Viper Energy Inc (VNOM) 2023 Q4 法說會逐字稿

Good day and thank you for standing by, welcome to the Viper Energy fourth-quarter 2023 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Thank you, Victor. Good morning and welcome to Viper Energy's fourth-quarter 2023 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; Kaes Van’t Hof, President; and Austen Gilfillian, Vice 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 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 to the appropriate GAAP measures can be found on our earnings release issued yesterday after.

I'll now turn the call over to Travis Stice.

Thank you, Adam, welcome, everyone, and thank you for listening to Viper Energy's fourth-quarter 2023 conference call. The fourth quarter wrapped up a milestone year for Viper.

For the full year, average oil production increased 13% compared to previous year, while our average share count was reduced by 1% over the same period. As a result of continued strong organic production growth, accretive acquisitions, and an opportunistic share repurchase program, the fourth quarter represented the eighth consecutive quarter of increased production per share for Viper.

For our return of capital for the fourth quarter, we have declared a $0.29 variable dividend to Class A shareholders, along with our $0.27 base dividend. Importantly, this variable dividend is the same that we would have paid with the 75% payout ratio, assuming we did not repurchase any shares during the quarter. However, inclusive of the $28.7 million in shares that we repurchased during the quarter.

Our effective payout ratio for Q4 is 97%. Our rationale for excluding the share repurchases done during the quarter and calculating our variable dividend is that we view this buyback, which was done during the secondary offering related to our GRP acquisition, as an extension of the financing of the deal. Additionally, we've already received $10 million in post affected cash flow that is applied as a reduction to the purchase price and does not show up in our reported financials for the quarter.

Looking back on the year as a whole, there were several strategic initiatives completed during 2023 that marked important steps in the growth and evolution of Viper. Our GRP acquisition, which closed in the fourth quarter, clearly laid out the framework that we look for in large scale M&A. First, it must be accretive on all relevant financial metrics. Second, there must be high quality undeveloped inventory that supports our long-term growth profile and provides clear visibility to future development. And third, the acquisition must provide significant scale that results in a pro forma business that is both bigger and better.

Separately, Viper also completed its conversion into a Delaware corporation during the fourth quarter. We believe this conversion has delivered increased governance rights for our shareholders and positions Viper to grow our business and fully highlight the advantaged nature of mineral and royalty ownership.

Looking ahead to 2024, we've initiated production guidance for both Q1 and the full year. While Q1 is expected to be the weakest quarter of the year, primarily as a result of the timing of large pads, we continue to see strong activity levels across our acreage position and expect significant growth to occur throughout the year with Q4 2024 production expected to be at, or above, the high-end of our guidance range. This continued production growth, along with our best-in-class cost structure, should enable Viper to continue to return a substantial amount of capital to our shareholders, primarily through our base-plus-variable dividend.

Operator, please open the line for questions.

(Operator Instructions) Neal Dingmann, Truist.

Morning, team, and nice quarter. My first question is on valuation. Just maybe broadly, it seems to me that the market still not appropriately valuing VNOM's growth and the continued associated and distribution. So Kaes for you and the team, just wondering you all believe this is still a more of a broader issue with the minerals group in general? Or is it more the market not appreciating VNOM's future value creation?

Yeah Neal, I think the market is starting to wake up to the VNOM story as well as the mineral story. I think generally the conversion that we did to [C-Corp] that has opened up a broader investor universe has allowed us to take meetings with shareholders that are prospective shareholders that haven't been able to buy the stock in the past.

I think it's good to see some index ownership. It's good to see the float pick up. And I think as you think about -- as we think about the vision for this business, as you continue to see consolidation in the E&P space, we think Viper will offer a unique opportunity and a unique investment case in the pure play Permian E&P or minerals business.

However, you want to look at it. I mean I think generally, as we continue to grow this business and it grows production, you can do that at Viper without -- even if the parent company is not growing. So generally, I think the market's waking up to the story. I mean this business is going to grow 14%, grow oil 14% quarter-over-quarter, Q4 '24 to Q4 '23, and that's a pretty impressive growth rate, and it's not impacting overall macro as much as it was upstream.

Yeah, I would agree. And then just second quick one on capital allocation. Given your low leverage relative, I assume you'll continue, or will you continue to pay out the 90% plus cash available for distribution? And would you consider leaning more into the buybacks?

