Q2 2020 Viper Energy Partners LP Earnings Call

Earnings Conference call at this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session second question drain, especially press star one on your telephone. Please be advised today's conference is being recorded.

Your priority for assistance. Please press Star Zero I now like to hear the conference over to Mr., Adam Lawlis VP Investor Relations. Please go ahead.

Thank you Sarah and good morning, and welcome to Viper Energy Partners second quarter 2020 conference call.

During our call today, we'll reference an updated investor presentation, which can be found on our website.

Representing back or do they are Travis stice CEO in case, they talk president.

During this conference call. The participants may make certain forward looking statements relating to the Companys financial condition results of operations plans objective.

Feature performed at the business.

We caution you that actual results could differ materially from those that are that they didn't these forward looking statements did a variety of factors.

Information concerning these factors can be found in the company's filings with the FCC.

In addition, we will make reference certain non-GAAP measures.

Conciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

Now for the cause of the Travis though.

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

During the second quarter Wiper had limited completion activity on our acreage as operators reacted quickly to oil price volatility.

Why cutting capital expenditures ceasing completions and in some cases curtailing existing production.

However.

Wipers production during the quarter was supported by 14 of Diamond backs 15 completions, having more than 8% average royalty interest net to Viper.

Further and as it relates to our second half production outlook.

Nearly all or curtailed production has come back online as commodity prices have improved in recent months.

Importantly, Diamondback has recently bought back.

<unk> completion crews to work after taking an almost three months to break from all completion activity in the second quarter of 20 Twond.

Looking towards the second half of 2020 dialing back expects to focus on its completion activity on areas, where Viper has significant mineral ownership primarily in the Midland Basin.

This increase completion activity, but down back will be supported by dialing back ending the second quarter with approximately 865, ducks, roughly 65% of which wiper expects to own a meaningful royalty interest.

This current DUC backlog.

Along with increasing visibility into third party operators anticipated activity levels will support vipers production profile for the coming quarters.

The advantage business model of wiper as a rule to company is highlighted during these times of depressed commodity prices in that or high cash margins.

No capital requirements.

And limited operational costs drive continuous free cash flow generation through the cycle.

To that end, that's $40 oil and production held flat relative to our second half 2020 guidance levels.

Wipers expected to generate more than 180 million in free cash flow went 2021.

Or a greater than 11% free cash flow yield.

This is expected to be a roughly two percentage point increase for more second half from 2020 annualized to free cash flow yield as some of our hedges roll off.

As it relates to the free cash flow from the second quarter of 2020.

We made the decision to retain 75% of that cash flow to fortify the balance sheet.

The board reviews, the distribution policy each quarter, but with the continued depressed oil prices and uncertainty in the energy industry. The prudent decision as to retain the majority of cash flow to reduce leverage and protect the business.

Well I could remains in strong financial shape with 436 million of liquidity and we'll continue to look for avenues to accelerate the de leveraging process.

And get back to returning to more meaningful amount of cash flow through our distribution.

In conclusion, I want to underscore the fact that mineral ownership remains the safest asset in the oil industry because it is a perpetual real property interest that is high margin in requires zero capital requirements.

Within the mineral sub sector Viper is further distinguished due to our relationship of down in the back as our primary operator.

Times like these emphasize that the relationship.

As Diamondback focuses its operations on areas, where Viper owns the minerals due to the lower consolidated breakeven economics.

This relationship is evident by the midpoint of our second half 2020 average production guidance.

Implying greater than 6% growth relative to Q2 2020.

Average daily oil production, even with the challenging macro backdrop operator, please open the line for questions.

I'd like to ask a question at this time. Please press star one on your telephone keypad. If you like to withdraw your question. That's about your first question comes from L. Thompson with Barclays.

Hey, good morning.

For travelers arcades, it seems pretty clear that time back doesn't plan to pursue growth from us we see a much higher forward curve.

Given the concentration that you'd be a minimum of Viper has high and arise we saw in Twoq you.

Would it be fair to assume Viper could see oil growth in 2021 that could provide upside the free cash within CVD, providing the slide deck just curious on your thought from maybe directly from by some extra.

Yeah well.

