Q1 2022 Viper Energy Partners LP Earnings Call

Thank you for standing by and welcome to the Viper Energy Partners first quarter 2022 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.

You ask a question during the session you will need to press star one on your telephone.

Be advised that today's conference call is being recorded if you require any further assistance. Please press star zero.

I'd now like you had the conference over to your Speaker today, Adam Lawlis, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you Terry good morning, and welcome to Viper Energy partners first quarter 'twenty two conference call. During our call today will reference an updated investor presentation, which can be found on vipers website.

Representing Viper today are Travis Stice, CEO and case for yourself 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 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 in the company's filings with SEC.

We will make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon, I'll now turn the call over to Trust us.

Thank you Adam welcome everyone and thank you for listening to Viper Energy partners first quarter 2022 conference call.

During the first quarter life, we've continued to build on its track record of delivering strong financial and operating results.

<unk> got a 43% quarter over quarter increase in our distribution to <unk> 67 cents per common unit.

This distribution represents approximately 70% of the total cash available for distribution and applause and 95% annualized yield based on yesterdays closing price.

Additionally, we repurchased one 6 million common units during the quarter at an average price of $24 84 per unit.

Our total cost of $39 million combined with the distribution. This represents a return of approximately 95% of free cash flow towards unit holders.

Looking ahead, we continue to focus on maximizing long term returns to our unitholders and believe we are differentially positioned to do so with our best in class cost structure.

That enables investors to participate in the recent strength seen in commodity prices via the highest margins in the public oil and gas industry.

Importantly, with zero capital requirements, and only limited operating costs, while we.

We will not face inflationary cost pressures seen across the industry and broader economy.

As a result of the strong production seen during the first quarter as well as continued strong levels of activity across our acreage position. We have increased our guidance for oil production for the full year by roughly one 5% at the midpoint.

Our 23, five net wells currently with visibility to development as a company record and underscores our confidence in this forward outlook.

This record amount of activity, which is enhanced by Diamondback continued focus on developing our concentrated royalty acreage.

Demonstrates both the quality of our acreage as well as our ability to grow production without having to spend a single dollar of development or acquisition capital.

Based on the midpoint of this full year 2022 production guidance Viper is expected to generate over $3.75 per unit and distributable cash flow assuming $95.

Or a greater than 13.

With a 70% payout and an opportunistic unit repurchase program.

<unk> offers a competitive cash return that provides maximum exposure to commodity prices with limited operational risk.

In conclusion, the first quarter was an outstanding quarter that was record setting almost every metric.

Record 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, we 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.

At this time I would like to remind everyone to ask a question you will need to press star one on your telephone again Thats Star then the number one on your telephone keypad.

Your first question comes from the line of Neal Dingmann from drew with Securities. Your line is now open.

Good morning, guys nice results.

Maybe for your trial.

For a product like like this how do you all think about you I noticed you had a few a bit of buybacks in there as well as continued to.

What was a record payout on the distribution. So I'm just wondering how do you sort of.

Think about that differently on the mineral business or do you think about that any differently on the mineral business horses.

When you're thinking about that diversification entre.

Yeah. Good question, Neil listen I think Viper is one of the original cash distribution vehicles in North American oil and gas right. So if you go back.

When this business went public in 2014 and that was when E&ps were still spending 100% of cash flow operating cash flow.

To grow in Viper was a beneficiary of that while still distributing cash to its investors. So I think we still have we still have yet so we're not going to distribute 100% of the cash that we have every quarter, but.

I think the deal markets tough right now.

So there is a lot of extra cash beyond that 70% of free cash being returned via the distribution.

On that revolver closer to zero.

And then we have a discussion on more shareholder returns I think the buyback authorization has been very positive for the story. It's there's been a lot of volatility in this space. So we've got opportunities to buy back shares to having that out there.

Most defensive.

The mechanism is positive and do you know.

EBITDA is what we did in Q1 with buying out some of the Blackstone units. So we gave them.

The swaps are built so.

Generally 70% as the baseline that's the cash number I think as long as the balance sheet continues to improve.

The unit price continues to rise then we'll we'll be.

Rest of world continuing to distribute more than that on a quarterly basis.

Okay, and then just lastly on the confidence on boosted.

Reduction is that just on the visibility you're seeing mostly on COVID-19.

And of course down that you're going to do on third party or there is theres nothing assumed in there I don't I don't know I don't assume you have any.

Any dropdowns left remaining that you could do from Diamondback is it just primarily third party upside for the rest of the year.

Yes, that's right Neil for the most part it's just having that increased visibility to the non op side, we didn't want to be too aggressive in making assumptions with timing that we can't control.

Typically we can put out that rolling six month guidance, because thats such a rough timeline for when you will get spud to when you get through the production. So as we fast forward through the year and activity remains strong we just had perfect visibility to the back half of the year in a decade.

The increase that outlook.

Awesome, Thanks, a lot.

Thank you.

Your next question comes from the line of Chris Baker from Credit Suisse. Your.

Your line is now open.

Hey, guys congrats on the quarter solid cash flow and cash return update.

