Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Viper Energy Partners fourth quarter 2019 earnings call. At this time, all participant learns Warner listen only mode. After speakers presentation, there will be acuity session.
That's a question during the session you need to press Star one.
Please be advised to today's conference is being recorded.
Require any further assistance, please press star zero and I like to hand, the conference over to your Speaker, Adam Lawlis, Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you Justin good morning.
Welcome to Viper Energy partners fourth quarter 20, not seen conference call.
During our call today, we'll reference an updated investor presentation, which can be found them bikers website.
Representing Piper today are Travis I see in case Bantle President.
During this conference call participants may make certain forward looking statements relating to the Companys financial condition results of operations plans objectives future performance and businesses.
We caution you that actual results could differ materially from those that are indicating these forward looking statements student variety of factors information concerning these factors can be found in the company's filings does he see.
In addition, we'll make reference certain non-GAAP measures reconciliations would be appropriate GAAP measures can be found in our earnings release issued yesterday afternoon, and I'll turn the call arbitrage.
Thank you Adam welcome everyone and thank you for listening to a Barbara energy Partners' fourth quarter 2019 conference call.
2019 was an important here for a vibrant as we successfully leveraged or size and scale to acquire more than 9000 net royalty acres.
And most importantly, more than doubled our exposure to diamondback operated royalty acreage.
As a result, Viper expects to have exposure to roughly 70% of diamond backs 2020, gross completions with an average net revenue of interest of greater than 5%.
This increased exposure directly translates to at least 12 Diamondback operated 100% net royalty interest wells expected to be turned to production on vipers acreage this year versus less than eight in 2019 offering fiber the most exposure today.
Coming back in years.
Outside of Diamondback operated acreage.
Wipers premium acreage position under other well capitalized operators has continued to track strong activity levels. Despite the overall decline in a rig count seen across the Permian basin.
Viper today has a stronger near term inventory of net wells currently in the process of active development.
Well as additional line of sight wells that have not yet but bench, but.
And at any time in our short history.
However, in an effort to be conservative.
We have contemplated slower than normal timing assumptions for both spud to first production and permit to first production in our 2020 production forecast.
Even with these slower timing assumptions, which had been pushed out by three months on average per pad versus historical actual conversion rights.
We are assuming over 10% more net wells turned to production at 2020 owner acreage not operated by Diamondback compared to 2019.
As a result bikers initiating full year 2020 oil production guidance that implies 28% growth relative to full year 2019 oil production.
Separately.
Addition to the strong production growth expected in 2020.
Oil realizations are also expected to be a tailwind this year as the last of diamond backs fixed differential contracts rolled off in December of 29 thing.
Realizations are expected to move closer to the current middle market with the potential improvement.
Should brent or any age spreads widened versus local Midland pricing, given diamondbacks position on the grey oak and ethic pipelines.
Given this and assuming $55 <unk> 2020, Viper is projecting aggregate 2020 distributions of greater than $2 per unit.
Point, a greater than 9% annualized forward yield at the current unit price.
Further given wipers cost structure and like cash margins. The company is still expected to generate a free cash flow yield that is 70% higher than the current S&P 500 sector average even at $40 oil.
In a difficult energy landscape Vipers resilient free cash flow yield and unique relationship a dominant that will further distinguish it from its peers.
We will continue to be active in acquiring diamondback operated acreage.
Head of the drill bit to further enhance the embedded high margin long term growth potential of our asset base that requires zero capex.
And we look forward to continuing to generate significant organic production growth in 2020.
And for many years to come.
Operator, please open the lines for questions.
As a reminder to ask a question you need to press Star one on your telephone told you. All your question press the pound key please stand by the compiled the Q and a roster and again if you'd like to ask a question that is star one.
And I first question comes from Derrick Whitfield from Stifel. Your line is now open.
Hi, Good morning, all and thanks for your continued purely disclose your own operated and Nonoperated activity.