Certainly it's a it's a possibility, particularly from the exit Q4 number, but I think a year over year basis with with with Q1 being as high as it was.

Yeah, I think it'd be tough to grow and our year over year basis, we'd have to see some you know some more activity on the non upside, but but you're exactly right I mean, even though diamondback is not pursuing a a large growth.

How did you and 2021 you know the concentration in the focus on Viper minerals, which I think as Ben.

You know accelerated due to the low commodity prices, what will benefit Viper and whole Viper up through.

You know what is a pretty uncertain time, so no I I think drugs can continue from from Q4 right now what we can see is.

Growth into Q3, and certainly grew up into Q4 from Q3, all held up by dialing back and then and then I think you know 2021 has had some optimism, but they've got to finalize the completion schedule a at this point.

Okay. That's helpful color and then in terms of that payout ratio.

You guys, obviously stress it that's reviewed on on a quarterly basis I can appreciate there is some restrictions in terms of debt covenants on on the payout ratio I understand seems to come three times leverage but.

Maybe I'm wrong. There is some flexibility in terms of I don't know bucket to carve out that allow you to exceed that I'm, just just help us understand how you're thinking about the payout ratio going forward as we see kind of a better or strip outlook and just in terms of the line growth.

Yeah. We do you know we have a few buckets in the a in the indenture that allow us to distribute eating it for about three times leverage Oh, we're not about three times leverage today, but but I think you know as the board went through the conversation on the Q2 distribution you know given that the total free cash flow is about 12 cents a unit and we're distributing too.

25% of that you know really there's not a huge delta between paying out a 100% and 25%.

For this quarter, but but certainly going forward.

We're going to have some detailed conversations about what we can do and if we have confidence in the forward outlook. There were not you know kind of get close to four times and we're closer to below three times. Then then then above it.

I think there's there's a chance to to increase that distribution I was looking into the second half this year and into 2021.

Okay. Thank you very much.

Next question comes from Chris Baker with Credit Suisse.

Yeah. Good morning, just in terms of I'm on the topic of Dynavax ownership of Viper, which came from a call earlier today.

The board's comfortable with where things are currently but just curious what the thinking is longer term as it relates to Viper.

Yes, certainly Chris you know if you look at our prior behaviors that Saddam a buck level every opportunity. We've had we've increased ownership in the in Viper and no. That's I think we're very comfortable with or without the dollar back level were where we're what our ownership position isn't environment.

Yeah, Okay, great listen to it certainly will support a support to the debt at Diamond back and that's kind of the point, where we were a hammering and I I think there's no. There's no intention today to sell and eat and sell down any any owner shipping Viper and on top of that a you know I think just just look at our actions where weve increase.

So the share count of what we've owned.

Since IPO.

That's helpful. And then just a follow up you know you mentioned attached you know looking to accelerate the deleveraging process than just curious how you're thinking about levers.

You could potentially Paul beyond maintaining that lower payout ratio.

Yeah, Chris I mean, obviously, the payout ratios and most visible, but but theres a lot going on back the backdrop of.

Doing work on our asset position, making sure we're getting paid for what we deserve to get paid on.

You know working down the accounts receivable balance, but but also you know probably more importantly, you know working to bring some cash and by selling so undeveloped acreage positions and we've had a couple unsolicited bids on completely undeveloped properties, where you know private equities, making a bad on next two or three year develop.

And that doesn't.

Provide a lot of value to Viper today so.

Those are kind of smaller packages here in there or is it fair that we're looking to sell up it's not reducing our cash flow.

Great. Thanks.

Thanks next question comes from Derrick Whitfield with Stifel.

Hey, good morning, guys.

Hey, Derek.

With regard to your 2020 guidance, we're back it into an implied Q4 that has materially above the street in on the higher side of your second half range does that square with your views based on the expected timing of done it back operated completions.

I think Thats fair Derek you know I think I think we try to come out strong with the with the forward guidance and also maintained guidance on like a lot of our peers, who aren't even providing it.

Certainly with the high interest wells coming on.

You know really starting about now and through the end of the year, we feel really good about the growth profile it at Viper into the back half of the year.

Okay.

Great and then perhaps for yourself for Travis certainly based on your earlier down in back call I know the environment for public or private M&A is challenging for working interest acquisitions.

