Viper Energy Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Viper Energy Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Adam Wallace, VP of Investor Relations. Please go ahead.

Speaker 1

Thank you, Stephen. Good morning and welcome to Viper Energy Partners' Q3 2024 conference call. During our call today, we will reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO Case Van Tas, President and Austin Gilfillan, Vice 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.

Speaker 1

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 the SEC. In addition, we will make reference to certain non GAAP measures. 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.

Speaker 2

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's Q3 2024 conference call. The Q3 marked a continuation of Viper delivering on its differentiated strategy and value proposition and was highlighted by both continued organic production growth on our legacy asset base and the closing of the Tumbleweed acquisition. As we prepare to head into 2025, we look forward to further delivering on our strategy of consolidating high quality mineral and royalty assets through a disciplined and focused approach. Looking specifically at current operations, activity remains strong across our acreage position as represented by the substantial amount of work in progress and line of sight wells.

Speaker 2

And we continue to benefit from Diamondback's large scale development of our high concentration royalty acreage. Importantly, Diamondback's merger with Endeavor, which closed during the Q3, only enhanced this alignment as Endeavor was previously the 2nd largest third party operator on Viper's royalty assets in terms of both production and acreage. Bigger picture, we continue to believe that Viper presents a differentiated investment opportunity with 0 capital or operating costs, alignment with a parent operating company that has helped Viper deliver consistent organic growth and a current size and scale that positions us as a strategic consolidator in what remains a highly fragmented minerals and royalty space. In addition to these attributes, our market presence and acquisition strategy has been greatly enhanced now that we are 1 year post conversion to a Delaware corporation. Looking back 12 months later, we've witnessed a dramatic change in our investor base and trading liquidity.

Speaker 2

On this point, Viper was added to the S and P Mid Cap 400 in September following being added to the Russell 1,000 during the Q2, both of which are milestones that demonstrate the continued execution of our strategy in highlighting the advantaged nature of mineral ownership and the unique value proposition that Viper presents within the space as well as in the energy complex more broadly. Operator, please open the line for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Neal Dingmann of Truist Securities. Your line is now open.

Speaker 3

Good morning, Travis. Thanks for the time. Travis, my question for you, the team, is on your future well activity, specifically last quarter. You guys talked about, I think, 81 gross paying wells with a 5.1% royalty interest and then 249 remaining with a 1.1 percent. So my question is, when you look at your 4th quarter guide, excuse me, of the 29.5 BO per day and then you think about 25 production, I'm just wondering, is this based on sort of a similar thing versus other operators split and would you anticipate royalty interest of either of these changing much next year?

Speaker 4

This is Austin. So a couple of points on that really as it relates to the work in progress and and line of sight wells that we disclose. So as you can see in the kind of in the current stats with activity, we had a pretty material step up in the work in progress wells on the Diamondback operated side. So that's really the legacy Diamondback and legacy Viper acreage, particularly selling Robertson Ranch there in Northeast Martin County. So that's going to drive a lot of the growth that we're going to see over the next 2 or 3 quarters.

Speaker 4

And then you kind of on the tail end of that have a big step up on the line of sight wells on the 3rd party side. So we added about 5 to 6 net wells in that bucket from the Tumpe Weed acquisition. So we've got a pretty good portfolio effect now kind of following that growth on the Diamondback side. We're going to see a pretty big step up in the 3rd party side. So overall, feeling pretty good about activity.

Speaker 4

And then not to mention, as Diamondback continues to high grade activity plan post Endeavor and post tumbleweed, we have a lot of that growth coming in 2026 that we talked about along with the tumbleweed acquisition.

Speaker 3

I look forward to that activity. Thanks, Austin. And then second question, just quickly on shareholder return and capital allocation specifically, is that the goal to continue to pay out roughly around 85% of cash available for distribution? And I'm just wondering how do you pair this with what you consider to be sort of appropriate debt repayment quarterly?

Speaker 1

Yes, Neal, good question. I think the 3rd quarter was a little unique because of the amount of shares added for the Tumbleweed acquisition, particularly good amount of shares added on October 1 in early Q4. And I think what we decided to do as a Board and the management team was to continue to be shareholder friendly and make our shareholders whole for their participation in ownership of Viper through the Q3. So the 83% was kind of a one off. It's 8% higher than the 75% minimum commitment, but we felt it was necessary particularly for the added 10,000,000 shares in October to make our Q3 investors whole.

Speaker 1

So sticking with 75,000,000 I think it's a really good number for this business. The base dividend well protected, down to $30 a barrel, which is as low as anything in the space. That's going to continue to grow. And our breakeven at Viper is going to continue to decrease as well as we continue to build size and scale and grow this business.

Speaker 3

Makes sense. Thanks guys.

Speaker 1

Thank you, Neil.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Betty Jiang of Barclays. Your line is now open.

Speaker 5

Hello. Good morning again. I wanted to talk ask about the Endeavour mineral drop down just given it's such a significant event for Viper. Can we just talk through the timing and how you're thinking about the funding of that drop? How much debt could you take on at the Viper level?

Speaker 5

And how does that how should we be thinking about Diamondback's share exposure on that mineral activity side and the implication on growth from there?

Speaker 1

Yes, Betty, good question. I think there's some things we can say as we continue to do a lot of work on the dropdown. I don't think we can give you perfect detail on everything. I think that's going to be up to the 2 boards to decide cash stock mix. I do think overall though both boards and management teams are very aligned that it's not prudent to lever up the sub in exchange for cash upstairs at the parent.

