Good day. Thank you for standing by, and welcome to the Viper Energy Partners First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you, Cherry. Good morning, and welcome to Viper Energy Partners first quarter 2022 conference call. During our call today, we 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 first quarter 2022 conference call. During the first quarter, Viper continued to build on its track record of delivering strong financial and operating results, highlighted by the 43% quarter-over-quarter increase in our distribution to $0.67 per common unit. This distribution represents approximately 70% of the total cash available for distribution and implies a 9.5% annualized yield based on yesterday's unit closing price. Additionally, we repurchased 1.6 million common units during the quarter at an average price of $24.84 per unit, for a total cost of $39 million. Combined with the distribution, this represents a return of approximately 95% of free cash flow to our unitholders.
Looking ahead, we continue to focus on maximizing long-term returns to our unitholders and believe we are differentially positioned to do so with our best in class cost structure that enables investors to participate in the recent strength seen in commodity prices via the highest margins in the public oil and gas industry. Importantly, with zero capital requirements and only limited operating costs, Viper will not face the inflationary cost pressures being seen across the industry and broader economy. As a result of the strong production seen during the first quarter, as well as continued strong levels of activity across our acreage position, we have increased our guidance for oil production for the full year by roughly 1.5% at the midpoint. Our 23.5 net wells currently with visibility to development is a company record and underscores our confidence in this forward outlook.
This record amount of activity, which is enhanced by Diamondback's continued focus on developing our concentrated royalty acreage, demonstrates both the quality of our acreage as well as our ability to grow production without having to spend a single dollar of development or acquisition capital. Based on the midpoint of this full year 2022 production guidance, Viper is expected to generate over $3.75 per unit in distributable cash flow, assuming $95 WTI or a greater than 13. 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. In conclusion, the first 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. 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 unitholders. Operator, please open the line for questions.
At this time, I would like to remind everyone to ask a question you will need to press star one on your telephone. Again, that's star, then the number one on your telephone keypad. Your first question comes from the line of Neal Dingmann from Truist Securities. Your line is now open.
Morning guys. Nice results. Kaes, maybe for you or Travis, just for a product like this, how do you all think about. I noticed you had a few buybacks in there as well as continuing to, you know, hit what was a record payout on the distribution. I'm just wondering, how do you sort of think about that differently on the mineral business? Or do you think about that any differently on mineral business versus, you know, when you're thinking about that diversification on FANG?
Yeah, good question, Neal. You know, listen, I think Viper, you know, is one of the original cash distribution vehicles in North American oil and gas, right? If you go back, you know, when this business went public in 2014, that was when E&Ps were still, you know, spending 100% of cash flow or outsourcing cash flow
To grow and Viper was a beneficiary of that while still distributing cash to its investors. I think we still have debt, so you know, we're not gonna distribute 100% of the cash that we have every quarter. You know, I think the deal market's tough right now, so there is you know, a lot of extra cash beyond that 30% of free cash being returned via the distribution to pay down debt, get our revolver closer to zero. Then again, discussion on more shareholder returns. You know, I think you know, the buyback authorization has been very positive for the story. It's, you know, there's been a lot of volatility in this space, so we've had opportunities to buy back shares.
Having that out there as a, you know, nice defensive mechanism is positive. You know, exhibit A is what we did in Q1 with, you know, buying out some of the Blackstone units that we gave them in the Swallowtail deal. You know, generally 30% is the baseline. That's the cash number. I think as long as the balance sheet continues to improve and, you know, the unit price continues to rise, then we'll be aggressive with continuing to distribute more than that on a quarterly basis.
Okay. Just lastly on the confidence on boosting the production. Is that just on the visibility you're seeing mostly on? I mean, you know what, of course, Diamondback's gonna do. On third party or there's nothing assumed in there. I don't assume you have any drop downs left remaining that you could do from Diamondback. Is it just primarily third party upside for the rest of the year?
Yeah. That's right, Neal. For the most part, you know, it's just having that increased visibility to the non-op side. We don't like to be too aggressive in making assumptions with timing that we can't control. Typically we put out that rolling six-month guidance because that's a rough timeline for when a well gets spud to when it gets turned to production. As we fast-forward through the year and activity remains strong, we just have further visibility to the back half of the year and that gave us the confidence to increase that outlook.
Awesome. Thanks, Austen.
Thanks, Neal.
Your next question comes from the line of Chris Baker from Credit Suisse. Your line is now open.
Hey, guys. Congrats on the quarter, solid cash flow and cash return update. If I could ask sort of a similar question, maybe perhaps a different angle here. Last year looks like the buyback plus the variable dividend returned roughly 80% of cash available. I'm just wondering if that's a fair baseline trying to think about the pace of the buyback for the rest of the year.
Yeah. You know, I still think that the buyback, Chris, is gonna be opportunistic. I don't wanna say that we're gonna hit, you know, a certain amount of units a month or a trading day or a quarter. You know, kind of like we said on the Diamondback call earlier today, this market's provided us a lot of opportunities to buy back shares, you know, opportunistically, and I think we're gonna have that opportunity at Viper. You know, we do wanna adhere to a top. You know, I think right now where Viper's trading, you know, we're gonna have chances to buy back shares. I think it would be fair to say, you know, 80% or 85% of total cash gets returned through the dividend plus the buyback.
