Viper Energy Inc (VNOM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Viper Energy Partners fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference Adam Lawlis, Manager, Investor Relations. Sir, you may begin.

Thank you Jonathan. Good morning and welcome to Viper Energy Partners fourth-quarter 2016 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, Tracy Dick, CFO and Kaes Van't Hof, Vice President of Strategy and Corporate Development.

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 on 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 will now turn the call over to Travis Stice.

Thank you Adam. Welcome everyone and thank you for listening to Viper Energy Partners fourth-quarter 2016 and first standalone conference call. Viper had a very strong finish to 2016, with the fourth quarter daily production of over 7,900 BOEs a day, up 27% quarter-over-quarter from the third quarter and up 47% from second quarter.

As a result of this increased production and a 10% increase in pricing in Q4, Viper is set to distribute almost $0.26 on February 24 to unit holders of record at close of business on February 17. This distribution represents the largest in ten quarters of Viper's history as a public company and is a marked improvement from the low's of the first half of 2016, when commodity price weakness impacted distributions.

We look to continue this momentum into 2017, as the midpoint of our initial production guidance implies 25% year-over-year growth on today's asset-base. Our acquisition machine accelerated in the second half of 2016, closing on $194 million worth of deals, over the last six months of the year, across 26 transactions, increasing our asset base by over 40% in this short time.

We closed 13 of these deals for $68 million in the fourth quarter, adding 887 net royalty acres or 16% of the third-quarter acreage. We also recently completed an equity raise in January that paid down our revolver; which has $275 million of capacity and resulted in net cash on our balance sheet.

Given we now have a full-time dedicated Viper acquisition team, we look forward to building on our momentum in the acquisition market. Our focus continues to be on buying minerals in oil-weighted basins, with competent operators, and high visibility into future cash flows. We are also continuing to buy minerals under acreage operated by Diamondback, as the cash flow accretion from these acquisitions is magnified due to the control of pace of asset development from Diamondback. I will now turn the call over to Kaes.

Thank you Travis. Turning to slide 4, Viper currently has over 6,400 net royalty acres located in the Permian Basin. Our operators currently have seven rigs running across our 107,000 gross acres and there are 161 active drilling permits across this acreage. Slide 5 shows our production and acquisition history by quarter. As you can see, production has increased substantially, up over 47% from low's earlier in 2016.

Simultaneously, our acquisition machine has been active, completing $194 million worth of deals across 26 closed transactions in the second half of the year. As the bid-ask spread on deals have normalized and the A&D market has improved due to steady oil prices, we will continue to be active in buying minerals that are accretive to our distribution.

Slide 6 shows the Company's distribution history over time. We are proud to announce that Q4 2016, will be the largest distribution in Company history, despite the oil price being half of its 2014 high's when distributions were last near this level. The right side of the page illustrates the potential impact on our Q4 distribution should oil price continue to rise and production remain flat. For every $1 of revenue about $0.90 is distributed to unit holders, while 100% of cash available for distribution.

On slide 7, we show the growth of the Company since the 2014 IPO on absolute and on a per unit basis. Our goal is to continue to grow production and reserves on a per unit basis via both organic growth and acquisitions.

Slide 8 shows the extensive inventory runway and undeveloped resource at Viper. 41% of our acreage is currently operated by Diamondback; which along with RSP Permian has provided the majority of our revenue to date. But with the amount of acquisitions completed in the second half of 2016, we look forward to the remainder of our acreage contributing meaningfully to growth in the years to come.

Slide 9 details the acreage acquired in Q4. While slide 10 gives an update to our two large acquisitions closed in Q3 of 2016. Both deals continue to outperform expectations, as the operators have completed more wells and higher initial rates than our acquisition assumptions.

On slide 11, we illustrate the drop-down potential from our parent Company Diamondback Energy. Diamondback's pending acquisition of the assets of Brigham Resources, includes over 1,100 net royalty acres; which is 18% the size of Viper's current asset base. It is also just over half the size of Diamondback's operated position in Spanish Trail; which contributed almost 65% of Viper's 2016 revenue. We anticipate undertaking this drop-down at the appropriate time after the closing of the acquisition once Diamondback has taken over operatorship and begun to grow production on the Brigham properties.

On slide 12, we used production history of Spanish Trail, over the last four years, to illustrate the potential production growth and value creation when Viper owns minerals under Diamondback operated acreage. Replicating this on the pending Brigham royalty acres or other Diamondback operated acreage will drive production growth for Viper.

Slide 13, shows that Viper owns minerals in the most economic place in North America and concentrates it's acquisition efforts in its counties with the highest activity levels.

