Good day, and thank you for standing by, and welcome to the Viper Energy Partners third quarter 2021 earnings. At this time, all participants are in a listen-only mode. After the speaker's remarks, 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 is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to Viper Energy Partners third quarter 2021 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 third quarter 2021 conference call. During the third quarter, Viper saw third-party operated net wells turn to production on our acreage rebound to their highest level since the first quarter of 2020. As a result of our continued strong production and further enhanced by our high margin exposure to increase in commodity prices, Viper's cash available for distribution increased 15% quarter-over-quarter to $0.54 per common unit. With this strong cash flow, Viper will pay a $0.38 per unit distribution on top of the $14 million we deployed through our unit repurchase program last quarter. In total, the combined return of capital between the distribution and buyback represents $0.47 per unit or an 8% yield based off yesterday's closing stock price.
Following the recent closing of the Swallowtail acquisition, Viper has unprecedented high confidence visibility into Diamondback's forward development plan that is expected to bolster oil production for Viper, not only for the next several quarters, but also for years to come. More specifically, Diamondback plans to complete over 400 wells on the acquired Swallowtail acreage over the next five years, or an amount that represents over 17 net wells for Viper over this period. Looking at near-term production, Viper initiated average production guidance for Q4 2021 and Q1 2022 that implies over 17,000 barrels per day of production at the midpoint. Additionally, we increased our full year 2021 oil production guide by over 2% at the midpoint.
Based on the average Q4 2021 and Q1 2022 production guidance, assuming production is held flat at the stated midpoint of the range, Viper is expected to generate roughly $375 million of annualized free cash flow in the fourth quarter of 2021, assuming $75 WTI. Importantly, given these same assumptions, we're expected to generate over $475 million in annualized free cash flow in the first quarter of 2022 as our defensive hedges placed in 2020 roll off. This 2022 free cash flow amount equates to greater than 11% free cash flow yield as a percentage of our enterprise value or almost 13% based on our current market cap. In conclusion, the third quarter of 2021 was another strong quarter for Viper that once again highlighted our high-quality asset base, best-in-class cost structure, and overall differentiated business model.
As our balance sheet has continued to strengthen, we have evolved our hedging strategy so that we can maximize upside exposure to commodity prices while also protecting against extreme downside. With our strong inventory of work in progress and line of sight wells, we look forward to continuing to generate robust amounts of free cash flow and subsequently using that cash to both reduce debt and increase returns to our unit holders. Operator, please open the line for questions.
Thank you. At this time, we are now taking questions. If you would like to ask a question, please press star then the number one on your telephone keypad. Again, that is star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Neal Dingmann with Truist Securities. Your line is open.
Hey, good morning, guys. Travis, my first one is just on sort of private activity. I mean, obviously, the bulk I know of VNOM is related to Diamondback and some other public, but there's obviously been a notable, sort of increase in some of the privates out there. I'm wondering how that might shape, the profile of Viper, if at all.
Certainly the privates, you know, have really leaned into this commodity price and their activity levels, you know, continue to increase, you know, month-over-month. We try to conservatively take that into account as we forecast future volumes. Volume growth will in no small part be influenced by private operators.
Got it. For you, Kaes just now you pay up to $0.38. I think you talked about being about 70% of cash distributions, you know, being up, I think almost 15% or more. I'm just wondering, is that kind of a good ballpark where you'd like that to continue to float or you think about that payout, what is, you know, what should we think about on a go forward?
I think we'd like 70% is kind of the minimum, Neal, you know, for cash distributions. You know, I think generally, you know, we have the size and scale to take on a little bit of debt, but we wanna pay that debt down with free cash flow. You know, we took on some debt with the Swallowtail acquisition and wanna pay that down over the next couple quarters, before we start ratcheting up the 70%. You know, I think we've also talked about, you know, more prudent hedging policy where we, you know, buy puts to protect the extreme downside. We're just kind of, you know, 2x leverage at the max, and therefore still able to distribute a lot of cash, and not have the balance sheet blow out.
70% is kind of the baseline for now, supplemented with you know, the share repurchase program in times of weakness and the rest of the cash going towards deals or paying down debt.
