Viper Energy Inc (VNOM) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Viper Energy Partners Fourth Quarter 2017 Earnings Conference. (Operator Instructions) And as a reminder, this conference is being recorded. Now I would like to welcome and turn the call to the Director of Investor Relations, Mr. Adam Lawlis.

Thank you, Carmen. Good morning, and welcome to Viper Energy Partners Fourth 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 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 Fourth Quarter 2017 Conference Call. 2017 was a truly transformational year for Viper. We grew production by over 70%, increased our asset base by over 60%, and are set to distribute another company record distribution.

On February 26, Viper will distribute $0.46 per unit to unitholders of record at the close of business on February 19. This distribution is up 78% year-over-year and 36% quarter-over-quarter, and is attributable to organic growth on existing assets, as well as accretive acquisitions closed in recent quarters.

Viper closed 112 deals for over $340 million in 2017, adding roughly 3,150 net royalty acres to our asset base. This momentum continued into 2018, with the closing of our first out-of-basin acquisition with an immediately accretive entrance into what we believe to be the core of the core in the Eagle Ford shale. With the addition of this acreage, along with other deals that have closed to date in 2018, Viper's footprint now stands at over 10,400 net royalty acres. As a result, we are initiating average production guidance for the first half of 2018 of 14,000 to 15,000 BOEs a day, as well as full year 2018 production guidance of 14,500 to 16,000 BOEs a day. The midpoint for the full year 2018 guidance represents a 38% increase year-over-year.

I'll now turn the call over to Kaes.

Thank you, Travis. Moving ahead to Slide 5, we take a look back at 2017 performance and introduce our 2018 outlook. We also show the range of our 2018 distribution, given current guidance range and various commodity prices.

Fourth quarter oil production grew 3% quarter-over-quarter. However, our total production was impacted by the completion of an eight well pad in our largest field, Spanish Trail, which makes up a significant portion of Viper production. November and December volumes returned expectations, and averaged over 13,000 BOE per day, setting us up for continued growth into 2018.

As our sponsor Diamondback increases pad sizes in Spanish Trail, a field that is less than 25% of Diamondback's overall production, Viper production will continue to grow, but we'll have larger monthly impacts due to these larger pad sizes. Further, we have accounted for this in our 2018 guidance.

On Slide 6, we show our production per million units outstanding over time. As you can see, Viper has significantly outperformed public royalty peers due to the high organic growth embedded in the mostly undeveloped, unconventional assets we have acquired in the Permian Basin.

Unlike working interest E&Ps, Viper does not need to reinvest cash flow to grow. Distribution simply grows a direct result for operators reinvesting our cash flow to grow on their acreage for Viper-owned minerals.

Slide 7 shows Viper's distribution growth compared to all energy focused MLPs since the first quarter of 2015. Over this time period, Viper's distribution has tripled.

Slide 8 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 3x. 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 10% by year-end 2019 at today's prices. This distribution growth only assumes organic growth. Acquisitions further enhance opportunities for unitholders.

Slide 9 shows the growth of the company's production, acreage and proved developed producing reserves on both a consolidated and per unit basis. These per unit metrics are vital to our analysis of acquisition opportunities. Production per million units and thereby distribution need to rise pro forma for acquisitions.

Slide 10 illustrates Viper's position as an industry leader in both return on and return of capital. Since going public, Viper has distributed over $3.50 in aggregate to unitholders. The fourth quarter was an exceptional quarter for Viper with respect to both of these measures, allowing us to achieve an average return on capital employed of over 14% for the full year 2017, well in excess of our estimated cost of capital.

The next few slides give an update on Viper's acreage position and inventory. On Slide 12 and 13, we break down some of the details of our entry into the Eagle Ford shale. We acquired 681 net royalty acres primarily in DeWitt and Karnes County for roughly $123 million. This oil-weighted acquisition is significantly accretive on a cash flow basis, and is highlighted by active visible development by major well-capitalized operators who have publicly disclosed multiyear growth plans.

We expect this acquisition to conservatively produce about 900 BOEs a day in 2018. At today's commodity prices, this BOE yields north of 14%, massively accretive to Viper's current yield. Our strategy has not changed. We will continue to focus on acquiring minerals in the Permian Basin, but we'll selectively look for sizable acquisitions in oil-weighted basins with cash flow accretion and forward visibility, all of which describe this acquisition.

