Viper Energy Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 1, 2024

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Viper Energy First 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. At this time, I would like to turn the conference over to Mr.

Operator

Adam Wallace, Vice President of Investor Relations. Sir, please begin.

Speaker 1

Thank you, Howard. Good morning, and welcome to Viper Energy's Q1 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

Speaker 2

be found in the company's filings with the SEC.

Speaker 1

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 now turn the call over to Travis Stice.

Speaker 3

Thank you, Adam. Welcome everyone and thank you for listening to the Viper Energy's Q1 2024 conference call. The Q1 was a strong start to the year for Viper and the period which uniquely highlighted the benefits of Viper's business model and high quality assets. Despite commodity prices declining during the quarter, Viper's continued production growth along with our best in class cost structure allowed for us to increase our cash available for distribution per share quarter over quarter. Importantly, as a result of our strong financial and operational results, our board has declared a combined base plus variable dividend for the Q1 of $0.59 a share.

Speaker 3

Looking specifically at operations, both activity and well productivity trends across our acreage position continue to be encouraging. As a result, we have initiated production guidance for the Q2 that implies over 3% growth relative to the Q1. It is important to note that this guidance takes into account the divestiture of our non Permian assets and losing their production contribution for 2 months of the quarter. On a pro form a basis, so including the loss of roughly 4 50 barrels of oil per day from the divestiture, our true organic growth quarter over quarter is expected to be almost 5%. Additionally, we have also provided updated production guidance for the full year 2024.

Speaker 3

While the midpoint of this guidance range has been reduced by 2 50 barrels of oil per day versus our previous guidance range, that loss is entirely attributable to the loss of the production contribution from the non Permian assets for the remaining 7 months of 2024. As a further point on the continued strong activity levels across our acreage position, the implied average production for the second half of twenty twenty four represents a roughly 2% increase relative to the midpoint of our 2nd quarter production guidance range. Looking more long term at potential inventory expansion, during the Q1, Diamondback completed its first test of the Wolfcamp D and Spanish Trail with 2 wells being turned to production. Of these two wells, only one was developed under an existing Wolfcamp B well as to test the vertical communication between the two zones. To date, we have seen similar performance between the 2 wells and therefore believe that there's enough vertical separation between the two zones to limit the parent child effect.

Speaker 3

The initial takeaway is that the Wolfcamp D and Spanish Trail can be effectively developed below existing Wolfcamp D wells. And while they are not the highest returning projects in Diamondback's portfolio, they can't compete for capital over the next several years, especially inclusive of Viper's high NRI and the existing infrastructure that's in place. This test derisks a substantial amount of net inventory for Viper and as a result gives confidence to an extended outlook for a potential organic production growth. Separately, we have increased our guidance for cash G and A slightly as a result of increased costs associated with our conversion to a corporation, but we continue to run our business extremely efficiently and with peer leading per unit costs. Our continued best in class cash margins and free cash flow generation along with the previously detailed organic production growth should enable Viper to continue to return a substantial amount of capital to our shareholders, primarily through our base plus variable dividend.

Speaker 3

Operator, please open the line for questions.

Operator

Our first question or comment comes from the line of Neal Dingmann from Trust Securities. Your line is open.

Speaker 4

Good morning, Travis and Dingmann. Congrats on a nice quarter. Travis, my first question is on capital allocation for your case. Specifically, your thoughts on potentially lowering the payout ratio until the leverage declines as you did on it over at FANG. And I'm just wondering, maybe secondly there, how in the future you all would view buybacks versus divs in this vehicle as I know some mineral investors continue to prefer more exclusively dividends?

Speaker 2

Yes, good question, Neil. Welcome to the call. I think for us, the capital allocation philosophy at Viper remains a focus on cash distribution over a buyback. I think there have been times of stress over the past few years where we've allocated much more capital to the buyback versus the cash distribution and that has been a very value accretive deal for Vipra shareholders. Listen, stocks performed well.

Speaker 2

We still think there's a lot of value to be earned on the mineral business. But right now we're probably leaning more towards cash versus buybacks as you can see in the Q1. I think we're also continuing to try to grow that base distribution consistently on kind of a semi annual basis and that will continue as well. Going to your question on debt reduction and the percent of free cash returned, the business on the mineral side can generate generates pure free cash flow. So it's very easy to delever.

