Q2 2022 Viper Energy Partners LP Earnings Call

August 2, 2022

Good day and welcome to the Viper Energy Partners 2022 earnings call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

Ask a question during this session you will need to press star one one on your telephone.

Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Adam Lawlis, Vice President Investor Relations. Please go ahead.

Thank you Sherry good morning, and welcome to Viper Energy Partners second quarter 2022 conference call.

During our call today, we will reference an updated investor presentation, which can be found in vipers website.

Representing Viper today are Travis Stice, CEO and 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 these forward looking statements due to a variety of factors.

Information concerning these factors can be found in the company's 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.

Ill now turn the call over to Travis Stice.

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

The second quarter was an outstanding quarter for lifetime oil.

<unk> grew 9% quarter over quarter, which combined with the benefit of increasing commodity prices and no inflationary cost pressures.

<unk> and a 20% increase in cash available for distribution.

Importantly, the significant increase in production was driven primarily by a record four eight net wells being turned to production.

Diamondback during the quarter.

As a result of Diamondbacks consistent focus on developing Vipers high concentration royalty acreage primarily in the northern Midland Basin.

As well as continued strong activity levels by third party operators.

Viper is increasing our guidance for oil production for the full year 2022 by 4% at the midpoint.

This is the second time, we've increased our production guidance for the year with the midpoint now 1000 barrels a day higher than our initial production guidance.

Despite diamondback and many other larger Permian operators committing to a maintenance capital plan over the past year Viper has had oil volumes grow 20%.

Over the same period.

Additionally, Viper today announced the next step in the evolution of our capital return program.

Beginning in the third quarter. The board has approved an annual base distribution of $1 per unit, which provides.

It's a competitive yield of three 3% at today's unit price.

And which would represent an annual distribution roughly equal to 50% over estimated cash available for distribution assuming $50 <unk>.

The board also approved an increase to our return of capital commitment to at least 75% of cash available for distribution.

To meet this commitment our base distribution is expected to be supplemented by additional return of capital in the form of variable distributions and opportunistic unit repurchases.

This enhanced return capital return on capital framework, along with the increase in the unit repurchase authorization displays the confidence we have in our forward outlook.

The optionality provided by the variable return of capital beyond our base distribution will allow greater flexibility in taking advantage of extreme market volatility and the current dislocation from a long term intrinsic value of our asset base.

Going forward, we remain committed to generating the highest value proposition for our unit holders whether that be allocating capital to a growing base distribution variable distribution or opportunistic unit repurchases.

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

The record results of our business highlight our quality asset base best in class cost structure and overall differentiated business model.

Viper remains differentially positioned to grow production without having to spend a single dollar of development or acquisition capital.

And as a result.

Also expect to generate unmatched per unit growth and returns.

Operator, please open the line for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question will come from Neal Dingmann with Joyce. Please go ahead.

Good morning, Travis Thanks for the brief comments, Mike first question was on the record wells turned to production last quarter definitely notable and Im just wondering are you expecting to continue at this pace and wondering either external opportunities to boost third party interest.

Which obviously would help them the net well results going forward.

Hey, Neil this is often so the second quarter I mean, if you look at the Diamondback wells turned to production.

Turning to the quarter that was a company record for us even going back to the days when diamondback with earning 20 to 25 rigs this was still.

A really strong quarter with 85 plus percent exposure to diamondback completions with about 90% NRI. So.

We probably didn't go to maintain quite brisk pace, but when you look at it on an annualized basis still looking at 11 or so net loss for the year end.

I think we can grow from that on an annual basis going forward.

On the third party side, it was a little bit of a lighter quarter, but we definitely have some higher interest up in the back half of the year.

So I think thats going to support the production profile for the remainder of the year and that's going to continue to focus our activity on our royalty acreage in northern Midland Basin. So should be a strong combination of wells being turned to production here for the foreseeable future.

Great. Thanks, Austin and then second question probably for you just looking at capital returns specifically.

Travis had mentioned prepared remarks, or the press release, the new 75% minimum capital commitment I'm just wondering.

How do you balance this and I know you all continue to want to pay down a bit of debt. So just wondering on a go forward how do you balance this and.

Is there a certain point, where you get that down to where that payout will be well over 75%.

Yes, good question, Neil I would say generally the.

Move to 75%.

Took a lot of thought and consideration.

On the Viper side, particularly moving to our base distribution, which can be seen as basically a base dividend like at the diamondback side, but it's a little bit higher on a yield basis, and then maintaining that flexibility to repurchase units or pay a variable.

The other.

With the other 75% of free cash flow and.

Put a governor on us for the other 25%, we definitely want to continue to try to consolidate new deals here and there that gives us cash to do those deals and if we don't find any deals in a particular quarter will will pay down debt like you did pretty aggressively and in Q2. So I think it puts the governor on.

