Viper Energy Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the VIPER Energy Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Jill. Good morning, and welcome to Viper Energy's Q2 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's CEO Kate Vanthoff, 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. 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 Stutz.

Speaker 2

Thank you, Adam. Welcome everyone and thank you for listening to Viper Energy's Q2 2024 Conference Call. The Q2 was a strong quarter for Viper with wool production growing roughly 4% quarter over quarter and our cash available for distribution increasing by almost 9% over the same period. As a result of the production outperformance we have seen during the first half of the year as well as an increase in expectations for the remainder of 2024, we have increased our production guidance for the full year 2024. In addition to updating our full year guidance range, we've also provided guidance for Q3 that implies 1.5% growth relative to Q2 despite losing roughly 100 and 50 barrels of oil per day of quarterly production from the non Permian assets we divested during the Q2.

Speaker 2

Overall, we continue to see strong activity levels across our acreage position and benefit from Diamondback's continued large scale development of Viper's high concentration royalty acreage. In addition to the strong operational and financial results announced yesterday, we also announced that Viper's Board of Directors has approved an 11% increase in our annual base dividend, which highlights the Board's belief in a sustainable and growing base dividend can be maintained through the cycle. This belief in commitment to our shareholders is supported by Viper's strong balance sheet and durable cash flow profile. Relative to a year ago, when we last increased our base dividend, Viper has grown oil production per share by 14% while maintaining our cash margins and free cash flow conversion at around 80%. Importantly, at current production levels, the annual fixed amount of the increased base dividend represents roughly 50% of the expected free cash flow at $50 WTI and is fully protected down to below $30 WTI.

Speaker 2

Bigger picture, the 2nd quarter was also an important quarter strategically for Viper. Following our conversion to a Delaware Corporation late last year, we were added to several notable indices during the Q2, including the Russell 1,000. In addition to the increased governance rights that this conversion provided for our shareholders, it has so far also delivered on our expectations of providing an expanded investor base and improved trading liquidity. Fundamentally, we believe this conversion is just one step in the process of fully 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 the question and answer session. First question comes from Neal Dingmann with Truist. Go ahead. Your line is open.

Speaker 3

Good morning. All fantastic results. Travis, my first question is on your 2024 guided production bump. Specifically, you all seem to be expecting some really notable upside, especially when you capture that asset some of the asset sales. So I'm just wondering, are you assuming much kind of on a go forward or with this forecast, are you assuming much change in rig count or we assume majority of this upside is coming from the operational efficiencies like we're seeing over at FANG?

Speaker 4

Yes. I mean, good question, Neal. I think high level as you think about when we start the year, we don't have as much visibility on non FANG operated properties. And as the year goes on that visibility increases. I think part of it is the efficiency piece.

Speaker 4

I think we always kind of expected a pretty big ramp in the back half of the year with some significant bang wells or bang pads coming on and that gives us a lot of confidence in the Q3. And then we're starting to see more near term activity visibility into 4th quarter showing that we're going to keep growing this business organically in the second half of the year versus

Speaker 2

the first half. Austin, do you want

Speaker 4

to add anything to that? Yes. On the divestiture, as

Speaker 5

a reminder, that was doing about 4.50 barrels of oil per day and that divestiture closed May 1. So we got 1 month of contribution in the 2nd quarter, but have updated the full year guidance to reflect the loss of that production contribution. And to Ketan's point, we only guide to what we can see. So we have pretty good visibility to the back half of the year on the non op side. On the Diamondback operated side, halfway through the year, we've only had about 40% to 45% of the net Diamondback locations turn to production.

Speaker 5

So we'll see a pretty significant ramp in activity and production there, as we kind of progress through the next two quarters.

Speaker 2

Neil, since you listened to the Diamondback call, you heard the commentary around improved efficiencies and that's obviously a direct read through for operators that are developing Viper's minerals, but also your Diamondback talk about these additional zones that we didn't formally think were Tier 1 zones at the Diamondback level, but now we're confident in the Upper Spraberry and the Wolfcamp D that those zones are going to start contributing as well too. All of those are positive read through for Viper. And again, I emphasized it in my prepared remarks, but with Viper having a below a $30 WTI breakeven price, That's a pretty stunning statistic.

