Viper Energy, Inc. Q4 FY2023 Earnings Call

Thank you, Victor. Good morning, and welcome to Viper Energy's Fourth Quarter 2023 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; Kaes Van’t Hof, President; and Austen Gilfillian, Vice 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'll 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's Fourth Quarter 2023 conference call. The fourth quarter wrapped up a milestone year for Viper. For the full year, average oil production increased 13% compared to the previous year, while our average share count was reduced by 1% over the same period. As a result of continued strong organic production growth, creative acquisitions and an opportunistic share repurchase program, the fourth quarter represented the eighth consecutive quarter of increased production per share for Viper. For our return of capital for the fourth quarter, we've declared a $0.29 variable dividend to Class A shareholders to go along with our $0.27 base dividend. Importantly, this variable dividend is the same that we would have paid with a 75% payout ratio, assuming we did not repurchase any shares during the quarter. However, inclusive of the $28.7 million in shares that we repurchased during the quarter, our effective payout ratio for Q4 is 97%. Our rationale for excluding the share repurchases done during the quarter and calculating our variable dividend is that we view this buyback, which was done during the secondary offering related to our GRP acquisition as an extension of the financing of the deal. Additionally, we've already received $10 million in post-effective cash flow that is applied as a reduction to the purchase price and does not show up in our reported financials for the quarter. Looking back on the year as a whole, there were several strategic initiatives completed during 2023 that marked important steps in the growth and evolution of Viper. Our GRP acquisition, which closed in the fourth quarter, clearly laid out the framework that we look for in large-scale M&A. First, it must be accretive on all relevant financial measures. Second, there must be high-quality, undeveloped inventory that supports our long-term growth profile and provides clear visibility to future development. And third, the acquisition must provide significant scale that results in a pro forma business that is both bigger and better. Separately, Viper also completed its conversion into a Delaware corporation during the fourth quarter. We believe this conversion has delivered increased governance rights for our shareholders and positions Viper to grow our business and fully highlight the advantaged nature of mineral and royalty ownership. Looking ahead to 2024, we've initiated production guidance for both Q1 and the full year. While Q1 is expected to be the weakest quarter of the year, primarily as a result of the timing of large pads, we continue to see strong activity levels across our acreage position and expect significant growth to occur throughout the year with Q4 2024 production expected to be at or above the high end of our guidance range. This continued production growth, along with our best-in-class cost structure, should enable Viper to continue to return a substantial amount of capital to our shareholders primarily through our base plus variable dividend.

Our first question will come from Neal Dingmann from Truist.

Nice quarter. My first question is on valuation. Just maybe broadly, it seems to me the market is still not appropriately valuing VNOM's growth and the continued associates and distribution. So, case for you and the team, just wondering, do you all believe this is still more of a broader issue with the Minerals group in general? Or is it more the market not appreciating VNOM's future value creation?

Yes, Neal, I mean listen, I think the market is starting to wake up to the VNOM story as well as the mineral story. I think generally, the conversion that we did has opened up a broader investor universe and has allowed us to take meetings with shareholders or prospective shareholders that haven't been able to buy the stock in the past. I think it's good to see some index ownership. It's good to see the float pickup. And I think as we think about the vision for this business, as you continue to see consolidation in the E&P space, we think Viper will offer a unique opportunity and a unique investment case in the pure play Permian E&P or minerals business, however you want to look at it. I think generally, as we continue to grow this business and it grows production, you can do that at Viper even if the parent company is not growing. So generally, I think the market is waking up to the story. I mean, this business is going to grow oil 14% quarter-over-quarter, Q4 '24 to Q4 '23, that's a pretty impressive growth rate, and it's not impacting overall macro as much as it was upstream.

And then just a second quick one on capital allocation. Given your low leverage rate, I assume you'll continue or will you continue to pay out the 90% plus cash available for distribution. And would you consider leaning more into the buybacks?

