Viper Energy Partners LP
NASDAQ:VNOM
Earnings Call Analysis
Q4-2023 Analysis
Viper Energy Partners LP
Viper Energy has demonstrated a robust increase in oil production, with an impressive 13% surge in the average production compared to the previous year. This is complemented by a meticulous strategy in reducing the average share count by 1%, a move that enhances the production per share, marking the eighth consecutive quarter of such an increment.
The commitment of Viper to shareholder returns is evident in their declaration of a $0.29 variable dividend on top of a $0.27 base dividend for Class A shareholders. Notably, the Q4 effective payout ratio reached 97%, inclusive of a strategic $28.7 million share repurchase that the company orchestrates as financing for their GRP acquisition, reflecting a calculated approach to balance share buybacks with direct shareholder distributions.
Viper views its share repurchase during Q4 as integral to the company's financial strategy, particularly in the context of the GRP acquisition. This strategic buyback is coupled with an additional $10 million in post-acquisition cash flow, which, although not recorded in the quarter's financial report, effectively reduces the purchase price and demonstrates Viper's strong post-acquisition financial management.
The strategic acquisitions completed in 2023 have solidified Viper's market position, bringing forth a larger and more robust business model. The company has pursued scale and clear visibility to future development, ensuring accretion on all relevant financial metrics. Additionally, the conversion into a Delaware corporation has augmented governance rights, setting a clear trajectory for continuous growth.
Looking into the future, Viper has set a vibrant production outlook for 2024, with expectations of Q4 production reaching or surpassing the higher end of their guidance. This progression, coupled with the company's efficient cost structure, should sustain significant capital returns to shareholders, particularly through a structured base plus variable dividend approach.
Viper's growth narrative doesn't just rest on past success; the company anticipates a substantial 14% growth in quarter-over-quarter oil production for Q4 '24 compared to Q4 '23. This robust projection speaks volumes about the company's potential to sustain growth and continue enhancing shareholder value without disproportionately affecting the broader upstream market dynamics.
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Good day, and thank you for standing by. Welcome to the Viper Energy Fourth Quarter 2023 Earnings Call. [Operator Instructions] 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.
Thank you, Victor. Good morning, and welcome to Viper Energy's Fourth Quarter 2023 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 Gilfillian, 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.
Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's Fourth Quarter 2023 Conference Call. The fourth quarter wrapped up a milestone year for Viper. For the full year, average oil production increased 13% compared to the previous year, while our average share count was reduced by 1% over the same period. As a result of continued strong organic production growth, accretive acquisitions and an opportunistic share repurchase program, the fourth quarter represented the eighth consecutive quarter of increased production per share for Viper. For our return of capital for the fourth quarter, we've declared a $0.29 variable dividend to Class A shareholders to go along with our $0.27 based dividend. Importantly, this variable dividend is the same that we would have paid with a 75% payout ratio, assuming we did not repurchase any shares during the quarter. However, inclusive of the $28.7 million in shares that we repurchased during the quarter, our effective payout ratio for Q4 is 97%. Our rationale for excluding the share repurchases done during the quarter and calculated our variable dividend is that we view this buyback, which was done during the secondary offering related to our GRP acquisition as an extension of the financing of the deal. Additionally, we've already received $10 million in post effective cash flow that is applied as a reduction to the purchase price and does not show up in our reported financials for the quarter. Looking back on the year as a whole, there were several strategic initiatives completed during 2023 that marked important steps in the growth and evolution of Viper. Our GRP acquisition, which closed in the fourth quarter, clearly laid out the framework that we look for in large-scale M&A. First, it must be accretive on all relevant financial measures. Second, there must be high-quality, undeveloped inventory that supports our long-term growth profile and provides clear visibility to future development. And third, the acquisition must provide significant scale that results in a pro forma business that is both bigger and better. Separately, Viper also completed its conversion into a Delaware corporation during the fourth quarter. We believe this conversion has delivered increased governance rights for our shareholders and positions Viper to grow our business and fully highlight the advantaged nature of mineral and royalty ownership. Looking ahead to 2024, we've initiated production guidance for both Q1 and the full year. While Q1 is expected to be the weakest quarter of the year, primarily as a result of the timing of large pads, we continue to see strong activity levels across our acreage position and expect significant growth to occur throughout the year with 20 -- with Q4 2024 production expected to be at or above the high end of our guidance range. This continued production growth along with our best-in-class cost structure should enable Viper to continue to return a substantial amount of capital to our shareholders, primarily through our base plus variable dividend. Operator, please open the line for questions.
[Operator Instructions] Our first question will come from the line of Neal Dingmann from Truist.
