Viper Energy, Inc.

Good day and thank you for standing by. Welcome to the Viper Energy Partners first quarter 2023 earnings conference 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 that session, you'll need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Adam Lawless, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Chris. Good morning, and welcome to Viper Energy Partners' first 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 Skye, CEO, Kate Vantoff, President, and Austin Gilfillan, General Manager. 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 gap measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Spice.

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' first quarter 2023 conference call. The first quarter was a strong start for the year as Viper Oil Production set a company record for a fourth consecutive quarter. The advantage nature of this royalty business model was highlighted during the quarter as we maintained our strong free cash flow conversion despite the volatility in commodity prices. Further on that point, Vipers' low operating costs and zero capital requirements allow us to convert over 80% of our operating cash flow into free cash flow during the quarter. This metric compares favorably to many operators at around a 40% free cash flow conversion and insulates BIPER's free cash flow profile and return of capital during times of commodity price volatility. Additionally, BIPER announced it completed a drop-down transaction of certain royalty interests from Dynavac on operated properties located in Ward County. This transaction was a $75 million acquisition of an overriding royalty interest representing 660 net royalty acres that will provide high NRI exposure to Diamondbacks' expected development plant in the southern Delaware Basin. Production on the acquired asset was roughly 300 barrels of oil per day during the first quarter and is expected to increase through the remainder of the year to average over 500 barrels of wool per day for the full year 2023. Looking ahead, we have initiated average production guidance for Q2 and Q3 2023 that implies over 8% growth relative to the first quarter. Importantly, on an organic basis, so excluding the impact of the drop-down acquisition, Production is growing at over 5% this period, primarily as a result of large down-and-back operated pads with high Viper NRIs being turned to production. On the capital return front, Viper took advantage of the volatility experienced during the quarter through our flexible return of capital program by opportunistically repurchasing over 1 million units. Since the inception of our unit repurchase program, we have now repurchased over 11 million units for an aggregate of roughly $250 million, reflecting an average price of under $23 per unit. In addition to these unit repurchases, our return of capital program during the quarter is going to also deliver a distribution that represents a roughly 5% annualized yield at today's price. In conclusion, the first 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 capital and with only limited operating costs. And as a result, We look forward to continuing to efficiently return substantial amounts of capital back to our unit holders. Operator, please open the line for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your phone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by as we compile the Q&A roster.

One moment, please, for our first question.

Our first question will come from Neil Dingman of Truist Securities. Your line is open.

Morning, gentlemen. Thanks for the time. My first question is on future activities specifically. Can you remind me maybe just in really broad terms how much of your acreage has what I would call maybe more relatively virgin units where we can see continued large pads boosting the already record volumes versus, you know, a lot of the other acreage out there I know is more on what I would call developed assets where we're seeing more child type wells.

Yeah, good question, Neil. I mean, I would say, you know, almost all of the Diamondback operated position that we bought from Swallowtail is is still, you know, the vast majority of it is still completely undeveloped. I mean, we haven't even brought on our first pad yet in the Robertson Ranch area where we own, you know, essentially half the minerals at Viper. So, you know, I think what's fundamentally misunderstood on Viper's growth profile is that this growth profile is not going to be a flash in the pan over the next couple quarters. You know, I think this business can grow significantly over the next few years, even with the E&P business, you know, growing slower or, you know, in some cases in maintenance mode. So, you know, that's the benefit of this mineral business. There's a lot of growth to be had because when we allocate capital on the drilling side of Diamondback, we take into account the 58% ownership of Viper into those economics.

Great point. Okay. And then second question just on capital allocation of the shareholder return. Just wondering, while I know, and Adrian asked earlier, I know at FANG, the allocation decision is largely driven by how you view your share price versus the assumed value, you know, based on mid-cycle prices. And I'm just wondering, do you think about that the same way Viper and, you know, obviously with oil down today, now approaching 70, is there any change to your thinking?

Yeah, let me say a couple things about mineral valuations, because this is important and why we changed our capital allocation philosophy at Viper to not just distribute every dollar we make. We wanted to retain some flexibility between a buyback of units and a variable dividend. Now, we have a higher base dividend at Viper, so that was put in place for a reason. But I think generally the public markets are fundamentally mispricing mineral interests relative to upstream assets. Therefore, we've allocated a lot more capital to own more of the mineral business. And if the market continues to misprice mineral values and not understand the benefit of a mineral versus an upstream asset, we'll just simply own more and more of this business like we did in Q1. Second to that, we do look at our NAV at Viper. We're significantly undervalued relative to our NAV at a mid-cycle deck. And mid-cycle at Viper is $60 a barrel, just like it is at Diamondback. And the other validation we have in the mineral market, while I'm not going to hang our hat on 100% of this, but we are getting blown out in the private market, absolutely blown out on deals in the private market. We're losing deals by 50%, 60%, 70%. And these deals, Neil, are of much lower quality than the acreage position that Viper has today. So while that's an anecdote and we don't base our business on where third-party deals are trading, If third-party deals are going to continue trading at 50% to 70% above where we're trading, we're going to buy back a lot of units.

