Q2 2021 Viper Energy Partners LP Earnings Call
Good day, and thank you for standing by and welcome to the Viper Energy partners second quarter 2021earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need depressed power 1 on.
On your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.
Thank you Peter Good morning, and welcome to Viper Energy Partners second quarter 2021 conference call. During our call will debut and reference an updated investor presentation, which can be found on vipers website.
Presenting today are Travis Stice, CEO and <unk> President and during this conference call. The participants may make certain forward looking statements relating to the company's financial condition results of operations plans objectives future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors.
Information concerning these factors can be found and the company's filings with the C suite.
In addition, we and make a reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found on the earnings release issued yesterday afternoon, and I will turn the call over to Travis Stice.
Thank you Adam welcome everyone and thank you for listening to Viper Energy partners second quarter 2021 conference call.
Vipers production during the second quarter were supported by a concentrated exposure to Diamondback Midland Basin development plan as well as and increasing activity from third party operators as a result of the strong production.
And enhance tomorrow and best in class cost structure.
Viper generated over $75 million and free cash flow during the quarter.
This strong free cash flow generation and the resulting in continued decrease net debt has enabled by from to increase our distribution to common unit holders to 70% of cash available for distribution.
This increase and our distribution marks the second consecutive quarter of increasing return of capital unit holders and the 33 per unit distribution represents a 32% increase.
From the first quarter distribution.
Looking ahead, we increased our production outlook for 2021 and continued to maintain visibility and to Diamondback expected forward development plan that includes several large pads, where viper on a significant royalty interest and the second half of the year. Additionally, Viper initiate.
On an average production guidance for the second half of 2021 and that implies almost 16000 barrels per day production at the midpoint.
Based on this second half 2021 guidance and assuming production is held flat at the stated mid point and a range.
<unk> is expected to generate roughly $320 million of annualized free cash flow and the back half of the year, assuming $65 does UTI.
Importantly, given these same assumptions were expected to generate over $360 million of annualized free cash flow and the first half of 2022.
And as our out of the money hedges roll off this 2022 free cash flow amount equates to greater than 11% free cash flow yield as a percentage of our enterprise value or almost 13 percentage of more current market cap.
In conclusion, the second quarter of 2021 was another strong quarter for Viper.
Once again highlighted our high quality asset base best in class cost structure and.
And overall differentiated business model.
Given the strength of our balance sheet.
Current distribution, representing greater than a 7% yield.
And from plans to retain 30% of its cash flow for the foreseeable future to focus on acquiring diamondback operated and minerals as well as to buy back units are.
Our acquisition strategy is unique and that we have a clear understanding and more parent company's future development plans.
And we plan to leverage net knowledge to provide further exposure to the diamondback drill bid.
Operator, please open the line for questions.
Thank you as a reminder to ask a question you will need the price power 1 on your telephone again that is par and then the number 1 on your telephone and so we'd draw your question press the pound key.
Please standby, while we compile the Q&A roster.
And your first question on will come from Brian Downey with Citigroup. Your line is open.
Hey, good morning, Thanks for taking the questions on the on cash flow allocation as you just mentioned.
And you plan to retain and 30% of cash flow for acquiring royalty interest and continuing.
And I do repurchases, which implies about a 70% payout ratio for the coming quarters could you give an update on what youre seeing today and the mineral A&D market and how youre thinking about allocating capital between that that acquisition bucket and repurchase bucket.
Yes, Brian Good question and I think.
Generally where we're moving towards a 70% payout ratio because traditionally and this business was founded 100% with equity.
I think the world has changed in terms of raising equity to pay for deals and so on the mineral space, but also just in the energy energy space in general so.
Serving some of that cash to use cash and in deals.
Feels prudent.
Particularly and then I'll get into.
And so continue to lever up so.
And you know right now we're still focused on diamondback operated properties.
And you can see and the and the quarter, we didnt do much but there are some some deals and it works and and a lot of undeveloped diamondback acreage that's been acquired with the QEP and guide on physicians.
Potential for Viper, Viper and mineral purchases.
Okay, Great and then on ops.
Finished.
I think if.
If we don't have line of sight to deals and we're going to use cash for I think.
Continuing to use cash to buy back units.
And as a prudent use of that capital.
It makes sense and then on the hedging strategy you started hedging 2022 with relatively wide collars and deferred premium puts as you hinted that during last quarter's conference call should we anticipate that strategy continuing going forward and it seemed like you were at and call. It mid to high $40 per barrel floor did you.
At that level intentionally in terms of how you see distributable cash flow and and leverage protection at that level or is that just happened to be where the caller and deferred premium pricing checkout bass.
No I mean, it's really solving for.
Im not going on above.
And 2 times leverage and also selling still being able to pay out a good amount of cash flow to unit holders and I think.
And discussions with large shareholders as well as thinking about.
The business model coming out of this down cycle.
Having that insurance for a rainy day is is money well spent and.
And I think Youll see us continue to build.
You know a few quarters and advance the hedge position. So that you know we never put in a position like we were in Q2 of 2020 again, So you know.