I could ask.

Sort of a similar question, maybe perhaps a different angle here. So last year it looks like the buyback plus the variable dividend return roughly 80% of cash available.

Just wondering if that's a fair baseline for how to think about the pace of the buyback for the rest of the year.

Yeah, I still think the buyback Chris is going to be opportunistic. So I don't want to say that we're going to hit a certain amount of units a month or a trading day or quarter.

Kind of like we said.

The Diamondback call earlier today. This market has provided us a lot of opportunities to buy back shares Opportunistically and I think we're going to have that opportunity set Viper you know, but we do want to adhere to a top.

But I think right now we're about this trading you know what.

We're gonna have chances to buy back shares I think it would be.

Fair to say, you know, 80% or 85% of total cash gets returned.

Does dividend plus the buyback.

But if we get another opportunity to buy a big chunk of stock like we did with the Blackstone trade in Q1.

Entertain that opportunity.

Presented itself.

Great, Yes, no that makes a lot of sense.

And as a follow up I appreciate the additional color in the deck around the Fang operated inventory I'm just curious how many.

Third party locations would you add on top of there and sort of on a related if I could squeeze one third one in.

How many net completion do you do you view needing to generate say.

Mid single digit oil CAGR I mean, it sounds like maybe north of 20 years, but just curious how you would frame that up on the inventory side. Thanks.

Well I think the inventory question you know you can take the data about the inventory and assumed most operators in the basin are using similar spacing and economic zones to Diamondback. So you could gross that up on the non op side.

Certainly have a lot more confidence in the pace of development on the <unk> side when we can.

Get those net wells drill faster.

So the pace will slow on the non op piece, but the inventory inventory was still there.

And then on.

Well I think we're projecting some growth this year, obviously the forward visibility is as high as it's ever been.

And growth is the output of that.

And how many net wells a year.

Keeps it wrong yeah. So this year, we're kind of looking at something like 11 to 12 net wells on the diner side and maybe five to six on the on the non op side. If you look at where we exited last year pro forma for this volatile acquisition I would say that you know call. It ballpark 17, net wells, who will give you what's looking like 5% organic growth.

I think that basically has come down a little bit too.

Since activity slowed down a bit over the past couple of quarters. So when you fast forward to 2023, I would put us somewhere in the <unk>.

<unk> 16, or so net royalty year kind of maintain your production flat and with our current activity levels and what the forward outlook looks like you know you are probably getting some some great with that.

Great. Thanks, Yeah, it sounds like definitely a differentiated inventory depth I appreciate the update guys.

Yes.

I'll add on that is it's volatile deal.

It gets developed.

The confidence of the Diamondback growth is only only enhanced I think.

When we announced the deal we said we would get to 5000 barrels a day net by 2025.

That looks on track so that's going to help the growth profile of the rest of the business.

Your next question comes from the line of Derrick Whitfield from Stifel. Your line is now open.

Hi, good morning, all.

Hey, Derik.

With my first question I wanted to touch on the Ward Ward County acquisition that Diamondback announced yesterday.

In light of its elevated NRI in the premium paid for is the incremental NRI.

With that asset something that you'd envision dropping down at some point environment.

Yeah, I think that's logical.

Have that discussion we're doing our work now I don't think there is.

Ah rush necessarily given that Diamondback is just starting and developing that position. So you won't see much production until the end of the year or next year, but there's.

There's probably a time, where viper and diamondback can get together to get a deal done here, which is law.

Probably the number one today in Q2.

That makes sense and then.

Kind of looking out over the balance of the year and even further out in the 2023, how should we think about your cash tax exposure for distributions in light of the current higher prices that we're seeing.

Yes so.

Just to wind back the history history books here when Viper converted to a taxable partnership from from a MLP.

We did a deal with diamondback to shield.

As investors central cash tax burden.

<unk>.

When the conversion happened and there was a big special allocation of income there that helped that shield.

Commodity prices, where they are that shields can run out this year so far.

Depletion protection, it's likely that Vical.

<unk> becomes a significant cash taxpayer in 2023 and beyond.

And therefore, it's important for this year is we put out that guidance of 10% to 15% effective cash tax rate, but that's only 58 home next routine at Viper LP level. So as Keith outlined we still have that special allocation of income boom at the Diamondback. So if you look at it this quarter, 85% of the pretax income when after diamondback and they pay the taxes at that level.

And then the 15% remains at the LP level, which is subject to that.

Tax rate that we put out guidance for <unk>.

Tony had next year Diamondback will just get their pro rata ownership of 54% to 55% of pre tax income so there'll be more absolute dollars at the LP level, and we will probably pay a slightly higher rate on that as well.

That's great. Thanks again for your time guys.

Thanks Terry.

Your next question comes from the line of Gene <unk> from Barclays. Your line is now open.

Hey, good morning, good afternoon, thanks for taking our questions.

Hello, My first question, maybe just hitting back on the minerals market. You mentioned there may not be as many deals out there as there was before so that skews the cash distribution higher which is terrific, but can you just provide a little bit more color on what's going on out there in the market in particular for differently size deals.

