Q4 2021 Viper Energy Partners LP Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Viper Energy Partners fourth quarter 2021 earnings Conference 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 this session you will need to press Star then one on your telephone please.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your speaker for today, Adam Lawlis, Vice President Investor Relations you may begin.
Thank you Wanda good morning, and welcome to Viper Energy Partners fourth quarter 2021 conference call.
During our call today, we'll reference an updated investor presentation, which can be found in buses website.
Sending viper today are Travis Stice, CEO and case fans off president.
During this conference call participants may make certain forward looking statements relating to the company's financial condition results of operations plans objectives future performance and businesses.
Caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors.
As a nation concerning these factors can be found in the company's filings with SEC.
In addition, we'll make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
Turn the call over to Genesis.
Adam welcome everyone and thank you for listening to Viper Energy partners fourth quarter 2021 conference call.
During the fourth quarter.
<unk> generated record financial and operating results highlighted by the 67 cents per common unit of cash available for distribution.
Exceeding our previous record by over 10%.
Importantly production outperformed expectations during the quarter following the closing of the swallowtail acquisition as third party activity levels exceeded our conservative acquisition assumptions and Diamondback continued to focus its activity on vipers concentrated royalty acreage.
Looking ahead to 2020 to Viper is uniquely positioned within the industry to be able to capture numerous headwinds and return substantial amounts of cash back to our unit holders.
With zero capital requirements, and only limited operating costs.
The companies will be advantaged in 2022.
As we will not face inflationary cost pressures.
For <unk>, specifically as our defensive hedges placed in 2020 roll off at the end of 2021.
Our industry, leading cash margins will now be further enhanced by mostly uncapped exposure to strength in commodity prices.
Additionally, Viper continues to have unmatched high confidence visibility into Diamondbacks expected forward plan to support our production profile with additional upside from third party operated production continuing to exceed our conservative activity and ton assumptions.
We have initiated average production guidance for 2022 that implies over 18000 barrels of oil per day at midpoint.
Viper is expected to have meaningful exposure to diamondback hydrated, primarily Midland Basin focused development plan in 2022.
Specifically this means that we expect to have roughly 70% exposure to diamondback 's expected gross completions with an average 6% NRI on those wells.
On the third party operated portion of our production.
Despite seen an increase of over 20% in activity levels and an accelerated pace of development.
We continue to contemplate slower than average time assumptions in our production guidance.
Based on the midpoint of this full year 2022 production guidance <unk> is expected to generate over $550 million of annualized free cash flow assuming $85 <unk>.
This 2022 free cash flow of liquids to roughly 11% free cash flow yield as a percentage of our enterprise value or almost 13% based on our current market cap.
With a 70% payout and opportunistic unit repurchase program.
Viper offers a competitive cash return yield that provides maximum exposure to commodity prices with limited operational risks.
On the acquisition front 2021 was a successful and important year for <unk> as we increased our diamondback operated acreage, but over 1800 net royalty acres.
Or greater than 15% increase.
Vipers asset base is less than 25% developed and with Diamondback operated and 54% of the acreage.
We have visibility to production that will support our strong free cash flow for years to come.
In conclusion, the fourth quarter topped off an outstanding year survivor.
Results of our business highlight our quality asset base.
Best in class cost structure.
And overall differentiated business model.
Given the strength of our balance sheet.
Have evolved our hedging strategy. So that we can maximize upside exposure to commodity prices, while also protecting against the extreme downside.
We look forward to continuing to generate robust amounts of free cash flow and maximizing returns for our unitholders.
Operator, please open the line for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you would need to press Star then one on your telephone.
So withdraw your question press the pound key.
Again, Thats star one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Neal Dingmann.
Truest Securities Your line is open.
Good morning, guys great quarter.
Are you a case it can't help but notice you guys had great growth for the quarter. Despite.
A lot of the public companies still just having kind of flattish production could you talk about just how you see going forward.
How are you able to accomplish that.
Yes.
First of all fourth quarter was really good the solitaire acquisition.
Our acquisition and outperformed our expectations, particularly on the non op side.
If you go back a couple of quarters the rationale for that small cell deal with non op production would kind of hold us over until Diamondback large scale development until just really grows production over the next few years of Viper.
On top of that.
<unk> exposure to more of Diamondback as planned.
If we're doing our job right.
At both companies.
Drilling our inventory.
Inventory with very high minimum mineral ownership first is what we should do for combined capital efficiency and therefore in a world where diamondback might stay flat Viper will grow like it did in the fourth quarter and like we're expecting in 2022.
Great great to see and then.
Just a follow up loved the.
Continuing to I think the last two quarters paying out approximately I think 70% of the total cash belt distribution you paid out.