Hedging on the money.
Volume puts you know with this business you still generate a lot of free cash.
On a leverage doesn't blow out and and you can sell distribute a lot of that cash to unitholders.
Great I appreciate the color. Thanks.
Thank you Brian.
Yeah.
Your next question will come from Chris Baker with Credit Suisse.
Hey, good morning, guys I just wanted to follow up on the acquisition program. So I think at 70% payout ratio and imply maybe a little over $100 million and retained cash for next year is the intent to match that sort of pace of acquisitions with retained cash over time and then.
Charlie Self fund net.
Yeah.
And then.
No guarantees and is it really just depends what size of deals are presented to US you know I think I think we like 70, because our ground game, 70% distribution because our ground game.
Little slow year to date and.
And we've kind of gotten the revolver down to where almost zero to where we set a goal out earlier this year.
And if theres larger deals and we have to find a different way to fund it and just retained cash flow, but for smaller deals I think the blocking and tackling deals that we do on and on a day to day basis that that number makes sense.
Okay, Great and then just as a follow up we've seen some E&P peers introduce or accelerate cash return programs and variable dividends could you maybe just highlight how you frame up vipers differentiated value proposition today.
Just thinking about.
And where you might be able to see opportunities to strikes and that profile given what's.
Obviously, a very lean cost structure today and.
And as you mentioned are quickly improving leverage profile.
Yeah, John Viper paint the first variable dividend and the E&P space and Q4 of 2014 and and it's been a variable dividend per since then so.
And I think we cut back on the percent distributed on the way I like to think about it and the mineral company.
Distribute 70% retained 30 without needing to go to the equity markets to fund deals and and E&P is kind of the inverse where we'd have to spend capital and use 70% and cash flow for sustaining.
Capital and the rest.
And going to shareholders. So I think it's interesting to see the E&P business model evolved closer to what the mineral business model has been for the last.
4 or 5 years, starting with Viper and some of our peers and Canada.
And I think and highlights the value that minerals have I think that value has been underappreciated by the market for the last.
And 5 or 6 quarters, but you know and a rising.
Commodity price environment, and when you can give almost all your cash flow back to unit holders.
That's a pretty good business.
Great. Thanks, guys.
Your next question will come from Neal Dingmann with truly Securities. Your line is open.
Morning, guys. My first question is probably for you just still a bit more on this free cash flow allocation I want to make sure I understand can you give me an idea of that 30% of your free cash flow. That's not part of the cash distribution would I know you mentioned about net use and start to obviously to fund acquisitions with most of that then just go down 1 day.
Paying debt pay and the Army L down and then you can use obviously just use that again to do deals or I just want to make from understanding right about what youre thinking about that allocation on that 30%.
Yes, Youre right and I, just think you know our crews to the balance sheet.
And it pays on the <unk> zero.
Start to build the cash position and.
And I think we want to think about our RV.
And you know temporary funding and not permanent funding and so anything that gets put on that.
Need to have a path towards reduction and and in a business like minerals, where you don't have to spend capital.
And you know to sustain and grow production.
Net debt down.
Balance gets paid down very very quickly.
Yes, and I haven't said it makes a lot of sense and then just secondly beyond thing can you just talked about you and Travis just maybe talks about the concept of activity for the remainder of this year and into next I'll, obviously be on thing and you know really how quickly can these plans changed so just it does sound like Youre confident about some stable activity going forward, maybe just any color.
Around that.
Yeah, so feel really good about the diamondback activity levels.
And particularly in the fourth quarter and going out.
And I think 8 wells in Spanish trail come on and 2 wells on the Delaware that are behind.
Hi, and mineral interest so I feel really good about about that plan non op.
Well, it's still a little murky outside of the next couple of quarters. We are seeing the rig count rise and we're seeing you know from a from a net wealth perspective and the forward outlook.
Non op piece pick up steam here so.
And I think we'll continue to.
And the guide conservatively.
On the non op side I think this is our sixth consecutive quarter of of being over 1% over the midpoint of our guidance on the oil front and.
And Thats, just due to non op conservatism.
You know fair on the on the assumptions that go into the down on that plan.
Sure makes a lot of sense. Thank you.
Thanks Neil.
And your next question will come from Gail Nicholson with Stephens. Your line is open.
Good morning, and you can happen.
And advantaged structure, I think 80% on the 'twenty 1 dividend are estimated to contemplate a non taxable reduction.
Barrels.
Change in 'twenty, 2.4 and especially with the higher commodity price environment. We are currently on.
Yeah.
Looking back when we when we converted to a.
Taxable partnership.
In a couple of years ago, you know, we made sure that our unit holders at the time were not differentially affected by that conversion from and MLP to a taxable partnership and what we did was allocated some income from the part of the limited partners to Diamondback shield their tax structure.
Sure.
And our special allocation is running.
And let's say running out.
Running lower particularly with.
And the commodity prices rising like they have so instead of the last couple of years being 100% tax deductible to the to the mineral oil or the L. P owner.