Yes, no it's just.

Let's just talk I know, there's been a lot of consolidation in the mineral space and.

Commodity prices, particularly on the front end to the mill owners are receiving massive checks on a monthly basis.

Also as a buyer staying disciplined aren't going to pay for.

That strip little strip, but certainly not spot month.

Type multiples so.

I think I think we'll still be very competitive in larger packages like this volatile deal. It's just that we haven't had a lot of success doing.

<unk> transactions in 2022, yet Austin, what else do you want to add to that yeah, and then I'll talk therapy, we're still seeing things transact, even with the higher commodity prices, but most of the deals are packages that have visibility whether it be through introduction of permits and.

Given that most of that production is going to come online with the higher prices, we should assume with where the strip is today.

Underwriting lower price decks that we haven't been.

As a as a competitive on those and also we're not incentivize necessarily to be trying to look at near term, which we look a little longer term. So we're trying to get creative and we're working with Diamondback for what what's the development plan will look like for next two three even four years out.

Tried to add some inventory on the back there where we can also when they write a little bit lower price deck.

We're having to be patient and be creative but I think there's potentially some small deals to be done here and there.

Okay, Great and then a follow up question I apologize, Sir hitting back on cash returns again, but maybe following up on kneeling Chris's question.

In terms of the expanded buyback program.

Can you just talk a little bit more about how you decide between the buyback and the payout ratio I noticed that.

Can you talk a lot about mid cycle pricing.

Necessarily about intrinsic value relative value youre looking at.

<unk> track record of buybacks in the industry is not so great and you guys kind of bucked that trend. So can you just talk a little bit more about how youre thinking about that for venom. Thank you.

Yes, I mean Viper.

70%.

Right. So that's coming out in terms of.

Fixed, but a variable distribution in.

Russ I think we have an internal view of NAV.

Sure.

We also looked at what kind of what can we buy minerals in the market and the stock market through Viper stock versus in the private market.

I think the private market is very very hot and therefore.

And the implied dollar per net net acre for what is better acreage with higher visibility is lower than that so that gives us confidence that.

We can buy reserves through our stock.

Through our unit price rather than.

Through deals on the ground.

Great. Thank you.

Thanks Gene.

Your next question comes from the line of Kyle May from capital One Securities. Your line is now open.

Hey, good morning, everyone.

Just a quick question looking at unit costs, it looks like in the first quarter.

Unit costs were lower versus your guidance. So just kind of curious how we should be thinking about those trending through the year.

I think where John I think we're in good shape, there's a little bit of noise in G&A.

Throughout the year, So I think I think we feel like.

You know, we're going to hit those those numbers there enough, where we're able to continue to pay down.

Interest expense are going to pay down our revolver aggressively and we could be towards the lower end of our all of our interest expense guidance.

Most of the year.

You have to get the call. It most of those cost items are pretty sticky.

Inflation here, so hopefully if performance continues to outperform they trend lower on a dollar per Boe basis, but.

Generally if you model them on an absolute basis, I think that'll be pretty fair.

Okay, Great. That's helpful and also on the hedging front it looks like you remove the oil collars that were in place for <unk> just wanted to get your latest thinking around hedging at Viper.

Yes, it's kind of it's kind of evolving to a similar story.

What does the deal at the Diamondback level buying puts and protecting the extreme downside. We certainly don't want to go back to a world where you have to think about our distribution.

Policy, changing and so buying 50% to $55 a foot.

Let extreme downside needs.

Tony and world leverage doesn't blow out and we're still paying significant distributions and trying to maximize upside exposure.

To close rather than than the watercolors.

Okay, Great I appreciate the time.

Thanks, Tom.

Your next question comes from the line of Leo Mariani from Keybanc. Your line is now open.

Hey, guys wanted to follow up on one of the prepared comments here.

Obviously, you all bought a nice chunk of stock from Blackstone in the first quarter, just so I heard you right. It sounds like you guys would be very open to doing more deals like that if the opportunity presents itself.

Yes.

Price sensitively, we're not looking to just.

So through our buyback program just to do it.

You guys take advantage of.

I'll pull backs in the market and I think we've had that opportunities here.

The last couple of months to do so.

Got it.

Okay.

And then just lastly, I just wanted to clarify on cash taxes, if I heard it right. It certainly sounds like you would expect the rate to be up.

Next year and then your cash tax shield.

Speaking I think you guys said was you know.

Something around 55% I just wanted to maybe understand that part and I guess, that's maybe the the ownership interest of <unk>.

Venom about Fang essentially.

Yes, basically high levels.

She'll shielded income from the parent company to the public unit holders is going away next year. This is the last year or so.

Small amount of cash taxes, this year, but stepping up pretty meaningfully next year.

Okay. Thanks.

Again, everyone. If you have questions.

Press Star one.

Alright, I'm showing no further questions at this time I would now like to turn the conference back to Travis Stice.

Thank you again to everyone for participating in today's call. If you've got any questions. Please reach out using the contact information provided.

Yes.

This concludes today's conference call. Thank you all for your participation you may now disconnect.

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