Good day, everyone, and thank you for joining us. Welcome to the Viper Energy First Quarter 2024 Earnings Conference Call. I would now like to hand the call over to Mr. Adam Lawlis, Vice President of Investor Relations. Please proceed.

Thank you, Howard. Good morning and welcome to Viper Energy's First Quarter 2024 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 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's First Quarter 2024 Conference Call. The first quarter was a strong start to the year for Viper, which uniquely highlighted the benefits of Viper's business model and high-quality assets. Despite commodity prices declining during the quarter, Viper's continued production growth, along with our best-in-class cost structure, allowed us to increase our cash available for distribution per share quarter-over-quarter. Importantly, as a result of our strong financial and operational results, our Board has declared a combined base plus variable dividend for the first quarter of $0.59 a share. Looking specifically at operations, both activity and well productivity trends across our acreage position continue to be encouraging. As a result, we have initiated production guidance for the second quarter that implies over 3% growth relative to the first quarter. It is important to note that this guidance takes into account the divestiture of our non-Permian assets, losing their production contribution for 2 months of the quarter. On a pro forma basis, including the loss of roughly 450 barrels of oil per day from the divestiture, our true organic growth quarter-over-quarter is expected to be almost 5%. Additionally, we have also provided updated production guidance for the full year 2024. While the midpoint of this guidance range has been reduced by 250 barrels of oil per day versus our previous guidance range, that loss is entirely attributable to the loss of the production contribution from the non-Permian assets for the remaining 7 months of 2024. As a further point on the continued strong activity levels across our acreage position, the implied average production for the second half of 2024 represents a roughly 2% increase relative to the midpoint of our second quarter production guidance range. Looking more long term at potential inventory expansion, during the first quarter, Diamondback completed its first test of the Wolfcamp D and Spanish Trail with 2 wells being turned to production. Of these 2 wells, only 1 was developed under an existing Wolfcamp B well to test the vertical communication between the 2 zones. To date, we have seen similar performance between the 2 wells and therefore believe that there's enough vertical separation between the 2 zones to limit the current child effect. The initial takeaway is that the Wolfcamp D and Spanish Trail can be effectively developed below existing Wolfcamp B wells. While they are not the highest-returning projects in Diamondback's portfolio, they can compete for capital over the next several years, especially inclusive of Viper's high NRI and the existing infrastructure that's in place. This test derisks a substantial amount of net inventory for Viper and, as a result, gives confidence to an extended outlook for potential organic production growth. Separately, we have increased our guidance for cash G&A slightly as a result of increased costs associated with our conversion to a corporation, but we continue to run our business extremely efficiently and with peer-leading per unit costs. Our continued best-in-class cash margins and free cash flow generation, along with the previously detailed organic production growth, should enable Viper to continue to return a substantial amount of capital to our shareholders primarily through our base plus variable dividend. Operator, please open the line for questions.

Our first question or comment comes from Neal Dingmann from Truist Securities.

Congrats on a nice quarter. Travis, my first question is on capital allocation for your case, specifically, your thoughts on potentially lowering the payout ratio until the leverage declines as you did at FANG. I'm just wondering, maybe secondly there, how in the future you all would view buybacks versus dividends in this vehicle, as I know some mineral investors continue to prefer more exclusively dividends.

Yes. Good question, Neal. Welcome to the call. I think for us, the capital allocation philosophy at Viper remains a focus on cash distribution over buybacks. I think there have been times of stress over the past few years where we've allocated much more capital to the buyback versus the cash distribution, and that has been a very value-accretive move for Viper shareholders. Listen, the stock's performed well. We still think there's a lot of value to be earned on the mineral business. But right now, we're probably leaning more towards cash versus buybacks, as you can see in the first quarter. I think we're also continuing to try to grow that base distribution consistently on kind of a semiannual basis, and that will continue as well. Going to your question on debt reduction and the percent of free cash returns, the mineral business can generate pure free cash flow. So it's very easy to delever. I think, generally, the first quarter had some working capital headwinds as well as we did a couple of small deals in the Permian. Second quarter should see net debt go down pretty significantly with free cash generation as well as the sale of the non-Permian assets. So I think we comfortably see this business near 1 turn of leverage at year-end. I think 1 turn of leverage for a mineral business is a very conservative funding structure. But part of the job of our team over the course of this year and into next is, as this business gets bigger, we should try to earn a lower cost of capital with the public bond investors and the rating agencies as they start to understand the pure free cash flow nature of this business.

Great details. And then just a quick follow-up on your mineral position. I was looking at the slides and continue to notice the dominant position you have in Martin County. So my question there is just when you take over the Endeavor acreage, will activity there stay relatively the same, given what you'll have under the pro forma company? Or do you anticipate potentially a little bit of change? Just trying to figure out how much really you have just in Diamondback exclusively versus sort of what you'll have with the combination.

