Q3 2021 Viper Energy Partners LP Earnings Call
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Good day, and thank you for standing by and welcome to the Viper Energy partners third quarter 2021 earnings at this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's.
The conference is being recorded if you require any further assistance. Please press star zero 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 good morning, and welcome to Viper Energy Partners third quarter 2021 conference call. During our call today do you reference an updated investor presentation, which can be found on Vipers website.
Presenting viper today are Travis Stice CEO.
Vanitas President 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 actually 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 in the.
The company's filings with SEC. In addition, we'll make reference to certain non-GAAP measures reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
The Covid drugstores.
Adam welcome everyone and thank you for listening to Viper Energy partners third quarter 2021 conference call during.
During the third quarter Wipers saw third party operated net wells turned to production on the acreage rebound to their highest level since the first quarter of 2020 as a result of our continued strong production in <unk>.
Further enhanced by our high margin exposure to increasing commodity prices.
Blackberry <unk> cash available for distribution increased 50% quarter over quarter to.
So 54 cents per common unit.
With this strong cash flow Viper will pay a <unk> 38 per unit distribution on top of the $14 million, we deployed through our unit repurchase program last quarter in total the combined return of capital between the distributions and buyback represents 47 per unit or an 8% yield based on yesterday's.
<unk> stock price.
Following the recent closing of the swallowtail acquisition Viper has unprecedented high confidence this visibility.
Visibility in the down about forward development plan that is expected to bolster oil production for Viper alone for the next several quarters, but also also for years to come.
More specifically diamondback plans to complete over 400 wells on the acquired swallow until acreage over the next five years.
Or an amount that represents over 17 net wells for Baidu over this period.
Looking at near term production.
<unk> initiated average production guidance for Q4, 2021 and into Q1 2022 that implies over 17000 barrels per day production at the midpoint.
Additionally, we increased our full year 2021 oil production guide by over 2% at the midpoint.
Based on the average Q4 2021 in Q1 2022 production guidance assuming production is held flat at the stated mid point of the range Viper is expected to generate roughly $375 million of annualized free cash flow in the fourth quarter of 2021, assuming $75.
The WTO.
Importantly, <unk>.
Given these same assumptions were expected to generate over $475 million annualized free cash flow in the first quarter of 2022 as or defensive hedges placed in 2020 real world.
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% based on worker.
Market cap.
In conclusion.
The third quarter of 2021 was another strong quarter for Blackbird that once again highlighted our high quality asset base.
Best in class cost structure, and overall differentiated business model.
As our balance sheet has continued to strengthen we have evolved our hedging strategy. So that we can maximize upside exposure to commodity prices, while also protecting against extreme downside.
With our strong inventory of work in progress and line of sight wells, we look forward to.
<unk> to generate robust amounts of free cash flow and subsequently using that cash to both reduce debt and increase returns towards unitholders. Operator. Please open the line for questions.
Yeah.
Thank you.
At this time, we will now take any questions.
If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again that is star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Yeah.
We have our first question coming from the line of Neal Dingmann went through its security your line is open.
Hey, good morning, guys.
First wanted to just on sort of private activity, obviously bumped up.
And it was related to diamondback.
There's obviously been norland.
This rate increase from some of the privates out there I'm wondering how that might shape.
Michael This at all.
Certainly the privates.
Have really leaned into this commodity price and their activity levels.
Continued to increase.
Month over month end and we've.
Try to conservatively take that into account as we forecast future volumes, but but volume growth.
No small part be influenced by the private operators.
Got it and then just.
It's a nice payout 38, I think you talked about being about 70% of cash distribution.
Being up I think almost 15% I'm just wondering is that kind of a good ballpark.
Like that to continue deploying occur when you think about that payout.
As we think about it on a go forward.
I think we'd like 70% is kind of a minimum Neal you know FERC cash distributions.
Generally you have the size and scale to take a little bit of that but we want to pay that debt down.
Cash flow.
Took on some debt with the <unk>.
Bill acquisition, and while pay that down over the next couple of quarters.
Before we start ratcheting up the 70% and I think we've also talked about more prudent hedging policy, where we are.
