Viper Energy Inc (VNOM) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Viper Energy Partners Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, Adam Lawlis, Director of Investor Relations. You may begin.

Thank you, Tanya. Good morning, and welcome to Viper Energy Partners' Third Quarter 2017 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, 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 on 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 2017 Conference Call. Viper's production growth continued in the third quarter with daily production of over 12,600 BOEs per day, up 20% quarter-over-quarter and 102% year-over-year. As a result, Viper is set to distribute over $0.33 per unit on November 14 to unitholders of record at close of business on November 7. This distribution represents the largest in company history and is up 63% year-over-year. Distributions have now increased in the last 6 quarters.

Also, because of increased operator activity and significant acquisitions completed year-to-date, we are initiating average production guidance for the next 2 quarters of 13,000 to 14,000 BOEs per day. The midpoint of which is up 7% from the third quarter production.

Our acquisition machine added the most acreage in 1 quarter in company history, closing 17 transactions for $179 million. With the addition of this acreage, Viper's footprint now stands at over 9,100 net royalty acreage. Our acquisition strategy remains focused on increasing distributions, reserves, production and inventory on a per unit basis. We will continue to be active in the A&D market using our increased liquidity and expertise as an active Permian operator to source and evaluate deals.

I'll now turn the call over to Kaes.

Thank you, Travis. Moving ahead to Slide 5, we show our production per million units outstanding over time. As you can see, Viper had significantly outperformed public royalty peers due to the higher organic growth embedded in the mostly undeveloped, unconventional assets we acquired in the Permian Basin. Unlike working interest E&Ps, Viper does not need to reinvest cash flow to grow. Distribution simply grow as a direct result of operators reinvesting their cash flow to grow production on their acreage where Viper owns minerals.

Slide 6 shows Viper's distribution growth compared to all energy-focused MLPs since the first quarter of 2016. Viper's over 125% distribution growth over this time period leads all energy MLPs.

Slide 7 depicts Viper's production per million units outstanding since going public in 2014, which has outpaced the growth of production in the Permian Basin by over 4x. Viper's goal is to continue this rate of growth and distributions by continuing to acquire minerals that have active or visible future development. Even if Viper were to simply grow at the estimated Permian Basin growth rate, our yield would grow to 11% by year-end 2019 at today's prices. This distribution growth only assumes organic growth. Acquisitions further enhance opportunities for unitholders.

Slide 8 shows the continued transformation of Viper as the company has dramatically increased production and assets in the last few quarters while maintaining 90% cash margins.

Slide 9 illustrates Viper's position as an industry leader in both return on and return of capital. Since going public, Viper has cumulatively returned over $3 per unit, returning $285 million to unitholders. Viper has also had an average return on capital employed of 13% for the first 3 quarters of 2017.

Slides 10, 11 and 12 give an update on Viper's acreage position and inventory. Slide 10 discusses how Viper defines net royalty acreage versus industry peers. Viper prefers to define the acreage that receives revenue as a mineral owner, rather than discuss the remainder of the acreage we do not receive revenue from.

On Slide 11, the company increased its acreage position by over 1,600 net royalty acres across 17 deals during the third quarter, the company's most active quarter ever for M&A. Roughly 50% of our pro forma acreage position is now operated by Diamondback.

Slide 12 demonstrates undeveloped nature of Viper's minerals. Many of the mineral interests we acquire are less than 10% developed, providing years of production growth for the company.

Slide 13 depicts the mineral assets currently being held by Diamondback, which grew in the third quarter of 2017. We plan on dropping these assets down to Viper from Diamondback when production has reached the point where the deal will be accretive to the distribution for Viper unitholders.

Slide 14 shows the growing impact of third-party volumes from deals completed over the last 6 quarters as a percentage of Viper's total volumes. Due to the conservative underwriting assumption as a baseline for cash flow growth, these deals have outperformed acquisition assumptions and resulted in our continued company-wide volume outperformance.

Slide 15 demonstrates Viper's advantageous position as a mineral owner relative to traditional E&P companies, burden with operating expenses, in that we can generate industry-leading cash margins per barrel. Viper's operating costs are less than half of the lowest-cost operator in the traditional E&P peer group.