Speaker 2

I think generally the Q1 had some working capital headwinds as well as we did a couple of small deals in the Permian. 2nd quarter should see net debt go down pretty significantly with free cash generation as well as the sales of non Permian assets. So I think we comfortably see this business near a turn of leverage at year end. I think a turn of leverage for mineral business is a very conservative funding structure. I think the but the part of the part of the job of our team over the course of this year and into next is, as this business gets bigger, we should try to earn a lower cost of capital with public bond investors and the rating agencies as they start to understand the pure free cash flow nature of this business.

Speaker 4

Great details. And then just a quick follow-up on your mineral position. I was looking at the slides, continue to notice the dominant position you have in Martin County. So my question there is just when you take over once you take over the Endeavour acreage, will activity there stay relatively the same? I mean, given what you'll have under the pro form a company or do you anticipate potential a little bit of change there?

Speaker 4

I'm just trying to figure out how much really you have just in Diamondback exclusively versus sort of what you'll have with the combination?

Speaker 2

Yes. I mean, I think for Viper, that exposure to that area is going to be huge for the future growth profile of the business. That area, obviously, some of the best rock

Speaker 4

in the United States continues

Speaker 2

to get better, continues to add more zones. It's kind of where we've been seeing really good Wolfcamp D results. I think pro form a with Endeavor, the combination there is going to be one of the best places to drill for oil in the United States with some combination of longer laterals, big pads, high mineral interests. That's going to be kind of the focal point where we're going to have a majority of our rigs in that Martin County area.

Speaker 4

Yes, that's always one. I mean, I guess there is potential for lease bonuses and all that just for something down the future, right?

Speaker 2

Yes. Well, I mean, listen, I think there's potential for lease bonuses across Cipher's position. We've seen that a bit with the Barnett and Woodford leasing taking off. There's been some Wolfcamp de leasing taken off because that's not always been held from those vertical Wolf Barry days. And just talks about the benefits of the mineral business.

Speaker 2

If you own minerals, you own every piece of every barrel of oil produced in that section or unit forever regardless of if it's primary development, secondary zones, who knows what happens down the road. That's just the beauty of being a mineral owner.

Speaker 4

Great point. Thank you all.

Speaker 2

Thanks, Neal.

Operator

Thank you. Our next question or comment comes from the line of Chris Baker from Evercore ISI. Mr. Baker, your line is now open.

Speaker 5

Good morning, guys. Just was hoping you could talk a little bit more about the Wolfcamp D. Just any additional color you can share on early results, plans for testing and maybe just how that fits into sort of the broader organic inventory opportunity set that you guys see today?

Speaker 2

Chris, we're going to have Al Barkman, our Chief Engineer respond to that question.

Speaker 6

Yes, Chris. This was a test our first test of the WD in Spanish Trail. Like we mentioned in the opening remarks, we kind of wanted to test the performance of the D under existing Wolfcamp B wells and then without that, really pleased with the initial performance here. Both of those wells IP above 1,000 barrels a day and really kind of tracking on top of each other. So we don't think we're seeing any degradation from the Wolfcamp B wells being on top.

Speaker 6

And I think that's something that the returns are obviously uplifted with the Viper ownership at the same level. And so I think that's something that we'll continue to delineate across that position.

Speaker 5

Great, thanks. And then just as a follow-up, the other question I think we keep getting is just realizing it's early days, but maybe just frame up the opportunities on the M and A front, realizing there's likely a big drop down coming, a little bit more visibility in terms of when that deal will close. But just remind us in terms of just big picture sort of check the box type data points in terms of leverage and just how to think about that at least from where we if possible?

Speaker 7

Yes, Chris. I mean, listen,

Speaker 2

I think we're obviously disappointed that the Diamondback Endeavor deal has been delayed a bit, but we still have a lot of confidence it's going to close in Q4. That probably puts the discussions between Viper and Diamondback or Viper and pro form a Diamondback into kind of early 2025. But as you know, we like to move quickly and get things done. I think we're very excited about the opportunity set to put the mineral business from Endeavor with combined with Viper's business and create kind of a true category killer in the mineral space of a size and scale that really hasn't been seen to date. I think on top of that, if we did do that deal, we're certainly not looking to lever up the mineral business at the expense of the upstream business.

Speaker 2

We've never done that. So we expect that trend to continue. And in the interim, we're still looking at deals with Viper. There's been a few packages out there of size that have interested us. We've looked pretty closely and I think we'll continue to be in the fight on those deals.

