Q2 2019 Earnings Call
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Our first question comes from valleys Fitzpatrick of Suntrust. Your line is open.
Hey, good morning, and congrats.
Creative dropdown.
Thank you will.
My first question is on on cash taxes does the does the dropdown push that forward to maybe early 21 and have you guys have you guys thought about extending the you know well agreement with with Diamond back and if so.
Whether any consideration would be given.
Hey, Welles.
We're a long way from that that analog agreement running out you know I don't think the dropdown impacts it much.
You know, there's a significant amount of factors that go into that.
The agreement and then a wells are calculated.
You really based on production well price not of acquisitions, we do.
You know the there's a significant amount of of items that go into that so I don't think that's an issue we need to think about today I think we have a lot of running room left to go I think.
As you think about how diamondback and Viper had work symbiotically over the over the past four or five years.
We expect that relationship to continue and and to do the right thing for both shareholders.
Okay. Okay perfect no that makes that makes sense and then we've seen a I guess, a pretty mild slowdown, especially in the core areas Oh on the rig count and in the Permian.
Talk to the mineral market now hasn't seen any softening from from that slowed down or is it is it still pretty hot in areas you guys are active.
Yeah, I I I'd say prices have softened a little bit you know mineral prices, though are pretty sticky relative to.
You know oil price or activity levels, you know a mineral owner doesn't have to sell their minerals. So there's not a there's not a you know a forced sale there so they can be pretty sticky with their price expectations.
You know for US you just had to stay disciplined and.
Got a lot of competition perk up over the last four or five years and and I think you know we have a very defined strategy in that separates us from some of these these peers that are.
Either private are now becoming public.
Okay, Perfect and then just one last one and this one seems extremely cut and dry, but oh I just want to clarify because we keep getting question.
The roll up of this of this Carlyle fund that has zero effect on the JV and zero effect on the mineral acres et cetera, and that's a correct interpretation isn't it.
Yeah, that's correct.
Okay perfect. Thanks, that's all I had.
Thanks World.
Our next question comes from theme how wide at Stifel. Your line is open.
Hi, Thanks for taking the question could you speak to the financing of the drop down kind of.
That makes a a debt and equity and maybe to the long term leverage targeted Viper a as you kind of increase your scale.
Hey, Tim Yeah, So you know.
From a long term perspective, whether its diamondback Viper rattler or consolidated you know, we're never going to go above two times debt to EBITDA, whether that's on a consolidated basis or at each of the subs now I think what this dropdown what's what's unique about it is is the amount of cash flow that we add to our you know our next 12 months in 2020 projections at Viper and now fibers, you know in a position to probably put some permanent financing you know maybe a turn of leverage of a permanent financing given the size and scale that we've achieved at the at the business now it's very important that the parent borrowing costs have come down and you know diamond back we feel as an investment grade company and on its way and that will naturally bring down the borrowing cost of the sub so as we thought about the debt and equity split you know I think the dime that board really likes owning a lot of Viper and this brings Don I'm back to ownership in Viper up to 60% and ER and it also gives some cash consideration to diamondback without needing to so far.
This deal with equity.
That's helpful. Thanks.
And then pivoting to the organic growth profile in kind of 2020 and beyond how are you guys thinking about that.
Well I think I think whats great here, Tim is that you know they are doing this deal a you know which is a massive deal for Viper increases the diamondback operated position by 80% and it's all in areas, where Diamondback is operating so I think if you think about the long term growth rate of Viper.
The two businesses Diamondback and Viper should grow almost in concert no Viper will have the benefit of of doing some acquisitions on third party acreage what should you know drive that growth rate up a little bit over the long term as well.
Okay got it and then as it relates to third party M&A.
Is it more on an opportunistic basis or do you have a target every quarter or year.
Yeah, I don't like putting out targets I mean, we certainly have have goals to continue to consolidate the private minerals market. You know we've set our machine up at Viper on a very unique way in that in that we can you know we have a ground game, we can close.
40, 40 acquisitions in a quarter, even if they're small small check sizes. So I think we're set up to do a $700 million dropdown, but you know today were closing 200000, and 300000 dollar deals that add up and make a big difference, especially under diamondback operated acreage.
Got it thanks, and congrats on the deal.
Thank you Tim Thanks to.
Hi, My question comes from Jeremy Frozen before your line is open.