Finally, on Slide 16, Viper's assets are operated by the most active Permian E&Ps. This slide shows the top operators of our assets as well as their activity levels and amount of exposure Viper currently has to their permits on file.

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

Thank you, Kaes. Viper's third quarter 2017 net income was $26.6 million or $0.24 per diluted share. Our operating income for the quarter was $42.5 million, up 16% from $36.6 million in the second quarter of 2017. Viper's average realized price per BOE for the third quarter was $36.38. During the quarter, our cash G&A costs were $0.75 per BOE, while noncash G&A costs were $0.43.

As shown on Slide 17, Viper ended the third quarter with a net cash balance of $4 million and liquidity of $284 million. Also on Slide 17, we provided our updated guidance for the next 6 months as well as full year 2017. Viper is increasing its 2017 production guidance to 11,000 to 11,500 BOE per day from 10,000 to 11,000 BOE per day, the midpoint of which is up over 75% from 2016 average production. We are also initiating next 6 months average production guidance of 13,000 to 14,000 BOE per day, which is an increase of 7% relative to actual third quarter 2017 production.

With my comments now complete, I'll turn the call back over to Travis.

Thank you, Tracy. In closing, we look to continue to be an industry leader in terms of return on and return of capital in North American energy. Viper's continued volume and distribution growth is a direct result of organic growth on legacy assets and accretive acquisitions. We look forward to maintaining our momentum in 2017 by continuing to grow our distributions, production and reserves on a per unit basis.

Operator, please open the lines for questions.

(Operator Instructions) Our first question comes from Gordon Douthat of Wells Fargo.

I did have a question. I thought Slide 7 was pretty interesting about the growth rate of Viper versus the broader Permian basin. And I just wanted to get a sense on -- it looks like there's some upside to your projections, at least on a per unit basis, so I just wanted to get a sense on how you're -- how you go about kind of risking your forward outlook versus kind of the growth historically and how you expect that to play out over time?

Yes. Gordon, this is Kaes. I'll kind of take it in a couple of parts. We really like to guide to what we can control and have visibility into, so we don't put wells on a schedule in the next 6 months that we really don't think will be completed. We don't make assumptions based on current rig counts or permits. We really focus on where to drill bits in the ground and -- as well as the interest that we receive in those wells.

And I will say, in our history, we have conservatively guided as well as conservatively underwritten acquisitions, especially as -- now third parties are becoming such a large piece of our Viper story. We really want to guide to what we have the visibility into.

Okay. And then the next question or my follow-up question, I guess, is it looks like the minerals under the Brigham acreage that you acquired, it looks like they went up or was part of the acquisition activity that you made in the third quarter. I just wanted to get a sense on the opportunity set under Diamondback-operated acreage that you currently own, but you don't own the minerals. I just wanted to get a sense, is there any way you can kind of frame up the potential to grow that mineral piece under existing Diamondback-operated acreage?

Yes. I mean, we're always looking for more acreage under Diamondback. I think with the amount of acreage Diamondback acquired last year with 100,000 new acres in the Delaware Basin, it gave our guys a lot of opportunities to acquire more of a larger position in the basin. You'll see that we did increase our ownership at Diamondback of minerals that will be dropped down, really because of the lack of current development and the lack of cash flow today on a larger transaction that we're focused on dropping down and making that accretive to Viper unitholders sometime in the next 12 months.

And our next question comes from Dave Kistler of Simmons/Piper Jaffray.

Real quickly, kind of looking at the growth in distributions in 3Q versus the growth in units. Obviously, with the growth of distributions exceeding the growth in units accretive to both existing shareholders and to our unitholders and the unitholders who participated, but as we look forward and you guys kind of continue to acquire, can you talk a little bit about the need for incremental units versus the need to tap the liquidity that you currently have? I think it's around $280 million. And what kind of running room that might give you and kind of help you guys continue to manage best-in-class return on capital employed?