We did a unique deal in Q4 to buy back 1 million units from what was given to GRP seller financing in opportunity to buy back a lot of shares at one time. Viper shareholders have been rewarded for that from a returns perspective. I think generally, we still believe minerals should be distribution vehicles. We have a big distribution that's grown in the last couple of years, we have a variable distribution that's probably our second call on payout. And then behind that is probably repurchases. I think there will be opportunities to repurchase shares in the future. But right now, the priority feels to be shifted more towards the base plus variable unless there was a unique event like a large shareholder selling.

Our next question will come from the line of Derrick Whitfield from Stifel.

I wanted to circle back on a topic that came up earlier on your Diamondback call today regarding the increased inclusion of Wolfcamp D in 2024. Is that development focused in your Spanish Trail area or more broadly integrated across your STACK development?

It's more integrated across the portfolio, but there is significant untapped potential in Spanish Trail. We signed a major lease last year for deep rice that primarily covered Barnett and Woodford in that area, with a portion of Wolfcamp B. There are a few wells expected to come online this year in Wolfcamp D, which paves the way for further mineral ownership development. When we acquired Spanish Trail a decade ago, the focus was mainly on single bench Wolfcamp B and possibly some vertical wells. Now, we are developing five or six benches and exploring deeper zones. Overall, being a mineral owner in Texas is advantageous, and with Viper as a large mineral holder supported by a well-capitalized parent operator, we are in a strong position. The benefits of the $400 million purchase from ten years ago in Spanish Trail can be seen in the data presented in Slide 12 of the deck.

I agree. Quite amazing. Maybe kind of bridging from that topic, with the potential inclusion of Endeavor, are you guys aware of any leases or ranches with materially higher NRIs like Spanish Trail? Or is it just uniformly higher from your perspective?

Yes, there are definitely some opportunities. We previously discussed the Quinn Ranch with Endeavor a few years back, and they acquired the title to the ranch. However, we know the mineral owner there, who possesses a substantial amount of minerals, and we should engage in conversations with them. I believe these opportunities will emerge as we collaborate with the Endeavor team on both what they possess and what we have, ultimately creating a top-tier resource from both the upstream and mineral perspectives.

Next question will come from the line of Paul Diamond from Citi.

Just a quick one on kind of the run rate cadence. If we take those 13.4 net wells in active development and kind of run that out on our numbers, we get to pretty close to the high end of guidance pretty quickly for '24. Should we kind of view that as this a bit of conservatism into it? Or is it more just accounted for ongoing volatility in pricing and just operational cadence across the market?

Yes. Paul, a lot of it is timing related. So if you think about Q1, right, it's kind of in the lower end of the range mainly as a result of the lower well count that we saw turn production in Q4 carrying into the year. So when you think about the full year, we've obviously had this range of 25.5% to 27.5% on oil out there since September of last year when we announced the GRP deal. As we kind of roll forward a couple of months and you look at our net well count with current activity being picked up a little bit. So I think that hybrid a little bit higher than we previously thought in the back half of the year. But we're typically pretty conservative when it comes to converting permits to production and kind of put some of that activity that you see there into the 2025 timeline. But if things stay current with the operators' pace of development, there could be a little bit of upside to our guidance. But we just guide what we can see and be very confident in today. Yes. The beginning of the year is the toughest part for us on giving a full year guide, particularly on the mono side. I mean you know the bank side very well, and that moves around slightly. But I think, generally, we're a little more conservative in what we think gets popped in the second half of the year on the non-op piece.

I have a quick follow-up regarding the increase in mergers and acquisitions in both the mineral sector and among operators. Has this influenced your perspective on what you consider to be the most appealing deal size after the Grand Recovery Plan? Has the threshold for an attractive deal size increased because your operations have grown larger, or do you still see a range of sizes and locations?

