Viper Energy, Inc. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Viper Energy Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Chip Seale, Investor Relations Director. Please go ahead.

Thank you, Amber. Good morning, and welcome to Viper Energy's Third Quarter 2025 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 Kaes Van't Hof, CEO; and Austen Gilfillian, 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 will now turn the call over to Kaes.

Thank you, Chip. Welcome, everyone, and thank you for joining Viper Energy's Third Quarter 2025 Conference Call. During this quarter, Viper continued to pursue our growth strategy, strengthened by the completion of the Sitio acquisition and ongoing organic growth. Our guidance for oil production in the fourth quarter of 2025 suggests a roughly 20% rise in oil production per share compared to the same quarter last year. Looking ahead to 2026, we expect mid-single-digit organic oil production growth from the estimated production of the fourth quarter of 2025. This indicates double-digit year-over-year growth in oil production per share relative to 2025. In the third quarter, Viper also demonstrated our unique return of capital strategy. With our high operating and free cash flow margins, robust balance sheet, and recent completion of our non-Permian asset sale, we decided to enhance our return of capital commitment, returning 85% of cash available for distribution to stockholders in the third quarter. Consequently, Viper is effectively executing on multiple strategic capital allocation initiatives this quarter. Our combined base and variable dividend yields over 6% annually, marking an almost 10% increase compared to our dividend from last quarter. This dividend increase is in addition to over $90 million in share repurchases completed during the quarter, with an extra $60 million retained on the balance sheet. Overall, the return of capital per Class A share in the third quarter reflects a 48% increase from the second quarter. Looking ahead, as we progress towards finalizing our non-Permian asset sale and advance towards our long-term net debt target of $1.5 billion, we expect to return nearly 100% of cash available for distribution to stockholders. We plan to continue allocating the majority of our cash for distribution towards our base and variable dividend but also see it as essential to repurchase shares in the current market due to the unique opportunity for countercyclical investment in our high-quality mineral royalty assets. Importantly, today's share repurchases will further enhance our growth in per share metrics and enable us to offer more through our base and variable dividend in the long term. Operationally, we are witnessing strong activity levels across our asset base and still expect mid-single-digit organic growth in 2026 despite recent commodity price volatility. Following the completion of the Sitio acquisition, Viper is in a strong position, benefiting from both concentrated interests in Diamondback's core Midland Basin development, which should drive significant long-term oil production growth, and broad exposure to leading third-party operators across both the Midland and Delaware basins. Our current acreage captures nearly half of all third-party activity in the Permian, and the 25,000 existing horizontal wells in the Permian Basin in which Viper has an interest offer a significant information advantage. In summary, we believe Viper represents a unique investment opportunity within the broader energy sector. Our unmatched ability to provide sustained per share growth with no capital and minimal operating costs should lead to an increased capacity to return capital to stockholders over time. Furthermore, our exceptionally low breakeven points should yield more consistent cash flow returns amid overall market volatility. Operator, please open the line for questions.

Our first question comes from Neal Dingmann of William and Blair.

Great free cash flow story. My first question is about the nearly $700 million asset sale and the expected over $1.5 billion in free cash flow next year. Could you discuss your near-term and 2026 capital allocation plans? It looks like you'll not only be able to quickly repay that debt but also significantly increase distributions and possibly initiate some buybacks. I would love to hear your thoughts on this.

Yes, Neal, I think we achieved a great outcome with that asset sale, and we had some internal discussions about whether to wait or proceed. We chose to move forward. The reason is that last quarter, we mentioned that once Viper reaches $1.5 billion in net debt, we would return 100% of free cash to shareholders. With the proceeds from this asset sale, we believe we're on track to meet that goal. Therefore, we're going to proactively engage in some share repurchases, especially considering how much the market has diverged between Viper's performance and where it should be. Overall, I expect that by the beginning of next year, we'll be positioned to consistently return nearly all free cash to shareholders, but we won't slow down now. We're going to take a more aggressive approach with buybacks and continue to distribute significant cash.