Good morning, with a roller coaster oil prices that we've experienced over the last 12 months I just wanted to get some incremental color on your thoughts on hedging.
And how you guys would proceed maybe in 20 2020 to protect that downside of oil in order to make sure that cash distribution continues to be healthy I think <unk>.
Yes, although you know this there's a lot of discussions internally I'm on hedging I you know right now were an unhedged vehicle I don't think you know I think it's up to the board to decide you know what we're gonna do from from a hedging philosophy, because it would be a a big shift in strategy.
If we were to do anything you would be some downside protection are giving you know, leaving all upside for for our investors.
Great. Thank you.
Thank you Gil Thanks Gil.
Your next question comes from team a rise of one of Oppenheimer. Your line is open.
Good morning folks thanks for taking my call.
First question does this drop now sort of wipe all the legacy Diamondback and energy and minerals are they have they all now been moved down or is there still kind of a potential Q.
Yeah for all intents and purposes. Tim. This this is it you know there's a there's some overrides it remained in the southeast New Mexico stuff, but we're a resale those out no because we continue to look for ways to create value on that acreage, but just this essentially it.
Okay. Okay. Thank you.
And then at the move obviously the drop is impactful dining back now controls greater than 50% of the Viper royalties.
Was that sort of just a kind of happy coincidence or was there an idea that.
You want to control a greater part to have more visibility on growth.
Yeah, I think the I think you know that's been an ongoing part of our strategy is weve executed on acquiring these minerals case, just talked about the machine we have in place and we still like to differentially focus on.
Acquiring minerals under Diamondback operated properties I think if you look at the other.
Mineral companies out there and you know this remains a clear differentiator.
Keep looking to to acquire minerals under Diamond back, but we also have a machine now where we are buying third party minerals with clear visibility.
You know I had good prices.
Okay. Okay. That's helpful and then just.
One last one if I can I'm you nudged up sorted out the midpoint of 2019 production guidance is that because of activity you're seeing in the field now and well productivity or is that because of the acquisition and it can you give kind of any ballpark on the anticipated closing date.
Yes, Tim I think it's fair to assume that the deal closes right at the beginning of the quarter.
You know certainly we had to raise production guidance for Q4.
When that you know the dropdown closes and adds to the production of Viper in the fourth quarter.
We're going to see a pretty significant jump excluding the dropdown from Q2 to Q3.
And then you know some organic growth on top of that into Q4 with the dropdown, adding significant amount of growth over 4000 barrels a day on top of that.
Okay. Okay. Thanks, that's all I had.
The next question comes from Seattle, So a lot of Scotia Howard Weil. Your line is open.
Good morning, guys congrats on getting the deal an ounce.
I really appreciate the you know the incremental data points on slide eight of the Investor deck I'm, particularly you know now anticipate it you know gross completions in 2020 and 2021 given that you know you are contemplating the net revenue interest going up in 2021 does that imply that kind of the incremental wells that will be completed over the the 2020 level will primarily be in kind of Spanish trail, north and the Midland area that you've identified on that map.
Yeah, no. It's actually there's some details beyond that you know for instance, like you know you see that in 2019, we only have 30 to 35 wells completed in the rest of the year, but at the beginning of the year, we completed two almost 25% and our I 10000 foot wells in the Delaware. So you know we have pockets of acreage that is very very concentrated and you know has been significant in our eye and you'll see that when we talk about that on the.
One of the later pages on on page 14 of our deck you know some very high interest wells that are going to be developed into 2020 naturally.
Given consolidated.
Capital allocation, we're going to keep pushing to do the higher interest pads first but you know there will be some high interest stuff coming on in 19, and 20, and then you know a significant amount into 21.
Good deal I appreciate the color there and then I wondered if we could circle back on the Eagleford, it's been a while since weve gotten a a material update there. Obviously you know it it's very small in kind of the Grand scheme of things for the overall Viper picture, but just kind of curious I think you you guys have had that acreage for about 18 months now and just kind of curious how you view that deal now looking back on it and if you see any any similar opportunities you know in the Eagle Ford or potentially in the Bakken or other oily.
I'm kind of lower 48 basins that are kind of peaking your interest right now.
Yes, I mean, I think we time that that deal very well. It's it's performed you know as an above our expectation zinc prices explore performed above our expectations.
