Ladies and gentlemen, thank you for standing by and welcome to the Viper Energy Partners Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Adam Lawlis, Vice President, Investor Relations. You may begin.

Thank you. Good morning and welcome to Viper Energy Partners fourth quarter 2021 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; 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 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 2021 conference call. During the fourth quarter, Viper generated record financial and operating results highlighted by the $0.67 per common unit of cash available for distribution exceeding our previous record by over 10%. Importantly, production outperformed expectations during the quarter following the closing of the Swallowtail acquisition as third-party activity levels exceeded our conservative acquisition assumptions and Diamondback continued to focus its activity on Viper's concentrated royalty acreage. Looking ahead to 2022, Viper is uniquely positioned within the industry to be able to capture numerous tailwinds and return substantial amounts of cash back to our unitholders. With zero capital requirements and only limited operating costs, royalty companies will be advantaged in 2022 as we will not face inflationary cost pressures. For Viper specifically, as our defensive hedges placed in 2020 roll off at the end of 2021, our industry-leading cash margins will now be further enhanced by mostly uncapped exposure to strength in commodity prices. Additionally, Viper continues to have unmatched high-confidence visibility into Diamondback's expected forward plan to support our production profile with additional upside from third-party operated production continuing to exceed our conservative activity and timing assumptions. We have initiated average production guidance for 2022 that implies over 18,000 barrels of oil per day at midpoint. Viper is expected to have meaningful exposure to Diamondback's high-graded, primarily Midland Basin focused development plan in 2022. Specifically, this means that we expect to have roughly 70% exposure to Diamondback's expected gross completions with an average 6% NRI on those wells. On the third-party operated portion of our production, despite seeing an increase of over 20% in activity levels and an accelerated pace of development, we continue to contemplate slower-than-average time assumptions in our production guidance. Based on the midpoint of this full year 2022 production guidance, Viper is expected to generate over $550 million of annualized free cash flow assuming $85 WTI. This 2022 free cash flow equates to roughly 11% free cash flow yield as a percentage of our enterprise value or almost 13% based on our current market cap. With a 70% payout and an opportunistic unit repurchase program, Viper offers a competitive cash return yield that provides maximum exposure to commodity prices with limited operational risk. On the acquisition front, 2021 was a successful and important year for Viper as we increased our Diamondback-operated acreage by over 1,800 net royalty acres, or a greater than 15% increase. Viper's asset base is less than 25% developed. And with Diamondback operating 54% of the acreage, we have visibility to production that will support our strong free cash flow for years to come. In conclusion, the fourth quarter topped off an outstanding year for Viper. The record results of our business highlight our quality asset base, best-in-class cost structure and overall differentiated business model. Given the strength of our balance sheet, we have evolved our hedging strategy so that we can maximize upside exposure to commodity prices, while also protecting against the extreme downside. We look forward to continuing to generate robust amounts of free cash flow and maximizing returns for our unitholders. Operator, please open the line for questions.

Thank you. Our first question comes from the line of Neal Dingmann with Truist Securities. Your line is open.

Good morning guys. Great quarter. Travis, for you or Kaes, I can't help but notice you guys had great growth for the quarter despite a lot of the public companies still just having flattish production. Could you talk about just how you see going forward how are you able to accomplish that?

Yeah. I mean, Neal, first of all the fourth quarter was really good. The Swallowtail acquisition outperformed our expectations particularly on the non-op side early. If you go back a couple of quarters, the rationale for that Swallowtail deal was non-op production would hold us over until Diamondback's large-scale development on sales in Robertson ranches really grows production over the next few years of Viper, but on top of that continued exposure to more of Diamondback's plan. And if we're doing our job right at both companies, drilling our inventory with very high mineral ownership first is what we should do for combined capital efficiency. And, therefore, in a world where Diamondback might stay flat, Viper will grow like it did in the fourth quarter and like we're expecting in 2022.

It's great to see. To follow up, I appreciate the consistent payouts over the last two quarters, approximately 70% of the total cash available for distribution. Is this the target, or are you aiming for an implied annualized yield of over 7%? What is the focus on growth in this area? It seems like the market is not fully recognizing that, and I'm curious about the target you have in mind.