Sure. It all makes a lot of sense. Thanks, guys.
Thanks, Neal.
We have our next question coming from the line of Chris Baker with Credit Suisse. Your line is open.
Hey, good morning, guys.
Good morning, Chris.
M orning. Just with the improvement in commodity prices and the cash flow outlook, could you just talk a bit about how you're thinking about the fixed debt balance, which I believe becomes callable late next year? Just, you know, at this point, how you're thinking about the appropriate level of leverage for the business longer term?
Yeah. I mean, I think 2x is the max, Chris, and we've tried to protect that with hedges, and we'll continue to do so. You know, the debt that we have or the bond that we have outstanding is callable in about a year from now. We did take on a revolver balance with the Swallowtail acquisition. I'd like to, you know, in an ideal world, work that revolver balance down a bit over the next three or four quarters, and then be able to refinance all that debt at a lower interest rate. You know, the business has proven that. The bonds have traded well, so we'll see where we stand in a year. Right now it makes sense to refinance that cheaper if we could.
Okay, g reat. Just as a follow-up, you know, with the release talking about the unprecedented visibility, you know, following the Swallowtail acquisition, could you just maybe talk about how that influences your M&A outlook, I guess, if at all, going forward? Thanks.
Yeah. I mean, I wouldn't say that they're too related. You know, it is pretty unprecedented how much visibility we have given, you know, Diamondback's intentions to keep production flat. That kind of means the plan is the plan. You know, the projects that are on schedule in 2022 and 2023 and beyond, you know, are more than likely to happen, you know, unless we have an experience like we did in 2020, which, you know, gives us a lot of confidence in the earnings forecast for the business. You know, probably since we first started in Spanish Trail back, you know, five or six years ago, now seven years ago. It won't impact M&A strategy. I'd say M&A strategy is still fairly consistent.
High visibility Diamondback operated properties and we're still on the lookout for those. It's just that Swallowtail is an opportunity to get a lot of Diamondback operated properties at one time.
Thank you. We have our next question coming from the line of Jeanine Wai with Barclays. Your line is open.
Hi. Good morning, everyone. Thanks for taking our questions.
Hi, Jeanine
Good morning. Maybe just following up a little bit on Neal and Chris' question. I know you just said your M&A strategy doesn't change. Can you just share your view maybe on the most current acquisition landscape, how you view that? I n particular if there's any difference in the bid-ask spreads between smaller versus larger deals?
You know, the smaller deals are still very competitive in the Permian. You know, almost a knife fight to get the smaller deals. I'd say we have probably a little bit of an advantage on Diamondback on permitted properties, but the permitted small deals are still very competitive throughout the basin. You know, what was unique is that, you know, Swallowtail, outside of probably the drop-down that we did from Diamondback, is probably the largest mineral deal I've seen in a long time. That just highlights the size and scale we have that we can put that much cash into a deal and that Blackstone was willing to, you know, own a good amount of stock in Viper.
Okay, g reat, t hank you. That's very helpful. Maybe on a slight housekeeping item on cash taxes, I think there's about $360 million remaining on the tax agreement that you've got with FANG. Given where that agreement was struck, and oil prices being a lot higher now, can you just talk about how we should think about the cash tax components for 2022, which might get accelerated and then the trajectory for maybe 2023?
Yeah, you know, it's a good thing that commodity prices have gone where they've gone. At the time, in 2020, we extended the tax sharing agreement, you know, over a period of multiple years, anticipating lower for longer oil prices. You know, I think there's probably a conversation to have with the Viper board and the Diamondback board about, you know, moving that sharing agreement up into 2022, just from a PV perspective, probably the best way to utilize our tax base. But certainly getting closer to cash taxes. If we can't get that adjusted in 2022, we'll pay some cash taxes, and more so in 2023 if commodities stay where they are.
Great. Thank you.
Thanks, Jeanine.
We have our next question coming from the line of Derrick Whitfield with Stifel. Your line is open.
Good morning, all. With regard to your six-month trajectory, the guidance implies relatively flat drill volumes for Q4 and Q1. As we think about 2022 based on your prepared comments and near-term inventory, how should we think about the growth trajectory throughout the year?
