Good morning. My name is Kate Rooman. I will be your conference operator today. At this time, I would like to welcome everyone to the Viper Energy Partners First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Adam Lawlis, Director of Investor Relations, you may begin your conference.

Thank you, Kate Rooman. Good morning and welcome to Viper Energy Partners First Quarter 2018 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; Teresa 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 on 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' First Quarter 2018 Conference Call. The first quarter was a great start to 2018 for Viper, building on the momentum gained in 2017 with recovery in commodity prices and activity levels on our acreage. We grew production 14% quarter-over-quarter, increased our asset base by 10%, primarily through the closing of our entry into the Eagle Ford and delivered another company record distribution with an annualized return on average capital employed of 17%. Our distribution this quarter increased 59% year-over-year and 4% quarter-over-quarter and represents our eighth consecutive quarterly increase. This continued distribution growth is a result of organic production on our existing acreage, accretive acquisitions and the tailwind of the increasing commodity prices. As a result of this increased activity, we are initiating average production guidance for the second and third quarters of 2018 of 15,250 to 16,250 BOEs a day, as well as raising full year 2018 production guidance to 15,500 to 16,500 BOEs a day, up 5% from our previous full year guidance and representing over 45% year-over-year production growth. Also, as announced earlier last month, Viper's Board of Directors unanimously approved a change of Viper's federal income tax status from that of a pass-through partnership to that of a taxable entity. After going through the appropriate review and approval process, we expect this conversion to be effective on or after May 10. This conversion will allow us significantly broader investor base, both domestic and international, to participate in the differentiated investment opportunity presented by Viper Energy Partners. I'll now turn the call over to Kaes. Kaes Van’t Hof: Thank you, Travis. Turning to Slide 5, we show our year-over-year growth on several key financial metrics, as well as give an update on our…

Thank you, Kaes. Viper's first quarter 2018 net income was $42.9 million or $0.38 per diluted share. Our operating income was $62.4 million, up 5% from $59.2 million in the fourth quarter of 2017. Viper's average realized price per BOE for the first quarter was $49.09. During the quarter, our cash G&A costs were $1.12 per BOE, while non-cash G&A costs were $1.01 per BOE. As shown on Slide 19, Viper ended the first quarter with a cash balance of $18 million and liquidity of $178 million. In connection with our spring redetermination, Viper expects our revolving credit facility to increase to $475 million from $400 million currently. Also on Slide 19, we provide our updated guidance for the next six months, as well as full year 2018. Viper is initiating average production guidance for the second and third quarters of 15,250 to 16,250 BOE per day, the midpoint of which is up 12% from first quarter 2018 production. We are also raising full year 2018 production guidance to 15,500 to 16,500 BOE a day. This is an increase of 45% 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. We look forward to maintaining our momentum in 2018 after our corporate tax status election becomes effective, by continuing to grow our distributions, production and reserves on a per unit basis. Operator, please open the line for questions.

[Operator Instructions]. Your first question comes from the line of Dave Kistler.

One, congratulations on continued operating success. But with respect to questions and kind of looking at the Eagle Ford, obviously pretty impressive that's already shown a 15% yield. But can you talk about the differences in the minerals market in acquiring minerals and royalties in the Eagle Ford versus the Delaware and how important it is, whether you are in-basin or out of basin, i.e., obviously headquartered over in the Midland Basin and probably lot more exposure to deal flow in that area, but just to kind of help us frame up what growth might look like from an acquisition standpoint going forward. Kaes Van’t Hof: Hey, Dave, this is Kaes. Yes, our primary focus will still be the Permian. We saw this Eagle Ford deal as a rare opportunity to amass a large position in one trade. I'd say we're set up for continuing to do the 100-plus deals we did in the Permian over the last 12 months and the deal flow is much more active in the Permian. That's not to say we haven't received inbounds post announcing the Eagle Ford acquisition. I think an acquisition of that size, with the visibility that we saw at a 15% yield and operators publicly disclosing long-term growth plans, gave us a lot of comfort to leave the basin. But at the end of the day, the Permian is our home and the opportunity set is just so dramatic ahead of us on the Permian side of the basin.

