Viper Energy, Inc.

Good day and thank you for standing by. Welcome to the VIPER Energy Partners fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone keypad. You will then hear an automated message advising you your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would like to now hand the conference call over to one of your speakers today. That would be Mr. Adam Wallace, Vice President of Investor Relations. Adam, please go ahead.

Thank you, Chairman. Good morning, and welcome to Viper Energy Partners' fourth quarter 2022 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 Spice, CEO, and Kate Vantoff, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial conditions, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results can differ materially from those that are indicated in these four different statements due to a variety of factors. Information concerning these factors can be found in the company's files with 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 Suss. Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' fourth quarter 2022 conference call. The fourth quarter topped off a record year for Viper, with quarterly oil production setting a company record on both an absolute and per unit basis for the third consecutive quarter. Additionally, as a result of our strong production and continued best-in-class margins, further supported by our disciplined capital allocation approach, we were able to deliver on multiple return of capital and financial initiatives during the quarter. During the fourth quarter, we reduced net debt by $100 million quarter-over-quarter, repurchased roughly 1 million units, and are scheduled to pay a distribution that provides a greater than 6% annualized yield. Looking ahead to 2023, we have initiated average production guidance for the full year that implies 8% year-over-year growth. Importantly, VIPER can deliver this growth without spending a single dollar of capital and with most operators in the Permian maintaining roughly flat activity levels. Additionally, this production growth, even as we generated over $100 million in proceeds from non-core asset sales during 2022, including the sale of our Eagleford asset, which was producing roughly 250 barrels of wool per day, or just over 1% of our current volumes. On the capital return front, Viper continued to execute on our opportunistic unit repurchase program during the fourth quarter, but at a slower place than during the third quarter. As a result, we are set to pay 49 cents per unit distribution, which is flat quarter over quarter, despite oil prices being down 10% over the same period. Our combined base plus variable distribution represents a greater than 6% yield at today's unit price. In conclusion, The fourth quarter was an outstanding quarter for Viper, and the forward outlook continues to improve as our high-quality asset base continues to attract outsized activity levels. Viper remains differentially positioned to grow production without having to spend a single dollar of development, of acquisition capital, and with only limited operating costs, we will be mostly insulated from continued inflationary cost pressures. Given the midpoint of our 2023 production guidance and assuming $75 WTI, we are expected to deliver almost 10% annualized free cash flow yield. Operator, please open the line for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mr. Neil Dingman with Truist.

Good morning, guys. My first question is just on shareholder distribution specifically. Given now the low debt level and your current unit price, do you all think today any differently about unit buybacks going forward than you have in recent quarters? It continues to be a nice mix. I'm just wondering how you think about today, about buybacks versus the yield, the distribution out there.

Yeah, Neil, good question. You know, it really comes down to, you know, can we buy minerals in the market cheaper than we can buy minerals in the, you know, the private market where we do deals. And it still seems that, you know, buying back units at a price per net at acre that is competitive with lower quality assets that are for sale in the basin, you know, seems like a good use of capital. You know, we've been pretty aggressive since converting our capital return plan to more buybacks, particularly in Q3, a little less so in Q4. I think that kind of mimics how we're thinking about things where, you know, in a time period like today or over the last couple of weeks, we've had a sell-off and that's when the buyback kicks in. But fundamentally, you know, we run an NAV at Viper. We also look at what, you know, deals are trading for in the market versus what Viper's trading at. And quite frankly, we believe we have a far superior asset base that's trading lower on a net acre basis than some of the stuff we've seen trade out in the market.

Yeah, that makes sense. And then just a quick follow-up, just on that small Eagleford, I assume, you know, again, just you didn't see the growth there and you have better, you know, I don't know, maybe call it better prospects for continued growth in the Permian. Is that the sort of rationale and? Could we assume any upcoming non-core small Permian sales? Maybe talk about that a little bit, Casey.

We've sold some non-core Permian assets. It's usually from an operator that is going to develop those minerals very quickly, so they're paying a number where it's higher than our whole case because if they get the deal, they're going to develop the asset faster. So that's kind of what's happening in the Permian. I would call that the exception versus the norm. With the Eagleford sale, we bought that deal in 2016, 2017. It's been a good deal for us. Unfortunately, there's not as much growth there as there was in years past. And we just thought that that would be a very good use of proceeds to fund Permian acquisitions. And I think generally... Being able to sell that, losing 250 to 300 barrels of oil a day and still hit numbers in 2023 that we expected prior just shows that we didn't need that asset in the portfolio and instead we're moving to 100% Permian and higher growth as we pointed out in Travis's prepared remarks. This business, even though Diamondback or Other operators in the basin aren't growing like they used to. The benefit of the mineral business is it can grow despite the parent company or other companies not growing as much.

