Good day, and welcome to the Viper Energy Partners 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Adam Lawlis, Vice President, Investor Relations. Please go ahead.
Thank you, Cherie. Good morning, and welcome to Viper Energy Partners' second quarter 2022 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, 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' second quarter 2022 conference call. The second quarter was an outstanding quarter for Viper. Oil production grew 9% quarter-over-quarter, which combined with the benefit of increasing commodity prices and no inflationary cost pressures, resulted in a 20% increase in cash available for distribution. Importantly, the significant increase in production was driven primarily by a record 4.8 net wells being turned to production by Diamondback during the quarter. As a result of Diamondback's consistent focus on developing Viper's high concentration royalty acreage, primarily in the Northern Midland Basin, as well as continued strong activity levels by third-party operators, Viper is increasing our guidance for oil production for the full year 2022 by 4% at the midpoint.
This is the second time we've increased our production guidance for the year, with the midpoint now 1,000 barrels a day higher than our initial production guidance. Despite Diamondback and many other larger Permian operators committing to a maintenance capital plan over the past year, Viper has had oil volumes grow 20% over the same period. Additionally, Viper today announced the next step in the evolution of our capital return program. Beginning in the third quarter, the board has approved an annual base distribution of $1 per unit, which provides a competitive yield of 3.3% at today's unit price, and which would represent an annual distribution roughly equal to 50% of our estimated cash available for distribution, assuming $50 WTI. The board also approved an increase to our return of capital commitment to at least 75% of cash available for distribution.
To meet this commitment, our base distribution is expected to be supplemented by additional return of capital in the form of variable distributions and opportunistic unit repurchases. This enhanced return capital, return of capital framework, along with the increase in the unit repurchase authorization, displays the confidence we have in our forward outlook. The optionality provided by the variable return of capital beyond our base distribution will allow greater flexibility in taking advantage of extreme market volatility and the current dislocation from the long-term intrinsic value of our asset base. Going forward, we remain committed to generating the highest value proposition for our unit holders, whether that be allocating capital to a growing base distribution, variable distribution, or opportunistic unit repurchases. In conclusion, the second quarter was an outstanding quarter that was record-setting on almost every metric.
The record results of our business highlight our quality asset base, best-in-class cost structure, and overall differentiated business model. Viper remains differentially positioned to grow production without having to spend $1 of development or acquisition capital. As a result, also expect to generate unmatched per unit growth and returns. Operator, please open the line for questions.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question will come from Neal Dingmann with Truist. Please go ahead.
Morning, Travis. Thanks for the brief comments. My first question is on the record wells turned to production last quarter, definitely notable, and I'm just wondering, are you expecting to continue at this pace? You know, wondering, are there external opportunities to boost third-party interest, which obviously would help the net well results going forward?
Hey, Neal, this is Austen. The second quarter, I mean, if you look at the Diamondback wells turned to production, 4.8 for the quarter, that was a company record for us. You know, even going back to the days when Diamondback was running 20-25 rigs, you know, this was still a really strong quarter with, you know, 85%+ exposure to Diamondback's completions with about a 9% RI. So,
We probably won't be able to maintain quite this pace, but when you look at it on an annualized basis, still looking at 11 or so net wells for the year, and I think we can grow from that on an annual basis going forward. On the third-party side, you know, it was a little bit of a lighter quarter, but we definitely have some higher interest stuff in the back half of the year. I think that's gonna support the production profile for the remainder of the year. You know, Diamondback's gonna continue to focus their activity on our high royalty acreage in the Northern Midland Basin. Should be a strong combination of wells being turned to production here for the foreseeable future.
Great details. Thanks, Austin. Second question, Kaes Van't Hof, probably for you just looking at capital returns specifically, you know, as Travis Stice said, mentioned prepared remarks or on the press release the new 75% minimum capital commitment. I'm just wondering how do you balance this? You know, I know you all continue to wanna pay down a bit of debt. Just wondering on a go forward, you know, how do you balance this? You know, is there a certain point where you get debt down to where that payout would be well over 75%?
Yeah. You know, good question, Neal. I would say generally, you know, the move to 75%, you know, took a lot of thought and consideration on the Viper side, particularly, you know, moving to a base distribution, which kind of can be seen as basically a base dividend like at the Diamondback side, but it's a little bit higher on a yield basis. This puts a governor on us for the other 25%. We definitely wanna continue to try to consolidate, do deals here and there, that gives us cash to do those deals.