<unk> puts to protect the extreme downside, there's kind of two times leverage at the Max.
And therefore, it's still able to distribute a lot of cash and.
And not have had the balance sheet blowout, so 70% kind of the baseline for now supplemented with the share repurchase program.
Hans of weakness and.
And the rest of the cash flow towards the deals or paying down debt.
Sure and I'll make some losses.
Thanks, guys.
Yes.
Thanks Neil.
We have our next question coming from the line of Chris Baker with Credit Suisse. Your line is open.
Hey, good morning, guys.
Okay.
Good morning, just on just with the improvement in commodity prices and the cash flow outlook could you just talk a bit about how you're thinking about the fixed debt balance, which I believe becomes callable late next year and just you know at this point how are you thinking about the appropriate level of leverage for the business longer term.
Yes, I think I think two times is the Max.
Chris and we've tried to protect that with hedges and we'll continue to do so.
The debt that we have there the bonds. We have outstanding is callable in about a year from now and we did take on a revolver balance with the small cell acquisition I'd like to.
An ideal world work that revolver balance down a bit over the next three or four quarters, and then there'll be able to refinance all of that debt at a lower interest rate. The businesses has proven that the bonds have traded well. So we'll see where we stand in the year, but right now it makes sense to refinance that cheaper if we could.
Good.
Okay, Great and then just as a follow up with the release talking about the unprecedented visibility following the solitaire acquisition could you just maybe talk about how that influences. Your M&A outlook I guess, if at all going forward.
Yeah.
I would say there are two related.
It is pretty unprecedented how much visibility we have given.
Diamondback intention to keep production flat or declining the plan is the plan and so.
So they are on schedule in 'twenty, two and 'twenty three and beyond.
More than likely to happen.
We have.
Experience like we did in 2020, which gives us a lot of confidence in the earnings forecast for the business probably.
Probably since we first started and finished your opex, but five or six years ago seven years ago.
So it won't impact M&A strategy I'd say the strategy is still fairly consistent.
Visibility Diamondback operated properties and we're starting to look out for those that just that volatile as an opportunity to get a lot of diamondback operated properties at one time.
Yeah.
Thank you we have our next question coming from the line of Jeanine Wai with Barclays. Your line is open.
Hi, good morning, everyone. Thanks for taking our questions.
Ginny good morning, maybe just following up a little bit on Nealon Chris's question. I know you just said your M&A strategy doesn't change.
Sir your view maybe on the most current acquisition landscape, how you do that and in particular, if there is any difference in the bid ask spreads between smaller versus larger deals.
The smaller deals are still very very competitive in the Permian.
Almost almost a knife fight to get the smaller deal that we do.
We have probably a little bit of an advantage on diamondback on permitted properties plus the permitted small deals are still very competitive.
Throughout the throughout the basin what was unique.
Phil I'll start.
Following the Dropdowns that we did from Diamondback is probably the largest.
Mineral deal I've seen in a long time and that just highlights.
The size and scale, we have that we can put that much cash into a deal that Blackstone was going to only get amount of stock in buffer.
Okay, great. Thank you that's very helpful. Maybe on a slight housekeeping item on cash taxes, I think theres about $360 million remaining on the tax agreement that you've got with Fang and given where that agreement was struck.
Oil prices being a lot higher now can you just talk about how we should think about the cash tax components for 2022, which might get accelerated and then the trajectory for maybe 23.
Yeah.
Good thing that commodity prices have gone, where they where they've gone at the time in 2020, we extended the tax sharing agreement.
Over a period of multiple years anticipating lower for longer oil prices.
I think there's probably a conversation to have with the Viper boards in the Diamondback Board about.
Moving the sharing agreement up into 2020 to just run with PV perspective, probably the best way to utilize.
Our tax base.
But certainly getting closer to.
So cash taxes, if you can't get that.
Adjusted in 2020, we'll pay some cash taxes.
And more and more so in 'twenty three.
Commodities stay where they are.
Great. Thank you.
Thanks Gene.
Yeah.
We have our next question comes from the line of Derek <unk> with Stifel. Your line is open.
Good morning, all.
That's right.
With.
