Q1 2020 Earnings Call

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I wouldn't like to introduce your host for today's conference Adamopoulos, Vice President Investor Relations you may begin.

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Good morning, Lumpier Viper Energy partners first quarter 2020 conference call.

Sure Paul today, your reference an updated investor presentation, which can be found in diapers website.

If we're getting quite the today are Travis stice, the UK samples taken it.

During this conference call to consistently make certain forward looking statements relating to the Companys financial condition.

Guilty of operation plan injectors to future performance and businesses. We caution you that actual results could differ materially materially for measured and indicated these forward looking statement you do a variety of that.

Information concerning these factors can be found many companies that's easy.

In addition to make reference certain non-GAAP measures reconciliations <unk> GAAP measures can be.

We issued yesterday afternoon and.

I'll now turn the call we try to.

Thank you Adam welcome everyone and thank you for listening to the Viper Energy partners first quarter 2020 conference call.

Before we started.

I can say committed to extend our thoughts and first of all those affected by the covert Norton pandemic.

The challenges presented so for <unk>.

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Spirits is evident decisive actions we've taken.

Preserve our strength through the shock.

Turning to the quarter.

<unk> oil production should be person spiritually and 37% year over year.

This solid production performance, along with warmer utilization of 99% of diabetes.

Fortunately has been overshadowed by the dramatic decline in commodity prices.

Again in March has continued through the day.

Viper took action in hedged almost 200 pursuant to the expected annual production.

You know with 50% of expected 21, 2021 production in the form of diabetes coach putting a floor under future oil price realizations and cash flow.

[music] the advantage business model <unk> as a wall to kill can you just highlighted during these times depressed commodity prices.

Hi crush margins.

No capital requirements and limited operation cost drive continuous free cash flow generation through the cycle.

That is even at current strip pricing biker is expected to generate an old Gen person free cash can view and shouldn't today's unit growth.

As it relates to the free cash flow from the first quarter two weeks warning. We've made the decision to retain 75% that cash flow to fortify the balance sheet.

The board intends to review the distribution policy each quarter.

It would be uncertainty in the forward activity outlook industry pricing.

Prudent decisions to retain a majority of the cash flow to reduce leverage in protective business.

What remains in strong funnier financial shape from 447 million of liquidity after Justin.

For the expected reduction are born base from 775 million to $580 million. This spring.

Looking forward.

And there's recovery commodity prices.

I'm back expects to resume completion operations in the second half of which one focused on high interest vibrant own wilted acreage.

<unk> relationship with drama back also provides added advantage of larger benefiting.

Diamond backs from transportation and ethnic greater pipelines.

Twice and lead to the more liquid Gulf coast.

Export markets in Spanish trail production.

Any age pricing.

In conclusion.

Underscores the fact that mineral ownership mange, the safest asset in the oil industry, because it's a perpetual.

Property interest that's a high margin.

Is that requires she real capital requirements.

In the middle sub sector.

<unk> further distinguish due to our relationship we've done it back as a primary operator.

Times like these emphasize that relationship is down about focuses its operations on areas, where barker owns the minimum wage.

To the low.

So they break even they cannot.

Operator, please open the lines for questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press star and the number one on your telephone keypad.

Your first question comes in a line of Brian Brian Downtick with Citigroup.

Good morning, Thanks for taking the questions I guess my first ones on the distribution policy could you provide guidepost on how you're thinking about that payout ratio on a go forward basis.

Understandably there there may be some leverage ratio implications with the senior notes, but how you're thinking about balance sheet goals, whether that's leverage ratio versus absolute leverage just trying to just think how we should be a dimension that that payout ratio through the rest of year.

Yeah, Brian was a good question you don't really all we have today going up we haven't been about strip and yeah. We haven't made can talk to him.

You know based on the first quarter being well no interest cash inflows that we're gonna have over the next.

Five or six quarters based on where the truth is today and you that resulted in lost you know probably in the distribution to 25% of available cash and I think it's going to be a derrick wood processing I can only really.

You know used the baseline was up 25% for now, but I will say, we run sensitivities every every quarter with the board and the board and there's gonna have to have a you know wheel conversation about about that policy going forward.

Yeah, I think overall, that's a best indication is where we aren't scraping the detailed 25% at strip today.

You know we're not we're not nothing we saw a you know secured secured leverage covenants are so at the revolver level.

Got it and then I guess, how should we think about leverage reduction as it pertains to revolver pay down versus opportunistically buying back debt it's available.

I think that's the key word it's opportunistic.

We don't have a lot of experience buying back bonds in the open market. It seems like a bonds trade a little bit but not much no certainly.