Can you share your thoughts on how activity outside of Diamondback is trending? Based on last quarter, it seems quite active, possibly even more so than some operators. I just want to confirm if that remains true.

Yes, I think it's really strong. I'll let Austen give some more detail, but this is the first quarter we're looking at a combined Viper and Sitio together, and we think that gives us a broad exposure to a lot of the Permian.

Yes, I mean, we put some new details in the deck, Page 11 being one of those. And what this really does is go back to the beginning of 2023, and it looks at all of the wells drilled across the Permian Basin excluding Diamondback and what percentage of those Viper's current asset base would have an interest in. And what you'll see is that we've just captured almost half of all activity across the basin over this time period with a pretty consistent average NRI at around 1.5%. So it will trend up and down kind of with activity a bit. But I really think it speaks to the quality of the acreage and the operators that we have outside of Diamondback deploying consistent capital to this position. That gives us a lot of confidence to the forecast in 2026 and really even beyond that.

Our next question comes from Betty Jiang of Barclays.

I wanted to ask about the third-party activity. The backlog has continued to increase, and I would like to understand how much of that increase is driven by the Sitio contribution and how much is attributed to a broader positive trend from the legacy assets of other operators in the Permian.

Yes, Betty, I would say it's pretty evenly mixed. I think being a couple of months in post Sitio closing, that asset base has outperformed the underwriting assumptions. But really, legacy Viper's third-party operating position has continued to outperform as well, mainly as a result of some of the higher NRIs, and you can kind of see that showing up on Slide 11, as I mentioned. So as we look at it today, right, we don't have full visibility into what will happen for the full year 2026, especially in the back half of the year. And we'll continue to monitor new activity as it shows up and the conversion of those permits and those wells that have been spud. But I would say, generally, we're extremely pleased with the third-party exposure and especially the complement that, that provides to the concentrated exposure through the Diamondback drill bit.

Yes. Those are really encouraging signs to see. My second question is on AI. It strikes me that the royalty model is ideally positioned to benefit from AI integration. And thinking about the impact of predictive nature of future activity, maybe the organization, can you just speak to how you see the tools that are available today could potentially impact your operations and M&A?

Yes, Betty, you're correct. There is a significant amount of data involved in the mineral business, particularly concerning 35,000 wells across the Permian. This data can be leveraged for various purposes, including making operational adjustments to acquire more minerals in emerging areas. In the short term, AI, automation, and machine learning will enhance our efficiency on the backend. Monitoring 35,000 wells each month shouldn't be a manual task, so we are transitioning to an automated process. Moreover, it’s vital to discover how to use this data effectively and efficiently, and there may even be opportunities to monetize it. However, for now, we will keep this data internal while focusing on automation, which is one of the benefits the Sitio team contributed that we had yet to develop at Viper. Each deal provides us with learning opportunities, and the most significant insight from the Sitio team has been related to big data and automation.

Our next question comes from Neil Mehta of Goldman Sachs and company.

Yes, congratulations on the non-Permian divestitures. It's encouraging to see the business becoming more centered around the Permian again. As we consider the incoming cash, Kaes, should we be aware of any factors regarding the amount being received? Are there any potential offsets, such as taxes or other considerations related to these inflows?

Yes, we kind of highlighted that there would be a little bit of a tax hit. So I think our net proceeds will be about $610 million. There will be some reduction between effective date and close date. But all in all, I think generally, the proceeds are going to pay down essentially the revolver to zero as well as almost pay our term loan down to essentially zero. And that would put essentially a balance sheet I define as an almost perfect position with one 5-year note, one 10-year note that we executed over the summer, leaving us a lot of optionality and flexibility to buy little deals, but also return a lot of cash to shareholders.

Yes. And Kaes, can you talk about the A&D market? That's been kind of a hallmark of the broader Diamondback complex is finding those bolt-on opportunities. We think, especially given the softer commodity price environment, does that make it easier or harder to get deals done here over the next 6 to 12 months?

