Q3 2022 Viper Energy Partners LP Earnings Call

Good day and thank you for standing by welcome to the Viper Energy Partners third quarter 2022 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.

I ask a question. During this session you will need to press star one one on your telephone and you will then hear an automated message it buys in your hand as rate please be advised.

Today's conference is being recorded 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 Rebecca good morning, and welcome to Viper Energy Partners third quarter 2002 conference calls.

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

Billing Patrick today are Travis Stice, CEO vacation rental president.

During this conference call participants may make certain forward looking statements related 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.

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

In addition, 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 turn the call over to Joseph.

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

The third quarter was another strong quarter for vital oil production set a company record for the second consecutive quarter on bolt on absolute and per unit basis.

Importantly, this quarter marks our first quarter with our enhanced capital return program in place.

And with the flexibility we now have in returning capital, we repurchased over $1 8 million units during the quarter at an average price of just below $28 per unit.

With our focus on increasing per unit metrics. These opportunistic repurchases helped drive oil production per unit up 2% quarter over quarter.

Despite absolute production staying relatively flat.

On a year over year basis oil production per unit has increased over 15% further highlighting the success of both our unit repurchase program and the swallowtail acquisition that we completed during the fourth quarter of last year.

Since authorizing a unit repurchase program in Q4, 2020, we've now repurchased over 9 million units or almost 6% of our starting unit care at an average price of roughly $21 per unit.

The optionality provided by our <unk>.

Enhanced capital return program allow us greater flexibility in taking advantage of the extreme market volatility that we've seen over the past several quarters.

But we also remain committed to returning a meaningful amount of capital to unitholders through our base plus variable distribution.

Although our distribution went down from previous quarters, as we allocated more capital to unit repurchases.

We will still be paying a distribution for the third quarter of 49 cents unit.

Which provides a competitive annualized yield of almost 6% at today's unit price.

Looking ahead Viper has initiated average production guidance for Q4, 2022, and Q1 2023.

That implies roughly flat volumes relative to the third quarter.

As operators move to developing larger pads royalty volumes can now be subject to somewhat uneven volumes from quarter to quarter.

It is important to note. However that Viper continues to expect diamondback to focus on developing blockers high concentration royalty acreage in the northern Midland Basin.

And as a result.

Growing <unk> 2023, Diamondback operated net oil volumes by roughly 10% year over year.

Given that Diamondback operates roughly 60% of Vipers total production, we still anticipate meaningful production growth in 2023.

In conclusion, the third quarter was an outstanding quarter for water.

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

And with only limited operating costs.

We will mostly be insulated from the inflationary cost pressures faced by operators.

Going forward, our focus remains on increasing long term per unit growth and returns as we continue to focus on creating value for your core business.

We will also look to generate the highest value proposition for our unit holders and returning capital.

Whether that be allocating capital beyond our base distribution to variable distributions or opportunistic unit repurchases.

Operator, please open the line for questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.

Our first question comes from the line of Neal Dingmann from Truest Securities. Your line is now open.

Good morning, all thanks, Travis My first question is on.

You're just talking about travelers on that new enhanced return program specifically.

Im just wondering what will determine the sort of typical quarterly unit repurchase above that 75% return of capital, but really what I'm trying to get a sense of is how commodity prices maybe your unit price.

It will impact us.

Yes good.

Good question.

Safety program, we have as Diamondback I would just say, it's probably more heavily weighted towards distributions.

Distributions over buybacks, but given the volatility we saw in the quarter Viper was very aggressive on the buyback, particularly between the time of announcing our distribution are paying it.

Some some.

Weakness there that allowed us to be aggressive in buyback units.

At that point in the quarter.

For like I said, we like kind of allocating more cash to return of capital from a cash perspective here, but.

The buyback is there to support the stock.

Any form of weakness.

As we showed in Q1, we negotiated a deal with Blackstone is a large holder of our shares to buy some of their units outright and reduced that position. So.

Are those conversations still happening.

We just haven't been able to get any more repurchased since since Q1.

No that's great I'm glad you all are willing to step into it like that and then secondly, just on activity specifically.

Outlined pretty nicely on slide nine some strong near term inventory given not only that work in progress, but obviously a line of sight.

So I'm just wondering is it fair to say that Travis you mentioned I think kind of in broad terms about that my question is so in 'twenty three.

So do you continue to have a let's call it an active year assuming that dime.

Diamondback and third party operators continue with their intended plans or.

I'm just wondering is there anything that you see that could disrupt this.

Yes, no this is often.

Really for the past four quarters activity levels as we report by certain progress Atlanta site have stayed relatively consistent.

As we look at the next two quarters with the guidance that we put out but more importantly for the full year 2023.

Right now we get back to as much visibility with the growth that is going to come to the diamond drill bit.

Really the only nuance there.

The timing on some of those larger pads and we outlined some of that detail on on slide 11, So that's about 60% of our production growth.

That plan, that's pretty set in place that's going to drive about 10% of production growth on a proportionate production.