Is that sort of the goal or are you trying to hit at it I think it implied you said over a 7% annualized yield.
What is the growth kind of the focus on that because it seems like the market's not to me it fully recognizing that and I'm. Just wondering is there maybe just talk about what is what is the sort of target you're looking at.
Yes, I mean, if you look backwards, we've been at 70% for a couple of quarters now but.
But we also had <unk>.
<unk> to buyback a lot of units at much lower prices than we are today. So we probably spend another 15% to 20% of cash flow buying back units over that same time period.
As you look forward, we did take on some debt with the small cell deal I'd like to get our revolver down a little bit.
But also probably term out some of that at the end of the year when our bonds are callable and that probably opens the door for us to go higher than 70% I think generally the baseline or the minimum is 70% of free cash getting return.
Great to hear thanks, guys.
Thank you Neil.
Thank you.
Our next question comes from the line of Chris Baker with Credit Suisse. Your line is open.
Yeah.
Hey, good morning, guys.
Just wanted to ask on the acquisitions you completed in the fourth quarter.
Great to see.
Continued effort to increase Vipers leverage to Diamondback and just wondering if you can help frame up the sort of cash flow yield you see that acquisition generating and how it kind of fits into the details you guys provided on that slide 13.
Yeah, I'll give you some background on the deal in Austin can give you the details of what's coming this year, but that was a deal we sourced ourselves a pretty large.
Contiguous property, where there were a significant number of mineral mineral owners, but we were able to get a lot of them to sell and the point being hey. This this ranch might not be in Diamondback 2022 plan, but if we own 10% of the minerals on that ranch it certainly moves up.
The quality spectrum, so generally thats exactly what the Viper team should be doing thats kind of why we reserve that 30% of cash flow will be able to do deals like that fell in needing to tap the equity markets or the debt markets.
Austin, you can add a little color on that that deal, yes, so that was a pretty big.
Block up in Northwest Martin County Legacy Guide on operating and as Keith mentioned, it wasn't going to fit in the immediate near term plans of a diamondback, but now that we own you know about a 6% interest across a couple of units that will provide 70 or indeed gross upside locations and with Viper ownership, we're going into 14, well pad at the end of this year.
<unk>.
At 9% ish or so no real production on it today, but we will get about $1 three net wells here at the end of the year and that's just really highlights the relationship here, yet we were able to underwrite that development, where no one no one else could and there were no permits on it when we bought it and then all their permits on it will be.
Great No I appreciate the color and congrats to you both on the promotions announced Tonight.
Yeah, Thank you, Chris and thanks Bruce.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line of Derrick Whitfield.
Steve Your line is open.
Good morning to all again.
Good morning Derek.
With my first question I wanted to focus on visibility at a high level.
<unk> slide 10.
You've added approximately two three net wells to your line of sight inventory since Q3.
And thinking about your rig growth comments from the Diamondback call earlier.
And the general trajectory in activity, we've seen since November would it be reasonable to assume that that number could be conservative.
Yes, I think it's reasonable to think we kept conservative non off assumptions over the last couple of years and have outperformed expectations consistently and have no intention of changing that.
I wouldn't say that diamondback assumptions are conservative because it ties to the actual development plan and with Diamondback staying flat in production.
Drill schedule might change around a little bit, but the projects on the schedule of the project. So those are all going to happen, but also any commentary on Oman off of what we're seeing yes.
Yes, I mean, we.
We normally expect those working progress was to be converted within kind of six to eight months.
Timing is baked into the guidance I will stay with the average that we're seeing with operators now, we're giving ourselves a couple of months of cushion.
So if operators continue at their current pace of development I think that'll be upside to the guide and then took a line of sight wells. It's kind of the same thing a couple of months of conservatism baked in with converting permits but at current paces at current pace with our guidance I would expect around 50% of it is non op wells to be converted this.
This year.
That makes sense and then as my follow up.
Really looking out over the balance of the year and even out to 2023.
How should we think about your cash tax exposure for distributions in light of the higher commodity prices we're seeing.
I think we're okay. This year shielded, but next year.
You can start to pick up so I think we have a couple of million dollars of expected cash taxes. This year, and then and then ramp it up next year.
Great update thanks, guys.
Thank you Derek.
Thank you.
Our next question comes from the line of Leo Mariani with Keybanc. Your line is open.
Hey, guys wanted to just generally ask about how you see the M&A environment.
These days.
Viper, obviously, you sold a small property you made a little acquisition, which you just gave some some details on it sounds like that was kind of a.
Negotiated deal with a separate landowner, who maybe had a relationship there sounded like a good deal, but can you maybe just generally kind of talk about.
The environment that you are kind of seeing out there from a minerals company perspective.
Yes.