On the return to unit holders, but they know that thats coming quarter in quarter out.

And the other 25% we are a little bit of flexibility to.

Consolidated here and there if deals pop up or will continue to pay down.

Both the revolver and our senior notes.

No great job by the yields out there thanks guys.

Thanks Neil.

Thank you one moment for our next question.

That will come from the line of Chris <unk> with Credit Suisse. Please go ahead.

Hey, guys. Congrats on another beat and raise quarter just to kind of follow up on Neil's question.

I guess, where the stock is today is there any reason to think that the quarterly dividends in the second half will be above that 25 per share base level.

And then just.

Is it fair to assume that residual cash.

Again, just given where the stock is today would go to an accelerated buyback.

Yes, that's kind of the flexibility that we wanted to get from the board with this new plan, Chris I think generally we wanted to have a.

A pretty high base dividend as often mentioned that would be about 50% of free cash flow at $50 oil.

It's a sizable base dividend.

But generally with the dislocations we've seen in the equity markets just like we talked about on the Diamondback call I can't we can't go buy a mineral in a tier one area.

For anything close to where we're trading at today in the public market. So I think it just continues to highlight the disconnect between oil and the public markets versus oil in the ground and so as a.

<unk>.

We're going to be leaning into the buyback here.

If we continue to see weakness will just continue to lean into it and Thats why the board wanted to be so aggressive with the.

The size of the increase.

Great. Thanks, and just as a follow up.

It's still early days, but.

Perhaps for Austin on 23 can you just remind us the exposure Viper has to Robertson ranch.

And how many net wells that could potentially contribute to next year's program that you guys have been working on building out that water and gas processing at there. Thanks.

Yes, we're really just starting to get to get active in the area of that kind of foot sale and Robertson ranch into one one blocks together.

There should be three or four rigs consistently running over the next few years in that in that block. So I think.

That's kind of the benefit of the story this year as well.

We're outperforming expectations of the year has continued to look better non op activity has continued to go up and we're still not even in the.

In the core block that we're going to start developing here pretty soon.

Thank you one moment for our next question.

That will come from the line of Jeanine Wai with Barclays. Please go ahead.

Hi, Good morning, good afternoon, thanks for taking our questions.

Hedging.

Hi, good morning.

Our first question is Jeff <unk>.

We'll jot down of Mris from.

Recently acquired Ward County acreage is this more pushed out in time and prioritize debt reduction.

Could you have the revolver that's why in 2007, so maybe that's more likely to be a 2023 plus type events.

Yes, we really don't have a set timeline or plan to drop that down certainly that needs to be a little more development on the block before we consider it.

But I think it's generally.

A deal that Viper.

Could handle the cash.

The time, if the time comes but generally.

Starting to starting to drill on that position certainly need cash flow before.

Conversation can happen.

Okay, great. Thank you and then a follow up question, maybe Dovetailing on Neal's question.

<unk> got a lot of third party, operator, and your work in progress wells.

Have you seen any kind of change and that type of activity just broadly.

Sure you are on your enterprise with what we're seeing in oil prices and kind of the continuing tightening in the service price environment.

No. It's I mean from a gross level, we've seen pretty steady activity I think on the third party side pretty much for the past nine months or maybe a year, even when you look at the rig count or the kind of leading edge indicators with the permitting activity.

That's increased stayed pretty steady, we havent really seen any slowdown or increases for that matter given the macro backdrop, but with that said with the activity that's going on now and it will be resulting in a net loss can you turned to production in the back half of the year I think you'll just see the MRI bump up a little bit on the third party side so on.

Maybe the net wells, so probably a little closer to where they were in Q1 as opposed to Q2 for the third party.

But really it's just all of your big public guys that are really active right now kind of in the Martin and Midland County is driving the majority of our activity on the third party side.

I think what's also changed a little bit is as all of us have gone to bigger pads.

The lumpiness of both operated and non operated production.

It picked up a little bit, but generally that means if you do have minerals and a non op unit.

Youre very confident that that unit is going to get developed.

Once rather than the.

So five or six years likely we used to look at things in the past.

Great color. Thank you gentlemen.

And one moment for our next question.

That will come from the line of Leo Mariani.

With <unk> partners. Please go ahead.

Hey, guys wanted to dive a little bit more into the kind of the share buyback versus the variable distribution.

Optionality here I totally understand that at the parent level Fang, but I guess, just maybe from my perspective, I think a lot of people look at.

<unk> is more of a yield vehicle and really count on it for these really fat juicy variable dividends, which obviously you all paid here in the second quarter.

So you can just provide maybe a little bit more color in your analyst day. The shares are depressed could there be just a much higher level of buyback versus variable distribution or is it still going to continue to be the variable distribution at the main avenue for returning capital to shareholders.

That's a good question I would say generally we are.

Probably we probably would like to be distributing.

