Good day and thank you for standing by. Welcome to the Viper Energy Second Quarter 2024 Earnings 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 first speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Thank you, Jill. Good morning and welcome to Viper Energy's Second 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 Second Quarter 2024 Conference Call. The second quarter was a strong quarter for Viper with oil production growing roughly 4% quarter-over-quarter and our cash available for distribution increasing by almost 9% over the same period. As a result of the production outperformance we have seen during the first half of the year, as well as an increase in expectations for the remainder of 2024, we have increased our production guidance for the full year 2024. In addition to updating our full year guidance range, we've also provided guidance for Q3 that implies 1.5% growth relative to Q2 despite losing roughly 150 barrels of oil per day of quarterly production from the non-Permian assets we divested during the second quarter. Overall, we continue to see strong activity levels across our acreage position and benefit from Diamondback's continued large-scale development of Viper's high-concentration royalty acreage. In addition to the strong operational and financial results announced yesterday, we also announced that Viper's Board of Directors has approved an 11% increase in our annual base dividend, which highlights the Board's belief that a sustainable and growing base dividend can be maintained through the cycle. This belief and commitment to our shareholders is supported by Viper's strong balance sheet and durable cash flow profile. Relative to a year ago, when we last increased our base dividend, Viper has grown oil production per share by 14%, while maintaining our cash margins and free cash flow conversion at around 80%. Importantly, at current production levels, the annual fixed amount of the increased base dividend represents roughly 50% of the expected free cash flow at $50 WTI and is fully protected down to below $30 WTI. Bigger picture, the second quarter was also an important quarter strategically for Viper. Following our conversion to a Delaware corporation late last year, we were added to several notable indices during the second quarter including the Russell 1000. In addition to the increased governance rights that this conversion provided for our shareholders, it has so far delivered on our expectations of providing an expanded investor base and improved trading liquidity. Fundamentally, we believe this conversion is just one step in the process of fully highlighting the advantaged nature of mineral ownership and the unique value proposition that Viper presents within the space as well as in the energy complex more broadly.

Thank you. At this time, we will conduct a question-and-answer session. The first question comes from Neal Dingmann with Truist. Go ahead. Your line is open.

Good morning. Fantastic results. Travis, my first question is on your 2024 guided production bump. Specifically, you all seem to be expecting some really notable upside, especially when you capture those asset sales. So I'm just wondering, are you assuming much change in rig count with this forecast? Or can we assume that the majority of this upside is coming from the operational efficiencies that we're seeing?

Yes. Good question, Neal. I think, high level, as you think about when we start the year, we don't have as much visibility on non-operated properties and as the year goes on, that visibility increases. I think part of it is the efficiency piece. I think we always expected a pretty big ramp in the back half of the year with some significant paying wells or pads coming on, and that gives us a lot of confidence in the third quarter. We're starting to see more near-term activity visibility in the fourth quarter showing that we're going to keep growing this business organically in the second half of the year versus the first half. Austin, do you want to add anything?

Yes, on the divestiture. As a reminder, that was producing about 450 barrels of oil per day and that divestiture closed on May 1. So we've got one month of contribution in the second quarter but have updated the full year guidance to reflect the loss of that production contribution. To Kaes's point, we only guide to what we can see. So, we have pretty good visibility through the back half of the year on the non-op side. On the Diamondback operated side, halfway through the year, we've only had about 40% to 45% of the net Diamondback locations turned to production. So we'll see a pretty significant ramp in activity and production as we progress through the next two quarters.

Yeah, Neal, since you listened to the Diamondback call, you heard the commentary around improved efficiencies, and that's obviously a direct read-through for operators that are developing Viper's minerals. Also, Diamondback talked about these additional zones that we didn't formally think were Tier 1 zones at the Diamondback level, but now we're confident in the Upper Spraberry and the Wolfcamp D that those zones are going to start contributing as well. All of those are positive read-throughs for Viper. And again, I emphasized it in my prepared remarks, but with Viper having below a $30 WTI breakeven price, that's a pretty stunning statistic.

Great addition, Travis. And then my second question is just on capital allocation. Specifically, do you view VNOM's payout maybe for Kaes's options as opportunistic? Or given the mineral structure, are you more inclined to stick with the base and variable dividends?

Yes. I think the feedback from investors and our Board has been to lean more towards the cash distribution model but also continue to grow that base dividend. I think we moved to this base plus variable model two years ago now, and it's been a positive development. I think buybacks aren't out of the question at Viper, but they are probably third behind base dividend, variable dividend, and then buybacks, kind of the opposite at Diamondback. There will be times of stress in this very cyclical industry where buybacks make a lot of sense, like when we started buying back shares at the end of 2020 and into 2021. But right now, we're very comfortable with the high distribution model.

Thanks, Kaes.

One moment for our next question. The next question comes from Betty Jiang with Barclays. Go ahead. Your line is open.

Good morning. Actually, I have a follow-up. I would love to get more color on the visibility on the activity trends that you're seeing. We did note that the rig count on the mineral portfolio is down quarter-over-quarter, but the well backlog is still flattish. So, clearly, we're hearing from the backhaul that there's an uptick in efficiency gains, but are you seeing more activity conversion from less equipment, not just from the Diamondback operated assets but also on another front? Maybe asked another way, can you maintain this level of activity at a portfolio level even at a lower rig count? Thanks.

