Q4 2020 Viper Energy Partners LP Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Viper Energy Partners fourth quarter 2020 earnings call. At this time, all participants on a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask the question during the session you will need to press Star then one on your telephone.

Please be advised of today's call is being recorded if you will.

Acquired the Snow system, you May Press Star then zero on to reach an operator.

I would now like to hand, the call over to Adam Lawlis, Vice President Investor Relations. Please go ahead.

Thank you Michele good morning, and welcome to the Viper Energy partners fourth quarter 2020 conference call.

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

Representing Viper today are Travis Stice CEO, the case Panther President.

During this conference call of the participants may make certain forward looking statements relating to the company's financial condition results of operations plans objectives future performance of the businesses.

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

Information concerning these factors can be found on the company's filings with the P. C.

In addition, we'll make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found on the earnings release issued yesterday afternoon.

I will turn the call over to the Travis Stice. Thank you Adam welcome everyone and thank you for listening to the Viper Energy partners fourth quarter of 2020 conference call.

Vipers financial and operational performance rebounded strongly in the second half of last year. After surviving the unprecedented volatility experienced through most of 2020.

Commodity prices have increased and associated activity on Vipers acreage has increased alongside the commodity.

Even in a year, where we experienced historically low commodity prices.

Who was able to generate almost $200 million in operating cash flow, which was almost entirely converted to free cash flow.

Due to our business, having zero capital requirements.

This recovery again highlights both the advantaged nature of the royalty business model.

As well as the benefit of Vipers symbiotic relationship with our parent company of Diamondback.

Looking at the fourth quarter, specifically vipers, 10% quarter over quarter increase in oil production was driven primarily by Viper, having an interest in 'twenty one of Diamondbacks 35 completions.

With well performance exceeding internal expectations.

Viper also benefited from third party operated well performance and timing of wells being turned to production outperforming our prior conservative expectations, which had been lowered due to the uncertainty presented by the volatile oil prices experienced early last year.

Viper was once again able to generate significant free cash flow of both organically as well as inorganically through noncore asset sales, which accelerated in the fourth quarter.

The truly unique nature of of Wipers business model is highlighted by the fact that during the fourth quarter alone we were able to declare a 14th distribution repurchased over 2 million units and repay over $40 million on debt.

Over the past nine months, we have now reduced total debt by $110 million or roughly 16% over this period.

Further the units we have repurchased to date represent one 6% of.

Of total units previously outstanding.

Looking ahead, the 2021 we have initiated production guidance for 2021 that incorporates our strong backlog of work in progress plus line of sight wells as well as the anticipated impact to our production from the recent winter storms in the Permian Basin.

Viper is expected to have meaningful exposure to diamondback 's high graded primarily in Midland Basin focused the development in 2021 <unk>.

Additionally, visibility in the third party operators anticipated activity levels continues to increase as commodity prices have improved and operators have returned to work.

However.

In an effort to be conservative, we will continue to incorporate slower than normal timing assumptions in the guidance we have provided.

Despite this conservatism along with the production impact from the recent winter storms.

<unk> is still expected to generate roughly $250 million of free cash flow of this year, assuming $55 <unk> and production at the midpoint of our full year of 2020 guide.

This equates to greater than 8% free cash flow yield as a percentage of our enterprise value or roughly 10%.

Just on of our current market cap.

<unk> remains in strong financial shape with $515 million of liquidity and we'll look to continue to decrease leverage while also increasing the return of capital to our unit holders over the coming quarters.

In conclusion 2020 was.

Truly historic for all of the wrong reasons. Despite these difficult conditions.

<unk> showcased its differentiated business model and version of best in class cost structure to emerge from this down cycle with the positive forward outlook on.

Operator, please open the line for questions.

As a reminder to ask a question. Please press Star then one.

If your question has the answers and you like to remove yourself from the queue press the pound key.

First question comes from Neal Dingmann with true Securities. Your line is open.

Good morning, guys.

