Viper Energy, Inc. (VNOM) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Viper Energy Partners Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Adam Lawlis, Director, Investor Relations. Sir, you may begin.

Thank you, Andrew. Good morning, and welcome to Viper Energy Partners Second Quarter 2017 Conference Call. During our call today, we will reference an updated investor presentation which can be found on our 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 Second Quarter 2017 Conference Call. Viper’s production growth continued in the second quarter with daily production of over 10,400 BOEs a day, up 23% quarter-over-quarter and 95% year-over-year. As a result, Viper is set to distribute over $0.33 per unit on August 24, to unit holders of record at close of business on August 17. This distribution represents the largest in company history, and is up 76% year-over-year. Distributions have now increased the last the quarters. Also, because of increased operator activity and significant acquisitions completed year-to-date, we are initiating guidance for the second half of 2017, of 11,250 to 12,250 BOEs per day, the midpoint of which is up 24% from first half actual production. Our acquisition machine continued buying in the second quarter, closing 46 transactions for $116 million. We’ve also closed seven deals in the third quarter to date for $78 million, and signed definitive agreements for another $87 million set to close this month. Pro forma for these transactions, Viper will have increased its asset base by 38% since the end of the first quarter. Viper’s acquisition strategy is 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 expertise as an active Permian operator to source and evaluate deals. I’ll now turn the call over to Kaes. Kaes Van’t Hof: Thank you, Travis. Turning to Slide Four, Viper has transformed itself in the past 12 months, doubling production and more than doubling assets, while increasing distributions over 75% in the last year. Pro forma for completed and pending acquisitions, Viper has over 8,900 net royalty acres located in the Permian Basin. Operators currently have 18 rigs running our acreage, and there are 349 active drilling permits. There are also over 150 wells currently spud or waiting on completion on Viper’s acreage. Slide Five shows our production per day per million units outstanding over time. As you can see, when compared to other public royalty peers, Viper has significantly outperformed due to the high organic growth embedded in the mostly undeveloped assets we acquire. Unlike public E&Ps, Viper also does not need to reinvest cash flow to grow. Distributions simply grow as a direct result of E&P companies reinvesting operating cash flow to grow production on their working interest via new wells. Slide Six shows the company’s potential future growth. Our goal is to acquire minerals that have active or visible future development and will, therefore, grow production faster than the estimated Permian Basin production growth. If Viper were to simply grow at the basin growth rate with the same realized prices as the first half of 2017, our yield would grow to almost 11% in 2019, from just over 7% today. On Slide Seven, we further detailed the year-over-year transformation of the company on an aggregate and per unit basis. Slide Eight exhibits the distribution growth over the last five quarters, while commodity prices remain range bound over the same time period. Even in a flat lower-for-longer commodity price environment, the Permian Basin will continue to grow production because of the robust single-well economics of this resource, which is why Viper has continued buying minerals in the Permian Basin. Slides Nine and 10, detail the completed and pending acquisitions since the end of the first quarter this year. As you can see on Slide 10, Viper has been active in acquiring minerals under Diamondback’s Southern Delaware Basin acreage, as well as in Glasscock County. Slide 11 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 unit holders. Slide 12 shows the impact of third-party volumes as a percentage of Viper’s total volumes. As we have acquired acreage outside of our core asset in Spanish Trail, third-party production is becoming a larger piece of the Viper story. Due to the conservative underwriting assumptions as a baseline for cash flow growth, these deals have outperformed acquisition assumptions and resulted in our continued company-wide volume outperformance. With these comments now complete, I’ll turn the call over to Tracy.

Thank you, Kaes. Viper’s second quarter 2017 net income was $22.1 million or $0.23 per diluted share. Our operating income for the quarter was $36.6 million, up 9% from $33.7 million in the first quarter of 2017. Viper’s average realized price per BOE for the second quarter was $37.64. During the quarter, our cash G&A costs were $0.88 per BOE, while non-cash G&A costs were $0.75. As shown on Slide 13, Viper ended the second quarter with a net cash balance of $82 million and liquidity of $397 million pro forma for our recently completed 16 million unit equity offering. Also on Slide 13, we provide our updated guidance for the back half and full year of 2017. Viper is increasing its 2017 production guidance to 10,000 to 11,000 BOE per day, from 8,500 to 9,500 BOE per day, the midpoint of which is up over 60% from 2016 average production. We are also initiating second half 2017 production guidance of 11,250 to 12,250 BOE per day, with 1,500 BOE per day attributable to completed and pending acquisitions expected to close throughout the third quarter. With these comments now complete, I’ll 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 growing distributions, growing production and growing reserves on a per unit basis. Operator, please open the line for questions.

