Q3 2020 Viper Energy Partners LP Earnings Call

And welcome to the Viper Energy Partners third quarter 2020 earnings conference call at.

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I would now like they hand, the conference over to Adam Lawlis, Vice President Investor Relations. Thank you. Please go ahead Sir.

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

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

This is going to be Viper today are Travis stice CEO in case things <unk> President.

During this conference call. The participants may make certain forward looking statements relating to the company's financial condition.

Hi, good operations plans objective pieces perform if the businesses.

We caution you that actual results could differ materially from those that are indicated in the forward looking statements due to a variety of factors.

Information concerning these factors can be found in the company's Congress with the FTC.

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

Reconciliations with the appropriate GAAP measure can be found in our earnings release issued yesterday afternoon, well now turn the call over to process.

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

The third quarter was a strong quarter for Viper as we saw a resumption of completion activity on on mineral and royalty acreage as commodity prices improve from the historic lows witnessed during the second quarter of this year.

Bikers, 10% increase in oil production during the third quarter was driven primarily by 38 of Diamond backs 41 completions in the quarter, having roughly 10% average royalty interest net to Viper as third party activity remained minimal again showcasing the differential relationship between them back in.

Excellent.

The advantage nature of the royalty business model with no required capex and only minimal operating expenditures further enhanced by Barkers best in class cost structure has been highlighted during this severe industry downturn as wipers been able to reduce total debt by 10% and just the past six months.

As a direct rule result of this and because of our confidence and the expected free cash flow to be generated in our forward outlook.

The board has elected to increase our distribution payout for the third quarter to 50% of our total cash available for distribution.

Oh up from 25% previously.

21 cents per unit of total cash available for distribution and plus the 12% annualized distributable cash flow yield based on our current unit price.

On the operations front, we continued to maintain a strong inventory of both work in progress and line of sight wells.

Given that visibility we have initiated the average production guidance for the fourth quarter of 2020 in the first quarter of 2021, a 15.25 to 16.2 5000 barrels of oil per day.

While production is already within the high end of our previously guided range and we remain confident we'll exit 2020 with a strong production rate.

Diamondback operated activity on borrowers acreage is expected to be slightly lower in the fourth quarter of this year and into the first quarter of next year before returning to a more elevated level again, starting in the second quarter of 2021.

This is seen with only 3.5 net done back operated wells in the work in progress bucket.

Which we define as well is expected to be turned to production within the next six to eight months, but 7.4 net line of sight wells, which are expected to be turned into production.

And the roughly six day month time period thereafter further.

Further we continue to be conservative in our forecast in the third party operated production, despite leading edge indicators pointing to a return to increased activity levels and timing of operations.

Despite this conservatism at $40 Wtvr and production held flat relative to our average fourth quarter 2020, and first quarter 2021 guidance.

Fiber is expected to generate approximately 200 million of free cash flow.

On an annualized basis in the first quarter of 2021 six.

This equates to greater than 11% free cash flow yield as a percentage of enterprise value or roughly 18% based on our current market cap.

Bakken remains in strong financial shape with $461 million of liquidity.

And we will continue to look for avenues to accelerate the deleveraging process. So that we can continue to increase our return of this free cash flow to our unitholders over the upcoming quarters.

Operator, please open the line for questions.

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Our first question comes from the line of Brian Downey with Citigroup. Your line is open.

[noise] morning, hope everyone's well and thanks for taking my questions you increased your implied payout ratio here, that's a 50% in the third quarter and noted in your deck that you expect to continue to maintain a portion of cash available to reduce debt any updated thoughts on how we should think about the pace of that payout ratio increasing over time, what guide posts, you're watching and and what the.

Anticipated ceiling is given those debt reduction goals.

Yeah, Brian Good question I mean, I think we are going to be patient we did take the.

No the stuff from 25% up to up to 50% this quarter and I think there's a lot of confidence and in keeping that kind of overall payout ratio I'm going forward now I think the key is going to be Q1, and Q2 and our our our hedges roll off from from.

20.

Let me start to realize a lot higher oil price on a majority of our production and if we you know I think we're at current prices to go higher from here and we don't think it's logical that payout percentage you know.

Rises a little bit I think still we're probably focused on getting to two times leverage at the end of 2021, which I think is a pretty logical first step or next step for us from a from a leverage perspective and and.

But like you like we've said.

The increased payout is obviously mutually exclusive to that to that further debt reduction.