Slide 14 shows the transformational acquisitions made across the Permian Basin since the end of 2016. The company increased its acreage position by over 3,000 net royalty acres across 128 deals, bringing our total Permian footprint to over 9,700 net royalty acres.

Slides 15 and 16 give more details about Viper's inventory across the Permian Basin, both Diamondback operated and third-party operated acreage throughout the oil-weighted counties in the Permian.

Slide 16 also shows the breakdown of Viper's exposure to permits currently on file from some of the most active operators in the Permian and Eagle Ford.

Switching to Slide 17, we depict the mineral assets currently being held by Diamondback, which continues to grow. We plan on dropping these assets down to Viper from Diamondback when production has reached a point where the deal will be accretive to the distribution for Viper's unitholders.

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

Thank you, Kaes. Viper's fourth quarter 2017 net income was $42.1 million or $0.37 per diluted share. Our operating income for the quarter was $59.2 million, up 39% from $42.5 million in the third quarter of 2017.

Viper's average realized price per BOE for the fourth quarter was $43.76. During the quarter, our cash G&A cost were $0.77 per BOE, while noncash G&A cost were $0.31 per BOE.

As shown on Slide 19, Viper ended the fourth quarter with a net cash balance of $24 million and liquidity of $331 million. Also, on Slide 19, we provided our updated guidance for the next 6 months, as well as full year 2018. Viper is initiating first half 2018 average production guidance of 14,000 to 15,000 BOE per day, the midpoint of which is up 17% from fourth quarter 2017 production.

We're also initiating full year 2018 production guidance of 14,500 to 16,000 BOE per day, which is an increase of 38% year-over-year. With these comments 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. Viper's continued growth is a direct result of organic growth on our existing asset base and selective, accretive acquisition strategy. We look forward to maintaining our momentum in 2018 by continuing to grow our distributions, production and reserves on a per unit basis.

Operator, please open the line for questions.

(Operator Instructions) And our first question is from the line of Jason Wangler with Imperial Capital.

I was curious, on the fourth quarter, just the lease bonus was pretty significant. Everything else kind of checked out, but just curious if you could maybe talk about what that was and then how we should think about that, going forward.

Yes, Jason. This is Kaes. That was a pleasant surprise because we do buy in tier 1 very attractive areas in the Permian. Operator's are going to want to continue to hold their leases, and in this instance, a significant portion of a section, the lease had expired and the operator paid $9 million to retain that lease or extend that lease. And with that, we also got a multiyear -- a multi-well commitment over the next 18 months. So it's not something that we plan our business on, but it is a pleasant surprise and something that started to occur more often as we've grown our third-party presence.

Sure. I certainly agree. And then as you talk about the drop-down visibility from Diamondback, I know they haven't given us 2018 activity and things. But as you look at those positions, and you guys, obviously, have acreage all around it, can you maybe talk about the activity levels kind of you're seeing in those nearby regions or just kind of what your outlook is in 2018 as far as seeing those properties in the development stage?

Yes. I won't commit to too many details, but round numbers, Diamondback ran about 2 rigs on the Brigham properties last year in Pecos County. And this year, we're planning on running about 4 or 5 rigs for majority of the year on that acreage. So cash flow should start to grow with those rigs starting work now early in the year, and cash flow will grow through the midpoint of the year, which we anticipate then on a forward basis there could be some version of a drop-down. Now sizing is still to be determined because the position has grown. We've bought more minerals at the Diamondback level, but we anticipate some -- because of the active development coming this year that there will be some version of a drop-down through 2018.

And our next question is from the line of Gordon Douthat with Wells Fargo.

Just a question on your recent Eagle Ford acquisition and somewhat more bigger picture, I guess, in that. How do you view the opportunity set within the Permian kind of where your core areas are versus outside the Permian, both on a -- the availability of potential acquisition opportunities and also from a relative valuation standpoint between the Permian and outside the Permian?

