be at the back to your cabinet for you guys.
No. They tell you they tell you that never sell your minerals and we're you know we're very confident that we're buying minerals in the in tier one areas that will be developed you know all the basin is taking a little bit of a breath here in Q4, we feel confident that what we're buying under third parties is.
Under active development, well capitalized operators that are going to be around for a long time.
Great. Thanks, guys.
Thank you Gale.
Next question is from well funds and from Barclays. Your line is now open.
Good morning, I know, it's not your ammo to provide production guidance beyond six months, but given the near term noise associated with third party budget exhaustion lack of immediate activity over a newly acquired minerals than just the lumpiness in terms of quarterly enterprise, maybe can you help us understand how we should think about second half 2020 versus the before Q1 Q2 0 guidance.
Yeah, well I mean, you know we're going to come out with full year guidance in February of next year for for the whole business. You know I think you know even if you conservatively assume.
You know, one one and a half or to net wells on third party properties, you'll see this business continues to grow in 2020, you know I think.
Yeah with Diamondback support next year and the exposure to docking such a large piece of the production profile, probably two thirds parts of it but even if you assumed third party was flat or if you see assumed it declined a you know the parents support next year will you know will drive distribution growth and on top of that no one of my.
And more call that.
You know Q3.
2019 to the next six months you know, we increased our share count 17% this quarter by closing the dropdown and closing the Santa Lane acquisition. If you take the midpoint of our guidance for the next six months, even though it's weaker than original expectations oil at the midpoint is going to be up 27%.
Versus Q3, so you've got a business that from the oil production per million shares is up eight or 9% at the midpoint versus.
The Q3 number.
That's helpful color.
Which should drive distribution growth.
Okay.
And then maybe as a follow up I know its slide 11 of the deck shows about four and a half net wells or about 44% and whats implied for Fang exposure in 2020.
Looks like the till schedules is heavily weighted to Twoq you in Fourq you because you don't have a full picture there just curious I think in terms of.
Maybe that the thing till schedule, if it would be more kind of level loaded or if we just think about lumpiness associated with Spanish trail or something like that.
Yeah, you know, we consciously took sprint's managerial out of slide 11, you know there is a big pad Pat a which is just north of Spanish Trail Oh, that's going to come on in the second quarter next year, you know as we're going through the docking back budgeting process right. Now we are trying to move some of these.
Pass up as efficiently as we can but you know for instance, you know pad E and pad D.
Those are Santa Elena acquisition pads that we've added in the last three or four week. So I think there will be some lumpiness, but but you won't see the lumpiness that we used to have with Spanish trail being you know 60, 70% of the total production. Instead, you have a broader exposure to more wells at donlin back in the four or five per se.
That range and these you know these big big enter I pads are kind of the kicker on top.
Okay all right. Thank you.
Thank you will.
Next question is from well fed Patrick from Suntrust. Your line is now open.
Hey, good morning.
Well.
Can you talk a little bit about your appetite to by non saying acreage I mean, presumably it's going for a little bit cheaper than it than it used to in a drop in Reagan environment, but at the same time, maybe it's a little bit less less appetizing de all given the given the visibility you have.
Yeah, well I'd say, our appetite is decreased a little bit. It's we're certainly not out of the game on third party acreage I just think Mark Viper has the most unique market advantage in the mineral space due to the fact that you all the wells you see in this you know in this presentation there no permits filed so our competition.
And can't.
Really figure out where all of those wells are going to be completed and so that's kind of the core focus of the Viper team over the next three to six months is let's get ahead of that drill schedule. We have this asset, let's take advantage of it and and by minerals under down back now.
I will say mineral prices tend to be sticky regardless of commodity price and sentiment. So you know private mineral owners you know when they have a number in their minds. So you need to be cognizant of that number and that's why we need to be extra conservative from a timing assumptions on on third party acreage right, now, which which naturally reduces what we can pay.
Okay makes makes sense and then it seemed like Ngls jumps and gas didn't quite as much in the quarter. It looks like maybe that's processing kicking in is it is it fair for us to.
I assume that going going forward for you.
I think it to level set a little bit we had a pretty big jump in Q3 due to a true up in in shrinks and yields on non op acreage you know, we we don't see the final settlements statement until we start receiving checks from those particular plants. So a little bit of a true up in Q3, I think it will normalize as we go back into Q4.
For a that brings up another point in that.
With the basin flaring, and then not flaring and ethane being rejected and then it's being accepted.
I think we'll start guiding to oil production rather than oil percentage because that does move move things around.