Thank you.
We regarding your more conservative third parties cycle time assumptions would it be fair to view the production impact from a planning perspective as more onetime in nature, assuming cycle time outlook remain static.
That's the case do you guys have a view on factors leading to longer cycle times and aggregate across the basin.
Hey, Derrick Yeah, I mean, you know with.
No not being about a third of of our volumes and done back operated being two thirds.
Our using the exact time doctoral schedule on production forecast for a you know about two thirds of Vipers production for the other third on the not the you know traditionally our spud to first production in the Midland Basin as average between six and seven month and our spot the first production in the.
Delaware Basin has averaged five to six months.
And this guidance here given that it's you know early February and.
It's been it's multi was 2020 already we're gonna be conservative and guide to spud to first production of nine month.
And a you know not a lot of permit conversion in 2020, you know we certainly expect.
All our permits to be converted at very high permit conversion ratio.
You know just at this juncture in the year. This is the hardest. This is the hardest guide for Viper for the year to guide to the full year or so we're pushing does the spot the first production assumptions out by about three months.
That makes sense and as a follow on to that question could you comment on how your spud to pop and permit to pop cycle times have trended over the last couple of years for your operator program.
Oh the operated program is pretty consistent you know not in that five or six month timeframe I mean, I won't say, a we wait on filing permits at the done back levels that are Viper team can get ahead of.
You know by minerals before that permits filed because the price of minerals or the price of poker for minerals goes up dramatically once that permit style.
That's a that's helpful makes sense thanks for your commentary.
Thank you Dirk.
Thank you and our next question comes from Bryan singer from Goldman Sachs. Your line is now open.
Thank you good morning.
Hey, Brian.
I wanted to see what expectations for well performance you as a you've built in and Twentytwenty relative to 2019, and how that trend may differ or notch. When you look at third party operators year on year versus a thing as the operator.
Yeah, Brian I mean, I'll speak for dialing back you know, we we've used the exact type curves were using it for dialing back level.
You know, we've we've bristows type curves, we traditionally risk a new type curves in general, but also we've added another water out effect that we're gonna see throughout our are different various fields throughout the year and that's been reflected into Viper guidance, you know certainly not looking to on third parties.
I assume a the best type curve possible, particularly in this environment, but I'll say that our third party type curves are probably on average you know.
Double digit percent below expectations, but you know really that's more about a lower IP rate in our model. Then then what we traditionally see on the non upside.
Got it I guess he I I guess are you seeing anything to suggest that beyond conservatism. There is reason for it immaterial degradation or or improvement year on year in and and well performance in a type curve.
No I don't I don't foresee a significant change you know I think I'm, certainly more up more and more operators of developing more zones on larger pads and that has a different production profile than just a single unbounded parent wells, but I think that's that's well reflected in what we're projecting here.
Great. Thanks, and then my follow up is on the acquisition front.
Have you contemplated any incremental acquisitions, when you think about guidance in production trajectory and how do you see.
Have you seen characterize the market and a and your interest.
Yeah. So we always guide to the assets that we have today. So no there's no incremental production or a cash flow contribution from projected acquisitions. You know, we certainly are consumed will continue to be acquisitive.
I would say, we're being a lot more selective on third party acquisition opportunities.
But that doesn't mean, we haven't stopped you know continuing the acquisition machine on the Don Backside I think there's.
A significant amount of opportunities remaining for us on the diamond backs I would just have to be be careful in this in this environment, but also you know reset some price expectations from a market that gets.
Sometimes gets pretty heated so you know for us saying no to deals is.
It's going to be more the more than the norm than the exception in 2020.
But that doesn't mean, we can't keep a.
Buying aggressively under the dialing back drillbit.
Great. Thank you.
Thanks, Brian.
Thank you and that next question comes from Jeff Grampp from Northland Capital markets. Your line is now open.
Good morning, guys.