Yes. I mean, I think for Viper, that exposure to that area is going to be huge for the future growth profile of the business. That area, obviously, has some of the best rock in the United States, continues to get better, continues to add more zones. That's kind of where we've been seeing really good Wolfcamp B results. I think pro forma with Endeavor, the combination there is going to be one of the best places to drill for oil in the United States with some combination of longer laterals, big pads, high mineral interests. And that's going to be kind of the focal point, where we're going to have a majority of our rigs in that Martin County area.

Yes, that's what I mean. I guess there is potential for lease bonuses and all that just for something down in the future, right?

Yes. Well, I mean, listen, I think there's potential for lease bonuses across Viper's position. We've seen a bit of it with the Barnett and Woodford leasing taking off. There's been some Wolfcamp D leasing taken off because that's not always been held from those vertical Wolfberry days and just talks about the benefits of the mineral business. If you own minerals, you own every piece of every barrel of oil produced in that section or unit forever, regardless of if it's primary development or secondary zones. Who knows what happens down the road. That's just the beauty of being a mineral owner.

Our next question or comment comes from the line of Chris Baker from Evercore ISI.

Just was hoping you could talk a little bit more about the Wolfcamp D. Just any additional color you can share on early results, plans for testing and maybe just how that fits into the broader organic inventory opportunity set that you guys see today?

Yes, Chris. We're going to let Al Barkmann, Chief Engineer, respond to that question.

Yes, Chris. This was a test — our first test of the WD and Spanish Trail. Like we mentioned in the opening remarks, we kind of wanted to test the performance of the D under existing Wolfcamp B wells and then without that. I'm really pleased with the initial performance here. Both of those wells are producing above 1,000 barrels a day and really kind of tracking on top of each other. So we don't think we're seeing any degradation from the Wolfcamp B wells being on top. I think that's something that the returns are obviously uplifted with the Viper ownership at the same level. And so I think that's something that we'll continue to delineate across that position.

Great. And then just as a follow-up, the other question, I think we keep getting is just — realizing it's early days, but maybe just frame up the opportunity set on the M&A front, realizing there's likely a big drop-down coming, a little bit more visibility in terms of when that deal will close. But just can you remind us in terms of just big picture, sort of check-the-box-type data point in terms of leverage and just how to think about that, at least from where we are?

Yes, Chris. I mean, listen, we’re obviously disappointed that the Diamondback-Endeavor deal has been delayed a bit, but we still have a lot of confidence that's going to close in Q4. That probably puts the discussions between Viper and Diamondback or Viper and pro forma Diamondback into kind of early 2025. But as you know, we like to move quickly and get things done. I think we're very excited about the opportunity set to put the mineral business from Endeavor with — combine with Viper's business and create kind of a true category killer in the mineral space of size and scale that really hasn't been seen to date. I think on top of that, if we did do that deal, we're certainly not looking to lever up the mineral business at the expense of the upstream business. We've never done that. So we expect that trend to continue. And in the interim, we're still looking at deals at Viper. There's been a few packages out there of size that have interested us. We've looked pretty closely, and I think we'll continue to be in the fight on those deals. But as you think about the next 3 to 5 years of the Viper business model, it's really to be competitive in the deals that are 10 figures plus that we tend to be in a league of our own for that size.

Our next question or comment comes from the line of Betty Jiang from Barclays.

Maybe a follow-up on the Endeavor drop-down opportunity. I guess given the materiality of the EBITDA on that asset you outlined at the time of the acquisition, and just a variety of types of mineral interest sitting within Endeavor, how should we be thinking about the size of the drop? Would it be one drop or multiple tranches?

Yes. Well, first of all, welcome back, Betty. It's good to hear your voice and I look forward to you continuing to cover Viper. I think I can't make any promises. We've got 2 Boards, we have to have discussions and look at this deal post close. I think our intention is probably given the amount and size is to do this all in one fell swoop. I think that generally means more exposure to a consistent development plan for a longer period of time. But I guess it's not completely my decision. So we'll see what everyone decides, but that would kind of be our preference to tell the cleanest story possible.

Right. And then one of the key advantages of the Endeavor merger is the increased visibility on Viper's activity. Can you remind us what's Viper's current exposure to Endeavor's development program and if you are able to make any headway to increase your exposure to their activity through organic leasing and other smaller mineral pickups?

Yes. I think it would be hard to do anything material to continue to improve that exposure. High level, right now, about 55% of our production comes from Diamondback. I don't know, I would probably say less than 10%, probably 7% or 8% of our production comes from Endeavor. I do think deals like the GRP deal had a lot of exposure to both Endeavor and Pioneer units on top of Diamondback. So I think just generally, exposure to ourselves is what we prefer. But second to that would be exposure to good operators like Endeavor, like Pioneer in areas with really good rock and really good line of sight to development.