If we don't, you know, find many deals in a particular quarter, we'll pay down debt like we did pretty aggressively in Q2. I think it puts the governor on, you know, the return to unit holders, but they know that that's, you know, coming quarter in, quarter out. The other 25%, we have a little bit of flexibility to, you know, consolidate here and there if deals pop up or continue to pay down both the revolver and our senior notes.
No, great job. Heck, the yield's still out there. Thanks, guys.
Thanks, Neal.
Thank you. One moment for our next question. That will come from the line of Chris Baker with Credit Suisse. Please go ahead.
Hey, guys. Congrats on another beat and raise quarter. Just to kind of follow up on Neal's question. You know, I guess where the stock is today, is there any reason to think that the quarterly dividends in the second half will be above, you know, that $0.25 per share base level? And then just, you know, is it fair to assume the residual cash, again, just given where the stock is today, would go to an accelerated buyback?
Yeah. You know, that's kind of the flexibility that we wanted to get from the board with this new plan, Chris. You know, I think generally we wanted to have a pretty high base dividend. You know, as Austin mentioned, that would be about 50% of free cash flow at $50 oil. It's a sizable base dividend. But, you know, generally with the dislocations we've seen in the equity markets, you know, just like we talked about on the Diamondback call, we can't go buy a mineral in a Tier 1 area, you know, for anything close to where we're trading at today in the public market. I think it just continues to highlight the disconnect between oil in the public markets versus oil in the ground.
As a result, you know, we're gonna be leaning into the buyback here. You know, if we continue to see weakness, we'll just continue to lean into it, and that's why the board wanted to be so aggressive with the, you know, the size of the increase.
Great. Thanks. Just as a follow-up, you know, realize it's still early days, but, you know, perhaps for Austin on 2023, can you just remind us the exposure Viper has to Robertson Ranch, and how many net wells that could potentially contribute to next year's program? I know you guys have been working on, building out that water and gas processing adds there. Thanks.
Yeah. You know, we're really just starting to get active in the area. I kind of put Sale and Robertson Ranch into one block together. You know, there should be three or four rigs consistently running over the next few years in that block. I think that's the kind of the benefit of the story this year is, you know, we're outperforming expectations. The years continue to look better. Non-op activity has continued to go up, and we're still not even in the core block that we're gonna start developing here pretty soon.
Thank you. One moment for our next question. That will come from the line of Jeanine Wai with Barclays. Please go ahead.
Hi. Good morning. Good afternoon. Thanks for taking our questions.
Hey, Jeanine.
Hi. Good morning. Maybe our first question is just on the potential drop down of NRIs from FANG's recently acquired Ward County acreage. Is this more pushed out in time as you prioritize debt reduction, 'cause you got the revolver in the 2027? Maybe that's more likely to be a 2023 plus type event.
Yeah. You know, we really don't have a set timeline or plan to drop that down. You know, certainly there needs to be a little more development on the block before we consider it. You know, but I think it's generally a deal that Viper could handle with cash if the time comes. Generally, you know, starting to drill on that position certainly need cash flow before that conversation can happen.
Okay, great. Thank you. Then our follow-up question may be dovetailing on Neal's question. You know, you've got a lot of third-party operators in your work in progress wells. Have you seen any kind of change in that type of activity just broadly, either in the industry or on your NRIs, with what we're seeing in oil prices and kind of the continuing tightening in the service price environment?
No, Jeanine, I mean, from a gross level, we've seen pretty steady activity, I think on the third party side, pretty much for the past, you know, nine months or maybe a year even, when you look at the rig count or the kind of leading edge indicators with the permitting activities. That's been staying pretty steady, and we haven't really seen any slowdown, you know, or increases for that matter, given the kind of macro backdrop. With that said, you know, with the activity that's going on now and will be resulting in net wells being turned to production in the back half of the year, I think you'll just see the NRI bump up a little bit on the third party side.
You know, maybe the net wells look probably a little closer to where they were in Q1 as opposed to Q2 for the third party. Really, it's just all of your big public guys that are really active right now, kind of in the Martin and Midland Counties, driving the majority of our activity on the third party side.