I wanted to circle back first on a common case I think you made it at the beginning here.
I think two thirds of production is the dining backside and a third Oh on a third party side is that I guess first one makes right here and there right that was on the production front and is that a decent kind of split for 2020 completions that that are baked into guidance or it is that dramatically alter and given the drop in some of the acquisitions you've done lately.
No I think that's fair, Jeff I mean, I kinda have production, increasing you know diamond backs percentage of total production increasing throughout the year, but about two thirds is is it fair number for where we're gonna be in the fourth quarter, you don't want to net well basis in our model right now Diamond backs, you know, 65% to 70% of the net.
Wells.
But that ran at that's with not off net well inventory a pretty low in the fourth quarter, given where we are today the first quarter. So in general.
You know 50% of the assets operated by saying.
Are going to generate two thirds of the production.
Got it got it really helpful and that for my follow up on hopefully a quicker. One do you guys have an estimate of kind of what the a the PDP decline rate of the asset bases. If were to look at kind of Fourq you Nike into Fourq you 20.
It should be about you know mid thirtys on dealings and high Thirtys on on oil.
Got it got it alright, Great Britain some guys. Thanks.
Hey, Jeff Thanks, you.
Thank you and our next question comes from William Thompson from Barclays. Your line is an open.
Hey, everyone. Good morning.
One William.
Before the street consensus models, one Q 20 simply at the midpoint of the first first half production guidance you maybe help us understand the cadence of the 20 net completions you have visibility on how that can translate into oil growth throughout the year. How should we think about maybe modest the flattish squawk growth in one Q, but a pickup in twoq.
Yeah, I think that's there you know we you know from a diamondback operated perspective.
The number of net wells in Q1 will look very similar to Q4 about two net wells now that's steps up by about 50% in Q2, and then from a diamond back operating perspective, you know, we're almost averaging four not wells a quarter and a in the back half of the year. So I think from a from a growth perspective, you know we expect.
The grow modestly off of the release you for numbers, a you know low single digits and have a pretty pretty meaningful step up in Q2 or from a <unk> oil and be a wee production perspective into the mid single digits from Q1 to Q2 the way we have it all.
Right now there are some large pads coming on in the back half a year, which should.
Healthy year exit very strong you know with an exit to exit number Q4 19 into Q4 20 of you know mid mid to high teens on the oil and the Joey side.
Okay. That's helpful color and then regarding the updated oil realization got into 97 dependent W.P. I can you can you maybe just clarify the moving parts there you'd indicated that steinbeck represents about two thirds of Adams volumes.
Got you you had a reduction and then at back at the time back legacy Spanish Trail sales agreement I think that was linked at any age and I was the MGH WCS differentials at the moving around so maybe just help us understand the moving parts that you're assuming into that that did not real does she got it.
Yes, the spreads are going to move you know, it's hard for us to guide to W. T. I wouldn't really none of our barrels get priced on W. CCI. So.
As you think about Spanish trail.
He age versus.
Versus the VTI is greater than $3.50. You know you should equal about 100% of WT Island on that number for that operate a piece you know the rest of our position, particularly when ethic and great start up is gonna be priced off of Brent. So you know friend W.P. eyes wide, we will benefit to.
The higher than than W.G.I., but I've seen a lot of noise about the 97% to 100% I think you can just think of it as some conservatism in and also you know looking at spreads where they are today you know mid Midland Cushing has been a dollar or more for a few of the last couple of months and today. It was 15 cents. This morning. So you know there.
These spreads move around and you know after having a tough time.
Going through the realizations, we had to go through in 2019 I'm just excited that we're going to be up you know eight or 9% from from where we weren't 2019.
And just add onto that point I think on.
On page 18, a deck. It indicates had been MBS does seem viability of adding hedges that pertaining to maybe locking in some of those basis.
<unk> differentials.
Yeah. So we have we have received approval to to add hedging to our program and we certainly at these prices aren't aren't gonna be hedging oil but.