Okay, appreciate that color. And then you kind of mentioned this in your prepared remarks and a focus on concentrated positions. Can you talk a little bit about when you find yourself in a situation where you have minerals that might not cross or that cross kind of halfway through, say, a drilling lateral, how does that work? Kaes Van’t Hof: Yes, it just depends where you are in that unit. If you're owning one section of the unit and it's a two section lateral, let's just say you owned 100% of the minerals in one section and it's a two section lateral, you would own 50% of the minerals of that 10,000-foot well. So it's all based on what the operators do to build units. So when we do our analysis in buying minerals, we don't want to buy sections that we think could be stranded or sections that we think would have short laterals and could be developed with long laterals.

Okay, appreciate that. And then with respect to conversion to C-Corp and thinking about units as an acquisition currency, can you talk a little bit about what part of the market that opens up? Obviously it removes sort of K1 restrictions and things like that, but can you talk about how that frees up a little bit, potentially, forward transactions? Kaes Van’t Hof: Yes, I'll speak to the investor universe first. We put out a slide when we did the conversion that the top 10 holders of C-Corp yielding equities in energy have 65x the capital at their disposal to the top 10 holders of MLP papers. So I think this will still be a very attractive story to the holders of MLP paper, but we're just opening up to investors that are restricted on a -- from a K1 perspective, as well as investors that have tax issues via international ownership. So we've been really excited with the amount of conversations our team has had with both Diamondback investors, as well as new investors that are doing their work on Viper and getting up to speed for this conversion.

Okay. And what about with respect from an acquisition currency basis? Is that enhancing your ability to execute those types of transactions or it's sort of indifferent ultimately? Kaes Van’t Hof: I think at the end of the day, more liquidity is better and it's more attractive to a potential seller, should they want to take Viper units. I think the Viper units are a compelling story on their own, but having liquidity and being able to get out of a stock, should they take units or being able to fund larger acquisitions and larger trades, the example being our revolver is now $475 million from just over $200 million a year ago. So our flexibility to do deals has only increased and will only increase more with this conversion.

Your next question comes from the line of Neal Dingmann.

Kaes or Travis, looking at Slide 4, you talk about the dropdown opportunity. I know you've mentioned this a few times over there in Pecos and on the Delaware side. What about up in -- looks like still you have some FANG royalty acreage up in that Martin area. Is that potential for a dropdown as well? Kaes Van’t Hof: Yes, Neal. We give even more detail on Slide 14. But definitely, the Martin County -- everything above a 75% NRI is a candidate for a dropdown to Viper. We are beginning a lot of active development on the Diamondback side in Martin County. We see multi-zones competing at the top end of our inventory there. So everything you see on Page 14 should be dropped down. We're kind of indicating that some version of it will happen in the next couple of quarters and then the rest will take about another year to get to the development point where it's accretive to Viper's yield on a first quarter basis.

Okay. And then besides just your potential dropdown opportunities, are you seeing a number of accretive deals out there? Again, I guess why I ask them, on our side and Wall Street side, we don't a lot often see sort of the prices for minerals, but knowing what's happened for the price of Permian leases over the last year or so, I'm just wondering, given what we've seen on that side are prices still sufficient yet where you can do some fair amount of consolidation and pull in some of these accretive acquisitions? Kaes Van’t Hof: Yes, we're going to stay very busy. Q2 and Q3, into the end of the year, tend to be the most active quarters. Q1 traditionally is a little quieter. I'll say the pipeline is very full right now with respect to the private market. And I think with commodity price where it is and our forward yield looking where it is, we can be a lot more competitive on deals. A lot of deals we look at are NAV accretive, but would hurt our distribution. And I think we have a number one goal of never hurting the distribution and keeping that continuing to rise on a quarterly basis. The pipeline is pretty robust right now.

And then lastly on the distribution level, even given the nice run the shares have had, you all mentioned in your press release you're still yielding kind of nearly 7%. I mean, what case do you see as sort of -- I mean, I still -- that still seems to be pretty high to me versus some alternative investments out there. How do you sort of look at -- what you'd suggest more of a -- more inline yield out there? Kaes Van’t Hof: I don't want to give a target yield, but I do think the amount of growth we're going to see from a production basis, as well as a price basis over the next decade, just gives you a lot of comfort in the growth ahead -- coming ahead of Viper. We are fundamental investors internally and all we can do is work on the denominator by growing -- sorry, the numerator by growing those distributions every quarter and making that yield look -- continue to look attractive on a forward basis.

