Viper Energy, Inc. (VNOM) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Viper Energy Partners Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [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’ll 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 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 2016 and first standalone conference call. Viper had a very strong finish to 2016 with fourth quarter daily production of over 7,900 Boes a day, up 27% quarter-over-quarter from the third quarter and up 47% from the 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 unitholders of record at close of business on February 17. This distribution represents the largest and 10 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 a $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’ll now turn the call over to Kaes. Kaes Van’t Hof: 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’re proud to announce that Q4 2016 will be the largest distribution in company history, despite the oil price being half of its 2014 highest when distributions were lost 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 unitholders, while 100% of cash available for distribution. On Slide 7, we show the growth of the company since 2014 IPO on an 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 at higher initial rates than our acquisition assumptions. On Slide 11, we illustrate the dropdown 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 dropdown 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 the 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 its acquisition efforts in counties with the highest activity levels. Slide 14 simply explains the difference between Viper, E&P C-corps and other MLPs. Essentially, Viper is the MLP equivalent of a high-growth E&P company with no CapEx requirements, low leverage, and minimal costs that distributes a 100% of its cash flow to unitholders. 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 cost was $0.36 per boe, while non-cash G&A $1.15. During the quarter, Viper spent $68 million in acquisition across 13 deals, increasing asset by 16% quarter-over-quarter. As shown on Slide 15, Viper ended the fourth quarter of 2016 with a net GAAP 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 provided 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’ll 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.

Certainly. [Operator Instructions] Our first question comes from the line Jeff Grampp from Northland Capital Markets. Your question please.

Good morning, again, guys. I guess, first question on the Brigham minerals, certainly it seems like a pretty exciting opportunity to replicate Spanish Trail in some regards. Just can you kind of talk through maybe what could a catalyst be that that would get the dropdown kind of moving, obviously, it’s going 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 guys? Kaes Van’t Hof: Hi, Jeff, Kaes here. Good question, and I agree. First, we need to get this deal closed end of February. And then 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’ll say that we’re still active buying minerals at the Viper level across the Brigham acreage as well. So it won’t just be this 1,100 net royalty acres that we have at the Diamondback level post-closed. But really it’s getting some production going and making sure that there’s a a fair trade there when that dropdown does occur.

Okay. And do you guys have kind of a ballpark production number associated with that mineral interest offhand? Kaes Van’t Hof: 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. And then just as a follow-up, looking on the updated map here, it looks like there was some big royalty blocks you guys had up in Borden County on the Midland side. Just kind of curious what you guys are seeing up there that or what kind of made you guys think that was an interesting area to get some royalties? Kaes Van’t Hof: Yes, that’s really one-off type deal. We saw that as a nearly 20% yield at the price that we did it at and really it’s a very, very low decline waterflood assets that probably declined less than 5% a year. So 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, guys. Thanks. Kaes Van’t Hof: Thank you.

Thank you. Our next question comes from the line of Jason Wangler from Wunderlich. Your question please.

Thanks, and good morning. Maybe just a follow-up on that last question. Do you see a lot of deals of that nature out there as far as kind of more yield-based versus obviously what you’ve been targeting more on the acreage and growth side as you look throughout either side of the basin? Kaes Van’t Hof: 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 $2 million deal. So really – our core focus is going to be on the high growth assets of the Midland and the Delaware. I think we’ve been pretty balanced 50-50 between buying, between both the Midland and the Delaware. And the amount of package is coming through on those two plays as the margin occupied most of our time.

Sure. And then maybe just on that, as you look at the two sides, obviously, from the industry, we really saw the Midland as a big focus and it shifted over to the Delaware a lot from the working interest perspective. Are you seeing a similar kind of 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? Kaes Van’t Hof: Yes, 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’re fast followers behind the acreage trades. So you tend to see the E&P deals happen first and then comes Midstream and royalties. So, deal flow right now is pretty much 50-50. On the Delaware side, you do have less development. So you have to believe more in that future cash flow for growth whereas on the Midland side, you have some two or three years of of horizontal development behind us.