Nice quarter. My first question is on valuation. Just maybe broadly, it seems to me that the market is still not appropriately valuing VNOM's growth and the continued association distribution. So Kaes, for you and the team, just wondering, you all believe this is still more of a broader issue with the Minerals group in general? Or is it more the market not appreciating VNOM's future value creation?
Yes, Neal, I mean, listen, I think the market is starting to wake up to the VNOM story as well as the mineral story. I think generally, the conversion that we did to C-corp has opened up a broader investor universe has allowed us to take meetings with shareholders that -- or prospective shareholders that haven't been able to buy the stock in the past. I think it's good to see some index ownership. It's good to see the float pickup. And I think as you think about -- as we think about the vision for this business, as you continue to see consolidation in the E&P space, we think Viper will offer a unique opportunity and a unique investment case in the pure play Permian E&P or minerals business. However, you want to look at it. I mean I think generally, as we continue to grow this business and it grows production, you can do that at Viper even if the parent company is not growing. So generally, I think the market is waking up to the story. I mean, this business is going to grow 14% -- grow oil 14% quarter-over-quarter, Q4 '24 to Q4 '23, that's a pretty impressive growth rate, and it's not impacting overall macro as much as it was upstream.
Yes, great. And then just a second quick one on capital allocation. Given your low leverage, I assume you'll continue or will you continue to pay out the 90% plus cash available for distribution. And would you consider leaning more into the buybacks?
Yes. Little bit. We did a unique deal in Q4 to buyback 1 million units from what was given to GRP seller financing. I think that's the unique opportunity to buyback a lot of shares at one time. Viper shareholders have been rewarded for that from a returns perspective. I think generally, we still believe minerals should be distribution vehicles. We have a fixed distribution that's grown in the last couple of years. We have a variable distribution that's probably our second call on payout. And then behind that, it's probably repurchases. I think there will be opportunities to repurchase shares in the future. But right now, the priority feels to be shifted more towards the base plus variable unless there was a unique event like a large shareholder selling.
One moment for our next question. Our next question will come from the line of Derrick Whitfield from Stifel.
I wanted to circle back on the topic that came up earlier on your Diamondback call today regarding the increased inclusion of Wolfcamp D in 2024, is that development focused in your Spanish Trail area or more broadly integrated across your stack development?
It's more broadly integrated across the portfolio, but there is a lot of undeveloped opportunity in Spanish Trail. We signed a big lease last year for deep [indiscernible], which included a little bit of Wolfcamp D but mainly Barnett and Woodford across that Spanish Trail position. I think there's a couple of wells coming on this year in the Wolfcamp D, which just opens up the next leg of the seal when it comes to mineral ownership. I mean when we first bought Spanish Trail 10 years ago, it was focused on single bench Wolfcamp B development and maybe some more vertical wells. And now here we are developing 5 or 6 benches and upside in the deeper zone. So at the end of the day, it's always good to be the mineral owner in Texas and Viper being a large mineral owner with a well-funded parent operator is in a very good position.
And often laid out in Slide 12 of the deck, what that looks like and what the benefit has been to the Viper shareholders in Spanish Trail from a deal that started with the $400 million purchase 10 years ago.
I agree. Quite amazing. Maybe kind of bridging from that topic, with potential inclusion of Endeavor, are you guys aware of any leases or ranches with materially higher NRIs like Spanish Trail? Or is it just uniformly higher from your perspective?
Yes. There's certainly some opportunities. There's the [indiscernible] ranch which we had a little discussion about with Endeavor a few years ago, and they got title to the ranch, but we know the mineral owner there who owns a significant amount of minerals and someone we should be talking to. But I think those are all kind of opportunities that will open up as we get to work with the Endeavor team on what they have and what we have and putting together will truly be a kind of a world-class resource at the upstream angle and the downstream angle -- sorry, the mineral angle.
Next question will come from the line of Paul Diamond from Citi.
Just a quick one on kind of the run rate cadence. If we take those 13.4 net wells in active development and kind of run that out on our numbers, we get to pretty close to the high end of guidance pretty quickly for '24. Should we kind of view that as despite a bit of conservatism into it, there is more just accounting for ongoing volatility in pricing and just operational cadence across the market?
Yes. Paul, a lot of it is timing related. So if you think about Q1, right, it's kind of in the lower end of the range mainly as a result of the lower well count that we saw turn production in Q4 carrying into the year. So when you think about the full year, we've obviously had this range of 25.5% to 27.5% on oil out there since September of last year when we announced the GRP deal as we kind of roll forward a couple of months and you look at our net well count with connectivity being [indiscernible] up a little bit. So I think that [indiscernible] maybe a little bit higher than we previously thought in the back half of the year. But we're typically pretty conservative when it comes to converting permits to production and kind of put some of that activity that you see there into the 2025 time line. But if things stay current with current expert with operators pace of development, potentially there could be a little bit of upside to our guidance. But we just guide what we can see and be very confident in today.