You know probably going to be a combination of both you know parking caching and paying down the revolver and using you know you can see opportunity to buyback that below par it if the bond useful trade ballpark.

I appreciate the color that's <unk>.

Thanks Bye.

Your next question comes on line of Derrick Whitfield with Stifel.

Hello, Good morning, all.

Hi, good morning, Eric.

With regard to your 2020 got its went back into an implied Q4 guy that's materially above the street is that a reasonable interpretation based on it the expected resumption of donlin back activity in the second half.

Yes, that's the key right. It is always probably getting back to activity in the U.S. instead on the bottom that call you only need it first complete backer curtailed volumes and then get back to work now you know the base case is that that happens and you know what do we haven't model right now Viper has exposure to.

About 80% of diamond backs future completion.

About a seven or more percent interest. So those are some pretty pretty meaningful numbers or when you look at advisers production and you know we hope that that that's the case now things.

Oh, I remain weak and dialing back up and get back to work done and that'll we no push that out on a quarter too.

Understood and as my follow up could I ask you to comment on your broader views on the M&A market for the balance of 2020 I suspect. The Q1 acquisitions were largely a function of work in progress.

Yeah, that's correct I mean.

Close everything in the first quarter with all those if they had been finding and number December and January and you know, we certainly look in a walk on a on a p. afraid every sign to me on other commitments, but right now or.

Acquisition machine and is silent for for the foreseeable future now Oh, you know mineral owners tend to be stickier with respect to.

Perception of value him is often most loved Virginia and the mineral space. So I think it's gonna be pretty quiet here for the next after the next couple of quarters.

Helpful. Helpful color. Thanks for your time goes.

Thank you Dan.

Your next question comes from the line of will Thompson with Barclays.

Hey, good morning travelers the kids I'm wondering your thoughts on that's not the push pull dynamic for two years, even mineral Mars in terms of shut ins and continues to win allegations.

Same thing is guided throughout the relatively modest contaminants I think the shut in aspect is less of an issue for paying operated acreage and maybe for non op acreage in the modest override royalties dependent as how do you expect the leases do you expect really determine if you could continue center production and are going to activate rigs in frac crews in the near term well to get your fingers just thoughts there.

Yeah, I mean, it didn't really don't speak to the Diamond backs no time, that's a portion of that you know we've been very focus the Bible in buying mineral interest versus overrides and get on top of that you know most of all right, but I'd be done back level and I'm sure. You guys. You know, we expect to retain all of our.

Production, then and leases.

I don't have a meaningful viper component to it.

Yeah, I think as you think about Vipers production, we certainly modeled in some some curtailments I think Mike will be head a little less than dialing back from a percentage basis just given.

The nature of the two working together to focus on the high interest property, you're staying active.

Okay, and then maybe going back to Brian's question understanding the covenants restrict denims distributions in the 12 month currently now sector.

EBITDAX metric.

How do you think about manage the payout ratios production stabilize and all prices improve or are you comfortable going past three times leverage temporarily I. Appreciate the three times longer to prevent them is what cumbersome and 3.3 times leverage for any Pete you pieces just aren't back to just curious to get your thoughts.

No I think I think we're fortunate to be you don't make distribution decisions you know halfway through the next quarter and I think if we're seeing significant improvement in production in pricing.

No, it's a little easier to lead in.

Make distribution you know at a higher leverage ratio. So I think it's all going to be very fluid, but no I think.

Overall, we're going to be as flexible as possible and recognize that this business model is meant to distribute cash cash to shareholders are the largest being done back and that's still our primary objective.

Objective here at the Viper level, Yeah, we're just want to emphasize that I mean, no fiber is a yield company would move down back being the largest largest owners that company and you can bet that department level, you know we're focused.

No on maximizing return of capital Guard unitholders.

Taking all these things into consideration that's still about mechanization that return.

Thank you.

Your next question comes from the line of Bryan singer with Goldman Sachs.

Thank you good morning.

I wanted to follow up on the debt covenants piece can you you mentioned earlier the importance of the secured debt covenants that can you talk a little bit more about the unsecured covenant and how that.

Well the impact of three times, what impact the timing of under consideration for the distribution policy.

Yeah, Brian This is Andy.

Hi, Joe coveted youngster covenant.

Simply a restricted payment should you be above three times leverage.

But there are some baskets that you can distribute autos.

The biggest being I think you know trailing net income that region and looked at on the on the secured piece.

You know your revolver is looking at four times leverage as that Covenant and you know I think that's you go back a little beyond restricting payment. So that's that's really the impetus for the decision. We made today is is you know we're not not looking to mess with any Easter covenants here.

