Viper Energy, Inc. (VNOM) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Viper Energy Partners First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Adam Lawlis, Director, Investor Relations. Sir, you may begin.

Thank you, Brian. Good morning and welcome to Viper Energy Partners’ first 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 conditions, 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 will now turn the call over to Travis Stice.

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners’ first quarter 2017 conference call. Viper’s production growth continued in the first quarter of 2017 with daily production of over 8500 BOEs a day, up 8% quarter-over-quarter from the fourth quarter of 2016 and up 38% year-over-year. Realized pricing for the first quarter was up 9% over the fourth quarter of 2016. As a result, Viper is set to distribute over $0.30 per unit on May 25 to unitholders of record at close of business on May 18. This distribution represents the largest in 11 quarters of Viper’s history as a public company and is over double the distribution from the first quarter of 2016 12 months ago. Also, as a result of the strong start to the year and increased operator activity, we are increasing our 2017 production guidance to 8500 to 9500 BOEs a day, up 9% at the midpoint from our initial 2017 annual guidance. Our guidance now implies over 40% year-over-year growth on today’s asset base. Our acquisition machine continued buying in the first quarter of 2017, closing 28 transactions for over $8 million. 100% of the mineral acreage acquired in the quarter is operated by Diamondback Energy, which allows us to control pace of development and maximize NPV given the relationship between the two companies. Our revolver was undrawn at the end of the quarter and our lead bank has recommended a borrowing base increase to $315 million from $275 million as part of our spring redetermination, which is expected to close later this month. Our acquisition team’s focus continues to be buying minerals in oil-weighted basins with competent operators and high visibility into future cash flows. I will now turn the call over to Kaes. Kaes Van’t Hof: Thank you, Travis. Turning to slide 4, Viper currently has over 6500 net royalty acres located in the Permian basin. Operators currently have eight rigs running across our 120,000 gross acres and there are 198 active drilling permits, up 23% from our fourth-quarter call in February. Slide 5 shows our production and acquisition history by quarter. As you can see, production has increased substantially since the oil price began to recover in the second half of 2016. Simultaneously, our acquisition machine has been active, closing 54 transactions for $202 million in the last nine months. The A and B market continues to be robust and we are actively bidding on multiple packages both large and small every week. We will continue to be active in buying minerals that are accretive to our distribution. Slide 6 shows the Company’s distribution history over time. We are proud to announce the first-quarter 2017 distribution will be the largest in Company history, up 17% quarter-over-quarter despite the oil price being half of its 2014 high. The right side of the page illustrates the potential impact on our Q1 distribution at various oil prices at the same production level. For every $1 of revenue, about $0.90 is distributed to unitholders or 100% of cash available for distribution. On slide 7, we show the growth of the Company since its 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. Over 41% of our acreage is currently operated by Diamondback, which, along with RSP Permian, has provided the majority of our revenue to date. But as can be seen on slide 9, with the amount of acquisitions completed in 2016 operated by unrelated third parties, the remainder of our acreage will begin to meaningfully contribute to our production growth in years to come. The right side of the page shows some catalyst wells producing on this acreage at high average royalty interest. Slide 10 depicts the mineral assets currently being held by Diamondback. We plan on dropping these assets down to Viper at the appropriate time when production has reached a point where the deal will be accretive to Viper’s unitholders. The majority of this acreage lies under the recently acquired position in Pecos County from Brigham Resources and its sister company, Brigham Minerals. Slide 11 shows that Viper owns minerals in the most economic plays in North America and concentrates its acquisition efforts in counties with the largest activity levels. Slide 12 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 distribute to 100% of its available cash to unitholders. With these comments now complete, I will turn the call over to Tracy.

