Good day, and welcome to the Viper Energy merger conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Chip Seale, Investor Relations Director. Please go ahead.
Thank you, Michelle. Good morning, and welcome to our call announcing the merger between Viper Energy and Sitio Royalties Corporation. During our call today, we will reference an investor presentation, which can be found on Viper's website. Representing Viper today are Kaes Van't Hof, CEO, and Austen Gilfillian, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial conditions, results from 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 such factors can be found in the company's filings with the SEC. I will now turn the call over to Kaes.
Thank you, Chip. Welcome, everyone, and thank you for listening to today's call. Today's an exciting day for Viper, Sitio, and the minerals business in general. We're excited to announce that today Viper and Sitio are merging. Viper will acquire Sitio in an all-equity transaction valued at approximately $4.1 billion, including Sitio's net debt of approximately $1.1 billion as of end of first quarter 2025. The consideration will consist of 0.4855 shares of pro forma Viper for each share of Sitio Class A common stock, representing an implied value to each Sitio stockholder of $19.41 per share based on the closing price of Viper common stock yesterday, June 2, 2025. This transaction was unanimously approved by the board of directors of each company and has been approved by written consent of Diamondback as Viper's largest stockholder.
Second, stockholders holding in approximately 48% of CTO's outstanding voting power have agreed to vote in favor of the transaction. This transaction is expected to close in third quarter 2025 and is subject to customary regulatory approvals. We're excited about this deal for multiple reasons. First, most importantly, size and scale. This transaction adds substantial scale and inventory depth that will support pro forma Viper's durable production profile and free cash flow growth over the next decade. CTO owns approximately 25,300 net royalty acres in the Permian Basin. They also own an additional 9,000 net royalty acres primarily in the DJ, Eagle Ford, and Williston basins. While we are excited about the acreage outside the Permian, we intend to continue to be a Permian-focused company and see the other basins as upside to our base case projections.
Pro forma Viper will own approximately 85,700 net royalty acres in the Permian Basin and produce approximately 66,000 barrels of oil per day and over 125,000 BOEs a day by the fourth quarter of this year, which is expected to be the first full pro forma quarter post-close. Second, this deal offers meaningful financial accretion and higher cash returns at a lower breakeven. We expect this transaction to be approximately 8%-10% accretive to cash available for distribution per share immediately upon closing and expect that accretion to grow thereafter as synergies are realized. Viper is extremely focused on per-share metrics, and this deal increases all relative per-share metrics immediately. The board also approved a 10% increase to Viper's base dividend in conjunction with this transaction, effective immediately.
Even with this increase, this deal reduces pro forma Viper's base dividend breakeven by approximately $2 per barrel to sub-$20 WTI. Viper's increased base dividend represents approximately 45% of cash available for distribution at $50 WTI. Next, this transaction offers significant tangible synergies. We estimate the total synergies to be more than $50 million annually, primarily attributable to G&A and cost of capital savings. Pro forma Viper is expected to maintain its investment-grade status, and pro forma leverage is expected to be approximately 1.2 times at closing at current strip pricing. We expect to execute a significant liability management exercise as part of this trade to reprice all of Viper's pro forma full debt stack. We also announced today a near-term net debt target of $1.5 billion, which we expect to achieve through free cash flow generation and potentially non-core asset sales.
Finally, I think it's important to highlight that the Diamondback relationship remains strong and a distinct competitive advantage for Viper. Diamondback is expected to own approximately 42% of pro forma Viper's outstanding common stock after closing and will continue to drive meaningful long-term oil production growth from the company's acreage. From a Diamondback perspective, this deal meaningfully increases the distributions received each quarter on the approximately 155 million shares that they own of Viper. In conclusion, we continue to believe that Viper presents a differentiated investment opportunity, and today's merger only enhances our position as we look to compete with mid and large-cap E&Ps for investor dollars, attention, and access to capital. Operator, please open the line for questions.
Thank you. If you'd like to ask a question, please press star one one. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. One moment while we wait for questions. Our first question comes from Neil Mehta with Goldman Sachs. Your line is open.
Yeah. Good morning, Kaes and team. Congratulations on the transaction. A couple of questions. First, just better understanding the customer base over at Sitio. For those of us who know the story a little bit less, it looks like a lot of the acreage is on the Delaware side. One of the things that's really distinctive about the Viper side is just how strong the customer base you have is. Just talk about who you're going into business with in the Delaware and how you feel about the acreage that you're picking up here.
Yeah. I think high level, we've watched Sitio grow their business over time, and I think you'd expect that we knew almost every trade that they built their business on. We did a lot of work studying the Delaware Basin and the operator group there. I think it's all the big ones you would expect: a lot of Conoco, a lot of Oxy, a lot of EOG. I think if there's a bigger New Mexico position that we're excited about that we didn't have a significant position in prior. I'll let Austen give a few more details, but high level, I would say as a mineral owner, we love the Delaware Basin. The stack pay is significant. You remove some of the higher-cost operating challenges as a mineral owner, and I think there's a lot of resource left to be developed.