You know, I think what's also changed a little bit is as all of us have gone to bigger pads, you know, the lumpiness of both operated and non-operated production has picked up a little bit. Generally, that means if you do have minerals in a non-op unit, you know, you're very confident that that unit's gonna get developed, you know, all at once, rather than, you know, over the course of five or six years like we used to look at things in the past.
Great color. Thank you, Kaes Van't Hof.
Thanks, Jeanine.
One moment for our next question. That will come from the line of Leo Mariani with MKM Partners. Please go ahead.
Hey, guys. Wanted to dive a little bit more into the share buyback, you know, versus the variable distribution, you know, optionality here. I totally understand that at the parent level for FANG, but, you know, I guess just from my perspective, I think a lot of people look at, you know, Viper as more of a yield vehicle and really count on it for these, you know, really fat, juicy, variable dividends, which obviously y'all paid here in the second quarter.
You can just, you know, provide maybe a little bit more color and, you know, if the shares are depressed, could there be just a much higher level of buyback, versus, you know, variable distribution, or is it still gonna continue to be the variable distribution as the main avenue of returning capital to shareholders?
You know, Leo, that's a good question. I would say generally, you know, we probably would like to be distributing more over the buyback at Viper. I think that's what the business was set up for. I think if I put my Diamondback hat on, I like that distribution up to the parent company, but also need to recognize the value of the investment we have and what we can, you know, do with this business. In my mind, I think minerals have traded closer to where E&Ps trade, when in fact, minerals, you know, should trade a significant premium. They're the highest form of security in the oil field.
You know, if an operator loses a lease or needs to extend a lease, you know, they have to pay us to get that done. Also, there are no inflation concerns with this business. It's just, you know, it's frustrating to us to see a business that has grown oil production 20% year-over-year, repurchase, you know, 3% or 4% of the stock. You know, the yield is just eye-watering. That's why we wanna put our money where our mouth is and buy back units if we see dislocation. At the end of the day, like you said, the priority for this business is to be a distribution vehicle. That's why we went with such a high number on the base distribution.
You know, when the equity markets recognize the value of oil assets in the Permian Basin, again, we'll stop buying back and pay back a huge distribution.
Okay, great. I guess just as a, you know, another question here for you folks. Obviously, you guys haven't done much, you know, really on the M&A side. Understand you're basically saying that the asset values in the private market are too high. Just maybe you could give us a little bit more color around that market. I know that y'all are not participating in the Viper level, but are you seeing other deals, you know, trade hands, out there in the minerals space? Or are you just kind of seeing a general slowdown across the whole sector where maybe a lot of deals are being shown at these high prices, but, you know, buyers just aren't as interested?
Yeah, we've actually seen quite a bit of stuff transact over the first half of the year and kind of continue here into the summer. I think there's really two points to note, though. You know, most of that's been stuff that has a lot of DUCs and permits on it. You know, people are willing to pay a premium there for that visibility to the production of cash flow. You know, with our relationship with Diamondback, you know, we can kind of get that same level of confidence by buying further out in the drill bit and just get it for a lot cheaper and not have to, you know, compete with all the other players in that same small bucket.
Really for us, it just all boils down to that it's a pretty high hurdle right now for M&A. I mean, we can look at, you know, our Diamondback operating production being 60% or two-thirds of our total production and have really high confidence that it's gonna grow over the next 35-year period. To buy a mineral out here in the Permian that you have that same level of confidence in is just a pretty high hurdle to clear. You know, we're continuing to poke around, and I think maybe things have softened up a little bit from a couple months ago. We're just staying really disciplined on that front for now.
Yeah, this kind of goes back to that comment I made about, you know, full units getting developed. You know, the prices being paid for DUCs and permits are pretty shocking to us on our side. I think generally if we use, you know, cash to do deals and buy stuff that's further out in the drill schedule, you know, that should support the longevity of this business, you know, rather than chasing the next deal to boost near term cash flow.
Okay. It's a great color. Thanks.
Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to CEO, Travis Stice, for any closing remarks.
Thank you again to everyone participating in today's call. If you have any questions, please contact us using the contact information provided.
This concludes today's conference call. Thank you for your participation. You may now disconnect.