You know some sort of protection on on both the spread side or even though you know the gas well how spread side you know given the you know the outlook for Permian gas is pretty dire here in 2020, I think we're looking to take that risk out of a out of the Viper story. So we'll be.
Looking at the market in and now have approval to head from a from a downside and spread protection perspective.
Oh, thanks, guys.
And thank you.
And our next question comes from Gail Nicholson from Stephens. Your line is now open.
Good morning, most my questions have been asked but I guess.
Overall I take against that.
Like the market, it's kind of missing the value that by for Craig.
Yes.
Well when you kind of look at.
Can you just talk about confidence level and you know overall plan and going forward any ability to even in a variant oil price environment still deliver it really thought here a yield not just across the energy, but really the entire SMP sector.
Yeah. Good luck, we feel really confident about the 2020 or 2020.
Forecast that we put in place again.
Some of that confidence is because of the increased exposure to diamondback operated wells, but you know we included the no a new slide into detected that shows I think its slide number five that really shows even at $40 or will you know this vehicle gonna have an annualized yield of over 6.5%.
And so I just think I just think as the market you know I understand you know pristinely, how weve modeled our future and in how this is still a robust return vehicle that requires no no no capital or or operating expense. You know I think it's going to be a investment vehicle of choice because the.
The merits of it sure looks like it should be.
Great. Thank you.
Thank you.
Thank you and our next question comes from Pearce Hammond from Simmons Energy. Your line is now open.
Good morning, do you think vipers mineral acreage is outperforming the Permian basin as a whole when looking at rig activity meeting has the rig count declined at a lower percentage level on your acreage versus the Permian basin writ large.
You don't peers, but that's that's tough to that's tough to figure out I can't say that wall or non off.
Acreage increased last year, you know we're projecting.
10% more non-GAAP net 100% interest wells in 2020, then 2019, even that at the conservative assumptions, we've put out there. This year. So that that is you know that does 0.2 to acreage quality you know I will say you know, we do think about buying minerals as if we were the operator and what are the area.
Is that we would want to be operating and so hopefully well with our capital allocation and our knowledge of the Permian we are buying minerals in areas that we think they're gonna be developed first rather than last.
Okay. Good a and then my follow up the oil mix percentage declined during 2019 and looks to be roughly flat with Q4 19 levels is we are looking at the 2020 guidance. So what drove the oil mix percentage change in 2019 was it just more Delaware basin completions and do you see.
The the current oil mix is indicative of your production over the next few years.
Yeah appears you know so we certainly have added more Delaware Q2 on next and you know the gas content in the Delaware is significantly higher particularly in the northern Midland I think as we go through 2020.
We should have a higher percentage of flush production that advisor, which will help a oil mix, but you know overall, we try to.
Now guide to well production separately.
Yes forecast, particularly in the Delaware basin had been outperforming expectations.
And therefore, you know we decided to switch from a oil percentage guide to Oh, it to a oil total barrel God, particularly because the asset is now so diverse you know rather than just being Spanish trail only we just have a lot of different type curves and a lot of different areas.
Perfect that makes sense, thanks for taking my questions.
Thanks for your [laughter]. Thank you.
And our next question comes from Welles Fitzpatrick from Suntrust. Your line is now open.
Hey, good morning, obviously, a you saw nice uptick in development land site wells versus last quarter's released but can you give us an idea as to the cadence how much how much of that accelerate and January and February as new budgets came out.
Yeah, you know we saw some activity pick up you know towards the December ended December on some of our high interest areas. You know I think from a non op perspective. We're you know we think we're going to have a little more contribution in Q2 than Q1.
But you know I think you know the way we're modeling right now its Q1 versus Q4 2019 is is flat to a little bit up on the non upside, but overall I think I said this in the last question that you know from a non up net well perspective, you know even at today's assumptions were assuming you know, 10% or more net non op.