Thank you. [Operator Instructions] And our first question comes from Jeff Grampp with Northland Capital Markets. Your line is now open.

Just wanted to start on the acquisition side of things. And looking at Slide 9 here, it seems like recent acquisitions have been much more Delaware-weighted. And I’m just kind of curious to get your thoughts if that’s more pricing-related or opportunity-driven, or kind of why it seems like much more of the success has been on that side. And then just generally at a high level, can you guys talk about are opportunities getting maybe harder or easier with the recent volatility in pricing, or what you guys are seeing on the acquisition side of things. Kaes Van’t Hof: Yes, Jeff. I think it’s a combination. I think the Delaware Basin, following the E&Ps doing a lot of transactions out there last fall, the mineral deals have followed. And from what we’re seeing, we like the blockier stuff that has a higher net interest in each section that has higher visibility. So from our perspective, those deals fit our characteristics a lot more consistently in the Delaware Basin. And I will say that because of the higher EURs in the Delaware as well, from a mineral owner perspective, you receive more cash flow than a traditional Midland Basin well. So all that together is kind of fitting our acquisition strategy. And I will say that I think we’ve had good fortune in the last couple months. When we had a little dip in commodity price, we were able to get a few of the bigger deals that we’ve done this year at prices that we thought were very favorable on a returns basis.

Okay, great. And then just one more, really more of a clarification. I want to make sure I was understanding this point properly in the release. I think you guys referenced on the guidance update that about 1,500 BOEs a day was acquisition-related production. And I just wanted to make sure, was that all related to the recent acquisitions? So within that $280 million or so that you guys have referenced in the last quarter or so? Or is that kind of based on year-to-date acquisitions you guys have done? Kaes Van’t Hof: Really fits into the $282 million done since the end of the first quarter. First quarter we did only about $8 million or $9 million of acquisitions. So the 1,500 BOEs a day really ties to the big acquisitions that make up the bulk of that $282 million.

And our next question comes from Tim Rezvan with Mizuho. Your line is now open.

Hi, good morning folks, thanks for taking my question. First question is on the acquisition pipeline. You’re over $100 million in the second quarter, and you seem to be tracking well over $100 million for the third quarter. Are you content with that as a kind of a run rate on bolt-ons? Like how should we think about the leasing pace going forward or the acquisitions? Kaes Van’t Hof: Tim, this is Kaes. I mean, that’s kind of a baseline. But really, on an acquisition-by-acquisition basis, if an acquisition is going to increase our distribution, our reserves or our production on a per unit basis, especially looking near term, we’re going to be active and we’re going to get those deals. So we’re very focused on continuing to drive distribution growth and extending the resource life of this asset to grow for many years to come.

Okay. So you have your foot down on the pedal just as hard as you did a few months ago? Is that fair to say? Kaes Van’t Hof: Yes, every deal is taken as a separate deal and analyzed separately. And if that return and MPV and near-term yield exceeds our estimated yield here, we’re going to do that acquisition.

Okay. And then as a related follow-up. We can back into the kind of average pricing that has been done on some of these deals with mineral acres now going over $100,000 per acre. How much of the kind of the deals loosening up do you think have been from your willingness to kind of step up the amount paid per acre? Kaes Van’t Hof: Really on an amount paid basis, it’s more about what kind of visibility we see. And a lot of these deals had minimum drilling requirements that guarantee your cash flow in the near-term years, which allows us to pay a little more for some of these deals. Overall, on average basis, about $100,000 a net-net acre, and a lot of these deals come with some current production. But from our perspective, given the amount of visibility we see in a lot of these deals with respect to rigs on the acreage or DUCs or economics of the resource, we think we’re getting very good deals here.