It's tough to get deals done right now.
Animal spirits have come back into the mineral market, there's still a lot of small private mineral flippers in mineral buyers that you have little funds that.
We are competing with us I think the beauty of advisors that we can do a $500 million deal like most volatile but also.
Source and execute.
The other deal we did in Q4, but we're seeing some pretty frothy number is being paid for ducks and permits in that regard.
Our goal is to buy stuff under Diamondback that hasnt been permitted yet and then permanent after acquiring a large interest so we're going to be prudent we're going to be patient and we will.
This frothy market continues.
Yes.
Okay, and then just wanted to follow up a little bit on the production guide here.
So just simple math, if I look at fourth quarter of 'twenty, one about 18370 barrels a day well, obviously far exceeded the guide.
I just wanted to get a little sense of.
Kind of why it was so much better or was it strictly third party activity in fourth quarter, maybe there were some other things on just better well performance.
Look at the guide for 'twenty two.
The midpoint of the full year oil guide is pretty much flat with that fourth quarter and I guess just given.
All the increases that we've seen that hitting in the Permian my gut would be but it would be a little better than flat I know the Fang operated portion is flat, but so we should that should that lead us to think that if the industry continues to add rigs in the Permian and then maybe you end up sort of above that midpoint in 'twenty, two and all of that.
Yeah, well generally in 2021 and since the downturn in 2020, we've extended.
Our assumptions on mono and traditionally non op has come in higher than expected, but also more activity than I expected, but also higher than.
Expected on type curve solution, where we model. The first couple of months of production lower than what's been happening.
Turning type curve was so I think it's a combination of activity.
Now performance.
Looking ahead like I was saying that with Neal Dignan earlier, the Diamondback production is going to grow advisor right. Because we are allocating capital to the highest combined net returns. So diamondback production is going to grow, particularly in the second half of the year.
And then into 2023, the non op, we modeled conservatively.
<unk>.
If activity stays where it is today, we're probably modeling the back half of the year, a little more conservatively than what might happen on the non upside, but that's just prudent.
The model, what we can control and mineral land.
We're fortunate that we are the only company that can control two thirds of our production.
Alright, Bob.
Online is we're likely to see some of that Viper growth here in the second half of 2022 just im sure someone thats just based on kind of well cadence from Fang in terms of when things Paul.
Yes, second half 'twenty to think production is going to grow in it.
Travis as prediction of 400 rigs in the Permian is right then the non ops going to grow for sure.
Okay. Thanks, guys.
Thanks Lou.
Thank you.
Our next question comes from the line of Jeanine Wai with Barclays. Your line is open.
Yeah.
To me, so I could see if you're on mute.
You would think I figure that one out by now I'll start Eric Good morning, Thanks for taking our questions and Austin congratulation on your promotion.
Well deserved.
So we have got a question on hedges, we noticed that you add a little you added a little bit on warehouse slots I'll lay out in 2023, and so can you just talk again about your hedging strategy. Since it was such a big part of the story last year and a lot of those punitive hedges are rolling off or have rolled off as of the end of last year.
Yes, I mean, I think generally we don't want to be in a position like 2020 again.
Similar to Diamondback, we want to protect that extreme downside and hope for the best on the upside.
So we're buying more puts at Viper really wide callers I think at the low end of these.
Puts and collars leverage doesn't get close to two times, so youre still able to distribute a good amount of cash.
Probably in that world Youre buying back shares because the stock wouldn't be where it is today, but.
Generally just try to protect that.
Downside that we have some that we want to pay it down.
And keeping that upside for.
For our investors.
Okay, great. Thank you and then our second question.
As seen on slide 12, there is the other category on there it's a little hard for us to tell what the private exposure is in the near term inventory. So can you just talk about how you see the sustainability of private activity on your acreage. Thank you.
Yes.
For the most part of it is in the Midland Basin with Endeavour and chronic question and those guys have been getting really active I wouldn't say, it's a huge bracelet trend, but we had some relatively high can arise from that.
I think the current levels that you've seen from net wells.
Concern may be sustained here for a while.
Similar story in the Delaware when some of the larger ones such as new Bern.
No.
Not a huge rush footprint.
It helps having that timing accelerating which really drove the outperformance during the th anymore I think could be a catalyst outperformance again this year.
What we've also done with a couple of those operators often mentioned as we've actually gotten some mineral mineral trade trade.
Traded Diamondback operator.
We've traded for Diamondback operated properties and given them.
As we had under them. So certainly big asset base that we can do a lot of things with including trading now.
Okay and just some color. Thank you.
Thank you Janine.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Travis for closing remark.
Thank you again to everyone participating in today's call if you've got any questions. Please reach out to us using the contact information provided.
Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect.
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