Yes. That's a good question, Betty. I mean we obviously track the rig count, but much more important for us is the work in progress and line of sight wells. And then when you look at what percentage of those are converted and also kind of the cycle times to be converted. The rig count will fluctuate day-by-day, week-by-week, but we haven't really seen any change in the conversion rates or the cycle times. So with those work in progress and line of sight wells kind of staying at all-time highs, we still feel really confident that that's going to lead to some production growth in the back half of the year and into the beginning of next year.

Yes. I think it's important to consider net rigs as well. You might have significant exposure with a 0.5% interest rate across 100 wells. However, when looking at our exposure to the Diamondback development plan, this is where our net rigs and the progress of wells under development give us a distinct advantage.

No, that makes a lot of sense. And then just a follow-up on the Diamondback portion of the percentage of total activity. Q2 is a bit light on the Diamondback side. So going forward, the backlog Diamondback accounts for roughly 50% of the backlog. Should we expect that to revert higher back to that 50% level?

Yes, that's right. I kind of mentioned it on the previous question, but when we look at the Diamondback net completions expected for the year, only about 40% to 45% of those were in the first half and the remainder will be in the second half. We do see a big increase coming in the back half of the year, and it will revert to being more Diamondback growth driven here now versus the first half having a lot of upside from the third-party piece.

Great. Thank you for the color.

Thanks, Betty.

One moment for our next question. The next question comes from Paul Diamond with Citi. Go ahead. Your line is open.

Thank you. Good morning. Thanks for taking my question. Just a quick one for you as I think about portfolio optimization in the coming quarters. Where do you see the right mix going forward at current and looking to the next year as far as the breakdown between opportunities across whether it's from within Diamondback or elsewhere private in the third-party market?

Yeah. I mean I think we're trying to position ourselves to be the consolidator of choice in the Permian. You saw how we treated the non-core non-Permian assets associated with the GRP deal. We monetized those very quickly for a quick gain. I think generally the significant opportunities under Diamondback that would move the needle for Viper production are fewer and further between. There is potential drop-down from the Endeavor merger, which is the biggest and most visible opportunity. But on a Diamondback standalone basis, there's not a lot of opportunities out there. That's why we've moved to this portfolio effect of looking at really good rock that we covered at the Diamondback and Viper levels with deals like GRP, and that's a deal that's tough to get done in the mineral space today. We're positioning ourselves to be the buyer of choice for those large packages with a lot of visibility and a lot of upside in the basin that we know best.

Understood. Makes perfect sense. And just a quick follow-up talking about visibility into work in progress wells and cycle time evolution. How do you see the cycle times? They've obviously been trending positively. I guess, how linear should we expect that to be in the coming quarters and years in your view?

We don't really model an improvement from here. We're constantly watching operators geographically and also looking at pad size to think about what those permits will look like in terms of being converted to production and driving production growth. I wouldn't say that we've baked in an improvement in cycle times into our modeling. We've kept the historical average, so I would say as long as we have a steady state of work in progress or line of sight wells and cycle time has improved, that might just be a little bit of upside to the guidance we currently have.

Understood. Appreciate the color. Thanks for your time.

Standby for our next question. The next question comes from Leo Mariani with ROTH. Go ahead. Your line is open.

I just wanted to follow up on some of your comments here just around M&A. You talked about, obviously, the Endeavor drop-down being a big focus. Just wanted to kind of get a sense. I know the deal hasn't closed yet, but have you all been able to do some prep work ahead of time to maybe try to get that deal to fruition a little sooner? I know there's a lot of land work that needs to get done in the background. Or do you really have to wait for the deal to close to get on that? And then I guess, just is there any kind of high-level expectation on when that might happen? Do you anticipate that that big deal could happen by middle of next year?

Yeah, Leo. This has been a pretty restrictive process with the FTC second request at Diamondback, so we haven't been able to do much if anything at all. We look forward to getting through that quickly and then hitting the ground running. If history is any guide, we don’t move slow at Viper or Diamondback. We'll get to work on it right away, and nothing has changed from our perspective on the sizing and potential opportunity set we put in the merger deck at the Diamondback level.

Okay. No, that's helpful. And is it fair to say just based on your prepared comments that the smaller deals have kind of been a little more competitive and really these big deals that you might see out there from third parties, including kind of the drop-down here from Endeavor, that's the type of things we should expect VNOM to focus on?

Yes. I think certainly from an external perspective, that's what we're focused on. We still try to get the little deals here and there, but you’d be shocked to see how many $20 million to $50 million mineral funds there are that you never see on the outside. Those competitors are very aggressive on smaller deals. They probably take a little more risk on undeveloped acreage and timing, and we see our spot in the food chain as being the aggregator of those aggregators and being able to come to an opportunity with a real amount of cash, market access, and liquidity. That's why we've been really trying to improve our liquidity and trading volume position over the last 12 months, and it’s paid dividends for our unitholders.

Okay. Thanks, Kaes.

Thanks, Leo.

This concludes the question-and-answer session. I would now like to turn it back to Travis Stice, CEO, for closing remarks.

Thank you. This call this morning is concluded, and thank you for attending. If you've got any questions, please reach out. Thank you again, and have a great day.

This does conclude the program. You may now disconnect.