Yes. Dave, I think we're fortunate in that, in the last year, our revolve has almost doubled and we anticipate it to increase, again, here in the third quarter. We have our bank meeting in a couple of weeks. But that allows us now to have the liquidity where we can hold some minerals that we purchased on our revolver and wait to make sure that all the minerals have been developed to the point where it's accretive to our distribution. I will say we're very excited to increase our distribution in the quarter where we diluted shareholders 16% in a flat commodity tape. So the company has really transformed year-over-year and I think we just have a lot more capacity to do one more deal than 2 potentially larger deals.

Yes. And kind of building on that, when we think of the flexibility inherent in Diamondback and the ability to drop down, I guess one of the questions would be, how do you think about pricing those minerals that you dropdown to ensure that both Diamondback holders are getting the appropriate uplift and Viper holders are getting what continue to be accretive deals for you guys?

Yes. We very rarely buy minerals at Diamondback. I think they're only done in very unique situations where we have very little cash flow on the assets and that it would be a larger transaction. So as those assets could develop, we still have to go through fairness opinions and committees on 2 independent boards and make sure that we come to an agreement on valuation between both Diamondback and Viper. But I will say that we're going to be very careful about our timing on any dropdowns and making sure that our distribution goes up the following quarter when that happens.

Okay. I appreciate that. And then one last one. Just as we think about the forward guidance, I assume that's not reflective of incremental acquisitions that might take place between here and, call it, Q1 '18? But clearly, it sounds like you still, at least based on the press release and many commentary, have a bunch that are in the queue that if they continue to be accretive, would maybe bias that higher. Am I reading too much into the tea leaves? Or any color you can give us there would be great.

Yes. No, I mean, I think you're right. There's no acquisitions baked into these numbers. And if you look at where Viper started the year in 2017, I think our first guidance was 8,500 to 9,500 barrels a day. And now our full year midpoint is 11,250 a day. So a lot can change in a short amount of time with this company and that's what we're looking forward to continuing to do.

And our next question comes from Jason Wangler of Imperial Capital.

I was just curious on the rig, the active rigs on your acreage and maybe it's more Midland side, but are you starting to see a lot more pad development? Or is it still seeing a lot of acreage capture around the position of both Midland and Delaware?

Yes. Jason, on the Midland side, almost everything we do from a Diamondback side is on a pad. Right now, almost everything at Diamondback is a 4-well pad. Across the Viper acreage, we have a significant position underneath Pioneer. They drilled a 10-well pad on that acreage. RSP has been drilling some pads on our acreage as well. So Midland is definitely a full field pad development.

And then on the Delaware side, there are still a lot of acreage that needs to be held from all these operators that bought into the Delaware in the last 12 months. You're seeing a little more single-well development, but guys like EOG up in Loving County, we brought on a full -- we were underneath a full well pad from them earlier this quarter that helped out another operator, Mewbourne, who we bought under in Loving County, is bringing on pads as well. So I think the shift to pad development in Delaware is definitely moving forward.

And on that, I mean, does that help with that visibility you talked about with the 6 months guidance and things? As we shift further to pad development, would that, I guess, give you even more visibility as, obviously, those rigs would be kind of parked in those areas for a longer period of times and allow you to have better development planned that continues to extend further out?

100%. I mean, when we see a rig drilling at 3 or 4 well pad, we know that that capital needs to be developed pretty quickly and that operator doesn't want a 4-well DUC pad sitting there for too long before the completion crew comes on site. And that does help us with that forward visibility.

And our next question comes from Faisel Khan of Citigroup.

It's Faisel from Citigroup. Just a couple of questions. First on -- understood deal valuation trends. I know you guys have done a lot of work this year in finding some of these deals, but what's the trend been in those valuations over the course of this year? Has that been pretty steady or are they sort of ratcheted up as you sort of come in to the fourth quarter here?

Faisal, it's really a tale of 2 basins. We've really seen some astronomical valuation from the Midland side, which has really made us focus on the Delaware Basin where the EURs are higher per foot. So as a mineral owner, we receive more cash flow than we would receive on the Midland Basin side anyway. So we really have been focused on the Delaware. I'd say Delaware valuations are flat to up a little bit as the year has gone on, and there are certain areas that are probably too hot for us to plan, especially given the lack of visibility on cash flow growth. But down underneath the Diamondback acreage, we're able to pay a little more than most people because we can change our drilling schedule and get active on minerals that we own.