Yeah, I agree. I love the per unit growth, obviously, with the buybacks and the production growth. Nice job, guys. Thanks.

Thank you. Thanks, man.

Our next call comes from the line of Derek Whitfield with Stifles.

Derek, please go ahead with your question.

Good morning, all. Congrats again on a strong quarter. Thank you, Derek. With regard to your six-month and 2023 guidance, the outlook appears to imply a step up in growth in the second half to about the 22,000-barrel level for oil. Does that generally hit late Q2, early Q3 based on expected down and back activity?

Yeah, that's right, Derek. It's just a lot of timing on some of these bigger diamondback pads, you know, as they've kind of shifted to some of that large-scale development, particularly in So and Robertson Ranch, where we've got a larger NRI. It'll just vary a little bit quarter to quarter as those wells or pads get turned to production. But, you know, the way that we're looking at it right now, the first quarter will be kind of flat as to where we were here. And then you'll see, you know, volumes take up in the second quarter, kind of in the higher end of that first half range. But then, yeah, your math is right as well, that kind of the implied member in the back half of the year will still represent some pretty significant growth in that second quarter. And it's really just going to be, you know, the cadence of these net wells being turned to production.

You know, I think, you know, importantly, Derek, you can see these wells coming, right? I mean, like, you know, the Zepco pad, which is going to be one of the larger pads, and Robertson Ranch coming on here mid-year. You know, so it's not a growth on the come. You know, we know that that growth is coming. And you can visibly see it hitting the business in Q2 and Q3.

Great. Makes sense. And perhaps more long-term in nature, I wanted to ask how you guys are thinking about the opportunity and your exposure resulting from the deeper Wolf Camp D, Barnett, and Woodford delineation tests the industry is pursuing across the Midland Basin.

Yeah, you know, I think that is, you know, one of the greatest benefits of the mineral business is that, you know, we underwrite minerals based on what we know. And over the course of time, you know, particularly in the Permian, you've seen more zones become economic. You've seen, you know, better recoveries. You've seen, you know, large multi-pad developments. A lot of that was not underwritten five, six, seven years ago. If you buy minerals versus an override, you own those minerals forever in perpetuity. That creates opportunities like some of these deeper rights in places like Spanish Trail and the western side of the basin, which is starting to get a lot of attention as it relates to deeper development. More to come. You know, I haven't signed a lot of leases yet in those deep zones, but you can bet that that's going to be a benefit to VIPER and tangentially Diamondback.

Great. Thanks for your time. Thank you, Derek.

As a reminder, to ask a question, please dial star 11 on your keypad. Our next call is coming from the line of Paul Diamondwood City. Please stand by.

Hi, good morning. Just a quick follow-up here, looking more to the macro. I know you guys have talked about kind of the bid-asks being a bit wide for your tastes in prior quarters. Have you seen any movement on that in either direction as far as you guys are looking at, like, potential, whether it's both on or larger M&A?

Good question, Paul. I would say versus E&P land, the bid-ask is still pretty wide in minerals. Minerals is unique because a lot of these mineral owners, they don't pay any capex. They don't see the impacts of inflation on their cost structure or their checks. All they see is the months they received in July and August of last year when oil was $100 a barrel. So that's kind of their new baseline. And that results in a wider bid-ask spread today with crude at 75 than summer last year over 100. So it's a little different in mineral land. I would say the bid-ask is still pretty wide. Obviously, under Diamondback, we still have differential information on timing so that we can pay more from a value perspective because we know exactly when those minerals are going to get developed. But we'll see how it unfolds throughout the year, but right now it's pretty wide.

Understood. Thank you. And just a quick follow-up, kind of like shifting from the dynamic acreage more to the third party. As far as, like, operational cadence, is there anything you guys have seen in the last quarter or so that surprised you as far as their operations cadence or just kind of how they're thinking about the medium to longer term?

No, not really, Paul. I would say growth activity levels have been pretty – pretty steady. When you look at the rig count, you look at wells being spud or permits being filed across the position, I think really gross activity levels have been pretty steady for the past six to nine months. When we look forward to 2023, though, we're going to get some benefit on the third-party side of some of our higher NRI stuff being developed. So here today, in February, it's kind of the hardest guidance we have to do for the full year in making some assumptions on what Q4 of 2023 might look like. But right now today, you know, we've got pretty much the same visibility to total net wealth being turned to production this year as we did all of last year. So, you know, that's pretty encouraging for us when we look at third-party activity levels. And I think that, you know, could continue to improve as we progress through the year.

Understood. Thanks for your time.

Thanks, Paul.

At this time, I would like to now turn the call back over to Mr. Travis Stice, CEO.

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

Thank you for your participation in today's call. This does conclude the program. You may now disconnect.