Great. That's helpful and then it looks like from the Jack in the cash flow statement that you sold a small number of third party operated Delaware basin acres for a few million dollars could you update us on the potential for further third party operated asset sales and I guess more theoretically with the ERP consolidation, we've seen within some of Vipers third party operator.

Cohort has that changed how you're thinking about your third party operated acreage footprint at all versus three or six months ago.

I wouldn't say that the GNP consolidation has impacted our our thought process on asset sales, but but certainly the strength, we're seeing in the private market versus the public market or where we're trading has continued to give us confidence that.

Selling some assets at these prices isn't the worst idea I think overall were solid asset.

Our completely undeveloped under operators with not a ton of visibility and not a lot of active development.

We do have some some larger packages that were talking to people about.

But we're going to be patient and a and like.

I think like we said last last quarter were not a forced seller here, but.

But we are you know recognizing where we trade versus where we can sell some of the stuff in the in the public markets with zero cash flow.

Great I appreciate sorry, excuse me in the in the private markets with zero cash flow.

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Thank you. Our next question comes from the line of Derrick Whitfield with Stifel. Your line is open.

Hey, good morning, guys.

Good morning, Eric.

Thinking about 2021 production, while affiliate Allied can still change in the macro conditions would it be fair to assume that your forward visibility putting work in progress and line of sight wells with that visibility you could hold Q3 call. It Q4 production relatively flat assuming they ratable conversion about inventory.

Yeah, Doug I mean, I I think Thats fair you know there is obviously going to be some movement large.

A large pads at the diamondback level do impact Viper.

Uniquely versus.

A staple planet at the parent go you know I think that the the.

The kicker is going to be non off production in non op volumes and you know we're still.

Very conservative on how we're modeling those on our volumes, but that's certainly.

Our our leading indicators you know permits and rig count and Longsight Wells says has improved so.

Slightly on the on the non op side, particularly in the last couple of months, so well well I won't commit to.

Sustain flat as.

As guidance today, I think it's a potential outcome.

For the full year.

In case, just stand on that point, specifically when you guys look at the permits to assess your third party Q set of speed does that support the notion that the rig counts largely bottoms from a third party perspective, and then also when it support the notion that your completion flow probably.

Probably bottomed as well.

I think that's fair and I think you've seen it in the in the data we put out that the you know the.

Diamondback net wells really held up the company and in Q2, and and then well sorry, mainly in Q3, and we'll continue to do so and Q4.

Certainly.

Certainly helped the rig count has bottomed out but also from an industry perspective, we don't go back to grow grow grow grow and instead focus on.

Maintaining production and hopefully vipers, the beneficiary or some of that non op production getting turned to mine here over the next few quarters.

Great very helpful guys. Thanks.

Thank you Dirk.

Your next question is from the line of Brian singer with Goldman Sachs. Your line is open.

Great. Thank you on the denim that call I believe time back said, a flattish type production until oil prices move higher and then more longer term.

Low single digit or just single digit production growth and I, just wondered what's the longevity by which the Viper production profile can outperform.

Diamond back based on the focus of dialing back on drilling higher interest wells on a from a from a vibrant portfolio from a different perspective that was obviously a driver of the strong production here this quarter, but what's the what's the longevity of that until potentially you start to see diamond back growth equal equal Viper growth XT.

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XT what happens on the non operators.

Yeah, Brian I mean, I think I.

I think certainly the second half of this year, you know vipers growth is going to outperform diamond backs brother Vipers operated production by Diamondback is going outperformed diamond backs growth.

This does go in waves and we had some really high interest wells coming on in Q3, that's going to help us going into Q4, but over the longer over the longer term.

You know I would hope that Vipers Diamondback operated production can slightly outperformed diamondback at diamondback, staying flat or grow a couple bips higher than couple of hundred bips higher on a percentage basis, and then diamond backs, but you know that's our job as a consolidated capital allocator to make sure.

You know the drill schedule is encompassing Viper minerals and and what we see today is that you know theres going to be a lot of interest pads coming on in 2021, continuing that trend of.

You know increased pro forma capital efficiency heading into 2021.

Got it. Thank you and then my follow up you talked about asset sales earlier and understandable understandable focus on on deleveraging part part of which you've already shown here over the last six months, but can you just talk philosophically on the acquisition side about the interest level and further growth via.

Via M&A, and how you expect that market to and your interest level to evolve.

You know I think M&A has been has been really important to viper to achieve scale in the in the mineral space.