Some of these trades, as you can expect, and I said earlier, we know them very, very well, and we think we're getting them now under the Viper hood at good value. Austen, you want to give a little breakdown?
Yeah. So I mean, I would say first off, on their asset base, they own some pretty concentrated acreage positions in the Delaware Basin. It's a little bit more diversified to a broader set of operators than we have at Viper. But if you look at the top of the list, it's really still going to be the large-cap operators that you want to own under as a mineral owner that it's going to be an operator that capitalizes and develops the asset appropriately. Really, probably the top operators in terms of current production would be Chevron, ExxonMobil, and Occidental in order. To Case's point, we've been really interested in watching the asset develop over the years and having this opportunity to get under the hood and really dig into it.
We're really excited about really the breadth of the asset base, the existing production, and equally as important, I think the runway that this adds that's a little bit different than what we previously owned at Viper.
Yeah. One more thing, Neil, before you follow up. I mean, I think the way we think about this is we have a very highly concentrated position under Diamondback, which is the differentiator. Then outside of that, we have kind of more of a broad basin approach. As we get more size and scale, having a bigger basin approach, I think, is appropriate for the non-Diamondback operator piece.
That's really helpful, Case. Just talk about what this all means for a return of capital, which is a big part of the instrument. It looks like this is going to be an accretive deal and lower breakevens by $2 a barrel as well. What does that ultimately mean for your ability to return capital in a choppier oil macro?
Yeah. Listen, I think it means we can return more sooner. We're going to keep our 75% minimum commitment to equity at Viper. We raised the base dividend, so that's a little bit higher % of the total return of capital base. I think we're probably headed towards a base dividend increase at some point this year anyways. This deal only accelerates that. As you mentioned, the deal's accretive. Distributions go up immediately. I think this business has a lot of float, a lot of liquidity. It's going to get a lot more investor attention. We still have our buyback program in place in case there are any large holders that do want to hit the exits.
The primary return of capital is still going to be 75% going back to equity holders with a combination of a base plus variable dividend with kind of flexibility outside of that. I think last thing I'll say there is the mineral business, being pure free cash flow, delevers very quickly. Even with our two businesses working towards closing over the next three months or so, we'll delever by another couple hundred million dollars before the deal even closes. That is just a testament to this business model.
Yeah. It's advantageous. Thanks, Kaes. Thanks, Austen.
Thank you, Neil.
Thank you. Our next question comes from Paul Diamond with Citigroup. Your line is open.
Thanks, Allen. Thanks for taking the call. First, congratulations on the transaction. Just wanted to touch base on the non-Permian asset base. I know you talked about liking the optionality and the upside, but also talked about non-core asset sales. Just wanted to see if I get an idea of the balance between those two.
Yeah, Paul. I think it's very price-dependent. They have three large assets outside the Permian, DJ being the biggest, Eagle Ford second, Williston third. I think all three of those deals or all three of those positions are kind of of a size that we think would be a very competitive process should we decide to sell them. I think the other side of that coin, though, is we have a very strong balance sheet and we have time. We can be patient monetizing these assets at higher commodity prices eventually down the line, which reduces the purchase price significantly. Last I'd say is the Eagle Ford asset we're very familiar with. We actually owned a very similar piece of that same asset a few years ago. They owned a larger piece, but we're comfortable with that position. It's in a really good spot in Eagle Ford.
We also know that the market for minerals in the private world in that kind of $50 million-$200 million space is highly competitive. We've been kind of blown out on deals in that size in the Permian. That is why I think there's going to be a competitive market for some of these assets at the right time.
Understood. Makes perfect sense. Just one other quick follow-up. The net debt target, $1.5 billion, could you give me kind of your outside view on how that looks for timing? Is that a close 2026? Or is that a mid-2026 story? I guess, how are you thinking about getting to that number timing-wise?
Yeah. I think we get there by mid-2026 without selling anything, which is pretty unique. I think we've done a lot of work with the rating agencies. Viper's now investment grade. Expected to hold its investment grade rating. I think the rating probably should go higher over time. If you think about net debt-to-EBITDA at a mineral company, that's really net debt to free cash flow versus an upstream company that's either reinvesting 50% or 75% of its cash flow into CapEx at $60 oil. This business doesn't reinvest any. It's a strong credit. I think the credit markets recognize that it's a strong credit. One of the big synergies here is being able to kind of reprice our entire balance sheet combined with Sitio's into that investment-grade world.
Understood. Appreciate the time. I'll leave it there.
Thanks, Paul.
Thank you. Our next question comes from Leo Mariani with ROTH. Your line is open.
Yeah. Just wanted to kind of touch base on sort of growth here. Clearly, the Viper standalone business had some very nice built-in growth over time. Kind of eyeballing some of the Sitio kind of production numbers, I'm not as familiar with that story. I mean, it looks like their oil production was a little flatter, maybe not as much growth as Viper. So just trying to kind of get a sense of kind of where do you see that kind of standalone, kind of Sitio growth, say, into 2026? Do you expect that kind of relatively flat? How should we think about that? Certainly seems like the pro forma growth might come down a little. Just wanted to get your thoughts on that.