Yes, Gordon, we -- probably, won't go down the road on answering valuation questions, but I can tell you strategically that we're going to continue at the Viper level to be opportunistic and look at deals even outside the Permian that are sizable enough and visible enough that they kind of warrant our attention, at the same time, maintaining that strategy that Kaes outlined, those oil-weighted basins, under-active development and confident operators. I think while Diamondback is singularly focused on the Permian, Viper remains opportunistic in evaluating these minerals consistent with that stated strategy. That said, the pipeline's full. We got really excited about the opportunity that we see here in the Permian Basin, and we think there's plenty of runway in front of us.

Yes, and as Travis said, I mean, I think it's an and. We're staffed to continue to block up the Permian, and there's been no shortage of opportunities in the Permian. In this instance, we saw very unique opportunity and a sizable acquisition outside the Permian and an oil-weighted basin with a lot of visibility. And that's what attracted us to this particular deal.

Okay. And you've mentioned the growth through both organic distribution growth, organic opportunities that you have on your existing asset base and then also bolstered by the M&A activity. Was just wondering, is there an optimal level of scale that if you look down the road, 3, 5 years beyond, how do you see your asset base evolving?

Yes, we've been very consistent in our communication that as long as we can find accretive deals, whether it's a yield or a cash flow, the ways that continue to give us those type of accretive opportunities, we're going to continue to grow, and there's not a certain size, cap or anything else that we put our strategy around. We think the opportunity set is so robust, not only here in the Permian, but quite honestly, around these other major oil-producing basins that there's just lots of opportunities in front of us.

Our next question comes from the line of Neal Dingmann with SunTrust.

Kaes, I just want to hit on one thing you said earlier. You talked a bit about -- and I know you gave the guidance talking earlier or yesterday just on the oil sort of split and is that just something you'll see for the next couple of quarters? Maybe just talk about how you see the sort of oil ratio, going forward, for once you blend in the Eagle Ford -- the bid of the Eagle Ford properties as well.

Yes, so we released our first oil guidance this year to provide some clarity around that. And we anticipate being between about 71% and 75% oil for the year. Looking at Q3, we're in the high 60s. In Q4, we returned to about 72%. So on a long-term basis, we think that low- to mid-70s is the right number for us.

Okay. And then, the drop down opportunity, is that -- now that you're more active there, obviously, with all the rigs running, is that kind of the key that you've been waiting on? Or I'm just wondering when you do a drop-down like that, is it -- when you look at that, is it generally done in pieces? Would you drop the whole thing? Just wondering how we sort of expect that later in the year.

I think it will be done in pieces just because of how much we've purchased at the fang level. We purchased the original assets from Brigham, and then we've done some buying on our own of sizable acquisitions without current development. So because the forward calendar looks pretty full and looks like production is going to grow on those mineral assets, then we can size a drop-down appropriately that is primarily accretive to our existing yield, and that's really the governor for us. We need to do a deal that is immediately accretive in the following quarter to Viper unitholders.

Okay. And then just last, I think it's on Slide 7 where you show the distribution growth. Is there sort of a target growth? I mean, you bumped the distribution up slightly. I don't know, is it on the coverage metrics? Or how do you all look at to see what you'll continue to boost that -- distribution?

Yes, I mean our strategy hasn't changed. We're still going to distribute 100% of available cash or operating cash flow for the quarter every quarter. So really, it's a double bowl on Permian production and oil price. For every dollar in oil price, investors get $0.90, and for every percentage increase in production, that's going to be a corresponding percentage increase in the distribution.

Our next question comes from the line of Faisel Khan with Citigroup.

I just want to make sure, so on the acquisition in the Eagle Ford, I guess the strategic sort of rational behind it, is it concern you guys at all that it might divert from sort of the pure-play story of the -- of Viper itself?

No, because as I mentioned in my earlier comments, the Viper story has always been about acquiring assets in oil-weighted basins that have under -- that are currently being developed, and have confident operators. And while this is the first one that we've been able to close in an out-of-basin Permian, we've made -- over the years, we've made multiple offers in multiple basins, as we tried to do accretive deals. And I'm not in any way implying that the opportunity set is windowing out here in the Permian. In fact, quite the opposite. But as I highlighted, I think we're just trying to be smart managers of this asset and be opportunistic when we can find deals that immediately add to the distribution, and that's what we've done here and we'll continue to be opportunistic. You can compare and contrast that to Diamondback. And as I mentioned, Diamondback is singularly focused here in the Permian, where we do get credit for being a pure-play guy. I think if we can do deals at the Viper level that adds to the distribution, our unitholders will be happy.