Got it. Thank you and then my follow up is you talked earlier about some of the assumptions that go in from the Fang operated acreage what about the what you're seeing activity wise and shut ins from operators outside thing can you talk about what your base case expectations are for that.

Second and third quarter is a from a shut in perspective outside of thing and then what activity levels.

Characterize on expectations as you go to the rest of year.

Yes.

I can pick activity levels first we're assuming zero wells completed all in all acreage in the second quarter, a small returned to work in third quarter.

You know you haven't model shut ins on non op acreages shut ins that we then we just we just take a bigger chop through the PDP decline that we're seeing on on non off takers. So instead of our normal you know high single digits percent missing out on PDP.

Closer to <unk>.

Hi schemes or mid teens percentage whiskey on on the non off.

Thank you.

Thank you Dan.

Your next question comes from an lineup, Jeff Grampp with Northland capital markets.

Good morning, guys I'm, just hoping you could maybe speak to you no longer term and kind of a more normalized stable commodity price world should we think that the payout for Viper moves back to that 100% type of strategy or would you guys maybe give some consideration to subs some sub 100 per.

That payout to maybe incrementally pay down more adapter organically fund some acquisitions when that starts ramping back up.

Yes, Jeff it's hard to predict what the future looks like but I can tell you all just reemphasize the point that amazed at the reason black person up it's because it's a yield company without baxter's its largest shareholder. So you can bet that our singular focus will always be maximizing that returnable could happen to unitholders.

Understood and for my follow up and I think slide deck, you guys kind of emphasizes some to its kind of how the at the least works is the Delaware basin.

Example, can you guys kind of talk about what that economic opportunity set is this year do you see any opportunities for any kind of.

Extension renewal type of payments flowing through to Viper and any I guess, how high level characterization of what that economic opportunity could look like for you guys. This year.

Yeah, Jeff.

This slide is you know is very important to where we are today because you know what we're not acquiring acreage our team is focused on.

Our highest value tracks and one of the what are the least requirements with respect to continuous development.

Primary development or you know suspension of production. So we're really digging into all these leases.

And making sure you know we're communicating with the operators on their plans and you know I don't think it's gonna be big dollars coming into Viper, but but in this market every dollar matters and I think thats the benefit of being the mineral owners that the the acreage reverts back to you the operator doesn't meet the obligations.

Oh, the lease and that you know that's a that's the strongest form of security in oilfield and you know.

If the operator wants to let go of that acreage we couldn't really stood at some point, but are you most of the discussions we're having right now are about extensions.

You know extensions on obligations and extensions on a continuous development.

All right understood I appreciate the time guys.

Thanks.

Your next question comes from the line of Gail Nicholson with Stephens.

[laughter]. Good morning, just any thoughts on how we should think about oil price realizations, the remainder of the or.

Yes, no on the on the on the Diamondback operated side, you know Viper in Spanish Trail gets the diamond backs deal, which is kind of an Emmy h. less $3. That's about a third of of wipers oil production.

Yeah. The most of the rest of Vipers oil production on the Diamondback operated piece will get a friend's less pricing and there's just so much moving around on that front, but you know in a normal world there would be less six six or so dollars, but it's probably a little higher today and then you know on the rest of the acreage we get Midland.

Thing and that's why we are hedged that exposure and has all of our de jour exposure.

Okay, great. Thank you.

A higher level question you know.

Perhaps a durable free cash flow profile I'm really does provide security and that's come ultras world that we find ourselves and right now when you look at today's environment and going forward. What do you think is the biggest challenge for the business.

I think the biggest challenges is making sure yeah, we're getting paid for what we deserve we get paid and making sure operators are only need leases you know the leasing boom in the Permian up the last 10 years as put some pretty onerous turns into some of these leases and and biker no need to spend.

A lot of its time, making sure those obligations our owner.

Okay, great. Thank you.

Thank you yes.

Your next question comes on line of Jason Wangler with Imperial capital.

Hi, Good morning case, you just had a couple of questions about it for curious.

Slide seven talks about kind of 2021 being where theoretical lease expires. He is that most you kind of where we start to see that happen just 2020 kind of more about a year, where you're going to see extensions and things were 2021 is where you may well see more of that opportunity come up for you ever done it back.

Oh I would say so since we're already so far into 2020, but you know this was a just.

An illustrative example, I mean, I think a lot of leases in the dollar were taken in the in the 14 15, and 16 timeframe if need be prevent me maybe either been extended by now or developing has already occurred in the question is how much continues to golf and it's going to continue to occur on almost properties.

Okay. So some kind of watch we're going for okay. I appreciate it thank you.