We did a unique deal in Q4 to buy back 1 million units from what was given to GRP seller financing. I think that's a unique opportunity to buy back a lot of shares at one time. Viper shareholders have been rewarded for that, from a returns perspective. I think generally, we still believe minerals should be distribution vehicles.

We have a base distribution that's grown in the last couple of years, we have a variable distribution that's probably our second call on payout. And then behind that is probably repurchases. I think there will be opportunities to repurchase shares in the future. But right now, the priority feels to be shifted more towards the base plus variable unless there's a unique event like a large shareholder selling.

Great, thanks for the time.

Thank you.

Derrick Whitfield, Stifel.

Hi good morning, all.

Hi, Derrick.

I wanted to circle back on a topic that came up earlier on your Diamondback call today regarding the increased inclusion of Wolfcamp D in 2024, is that development focused in your Spanish Trail area or more broadly integrated across your STACK development.

It's more broadly integrated across the portfolio, but there is a lot of undeveloped opportunity in Spanish Trail. We signed a big lease last year for deep rice, which includes a little bit of Wolfcamp B, but mainly Barnett and Woodford across that Spanish Trail position. I think there's a couple of wells coming on this year in the Wolfcamp D, which just opens up the next leg of the stool when it comes to mineral ownership.

I mean when we first bought Spanish Trail 10 years ago, it was focused on single bench, Wolfcamp B development, and maybe some more vertical wells. And now here we are developing five or six benches and upside in the deeper zone. So at the end of the day, it's always good to be the mineral owner in Texas and Viper being a large mineral owner with a well-funded parent operator is in a very good position.

And it's laid out on slide 12 of the deck, what that looks like and what the benefit has been to the Viper shareholders in Spanish Trail from a deal that started with a $400 million purchase 10 years ago.

I agree. Quite amazing. Maybe kind of bridging from that topic with potential inclusion of Endeavor. Are you guys aware of any leases or ranches with materially higher NRIs like Spanish Trail? Or is it just uniformly higher from your perspective?

Yeah, there's certainly some opportunities. There's the Quinn Ranch, which we had a little discussion about with Endeavor a few years ago, and they got titles to the ranch, but we know the mineral owner there who owns a significant amount of minerals and someone we should be talking to.

But I think those are all opportunities that will open up as we get to work with the Endeavor team on what they have and what we have, and putting together what will truly be a kind of world-class resource at the upstream angle and the downstream angle -- sorry, the mineral angle.

That's terrific. Thanks for your time.

Thanks, Derrick

Paul Diamond, Citi.

Good morning, all, thanks for taking my call. Just a quick one on kind of run rate cadence. If we take those 13.4 net wells in active development and kind of run that out on our numbers, we get to you pretty close to the high end of guidance pretty quickly for '24. Should we kind of view that as just a bit of conservatism into it? Or is it more just accounting for ongoing volatility in pricing and just operational cadence across the market?

Yeah, Paul, a lot of it is timing related. So if you think about Q1, right, it's kind of in the lower end of the range, mainly as a result of the lower well count that we saw turn in production in Q4 carried into the year. So when you think about full year, we've obviously had this range of 25.5% to 27.5% on oil out there since September of last year when we announced the GRP deal as we kind of roll forward a couple of months and if you look at our net well counts with current activity being act up a little bit.

So I think that's my bias, I think it's a little bit higher than we previously thought in the back half of the year. But we're typically pretty conservative when it comes to converting permits to production and kind of put some of that activity that you see there into the 2025 timeline. But if things stay current with current expert with operators pace of development is potentially there could be a little bit of upside to our guidance. But we just guided what we can see and be very confident in today.

Yeah, the beginning of the year is the toughest part for us on giving a full year guide, particularly on the mono side, I mean you know the bank side very, very well, and that moves around slightly. But I think generally, we're a little more conservative in what we think it gets popped in the second half of the year on the non-op piece.

Got it. Understood. And just a quick follow-up on -- given the kind of proliferation of deals M&A across both on the mineral side as well as the non-op and just the operators more broadly, has that really shifted your guys' mind as where you see as like the most attractive deal size? post-GRP, has it gotten a little bit bigger because you guys are a bit bigger? Or is it still kind of run the gamut of different scale and geographies?