Thank you, Kaes. Viper’s first-quarter 2017 net income was $20.7 million or $0.22 per diluted share. Our operating income for the quarter was $33.7 million, up 18% from $28 million in the fourth quarter of 2016. Viper’s average realized price per BOE for the first quarter of 2017 was $41.80. During the quarter, our cash G&A costs were $1.73 per BOE while non-cash G&A costs were $1.06. During the quarter, Viper spent $8 million on acquisitions across 28 deals, increasing assets by 2% quarter-over-quarter. As shown on slide 13, Viper ended the first quarter of 2017 with a net cash balance of $29 million and liquidity of $304 million. Also on slide 13, we provide our guidance for the full-year 2017. Viper is increasing its 2017 production guidance to 8500 to 9500 BOE per day from 8000 to 8500 BOE per day, the midpoint of which is up 40% from 2016 average production. With these comments now complete, I will turn the call back over to Travis.

Thank you, Tracy. In closing, Viper looks forward to continuing our momentum from the last few quarters with respect to production growth and acquisitions. We have the assets in place today to support organic growth, but we will also continue to look to capitalize on accretive opportunities in the A&D market as they present themselves. Operator, please open the lines for questions.

[Operator Instructions] Our first question will come from line of Graham Price with Raymond James. Please proceed.

Good morning, guys. Thanks for taking my call. So I guess first up, now that the Brigham acquisition has closed, I was just wondering if we could get an update on maybe potential timing for a dropdown of those Brigham Mineral assets to Viper. I know you mentioned previously that you would like to see some production on the acreage first. I was just trying to get a sense of the timeline there. Kaes Van’t Hof: Yes, Graham, this is Kaes. Probably, at the earliest, we’re looking at the back half of the year for that drop. Really it is – we are running two rigs on the Brigham asset now at Diamondback and a majority of the wells over the next six months will be used to hold acreage, but there are some mineral wells or wells with high mineral interests that we will be drilling and as we get that cash flow up, then we want to make sure we do a deal on a forward basis that is advantageous to Viper shareholders with respect to distribution.

Okay, great, thanks. That’s definitely helpful and then I guess for my follow-up, I saw in the presentation that Brigham net royalty acreage looked like it was bumped up to about 1300 from 1150. Was just kind of wondering what accounted for the difference there. Kaes Van’t Hof: Yes, that was part of the deal we had with Brigham. When we signed the PSA with them on the Diamondback side, we only had 76,000 net acres and less than 1200 net royalty acres. They had some deals that they were working on and were in progress that we acquired upon close. So we added about 150 or 200 net mineral acres and 5000 net acres on the working interest side. So all good stuff and all the stuff that they were working on they ended up closing and we are happy to have it.

Okay, perfect. Thank you and congrats on the quarter. Kaes Van’t Hof: Thank you.

Our next question will come from the line of Jeff Grampp with Northland Capital. Please proceed.

Good morning, guys. Just a question on the revised guidance range. It looked a bit wider than where you guys were at before and obviously higher. Is that more a function of I guess just uncertainty on non-Diamondback-operated wells as you guys start to diversify the production base? Just trying to get a sense for the wider range.

Yes, Jeff. Really the first guidance range we came out with, which was low, was based on what we knew at the time and we really only like to guide on that third-party stuff to what we see on their schedule or what they have drilled or what is waiting on completion. So the wider range gives us a little more upside for the back half of the year and I think I echo the sentiment that we talked about on the Diamondback call in that we don’t know what the rest of the year is going to hold here with OPEC in May, so we kind of gave ourselves a little bit of a wider range. But we are happy with what we’ve seen from third-party operators becoming a larger piece of the pie in Q1 and that will continue to be a key piece of the story.

Okay, got it. On the acquisition activity you guys did in first quarter doing almost $8.5 million in the quarter, just I guess in terms of go-forward expectations, would you characterize first quarter as kind of an average activity level or do you think you were maybe more or less successful than you thought you would be going into the start of the year?

I’ll say it’s a different quarter because we did 28 deals, which was the highest number of actual deals we’ve closed in a quarter. Sometimes you don’t always get the size that you want, so I will say that was a lower quarter with respect to the dollar amount of deals done, but the fact that we got 28 deals done on some new buying areas, mainly being the Pecos County and Reeves County assets that we purchased, I’d say we are happy with that being 100% Diamondback-operated. With respect to A&D activity, we bid on very large packages and we bid on the smaller blocking and tackling stuff and it’s just – it depends on where those hit in the quarter.