Now on to about 80% I would say if oil prices stay where they are right now it's going to be about 80% next year. So still protected both from a little less so than and best.
Okay, great. Thank you and then just a follow up on that on regards to M&A.
And advance are you looking at the schedule in order to determine potential asset at Parsons.
And that I can think on something that will be developed and the next 12 to 24 months are you looking at a plus 20 apartment development plans.
Well, we certainly have more visibility and the next 12 to 24 months and and that's the benefit of slowing down at the Diamondback level, yet you have less.
Changes from the drill schedule and then the completion schedule and the projects that are on on the list are very likely to get completed.
Another benefit.
Bit of generating free cash you don't having a low breakeven versus commodity prices the commodity price goes down and 5 to 10 Bucks tomorrow, the plan and Diamondback isn't going to change so that gives us a lot of confidence and the mineral buying for the next 12 to 24 months.
And I'd say that drives the majority of our decisions and we really like to look at deals.
And units that don't have permits today, because when a permanent gets filed.
The minerals and the private mineral buyers get very aggressive and and their pricing.
So.
That's why we're focused on.
You know pads that are probably going to be developed and the second half of next year or into 2023, because we can get it cheaper.
Okay, great. Thank you.
Thank you Gail.
Again, if you would like to ask a question that is tower 1 on your telephone keypad.
And your next question will come from Pearce Hammond with Piper Sandler.
Hey, good morning, and congrats on a solid quarter.
Just a couple of questions from me number 1 might seem a little off the wall, but some of the mineral companies are starting to dabble, a little bit and solar and wind royalties. So just curious if you've looked at that or have any thoughts on that front.
Yes, I mean, we've seen it happened and the private markets here to peers and stopped.
Something we looked at we don't on a lot of surface.
And at Viper, and you know what.
What we do is a very small amount and so I don't think it makes.
It's on a sense for Viper today.
But certainly seeing it and you know I think in.
Generally positive from the industry.
And the industry is doing a good job on on ESG metrics and hopefully the more.
This gets attention and the more.
Outsiders realized that the oil and gas industry and the United States is doing what we can from an environmental perspective to clean things up.
Okay. Thank you case and then my follow up it seems like the thesis has been over the past couple of years is theres a lot of minerals and private equity handset eventually you'll find their way into the public domain.
And either by the public mineral companies buying them or potentially some of the private mineral companies going public.
Curious do you still see that unfolding or has it happened at a much slower pace than expected just curious your thoughts on that.
Yeah, I think generally private equity income.
Good job deploying capital into minerals I think.
And the issue is going to be monetizing.
I think for US you know a couple of years ago, we might have said and we wanted to be the biggest mineral company and the Permian and I think we would rather be the best.
And so that kind of limits.
The private equity opportunities that work for Viper and we'd have to have a lot of diamondback operated minerals to be interested in and a physician owned by a private equity company.
But but the conversations we've had with private equity is that they are working to solve this and that there are more public mineral companies and less and the next couple of years and.
And I think that'll be good for the industry, because you need you still need more flow and more attention to what I think is a great asset class that gets a lot of attention and the private markets are not a lot and the public markets today.
Great. Thank you kase.
Thank you Pearce.
And your next question will come from Derrick Whitfield with Stifel.
Good morning, and all and congrats on your update.
Thank you Derek.
With regard to your second half production outlook could you provide some shape to the Q3 and Q4 trajectory.
Yeah. Good question, Derrick I think I think generally.
We currently expect Q3 to be a little lighter than that and Q2, but probably a little better than Q1 on the oil side.
And I think we're going to exit the year and Q4, you know very similar to where we were this last quarter you know with a couple of large diamondback pads coming on at the end of the year and I think the 8 Spanish trail as I mentioned earlier and and.
2 Delaware, 2 Delaware wells with a high interest so good day.
Our accident year strong I think you know.
And generally we've tried to under promise and over deliver it at Viper and the last few quarters and and done sales. So you don't get surprised to the upside that would be great, but the play and as we see it today as diamondback activity in Q4 is going on kind of give us a strong exit.
And right for 2021.
Great and then as my follow up building on Neal's earlier question and I wanted to focus on the visibility on your high level of visibility.
And your forward visibility slides on pages 8 and 10.
Is there is the near term inventory at the call. It 15 net level a good run rate based on Diamondback 2022 outlet outlook that you guys announced yesterday and and third party activity levels.
Yes.
That's fair I'd Hope that third party, you know maybe surprises a little bit to the upside.
Given the increase in and activity we've seen in the Permian.
And I guess on a little conflicted on it because we want we want to keep U S production growth is as low as possible.
And keep this good price environment going but.
I think it's inevitable that we will see non op and third party.
You know visibility to increase as we get towards year end in 2022 budgets come out.
Very helpful. Thanks for your time guys.
Thank you Bert.
Excuse me speakers I'm showing no further questions at this time I will now hand, it back over to Travis Stice CEO for closing statements.
Thank you again to everyone participating on today's call. If you have any questions. Please contact us using the contact information provided.
This concludes today's conference call. Thank you for participating you may now disconnect.
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