But that doesn't make sense and then just one last one for me I mean, it seems like.
It seems like there is potential for kind of a catch up on these third party completions I mean like like you said at the top it's a frac holiday, it's not as though anyone's not going to complete. These ducs can can can you talk to I mean is there anything wrong with that interpretation of those eventually flowing through in the second quarter in second half of next.
Here It just seems.
It seems like a de Minimis chance that do things don't actually get completed and hit production sometime next year.
I think that's a very fair assessment, you know I think as as we have that data that visibility. We we'll certainly update our investors you know with that data a you know I think.
You know, we threw diamondback have access to the completion schedule throughout the basin. So that we don't.
Frac into each other and I'm back not watering out somebody else's production and vice versa, and what's happened is that the frac dates on that schedule have just moved to the right. They haven't disappeared they've just moved to the right on the on the Gantt chart.
Okay perfect. Thanks, so much.
Thank you all.
Next question is from that D. N from credit Suisse. Your line is now open.
Hi, Good morning, I'm, maybe just following up on not only is there any can we just some specific numbers are quantifying what that means in terms of the completion deferral like it since of drilling activity still very robust and then you're just deferring completions. So should we expect the.
That completion count how much should go down in the next two quarters and would have come back up to this slight net wells per quarter beyond the six month period.
Yeah, Buddy I'm not I'm not throwing out Q1 here I just I just based on what we're seeing as an operator, what we're seeing in the field, what we're seeing from Frac companies from drilling rigs from drilling rig operators coming to us and looking for work.
It's just it's just Q4 I mean, I I think budget exhaustion is very real this year I think operators are doing whatever it takes to stay within budget. This year versus years past and that's just resulting in a larger frac holiday I'm not going to say that no wells will be completed on not off properties. In Q4. We just took we just took what was it.
Original assumption and shop that by about a third do a half.
Got it but what would you say I'm sure a good run rate for 2020 net completions that will be benefiting Piper.
Next year.
On non op property.
Yeah I'm not.
Oh, you know I think anywhere from probably wanted a half to two and a half is probably a fair a fair assessment you know I think Q4 will probably be closer to one but come Q1 will be closer back to that one and a half the too I mean, a good quarter, two and a half net wells now you know diamondback.
[noise] alone will be a you know almost threex net wells a quarter to help Viper through 2020.
And that's pretty steady throughout the year.
It'll be a little bit of Lumpiness and you can see from some of those pads on the on the page we added but you know given that its exposure to over 200 wells you know those pads make up 10 or 15% of that total so you'll see more consistent.
Performance out of the dime back operated piece.
Got it.
So and then one follow up just on.
I'm trying to understand how much of the perform a production decline we're seeing a viper is a function of more wells that you were just capturing a lower percentage of the growth and how should we think <unk> marys.
Coming quarters.
Well I think I think I'll frame it a little bit differently, you know the deals that we bought and Travis put this in his opening remarks, we're always very cognizant of when flush production is coming on so we always try to make sure the effective date of a transaction.
Encompasses the flush production that should accrue to Viper and buy for shareholders now.
You saw a lot of flush production from those four large deals in Q4 and those deals are gonna decline into Q Im sorry in Q3, and those deals will decline into Q4, that's not to say, there's not going be activity next year, but for for instance on Santa Elena.
No we can't get back into that acreage until Q2 Q3 of next year and start completing those wells. So I think all overall and our eyes should be somewhat consistent throughout the year next year I'm I think we've gotten past the lows of average and arrive because with the dropdown. There's so much time back exposure at a higher higher and.
Hi.
Great. Thank you.
Thanks Betty.
Next question from TJ Schultz from RBC capital markets. Your line is now open.
Great. Thanks, just one from me you've indicated in the past to consider some hedges for downside protection are going to support some minimum levels of pay out just anymore thoughts on that thanks.
It's a you know that those conversations are still ongoing I think some sort of downside protection is is the right path for Viper or we just need to be.
Opportunistic when the market allows it you know we can't a you know we can't pay too much for these hedges I think it's more of a deferred premium put.
I will put spread type product that Ah that's being discussed at the at the board level.
Great. Thanks.
Thank you TJ.
Next question is from it appears haven't from Simmons Energy Your line is no.
Good morning, and thanks for taking my questions based on the recent dropdown acquisition and the soon to close Santa Elena transaction, how do you feel about your mineral inventory life quality of inventory exposure to various producers and then how do you think these acquisitions differentiate viper relative to other mineral companies.
[noise] you up here so you know.
I feel I feel great about inventory life. I mean this is the dropdown was a huge huge addition to inventory life you know Spanish trail.