Speaker 2

But as you think about the next 3 to 5 years of the Viper business model, it's really to be competitive in the 10 figure plus deals that we tend to be in a league of our own on that size. Great. Thanks. Appreciate the color. Thanks, Chris.

Operator

Thank you. Our next question or comment comes from the line of Betty Jiang from Barclays. Ms. Jiang, your line is now open.

Speaker 8

Good morning, Travis Case. A follow-up on the Endeavor dropdown opportunity. I guess given the materiality of the EBITDA on that asset you outlined at the time of the acquisition and just the variety types of mineral interest that's sitting within Endeavour. How should we be thinking about the size of the drop? Would it be, one drop or multiple tranches?

Speaker 2

Yes. Well, first of all, welcome back, Betty. It's good to hear your voice and look forward to you continuing to cover Viper. I think I can't make any promises, right? We got 2 boards.

Speaker 2

We got to have discussions and look at this deal post close. I think our intention is probably given the amount and size is to do this all in one fell swoop. And I think that generally means more exposure to a consistent development plan for a longer period of time. But again, it's not completely my decision. So we'll see what everyone decides, but that kind of be our preference to tell the cleanest story possible.

Speaker 8

Right. And then one of the key advantages of the Endeavor merger is the increased visibility on Viper's activity. Can you remind us what's Viper's current exposure to Endeavor's development program? And if you are able to make any headways to increase your exposure to their activity through just organic leasing and other smaller mineral pickups?

Speaker 2

Yes. I think it'd be hard to do anything material to continue to improve that exposure. High level, right now about 55% of our production comes from Diamondback. I don't know, I would probably say less than 10%, probably 7% or 8% of our production comes from Endeavor. I do think deals like the GRP deal had a lot of exposure to both Endeavor and Pioneer units on top of Diamondback.

Speaker 2

So I think just generally exposure to ourselves is what we prefer, but second to that would be exposure to good operators like Endeavor, like Pioneer in areas with really good rock and really good line of sight to development.

Speaker 8

Great. Makes sense. Thank you.

Speaker 2

Thanks, Betty.

Operator

Thank you. Our next question or comment comes from the line of Paul Diamond from Citi. Mr. Diamond, your line is now open.

Speaker 9

Gears have been in the M and A dialogue to kind of the opportunity set you're seeing in 3rd parties, kind of the smaller deals. I know with the volatility, we've seen some disparity in the bid ask spreads. Just didn't know if you could comment on what you all are seeing?

Speaker 2

Yes. Paul, I mean Paul, I missed the first part of the question. I think it's kind of talking about the overall M and A environment. And we'll let Austin kind of talk about what we've been seeing.

Speaker 7

Yes. I think it's still pretty competitive on what we call the ground game with the smaller deals, call it $50,000,000 and below, really especially in the kind of $5,000,000 to $10,000,000 range and below. I think what we've seen is an evolution in the minerals market, right? I mean, 6 or 7 years ago, a lot of private equity money came into the space and that's kind of where the night was and you go organically put together a position. But as industry has matured a little bit, you have bigger funds involved now and kind of all of that capital is rolling up.

Speaker 7

So we're not seeing a ton of deals transact right directly to the owner anymore. So it just brings more competition on what's available. We're able to get a couple of smaller deals done in the Q1 and that's kind of the benefit we have of our relationships out here. But like Keith mentioned before, I think where we see our strategic advantage really important from an M and A standpoint, it's going to be on the bigger deals, where we can kind of leverage the size, the cost of capital that we have.

Speaker 9

Understood. Thanks for the clarity. And just one quick follow-up. The 13.8 wells in active development, if we kind of run rate that out, we're starting to push the higher end of production guidance. Just to note, if there's anything you guys are seeing in your timing or cadence that would shift that potentially up or down, just given basically on reading it out?

Speaker 7

Yes. I mean, we continue to be pretty conservative with the timing assumptions on the 3rd party side, right? And we've got great visibility on the Diamondback side and that's what kind of drives a lot of growth into the second half of the year. The big bump that we're going to see from Q1 to Q2 here really is going to come from the 3rd party side and a lot of the high concentration activity that we had underwritten in the GRP deal. But look, I mean, what we have contemplated right now for the rest the year is 3rd party wells only being turned production that are currently being spud, not making any assumptions on permits.