And then on the third party portion.

With what we can see today not a full picture for 2023.

Suddenly see some permits coming in throughout the year.

I would expect activity levels to be at least flat year over year. So overall, we're feeling really good about the 2023 outlook just kind of.

Flattish volumes here for the next few quarters, yes, I mean high level, 10% Diamondback growth Diamondback is 60% of production, we're not going to commit to non op growth yet so you kind of give to you.

Yes mid to high single digits.

Total company oil growth without any reduction in the unit count.

Yes, I really like to set up.

No. It's a great setup thanks guys.

Thanks, Neil Thanks Nir.

Please standby for our next question.

Thank you.

<unk> comes from the line of Tim resin of Keybanc capital markets. Your line is now open.

Hey, good morning, everybody.

Were a bit surprised by that skew towards repurchases.

Over the variable in the third quarter, but we recognize the volatility and Viper units, maybe warranted that action is it fair to say that that was kind of an extreme skew in terms of kind of percentage of allocations and I guess another way what I'm trying to get at is how do you think about the importance of a competitive yield.

As a component driving the unit price higher.

Yes. Good question, Kimberly I would say a competitive free cash flow yield is probably more important in our mind in a competitive return on capital Hill.

Because the free cash flow the present value of the free cash flow for the business is what drives value.

I just think we want some flexibility on how we can return that value to shareholders.

Our unit holders and like I said on the question before and I think generally Viper, we are more focused on me.

A distribution vehicle, but when we can buy minerals in the market much cheaper than we can buy minerals in the private markets. We've seen some astronomical valuations on deals sold lower quality than what Viper has that's all about it.

Polyethylene by arguing a factor thats, a better deal than trying to grow the business by buying external models.

Okay. Okay. That's good.

Good color. Thank you and then I guess transitioning from that based on your comments, obviously theres been a couple of large Permian packages transacting here in recent months you obviously passed on them.

You have a new sandbox to attack in Ector County, with the Firebird eight.

<unk> acreage.

As you look forward.

Are you agnostic to diamondback versus.

Third party operator.

<unk>.

Cool.

How do you think about kind of that ground game going forward. When you look to add ons do you want to grow that 60% Diamondback operator exposure.

I'm just trying to extend kind of your plans going forward.

Yes, primarily.

Paul.

<unk> been for the last couple of years is to continue to grow that diamondback operated piece.

It's harder to do.

Given that we've been trying to buy minerals under under Diamondback for years now certainly the firebird assets provide a new sandbox for the advisor team to start buying.

And we've got some deals done in the quarter more than the quarter before and some of those work packages where.

Half for a majority of the minerals for Diamondback will be posted on our minerals.

The package. So it's certainly still a preference for diamondback operated differently, we know that.

No. The plan, we noticed schedule, we know the value.

On the non op side, you're starting to see deals with more cash flow, but in our minds, we would pay a lower multiple for that.

And what what drivers worth today.

Okay.

Thank you for the comments.

Thanks, Tim.

Our next question will come from the line of Leo Mariani of MTM Partners. Your line is now open.

Hey, just wanted to follow up a little bit on the Firebird asset.

Wanted to see are there any kind of visible.

It will drop downs like may come from there.

Near term and then could you just speak to Dropdowns in general I think it's been a little while since.

<unk> has received anything from Fang is that something that we might foresee as you work our way into the 'twenty three.

Yes.

Anything from the Firebird asset.

A couple of quarters ago Diamondback smaller.

A smaller tail kind of in the reward area that had a couple of extra interact points. So that's something that we have on the radar that we could do.

Maybe it will do but it's just more of a matter of timing.

Net assets on our scheduling.

Starts to get developed a kind of a little bit more cash flow on it.

We could look to do but.

Nothing meaningful, especially as it compares to two of the larger dropdowns that we have done in years past.

Okay. That's helpful.

And then just wanted to follow up on your comments around a little bit flatter production over the next few quarters, just want to make sure I sort of understood that.

You guys basically, saying that it's not really due to.

A slowdown in Fang operated activity, it's more just due to timing of some of these larger pads happening a little bit later as we look out over the next couple of quarters that kind of means that I guess, we will see more of that production growth as we get into <unk> 'twenty three and beyond.

Yes, just <unk>.

Generally we see some large pads coming on Q2 and beyond.

And the quote in the press release, and we said earlier is that the diamondback piece.

100% visibility on will grow 10%, it's just going to start growing in Q2 and Q3 and then.

Non op is celebrating its kind of budget season, we will see what happens on the non op side.

That would be that will be gravy, but the way we see it right now is basically.

Flat oil from Q3 versus the level of an all time high into Q4 and Q1 event.

The ramp starts to begin again in Q3 of next year or sorry, Q2 of next year.

Alright, thank you.

Thank you Neil.

At this time I'm showing no further questions. So I'd now like to turn it back to Travis Stice CEO for closing remarks.

Thank you again to everyone.

This call if you have any questions. Please contact us using the contact information provided.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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