You know, if we get another opportunity to buy a big chunk of stock like we did with the Blackstone trade in Q1, we'll, you know, entertain that opportunity if it presents itself.
Great. Yeah, no, that makes a lot of sense. As a follow-up, you know, appreciate the additional color in the deck around the FANG operated inventory. I'm just curious how many third-party locations would you add on top of there? Sort of on a related, if I could squeeze one third one in, you know, how many net completions do you view needing to generate, say, mid-single digit oil CAGR? I mean, it sounds like maybe north of 20 years, but just curious how you would frame that up on the inventory side. Thanks.
Well, I think the inventory question, you know, you can take the Diamondback inventory and assume most operators in the basin are using similar spacing and, you know, economic zones to Diamondback. So you could gross that up to, on the non-op side. You know, certainly have a lot more confidence in the pace of development on the Diamondback side, and we can, you know, get those net wells drilled faster. So the pace is a little slower on the non-op piece, but the inventory-wise, it's still there. And then, you know, on growth, you know, I think we're, you know, projecting some growth this year. Obviously, the forward visibility is as high as it's ever been, and growth is the output of that.
You know, I don't know, Austen, how many net wells a year keeps you growing.
Yeah. This year we're kind of looking at something like 11-12 net wells from the Diamondback side and maybe 5-6 on the non-op side. If you look at where we exited last year, pro forma for the Swallowtail acquisition, I would say that you know call it ballpark 17 net wells will give you what's looking like 5% organic growth. You know I think our base declines come down a little bit too since activity slowed down a bit over the past couple quarters.
You know, when you fast forward to 2023, I would put us somewhere in the 16 or so net wells a year, kind of maintains production flat and with our current activity levels and what the forward outlook looks like, you know, you're probably getting some growth with that.
Great. Thanks. Yeah, it sounds like definitely a differentiated inventory depth. Appreciate the update, guys.
Yeah. The only thing you know, I'll add on that is that the Swallowtail deal gets developed, that confidence from the Diamondback Energy growth is only enhanced. You know, I think you know, when we announced the deal, we said we would get to 5,000 barrels a day net by 2025. You know, that looks on track. That's gonna help the growth profile of the rest of the business.
Your next question comes from the line of Derrick Whitfield from Stifel. Your line is now open.
Good morning, all.
Hey, Derrick.
With my first question, I wanted to touch on the Ward County acquisition that Diamondback announced yesterday. In light of its elevated NRI and the premium paid for it, is the incremental NRI with that asset something that you'd envision dropping down at some point to Viper?
Yeah, you know, I think that's logical to have that discussion. You know, we're doing our work now. I don't think there's a rush necessarily, given that Diamondback is just starting developing that position. You won't see much production until the end of the year or next year. You know, there's probably a time where Viper and Diamondback can get together to get a deal done here. It's just not priority number one today in Q2.
That makes sense. Kind of looking out over the balance of the year and even further out into 2023, how should we think about your cash tax exposure for distributions in light of the current higher prices that we're seeing?
Yeah. You know, if you just to wind back the history, you know, history books here. When Viper converted to a taxable partnership from an MLP, you know, we did a deal with Diamondback to shield those investors' essential cash tax burden, you know, when the conversion happened. There was a big special allocation of income that helped that shield. You know, with commodity prices where they are, that shield's gonna run out this year. You know, outside of, you know, depletion protection, it's likely that Viper becomes a significant cash taxpayer in 2023 and beyond. Austen, you wanna add anything to that?
Yeah, Derrick, what's important for this year is we put out that guidance of 10%-15% effective cash tax rate, but that's only for the income that's retained at the Viper LP level. As Kaes outlines, you know, we still have that special allocation of income going out to Diamondback. If you look at it this quarter, 85% of the pre-tax income went out to Diamondback, and they pay the taxes at that level. Then only 15% remains at the Viper LP level, which is then subject to that tax rate that we put out guidance for. Going ahead to next year, you know, Diamondback will just get their pro rata ownership, you know, 54%-55% of the pre-tax income.
There'll be more absolute dollars at the LP level, and we'll probably pay a slightly higher rate on that as well.
That's great. Thanks again for your time, guys.
Thanks, Derrick.
Your next question comes from the line of Jeanine Wai from Barclays. Your line is now open.
Hi, good morning, good afternoon. Thanks for taking our questions.
Of course, Jeanine.
Hello. Our first question, maybe just hitting back on the minerals market. You know, you mentioned there may not be as many deals out there as there was before, so that skews the cash distribution higher, which is terrific. Can you just provide a little bit more color on what's going on out there in the market, in particular for differently sized deals?
