Ladies and gentlemen, thank you for standing by, and welcome to the Viper Energy Partners Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, Adam Lawlis, Vice President, Investor Relations. You may begin.
Thank you, Rhonda. Good morning, and welcome to Viper Energy Partners Fourth Quarter 2021 conference call. During our call today, we'll reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO, and Kaes Van't Hof, 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 Partners' Fourth Quarter 2021 conference call. During the fourth quarter, Viper generated record financial and operating results highlighted by the $0.67 per common unit of cash available for distribution, exceeding our previous record by over 10%. Importantly, production outperformed expectations during the quarter following the closing of the Swallowtail acquisition as third-party activity levels exceeded our conservative acquisition assumptions, and Diamondback continued to focus its activity on Viper's concentrated royalty acreage. Looking ahead to 2022, Viper is uniquely positioned within the industry to be able to capture numerous tailwinds and return substantial amounts of cash back to our unit holders. With zero capital requirements and only limited operating costs, royalty companies will be advantaged in 2022, as we will not face inflationary cost pressures.
For Viper specifically, as our defensive hedges placed in 2020 roll off at the end of 2021, our industry-leading cash margins will now be further enhanced by mostly uncapped exposure to strength in commodity prices. Additionally, Viper continues to have unmatched high confidence visibility into Diamondback's expected forward plan to support our production profile with additional upside from third-party operated production continuing to exceed our conservative activity and timing assumptions. We have initiated average production guidance for 2022 that implies over 18,000 barrels of oil per day at midpoint. Viper is expected to have meaningful exposure to Diamondback's high-rated, primarily Midland Basin-focused development plan in 2022. Specifically, this means that we expect to have roughly 70% exposure to Diamondback's expected gross completions with an average 6% NRI on those wells.
On the third-party operated portion of our production, despite seeing an increase of over 20% in activity levels and an accelerated pace of development, we continue to contemplate slower than average timing assumptions in our production guidance. Based on the midpoint of this full year 2022 production guidance, Viper is expected to generate over $550 million of annualized free cash flow, assuming $85 WTI. This 2022 free cash flow equates to roughly 11% free cash flow yield as a percentage of our enterprise value or almost 13% based on our current market cap. With a 70% payout and an opportunistic unit repurchase program, Viper offers a competitive cash return yield that provides maximum exposure to commodity prices with limited operational risk.
On the acquisition front, 2021 was a successful and important year for Viper as we increased our Diamondback operated acreage by over 1,800 net royalty acres or greater than 15% increase. Viper's asset base is less than 25% developed, and with Diamondback operating 54% of the acreage, we have visibility to production that will support our strong free cash flow for years to come. In conclusion, the fourth quarter topped off an outstanding year for Viper. The record results of our business highlight our quality asset base, best-in-class cost structure, and overall differentiated business model. Given the strength of our balance sheet, we have evolved our hedging strategy so that we can maximize upside exposure to commodity prices while also protecting against the extreme downside. We look forward to continuing to generate robust amounts of free cash flow and maximizing returns for our unit holders.
Operator, please open the line for questions.
Thank you. Ladies and gentlemen, as a reminder, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Neal Dingmann with Truist Securities. Your line is open.
Morning, guys. Great quarter. Travis, for you and Kaes, can't help but notice you guys had great growth for the quarter despite, you know, a lot of the public companies still just having kind of flattish production. Could you talk about just how you see going forward, you know, how are you able to accomplish that?
Yeah, I mean, you know, Neal, first of all, fourth quarter was really good. The Swallowtail acquisition outperformed our expectations, particularly on the non-op side, early. You know, if you go back a couple quarters, the rationale for that Swallowtail deal was, you know, non-op production would kinda hold us over until Diamondback's large-scale development on-scale, and Robertson Ranch's real growth production over the next few years at Viper. But, you know, on top of that, you know, continued exposure to more of Diamondback's plan. You know, if we're doing our job right at both companies, you know, drilling our inventory with very high mineral ownership first is what we should do for combined capital efficiency.
Therefore, in a world where Diamondback might stay flat, you know, Viper will grow, like it did in the fourth quarter and like we're expecting in 2022.
Great. Great to see. Then, just to follow up, love the, you know, continuing now I think the last two quarters, paying out approximately, I think, 70% of the total cash flow for distribution you paid out. You know, is that sort of the goal? Are you trying to hit a. You know, I think it implied you said over a 7% annualized yield. You know, what is the growth kind of the focus on that? Because it seems like the market's not, to me, fully recognizing that. I'm just wondering, is there. You know, maybe just talk about what is the sort of target you're looking at.