Speaker 3

Great. It's a great addition to that Travis. And then my second question is just on capital allocation Specifically, do you view Venom's payout maybe for K's options as opportunistic as Fang or given the mineral structure, are you more inclined to stick with the base of variable dividends?

Speaker 4

I think the feedback from investors and our Board has been to lean more towards the cash distribution model, but also continuing to grow that base dividend. So I think we moved this base plus variable model 2 years ago now and it's been a positive development. I think buybacks aren't out of the question at Viper, but they're probably 3rd behind base dividend, variable dividend and then buybacks, kind of the opposite at Diamondback. But there will be times of stress in this very cyclical industry where buybacks make a ton of sense like when we started buying back shares at the end of 2020 and into 2021. But right now, we're very comfortable with the high distribution model.

Speaker 3

Thanks, guys.

Operator

One moment for our next question. The next question comes from Betty Yang with Barclays. Go ahead. Your line is open.

Speaker 6

Good morning. I actually have a follow-up. I would love to get more color on the visibility on the activity trends that you're seeing. We did note that the rig count on the mineral portfolio is down quarter over quarter, but the well backlog is still flattish. So clearly, we're hearing from the Diamondback call that there's an uptick in efficiency gains.

Speaker 6

But are you seeing more activity conversion from less equipment basically not just from Diamondback operated assets, but also on Mana? Maybe ask another way like if can you maintain this level of activity at a portfolio level even at a portfolio level even at a lower rig count?

Speaker 5

Thanks. Yes. That's a good question, Betty. I mean, we obviously track the rig count, but much more important for us is the work in progress and line of sight wells. And then when you look at what percentage of those are converted, and then also kind of the cycle times to be converted.

Speaker 5

So the rig count will fluctuate day by day, week by week, but we haven't really seen any change in the conversion rates, the cycle times. So with those work in progress and line of sight wells kind of staying at all time highs, we still feel really confident that that's going to lead to some production growth in the back half of the year and into the beginning of part of next year.

Speaker 4

Yes. I think the other thing to think about, Betty, is also net rigs, right? I mean, we really look at you could have a lot of gross rig exposure at 0.5% interest across 100 wells. But if you think about the exposure we have to the Diamondback development plan, that's where your net rigs and your net work in progress wells that we have a differential line of sight to really give us an advantage.

Speaker 6

Yes. That makes a lot of sense. And then just a follow-up on the Diamondback portion of the percentage of total activity. 2Q is a bit light on Diamondback side. So going forward, the backlog Diamondback accounts for roughly 50% of the backlog.

Speaker 6

So, should that should we expect that to revert higher back to that 50% level?

Speaker 5

Yes, that's right. I kind of mentioned it on the previous question. But when we look at the Diamondback net completions expected for the year, only about 40% to 45% of those were in the first half and the remainder will be in the second half. And really, you kind of get a little bit of that lumpiness with the large pad sizes. So right now, we have a 24 well Diamondback pad with 9% to 10% Viper NRI being turned to production.

Speaker 5

So it's not always ratable, but we do see the big increase coming in the back half of the year and it will kind of revert being more Diamondback growth driven here now versus the first half having a lot of upside from the 3rd party piece.

Speaker 6

Great. Thank you for the color.

Operator

Thank you. One moment for our next question. The next question comes from Paul Diamond with Citi. Go ahead. Your line is open.

Speaker 7

Thank you. Good morning, Alphen. I appreciate taking my question. Just a quick one for you is, kind of think about portfolio optimization in coming quarters. I guess, where do you all see the kind of the right mix going forward at current and kind of looking into next year as far as the breakdown between opportunities across whether it's from within FANG or elsewhere in the 3rd party market?

Speaker 4

Yes. I mean, I think we're trying to position ourselves to be the consolidator of choice in the Permian. I think you saw how we treated the non core or non Permian assets associated with the GRP deal. We kind of monetize those very quickly for a quick gain. But really, I think generally, the significant opportunities under Diamondback that would move the needle for Viper production are fewer and further between.

