Viper Energy Q2 2024 Earnings Report

Viper Energy EPS Results

• Actual EPS: $0.61
• Consensus EPS: $0.42
• Beat/Miss: Beat by +$0.19
• One Year Ago EPS: $0.47

Viper Energy Revenue Results

• Actual Revenue: $216.71 million
• Expected Revenue: $216.28 million
• Beat/Miss: Beat by +$430.00 thousand
• YoY Revenue Growth: +34.80%

Viper Energy Announcement Details

• Quarter: Q2 2024
• Date: 8/5/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, August 6, 2024
• Conference Call Time: 11:00AM ET

Viper Energy (NASDAQ:VNOM) Partners LP is a publicly traded master limited partnership that owns and intends to acquire mineral and royalty interests in oil and natural gas properties. As a pass-through entity, Viper Energy Partners does not engage in drilling or production operations directly; instead, it generates revenues by holding overriding royalty interests, mineral fee interests and royalty fee interests. These interests entitle the partnership to receive a percentage of the proceeds from hydrocarbons produced and sold by third-party operators.

The partnership’s assets are concentrated in the Permian Basin, with a primary focus on the Delaware Basin region of West Texas and southeastern New Mexico. Viper Energy Partners continually seeks to expand its acreage position through strategic acquisitions of mineral and royalty interests, targeting assets that are operated by established producers. This approach provides unitholders with exposure to production growth and development activity in one of North America’s most active crude oil and natural gas basins, while limiting operational and capital expenditure risk.

Formed in August 2018 as a spin-off from Diamondback Energy, Inc., Viper Energy Partners is governed by a general partner, Viper GP LLC, which is a wholly owned subsidiary of Diamondback. The partnership benefits from its affiliation with Diamondback through technical oversight, lease acquisition support and financial backing. Management’s stated objectives include enhancing per-unit cash flow through disciplined acquisition and portfolio optimization strategies designed to capitalize on ongoing drilling and development in the Permian Basin.

Viper Energy Q2 2024 Earnings Call Transcript

Key Takeaways

• Viper delivered Q2 production growth of roughly 4% quarter-over-quarter and a 9% increase in cash available for distribution, prompting an upgraded full-year 2024 production guidance and Q3 growth forecast of 1.5%.
• The Board approved an 11% increase to the annual base dividend, representing about 50% of expected free cash flow at $50 WTI and fully covered down to below $30 WTI, underscoring dividend sustainability.
• Conversion to a Delaware corporation and inclusion in indices like the Russell 1000 have expanded Viper’s investor base, improved governance rights and enhanced trading liquidity.
• Continued strong activity across Viper’s acreage, driven by Diamondback’s large-scale development and efficiency gains in the Upper Spraberry and Wolfcamp D zones, supports sustained production ramp in H2 2024.
• Viper is positioning itself as the Permian’s consolidator of choice—pursuing large mineral packages and a potential dropdown from Diamondback’s Endeavor merger, while divesting smaller non-core assets.

Presentation

[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 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 telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. 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.

[Adam Lawlis, Vice President of Investor Relations at Viper Energy]

Thank you, Jill. Good morning, and welcome to Viper Energy's second quarter 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, Kaes Van't Hof, President, and Austen 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. 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 Stice.

[Travis D. Stice, CEO at Viper Energy]

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's second quarter 2024 conference call. The second quarter was a strong quarter for Viper, with oil 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 150 barrels of oil per day of quarterly production from the non-Permian assets we divested during the second quarter.

[Travis D. Stice, CEO at Viper Energy]

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 that can be maintained through the cycle. This belief and 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%.

[Travis D. Stice, CEO at Viper Energy]

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. Bigger picture, the second 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 second quarter, including the Russell 1000. 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.

[Travis D. Stice, CEO at Viper Energy]

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. 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 one again. Please stand by while we compile the Q&A roster. The first question comes from Neal Dingmann with Truist. Go ahead. Your line is open.

