Earnings Call: Q3 2022

Nov 8, 2022

Good day and thank you for standing by. Welcome to the Viper Energy Partners Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead. Thank you, Rivka. Good morning, and welcome to Viper Energy Partners' Q3 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 Case Van Toth, President. During this conference call, participants may make certain forward looking statements related 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 filed 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 yesterday afternoon. I'll now turn the call over to Travis Sasse. Thank you, Adam. Welcome everyone and thank you for listening to Viper Energy Partners' 3rd quarter 2022 conference call. The 3rd quarter was another strong quarter for Viper. Oil production set a company record for the 2nd consecutive quarter on both an absolute and per unit basis. Importantly, this quarter marks our Q1 with our enhanced capital return program in place and with the flexibility we now have in returning capital, We repurchased over 1,800,000 units during the quarter at an average price of just below $28 per unit. With our focus on increasing per unit metrics, these opportunistic repurchases helped drive oil production Per unit up 2% quarter over quarter despite absolute production staying relatively flat. On a year over year basis, Oil production per unit has increased over 15%, further highlighting the success of both our unit repurchase program And the Swallowtail acquisition that we completed during the Q4 of last year. Since authorizing the unit repurchase program in Q4 2020, we've now repurchased over 9,000,000 units or almost 6% of our starting unit count at an average price of roughly $21 per unit. The optionality provided by our enhanced capital return program allows greater flexibility in taking advantage of the extreme market volatility that we have seen over the past several quarters, But we also remain committed to returning a meaningful amount of capital to unitholders through our base plus variable distribution. Although our distribution went down from previous quarters as we allocated more capital to unit repurchases, we will still be paying a distribution for the 3rd quarter of $0.49 a unit, which provides a competitive annualized yield of almost 6% at today's unit price. Looking ahead, Viper has initiated average production guidance for Q4 2022 and Q1 2023 That implies roughly flat volumes relative to the Q3. As operators move to developing larger pads, Royalty volumes can now be subject to somewhat uneven volumes from quarter to quarter. It is important to note, however, That Viper continues to expect Diamondback to focus on developing Viper's high concentration royalty acreage in the Northern Midland Basin and as a result Growing Viper's 2023 Diamondback operated net oil volumes by roughly 10% year over year. Given that Diamondback operates roughly 60% of Viper's total production, we still anticipate meaningful production growth in 2023. In conclusion, the Q3 was an outstanding quarter for Viper. Viper remains differentially positioned to grow production Without having to spend a single dollar of development or acquisition capital and with only limited operating costs will mostly be insulated from the inflationary cost pressures faced by operators. Going forward, our focus remains on increasing long term per unit growth and returns. As we continue to focus on creating value through our core business, We will also look to generate the highest value proposition from our unitholders in returning capital, whether that We'll be on our base distribution to variable distributions or opportunistic unit repurchases. Operator, please open the line for questions. Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Neal Dingmann from Truist Securities. Your line is now open. Good morning, Alex. Thanks, Travis. My first question is on something you just talked about, Travis, on that new enhanced return program. And I'm specifically, I'm just wondering what will determine the sort of typical quarterly unit repurchase above that 75% return to capital? Really what I'm trying to get a sense of Is how commodity prices and maybe your unit price will impact this? Yes, Neil, good question. It's really the same program we have at Diamondback. I would just say it's probably more heavily weighted towards Distributions over buybacks, but given the volatility we saw in the quarter, Viper was very aggressive on the buyback, particularly between the time of announcing our distribution and paying it, we had some Weakness there that allowed us to be aggressive and buyback a good amount of units at that point in the quarter. I think going forward, like I said, We like kind of allocating more cash to return of capital from a cash perspective here, but The buyback is there to support the stock in any form of weakness. And as we showed in Q1, We negotiated a deal with Blackstone as a large holder of our shares to buy some of their units outright and reduce that position. Those conversations still happen. We just haven't been able to get any more repurchase since Q1. No, that's great. I'm glad you all are willing to step into it like that. And then secondly, just on activity specifically, You outlined pretty nicely on Slide 9 some strong near term inventory given not only that work in progress, but obviously the line of sight. So I'm just wondering, is it fair to say that, Travis, you mentioned, I think, kind of in broad terms about that. My question is on 2023, Should you continue to have a, let's call it, an active year assuming that Diamondback and your 3rd party operators continue with their intended plans? Or I'm just wondering, is there anything that you see that could disrupt this? Yes. No, this is Austin. I mean, really for the past 4 quarters, activity levels as we report by work in progress and line of sight have stayed relatively consistent. As we look at the next two quarters with the guidance that we put out, but more importantly for the full year 2023, Right now, we just have so much visibility with the growth that's going to come through the Diamondback drill bit. Really the only nuance there is just kind of the timing on