Yeah, I agree with you. Glad to see you all leaning into the unit repurchase.

Thanks, Jim.

Thank you.

One moment, please, for our next question.

Our next question will come from Paul Diamond of Citi. Your line is open.

Hi, good morning, guys. Thanks for taking my call. Just a quick one for you, talking about how's it going. Just a quick one for you, talking about you just noted that some of the private deals are going for 50%, 60%, 70% above what you guys think is a good value, but you still got a few things done last quarter. Is that kind of trend you're seeing is going to be a lot more nuanced and specific, or do you guys see the market opening up a bit more and just kind of coming back to, I guess, rationality on that front?

Yeah, I was also referring to where Viper's trading on a mineral acre basis. But I think, you know, your point is valid. I think, you know, we're getting beat pretty handily in a lot of the, you know, I would say mid-market deals, you know, $20 to $80 million deals or $20 to $100. I think Viper has a unique advantage with our size and scale to compete in the $500 plus million dollar mineral deals. Now, I think those are, you know, fewer and further between, but I do think eventually, like a deal like Swallowtail, we had a unique advantage to get that deal done. You know, that's kind of our playground because right now in the middle market deals, you know, the numbers being paid are astronomical.

Okay. No, understood. Makes perfect sense. And, yeah, I'll leave it there. Thanks for your time.

Thanks, Paul.

Thank you. One moment, please, for our next question.

Again, one moment, please.

Our next question will come from Derek Whitman of Stifel. Your line is open.

Good morning, all, and congrats again on a solid quarter and drop-down transaction.

Thank you.

With regard to the drop-down, and thinking about some of your comments on the mispricing of mineral assets, I mean, this drop-down was extremely impactful from the perspective of line-of-sight activity and elevated NRIs. As this was sourced from a ward acquisition at Diamondback over a year ago, I wanted to ask if there are other potential carve-outs from the Firebird or Lario acquisitions that could make sense in the future.

Yeah, Derek, there are none today that came with the Lario or Firebird packages. Now, when we do get a new playground to buy minerals in, that does allow some opportunities to try to buy minerals in those new areas. But no drop-down opportunities. To comment on the drop-down specifically, this deal, we have the benefit of figuring out the right timing of when to drop something down between the two companies And, you know, this deal wouldn't have made sense to do a year ago, but now that development's happening and there's that forward visibility, you know, it made a lot of sense to be able to get that done ahead of the first large paths coming on in March. Austin, you want to add anything to that?

No, that's right. I mean, we got it done right around, you know, the ramp up in production and then still quite a bit of visibility to some high interest pads over the next couple of years. So it made a lot of sense for Viper and I think Diamondback to do a deal on here this past quarter.

Terrific. And with my follow-up, I wanted to focus on a bigger picture question for Permian Activity, which I think plays to your benefit relative to your peers. And that question is, if we were to assume strip pricing, do you think we've seen peak activity in the Permian for at least the immediate term? given that privates generally have less quality inventory depth and are likely more exposed to weaker gas pricing? Again, the benefit part would just be what percent operating you guys carry today and the visibility you have with that.

Yeah, I think that's a good, a fair statement. I think we've probably seen peak activity in the Permian. Now, you know, we did make a lot of comments on service cost reductions on the Diamondback side. I would say part of that's attributable to other basins equipment opening up, but You know, we've kind of said that this is the year where, you know, publics kind of stay flat and Diamondback and Viper benefit from that activity-wise. You know, majors increase, and we don't own a lot of minerals under majors. And privates, you know, in general are slowing down to either, you know, preserve inventory or sell their companies. So, you know, this does put us in an advantage with the Diamondback piece, particularly with us allocating so much upstream capital to areas where we have mineral interests particularly, you know, Central Martin County.

Thanks. That's all for me. Thank you, Derek.

Thank you.

One moment, please, for our next question. Our next question will come from Leo Mariani of Roth MKM.

Your line is open.

Hey, I was hoping you'd provide a little bit more color around this kind of additional $41 million of acquisitions that you guys did, you know, kind of apart from the $75 million drop-down. Was that just kind of a bunch of, you know, little stuff? You know, in the aggregate, obviously, you commented that it's kind of hard to get deals these days given, you know, the overpricing in the markets. Maybe just some color around the recent $41 million of activity.