Perhaps if you guys could speak to the broader view on M&A for the mineral sector, which is a bit more fragmented and perhaps less mature.

Yeah, we're really not Derek it's probably harder on the mineral side I think there's still a lot of a lot of private money.

That likes this asset class and therefore, you know the numbers that we're seeing on the you know on the opportunity set or are still too high there's just such a bid ask spread that I.

I think other people are paying for a recovery in oil prices and that's kind of why we decided to sell some assets that aren't a that aren't developed you know we're getting we're getting prices that we thought were reasonable and well above our acquisition cost of that particular asset and that kind of spread the conversation.

Hey, maybe we should sell a little bit here in there.

It makes sense. Thanks all.

Thanks there.

Next question comes from Bryan singer with Goldman Sachs.

Thank you good morning.

First question is on the balance sheet and the dividend payout percentage can you just talked about how you see that how you see that evolving and where you see on a longer term basis that payout percentage a and then the same thing for the balance sheet do you have a a goal now of having a similar leverage at the diamond.

Okay and.

Venom level or is there comfort with Ben I'm, having a higher leverage ratio relative to dynamic.

Well I think I think it all depends on where the forward outlook goes on commodity price, but but overall given that denim is pure free cash flow.

And doesn't have to spends dollar on on Capex that that we should feel a little more comfortable with a higher leverage ratio it's at the bottom level.

Still think we think about leverage on a consolidated into an a de consolidated basis. So we have to be careful there, but but just like done back. There is no set target on the Betim side, we do want to get that payout.

I think the first step is to get the payout up from 25% to 50% and then and then have real conversations with the board on on what the future what the future holds I think overall.

Rely on capital markets for all of your acquisition activity is probably not the most prudent thing to do.

But but we've had a history of being able to to acquire and and raise capital and I think that that's probably changing a little bit but overall, we still want this to be a vehicle that pays out of the majority of its free cash flow to our to our shareholders the largest being done in back.

Great and then a follow up on the divestiture opportunity and then potential acquisitions would with these boasts the focused or wouldn't both divestitures and any potential acquisitions be focused on operators outside of diamond back or some of what you're talking about either from a divestiture perspective or acquisition perspective, and I'm talking about.

Operated properties.

Yeah, I mean, we're not focused on any acquisitions right now, but certainly divestitures our.

Acreage positions not operated by dialing back that we have no line of sight to development, if theres lot of site.

Or cash flow, that's producing on that asset than its not up for sale, but but the unique nature of the minerals business is that a lot of people like to bet on future development and no development today those those assets kind of follow the fond of of what we can sell.

Thank you.

Thanks, Brian next question comes from Jeff Grampp with Northland capital.

Jeff Your line is open. Please go ahead.

Next question comes from Gail Nicholson with Stephen.

Good morning, I'm I'm five outbreak.

The analysis you guys are receiving a 95% Debbie.

Can you just talk about what factors could adjust that expectation on a go forward basis.

Yes, I mean, it really depends on the Brent WTI spread renter BTI widens out a little bit more than it is right now is pretty narrow.

Then then you'd probably realize a little bit higher percentage of Ah of Wi Fi and I think for for us that 95% of the is a good conservative number for the back half of the year and really you know we're trying to hammer the point across here that while we're a little bit hamstrung by by hedging losses in the back half of the year the free cash flow really kicks up.

In a in the first half a 2021.

And you get a pretty pretty solid.

Free cash flow yield based on today's strip.

Great. Thank you.

Thanks Gil.

Next question comes from Leo Mariani with Keybanc.

Hi, guys just wanted to get maybe a little better quantification of possible on second half activity.

Just wanted to get a sense you guys mentioned, a little bit more insight into that kind of non op activity are you guys Bacon anything in on the non op sign into the second half 20 production Guy and then roughly how many second half 20, net well tie ins the expected.

Yes.

I think on the upside we're still going to be pretty conservative you know, we had 1.3 net wells in the second quarter and we're expecting that number to go down in the third quarter, but.

The diamondback side more than doubles on the net wells completed on the Diamondback side in Q3. So that supports the Q3 growth and then as you look into Q4, you are still completing a good amount of diamond back wells and we're baking in a little bit of non up.