With regard to your six month trajectory the guidance implies relatively flat oil volumes for Q4 and Q1 as we think about 2022 based on your prepared comments and near term inventory how should we think about the growth trajectory throughout the year.
Yes, Derrick I think generally we've been pleasantly surprised with the volumes we acquired from from swallowed Bill one month into closing the deal. So that's been very positive I think.
As we've talked about when the deal was announced there was not all.
Volumes are they will hold the silver.
Until Diamondback, Phil Robertson Ranch development kicks off and then you'll start to see a significant amount of growth.
Adding back operated property so.
I think the guide that we have out there for Q4 and Q1 'twenty two is a good baseline and then at.
Adverse development starts to kick in at the end of 'twenty two 'twenty three start to see a little bit of growth on the on the operating side.
Terrific and as my follow up would it be reasonable to assume the 18 to 19 net near term inventory level referenced on page 10 is a good run rate at current prices based on Diamondback as 2022 outlook and third party activity levels.
I think so.
So we're still going to be fairly conservative modeling the non op.
You know that's kind of a 20% increase in visibility from where we were a quarter ago and.
I think just I think that's pretty reasonable.
The benefit as we look into the end of 'twenty two 'twenty three like I, just said before as well.
The larger you know high interest pads on the Diamondback side, but you don't get to see the non op visibility to go up.
30% to 35% in the quarter.
Great update thanks again for your time.
Thank you Derek.
Thank you we have our next question coming from the line of Leo Mariani with Keybanc. Your line is open.
Hey, guys.
I just wanted to ask about I know, it's a difficult question to answer but you made some comment that you got some high confidence here and oil growth.
Over the longer term I guess when you look at the composition.
Of the Viper properties and I, certainly understand there's a increasing emphasis on him saying operated production, but now clearly the operating outlook from a planning perspective, it's flat oil can you can you kind of help us at all in terms of what it can look like over the next couple of years.
For like are we talking kind of mid single digit because of the ability of the thing to kind of focus more on the properties that they kind of Viper owns here just anything you can kind of help out with from a longer term perspective.
I think I think we you know we wouldn't be doing our jobs as a combined management team. If you weren't looking at combining the turns of properties with Viper interests combined with Diamondback interest so.
Diamondback staying flat the best capital efficient Houston, Diamondback solid sandblast with wells that are drilled on volume of properties.
We gave a pretty big number out there for the small cell deal, saying that we're going to get to 5000 barrels a day in five years, you know just for reference right now and then.
Minus 10000 barrels a day on Diamondback properties.
And so.
Even if there is some natural decline on that front.
Diamondback relevant cell phone until Robinson ranch, it is going to outweigh.
The declines are even.
Can we see on the non op side. So you don't think that there's likely growth at Viper, even if volume stays flat I don't want to commit to multiyear guidance here, but that's you know that's our intention is to focus on the highest.
Interest and highest consolidated return to.
To our shareholders.
Okay.
And obviously.
Very nice increase in the distribution this quarter. So it sounds like there's more to come as hedges roll off as we get into next year. I also wanted to ask on the buyback side, certainly noticed that kind of with a little bit more of a buyback here in the.
Third quarter and.
I would also talk about paying off the debt that yet he brought on a smaller scale deals. So how do you think about.
Kind of buybacks versus debt reduction here.
Head into 'twenty.
Yeah. Good question you know the buyback we have.
It goes through the end of this year and we have you know.
We need to talk to our board about what to do next on that.
But really the focus is probably that reduction.
In the near term over over the buyback just because you know we did.
We closed that's all sell deal and the cashes.
Let the system you know, we don't we don't like having the big balance on our revolver I think you know pay that balance down a little bit before refinancing our all of our debt hopefully in a year.
It's probably the best use of capital.
Without.
Having the buyback there in times of weakness.
Okay. Thanks, Scott.
Thank you Neil.
Thank you there are no further questions at this time I will now turn the call back over to Travis Stice for any closing remarks.
Thank you again to everyone participating in today's call if you've got any questions. Please reach out and contact us using the information provided.
This concludes today's conference call.
Thank you for participating you may now disconnect.
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