Yeah. No, it's just tough. You know, there's been a lot of consolidation in the minerals space. You know, as commodity prices rise, particularly on the front end, you know, mineral owners are receiving massive checks on a monthly basis. You know, us as a buyer staying disciplined, aren't gonna pay for that strip. Well, a little on strip, but certainly not front-month type multiples. You know, I think we'll still be very competitive in larger packages like the Swallowtail deal. It's just that we haven't had a lot of success doing significant transactions in 2022 yet. Austen, what else do you wanna add to that?
Yeah, no, that's all fair. I mean, we're still seeing things transact, even with the higher commodity prices. Most of the deals are packages that have visibility, whether it be through DUCs or permits. Given that most of that production's gonna come online with the higher prices, we should assume with where the strip is today, you know, we're still underwriting lower price decks. We haven't been as competitive on those. You know, also, we're not incentivized necessarily to, you know, be trying to look that near term. We're trying to look a little longer term.
We're trying to get creative, and we're working with Diamondback for what the development plan's gonna look like the next two, three, even four years out, and try to add some inventory on the back there, where we could also underwrite a little bit lower price deck. You know, we're having to be patient and be creative, but I think there's potentially some smaller deals to be done here and there.
Okay, great. Then for a follow-up question, I apologize for hitting back on cash returns again. Maybe following up on Neal and Chris's question. In terms of the expanded buyback program, can you just talk a little bit more about how you decide between the buyback and the payout ratio? I know at FANG, you talk a lot about mid-cycle pricing. It's not necessarily about intrinsic value, relative value. You're looking at the track record of buybacks in the industry. It's not so great, and you guys wanna buck that trend. Can you just talk a little bit more about how you're thinking about that for VNOM? Thank you.
Yeah. I mean, Viper, the 70% is there, right? So that's coming out in terms of a not fixed, but a variable distribution. In the rest, I think we have an internal view of NAV at Viper. We also look at what can we buy minerals in the market, in the stock market through Viper stock versus in the private market. I think the private market is very hot, and therefore, the stock and the implied dollar net acre for what is better acreage with higher visibility is lower than that.
That gives us confidence that, you know, we can buy reserves through our stock, through our unit price rather than, you know, through deals in the ground.
Great. Thank you.
Thanks, Jeanine.
Your next question comes from the line of Kyle May from Capital One Securities. Your line is now open.
Hey, good morning, everyone. Just a quick question looking at unit costs. It looks like in the first quarter, unit costs were lower versus your guidance. Just kind of curious how we should be thinking about those trending through the year.
I think we're in good shape. You know, there's a little bit of noise in G&A throughout the year. I think we feel like we're gonna hit those numbers there. Now, if we're able to continue to pay down interest expense or pay down our revolver aggressively, then we could be towards the lower end of our interest expense guidance throughout the year.
Yeah, the good thing, Kyle, is most of those cost items are pretty sticky. You know, we're not being faced with inflation there. Hopefully if performance continues to outperform, they trend lower on a dollar per BOE basis. You know, generally if you model them on an absolute basis, I think that'll be pretty fair.
Okay, great. That's helpful. On the hedging front, it looks like you removed the oil collars that were in place for 2Q. Just wanna get your latest thinking around hedging at Viper.
Yeah, it's kind of evolving to a similar story for like Kaes Van't Hof gave at the Diamondback level. You know, buying puts and protecting that extreme downside. You know, we certainly don't wanna go back to a world where we have to, you know, think about our distribution policy changing. You know, buying $50, $55 dollar puts, protecting that extreme downside means in a draconian world, leverage doesn't blow out, and we're still, you know, paying significant distributions and, you know, trying to maximize upside exposure by buying puts rather than the wider collars.
Okay, great. Appreciate the time.
Thanks, Kyle.
Your next question comes from the line of Leo Mariani from KeyBank. Your line is now open.
Hey, guys. Wanted to follow up on one of the prepared comments here. Obviously, y'all bought a nice chunk of stock from Blackstone in the first quarter. Just so I heard you right, it sounds like you guys would be very open to doing more deals like that if the opportunity presents itself.
Yeah, we're price sensitive, Leo. You know, we're not looking to just, you know, blow through our buyback program just to do it. You know, we got to take advantage of pullbacks in the market and I think, you know, we've had, we've got opportunities here over the last couple months to do so.
Got it. Okay. Just lastly, just wanted to clarify on cash taxes. If I heard it right, certainly sounds like you would expect the rate to be up, you know, next year and then your cash tax shield, roughly speaking, I think you guys said was, you know, something around 55%. Just wanted to maybe understand that part, and I guess that's maybe the ownership interest of VNOM, of FANG, essentially.
Yeah. Basically high level, you know, the shield, the shielded income from the parent company to the public unit holders is going away next year. You know, this is the last year of it. Small amount of cash taxes this year, but stepping up pretty meaningfully next year.
Okay, thanks.
Again, everyone, if you have questions, please press star one. All right. I'm showing no further questions at this time. I would now like to turn the conference back to Travis Stice.
Thank you again to everyone for participating in today's call. If you've got any questions, please reach out using the contact information provided.
This concludes today's conference call. Thank you all for your participation. You may now disconnect.