Okay, okay. Fair enough. And then on this 8 well pad that impacted production, so what was the -- what do you guys expect? What's the gross volume you expect out of that 8 well pad when it's fully up and running?

Yes, that's more of a Diamondback question. I think what was unique about this is that Diamondback traditionally develops -- had been developing Spanish Trail in a 3 to 4 well pad, and this was an 8-well pad. And as Kaes highlighted, while there was a material impact at the Viper level, because you had not only those 8 wells are waiting for production to come on, you had the corresponding water out effect for all the offset wells, but pleased -- we were pleased that their volumes came back in November and December. And now that we see that Diamondback is shifting to more multi-well pad developments, that's -- as Kaes also highlighted, we've included that in our forward guidance.

Does that make things a little more lumpy as you sort of move through the year? If you're waiting for larger pads to come online, does that make the volume sort of a little bit more volatile over the course of the year?

At the Viper level, it could. But again, that's why we don't guide towards the -- towards quarters. We've tried to, as articulately we could, describe for you what we think the next 6 months volume forecast is going to be. And yes, for me, at any time and point over that 6-month period, we could be up or down from the midpoint of that guidance, but we spend a lot of time and effort with our reservoir engineers trying to get an accurate forecast of what the volumes are going to be, and we've put that in our guidance, taking into account all of these different parameters that we understand.

And our next question is from Jeff Grampp with Northland Capital.

Just kind of sticking with the Eagle Ford acquisition, and Travis, as you pointed out, certainly, nothing new to the story about looking at a basin. But I'm kind of curious just a little bit of background there on what was kind of that missing piece that kind of prevented you guys from getting a deal across the finish line over the prior few years versus this opportunity that you guys were able to cross the finish line on?

Well, again, if you go back and look at the -- and review the words I'm saying about making these deals, being opportunistic and doing deals, where the distributions go up, it took some time on this particular asset for operation to get out there and drive the volumes up, so that we can make it an accretive deal, as we've described. Just on that acquisition front -- we're never going to go out and acquire scattered minerals in these other basins. We really focused on large, concentrated positions, oil-weighted that we have really good visibility on future cash flows, and that's what we've done here in this Eagle Ford acquisition, view growth profile operators. Those are kind of what we govern ourselves with.

And I think that ties back to the opportunity set in the Permian as well. We looked at a lot of deals in the last two years that were early in their development or had very little or no development in the Permian, and now, we're revisiting those deals, given that active development has begun and primarily in the Delaware Basin. I think that the opportunity set for us to be a deal that's accretive on yield, as well as NAV and our NAV workups that we do has now risen versus in the past.

Jeff, we always strive to make our story as simple as we can. That's sort of another governing principle. We're not going to do acquisitions that are complicated that are scattered, and we can't forecast future cash flows, and it's what we've done here in the Eagle Ford is exact opposite of all that. It's a simple story. You've got operators, and they're publicly stating what their growth plans are for those, the economics that are being produced there as capital allocators. We know the operators are going to develop this asset because it's probably the top 10% of their overall portfolio. So we're very confident that this is a really good deal for our unitholders.

Okay, great. Appreciate all those comments. And just for a follow-up, I noticed relative to last quarter, there seem to be a pretty substantial jump in the Perm account that you guys quoted, but rig count was actually a little bit down. Can you guys just kind of help us understand that divergence, and is it fair to kind of look at that big jump in permits as a sign of maybe where we should think the rig count is heading?

Yes, it's tough to take a lot out of that. We like to provide that data just to show what kind of explorers we have to the large operators. And I think from our forecasting perspective, we don't necessarily forecast at all permits become production. We really look at wells that are in the ground, where the rigs are operating today and DUCs primarily. But the increase in permit count is a function of, 1, our purchases of third-party acreage, where we have exposure to a lot of third parties outside of Diamondback, and 2, the increased permit count from Diamondback as well.

And I'd tell you, Jeff, from a macro perspective if you just look at the Permian and whole -- at once, you'll see the permits cycle with oil price. And so this uptick in permits across the Permian really started in the fourth quarter of last year and you're seeing it continue into the first quarter of this year, which is in direct correlation to the oil price.