Slide 14 simply explains the difference between Viper, E&P C Corps, and other MLP's. Essentially, Viper is the MLP equivalent of a high growth E&P company, with no CapEx requirements, low leverage, and minimal costs that distributes 100% of its cash flow to unit holders.

With these comments now complete, I will turn the call over to Tracy.

Thank you Kaes. Viper's fourth-quarter 2016 net income was $16 million or $0.19 per diluted share. Our operating income for the quarter was $28 million up 40% from $20 million in Q3 2016. Viper's average realized price per BOE for the fourth quarter of 2016 was $38.33. During the quarter, our cash G&A was $0.36 per BOE while non-cash G&A $1.15.

During the quarter, Viper spent $68 million in acquisitions across 13 yields increasing assets by 16% quarter-over-quarter. As shown on slide 15, Viper ended the fourth quarter of 2016 with a net debt to Q4 annualized adjusted EBITDA ratio of 1.1 times. Pro forma for our January equity raise, Viper had a net cash position of $36 million and liquidity of $311 million at quarter end.

Also on slide 15, we provide our guidance for the full year 2017. Viper's 2017 initial production guidance is 8,000 to 8,500 BOE per day, the midpoint of which is up 25% from 2016 average production. With these comments complete, I will now turn the call back over to Travis.

Thank you Tracy. In closing, Viper looks forward to continuing the momentum we built in the second half of 2016 with respect to production growth and our acquisition machine as we move into 2017. We have the assets in place today to support organic growth but we will also look to capitalize on accretive opportunities in the A&D market as they present themselves. Jonathan, please open the line for questions.

(Operator Instructions)

Jeff Grampp, Northland Capital Markets.

Good morning. First question on the Brigham minerals, it certainly seems like a pretty exciting opportunity to replicate Spanish Trail in some regards, can you talk through what could a catalyst be that, that would get the drop-down moving? Obviously it still needs to close but is it getting to a certain production level or development program in place or how should we be thinking about that opportunity for you?

Hello, Jeff, Kaes here. Good question, and I agree, first we need to get this deal closed, end of February and right now we're putting together our drill schedule at Diamondback for what we need to do to, one, hold leases, and two, grow production outside of that on the mineral acreage.

I will say that we are still active buying minerals at the Viper level across the Brigham acreage as well. It won't just be this 1,100 net royalty acres that we have at the Diamondback level post close, but really it's getting some production going and making sure that there is a fair trade there when that drop-down does occur.

Okay. Do you have a ballpark production number associated with that mineral interest offhand?

Today, it's not meaningful. I think Brigham was spending a lot of time drilling across the acreage, delineating acreage, and now with the minerals being our primary focus that, that production will grow dramatically.

Okay. Got it. As a follow-up, looking on the updated map here, it looks like there was some big royalty blocks you had up in Borden County on the Midland side. Curious what you are seeing up there or what made you think that was an interesting area to get some royalties?

That's really a one-off type deal. We saw that as a nearly 20% yield at the price that we did it at and it's a very, very low decline waterflood assets that probably declined less than 5% a year. Really saw it as a chance to get some yield and some near-term yield while some of our higher growth undeveloped assets tend to season.

Got it. Appreciate the time. Thanks.

Jason Wangler, Wunderlich.

Thanks and good morning. Maybe following up on that last question, do you see a lot of deals of that nature out there as far as more yield-based versus what you've been targeting more on the acreage and growth side as you look throughout either side of the basin?

We've seen a few of them. We haven't really been active in bidding on them. I think this was a one-off case and to be honest it looks a lot larger on the map than it really is. That was just over a $2 million deal.

Really our core focus is going to be on a high growth asset to the Midland and the Delaware. I think we have been balanced 50/50 between buying between both the Midland and the Delaware, and the amount of packages coming through on those two plays has been large enough to occupy most of our time.

Sure. Maybe just on that, as you look at the two sides, from the industry we really saw the Midland as a big focus and it shifted over to the Delaware and a lot from the working interest perspective. Are you seeing a similar trend in the royalty side of it? And maybe just where you see more of the opportunities or is there still a lot going on in the Midland side as well?

I would say the opportunities are split 50/50 right now, but you have seen an increase over the last six months with respect to the Delaware royalties. I think they are fast followers behind the acreage trades, so you tend to see the E&P deals happen first and then comes midstream and royalties.

Deal flow right now, 50/50. On the Delaware side, you do have less development, so you have to believe more in that future cash flow growth whereas on the Midland side you have some, two or three years of horizontal development behind us.

That's very helpful. Thank you. I will turn it back.