I think I think you know we're going to echo the comments that the Travis had on the on the Diamondback calls the Viper doesn't need to be the biggest mineral water in Texas or the biggest mineral owner in the Permian, we need to be the best and that means that we're going to be you know reshaping our portfolio a little bit.

Buying minerals under diamond back and selling non op minerals, and well I'm not going to you know like like we said, we're not going to sell minerals at fire sale prices, we do recognize that there's a bit of a value disconnect between where were trading and where you know these minerals are trading in the private market under operators with no visibility no on the side.

No, it's good acreage, but but there's no control over the drill bit so I'd rather have control over over minerals that we operate with a 16% for yield and a pristine visibility.

Great. Thank you.

Thank you Brian.

Our next question comes from the line of Chris Baker with Credit Suisse. Your line is open.

Hi, Good morning, I realize it's hard to talk about 2021 without formal guidance through Fang, but just looking at that slide seven in the deck. It looks like historically you guys have averaged called 70% to 75% of tying back activity, what's a reasonable place holder for vipers exposure to fee.

Thanks program next year.

And could that you know sort of be a biased above the historical average as we've seen over the past few quarters.

Well I think it's going to it's going to move around you know the Q3 number was it wasn't as high as it's ever been and I think we had 93% exposure to diamondback wells, but but I think Chris over up over a longer period of time, you know two thirds to three quarters is a pretty safe baseline now.

You know I do think.

Our Viper team is going to be looking to increase that number by buying hundred diamond backs when when the balance sheet allows it but two thirds to three quarters exposure to the diamond backs completions is probably a safe bet.

Okay, Great and just as a follow up you know realizing the focus today is on the balance sheet, but once that sort of peak leverage is in the rearview mirror or is there a specific leverage target you talked about two times by the end of next year, but is there a specific leverage targets that allows you to restart the acquisition program.

Albeit and what it sounds like is a very thoughtful way.

Yeah.

I think I think being closer to two and getting three times in the rearview mirror is more important to US today, you know I think if we have a lot of confidence that that's going to happen.

You know over over a couple of quarters and then we can restart the acquisition machine, but what I also think part of the acquisition acquisition machine can be funded through asset sales rather than debt or external funding.

Okay, great. Thanks.

Thank you Chris.

Our next question comes from the line of Jeff Grampp with Northland. Your line is open.

Yes.

Okay, maybe just a.

Just to build on the on the last thoughts on kind of leverage and a payout ratios or what are you guys kind of view if you formalized any any thoughts internally about kind of target leverage and payout ratios in a normalized world. However, you guys may want to define normalized.

Yeah, I mean [laughter] in 2020, I don't know what normal is any more Jeff, but but I do think it kind of a mid cycle oil price 45 to 55, W.T.I., which is a long way from where we are today, we should be closer to a turn or turn and a half levered at most and <unk>.

Well I won't commit to a long term.

Payout ratio on this call I do think it's something like the inverse of any in P. So BNP is.

You know reinvesting 70% of its cash flow into a maintenance capital and returns maybe the mineral company can be the opposite you know I think.

Heard a lot of talk about variable dividends in this in the MP space and I you know I.

I ask investors to go look back at what we've done in Viper has been a variable investment vehicle variable payout vehicle well, let you know.

For five or six years, Alan and its returned a lot of cash back to shareholders. So I think you know I think a rule of thumb could be that it's the inverse of opening in P. I mean, a a mineral company certainly needs to continue to add inventory. This is a you know a depleting business, but the urged that inventory for mineral company as much.

Different than than MP.

Got it appreciate that and for my follow up how how would you say a hedging philosophy integrates into some of those kind of longer term goals. I know you guys put some on at the beginning of this pandemic, but it seems like in a little bit quieter on that front should we expect viper longer term to return to an unhedged entity or does hedging have a role going forward.

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No I think I think through a through a down cycle you always have to look at the decisions you made and and figure out what were you doing before the down cycle that was good bad or indifferent and you know one of the lessons learned I think for us. It pit Vipers that you know if you have that you should probably hedge more than than less and.

Viper was always an unhedged vehicle because there was not a lot of debt when we added that bond.

We should have hedged and a you know that's a shame on me for not doing that but I do think lessons learned is that you know well I don't want to track Viper into a specific cash flow number I do think protecting the downside from some sort of wide range of callers.

No the guarantees our investors some form of return of capital.