[Neal Dingmann, Managing Director of Energy Research at Truist]

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, you know, kind of on a go forward or with this, with this forecast, are you assuming much change in rig count, or can we assume the majority of this upside is coming from the operational efficiencies like we're seeing over at Fang?

[Travis D. Stice, CEO at Viper Energy]

Yeah, I mean, good question, Neal. You know, 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. You know, I think part of it is, you know, the efficiency piece. I think we always kind of expected a pretty big ramp in the back half of the year with some significant Fang wells or Fang pads coming on, and, you know, that gives us a lot of confidence in the third quarter. And then we're starting to see more, you know near-term activity, visibility, you know, into fourth quarter, you know, showing that, you know, we're going to keep growing this business organically in the, in the second half of the year versus the first half. Austin, you want to add anything to that?

[Austen Gilfillan, VP at Viper Energy]

Yeah, I mean, on the divestiture, as a reminder, that was doing about 450 barrels oil per day, and that divestiture closed May 1. So we got one month of contribution in the second quarter, but, you know, have updated the full year guidance to reflect the loss of that production contribution. And to Kaes's point, you know, 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, you know, halfway through the year, we've only had about 40%-45% of the net Diamondback locations turn to production. So we'll see a pretty significant ramp in activity and production there, as we kind of progress through the next two quarters.

[Travis D. Stice, CEO at Viper Energy]

You know, and Neal, you, 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, you heard Diamondback talk about these additional zones that we didn't formerly think were tier one zones at the Diamondback level, but now we're confident, you know, in the Upper Spraberry and the Wolfcamp D, that those zones are gonna, you know, start contributing as well, too. All of those are positive read-throughs, you know, for Viper. And again, I emphasize it in my prepared remarks, but, you know, with Viper having a, you know, below a $30 WTI breakeven price, that's a pretty, that's a pretty stunning, stunning statistic.

[Neal Dingmann, Managing Director of Energy Research at Truist]

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

[Kaes Van't Hof, President at Viper Energy]

Yeah, but I think the feedback from investors and our board has been to lean more towards the cash distribution model, you know, but also continuing to grow that base dividend. You know, so I think we moved this base plus variable model two years ago now, and it's been a positive development. You know, I think buybacks aren't out of the question at Viper, but they're probably, you know, third behind base dividend, variable dividend, and then buybacks, kind of the opposite at Diamondback. But, you know, 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, you know, high distribution model.

[Neal Dingmann, Managing Director of Energy Research at Truist]

Thanks, guys.

[Operator]

One moment for our next question. The next question comes from Betty Jiang with Barclays. Go ahead, your line is open.

[Betty Jiang, Senior Equity Research Analyst at Barclays]

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

[Austen Gilfillan, VP at Viper Energy]

Yeah, that's a great 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, you know, what percentage of those are converted, and then also kind of the cycle times to being converted. So the rig count will fluctuate, you know, 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 gonna lead to some production growth in the back half of the year and into the beginning of part of next year.

[Kaes Van't Hof, President at Viper Energy]

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

[Betty Jiang, Senior Equity Research Analyst at Barclays]

Yep. No, 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. So, should we expect that to revert higher back to that 50% level?

[Austen Gilfillan, VP at Viper Energy]

Yeah, 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%-45% of those were in the first half, and the remainder will be in the second half. And really, you know, you kind of get a little bit of that lumpiness with the large pad sizes. So I mean, right, right now, you know, we have a 24-well Diamondback pad with 9%-10% Viper NRI being turned to production.

[Austen Gilfillan, VP at Viper Energy]

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

[Betty Jiang, Senior Equity Research Analyst at Barclays]

Great. Thank you for the color.

[Kaes Van't Hof, President at Viper Energy]

Thanks, Betty.

[Operator]

One moment for our next question. The next question comes from Paul Diamond with Citi. Go ahead, your line is open.

