Q2 2023 Viper Energy Partners LP Earnings Call
Good day and welcome to the Viper Energy Partners second quarter 2023 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 the session you will need to press star one one on your <unk>.
Allophone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Adam Lawlis VP Investor Relations. Please go ahead.
Thank you Abigail and good morning, and welcome to Viper Energy Partners second quarter 2023 conference call. During our call today, we may reference an updated investor presentation, which can be found in bankers website, representing Viper today are Travis Stice CEO case.
Case, Bancorp's, President and also general Ledger.
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 indicating the.
Peter variety of factors.
Information concerning these factors can be found in the company's filings with 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 will turn the call over to Trust us.
Thank you Adam and welcome everyone and thank you for listening to Viper Energy partners second quarter 2023 conference call.
Starting first with operations.
The results from the second quarter demonstrate the high quality nature of lockers royalty assets as well as the advantage the relationship we Havent diamondback.
And the broader landscape of <unk>.
Relatively flat production in the Permian Basin.
<unk> oil production increased 5% quarter over quarter.
With a fifth consecutive company record.
Looking ahead, we expect diamondback to continue to focus on their large scale development Viper is high concentration royalty acreage and as a result.
We have initiated production guidance for the third quarter that implies roughly 4% oil growth relative to the second quarter.
Importantly, as assumed in our updated guidance.
It is expected that <unk> diamondback operated net oil volumes will increase over 15% for the full year 2023.
With a further increase of roughly 10% expected for the full year 2024.
With Diamondback doing almost exclusively large scale development and the Viper owning variant interest across the different developments.
This growth will not always be ratable from quarter to quarter.
But we expect the trend of meaningful growth on an annual basis to continue.
On the return of capital front, Viper announced an 8% increase to its annual base distribution now up to $1 eight per common unit.
This increase is a natural progression of our enhanced return of capital program that was implemented with the second quarter earnings last year.
Over the past year, we have further improved our balance sheet.
Growing oil production by 7%.
And reduced our unit count by over 5 million units.
With the increased base currently representing over a 4% annualized yield.
Viper has the balance sheet strength and durable cash flow profile to support this level of committed return of capital through the cycle.
Further this base distribution represents approximately 50% of estimated free cash flow at $55 <unk> and is protected all the way down to $30 oil.
And while we still plan to Opportunistically repurchase units this increase to our base distribution highlights our commitment to a sustainable and growing return of capital through cash distributions over the long term.
Separately Viper also announced yesterday, our intent to convert our legal status from a Delaware limited partnership into a Delaware Corporation.
In connection with the conversion, which is expected to be completed by year end.
Pfizer intends to adopt our corporate governance structure designed to meet the eligibility requirements for certain indices and benchmarks.
Because viper has already treated as a corporation for federal income tax purposes. The conversion is not expected to impact the current tax treatment for our existing unit holders.
Just as with our increased based distribution. This announcement is an important step in the growth and evolution of Blackberry.
Simply put this conversion will deliver increased corporate governance rights to our current investors. It is intended to position vipers, such that the value of our mineral and royalty assets can be fully recognized.
We believe that having a structure that will enable index inclusion will further broaden our investor base and improve our trading liquidity.
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 one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment, while we compile the Q&A roster.
Our.
Question comes from the line of Neal Dingmann with <unk> Securities. Your line is open.
Good morning, all thanks for the time try this for your case. My first question is just it was exciting to hear about that and see about the new structure.
Al mentioned I think there'll be no tax changes, but just wondering is there any other maybe things we should be aware of it being cost or are there any other particular changes which for US and then what impact do you think this will have on particularly getting picked up by maybe the various indices out there.
Yes. Good question, we started this a lot and clearly it didn't want to impact either the.
Public unit holders or Diamondback tax position and we think that this conversion does just that.
We were taxable partnership before we're basically moving to a corporation in kind of an up C structure and.
The rules for index inclusion have seem to have loosened to allow a lot more up CS into various indices.
I don't know exactly how long, it's going to take to get into all those indices, but certainly seeing some higher index ownership from some of our peers.
<unk> gave us the idea to do this by for only adds about one 1% index ownership.
Some of them like Diamondback has 30 right I mean these are big numbers. So.
There's going to be a lot of impaired.
Improving liquidity and also I think for unit holders, becoming shareholders governance.
Important and moving their direction as well Diamondback still plans to be a large holder of Viper.
We havent sold any.
Any shares.
We own a diamondback, but.
This allows for future consolidation and growth opportunities and more volume and more float for this business.
Yes.
So that opportunity and then my second question is on the capital allocation.
Specifically can you speak to how you think about maybe the debt repayment versus <unk> versus buyback. So I'm, just wondering sort of looking at.
I wanted a lot if you'd think would be better off focusing more on debt repayment given in the near term given I think it's what about 9% of interest expense goes towards earnings. So just wondering how you think about those three potential outcomes.
Outcomes.
Yes.
We don't quite think about interest expense as a percent of earnings.
It is.
Yes.
Cost of capital has gone up for the minerals business and for our revolver.
We certainly want to get that revolver, Pinot closer to zero than where it is today.
But we also don't want to sacrifice.
Getting dollars back to our our.
Our unit holders at the end of the day.
This is a return of capital business, we think allocating 75% of our free cash to equity.
It's a good number 25% going to the balance sheet and being able to do small deals and.
Yes, I mean, while the interest expense has gone up because of <unk>.
Interest rates, we don't want to sacrifice.
Returns for the equity holders.
That makes sense. Thank you.
And also on the last thing that's really the only one.
One of the only major cost for this business strategy in this business runs at a 90% EBITDA margin no capex.
The only other expenses or G&A.
60.
$6 million to $8 million, a year of cash G&A and.
And <unk>.
Severance taxes, which is 78% of revenue so it's.
It's a pretty incredible business, we want to keep a lowly levered.
So that we can keep distributing cash to equity holders.
Okay, great. Thanks, guys.
As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
That concludes.
The question and answer session at this time I would like to turn it back to Travis Stice CEO for closing remarks.
Thanks again for everyone that was listening in on today's call. If you've got any questions. Please reach out using the information. We previously provided have a great day. Thank you.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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