Yeah. I mean, if you look backwards we've been at 70% for a couple of quarters now, but we also had opportunities to buy back a lot of units at much lower prices than we are today. So we probably spend another 15% to 20% of cash flow buying back units over that same time period. As you look forward, we did take on some debt with the Swallowtail deal. I'd like to get our revolver down a little bit, but also probably term out some of that at the end of the year when our bonds are callable. And that probably opens the door for us to go higher than 70%. I think generally though the baseline or the minimum is 70% of free cash getting returned.

Great to hear. Thanks guys.

Thank you, Neal.

Thank you. Our next question comes from the line of Chris Baker with Credit Suisse. Your line is open.

Hey good morning guys. Just wanted to ask on the acquisitions you completed in the fourth quarter. Great to see the continued effort to increase Viper's leverage to Diamondback, and just wondering if you can help frame up the cash flow yield you see that acquisition generating? And how it fits into the details you guys provided on that slide 13?

Yeah, I'll give you some background on the deal and Austen can give you the details of what's coming this year. But that was a deal we sourced ourselves a pretty large contiguous property where there were a significant number of mineral owners that we were able to get a lot of them to sell. And the point being, hey, this ranch might not be in Diamondback's 2022 plan. But if we own 10% of the minerals on that ranch, it certainly moves up the quality spectrum. So, generally, that's exactly what the Viper team should be doing. That's kind of why we reserve that 30% of cash flow to be able to do deals like that without needing to tap the equity markets or the debt markets. And Austen, you can add a little color on that deal.

Yes. So that's a pretty big block up in Northwest Martin County legacy guide on operating. And as Kaes mentioned, it wasn't going to fit in the immediate near-term plans of Diamondback. But now that we own about a 6% interest across a couple of units that will provide 70 or 80 gross upside locations. And with Viper's ownership, we're going to get a 14-well pad at the end of this year, but we'll have a 9% interest. So no real production on it today, but we'll get about 1.3 net wells here at the end of the year and that just really highlights the relationship period. We were able to underwrite that development where no one else could.

And there were no permits on it when we bought it and now there are permits on it or will be.

Great. I appreciate the color and congrats to you both on the promotions announced today.

Yes. Thank you, Chris.

Thanks, Chris.

Thank you. Our next question comes from the line of Derrick Whitfield with Stifel. Your line is open.

Hi. Good morning all again.

Good morning Derrick.

Hi, Derrick.

With my first question, I wanted to focus on visibility at a high level. Referencing Slide 10, you've added approximately 2.3 net wells to your line of sight inventory since Q3. And thinking about your rig growth comments from the Diamondback call earlier and the general trajectory and activity we've seen since November, would it be reasonable to assume that that number could be conservative?

Yes. I think it's reasonable. I think we've kept conservative non-op assumptions over the last couple of years and have outperformed expectations consistently. And we've no intention of changing that. I wouldn't say that Diamondback assumptions are conservative because it ties to the actual development plan. And with Diamondback staying solid production, this drill schedule might change around a little bit, but the projects on the schedule are the projects. So those are all going to happen, but Austen, any commentary on non-op and what we're seeing?

Yes. I mean, we normally expect those working progress well to be converted within kind of six to eight months. That's the timing that's baked into the guidance. I will say with the averages that we're seeing with operators now, we're giving ourselves a couple of months of cushion. So if operators continue at their current pace of development, I think that will be upside to the guide. And then with the line of sight wells, it's kind of the same being a couple of months of conservatism baked in with converting permits. But at current pace with our guidance, I would expect around 50% of those non-op wells to be converted this year.

That makes sense. And then as my follow-up really looking out over the balance of the year and even out to 2023, how should we think about your cash tax exposure for distributions in light of the higher commodity prices we're seeing?

I think we're okay this year shielded. But next year things are going to start to pick up. So I think we have a couple of million dollars of expected cash taxes this year and then ramp it up next year.

Great update. Thanks guys.

Thank you, Derrick.

Thank you. Our next question comes from the line of Leo Mariani with KeyBanc. Your line is open.

Hey guys. I wanted to just generally ask about how you see the M&A environment these days for Viper. Obviously, you sold a small property you made a little acquisition which you just gave some details on. It sounds like that was kind of a negotiated deal with a separate landowner maybe you had a relationship there. It sounded like a good deal. But maybe just generally kind of talk about the environment that you're kind of seeing out there from a minerals company perspective?