Talking to the Eagle Ford or the Bakken or other other place that that was a pretty unique deal on a one off deal.
I think all of our DNA today is dedicated to the Permian Basin and.
You know if an extraordinary opportunity comes up outside the basin. Then we'll think about it but you know really the acquisition machine as has become so fluid here in the Permian that that we haven't had a reason to leave.
Hi, guys makes sense I appreciate the time.
Thank you Phil.
Hey, Good morning was just curious and you talk a little bit about it already but do you expect you know you you obviously have the visibility of dialed back, but as you look at the second half of year do you expect a slowdown in completions and drilling in the Permian to kinda impact your numbers and does that kind of baked into the guidance that you put out.
Which is essentially our.
Net ducs and net wells in progress.
And that number continues to grow for us. So I think I think diamondback is going to you know pack the mail for Viper here in the back half of the year.
And that will outweigh any potential slowdown you might see.
How viper buys deals under other operators, we buy based on lease requirements. So I don't think operators are giving up leases at this time. So you know vipers forward production is protected by what the lease requires that operator to drill wells. They have to pass an extension or a you know we can potentially at least that acreage to diamondback, if we wanted to.
Okay. That's helpful and just curious I mean, obviously gas prices have been tough in the in the Permian is there anything much to do to mitigate that on your end.
Or is it just simply that it's just going to have to be something that headwind until some more pipe comes in and I'd hope gets a better price.
Yeah, I think this is going to be a headwind for you know for the Permian for the next three or four years is gonna be pockets of tightness you know certainly.
The you know Henry hub price hasn't helped but the dip on top of it.
It's hurting now Viper posted a negative number for the quarter, there's a little bit of noise in that number in that Viper takes all the realized price, we don't takeout gathering processing and transportation as a separate cost items, so that would have.
<unk> decreased our negative number a bit but as an unhedged vehicle. This is this is what we're living with us right now.
Thank you Jason.
The next question comes from the Oems I'm from Barclays. Your line is open.
Hey, good morning, So Travis.
You gave some helpful visibility on production expectations on the dropdown in overall flight eight suggest the ramp of activity on legacy Energen and Spanish Trail North.
Through 2021, I I recognize your front running the Diamondback Arnie.
Here and plans or maybe an influx I just want to get an updated sense on time backed activity planned for 2020.
Correct me, if I'm wrong, but I believe the latest comments have been that fame would would add about one to two rigs opt to one to two rigs and 20, Tony has anything changed your mind given the global demand concerns in investor prioritizing free cash flow for growth.
Yeah, William we've got a we've got a.
A week before but diamondback releases its earnings and we'll be able to talk about all that in detail at that time.
All right, let me try something different though Uh huh.
How do you think your third party activity you think third party activity snapped back in early 2020 following year end budget exhaustion, I mean based on rig count data, we pulled some of your peers continue drop rigs below expected levels and land rig contractors paying some of a bleak.
Outlook. So obviously recounted about six months ahead of production just curious I think some of your peers operate 2020.
Well I think taste laid out a pretty you know a pretty 60, a response to that because we're not forecasting vipers volumes based on you know.
There there are the rig count what we're looking at is the lease requirements and.
We know we know that that with a high degree of confidence that these third party operators are not going to let their leases expiring in the unusual case that they do that actually is a win for provide for because we can you know when you need to release it or at least what Saddam back or any other options. So I don't think.
Any of the any of those scenarios, where you are going to impact the way that we forecast the future for for Viper.
Okay, and maybe one more from me just on oil price realizations came at the high end of the guidance range you read it reiterated the 88% to 90% range for the full year.
I recognize the Spanish trail sale agreements improve again in early 2020, but what are the puts and takes and kind of the high end and the low end of that range for the remainder of the year.
Yeah, I think the more Spanish trail production. There is the lower will be on that range or so Spanish trail is going to pick up in Q3 and Q4 with these large pads coming on.
So, we'll probably be closer to the midpoint of that range for the rest of the year and then as you think about 2020 in Spanish trail deal significantly improves along with a lot of the other diamondback operated deals with fiber participates in and so we expect to be at a 100% of Devry CCI or greater in 2020.
All right helpful color. Thank you.
Thank you.
I am showing no further questions at this time I would now like Ferndale conference back to Mr. Travis the five Oh.
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Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.