Yeah, I mean, if you look backwards, we've been at 70% for a couple of quarters now, but we also had, you know, opportunities to buy back a lot of units at much lower prices than we are today. We, you know, probably spend another 15% or 20% of cash flow buying back units over that same time period. You know, as you look forward, you know, we did take on some debt with the Swallowtail deal. I'd like to get our revolver down a little bit, you know, but also probably term out some of that at the end of the year when our bonds are callable. That probably opens the door for us to go higher than 70%.
I think generally though, the baseline or the minimum is 70% of free cash getting returned.
Great to hear. Thanks, guys.
Thank you, Neal.
Thank you. Our next question comes from the line of Chris Baker with Credit Suisse. Your line is open.
Hey, good morning, guys. Just wanted to ask on the acquisitions you completed in the fourth quarter, you know, great to see the continued effort to increase Viper's leverage to Diamondback. Just wondering if you helped frame up the sort of cash flow yield you see that acquisition generating and, you know, how it kind of fits into the details you guys provided in that slide 13.
Yeah. I'll give you some background on the deal, and Austen can give you the details of what's coming this year. You know, that was a deal we sourced ourselves, a pretty large contiguous property where, you know, there were a significant number of mineral owners that we were able to get a lot of them to sell. You know, the point being, hey, this ranch might not be in Diamondback's 2022 plan, but if we own 10% of the minerals on that ranch, it certainly moves up the quality spectrum. You know, generally that's exactly what the Viper team should be doing.
That's kinda why we've reserved that 30% of cash flow to be able to do deals like that without, you know, needing to go tap the equity markets or the debt markets. Austen, you can add a little color on that deal.
Yeah. That was a pretty big block up in Northwest Martin County, legacy Guidon Operating. You know, as kaes mentioned, it wasn't gonna fit in the immediate near-term plans of Diamondback, but now that we own, you know, about a 6% interest across a couple units, you know, that'll provide seven-year AD growth upside locations. With Viper's ownership, you know, we're gonna get a 14-well pad. At the end of this year, we'll have a 9% interest. You know, no real production on it today, but we'll get about 1.3 net wells here at the end of the year. You know, that just really highlights the relationship here that we were able to underwrite that development where no one else could.
There were no permits on it when we bought it, and now there are permits on it or will be.
Great. No, I appreciate the color, and congrats to you both on the promotions announced today.
Yeah. Thank you, Chris.
Thanks, Chris.
Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Derrick Whitfield with Stifel. Your line is open.
Good morning, all again.
Morning, Derrick.
Hi, Derrick.
With my first question, I wanted to focus on visibility at a high level. Referencing slide 10, you've added approximately 2.3 net wells to your line of sight inventory since Q3. In thinking about your rig growth comments from the Diamondback call earlier and the general trajectory and activity we've seen since November, would it be reasonable to assume that that number could be conservative?
Yeah. You know, I think it's reasonable. I think we've kept conservative non-op assumptions over the last couple years and you know have outperformed expectations consistently. You know, we have no intention of changing that. I wouldn't say the Diamondback assumptions are conservative because it ties to the actual development plan. With Diamondback staying spot on production, you know, the drill schedule might change around a little bit, but the projects on the schedule are the projects. Those are all gonna happen. Austen, you want any commentary on non-op and what we're seeing?
Yeah. I mean, we normally expect those work in progress wells to be converted within kind of six to eight months. That's been kind of baked into the guidance. I will say with, you know, the averages that we're seeing with operators now, we're giving ourselves a couple months of cushion. So, you know, if operators continue at their current pace of development, I think that'll be upside to guide. With the line of sight wells, it's kind of the same thing. A couple months of conservatism baked in with converting permits. You know, at current pace with our guidance, I would expect around 50% of those non-op wells to be converted this year.
That makes sense. As my follow-up, really looking out over the balance of the year and even out to 2023, how should we think about your cash tax exposure for distributions in light of the higher commodity prices we're seeing?
I think we're okay this year, shielded, but by next year, things are gonna start to pick up. I think, you know, we have $2 million of expected cash taxes this year and then ramp it up next year.
Great update. Thanks, guys.
Thank you, Derrick Whitfield.
Thank you. Our next question comes from the line of Leo Mariani with KeyBank. Your line is open.
Hey, guys. I wanted to generally ask about how you see the M&A environment, you know, these days, you know, for Viper. Obviously, you just sold a small property. You made a little acquisition, which you just gave some details on. It sounds like that was kind of a negotiated deal with a separate landowner. Maybe you had a relationship there. Sounded like a good deal. Can maybe just generally kind of talk about, you know, the environment that you're kind of seeing out there from a minerals company perspective.