Pearce Hammond, Simmons.

Good morning. My first question is how much inventory remains at Spanish Trail for Viper?

Pearce, this is Kaes. We put that on page 8 of our deck. The 112 producing horizontal wells per day on the Spanish Trail same-operated acreage, and we have 273 remaining locations and I think we break that out by zone. More Lower Spraberry wells in inventory than have been drilled to date, as well as a significant amount of inventory in the Wolfcamp A, Wolfcamp B and Middle Spraberry; which is where we are most active. The Lower Spraberry is going to take most of the capital but we do see economic value in those other three zones.

Thank you. Kaes, my follow-up is what are the biggest challenges to getting royalty acquisitions completed?

I would say it's a combination. You need a willing seller and I think we've seen willing sellers come to market more in the last six months as oil prices have leveled off, and I think LTM royalty checks have gone down little bit so we're seeing more activity on that front. And then you're also starting to see more marketed packages from larger mineral buyers that have owned these assets for a couple years and they're looking for a liquidity hunt.

Great. Thank you very much.

Garth Grillo, SunTrust.

Good morning, thank you for taking my question. Thinking about the potential drop-down of the Delaware assets, on the FANG call, they talked about the oil production cut moving up from 73%, 75% world to 78%, 80%, should we expect the same thing on some of that mineral acreage for Venom?

Venom was 1% higher than FANG on oil cut in Q4, 74% versus 73%. I don't think you'll see us move too much up post that drop happening. As that production becomes more balanced, you'll see a little bit of an increase with respect to the oil cut.

Great. One follow up if I could. On the previous call as well, the Diamondback call, one of the callers mentioned potential MLP structure for some of the midstream assets. If you did go that route, would it make sense to potentially drop that into Viper or have a separate stand-alone structure? And I will leave it there, thank you.

We're focused on Viper owning minerals only and staying a pure-play mineral, full-distribution royalty Company.

Great. Thank you.

Brian Brungardt, Stifel.

Good morning. I appreciate the 2017 guidance. Curious what are the underlying assumptions there on the production side, and how should we think about the split between Diamondback and third-party?

Hello, Brian. Really we like to guide to what we can control and what we know. I think that tenant is the same between both FANG and Viper.

Really guiding that guidance is Spanish Trail operated FANG acreage, where we will have about two rigs running through the year. We are assuming RSP is going to run about one rig in their Spanish Trail acreage. And for third-party acreage, we are really assuming, one, the wells that are in place today, and two, wells that we have forward visibility into with respect to a permit, or drilling today, or waiting on completion.

From a third-party perspective, we haven't been aggressive with respect to that guidance, and we will continue to monitor our third-party operators activity and continue to look for that production.

Got you and to expand on that a little bit. Looking at 4Q production, in relation to the guidance, presumed there were some wells that got pulled into 4Q from 1Q. How should we think about cadence of production based on the plans at Diamondback at this point?

It really depends on the pace of the completions in Spanish Trail. In Q4, we had two forward-well pads completed, one from Diamondback and one from RSP, giving you that big bump in production in December. So going forward, looking at Diamondback's completion schedule, which is what we have more control over, you will have some water artifact and then production will come back and grow from that initial point. That's why you see a big bump in December volumes.

Thank you very much.

Gordon Douthat, Wells Fargo.

Hello again, everybody. A question on the dropdowns once again. In the Martin County and Upton County assets, what's the status of production there? Are those mature assets that would be in a place that could be dropped-down sooner than perhaps the Delaware Basin assets once you close that?

I think ideally we would like to do it all together given the relative size of those two assets versus the Brigham minerals asset. In Martin County, we do have active development. We are very bullish on the Lower Spraberry up there with the well results that we've released recently. On the Upton County acreage, right now I'm not completing very many wells. I think one or two wells completed last year, and really that's more of a mature asset with some solid production.

All right. Thank you very much.

Tim Rezvan, Mizuho.

I would like to follow up a bit on Gordon's question. Can you talk about how the 445 acres came to Diamondback, and going forward can we assume that any mineral acreage will go directly to Viper?

Yes, those were from the deal from when we initially did them. I think it's safe to assume that Diamondback wants to hold a 75% NRI and then anything outside of that, if decided, will go to Viper. But on a go-forward basis, any mineral acreage is purchased at the Viper level.

Okay. My other questions have been answered on guidance. Thank you.

This does conclude the question-and-answer session of today's program. I would like to hand the program back to Travis Stice, CEO, for any further remarks.

Thanks again to everyone for participating in today's call. If you have any questions please contact us using the contact information provided.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.