I think generally, a deal like GRP showed our advantaged position because we could do a deal of that size with a significant amount of cash. It's still a nice size in the basin for smaller deals and probably to solve, let's call it sub-$20 million, sub-$10 million deal market. And really, I think we still look at that market, but it's just not a huge piece of our business anymore.

I think generally, minerals have consolidated into funds that are sizable that we'll need to monetize at some point, and Viper should be the buyer of those larger positions rather than the blocking and tackling, making a big difference in the story.

I think also, Paul, minerals are, in our mind, well behind E&P's in terms of consolidating. There's going to be a probably more mineral consolidation in the next few years and more names that sell than upstream. I mean, upstream has been consolidating very rapidly. But there's going to be a solid wave of mineral positions that monetize big or small. And we want to be positioned to buy the best rock with the best visibility. And that in our mind is, mainly Permian, if not, mainly Midland Basin.

Got it. Appreciate your time. I'll leave it there.

Thanks, Paul.

Leo Mariani, Roth.

I appreciate some of the commentary there on your expectations for the minerals market to consolidate. Obviously, I think you guys laid out on the Endeavor acquisition call that Endeavor has roughly a portfolio that's two-thirds the size of VNOM's currently, which obviously is very, very significant.

Would you guys be able to kind of just give us a little bit of a high-level plan in terms of how you see that maybe playing out over time to the benefit of VNOM. Certainly, seems like there's significant drop-down potential. Is that something you think you could evaluate and kind of do multiple deals over kind of a handful of years? What do you think kind of the high-level game plan is?

Yeah, Leo, I mean, we gave some high-level information on the potential opportunity in the merger deck. I'll say that we can't really say much today on timing or sizing. But very clearly, it's a meaningful position that would differentiate Viper if we could get a deal done at the right time. But I think we're going to have to leave it up to the pro forma Board to decide and get the deal closed. And as you know, we don't move slowly. So we'll get working on it quickly, but I can't really give you much until that time comes.

Okay. And then just in terms of some of the numbers here, I certainly noticed that your G&A is kind of going up per barrel by a fair amount. I'm assuming that's really just the conversion of the C-Corp and the additional costs that sort of come on that end.

Yeah, Leo. That's fair, Leo. We're not adding a ton of people or anything. We run this business pretty lean, but there are some added costs as we now allocate fully between the two, the parent and the sub.

Okay. Thanks.

Thank you.

Tim Rezvan, KeyBanc Capital Markets.

Good morning, folks, and thanks for taking my question. I have two questions that are sort of related, following up on what's been discussed here. Is it fair to say that despite the Endeavor opportunity coming around the end of 2024 that you are open and willing to transact third-party minerals this year? I know in the past, the Diamondback history, you haven't been afraid to stack deals when you see opportunities. So are you sort of continuing to be on the prowl now and through 2024?

Yeah. Look, Tim, I think we want to be selective, but certainly something that looks like GRP like we did last year would be very interesting to us. I mean, I think although that deal didn't have all Diamondback operations, there's actually a lot of Endeavor permits and units under it.

But that visibility and that quality of remaining units in the Midland Basin, to us, has a lot of value. And if there are deals with a lot of undeveloped value, not just near-term free cash flow accretion, that's something we're going to look at. I just don't have direct visibility into what that is today.

Okay, that's helpful. And then related to that and as you think longer term on Endeavor, if you bake in the legacy, the acquired EBITDA on GRP, leverage looks like a little bit over 1 times and hard to see a lot of organic deleveraging in a low-70s oil world. So what are your thoughts on the balance sheet and where you are today and maybe where you'd want to be over the medium term to sort of be able to take down bigger opportunities as they come up? Thank you.

Yeah, I think a path towards 1 times no matter what the deal looks like is the right way to look at it. We are we are distributing 75% of free cash. So there's a more limited amount of free cash to go to the balance sheet on a quarterly basis.

But generally, minerals, we've proven that the mineral business can de-lever very quickly. It doesn't mean we're going to lever it up by any means. But security of pure free cash flow almost regardless of commodity prices is a pretty unique way to think about leverage in an oil or commodity-based business.

Thank you.

Thank you. I'm not showing any further questions in the queue. I'd like to now turn it back to Travis Stice, CEO, for any closing remarks.

Thank you again for everyone participating in today's call. If you've got any questions, just please reach out using the information we provided.

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.