Right. Okay. Fair enough. And then just on the potential for more third-party acquisitions. What's the -- is there a limit to size you're looking at? Or would you consider if there was a large piece of contiguous acreage, would you consider sort of doing a unit deal where you exchange your units for their -- for someone else's properties?

It's safe to say, just like on our -- on the E&P side, we look at everything and anything that creates unreasonable value for our Viper unitholders is something we're going to look at. A large blocky position with a lot of visibility is right up Viper's alley and that's really the type of deal we're looking for versus the more scattered out positions that don't give us the visibility and the high interest in each section that we're looking for.

Okay. Okay. And the last question for me, did you guys see anything unusual with netbacks or realizations in the end of the -- towards, I guess, the end of August or beginning of September around the hurricane activity? Are we -- it looks like your realizations are pretty consistent with the markers, but I just want to make sure I did not miss anything.

Yes. No, there wasn't anything major. We did see, prior to the hurricane, Midland was trading at a premium to WTI, which was advantageous to us. And we've seen a big spike in NGL prices in the quarter, but not a lot of real noise around realizations during that time period.

And our next question comes from Jeff Grampp of Northland Capital Markets.

Just back on the guidance front, looking out over the next 6 months, can you guys -- or do you guys have a sense for how we should be thinking about oil mix? I know, obviously, some of the more gassier areas of the Delaware can impact things quarter to quarter, but just was hoping to get maybe some line of sight there if you guys can.

Jeff, yes, I mean, really, if you think about the oil mix, this was a quarter where we had some higher gas content. Wells come on in the Northern Delaware Basin that really drove the BOE/D on the gas side. I anticipate Viper still being in that high 60s, low 70s oil cut. I think this is kind of near the lower end of our range. And it's never going to be as high as Diamondback, given Diamondback's size in the oiliest portions of the basins, but Viper has started to buy in areas where the gas cut is a little bit higher, but it's still all about what that return looks like on a distribution basis.

Okay. Great. Very helpful. And then the only other one I had. Just kind of, strategically, as you guys continue to ramp production, looking -- eclipsing $150 million EBITDA run rate, I think, this quarter, just kind of curious how you guys are maybe viewing the debt markets as a potential means of funding any acquisitions that you may have down the road? And then just, generally, can you guys kind of remind us here, general philosophy and views towards debt and what you guys are comfortable with on a leverage basis?

Yes. Traditionally, we've seen some of the mistakes made in the past with E&P, MLPs and permanent debt on those entities. I think we've made a lot of progress on our revolver in the last 12 months, almost more than doubling the capacity of the revolver, and that allows us a lot more flexibility to hold deals on the balance sheet versus having to hit the permanent debt or equity markets right away.

So I think we're, obviously, a very debt-averse company and very focused on providing investors upside to the commodity and not a lot of other things to worry about, whether it be leverage or otherwise.

Our next question comes from Tim Rezvan of Mizuho.

I know in the third quarter there was some production outperformance from those Northern Delaware Basin wells with large production where, I believe, you said you had a 20% royalty interest. It's obviously much higher than what you have kind of across your royalty portfolio. Can you talk how common are those wells and do you target kind of high NRI opportunities? I'm just trying to understand kind of how that royalty interest comes about.

Yes. Tim, I mean, this -- that particular deal was a deal that we funded last year about 12 months ago that had a minimum drilling commitment from the operator that they had to get 2 or 3 wells drilled in the first year, and instead they've drilled 5. So they outperformed our expectations. And those are the perfect deals that we look for, right? It's almost 100% of the minerals in a section, with the high visibility into that operator having to drill wells very quickly. Outside of Diamondback-operated property, I would say that's our ideal type of acquisition where we have concentrated position with a lot of visibility.

Okay. Is it fair to say that's the exception, not the norm now as you think about the gross number of wells being drilled?

I'd say we're pretty selective, but that particular deal is an exception. We have purchased full sections in other areas under third-party operators as well as under Diamondback as well. But ideally, that's what we look for and we're pretty selective on the more scattered out deals with a lower interest over a larger piece of the acreage.