Wells and we got a last year.
Okay that makes sense and.
The disclosure on the sensitivities is gratifying does on page five.
Obviously, an illustration of why you don't need to hedge but but.
You know, it's there's a recovery has has your view on that change at all I mean would you look to lock anything in or are you sticking to your guns as wanting to have that there.
Yeah, well you know I think we're only focused on today on hedging you know differential exposure, particularly on the gas side. So you know hopefully we can remove you know severe downside risk on the gas side from the the Viper story and that will leave a investors full exposure to both oil and NGL upside.
Makes sense so much.
Thank you.
Thank you I know next question comes from Phil Stewart from Scotiabank. Your line is an open.
Good morning, guys.
Hi, Andrew.
I guess kinda dovetailing on some of the previous questions. You know you all are obviously, focusing a lot more on the kind of net oil volumes to Viper. So I guess, you know and looking at that you. All of you know vipers done a good job of growing oil volumes per million units outside.
Turning over the last three quarters and as you think about financing acquisitions going forward is oil production per million units going to be you know maybe the most important factor for deal accretion going forward or is it still kind of pretty evenly split across you know your historic metrics for.
For deal accretion.
Yes, Bill I I think broadly for the for the Viper story or oil production per million units growth is is the key driver of the Viper story and that's what we've Oh, we doubled down on here with that with our acquisition machine or focus there.
You know overall.
We think about all deals as if they were equity funded today, what our distribution go up a you know over the next year by doing this deal and you know that hasn't changed I will say our commodity assumptions of change I think we've become more conservative on NGL pricing and essentially running gas almost zero.
So that does point us to you know more deals in the northern Midland basin or the eastern portion of the Delaware Basin.
Particularly under Diamond back where you know, we're very confident in the development program.
All.
All right guys I appreciate the time, that's it for me.
Thank you Phil.
Thank you and on next question comes from Leo Mariani from Keybanc. Your line is now open.
Yes.
Yeah, Hey, guys just wanted to pull on the commentary around acquisitions, obviously had a couple chunky deals close or you know when the fourth quarter with Santa Elena in the sang drop down just wanted to get a sense is there much of an appetite for anything chunky or here in the show.
And Tom or should we try to maybe just expect kind of a a better stream and kind of these little tiny deals out there and they tend to add up overtime.
Yes, I think I think we're really focused on you know we did some very large deals last year, especially relative to the size of Viper and I think for our investors, particularly in these uncertain times. It's it's important for us to prove that does organic growth on the asset and production per million units.
It is going up you know I'm not going to say, we're not going to look at you know some small deals here and there, particularly on the diamond backs, but you know today as I see it there's not a ton of huge deals were very interested in and you know I think a bid ask me come in on.
Some of these larger packages as we as we go through the next couple of years.
All right. That's helpful. A you know for sure here I guess, just looking into the Gionee side equation. I think you guys came out kind of somewhere in the low to mid Seventys per BOE easy in 2019 looking at your guide you kind of saying under 80, a you know for 2020, I guess that imply.
You know kind of flattish I guess I would've expected with the big production bombs that you get from the acquisitions in Fourq you. It runs in a little bit into first quarter 20, odd and maybe your per unit Geo eat a gene a preview he would drop a little bit in 2020, just don't potential for that's come down a little bit is under 80, maybe just the.
Conservative way of looking at it.
Yeah. Yeah. We are I think you know when you're wrong. When you run a company afford a half billion dollar company was $7 million your past DNA and you need to save some for the good guys. So and that's from you know we've always been pretty conservative on the DNA Guy I'm you know, we're certainly not adding upon a people this year, but we do.
You have more back office and we get you know three 400, while the a quarter ago, we're adding that we had to make sure. We're getting paid on so overall I think you know, we're knocking Ah well I can increase you named much on a gross basis the volumes will help a little bit but no we're saving that for the good guys.
All right. Thanks, guys.