Your next question comes from the line of Gordon Douthat.

Just on the tax conversion, a question leading up to May 10, in the expected effective date. Are there any administrative or regulatory, I guess, hurdles or things that you need to accomplish between now and then for that to become effective? Kaes Van’t Hof: Nothing to clear between now and then, we cleared every hurdle in April, which pushed the date from initially May 1 to on or after May 10. So everything is in line and we expect May 10 or shortly after the date of the conversion, and we'll issue out a press release when that is effective.

Okay. And then just more broadly looking at kind of the Permian in general, given your prospective with underlying properties operated by Diamondback and then a wide exposure to other operators with the permits that you've got currently active and production from currently producing properties. I just wanted to get your kind of broader take on the bigger picture infrastructure situation, take away any constraints you're seeing in either side of basin from this broader perspective. Kaes Van’t Hof: Yes. I mean nothing yet. When we do buy under third-parties, we buy based on the lease terms, and I think operators are very focused on maintaining their leases. And that's the underlying fundamentals of our third-party acreage. I won't speak for Diamondback on this call, but I will say that we are doing things to ensure that we have firm transportation. I think at the end of the day having the true firm transportation is going to outweigh any hedge you can put on, when oil production gets as tight as it's getting in the Permian.

And Gordon, we always talk about, when we purchase minerals, one of the key tenets is that it is a quality operator and we think that quality operators are addressing those issues that will ultimately impact Viper.

Your next question comes from the line of Jeff Grampp.

Question, first, I noticed, I guess, relative to 4Q, pretty big jump in rig count on your acreage, and just I got curious in the context of the guidance increase that you guys had, how much of that increase do you think was attributable to the jump in activity, or is it just more a function of maybe better wells or better productivity? Kaes Van’t Hof: Jeff, It's really a function of more visibility into that rig count. When we made our initial 2018 guidance in January, we like to guide to what we can control on third-party acreage that usually results in us being fairly conservative on when we assume wells are going to be completed and come on online. So in our guidance the third-party number is really wells with surveys or wells that have been recently completed and flowing back on a third-party basis. So we don't make broad assumptions on permits turning into wells throughout the course of the year. And so as we get into the year and see more activity from the third-parties, we feel more comfortable raising that guidance.

Got you. Appreciate that. And then for a follow-up, on the acquisition side, curious, given the pretty steep aggradation we're seeing in the curve, do you guys have a sense for how that impacts negotiations, I guess just both from the sense of when you guys are looking at acquisitions versus how -- any feedback maybe you get from sellers if they're looking at the current price and maybe being underwhelmed if you guys are looking at strip or something to that effect? Kaes Van’t Hof: I think current sellers are happy with the forward price. What brings the deals -- makes them accretive for us is that we run things at the strip and actually a little bit below the strip to make sure that we're getting an adequate return. And so, when you look at the NAV of the deals that we're doing, those NAVs are usually always accretive, but we always have a little bit of hesitancy on the yield in the near term. And with the price where it is, gives us confidence in the yield over the next 24 months to make that yield accretive, but also extend our inventory life and build our corporate NAV.

Your next question comes from the line of Jason Wangler.

I was curious, you guys mentioned it obviously in the slides and it's been your strategy for some time now to look at adding any hedges or anything in the Slide 5 with kind of the distributions you guys would be looking at. Was just curious, as you think about where oil prices are going and things, if that's something that may change, or if with still a little bit more debt on the books, you'd look at adding anything or if you're going to continue to play a bit with the market? Kaes Van’t Hof: Jason, we'd like to keep the business completely unhedged as a great exposure to oil price and Permian production. I don't think that's changed. We still want to keep a very conservative balance sheet and we'll use the revolver simply for deals and to buy a basket of deals and then talk to the market why these deals are accretive on an equity funded basis. So I'll never say never, but currently our strategy is to leave the business unhedged, because there is no capital program to protect and there's no lease requirements and simply investors benefit from the big double-ball of oil price and Permian production.