Speaker 7

So if activity continues to trend at like normal pace, maybe there can be some upside there, but we really want to guide to what we can see and what we can control.

Speaker 9

Understood. Makes perfect sense. Thanks for your time.

Speaker 7

Thanks, Paul.

Operator

Thank you. Our next question or comment comes from the line of Derrick Whitfield from Stifel. Mr. Whitfield, your line is now open.

Speaker 10

Thank you. Good morning all and thanks for your time.

Speaker 2

Hey Derek.

Speaker 10

My first question, I wanted to focus on your expected 2024 production profile after adjusting for the GRP non core divestiture. Your 2nd quarter guide suggests modest upside versus consensus. Is this the production profile you were expecting in your initial 2024 guidance or is there possibly some upside now based on the efficiencies you're experiencing in down and back?

Speaker 7

Yes. I want to say, there's a timing. I mean, the general profile still looks similar to what we expected coming into the year. I mean, I think a little bit of activity was brought forward in Q1 outperformed a bit and kind of normalizing for the divestiture. Maybe Q2 looks a little bit better than expected.

Speaker 7

I mean sitting here May 1, trying to make assumption on what's going to happen in the back half of the year for the 3rd party side like that's just not somewhere we want to get super aggressive. But I mean in a general sense, I would say activity has been brought forward a little bit relative to where it was 2 months ago. And the current backlog of activity wells is really strong. So I mean it's going to support some healthy growth throughout the year. We'll just kind of see where the exact numbers shake out as the year plays out.

Speaker 2

Yes. I would just say, Derek, non op, we always are pretty conservative at the beginning of the year. It seems like there's been some non op brought forward in the model versus original expectations and the fitting piece is kind of right online within a month of our expectations.

Speaker 10

Terrific. And with the understanding that your revenues are dominated by oil and we're operating in a depressed low hog gas price environment based on pipeline maintenance and tight egress conditions in general. Do your leases protect you against negative gas realizations experienced with 3rd parties?

Speaker 7

Yes. So we won't have negative realizations passed back to us. And historically, if you just look at like our realizations relative to Sanofi, for example, typically better across the three products as a lot of our leases have cost free royalties baked in there and there's some of those operating expenses that kind of can't be passed back to the lease owner. So I mean, it's certainly not good on the gas side, but wouldn't expect negative realizations for Viper.

Speaker 2

It's good to be the mineral owner, Derek. Sure. Great update, guys. Thank you. Thanks, Derek.

Operator

Thank you. Our next question or comment comes from the line of Leo Mariani from ROTH MKM. Mr. Mariani, your line is now open.

Speaker 11

I just wanted to follow-up quickly on this cash G and A guidance here. You kind of bumped it up versus where you guys were in kind of mid to late February when you came out with it originally. Were some of these just public sort of new kind of organizational structure costs just they just come in a little higher than expected as you guys kind of work through the accounting? Just curious as to kind of why it was tweaked only kind of a handful of months later.

Speaker 2

Yes. I mean, we're just we're moving into this public C corp world and there's been more expenses that are going to Viper today. At the end of the day, it's a real number on a percentage basis, but $0.20 on a business doing $200,000,000 a quarter of cash flow is minimal. We just want to get a rise, the allocation between parent and sub, particularly as the sub continues to grow and get investor attention and likely continue to stand on some 2 feet.

Speaker 11

Okay. I appreciate that. And then just obviously I know you guys have to get the Endeavor deal closed and it sounds like obviously a larger transaction could be coming here for Viper, maybe it's early next year. I guess we'll wait on the timing. But how do you think about kind of potential funding for that?

Speaker 11

You talked about kind of one time leverage really being a sweet spot for Viper. Would you kind of go above that temporarily to do kind of a major drop down from the Endeavor FANG combination? And if so, would you kind of prioritize maybe more debt pay now? And just can you kind of talk us through kind of how level how you're thinking about kind of the funding part and kind of the limits on leverage? Yes.

Speaker 2

I just think in a world where we see parent and sub consolidated, levering up the sub with the expense of the parent doesn't make a ton of sense. We look at leverage consolidated. Certainly, there's going to be a lot of cash flow that comes with whatever asset does end up in if it does end up in Viper's hands. I just think we're going to be responsible stewards of capital of both our upstream business and our mineral business. Okay, thanks.

Speaker 7

Thank you,

Operator

Leo. Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Viper's CEO, Mr. Travis Stice.

Speaker 3

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

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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