Not growth, but for a few more.

A little over one that wells coming on on the been on upside in Q4, so really driven primarily.

You know almost almost 65, 70% on activity.

On the Diamondback side, because we have a lot of confidence in that so it's been on up tend to surprise to the upside been done. That's you know that's gravy for provide for shareholders.

Okay. That's helpful. I guess I certainly I understand that you guys don't have kind of the hard and fast leverage target in fully agree then.

And supports more levers and certainly any traditional E. P company does but clearly you guys have made the decision to go on the defense here on distributions in only pay out roughly 25% you want the cash flow is there is there some kind of leverage level out there, whether it's kind of a fair bit below that three times.

Coming in if its two and a half times or last where you feel like Theres a lot more flexibility on the viper level either to pay out it much more meaningful level of cash flow and already kind of resume any M&A activity out there certainly noticeable that there were no deals in the second quarter. I know you guys said to bid ask spread is wide right now, but it's one.

Do you get a sense around kind of balance sheet governors as well to future M&A.

Yeah, I think the balance sheet, most important holding us back from M&A I mean, if we saw the best deal.

The history of minerals, we'd have to read up there I think hard about it but unfortunately those deals just aren't aren't out there and then on the.

On the on the leverage side really it really depends on the forward outlook and and we go through the the next 18 months with the board in detail every quarter and and if we see the strip materially improving and we're not getting hit on on hedge losses.

I can see that our path to de levering is naturally going to happen. Then then we're going to we're going to bump that distribution back up.

Okay. Thanks, guys.

Thanks next question comes from Phil Stewart with Scotiabank.

Good morning, guys.

I Wonder if we could just circle back on the divestiture comments just curious if you all are you the.

Interest is more skewed to the Delaware over the Midland just given not it's less developed you have got so many comments on that.

That's that's probably fair Filipino the couple of deals we've we've gotten down or are in the Delaware as not say that does not.

Midland opportunities, but but I think overall, our Midland position is is in areas that have a lot of active development or or a lot of visibility, whereas the Delaware is a little less developed and not as a as clear on the cost to for development.

Okay, and I guess, just one follow up on you guys said that you're not focused on selling cash flowing assets, but given that the eagle Ford position is outside of the Permian would that be under consideration as an asset sale as you know to sell left us.

It was there.

I think I think any assets for sale for bids there, but but there's really not I.

I don't think theres going to be a bid that we would want to move that move that asset certainly and we felt like we bought into that at a good pricing and it isn't one of the few areas, where there is actually activity in the Eagle Ford but.

Overall, I I think I think it a job the job of the capital allocators to be able to buy and sell and we're going to take responsible beds and if someone has to bid will will sell it but but right now I don't think that's gonna be a physician that's that's up for sale.

Okay guys. That's it for me I appreciate the time.

Thanks, Phil.

Next question comes from Wells Fargo, <unk> Patrick's insurance.

Hi, good morning.

Well.

Im sorry, the work in progress wells or or perhaps unsurprisingly skewed towards towards Diamondback could you maybe give your thoughts on on where you guys see exiting the year sort of percent diamond bank activity or percent Diamondback production.

Yeah, you know, it's really probably two thirds dialing back production exiting the year I think we're somewhere a little below that today, you know probably close to.

55% today, and then we're probably going to move up you know another another five or 10% has it gone back production I think from an activity perspective.

You know we're modeling wells is essentially 75% diamondback activity in Q3 and in somewhere around 50, 560% in Q4 three were basically averaging.

65, 70% diamondback activity in the back half of the year.

Okay, Okay that makes sense.

If I remember correctly, it's pretty minimal, but can you talk to any federal exposure you might have on third party acreage, particularly in the Delaware.

Oh, yes, I mean dialing back as non but Viper, though the mineral on our would be the the federal government. So they don't you know, we don't have any exposure and must read out or a small override but I don't think we'd have any of those.

Perfect.

At this time I'll turn the call over to Mr. travel sites.

Thank you again to everyone participating in today's call. If you have any questions. Please contact us using the contact information provided.

This concludes today's conference call you may now disconnect.

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