Okay. And if I could just sneak one more in. You talked about the drop from Diamondback being, it sounds like more 2018 event. Is there any royalty cash flow now from that project? Or can you highlight any plans to kind of get wells drilled in that area? Kaes Van’t Hof: Yes. Speaking for Diamondback, we’re running two rigs in that area, and we’ll increase rig count as cash flow allows. And outside of holding leases, we’ll then start drilling on the mineral properties. And I think given the amount of leases we’ve had to hold from on the acreage, you’ll probably see that drop pushed out into 2018 events, that we do a deal that’s accretive to Viper unit holders and it’s going to increase distributions in that ‘18 and beyond timeframe.

Thank you. And our next question comes from Lin Shen with HITE. Your line is now open.

This is Matt Niblack for HITE. So first of all, congratulations on results that just continue to impress. Want to understand the basis for the back half guidance. I know historically you’ve had obviously a lot more confidence in the Diamondback portion and you’ve been, I think, fairly conservative on the non-Diamondback modeling. So maybe could you comment on, with the raised guidance, is that philosophy the same? And what other commentary can you provide on the basis for that volume guidance? Kaes Van’t Hof: Yes. Matt, I think we initiated this back half guidance and I think this will be a continuing theme for Viper with a forward six-month look where we have a lot more visibility on both Diamondback and third-party properties. So we added this bullet point here with 70 wells in the Midland Basin with a 7% average interest and 80 wells in the Delaware with a 1.5% interest. These are the wells that we have a lot of visibility on that we think will be completed over the next six months together, guide our investors to, one, our production guidance growth and our overall distribution growth for the back half. So I think you’ll see us continue to give investors a six-month forward look on this business where we have the most visibility.

Great. And then on the deals front, based on the discussion a little bit earlier in the call, it sounds like there were unusually good conditions for getting deals done in the recent period. Should we think of the sheer volume of deals as being a bit of an outlier? And is there a better sort of run rate that you think is more reasonable going forward? Kaes Van’t Hof: I mean, really it’s all about the size of deals that are available. And you see first quarter we did almost 30 deals. It’s just that they were small deals and totaled only about $9 million. And then second quarter the bigger deals started to kick in. So it’s really about the lumpiness of the larger deals coming in and being available. If the opportunity presents itself, we’re going to take advantage of almost any size mineral deal, given our ability to raise capital in the space versus competitors’.

Yes. Matt, this is Travis. We always want to do accretive deals. I think that’s what Kaes has done a good job of outlining what makes a deal accretive for us. But that’s what we want to do at the Viper level.

[Operator Instructions] Our next question comes from Brian Brungardt with Stifel. Your line is now open.

As it relates to the lease bonus payments, how should we think about that going forward? Kaes Van’t Hof: Yes. I mean, we don’t really model that on a quarterly basis. We had a few instances where we received some lease bonuses in the last quarter. But really when we’re looking at a deal, we really anticipate that, that operator’s going to meet their drilling obligations rather than pay to extend the drilling obligation.

Okay. And maybe asking it a little different. When we look at the total mineral ownership, what percentage is not leased? And any significant area, either Delaware or Midland, that, that would be oriented in? Kaes Van’t Hof: Almost zero is not leased. Those lease bonuses were essentially extensions. In one instance in the Delaware Basin, a public operator had acquired a private operator and had to, given they were getting their DUCs in a row with respect to the pace of development, they paid us a lease bonus to extend the lease for a year or two.

Brian, that’s one of the real benefits of being a mineral owner like Viper Energy Partners, is the fact that if an operator doesn’t meet his lease obligations, those minerals revert right back to the mineral owner, and we can choose what to do with them from that point forward. But one of the reasons we’re buying these minerals in the areas we’re buying it, because Diamondback is -- we understand the rock and we like the areas that all these minerals are being acquired in. And if the lease was to revert back to the mineral owner, Viper Energy Partners, I suspect we could have a conversation. But that’s a good thing about owning minerals.

Thank you, I’m showing no further questions at this time. I would now like to turn the call back to Mr. 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.

Ladies and gentlemen, this does conclude today’s program and you may disconnect. Everyone have a great day.