Speaker 4

Obviously, the potential dropdown from the Endeavor merger is the biggest and most visible. But on a Diamondback standalone basis, there's not a lot of Spanish trails sitting out there. But that's why we've kind of moved to this portfolio effect of looking at really good rock that we covered at the Diamondback level or the Viper level with deals like GRP. And that's a deal that's it was a $1,000,000,000 deal that's tough to get done in the mineral space today. So I think we're positioning ourselves to be the buyer of choice for those large packages with a lot of visibility and a lot of upside in the basin that we know the best.

Speaker 7

Understood. Makes perfect sense. And just a quick follow-up talking about visibility into work in progress wells and cycle time evolution. How do you all see those cycle times have obviously been trending positively? How I guess how linear should we expect that to be in coming quarters years in your view?

Speaker 5

Matt, we don't really model an improvement from here. So we're constantly watching operators kind of by county or even more precise geographic region than that and then also looking at pad size as well to kind of think about what those permits will look like in terms of being converted to production and driving production growth. So I wouldn't say that we've baked in an improvement in cycle times into our modeling. We've kind of kept the historical average. So I would say as long as we have a steady state of work in progress or line of sight wells and cycle time has improved, then that might just be a little bit of upside to the guidance as we currently have it modeled on.

Speaker 7

Understood. Appreciate the clarity. Thanks for your time.

Operator

Standby for our next question. The next question comes from Leo Mariani with ROTH. Go ahead. Your line is open.

Speaker 8

I just wanted to follow-up on some of your comments here just around M and A. You talked about obviously the Endeavor dropdown being a big focus. Just wanted to kind of get a sense, I know the deal hasn't closed yet, but have you all been able to kind of do some prep work ahead of time to maybe try to get that deal to fruition a little sooner? I know there's kind of a lot of land work that needs to kind of get done in the background or do you really have to kind of wait for the deal to close to get on that? And then I guess just is there any kind of high level expectation on when that might happen?

Speaker 8

Do you guys anticipate that that big deal could happen kind of by middle of next year?

Speaker 4

Yes, Leo. This has been a pretty restrictive process with the FTC second request to Diamondback. So we haven't been able to do much, if anything, at all. We look forward to getting through that very quickly here and then hitting the ground running. I think history is any guide.

Speaker 4

We don't move very slow at Viper or Diamondback. And so we'll get to work on it right away. And I think nothing's changed from our perspective on the sizing and potential opportunity set that we put in the merger deck at the Diamondback level.

Speaker 8

Okay. No, that's helpful. I mean is it fair to say just based on your kind of prepared comments that you walked through on some of the M and A stuff that the smaller deals, just kind of the little stuff has kind of been a little more competitive and it's really these really big deals that you might see out there that are 3rd party and then in kind of the drop down here from Endeavor that's the type of things we should expect Venom to focus on?

Speaker 4

Yes. I think certainly from an external perspective that's what we're focused on. We still try to get the little deals here and there, but I think you'd be shocked to see how many kind of $20,000,000 to $50,000,000 mineral funds there are that you

Speaker 2

never see

Speaker 4

on the outside. So those competitors are very aggressive on smaller deals. They probably take a little more risk on undeveloped acreage and timing. And we kind of see our spot in the food chain as being the aggregator of those aggregators and being able to come to an opportunity with real amount of cash, real amount of market access, real amount of liquidity. And so that's why we've been really trying to improve our liquidity and trading volume position over the last 12 months and it's paid dividends for our unitholders.

Speaker 8

Okay. Thanks guys.

Speaker 4

Thanks, Leo.

Operator

This concludes the question and answer session. I would now like to turn it back to Travis Stice, CEO for closing remarks.

Speaker 2

Thank you. This call this morning has concluded and thank you for attending. If you've got any questions, please reach out. Thank you again and have a great day.

Operator

This does conclude the program. You may now disconnect.

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Earnings Conference Call
Viper Energy Q2 2024
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