Thank you live in Q.
And our next question comes from Jason Wangler from its Imperial capital. Your line is now open [laughter]. Good morning, guys case was just wondering.
Appreciate all the detailed but on the reserve side, you know as you talk about booking pretty conservatively. What's the makeup of dialed back versus the third parties in terms of the reserves.
Yeah, Yeah. So on the pod side, you know, we really don't like pausing, although the majority of our pause that we bought or 80 or 85% Diamondback operated the rest on our third parties and you know really those third party pods are either you know docs that we know we're gonna get completed or.
You know wells in Spanish trail that were up our operated by content. So you know overall you know you've seen the PDP percentage of Viper go off from 72%.
And 29, or sorry, 2018% to 78% in 2019, and you know given the liquidity. The company has there's there's really not a big push for us to continue to book pause or aggressively even gotten back operated or third party up.
That's really helpful. Thank you [noise].
Thank you.
And again, ladies and gentlemen, if you had a question that star one again, if you would like to ask the question that is star one and our next question comes from T.J. Schultz from RBC capital markets. Your line is now open.
A with the railroad commission coming out with the gas flaring reports soon or how does gas flaring in the Permian or just the need to limit flaring potentially.
Impact your outlook for pace of development over the next couple of years if at all.
Yes, certainly the flaring as appropriately gotten a lot of attention out here in the Permian basin, but as it is actually translate it into our forecast you know that's something we study very very closely monitor weekly at the data back level in and and and we take a mitigating steps a across the board to eliminate any.
Any flaring that were in control of.
How it read through to third party, a third party production forecast as of yet it's still London you know since undefined you know Oh, we're all interested in and Commissioner citizens report, that's going to come out here shortly.
To see how the each individual operator looks across the Permian basin, but so far DJ we've not taking in into anymore forecasting.
In the impacts of a flaring or increase learn regulation.
Okay understood or just lastly.
If acquisitions do slow down potentially just any.
Guidance you can give on when you would expect to be a cash taxpayer. Thanks.
A very dependent upon the oil price at the moment I mean that at low Fiftys, where we are today.
I think we're I think we're okay for for a couple of years, you know should we see a.
A massive ramp in commodity price or that would that would change and accelerate but you know where we are today at strip I think we're well okay for for 18 to 24 month.
Great. Thank you.
Thank you Jay.
Thank you and we have a follow up question from William Thompson from Barclays. Your.
Your line is an open.
Alright, Thanks for squeezing me in here for a more so the pushback, we sometimes get on the mineral spaces that organic growth isn't sustainable is M&A, it's required to backfill net well locations you show on slide 11 in inventory up 128 net locations are probably six years of inventory based on 20 net locations this year with 60% of that phase.
Operated I'm, just curious like but let's say Viper wasn't did you M&A and 2020 can you give us a sense on what organic growth would look like in 2021 I noticed is not guidance I'm just trying to get offense on can we still see double digit organic growth in 2021.
Yeah, well I'm not I'm not going to get you know talked into 2021 guidance here you know I will I will tell you for one thing you know most of our assets we buy you're seeing you know the first or second well in a section be completed. So you know we don't buy a full section that's just gonna be or PDP blow down you know most.
Our reserves are in the three P. category that you don't see and a in the reserve report, we got a long way to go you got a ton of inventory ahead of US you know we've been we've been running two rigs in Spanish trail for the last five years, we're still going to keep keep doing that for the next few so you know we backfill that undeveloped inventory with.
Undeveloped resources throughout both basins, and we expect to be around and to grow organically for a for very long time.
Okay.
[laughter].
Thank you.
And I am showing no further questions I'd now like to turn call back over to Travis Stice CEO for closing remarks.
Thank you again to everyone participating in today's call. If you have any questions. Please contact us using the contact information provided.
Thank you and ladies and gentlemen, this concludes todays conference call. Thank you participating you may now disconnect.
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