Hey, guys here, what's your guidance.

Maybe give me a little bit of help here.

You mentioned that all of the wells that are in process think 529, you put in there and then you talked about the $5 38 wells that are inside I'm. Just wondering could you talk about kind of what's based in the guide is that just these wells or maybe the expectations for total wells around that.

Yeah, Neil good.

Good question, you know I think I think what we're assuming.

Somewhere in the range of nine to 10 net diamondback wells throughout the year, you know I think while we had a lot of high interest timing.

Diamondback wells come on in Q3, and Q4, we're taking a bit of a pause there based on the schedule today, so that number will come down a little bit here in Q1, but the pick back up in Q2 of 2021, and then we're assuming you know kind of somewhere around one net well of quarter on the on.

The non op.

You know I think that probably is a little more back half weighted than the.

Then the then the Diamondback plan, but I think we're pretty excited on the amount of net wells we're seeing.

On the non op side.

You know start to get.

The permanent drilled and eventually completed here as the commodity has recovered.

Okay, no that makes sense and it was maybe not quite and then just one follow up should we think about kind of that 58% of oil weighting on I think the enterprise Ron was around 6% is that going to be somewhere.

In the ballpark sort of going forward.

I think I think the well waiting on 60.

Fair assessment awesome on the Fang operated six per slot.

Yes, that's probably about right 67%.

Kind of talked about it as percentage exposure to the.

The Standalone Diamondback development plan, so probably 70% of exposure to that plan and that will go down.

QEP and guide on our incorporated but yes, I think 6% to 7% average in the right throughout the year will be fair.

Okay. Thank you al.

Thanks Neil.

Our next question comes from Derrick Whitfield with Stifel. Your line is open.

Good morning, Ken.

Hey, Jerry case wanted to circle back to your comments on visibility at a high level referencing your forward visibility slides on pages seven to nine could you comment on how we should think about diamondbacks contribution to Viper post the QEP and guide on transactions.

Would it be safe to assume the combined value of.

Working price progress in line of sight wells would remain around that 10 to 11, net well or in line with Q3 and Q4 levels.

Yes, I think I think that's right Eric I mean, I think you know all of them will get into this probably later in the call, but we do have a lot of opportunities to increase the mineral ownership under QEP and guide on we didn't own a lot of minerals under those two entities prior to announcing these two deals but our team is doing some work in trying to get.

More exposure under the couple of pads that we have visibility to that might not have permits filed already.

Get a hop on on a good deal there. So I don't think it changes. The addition of QEP Your guide on changes the amount.

The amount of net wells under Diamondback for the year, but certainly as the year progresses, I think there will be opportunity to increase that number with selective purchasing of minerals underneath the.

The pro forma Diamondback development plan.

Okay that was in fact my follow up was the pending successful closure of those two transactions could you, perhaps put some parameters or speak to the degree of A&D opportunity that presents devices.

Yes, it's pretty significant you know Derek and.

People have been calling us I think we've been.

Trying to work the pro forma development plan to make sure we're buying selectively.

We also need to make sure we're managing our balance sheet appropriately.

And I think you know the capital allocation decision for us is gonna be do.

Do we continue buying back shares or do we use some cash to buy minerals.

Or trade minerals or continue to sell non op minerals like we did in the fourth quarter, you know I think that market continues to heal.

And I think you know as you think about Viper.

We no longer need to be the biggest mineral company out there, we just need to be the best in that to be the best means we have to have more visibility into the.

The other side of our business card, which we're trying to do here by buying more minerals under diamondback.

That makes sense very helpful guys.

Thank you Derek.

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

Good morning.

Of that $250 million of free cash flow generation assets.

Dollar of oil.

Bucket that in the standpoint of a cash distribution payments with shareholders versus debt reduction versus that continuing the buyback and the future M&A events.

Yes, I think we're pretty happy with the 50% of distributable cash flow going to an investors in the form of the distribution right now the.