Distributing more over the buyback at Viper I think thats, what the business is set up for I think about put my Diamondback had on a lifeboat distribution up to the parent company, but also need to recognize the value of the investment we have and what we can do.

With this with this business and in my mind.

I think minerals have traded closer to where e&ps trade when in fact minerals should trade at a significant premium they're the highest form of security in the oilfield.

Operator loses eliezer needs to extend the lease.

I have to pay us to get that to get that done also.

There are no inflation concerns at this business and it's just it's frustrating to us to see a business that has grown oil production, 20% year over year.

We repurchased.

3%, 4% of the stock and the.

The yield is just is just eye watering and that's why we want to put our money, where our mouth is and <unk>.

Buy back units the BT dislocation at the end of the day like you said the priority for this business is to be a distribution vehicle. That's why we relentless such a high number on the base distribution and.

When the equity markets recognize the value of oil assets in the Permian Basin again, we will stop buying back and pay back a huge distribution.

Okay, Great and I guess just because.

I have another question here for you folks obviously, you guys havent done much really on the M&A side understand youre, basically, saying that the asset values and private market are too high.

If you could give us a little bit more color around that market I know that you all are not participate in the venom level, but are you seeing other deals trade hands out there in the mineral space or are you just kind of seen a general slowdown across the whole sector, where maybe you need a lot of deals are being shown at these high prices, but buyers just always understood.

Yes, we've actually seen quite a bit of a step transact over the first half of the year and kind of continued here into the summer I think theres really two points to.

To note, though most of that's been stuff that has a lot of ducks and permits on it in our key people are willing to pay a premium there for for that visibility to the production and cash flow.

And with our relationship with Amazon, we can kind of get that same level of confidence by going further out in the drill bed in and just get it for a lot cheaper and not have to compete with all the other players in that thing.

Small bucket.

But really for us it all boils down to that it's a pretty high hurdle right now for M&A I mean, we can look at our diamondback operated production being 60% or two thirds of our total production and have really high confidence that it's going to grow over the next three to five year period. So to buy a mineral afternoon occurred meaning that you have that same level of confidence is at a pretty high hurdle to clear.

We're continuing to look around and I think maybe things have softened up a little bit from a couple of months ago, but we're just stay really disciplined on that front for now yes. It kind of goes back to that comment I made about full units getting developed.

Prices being paid for ducks and permits are.

Pretty shocking to us on our side. So I think generally if we use.

Cash to do deals and buy stuff that's further out in the drill schedule.

That should support the longevity of this business rather than chasing the next deal to boost near term cash flow.

Okay, that's great color. Thanks.

Thank you and I'm showing no further questions in the queue. At this time I would now like to turn the call back over to CEO Travis Stice for any closing remarks.

Thank you again to everyone participating in today's call.

If you have any questions. Please contact us using the contact information provided.

Yes.

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

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

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To ask a question during the session you will need to press star one one on your telephone please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker, Mr. Adam Lawlis, Vice President Investor Relations. Please go ahead.

Thank you Sherry good morning, and welcome to Viper Energy partners second quarter, 2022, Covid school careers.

During our call today, we will reference an updated investor presentation, which can be found in vipers website.

Representing Viper today are Travis Stice, CEO NK cells 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.

We caution you that actual results could differ materially from those that are indicated for <unk>.

Due to a variety of effects.

Information concerning these factors can be found at the 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.

I'll now turn the call over to Travis Stice.

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

Second quarter was an outstanding quarter for life.

Oil production grew 9% quarter over quarter, which combined with the benefit of increasing commodity prices and no inflationary cost pressures.

<unk> and a 20% increase in cash available for distribution.

Importantly, the significant increase in production was driven primarily by a record four eight net wells being turned to production.

Diamondback during the quarter.

As a result of Diamondbacks consistent focus of developing Vipers high concentration royalty acreage primarily in the northern Midland Basin.

As well as continued strong activity levels by third party operators.

Viper is increasing our guidance for oil production for the full year 2022 by 4% at the midpoint.

This is the second time, we've increased our production guidance for the year with the mid point now 1000 barrels a day higher than our initial production guidance.

Despite diamondback and many other larger Permian operators committing to a maintenance capital plan over the past year Viper has and oil volumes grow 20%.

Over the same period.

Additionally, bye for today announced the next step in the evolution of our capital return program.

Beginning in the third quarter. The board has approved an annual base distribution of $1 per unit.

Which provides a competitive yield of three 3% at today's unit price.

And which would represent an annual distribution roughly equal to 50% over estimated cash available for distribution assuming $50 <unk>.

The board also approved an increase to our return of capital commitment to at least 75% of cash available for distribution.

To meet this commitment our base distributions expected to be supplemented by additional return of capital in the form of variable distributions and opportunistic unit repurchases.