Okay. That's pretty helpful. And then you talked about the 6-month production guidance given out. We can sort of back into the 4Q '17 production given how you've colored the full year number. But should we assume, going forward, it's kind of similar linear growth that we've seen? Obviously, you had a big uptick last quarter, but is there anything -- any reason why it wouldn't be sort of linear in the near term?

Yes. I mean, that's kind of how we think about it. I will say that we've been surprised to the upside before. It's just a matter of those third-party wells and what kind of cadence those operators are completing wells at. So as you know, we like to guide conservatively and make sure that we're not hitting any or putting our thumb on the scale unnecessarily for third-party wells coming on sooner than we expect.

Okay. Okay. And then one last one for me related to that. And you mentioned your conservative underwriting estimates on acquisitions. Is it fair to say that you've risked the guides given the challenges that operators have had on the pressure pumping side and just general delays? Has that factored into that 4Q, 1Q production guide you gave?

Not necessarily. We risk all our guidance, whether it be at Diamondback or Viper for natural occurrences. It gets cold in the winter. It gets hot in the summer here, and there are always going to be issues. I think from our perspective, we like to buy under operators that we know are executing and able to get their wells completed as if we were doing so. So I think the completion side of the business is going to catch up and catch up to the billing side in the back half of the year.

And our next question comes from Philip Stuart of Scotia Howard Weil.

Most of my questions have been answered, but I guess one more looking at the acquisition side. Some of Diamondback's E&P peers have been increasingly purchasing mineral interests when they acquire assets. Are those mineral interests acquisition targets for VNOM? Or those E&P companies kind of paying full valuations for those mineral interest which would make it maybe tough for it to be accretive to VNOM?

I can't really speak for the valuations they're paying. I know that we, on a third-party deal, we are going to discount the price that we would pay for them versus ourselves because we have so much control over our own drilling programs. We're able to pay a little more than those guys. So I would say they probably can pay more because they have the ability to move their drilling schedule around to meet their acquisition targets on the mineral side. And we tend to not -- we tend to buy under guys that we know have active development or we have visibility into what they're planning on doing and if they're not actively purchasing minerals on their side of the business.

(Operator Instructions) Our next question comes from Neal Dingmann of SunTrust.

Kaes, what's your appetite for minerals outside of the Perm?

Neal, we've looked outside the Permian in the past. We always end up coming home because we believe in the Permian resource and the growth in the Permian versus the growth in some of these other basins. If we had a chance to acquire the best position and the best area in another basin, then maybe we would consider it. But at the end of the day, the amount of resource, the amount of undeveloped resource, the stack pay and the visibility we have into the Permian has always kept us home.

Okay. And then I just want to make sure I understand that Slide 13 that talks about -- I think you referenced this in your prepared remarks, as far as those additional dropdowns, what's the timing you said you would start to consider dropping those down, once it's accretive to VNOM, is that right? I just want to make sure I understand sort of the timing and what plays into that decision.

Yes. There's a lot of lease requirements across that acreage position that Diamondback bought from Brigham. I think we need to run 2 or 3 rigs on that acreage. So outside of those 2 or 3 rigs, we're going to start drilling some mineral, some mineral wells so that the production on the mineral side can equal what we're doing on the Viper side today. So I think over the next 12 months, you'll see us look to get that prepared and make sure that both sides are happy and Viper gets an increase to its distribution based on the drop.

Okay. And then just lastly. I think, it looks like Diamondback stills owns about 64%, 65%. When you and Travis look at sort of growing VNOM, is it just purely -- when you're looking at deals, you would consider using those shares if the deal peer is accretive? Or is there any more into that decision?

I think Diamondback is very happy owning the amount of shares that it owns today. We've done a good job getting the liquidity up in the stock. It's increased dramatically, as you see in one of our slides, as well as our ability to borrow on the RBL side. So Diamondback doesn't need Viper shares for liquidity, and Viper is -- Diamondback is 100% behind Viper and looking to get this business to be a category killer in the mineral space.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Travis Stice, CEO, for any further remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.