some of those larger pads and We outlined some of that detail on Slide 11. So that's about 60% of our production growth. And with that plan that's pretty set in place, That's going to drive about 10% of production growth on that portion of production. And then on the 3rd party portion, with what we can see today, Not a full picture for 2023 yet given still needing to see some permits coming in throughout the year. I would expect Activity levels to be at least flat year over year. So, overall, we're feeling really good about the 2023 outlook, just going to have kind of flattish volumes here for the next two quarters. Yes, I mean, high level, Neil, 10% Diamondback growth. Diamondback is 60% of production. We're not going to commit to non op growth yet. So you kind of get to mid to high single digits total company oil growth without any reduction in the unit count. Yes, really like the setup. No, it's a great setup. Thanks guys. Thanks, Neil. Thanks, Sameer. Please stand by for our next question. Question comes from the line of Tim Rezvan of KeyBanc Capital Markets, your line is now open. Hi, good morning, everybody. We were a bit surprised by the skew towards repurchases over the variable in the Q3, but we recognized the volatility in Viper units Maybe warranted that action. Is it fair to say that that was kind of an extreme skew in terms of kind of percentage of allocations? And I guess another way what I'm trying to get at is, how do you think about the importance of a competitive yield as a component to driving the unit price higher? Yes. Good questions, Nimmi. I would say a competitive free cash flow yield is probably more important in our mind than a competitive return of capital yield, Because the free cash flow the present value of the free cash flows of the business is what drives value. I just think we want some flexibility on how We can return that value to shareholders and our unitholders. And like I said on the question before, I think generally, Viper, we are more focused on being a distribution vehicle, but when we can buy minerals In the market, much cheaper than we can buy minerals. In the private markets, we've seen some astronomical valuations on Deals sold of lower quality than what Viper has, that tells us it's time to pony up and buy our unit factor that's a better deal than Trying to grow the business by buying external minerals. Okay. Okay. Yes, that's Good color. Thank you. And then I guess transitioning from that based on your comments, obviously there's been a couple of large Permian packages Transacting here in recent months, you obviously passed on them. You have new sandbox to attack in Ector County with the Firebird Hey, Grinch. As you look forward, are you agnostic to Diamondback versus 3rd party operator? How do you think about kind of the ground game going forward when you look to add on? Do you want to grow that 60% Diamondback Operator exposure or I'm just trying to understand kind of your plan going forward? Yes. Primary goal as It has been for the last couple of years is to continue to grow that Diamondback operated piece. It's harder to Given that we've been trying to buy minerals under Diamondback for years now, certainly the Viber assets provide a new Sandbox for the Viper team to start buying and we got some deals done in the quarter more than the quarter before. And some of those were packages where half or a majority of the minerals for Diamondback, but we took the non off minerals with the package. So certainly still a preference for Diamondback operated given we know the plan, we know the schedule, we know the value. On the non op side, yes, you're starting to see deals with more cash flow, but in our mind, we would pay a lower multiple for that And what Vipers work today. Thank you for the comments. Thanks, Tim. Our next question comes from the line of Leo Mariani of MKM Partners. Your line is now open. Hey, just wanted to follow-up a little bit on the Firebird asset. Wanted to see, are there any kind of visible mineral dropdowns that may come from there in the near term? And then could you just speak to dropdowns in general? I think It's been a little while since Venom has received anything from Fang. Is that something that we might foresee as we work our way into the 2023? Yes, I wouldn't expect anything from the Firebird asset. A couple of quarters ago, Diamondback did a smaller deal kind of in the reward area That had a couple of extra NRI points. So that's something that we have on the radar that we could do and maybe we'll do, but it's just more of a matter of timing. So that asset is on the schedule and as it starts to get developed and has a little bit more cash flow on it, that's something that we could look to do, but Really nothing meaningful, especially as it compares to 2 of the larger dropdowns that we had done in years past. Okay, that's helpful. And then just wanted to follow-up on your comments around a little bit flatter production over the next few quarters, I just want to make sure I sort of understood that. Are you guys basically saying that it's not really due to a slowdown In FAANG, operating activity is more just due to timing of some of these larger pads happening a little bit later as we look out over the next couple of quarters that Kind of means that I guess we'll see more of that production growth as we get into 2Q, 2023 and beyond? Yes. I think just generally we see some large pads Coming on Q2 and beyond and in the quote and press release and what we said earlier is that the Diamondback piece If we have 100% visibility on, we'll grow 10%. It's just going to start growing in Q2 and Q3. And then if non op accelerates, which you know it's kind of budget season, we'll see what happens on the non op side. That would be gravy, but the way we see it right now is basically flat oil from Q3, which is with an all time high Into Q4 and Q1 and then the ramp starts to begin again in Q3 of next year sorry, Q2 of next year. All right. Thank you. Thank you, Neil. At this time, I'm showing no further questions. So I'd now like to turn it Back to Travis Stice, CEO, for closing remarks. Thank you again to everyone for Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.