<unk> did have a very active discussion on on the buyback and we're very happy that the buyback has worked to date.

I think I think the buyback versus buying more minerals under Diamondback is really the fall from here, because I think probably a quarter of our free cash flow still goes towards debt reduction I think we want.

Our revolver to be at or near or close to zero as possible by the end of this year.

Well on our way to doing that so we have visibility into our revolver of zero.

Our bonds are trading well, so im not concerned there.

And and and more free cash flow of than the the distribution percentage will probably likely increase over time.

Great and then looking at the over and over $40 million on asset sales that were done this quarter or that was like smaller packages within the larger packets can you just talk about kind of what that on the M&A space. It looks like on the divestiture side for you guys.

Yes, it's really four deals too small.

Two of decent size.

Two of decent size of the one of those in the $12 million to $15 million range of almost close to $20 million.

And those were all on the third parties non operated by Diamondback without you know true.

True visibility.

Not a lot of permits no existing production some vertical production, but but no meaningful production. So you know.

We were happy to get that deal done and I think it accelerated the deleveraging process and also allowed us to buy back a lot of stock in December and January of the stock was weaker than it is today.

And.

Also we ended the year at under three times leverage So I think that was a testament to the the team.

Getting these deals done before the end of the year and not touching that three times the number that we.

I don't want to go above.

Great. Thank you.

Thank you Yale.

Our next question comes from Pearce Hammond with Simmons Energy Your line is open.

Good morning, and thanks for taking my questions. My first question well first just the statement congrats on the success of fortifying the balance sheet, just curious what leverage ratio of where you're targeting for the balance sheet and when you reach that target would you expect to increase the payout ratio or is the payout ratio of function of how much stock you expect to buyback.

Yes. Good question, Peter I think it's I think it's more of.

Our gross debt reduction I'd like to like I was saying earlier I'd like the revolver down to zero I think with the Ford strip, where it is the the forward free cash flow outlook looks strong enough debt.

We will be comfortably under two times by the end of the year, you know I think longer term, we would prefer to be in.

In the one to one five times ratio, but also paying down down gross debt so far.

First step is under two I think it's going to happen you know pretty pretty quickly here with the strip where it is.

But like just like of Diamondback, I don't think that precludes us from.

Continuing to increase the returns to shareholders in the form of the distribution.

Thank you and then as a follow up to that as the balance sheet as strength and then as it continues to get better.

Would that mean that the desire to hedge would be going down as well.

I think we've learned learned that maybe some small amount of hedging.

Viper to protect the downside of protect a minimum distribution.

And our maximum leverage is probably going to be in the cards.

I think it's gonna be hedge.

Hedging all of our production, but certainly protecting that downside and guaranteed some returns to investors and simplifying the business.

<unk> is probably prudent over a longer over a longer period of time here.

Okay. Thank you Jason.

The comment I'd love the prepared remarks, where Travis 2020 truly historic for all of the wrong reasons well put.

Thank you.

On to 2021.

There are no further questions I'd like to turn the call back over to Travis Stice CEO for any closing remarks.

Before trying to speak.

The question about the storm impact.

In Q1, I just wanted to give investors some guidelines around.

The year, because obviously your guidance was taken down a little bit of Viper, we're assuming four to five days of downtime on Diamondback operated properties, we're assuming five to seven days of downtime on.

On non op properties, just just to be conservative and then getting the production back.

I would point people to the kind of look at Q1 is very similar to what we produced in Q2 of 2020.

But then some pretty significant growth after that in Q2 through Q4.

Which which kind of.

Equals a similar oil production guide to where the street was prior to the storm impacts so.

While the storm impact is going to be meaningful in Q1, we do expect a pretty quick rebound.

In Q2, and we saw some positive things early early in Q1 prior to the storm. So Travis I'll, let you close I appreciate those comments Chris.

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

Yeah.

Ladies and gentlemen, this does conclude the program and you may all disconnect everyone have a great day.

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