Yeah. It's tough to get deals done right now. I mean, you know, animal spirits have come back into the mineral market. There's still a lot of small, private, you know, mineral flippers and mineral buyers that, you know, have little funds that, you know, are competing with us. You know, I think that the beauty of Viper is that we can do a $500 million deal like Swallowtail, but also, you know, source and execute a deal like the other deal we did in Q4. You know, we're seeing some pretty frothy numbers being paid for DUCs and permits. I think our goal is to buy stuff under Diamondback that hasn't been permitted yet and then permit it after acquiring a large interest.
We're gonna be prudent, we're gonna be patient, and, you know, we'll see how this frothy market continues.
Okay. I just wanted to follow up a little bit on the production guide here. So, you know, just simple math. If I look at fourth quarter of 2021, about 18,370 barrels a day of oil, obviously far kind of exceeded the guide. Just wanted to get a little sense of, you know, kind of why it was so much better. Was it strictly third party activity in fourth quarter? Maybe there were other things on just better well performance. If I look at the guide for 2022, kind of the midpoint of the full year oil guide is just pretty much flat with that fourth quarter.
I guess just given all the increases that we've seen in activity in the Permian, my gut would be maybe it would be a little better than flat. I know the FANG operated portion is flat, but should that lead us to think that if the industry continues to add rigs in the Permian, then maybe you end up sort of above that midpoint in 2022 on oil guide?
Yeah. Well, you know, generally in 2021 and, you know, since the downturn in 2020, we've kinda extended our assumptions on non-op. Traditionally, non-op has come in higher than expected but also more activity than expected, but also, you know, higher than expected on type curves. Traditionally, we model, you know, the first couple months of production lower than, you know, what's been happening type curve wise. I think it's a combination of activity and outperformance. You know, looking ahead, like I was saying with Neal Dingmann earlier, you know, the Diamondback production is going to grow at Viper, right? Because we're allocating capital to the highest combined net return. So Diamondback production is gonna grow, particularly in the second half of the year, and then into 2023.
You know, the non-op we model conservatively, you know, with that. You know, if activity stays where it is today, you know, we're probably modeling the back half of the year a little more conservatively than what might happen on the non-op side. You know, that's just prudence because, you know, we like to model what we can control. In mineral lands, you know, we're fortunate that we're the only company that can control two-thirds of our production.
All right. I guess bottom line is we're likely to see some of that Viper growth here in the second half of 2022. Just, I'm sure some of that's just based on kind of well cadence from FANG in terms of when things fall.
Yeah. Second half 2022, FANG production is gonna grow. If Travis's prediction of 400 rigs in the Permian is right, then the non-op's gonna grow for sure.
Okay. Thanks, guys.
Thanks, Leo.
Thank you. Our next question comes from the line of Jeanine Wai with Barclays. Your line is open.
Janine?
Check to see if you're on mute.
Good morning. Thanks for taking our questions. Austen, congratulations on your promotion. Well deserved.
Well deserved.
Yeah. We've got a question on hedges. We noticed that you added a little bit of Waha swaps all the way out in 2023. Can you just talk again about your hedging strategy since it was such a big part of the story last year, and a lot of those punitive hedges are rolling off or have rolled off as of the end of last year?
Yeah. I mean, I think, you know, generally we don't wanna be in a position like 2020 again. You know, similar to Diamondback, we wanna protect that extreme downside and hope for the best on the upside. We're, you know, buying more puts at Viper, you know, really wide collars. I think at the low end of these puts and collars, you know, leverage doesn't get close to 2x. You're still able to distribute a good amount of cash, you know, probably in that world. You're buying back shares because the stock wouldn't be where it is today. You know, generally just trying to protect that downside, knowing that we have some debt and we wanna pay it down, and keeping that upside for our investors.
Okay, great. Thank you. Our second question. We see on slide 12 there's the other category on there. It's a little hard for us to tell what the private exposure is in the near term inventory. Can you just talk about how you see the sustainability of private activity on your acreage? Thank you.
Yeah. I mean, you know, we for the most part it's in the Midland Basin with Endeavor and CrownQuest and those guys have been getting really active. I wouldn't say it's a huge growth spurt trend, but we have some relatively high NRIs in that. So, you know, I think the current levels that you've seen from net wells can certainly be sustained here for a while. It's a similar story in the Delaware with some of the larger ones such as Mewbourne. You know, not a huge growth spurt trend, but the NRI helps in having that timing accelerated, which really drove our performance during 2021, and I think could be catalyst for outperformance again this year.
Yeah. What we've also done with a couple of those operators Austin mentioned is, you know, we've actually gotten some mineral trades done. You know, we've traded Diamondback operated or we've traded for Diamondback operated properties and given them properties we had under them. Certainly, you know, big asset base that we can do a lot of things with, including, you know, trading now.
Great. Interesting color. Thank you.
Thank you, Jeanine.
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Travis for closing remarks.
Thank you again to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.