Yes, definitely going to watch for and you know, there's you know where our business development meetings used to be about what minerals are we looking to acquire now about Oh, you know what what are we hearing from our operators and what are the offers on the table for extensions or no new leases.

Thanks, so much.

Thank you.

Your next question comes from the line of Leo Mariani with Keybanc.

Oh I'm not the leverage side here just wanted to get a sense of whether or not you guys have kind of leverage target you know for Ben I'm fully get Dan you know it might have grown a little more than expected in this.

Unprecedented downturn here. So just kind of wanted to get extensive weird, where do you guys kind of want to see that kind of debt to EBITDA going here, maybe in the medium to long term.

Yeah, I think overall you know we've tried to be pretty conservative that both have done back Viper and rather levels and on a consolidated basis I think you know given the weakness in commodity prices.

Leverage is going to look at higher than when we traditionally been comfortable with so I think overall Leo.

Yeah. The business is probably going to have to look at no are we at two times levered at $40 oil or we haven't turned in a half of leverage at $40 oil because.

You can enter a year 60 and be at a 20 within within three months. So I think the volatility of this business is all is continuing to point towards lower leverage even with a business like Viper that has to your free cash flow.

Well, that's certainly makes a lot of sand so you know for sure.

I guess just to that end I know that the distribution policy is clearly an ongoing event, but my levels. It kind of fairness to maybe think about some of this is when you think you kind of get the de leverage a little more comfortable that's when you can kind of play a little more offense on the distribution is that how investors should think about it.

Yeah, I think that's fair I mean, just as Travis said. This this vehicle is set up to three return cash to shareholders and ER and that they <unk> and that big shareholder being done and back and we intend to get back to that is as soon as you can yeah. The drivers always maximizing you noted unitholder value no we'll continue to empty.

So that no as we were talking about distributions.

Got you, Okay, and just a follow up in terms about an earlier comment you guys made I just wanted to make sure I sort of understood. So.

When you guys are looking at did the guide here prevent them for the rest of year I know if I heard you correctly, but did you guys say that there was assumption that you know there were no turn in lines I in the second quarter 20, and those resume in the second half just want to make sure I understood that right.

Yes, that's correct.

Okay, then on both an operating basis and a non op basis or is just not really a line of sight on the non op right now.

Oh, no I'm not off we're assuming zero, you've gone backwards seeming to existing schedule, which you're going back not completing a lot of wells in the second quarter.

Okay. Thanks, guys.

Thanks Leo.

Your next question comes from the line of Pearce Hammond with Simmons energy.

Hi, good morning, Thanks for taking my questions. A case appreciate that you're you're not very heavily drawn on your revolver right now, but it definitely seems like the the debt market has improved quite a bit with the federal reserve activity that they are engaged in that and so are you seeing opportunities to maybe go do it debt issuance and.

And pay down the revolver and if you did that would that give you a little bit more flexibility on the distribution.

Oh, that's good question peers, but unfortunately, not because the revolver covenant is based on total debt. So you can't you, replacing a secured with unsecured debt I think.

You know wipers bonds are still trading a little below par and it might be an opportunity to to buyback some debt below below par here.

Okay and then my follow up is just a housekeeping when do you expect to follow the 10-Q.

Well into this week.

Thank you.

Thanks Bruce.

Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Your next question comes from Welles Fitzpatrick with Suntrust.

Hey, good morning.

Well they wells.

Just one quick one from me I mean, I would imagine the most severe leases a pretty iron clad force majeure clauses, but what did the shut ins do they create any any opportunity for incremental leasing revenue either from companies proactively trying to extend those leases that already exist or potentially.

From broken leases, then being able to be really.

Yeah, the least believed would not be broken and it really depends on each lease.

And what the cessation of production pause isn't that lease so you know its various.

Forms of.

Sufficient production and you know I won't say you know with my Diamondback experience, you know where were curtailing volumes, you're not getting close to.

No those sufficient production issues now I think if you're forced to shut in for 234 months consecutively. Then you start to have Ah you know start to start to trip those cessation of production pauses in the leases yeah. What was I can tell you just from a historical perspective, that's one of the first no decision nodes that Orlando organization goes through.

As you know, it's especially production losses and all these leases and that standard operating procedure for all operators. So you know the only Tom that would occur would be a you know about mission or by accident from other operators that certainly nothing we can plan or.

Okay, No that's when I say your thanks guys.

Thank you all.

At this time there are no further questions I would like to turn the call back over to Travis Stice CEO.

Thank you can tell everyone participating in today's call. When you got any questions. Please reach out fusion the contact information provided.

This concludes todays conference you may now disconnect.

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