No secret has been a very very core development area for us for a long time and inventory like there is not as significant as a you know areas like Vegas County, or Howard County, where we're going to be active for a long time, so I think from a from a confidence in production growth.
And inventory life perspective, the dropdown and transactions like Santa Elena you know out a lot of confidence to our long term growth plans and development plans you not I.
I think you know selfishly, we want to place to bet on ourselves in place to bet on buying back to continue to operate.
Given that I'm back to the low cost operator in the basin I don't think a you know gone back to planning on slowing down and that should naturally support Viper through a what is a somewhat of a tumultuous time here in the energy space.
And then how do you think it differentiates shoot the Piper relative to other mineral companies.
It's just that visibility peers, I mean, you know where we're dealing with.
Really tough visibility issues on on non op properties here in the fourth quarter.
I think I think that visibility will improve as things normalize, but you know we have a lot of confidence that a you know half of our work in progress walls and 66% of our inner I permits are going to come to fruition in the next 12 months.
Great and then my follow up cases, what is your long term leverage target for the balance sheet.
Oh under two times you know there that's a board mandate, we want to stand at two times at the at the parent level and that the two subsidiaries you know I think you're gonna see a lot of EBITDA growth just naturally from all the deals close Q3 to Q4, so I'd probably look at it on a few for run rate basis.
Great. Thanks, so much.
Thank you first.
Next question is from Jason Wangler from Imperial Capital. Your line is now open good morning case.
Just curious I mean, you're still talking a lot of drilling going on.
Obviously on your acreage but.
Do you see any lease expiration issues from some of the operators there that maybe an opportunity or anything like that happening either in the near term arise.
Stay pretty slow in the 2020 that maybe an opportunity for you.
Yeah, Jason I mean, that's definitely a very important point.
And our team is not you know spending a lot of time on lease expirations, particularly in 2020, particularly in the Delaware Basin, the Midland Basin in <unk> and a lot of cases.
That acreage is held by production until by vertical production, but in the Delaware Basin a lot of these new leases on new leases and I'm, you know I think for us to be on top of our.
Lease expirations next year and everything over the next 15 18 months is gonna be very important because as everyone knows if a lease expires it reverts back to the mineral owner, which is why being a mineral owners the highest former security in the in the oilfield and well either release that acreage or extend it for a little bit of a bonus.
But traditionally we try to.
Work with our last doors to to get wells drilled because we're in the business of production and cash flow. So we usually work with them to get more wells drilled sooner.
I appreciate it thank you.
Thank you Jason.
[noise] next question is from Phil So work fronts Cardio Bill Your line is now open.
Good morning, guys appreciate the time.
But I wonder if we could.
Circle back on the Santa Elena acquisition, it looks like that's primarily on kind of legacy Energen acreage and obviously you know on slide 11 pad de any are some pretty high in our I wells are you all see I'm kind of the legacy energen acreage footprint.
And as kind of the largest opportunity set going forward on the acquisition front for Viper in order to kind of bring in some some higher in our eye properties.
Yes, it's certainly newer fill and there's there's certainly more opportunity available you know I think you know I kind of see dime, because energen is as one company now so it's really what the pro forma drill schedule looks like but yeah and in that in that for me how area in Reeves County, you can see we don't have a lot of mineral interest yet and.
You know I don't think will be a big buyer in Glasscock county outside of what's on the drilling schedule you know what what was what was great about the Santa Elena deal is that you know we didn't have any wells planned on that acreage in 2020 are probably 2021, but now that we have such a high in IRI. You know we can drill some 15000 foot laterals next year.
And and have a a great pro forma return. So I think there's still a lot of a lot of wood to chop on energen properties, particularly northern Delaware basin, and a and northern Midland Basin.
Appreciate that that's really helpful. And then I wonder if we could circle back to slide nine again on the work in progress Wells I think you you mentioned that you kind of hair cut the third party completions by a third or half just wondering was that a blanket kind of you know haircut or was.
On a jump factor and some operators specific.
You know information that you might have no. That's just a rule of thumb you know we go we go specifically pad by pad interest by interest based on the Frac schedule that we see or and operators traditional tendencies to complete a well I would you say that even on a pad by pad basis, we move things.
To the right in the Gantt chart more conservatively a than we have in the past.
Hi, guys I appreciate the time.
Thank you Phil.
I'm showing no further questions at this time I would now like to turn the conference back to Travis type C O.
Thanks, again to everyone participating in today's call. If you have any questions. Please contact us using the contact information provided.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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