Yes. Traditionally, it makes mineral deals harder to get done. You see a lot more upstream deals lower in the cycle than minerals just because of the zero CapEx nature of minerals. So I think we're probably on a bit of a pause at Viper for now and waiting for what we see as still a significant opportunity set to come our way in the coming years. But Austen, anything else you want to add?

Yes. I think that's certainly the case on the larger, more strategic acquisitions. We've tried to position ourselves to be the consolidator of choice on the $1 billion-plus type opportunities. And it's tough to see those transacting with where commodity prices are today. I would say it's a little bit different on kind of the smaller ground game-type acquisitions. We've had some success in some of those owners might see the royalty checks go down and see that as an opportunity to liquidate it. But that's tougher to scale today relative to the size of the enterprise value at least. So part of our thinking additionally is with the buyback, that's an effective way to buy really high-quality assets that we know and that have grown the assets today. So it's kind of a combined strategy of how to deploy capital for us today.

Our next question comes from Kalei Akamine of Bank of America.

Kaes, in your opening remarks, you called out that Viper has been exposed to about half of all third-party activity in the Permian Basin over the last 3 years. In the basin this year, there has been a reduction in activity because of oil price uncertainty. The market expects maybe zero oil growth in the Permian Basin next year, yet your Permian volumes continue to grow. That's a favorable dynamic. How long do you expect that it can continue?

Yes, I believe the strong relationship between Diamondback and Viper will likely drive growth for at least the next couple of years, if not longer. We expect to have an average interest of around 5% to 7% in all of Diamondback's wells over the next five years. This puts us in a unique position. Additionally, as mentioned in our remarks, the broad exposure we have further strengthens our position for the coming years.

I appreciate that. For my next question, one question that we get from investors considers the valuation of Viper. It's the best risk-adjusted return in the Permian, in our view. Another way to look at it is that VNOM shares are trading with great value today. So my question is, would you ever consider using free cash at bank to purchase more interest in VNOM shares?

Yes, it's certainly on the table. I think Diamondback has some strategic priorities that they need to continue to execute on, mainly reducing its share count as well. But we certainly are trying to pound the table on VNOM's valuation. And also, I think as part of the rationale for the non-Permian asset sale getting executed so quickly is that we can lean in at the Viper level and reduce that Viper per share count. Because I think until the market wakes up to the free cash flow yield plus growth story, we're going to try to take advantage of it as a complex.

Our next question comes from Derrick Whitfield of Texas Capital.

For my first question, I wanted to start with your guidance regarding the soft guide for 2026. How are you thinking about the price sensitivity associated with that guidance from a Diamondback operating perspective?

Yes. So that really contemplates the base case of Diamondback's current activity levels, right, and really maintaining that more maintenance level through 2026. So to draw on their analogy being the yellow light scenario, that's kind of what's underwritten here. Things could flex up or down. I think the beauty of the relationship that Kaes was hitting on it earlier, to the extent that it flexes down, Diamondback will really be prioritizing the highest returning projects in the lower commodity price environment. So Viper tends to be insulated at least in gross reductions in Diamondback activity level and just kind of gives a higher percent exposure and a higher average NRI.

Got it. Makes sense. And then maybe just to build on an earlier question. With the benefit of more time with the Sitio team and their approach, could you guys elaborate on the synergy opportunity you see from a cash savings perspective on just implementing some of the AI processes? And then the opportunity it could generate from a ground game perspective?

Yes, the employee aspect of the deal and the resulting synergies have been realized, and we've onboarded some select high performers from Sitio who are contributing effectively. Additionally, one of the significant synergies was the cost savings related to debt for both Viper and us, especially after Viper was upgraded to investment grade and successfully executed its first investment-grade deal in July. This improves our balance sheet. On the automation front, there are clear benefits to streamlining processes at Viper, and over time, those same individuals involved in automation at Viper will shift their focus to enhancing operations at Diamondback. This creates synergies for the parent company as well. While I can't specify the exact figures at this moment, I anticipate that our operations will shift towards less manual data entry and more exception-based monitoring instead of routine tasks. There's a lot of potential for progress in this area. The entire industry is focused on increased automation, and we plan to be proactive in this aspect. Regarding deal opportunities, being located in Midland provides us excellent access, and there's a local saying that if a deal leaves Midland, it may not be favorable. We're actively engaged in the market and are experiencing a strong flow of potential deals.