Yes. The beginning of the year is the toughest part for us on giving a full year guide, particularly on the non-op side. I mean you know the bank side very, very well, and that moves around slightly. But I think, generally, we're a little more conservative in what we think it gets popped in the second half of the year on the non-op piece.
Got it. Understood. And just a quick follow-up on -- given the kind of proliferation of M&A across both on the mineral side as well as the non-op and just the operators more broadly, can that really shifted your guys' mind as where you see as like the most attractive deal size post-GRP, has it gotten a little bit bigger, because you guys are a bit bigger? Or is it still kind of run the gamut of different scale and geographies?
I think generally, a deal like GRP showed our advantaged position because we could do a deal of that size with a significant amount of cash. It's still a [indiscernible] in the basin for smaller deals and probably the -- let's call it sub-$20 million, sub-$10 million deal market. And really, I think we still look at that market, but it's just not a huge piece of our business anymore. I think generally, minerals have consolidated into funds that are sizable that we'll need to monetize at some point and Viper should be the buyer of those larger positions rather than the blocking and tackling making a big difference in the story. I think also, Paul, minerals are, in our mind, well behind E&Ps in terms of consolidating. There's going to be a probably more mineral consolidation in the next few years and more names that sell than upstream. I mean, upstream has been consolidating very rapidly. But there's going to be a solid wave of mineral positions that monetize big or small. And we want to be positioned to buy the best rock with the best visibility. And that, in our mind, is mainly Permian, if not mainly Midland Basin.
Our next question will come from the line of Leo Mariani from ROTH.
I appreciate some of the commentary there on your expectations for the minerals market to consolidate. Obviously, I think you guys laid out on the Endeavor acquisition call that, Endeavor has roughly a portfolio that's 2/3 the size of VNOM's currently, which obviously is very, very significant. Would you guys be able to kind of just give us a little bit of a high-level plan in terms of how you see that maybe playing out over time to the benefit of VNOM certainly seems like there's significant drop-down potential. Is that something you think you could evaluate and kind of do multiple deals over kind of a handful of years? I mean, what do you think kind of the high-level game plan is?
Yes, Leo, I mean, we gave some high-level information on the potential opportunity in the merger deck. I'll say that we can't really say much today on timing or sizing. But very clearly, it's a meaningful position that would differentiate Viper if we could get a deal done at the right time. But I think we're going to have to leave it up to the pro forma board to decide and get the deal closed. And as you know, we don't move slowly. So we'll get working on it quickly, but I can't really give you much until that time comes.
Okay. And then just in terms of some of the numbers here, I certainly noticed that your G&A is kind of going up per barrel by a fair amount. I'm assuming that's really just the conversion of the C-corp and the additional costs that sort of come on that end?
Yes, that's fair, Leo. We're not adding a ton of people or anything. We run this business pretty lean, but there are some added costs as we now allocate fully between the two, the parent and the sub.
Our next question will come from the line of Tim Rezvan from KeyBanc Capital Markets.
I have two questions that are sort of related, following up on what's been discussed here. Is it fair to say that despite the Endeavor opportunity coming around the end of 2024, that you are open and willing to transact with third-party minerals this year. I know in the past, the Diamondback history, you haven't been afraid to stack deals when we see opportunities. So are you sort of continuing to be on the prowl now and through 2024.
I think we want to be selective, but certainly something that looks like a GRP, like we did last year would be very interesting to us. I mean, I think although that deal didn't have all Diamondback operations. There is actually a lot of Endeavor permits and units under it, but that visibility and that quality of remaining units in the Midland Basin to us has a lot of value. And if there are deals with a lot of undeveloped value, not just near-term free cash flow accretion that's something we're going to look at. I just don't have direct visibility into what that is today.
Okay. That's helpful. And then related to that and as you think longer term on Endeavor, if you bake in the legacy, the acquired EBITDA on GRP, leverage looks like a little bit over 1x and hard to see a lot of organic deleveraging in the low 70s oil world. So what are your thoughts on the balance sheet and where you are today and maybe where you'd want to be over the medium term to sort of be able to take down bigger opportunities as they come up?
Yes. I think a path towards 1x no matter what the deal looks like is the right way to look at it. We are distributing 75% of free cash. So there's a more limited amount of free cash to go to the balance sheet on a quarterly basis. But generally, minerals, we've proven that the mineral business can delever very quickly. It doesn't mean we're going to lever it up by any means. But security of pure free cash flow, almost regardless of commodity price is a pretty unique way to think about leverage in an oil or commodity-based business.
I'm not showing any further questions in the queue. I'd like to now turn it back to Travis Stice for CEO for any closing remarks.
Thank you again for everyone participating in today's call. If you've got any questions, just please reach out using the information we provided.
Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.