Yes. It's tough to get deals done right now. I mean, animal spirits have come back into the mineral market. There's still a lot of small private mineral clippers and mineral buyers that have little funds that are competing with us. I think the beauty of Viper is that we can do a $500 million deal like Swallowtail, but also source and execute a deal like the other deal we did in Q4. But we're seeing some pretty frothy numbers being paid for DUCs and permits. And I think our goal is to buy stuff under Diamondback that hasn't been permitted yet and then permitted after acquiring a large interest. So, we're going to be prudent, we're going to be patient, and we'll see how this frothy market continues.

I wanted to follow up on the production guidance. Looking at the fourth quarter of 2021, we produced about 18,370 barrels a day of oil, which significantly exceeded our expectations. Can you explain why it was so much better? Was it primarily due to third-party activity, or were there other factors at play, such as improved well performance? For 2022, the midpoint of the full-year oil guidance is roughly the same as that fourth quarter. Given the increase in activity in the Permian, I would have thought it might be slightly better than flat. I understand that the FANG-operated portion remains flat, but does this suggest that if the industry continues to add rigs in the Permian, we could potentially exceed that midpoint in 2022?

Yes. Well, generally, in 2021 and since the downturn in 2020, we've kind of extended our assumptions on non-op. And traditionally, non-op has come in higher than expected but also more activity than expected and also higher than expected on type curves. Traditionally we model the first couple of months of production lower than what's been happening type curve wise. So, I think it's a combination of activity and outperformance. Looking ahead, like I was saying with Neal Dingmann earlier, the Diamondback production is going to grow at Viper right because we're allocating capital to the highest combined net return. So, Diamondback production is going to grow particularly in the second half of the year and then into 2023. The non-op we model conservatively that if activity stays where it is today we're probably modeling the back half of the year a little more conservatively than what might happen on the non-op side. But that's just prudent as we like to model what we can control. And in mineral lands, we're fortunate that we're the only company that can control two-thirds of our production.

The bottom line is that we are likely to see some of that Viper growth in the second half of 2022. Some of this is likely due to the timing from FANG regarding when things occur.

Yes. Second half 2022 paying production is going to grow. And if Travis' prediction of 400 rigs in the Permian is right, then the non-ops going to grow for sure.

Okay. Thanks guys.

Thanks, Leo.

Thank you. Our next question comes from the line of Jeanine Wai with Barclays. Your line is open.

Jeanine?

Check to see if you are on mute?

You would think I figure that one out by now. I'll start over. Good morning. Thanks for taking our question. And Austen, congratulations on your promotion, well deserved.

Thank you.

Well deserved.

Yes. So we've got a question on hedges. We noticed that you added a little bit of Waha swaps all the way out in 2023. And so can you just talk again about your hedging strategy since it was such a big part of the story last year and a lot of those punitive hedges are rolling off or have rolled off as of the end of last year?

Yes. I mean I think generally we don't want to be in a position like 2020 again similar to Diamondback. We want to protect that extreme downside and hope for the best on the upside. And so we're buying more puts at Viper really wide collars. I think at the low end of these puts and collars leverage doesn't get close to two times. So you're still able to distribute a good amount of cash probably in that world, you're buying back shares because the stock wouldn't be where it is today. But generally, just trying to protect that downside knowing that we have some debt we want to pay down and keeping that upside for our investors.

Okay. Great. Thank you. And then our second question, we see on Slide 12, there's the other category on there. It's a little hard for us to tell what the private exposure is in the near-term inventory. So, you just talk about how you see the sustainability of private activity on your acreage? Thank you.

Yes, for the most part, our activities are focused in the Midland Basin with companies like Endeavor and CrownQuest that have been quite active. While it may not represent a significant growth area, we do have relatively high net revenue interests there. I believe the current levels of net wells may be sustained for some time. The situation is similar in the Delaware Basin with larger players like Mewbourne. Although the overall footprint isn't large, the net revenue interests are beneficial, and the acceleration in time has contributed to strong performance in 2021, which I believe could drive further outperformance this year.

What we've done with a couple of those operators, as Austen mentioned, is complete some mineral trades. We have traded four properties operated by Diamondback, exchanging them for properties we had under their management. This gives us a substantial asset base that allows us to engage in various activities, including trading.

Okay, interesting color. Thank you.

Thank you, Jeanine.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Travis for closing remarks.

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

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.