[Paul Diamond, Director and Research Analyst at Citi]

Thank you. Good morning, all. Thanks for 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, you know, at current and kind of looking in the next year as far as the breakdown between, you know, opportunities across, whether it's from within Fang or elsewhere in the private market or in the third party market?

[Kaes Van't Hof, President at Viper Energy]

Yeah, I mean, you know, I think we're trying to position ourselves to be, you know, 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. You know, we kind of monetized those very quickly for a quick gain. But, you know, really, I think generally, you know, the significant opportunities under Diamondback that would move the needle for Viper production are fewer and further between. You know, obviously, the potential drop-down from the Endeavor merger is the biggest and most visible. But on a Diamondback standalone basis, there's not, you know, a lot of Spanish Trail sitting out there.

[Kaes Van't Hof, President at Viper Energy]

But that's why we've kind of moved to this portfolio effect of looking at, you know, really good rock that we covet at the Diamondback level or the Viper level, with deals like GRP, and, you know, that's a deal that's. It was a billion-dollar 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.

[Paul Diamond, Director and Research Analyst at Citi]

Understood. Makes perfect sense. And, just a quick follow-up, talking about, you know, 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 and years, in your view?

[Kaes Van't Hof, President at Viper Energy]

Matt, we don't really model, you know, an improvement from here, so we're constantly watching operators kind of by county or even, you know, 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. You know, 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, you know, work in progress or line-of-sight wells, and cycle time is improved, then that might just be a little bit of upside to the guidance as we currently have it modeled out.

[Paul Diamond, Director and Research Analyst at Citi]

Understood. Appreciate the clarity. Thanks for your time.

[Operator]

Stand by for our next question. The next question comes from Leo Mariani with Roth. Go ahead, your line is open.

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

I just wanted to follow up on some of your comments here, just around M&A. You talked about, obviously, the Endeavor drop-down 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, you know, do some prep work, you know, ahead of time to maybe try to get that, you know, deal to fruition a little sooner?

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

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, you know, is there any kind of high-level expectation on, you know, when that might happen? Do you guys anticipate that, you know, that big deal could happen kind of by middle of next year?

[Kaes Van't Hof, President at Viper Energy]

Yeah, Leo, this has been a pretty restricted process, you know, with the FTC's second request at Diamondback, so we haven't been able to do much of anything at all. You know, we look forward to getting through that very quickly here and then hitting the ground running. You know, I think, you know, if history is any guide, we are, we don't move very slow at Viper or Diamondback, and so we'll get to work on it right away. And I think, you know, nothing's changed from our perspective on the sizing and potential opportunity set that we put in the merger deck at the Diamondback level.

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

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

[Kaes Van't Hof, President at Viper Energy]

Yeah, I think certainly from an external perspective, that's what we're focused on. You know, we still try to get the little deals here and there, but, you know, I think you'd be shocked to see how many kind of $20 million-$50 million mineral funds there are that, you know, you never see on the outside. So, you know, those competitors are very aggressive on smaller deals.

[Kaes Van't Hof, President at Viper Energy]

They probably take a little more risk on undeveloped acreage and timing, and we kind of see our spot in the food chain as, you know, being the aggregator of those aggregators, and being able to, you know, come to an opportunity with, you know, a real amount of cash, real amount of market access, real amount of liquidity. 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 unit holders.

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

Okay. Thanks, guys.

[Kaes Van't Hof, President at Viper Energy]

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.

[Travis D. Stice, CEO at Viper Energy]

Thank you. This call this morning is 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.

Participants

Executives

• Adam Lawlis, Vice President of Investor Relations
• Austen Gilfillan, VP
• Kaes Van't Hof, President
• Travis D. Stice, CEO

Analysts

• Betty Jiang, Senior Equity Research Analyst at Barclays
• Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners
• Neal Dingmann, Managing Director of Energy Research at Truist
• Paul Diamond, Director and Research Analyst at Citi