Our next question or comment comes from the line of Paul Diamond from Citi.

Years have been on the M&A dialogue to kind of the opportunity that you're seeing in third parties, kind of the smaller deals. I know with the volatility, we've seen some disparity in the bid-ask spread. Just didn't know if you could comment on what you all are seeing.

Yes, Paul. I mean, I missed the first part of the question. I think it was kind of talking about the overall M&A environment, and we'll let Austen kind of talk about what we've been seeing.

Yes. I think it's still pretty competitive on what we call a ground game with the smaller deals, you could call, $50 million and below, really especially in the kind of $5 million to $10 million range and below. I think what we've seen is an evolution in the minerals market. About 6 or 7 years ago, a lot of private equity money came into the space, and that's kind of where the pipe was, and you organically put together a position. But as the industry has matured a little bit, you have bigger funds involved now, and all of that capital is rolling up. So we're not seeing a ton of deals transact directly to the owner anymore. So it just brings more competition on what's available. We were able to get a couple of smaller deals done in the first quarter, and that's kind of the benefit we have of our relationships out here. But like Kaes mentioned before, where we see our strategic advantage going forward from an M&A standpoint is going to be on the bigger deals, which can leverage the size and cost of capital that we have.

Understood. And just one quick follow-up. Of the 13.8 wells in active development, if we kind of run rate that out, we're starting to push the higher end of higher-end production guidance. Just didn't know if there's anything you guys are seeing in timing or cadence that would shift that potentially up or down just given basic run rating it out.

Yes. I want to say it's timing. I mean the general profile still looks similar to what we expected coming into the year. I think a little bit of activity was brought forward and Q1 outperformed a bit. And normalizing for the divestiture, maybe Q2 looks a little bit better than expected. Sitting here at May 1, trying to make assumption on what's going to happen in the back half of the year with the third-party side, that's just not somewhere we want to get super aggressive. But in a general sense, I would say activity has been brought forward a little bit relative to where it was 2 months ago. The current backlog of activity wells is really strong, so it's going to support some healthy growth throughout the year. We'll just kind of see where the exact numbers shake out as the year plays out.

Yes. I would just say, Derrick, non-op, we always are pretty conservative at the beginning of the year. It seems like there's been some non-op drop-forward in the model versus original expectations. The same piece is kind of right in line within a month of our expectations.

Terrific. And with the understanding that your revenues are dominated by oil, and we're operating in a depressed oil and gas price environment based on pipeline maintenance and tight egress conditions in general, do your leases protect you against negative gas realizations experienced with third parties?

Yes. So we won't have negative realizations passed back to us. Historically, if you just look at like our realizations relative to Diamondback, for example, they are typically better across the 3 products as a lot of our leases have cost-free royalties baked in there, and there are some of those operating expenses that kind of can't be passed back to the lease owners. So it's certainly not good on the gas side, but we wouldn't expect negative realizations for Viper.

It's good to be the mineral owner, Derrick.

Our next question or comment comes from the line of Leo Mariani from ROTH MKM.

I just wanted to follow up quickly on this cash G&A guidance here. You kind of bumped it up versus where you guys were in kind of mid- to late February when you came out with it originally. Were some of these just public sort of new kind of organizational structure costs just that just came in a little higher than expected as you guys kind of worked through the accounting? Just curious as to why it was tweaked only kind of a handful of months later.

Yes. I mean we're just moving into this public C-Corp world, and there's been more expenses that are going to Viper today. At the end of the day, it's a real number on a percentage basis. But $0.20 on a business doing $200 million a quarter of cash flow is minimal. We just want to get it right, the allocation between parent and subsidiary, particularly as the subsidiary continues to grow and get investor attention and likely continue to stand on its own two feet.

Okay. Appreciate that. And then just, obviously, I know you guys have to get the Endeavor deal closed. It sounds like, obviously, a large transaction could be coming here for Viper. Maybe it's early next year or I guess we'll wait on the timing. But how do you think about kind of potential funding for that? You talked about kind of 1x leverage really being a sweet spot for Viper. Would you kind of go above that temporarily to do kind of a major drop-down from the Endeavor combination? If so, would you kind of prioritize maybe more debt pay down? Just can you kind of talk us through how you're thinking about the funding part and the limits on leverage?

Yes. I think in a world where we see parent and subsidiary consolidated, levering up the subsidiary at the expense of the parent doesn't make a ton of sense. We look at leverage. Consolidated, there's going to be a lot of cash flow that comes with what our assets do end up in — if it does end up at Viper's end. I just think we're going to be responsible stewards of capital, both our upstream business and our mineral business.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Viper's CEO, Mr. Travis Stice.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.