I think generally, a deal like GRP showed our advantaged position because we could do a deal of that size with a significant amount of cash. It's still mid-size in the basin for smaller deals, probably the sub-$20 million, sub-$10 million deal market. I really think we still look at that market, but it's just not a huge piece of our business anymore. I think generally, minerals have consolidated into funds that are sizable that will need to monetize at some point and Viper should be the buyer of those larger positions rather than the blocking and tackling making a big difference in the story. I think, Paul, minerals are, in our mind, well behind E&Ps in terms of consolidating. There's going to be probably more mineral consolidation in the next few years and more names that sell than upstream. I mean, upstream has been consolidating very rapidly. But there's going to be a solid wave of mineral positions that monetize big or small. And we want to be positioned to buy the best rock with the best visibility, and that, in our mind, is mainly Permian, if not mainly Midland Basin.

Our next question will come from the line of Leo Mariani from ROTH.

I appreciate some of the commentary there on your expectations for the minerals market to consolidate. Obviously, I think you guys laid out on the Endeavor acquisition call that Endeavor has roughly a portfolio that's two-thirds the size of VNOM’s currently, which obviously is very, very significant. Would you guys be able to kind of just give us a little bit of a high-level plan in terms of how you see that maybe playing out over time to the benefit of them? Certainly seems like there's significant drop-down potential. Is that something you think you could evaluate and kind of do multiple deals over a handful of years? I mean, what do you think kind of the high-level game plan is?

Yes, Leo, I mean, we gave some high-level information on the potential opportunity in the merger deck. I'll say that we can't really say much today on timing or sizing. But very clearly, it's a meaningful position that would differentiate Viper if we could get a deal done at the right time. But I think we're going to have to leave it up to the pro forma board to decide and get the deal closed. And as you know, we don't move slowly. So we'll get working on it quickly, but I can't really give you much until that time comes.

And then just in terms of some of the numbers here, I certainly noticed that your G&A is kind of going up per barrel by a fair amount. I'm assuming that's really just the conversion of the C corp and the additional costs that sort of come on that end?

Yes, that's fair, Leo. We're not adding a ton of people or anything. We run this business pretty lean, but there are some added costs as we now allocate fully between the two, the parent and the sub.

Our next question will come from the line of Tim Rezvan from KeyBanc Capital Markets.

I have two questions that are sort of related, following up on what's been discussed here. Is it fair to say that despite the Endeavor opportunity coming around the end of 2024 that you are open and willing to transact with third-party minerals this year? I know in the past, the buying back history, you haven't been afraid to back deals when we see opportunities. So are you sort of continuing to be on the prowl now and through 2024?

I think we be selective, but certainly something that looks like a GRP like we did last year would be very interesting to us. I mean, I think although that deal didn't have all Diamondback operations, there is actually a lot of Endeavor permits and units under it, but that visibility and that quality of remaining units in the Midland Basin to us has a lot of value. And if there are deals with a lot of undeveloped value, not just near-term free cash flow accretion, that's something we're going to look at. I just don't have direct visibility into what that is today.

And then related to that and as you think longer term on Endeavor, if you bake in the legacy, the acquired EBITDA on GRP, leverage looks like a little bit over 1x and hard to see a lot of organic deleveraging in the low-70s oil world. So what are your thoughts on the balance sheet and where you are today and maybe where you'd want to be over the medium term to sort of be able to take down bigger opportunities as they come up?

Yes. I think a path towards 1x no matter what the deal looks like is the right way to look at it. We are distributing 75% of free cash. So there's a more limited amount of free cash to go to the balance sheet on a quarterly basis. But generally, minerals, we've proven that the mineral business can delever very quickly. It doesn't mean we're going to lever it up by any means. But security of pure free cash flow, almost regardless of commodity price, is a pretty unique way to think about leverage in an oil or commodity-based business.

I'm not showing any further questions in the queue. I'd like to now turn it back to Travis Stice for CEO for any closing remarks.

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

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.