That’s very helpful. Thank you. I’ll turn it back.

Thank you. Our next question comes from the line of Pearce Hammond from Simmons. Your question please.

Good morning. My first question is, how much inventory remains at Spanish Trail for Viper? Kaes Van’t Hof: Hey, Pearce, this is Kaes. We put that on page eight of our deck. The 112 producing horizontal wells today on the Spanish Trial 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 was as a significant amount of inventory in the Wolfcamp A, Wolfcamp B, and Middle Spraberry, which is where we are most active. I mean, the Lower Spraberry is going to take the most of the capital, but we do see economic value in those other three zones.

Okay. Thank you. And then, Kaes, my follow-up is, what are the biggest challenges to getting royalty acquisitions completed? Kaes Van’t Hof: 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 a 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 of years and are looking for liquidity event.

Great. Thank you very much. Kaes Van’t Hof: Thanks, Pearce.

Thank you. Your next question comes from the line of Neal Dingmann from SunTrust. Your question please.

Good morning. Thank you for taking my question. Just thinking about the potential dropdown of the Delaware assets, I guess, on the FANG call, they talked about the oil production kind of the cut moving up from 73%, 75% world to 78%, 80%. Should we expect the same thing on some of that mineral acreage for Venom? Kaes Van’t Hof: 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. But maybe as that – as the production becomes more balanced, you’ll see a little bit of an increase with respect to the royal cut.

Great, great. And just 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 guys did go that route, would it make sense to potentially drop that into Viper, or have a separate standalone structure? And I will leave it there, thank you. Kaes Van’t Hof: We’re focused on Viper owning minerals only in FANG, a pure play mineral, full distribution royalty company.

Great. Thank you.

Thank you. Our next question comes from the line of Brian Brungardt from Stifel. Your question please.

Yes, good morning, guys. So I appreciate the 2017 guidance. Just curious what are the underlying assumptions there on the production side? And how should we think about the split between Diamondback and third-party? Kaes Van’t Hof: Hey, Brian, really we like to guide to what we can control and what we know. And I think that that tenant is the same between both FANG and Viper. So we’re really guiding that 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 run about one rig in their Spanish Trail acreage. And for third-party acreage, we’re really assuming one of the wells that are in place today and two wells that we have visibility – forward visibility into with respect to a permit, or drilling today, or waiting on completion. So from a third-party perspective, we haven’t been aggressive with respect to that guidance. And we’ll continue to monitor our third-party operators activity and continue to look for that production.

Gotcha. And then to expand on that a little bit, I guess, 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? Kaes Van’t Hof: Yes, Brian, it really depends on the pace of the completion with Spanish Trail. And in Q4, we had two forward-well pads completed; one from Diamondback and one 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 out of fact and then production will come back and grow from that initial point. So that’s why you see the big bump in December volumes.

Thank you very much, guys. Kaes Van’t Hof: Thank you.

Thank you. Our next question comes from the line Gordon Douthat from Wells Fargo. Your question please.

Hello again, everybody. Just a question on the dropdowns once again. In the Martin County and Upton County assets, what’s the status of production there? Is 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? Kaes Van’t Hof: Gordon, I think ideally we would like to do it all together, given the size of – the relative size of those two assets versus the Brigham minerals asset. In Martin County, we do have active development. We’re very bullish on the Lower Spraberry out there with the well results that we’ve released recently. And 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 a – more of a mature asset with some solid production.

All right. Thank you very much.

Thank you. Our next question comes from the line of Tim Rezvan from Mizuho. Your question please.

Hi, good morning folks. I would like to follow-up a bit on Gordon’s question. Can you talk about how the 445 acres came to Diamondback? And I guess, going forward,can we assume that any mineral acreage will go directly to Viper? Kaes Van’t Hof: Yes, those are from the deals 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. Okay, my other questions have been answered on guidance. Thank you. Kaes Van’t Hof: Thank you.

Thank you. And 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. Good day.