Our next question comes from the line of Philip Stuart with Scotia Howard Weil.

Congrats on getting the Eagle Ford deal done. Can you all talk a little bit more about how that deal came about? And if there any other opportunities with that specific party to further increase your mineral interest percentage on that acreage?

This is a marketed deal, which we have actually seen some version of this in the past and it came back around. And it's probably a smaller percentage of what could be purchased under all that acreage, given that we have about a 1% interest across a wide sloth of acreage. So like we do in the Permian, if we buy a deal on a Permian -- in the Permian, and are happy with the forward production outlook in that particular section or in that particular area, we will send our team in to continue to acquire. So I think we're going to watch and see the production on this asset and see it grow and continue to be acquisitive if the opportunity presents itself.

Philip, this is just like we talked about the Diamondback level, we don't speculate on future acquisitions. We kind of give you an idea of what the opportunity set looks like, but we'd much rather tell you what we've done than tell you what we're going to do.

Good deal. And then, I guess, kind of talking about what you all have done, I know the last time we talked, I think you said there was seven employees at Viper. If I look out to kind of consensus cash flow that's meant for 2018, it looks like about $215 million. That's a little over $30 million per employee in cash flow. I haven't looked at all the other E&P companies, mineral interest companies, but I imagine that's probably the best. Is there any kind of increased staffing that you all might need to do as you continue to increase your footprint?

Well, Travis does run a pretty lean ship over here, but I do think we're going to continue to add small stuff, small percentages of stock just for analyzing third-party leases, analyzing production and analyzing deals, as we continue to be more acquisitive and production grows, but it's a full team effort. I don't necessarily -- I can't post employees as full time. The accounting staff spends a lot of time on that as well. So it's not necessarily a true 7 total employees, but it is a pretty lean shop.

Our next question comes from the line of Joel Musante with Euro Pacific Capital.

I just had a question on the organic reserve growth that you showed a pretty impressive reserve replacement rate for non-op. And I was just wondering how the adds break out between proved developed and PUDs?

Yes mostly -- it's mostly PDP adds. We only take PUDs on Diamondback-operated properties. So there's no PUDs on third-party operated properties. So really, the majority of the replacement is due to 95 wells on Diamondback-operated properties. You'll note that our PDP percentage is a lot higher than traditional E&Ps because we book so few PUDs at the Viper level.

All right, great. And you were talking about potential drop-downs from Brigham properties. I was just wandering if any of that was baked into your guidance at this point?

Nothing baked in at this time.

Our next question is from the line of Eli Kantor from DIR Advisors.

Given Diamondback's plan to remain a Permian Basin pure play, curious if you expect a recent trend of Viper diversifying away from Diamondback-operated acreage to continue once Diamondback's existing royalty assets have been dropped down? And if so, would that impact how Diamondback thinks about the decision between holding or divesting the Viper LP units?

I'll let Travis answer the question about the LP units. But if you think about the opportunity set, Diamondback, there's probably 50,000 net royalty acres underneath Diamondback-operated properties in the Permian, and we only own about 4,000 of those today. So we have a lot of opportunity set to continue to buy minerals underneath Diamondback, and I think it provides us a very unique advantage on a consolidated basis versus our peers. So I'll turn it over to Travis on the LP units.

Yes, Eli, Diamondback is very comfortable with our ownership in Viper Energy Partners, and plan to maintain where we're at.

Quick question on diamond-operated royalty acreage outside of Spanish Trail, looks like that number came down quarter-over-quarter. And also, the active rig count across Viper's acreage looks like it sell quarter-over-quarter. Just curious of what's driving those reductions.

It's really a definition issue. We're going to move all definitions to how many net royalty acres we have as a percentage of total. We used to define it as a percentage of gross acres. But I feel given that the production comes from net royalty acres, the percentage of Diamondback operated net royalty acres will be defined as Diamondback-operated net acres divided by total.

Got it. Last one for me, just curious what the current net Eagle Ford production is.

About 900 BOEs a day.

And ladies and gentlemen, this concludes our Q&A session. I would like to turn the call to the CEO, Travis Stice, for his final remarks.

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

And ladies and gentlemen, we thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.