Yeah. I think, Leo, there's less growth at the Sitio side that we see today. Again, it's a massive asset base. I think we're increasing our asset base by over 40%. There's a lot of optionality for growth in the future. Obviously, I have a much better line of sight to the Viper growth, which is still planning on happening in 2026 and beyond. I think I'll kind of point your attention, though, to the per-share growth, right? At the end of the day, we want our shareholders to own more oil production, more acreage, more cash flow, more free cash flow per share over time. I think the accretive nature of this transaction, the multiple spread between Viper and Sitio, combined with the organic growth profile of Viper standalone, is going to give you a pretty significant bump to per-share metrics in 2026.
Okay. That makes a lot of sense. Just wanted to kind of follow up on some of the uses of free cash flow here. You guys kind of mentioned in your prepared comments that if there were some shareholders that wanted to exit, you guys could kind of be supportive from a buyback perspective. It also sounded like there's going to be some prioritization of paying down debt with kind of the goal you guys laid out for kind of middle of next year, the $1.5 billion of net debt. Maybe you could expound upon that a little bit. Obviously, you guys did do some regular way buyback of the stock over the last couple of months for the first time in a while. Should we assume that perhaps the prioritization is debt paydown with more of the free cash flow over sort of the next 12 months?
How should we think about it?
No. I mean, listen, I think it's important to note that we're keeping our 75% return commitment to equity and 25% to the balance sheet or to do deals. I think this combined business, again, going back to debt- to- EBITDA versus debt to free cash flow, it's probably underlevered, but we still think it's appropriate to delever. Again, the base case is pay the base dividend, pay out the rest in terms of a variable dividend up to 75% of free cash flow. We do have some flexibility if there's a natural seller or if there's more weakness in the commodity to step up on the buyback like we did about a month ago. Obviously, we've been in negotiations for a period of time, so we've had to be a little cautious on our buyback.
At some point, we'll have ultimate flexibility to buy back more shares if needed. I think one other thing, Leo, the other side obviously has three large private equity holders in Kimmeridge, Blackstone, and Oaktree. I think they saw the value in combining these businesses to get more flow, more liquidity, and trade into an investment-grade stock that, as we mentioned in the call, is now a top 10 E&P in the U.S. in terms of or the U.S. in terms of size and scale. There are a lot of levers we can pull at Viper over the coming years. We think this is just another step towards kind of being the big mineral champion in the public markets.
Makes sense. Thank you.
Thank you. As a reminder, to ask a question, please press star one one. Our next question comes from Tim Rezvan with KeyBank Capital Markets. Your line is open.
Good morning, folks. Thanks for taking my questions. Case, you mentioned in your prepared comments liability management at closing. Can you explain a little more what that means? Looking at where Sitio and your debt trades, trading at pretty attractive rates. Just trying to understand what you meant with that comment.
Yeah. Sam, Sitio has a senior note outstanding, a little higher rate. Viper has a note outstanding that we can, that is callable today. I think we've kind of been waiting to call that note and reprice all that with one big trade. I think second to that, Sitio had, in our minds, a pretty significant amount drawn on their revolver, $500 million-$600 million, depending on the day. I think we would probably prefer that be in more of a term-like structure with no call protection that an investment-grade deal offers. I don't think we're looking to, I don't think we're looking to touch the 30-year or longer end of the curve here with 30-year rates as high as they are.
I think repricing this balance sheet in kind of a five year, 10-year fashion and giving us ultimate flexibility to do stuff between now and then is a good place to be and a long way from where we were at Viper just a few years ago.
Okay. So I assume that potential savings is baked into that synergy target?
That's right. It's probably about a third of that synergy target.
Okay. Okay. That's good. And then just thinking about the other synergies, you have G&A has been just under $1 a BOE. I know the beauty of the minerals business is that integration is sort of just transferring wires to your bank account. But how should we think about the size of the organization afterwards and what your cash OpEx could look like?
Yeah. I think we've grown our business significantly at Viper. We are kind of branching out away from the Diamondback umbrella, building different groups over time. Sitio has some very talented people that work there that we're going to speak to today and over the coming months. I think there are certainly gaps we need to continue to fill at Viper. Overall, I think in general, you'll still see best-in-class G&A probably coming down a little bit given the amount of BOEs we're adding. There are certainly some gaps, and we need some talent. We're going to start working on that today. G&A is coming down pro forma on a BOE basis.
Okay. Thank you.
Thank you. There are no further questions. I'd like to turn the call back over to Kaes Van't Hof, CEO, for closing remarks.
Thanks again, everybody, for joining today's call. Again, exciting day for Viper, for Sitio, and for the minerals market. We continue to believe that size and scale will be rewarded in this business. And our little mineral company, Viper, has come a long way. Please reach out if you have any questions, and have a great day.
Thank you for your participation. You may now disconnect. Everyone, have a great day.