This enhanced return capital return on capital framework, along with the increase in the unit repurchase authorization <unk>.

Displays the confidence we have in our forward outlook.

Going forward, we remain committed to generating the highest value proposition for our unit holders whether that be allocating capital to a growing base distribution variable distribution.

Or opportunistic unit repurchases.

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

The record results of our business highlight our quality asset base best in class cost structure and overall differentiated business model.

Viper remains differentially positioned to grow production without having to spend a single dollar of development or acquisition capital.

As a result.

Also expect to generate unmatched courage unit growth and returns.

Operator, please open the line for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question will come from Neal Dingmann with <unk>. Please go ahead.

Good morning, Travis Thanks for the brief comments, Mike first question was on the record wells turned to production last quarter definitely notable and I'm. Just wondering are you expecting to continue at this pace and wondering either external opportunities to boost third party interest which.

Which obviously would help them build the net well results going forward.

Hey, Joe This is often so the second quarter I mean, if you look at the Diamondback wells turned to production.

For the quarter.

That was a company record fresh even going back to the days when that is actually earning 20 to 25 rigs this was still.

A really strong quarter with 85 plus percent exposure extending next completions with about 90% of our ISO.

We probably didn't go to Macy's Whitefish Ace, but when you look at it on an annualized basis still looking at 11 or so net loss for the year end.

I think we can grow from that on an annual basis going forward.

The third party side.

A little bit of a lighter quarter, but you definitely have some higher interest that's in the back half of the year.

So I think thats going to support the production profile for the remainder of the year and that's going to continue to focus our activity on our royalty acreage in the northern Midland Basin. So should be a strong combination of wells being turned to production here for the foreseeable future.

Great detail. Thanks, Austin and then second question case, probably for you just looking at capital returns specifically as Rob had mentioned prepared remarks or the press release, the new 75% minimum capital commitment I'm just wondering.

How do you balance this and I know you all continue to want to pay down a bit of debt. So just wondering on a go forward how.

How do you balance this is.

Is there a certain point, where you get that down to where that payout will be well over 75%.

Yes, good question, Neil I would say generally the move to 75%.

With a lot of thought and consideration.

On the Viper side, particularly moving to our base distribution, which can be seen as basically a base dividend.

If the diamondback side, but it's a little bit higher on a yield basis, and then maintaining that flexibility to repurchase units or pay variable.

The other.

With the other 75% of free cash flow and this.

Let's put the governor on us for the other 25%, we definitely want to continue to try to consolidate new deals here and there that gives us cash to do those deals and if we don't find any deals in a particular quarter will will pay down debt like you did pretty aggressively in.

In Q2, so I think that's the governor on on the return to unit holders, but they know that thats coming quarter end quarter out and the other 25% we have a little bit of flexibility too.

<unk> here and there it feels pop up or will continue to pay down.

Both the revolver and our senior notes.

Now great job by the yields out there thanks guys.

Thanks, Dan.

Thank you one moment for our next question.

That will come from the line of Chris <unk> with Credit Suisse. Please go ahead.

Hey, guys. Congrats on another beat and raise quarter just to kind of follow up on Neil's question.

Where the stock is today is there any reason to think that the quarterly dividends in the second half will be above that 25 cents per share base level.

And then just is.

Is it fair to assume that residual cash.

Again, just given where the stock is today, we go to an accelerated buyback.

Yes, that's kind of the flexibility that we wanted to get from the board with this new plan, Chris I think generally we wanted to have.

Pretty high base dividend.

Often mentioned that would be about 50% of free cash flow at $50 oil.

The sizable base dividend.

But generally with.

The dislocations, we've seen in the equity markets just like we talked about on the Diamondback call I can't we can't go buy a mineral in a tier one area.

For anything close to where we're trading at today in the public markets. So I think it just continues to highlight the disconnect between.

Oil on the public markets versus oil in the ground and so as a result, we're going to be leaning into the buyback here.

We continue to see weakness will just continue to lean into it and Thats why the board wanted to be so aggressive with the.

The size of the increase.

Great. Thanks, and just as a follow up I realize it's still early days, but.

Perhaps for Austin on 23 can you just remind us the exposure Viper has to Robertson ranch.

How many net wells that could potentially contribute to next year's program. Now you guys have been working on building out that water and gas processing at there. Thanks.

Yes.

Really just starting to get to get active in the area that kind of sale.

Robertson ranch into one one blocks together another.

There should be three or four rigs consistently running over the next few years in that in that block. So.

Thank.

That's the kind of the benefit of the story. This year is we're outperforming expectations of the year has continued to look better non op activity has continued to go up and we're still not even in the.

In the core block that we're going to start developing here pretty soon.

Thank you one moment for our next question.

That will come from the line of Jeanine Wai with Barclays. Please go ahead.

Q2 2022 Viper Energy Partners LP Earnings Call

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