Our next question comes from Leo Mariani of ROTH.

I just wanted to clarify on the guidance here. I know it's a soft guide for 2026. When you guys talk about mid-single-digit growth next year versus the fourth quarter, I assume that's kind of unadjusted for the pending asset sale. So clearly, as we strip those volumes out, then you kind of wouldn't quite hit that mid-single-digit growth to be a little bit lower as kind of a pre-asset sale guide here?

Yes, if you consider Q4 as pro forma, you should see a couple of thousand barrels a day of growth based on the assets we will keep. The Q4 guidance of 66,000 barrels a day at the midpoint includes about 5,000 barrels a day from the non-Permian assets. If you exclude that, that will be your starting point for 2026, and then you can expect a couple of thousand barrels of growth from there, which will bring you to that mid-single-digit growth level.

Okay. Appreciate that clarification. And obviously, you've got the asset sale done and you certainly spoke to returning a greater percentage of capital to shareholders. You clearly leaned into the buyback pretty heavily. But just trying to get a sense as that debt is paid off, as you kind of spoke to, it sounds like in the next handful of months, are your eyes also looking to maybe kind of accelerate the growth in the variable dividend component as well over the next few quarters? Is that something that investors should also be looking forward to?

Yes. I mean, I think it's all price related, right? And the key point here on the buyback, which is, in our mind, our third priority return of capital behind the base dividend and the variable dividend, leaning into that buyback sends a pretty strong message that we think the stock is cheap. We do agree with a lot of our large shareholders, Diamondback being the largest, that we want a majority of the return of capital in the form of cash. But I think what's interesting about Viper with the debt position it's in, the balance sheet position it's in is that it can do both. And I think we would, at some point, tap the brakes on the buyback if the market wakes up to this story. But until then, we're going to keep reducing the share count.

Our next question comes from Tim Rezvan from KeyBanc Capital Markets.

I don't mean to beat the dead horse here, but the repurchase news was really notable. It was equal to your prior two biggest quarters combined. So is it safe to say this was more of kind of an extreme quarter given shares at the $37, $38 level? Or would you potentially look to go even bigger at the expense of the variable dividend if you thought the dislocation warranted that?

Yes. It depends, but what's interesting about Viper is that at $60 oil, we are generating margins of 92% to 93%. There's a lot of flexibility with cash. If you approach it from an exploration and production perspective, you're limited by the capital you need to spend to maintain production levels. However, others are spending that capital for you, which allows for more free cash to be used in different ways. If the market becomes more unstable, we can take additional risks without jeopardizing cash flow generation or our balance sheet. I believe this should ideally result in a lower cost of capital than its current trading level.

Okay. Okay. I appreciate that response. And then on the topic of repurchases, there's been some market consternation perhaps overdue about these new holders that you have following the Sitio closing. And I believe there's four, what people would call unnatural holders at about 13% of shares. Can you talk, Kaes, about any dialogue you've had with any of them? And how high that is on your sort of kind of maybe removing that overhang or sort of addressing that as they look to sell?

Yes, we are ready to step in if they decide to sell. I'm in discussions with many of them, especially regarding the Sitio merger. They chose to merge their stock with ours because they see significant long-term potential in the combined business. I can't speculate on their intentions to sell, as that's for them to decide. However, I can assure you that we have the resources to support such a scenario if it arises. Like any other shareholder, we are prepared to buy back shares from any large shareholders looking to sell.

Thank you. I am showing no further questions at this time. I would now like to turn it back to the CEO, Kaes Van't Hof, for closing remarks.

Well, thanks, everybody, for participating today. And please reach out if you have any questions, and we'll talk to you in one quarter.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.