Okay, understood. I’ll let someone else hop in. Thanks, guys.

Our next question will come from the line of Jason Wangler with Wunderlich. Please proceed.

Good morning. Maybe just sticking with the M&A side, are you seeing – it sounds like just from your previous answer there, you picked up a little bit more on the Delaware than the Midland side. Are you seeing much of a difference in the available packages on one side or the other of the basin? Kaes Van’t Hof: I’d say from a marketing perspective, the number of packages is about equal between the two sides. For us, these deals being a majority under Brigham, they really came from our initial mailings and our initial conversations with landowners after buying the Brigham assets at Diamondback. So that’s really what we were focused on in the first quarter. We are still actively looking at the Midland side. That’s just an area where we have been around a lot longer and have had success in Howard County, Midland County buying stuff under Diamondback. So really it’s the breakout into the new area that drove our acquisition activity in the first quarter, but from a package perspective, it’s pretty even between the two basins.

Okay, and maybe just – that’s helpful. On that, are you seeing more competition come back? I think you guys have done a great job of really picking up a lot of acreage the last year or so when it seems like a lot of other folks were maybe not as focused on it, but are you seeing kind of that competition kind of come back into this market specifically or is it just simply always going to be difficult given the economics are so good, especially for the operators you are working on? Kaes Van’t Hof: I would say the minerals market has become more competitive and has picked up in activity over the last 12 months. I think the difference that we have is we are not going to get aggressive on a package where we don’t have visibility into future cash flows and having Diamondback as the operator, we can bid more on those packages because we are confident in Diamondback’s ability to execute and their ability to move these wells up in the drill schedule and get some cash flow going. So I would say we are not going to be too aggressive on these large spread-out deals that don’t have a lot of visibility. We want to maintain our control over our distribution and our production.

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

Thank you. [Operator Instructions] Our next question will come from the line of Joel Musante with Euro Pacific Capital.

Hi, guys. Just had a question about the production growth. How did that break out between acquisitions and operator activity?

I would say a majority of it was operator activity that began in Q3 and Q4 and some of those larger acquisitions that we acquired in Q2 and Q3 last year. The $8 million of deals we did in Q1 wasn’t an impact on our Q1 production, but we are starting to see some of the larger deals bought last year really pickup in activity and that’s driving the production growth.

Okay, so is that kind of the way we should think about it going forward at this stage, that maybe the acquisition won’t add as much, but given that you are targeting the acquisition where the operators are, you are going to grow from there?

The good thing about Diamondback-operated acquisitions like the ones we did in the first quarter is that once we buy those, we can go into the Diamondback drill schedule meeting and say, hey, our economics are improved on these specific areas and so there will be a little lag with the production picking up when we do buy stuff in Diamondback-operated areas, but over the long term from an NPV perspective, it’s very beneficial to Viper.

Okay, all right, that’s all I had. Thanks.

Thank you.

Thank you. Our next question will come from line of Jeff Grampp with Northland Capital. Please proceed.

Hi, guys. Just a quick follow-up on production trajectories throughout 2017. Do you have a good sense for how we should think about that and maybe more specifically, do you have a good handle on how many completions we should expect on Spanish Trail in 2Q? Kaes Van’t Hof: We don’t really guide to the quarter. I will say first quarter was 8500 and the midpoint of our guidance is higher than that. I do think Spanish Trail will keep a fairly steady cadence versus what we saw in Q1. It’s all about timing with Spanish Trail because we’re drilling three or four well pads now. Sometimes you might see more pads come on in the quarter than less, but we are actively drilling that up with two rigs and our speeds running one rig in the Spanish Trail area.

Okay, that’s helpful. Thanks.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So now it’s my pleasure to hand the conference back over to Mr. Travis Stice, Chief Executive Officer, for closing comments and 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 your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.