On the downside and doesn't limit their exposure to oil prices on the upside is probably gonna become part of the part of the story along with you know continued debt reduction or if you use that to buy something a clear path to paying back that debt over.

Over a short period of time.

All right that sounds good thanks for the time guys.

Thank you Jeff.

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

Good morning, I'm not my questions have been asked but just kind of curious if you look at the volatility in the commodity and experiencing 20. How are you guys thinking about you know that maybe not according to pass, but the need to potentially build cash on the balance sheet on a go forward basis, just to how does a safety net.

Yeah, I guess I mean, if it's a good comment.

I think it's probably less important at viper than than Diamondback to build cash just because you know the.

The first step at Viper is to get that revolving credit facility down to almost zero and ER and reduce our reliance on bank funding I mean, you've seen obviously the banks of.

Had a tough time with energy companies through this down cycle, and we want to be as low touch as possible with those banks.

So I think we're a long way off from from getting the revolver to zero, but it's certainly having you know the ability to buy.

Buyback bonds in the open market pay down debt and also called out because vipers non investment grade.

I have a little less of a need to hoard cash, but what I do recognize that.

You know, having having cash for a rainy day, even in the worst thing in ER and then in running an energy company.

Great. Thank you.

Our next question comes from the line of Neal Dingmann with the Truest Securities. Your line is open.

Ill case family Richert rigs are currently like Britain Viper acreage and you know what are you thinking that will be about the same.

Are you assuming sort of going into next year.

Yeah.

No can you repeat that question.

The current rigs how many rigs operate right around me.

Yeah, we got almost got 21 rigs running 21 rigs running today four of which are dialing back operator for Don and back rigs and and I think we've seen something like 60 permits put on our position here in the last three weeks.

Wow, Okay. That's always good to talk great Great details and then secondly, Bill Viper has always benefited from Doug accepted that bucket gray okay.

The pricing that's link there. So I'm just wondering are you expecting much change I think what these are long term contracts. So would there be much change and how we think about this for for bite for going forward are or are not really given sort of the length and duration of these contracts.

No I don't think there'll be a change in you know we set this viper up to receive the same pricing as Don Ambac you know other companies have other even piece have marketing entities that take possession of the barrel in their local market and then sell it to the international market or wherever they end up selling the barrel too and in order to have full alignment between the two public entity.

These we sell at the wellhead and therefore Viper received the same prices Diamond back I think you know Viper because of Spanish trail being such a large piece of our production, but we're just a little more any h. exposure versus.

Diamondback, receiving more Brent exposure, but Tom you know those are long term contracts and we want to make sure a parent and sort of are aligned on what they receive.

Very good thank you.

Thanks Neil.

Our last question comes from the line of Leo Mariani with Keybanc. Your line is open.

Hey, guys just wanted to follow up on a comment you made around the production guide for Fourq, you 21 to 21.

I hear you guys right did you really not assuming much in the way of of non op activity at all in those numbers. Despite the fact that you're seeing these encouraging for me to answer.

Yeah, I mean, we all got worse, assuming some some non op non op activity, we're certainly not assuming you.

You know we get back to levels seen in the end of 2019 or early 2020, I think non that's going to help a little bit in Q4, and Q1, but Q4 will probably be mainly driven by the follow through of these high high and our I pads from Diamond back Oh.

You know benefiting Q4, and then Q1 still so a little bit far away from US right now to make any bold predictions, but I.

I do think Q4 is likely a bit stronger than Q1.

Okay. That's that's helpful.

And I guess just from a perspective of the payout ratio just kind of wanted to make sure I understood. You guys correctly here you, obviously took it up from 25% to 50%, which is nice to see I guess basically you're saying that yes, we're likely to kind of stay at this 50% for a while until we really see oil prices kind of recover to that.

45, plus type time frame.

Well, yeah, I mean, I think a while in our industry is a is a relative definition. So you know we have confidence that Q1 and Q2 strip starts to improve in that you know we're going to receive a much higher price for our commodity you know high Thirtys low Fortys and then I think it's on the board to look at that forward outlook and CFO.

Sure you know reducing debt to two times leverage kind of target.

At strip pricing and can we protect that a little bit via hedging and if we can do that then then lets you know increase the payout even further.

Okay. Thanks for your time.

Thank you Leo.

Thank you I'm not showing any further questions. So I'll now turn the call back over to Travis Stice CEO for closing remarks.

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

Ladies and gentlemen, this does conclude the program you may now disconnect. Thank you for participating and have a wonderful day.

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