Yeah, Derrick, I think generally we've been pleasantly surprised with the non-op volumes we acquired from Swallowtail , you know, one month into closing the deal, so that's been very positive. I think, as we talked about when the deal was announced, you know, those non-op volumes are gonna hold us over until Diamondback's sale and Robertson Ranch development kicks off, and then you'll start to see a significant amount of growth on Diamondback-operated properties. You know, I think the guide that we have out there for Q4 and Q1 2022 is a good baseline. You know, as that development starts to kick in at the end of 2022 and into 2023, start to see a little bit of growth on the operated side.
Terrific. As my follow-up, would it be reasonable to assume the 18 and 19 net near-term inventory level, referenced on page 10, is a good run rate at current prices based on Diamondback's 2022 outlook and third-party activity levels?
I think so. I mean, you know, I think we're still gonna be fairly conservative modeling the non-op, but, you know, that's kind of a 20% increase in visibility from where we were a quarter ago. You know, I think that's pretty reasonable. You know, I think the benefit as we look into the end of 2022 and 2023, like I just said before, is the larger, you know, high interest pads on the Diamondback side. But, you know, good to see the non-op visibility go up, you know, 30%-35% in a quarter.
Great update. Thanks again for your time.
Thank you, Derrick.
Thank you. We have our next question coming from the line of Leo Mariani with Key Banc. Your line is open.
Hey, guys. Just wanted to ask about. I know it's a difficult question to answer, but you made some comments that you've got some high confidence here in oil growth, you know, over the longer term. I guess when you look at the composition, you know, of the Viper properties, and I certainly understand there's an increasing emphasis on FANG-operated production. You know, clearly the operated outlook from a FANG perspective is it's flat oil. You know, can you kind of help us at all in terms of what it can look like over the next couple years, you know, for Viper? Are we talking kind of mid-single digit because of the ability of FANG to kind of focus more, uh, on the properties that Viper owns here? Just anything you can kind of help out with, from a longer term perspective.
Yeah, I think we, you know, we wouldn't be doing our jobs as a combined management team if we weren't looking at combined returns of properties with Viper interests combined with Diamondback interests. You know, if Diamondback's staying flat, the best capital efficient use of Diamondback's dollars is to stay flat with wells that are drilled on Viper properties. You know, we gave a pretty big number out there for the Swallowtail deal, saying that we're gonna get to 5,000 barrels a day in five years. You know, just for reference, right now we're doing, you know, 9,000-10,000 barrels a day on Diamondback properties.
You know, even if there is some natural decline on that, the Diamondback growth itself on Swallowtail and Robertson Ranch is going to outweigh, you know, the declines or even, you know, anything we see on the non-op side. You know, it's safe to say there's likely growth at Viper, even if Diamondback stays flat. Don't wanna commit to multi-year guidance here, but that's, you know, that's our intention, is to focus on the highest interest and highest consolidated return to our shareholders.
Okay. That's helpful. Obviously, you know, very nice increase in the distribution, you know, this quarter. Certainly sounds like there's more to come as hedges roll off as we get into next year. Also wanted to ask on the buyback side, certainly noticed that kind of was a little bit more of a buyback here, you know, in the third quarter. You guys also talked about, you know, paying off some debt that you brought on on the Swallowtail deal. How do you think about, you know, kind of buybacks versus debt reduction here as we head into 2022?
Yeah, good question. You know, the buyback we have, it goes through the end of this year, and then we have, you know, we need to talk to our board about what to do next on that. You know, really the focus is probably debt reduction in the near term over the buyback, just because, you know, we closed that Swallowtail deal and the cash has left the system. You know, we don't like having a big balance on a revolver. I think, you know, paying that balance down a little bit before refinancing all of our debt, hopefully in a year, is probably the best use of capital, without, you know, with still having a buyback there in times of weakness.
Okay. Thanks, guys.
Thank you, Leo.
Thank you. There are no further questions at this time. I will now turn the call back over to Travis Stice for any closing remarks.
Thank you again to everyone participating in today's call. If you've got any questions, please reach out and contact us using the information provided.
This concludes today's conference call. Thank you for participating. You may now disconnect.