Speaker 1

So I think you can assume a modest leverage increase that gets paid down very quickly on the cash side. I also think you can assume that Viper has done a lot of cap raises over the last year and a half and has continued to build its float and the ability to raise equity capital in the market and also reward those investors that participated in those capital raises. We've had 3 successful deals here over the last year and that momentum is very important for future success. And then I think we also recognize the size of the trade means Diamondback is going to have to take back some equity, but taking back equity has been well rewarded for Diamondback shareholders as well. So I think that mix is going to stay.

Speaker 1

It's going to be a mix of those three things. I think there's work to do on value and accretion. And as we said on the Diamondback call, this is the number one priority for both businesses to get this done and move on to more corporate development opportunities after that.

Speaker 5

I appreciate that. Look forward to more details around that. And my follow-up is thinking through the impact of the Endeavor merger on the visibility Viper has on Diamondback activity. I think the Tumbleweed acquisition really highlighted the power of the symbiotic relationship with Diamondback Back and providing that visibility out to 2026 onward. With the Endeavor merger, how much work have you guys done so far in optimizing the Diamond Back activity to give more visibility on the Viper mineral assets?

Speaker 4

Yes, Betty, it's definitely been a work in progress kind of with the Viper land and business development teams stacking hands with the Diamondback land and planning teams, right, to see where Viper owns kind of concentrated interest in undeveloped units and kind of see where those can slot into the pro form a development plan. And also how that might impact future acquisition opportunities, which is what we highlighted in the tumbleweed deal. So kind of as I was mentioning to Neil's question, you haven't really seen those show up in either what's classified as work in progress or line of sight wells yet, just given the lead times on the project size. But it's definitely something that the teams are working on together and I think would be a tailwind to 2026 and beyond because as we mentioned, Endeavor was previously the 2nd largest third party operator on Viper's acreage position. So definitely a sizable opportunity set to kind of high grade development plans.

Speaker 5

I appreciate that. Thank you.

Speaker 1

Thanks, Betty.

Operator

Thank you. Our next question comes from the line of Leo Mariani of ROTH. Your line is now open.

Speaker 6

Hi guys. Totally appreciate that it's going to take some time for you guys to figure out the consideration in terms of cash stock mix for the endeavor drop down. But I guess I just wanted talk about sort of leverage parameters. I mean, you did mention you will increase leverage at Venom somewhat and then attempt to kind of quickly pay that down over time to kind of get back in line. Is there kind of like a max leverage number you think about for Venom as you're kind of working through some of that math and calculation?

Speaker 1

Yes, Leo. I think a turn in the half on a pro form a basis seems reasonable. We can debate what oil price that needs to be at, but somewhere around there because you think about the size of the business pro form a and the ability of the business to delever both from either growth or debt pay down is pretty unique, right? 75 percent of free cash goes to equity, 25% goes to the balance sheet. But at the end of the day, that cash flow stream is 100% free cash unlike an E and P that has a reinvestment rate.

Speaker 1

So I think it's turning a half ish on a pro form a basis that can come down very quickly makes a ton of sense. I think with Viper's increased size and scale, we're starting to get more attention from the rating agencies appropriately so, moving up the rating scale and improving our overall cost of capital. So Viper is going to be a big business with a lot of free cash. And I think we have a goal of this business being a comp to mid cap E and Ps as the E and P universe continues to shrink. There's less and less Permian pure plays.

Speaker 1

Well, look at this business called Viper with no CapEx, but exposure to some of the best rock in North America and the best operators in North America. Okay. That makes a lot of sense

Speaker 6

for sure. And obviously, just looking at the Endeavor deal, obviously, it looks like it will be the largest transaction in Viper history. Obviously, the plan will be to pay down debt shortly after that. But you guys also mentioned that this will just continue to increase the size and scale of Venom and maybe make the company in an even better position to do more consolidation over time. So just kind of curious if the drop happens sometime in the 1st part of 2025, Do you envision that Venom will be in a position to look at other deals as we get later on in 2025?

Speaker 6

And you obviously have a nice multiple advantage, I think, versus the other public equities in the mineral space. But just wanted to see if you could give us kind of an update on how do you think about other deals post drop? And you think there's still a lot out there available? And what's the landscape for other deals in the space?

Speaker 1

Yes. I mean, I think certainly the business has been rewarded this year, and rightfully so. And while I won't comment on specific opportunities, I will say that there is a larger opportunity set out there for high quality mineral assets to be consolidated. I'll also say that our unique size and structural advantages that we offer at Tumbleweed, caught the attention of a lot of significant mineral holders around the basin that recognize that Viper can raise a good amount of cash, but also give them something in the form of like we gave the OpCo units where they can defer taxes and still essentially holding interest in mineral rights, but in a public setting where they can get liquidity. So I think those deals sparked a lot of interest.

Speaker 1

We're going to be picky. I think we have a very unique market position and we don't take that for granted. Okay. I appreciate that. Thanks, Leo.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn it back to Travis Stice, CEO for closing remarks.

Speaker 2

Thank you again to everyone participating in today's call. If you have any questions, please contact us using the information provided.

Operator

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

Powered by Quartr
Earnings Conference Call
Viper Energy Q3 2024
00:00 / 00:00