Sure. And you guys talked about infrastructure a bit earlier, but can you maybe just talk about how you guys are kind of spread out across the basin in the Permian and you obviously have an Eagle Ford too, but how you're seeing differentials impact kind of the realized prices or if that's been changing the last couple months with all the discussion about the higher differentials? Kaes Van’t Hof: Yes, January and February clearly had solid differentials and realizations; March got a little weaker. But if you think about Viper, Viper is making a play on the deals that its operators have put in place and the largest being Diamondback, which is 2/3 of our production. So safe to say with my Diamondback hat on, we're working tirelessly to get the best deals possible and thereby benefit Viper as we head into a period of tightness over the next 12 months.

Your next question comes from the line of [indiscernible].

Just looking at Slide 10 in the presentation saw that you acquired about 1,700 BOE per day in production. Was just wondering what portion of that could be attributed to the Eagle Ford acquisition and then maybe for the remainder if that had any influence on the raised guidance number.

So the only acquired production is the Eagle Ford, which is 900 BOEs a day currently. We only receive 600 BOEs a day of credit overage in Q1. The rest of that production growth, you see that 1709 on Page 10 is all organic growth. So we had about 1,100 BOEs a day of organic growth and 600 BOEs a day attributable to the Eagle Ford.

Okay. Perfect, And then for a quick follow-up. I know a quarter or two ago you had a fairly significant lease bonus payment. Doesn't look like there was one this quarter. Was just wondering if there was any visibility into that, if we should expect those to continue?

I wish we had one every quarter. Unfortunately that's more of a one-time event. Most of the leases that we do buy under -- are under the primary terms. So what we look for is when are these operators going to drill that that acreage and that defines the value that we put on buying those minerals. So it was a one-time event, and it was a good deal for Viper. I think there will be a couple wells that need to be drilled on that acreage as well, as part of that lease bonus over the next 12 months, but no, we don't expect any major lease bonuses going forward.

Your next question comes from the line of [indiscernible].

Just thinking about the opportunity set you've got in the Permian and recalling the broad exposure to multiple operators across the basin, as you look at the overall position and what rig count could reach over time, where do you see it settling in at as an optimal -- as run rate long term in terms of what the acreage can sustain? Kaes Van’t Hof: I think, I'll probably frame it in a different way. I think if you put your operator hat on, most of the acreage we're acquiring is less than 10% developed. I think if you look at the runways that we look at when we draw out the inventory on the acreage, we have multiple decades of growth ahead of us. Now, Diamondback will be the primary driver of that growth, especially over the next decade as we get more active in the Delaware Basin, where we have -- now have a very significant position that will -- as Spanish Trail -- Spanish Trail's growth subsides a little bit -- Spanish Trail can't grow to the sky forever, but once the Delaware kicks in, I think it's going to be a huge driver for Viper's growth over the next decade.

[Operator Instructions]. Your next question comes from the line of Joel Musante.

If you look at the trend for your guidance, it seems like you might be allowing for some growth in the fourth quarter, significant growth, I guess. And I just wonder if I might be reading too much into that, or you're planning some of the drop-down properties to happen at a point. Kaes Van’t Hof: Yes, Joel, our guidance does not include any drop-downs, that's all organic growth assumed on the acreage today. So anytime we put out guidance, it's based on the deals we've closed to that point. Acquisitions and drop-downs would only enhance that forward production estimate. But with respect to production, we are very surprised and pleasantly surprised internally at the growth expected in Q2 and Q3 and the resulting distribution growth associated with that.

Okay. And just on the Diamondback operated acreage, how much consideration does -- do you put on drilling decisions -- on Viper when making drilling decisions? Kaes Van’t Hof: Yes, that's a good part about having two sides to your business card, is that when Viper does buy acreage underneath a Diamondback lease, I can go you talk to Mike and the drilling team and say, hey, our combined economics here are a lot better and the drill schedule then changes and we can move pads up and move pads around to accelerate the production growth at both Viper and Diamondback.

We have no further questions at this time. I will now turn the call back over to Travis Stice, CEO.

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 concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.