Viper Energy, Inc.

Good day and thank you for standing by. Welcome to the Viper Energy fourth quarter 2023 earnings call. At this time, all participants are in 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 1-1 on your telephone. 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. I would like to hand the conference over to your first speaker today, Adam Manolis, Vice President of Investor Relations. Please go ahead.

Thank you, Victor. Good morning, and welcome to Viper Energy's fourth 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 Stice, CEO, Kate Stantoff, President, and Austin Gilson, 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 filing with SEC. In addition, we will make reference to certain on-gap measures. The reconciliations with the appropriate gap measures can be found in the earnings release issued yesterday afternoon.

I'll now turn the call over to Travis Day. Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's fourth quarter 2023 conference call. The fourth quarter wrapped up a milestone year for Viper. For the full year, average oil production increased 13% compared to previous year, while our average share count was reduced by 1% over the same period. As a result of continued strong organic production growth, creative acquisitions, and an opportunistic share repurchase program, the fourth quarter represented the eighth consecutive quarter of increased production per share for Viper. For our return of capital for the fourth quarter, we've declared a 29-cent variable dividend to Class A shareholders to go along with our 27-cent-based dividend. This variable dividend is the same that we would have paid with a 75% payout ratio assuming we did not repurchase any shares during the quarter. However, inclusive of the $28.7 million in shares that we repurchased during the quarter, our effective payout ratio for Q4 is 97%. Our rationale for excluding the share repurchases done during the quarter and calculating our variable dividend is that we view this buyback which was done during the secondary offering related to our GRP acquisition, as an extension of the financing of the deal. Additionally, we've already received $10 million in post-effective cash flow that is applied as a reduction to the purchase price and does not show up in our reported financials for the quarter. Looking back on the year as a whole, there were several strategic initiatives completed during 2023 that marked important steps in the growth and evolution of Viper. Our GRP acquisition, which closed in the fourth quarter, clearly laid out the framework that we look for in large-scale M&A. First, it must be accretive on all relevant financial measures. Second, there must be high-quality, undeveloped inventory that supports our long-term growth profile and provides clear visibility to future development. The acquisition must provide significant scale that results in a pro forma business that is both bigger and better. Separately, Viper also completed its conversion into a Delaware corporation during the fourth quarter. We believe this conversion has delivered increased governance rights for our shareholders and positions Viper to grow our business and fully highlight the advantage nature of mineral and royalty ownership. Looking ahead to 2024, we've initiated production guidance for both Q1 and the full year. While Q1 is expected to be the weakest quarter of the year, primarily as a result of the timing of large fads, we continue to see strong activity levels across our acreage position and expect significant growth to occur throughout the year with Q4 2024 production expected to be at or above the high end of our guidance range. This continued production growth, along with our best-in-class cost structure, 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.

Thank you. And as a reminder, to ask a question, you will need to press star 11 on your telephone and wait for a name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Neil Dingman from Truist. Your line is open.

Morning, team. A nice quarter. My first question is on valuation. Just maybe broadly, it seems to me that the market's still not appropriately valuing Venom's growth and, you know, the continued association distribution. So, you know, Case, for you and the team, I'm just wondering, you all believe this is still a more of a broader issue with the minerals group in general, or is it more, you know, the market not appreciating Venom's future value creation?

Yeah, Neil, I mean, listen, I think the market's starting to wake up to the Venom story. as well as the minerals story. I think generally the conversion that we did to C-Corp has opened up a broader investor universe. It's allowed us to take meetings with shareholders or prospective shareholders that hadn't been able to buy the stock in the past. I think it's good to see some index ownership. It's good to see the float pick up. I think as we think about the vision for this business, as you continue to see consolidation in the E&P space, We think Viper will offer a unique opportunity and a unique investment case in the pure play Permian EMP or minerals business, however you want to look at it. I think generally as we continue to grow this business and it grows production, you can do that at Viper even if the parent company is not growing. Generally, I think the market's waking up to the story. I mean, this business is going to grow 14%, grow oil 14%, quarter over quarter, Q4 24 to Q4 23. That's a pretty impressive growth rate, and it's not impacting overall macro as much as it was upstream.

Yeah, I would agree. And then just a quick one on capital allocation. Given your low leverage, I assume you'll continue or will you continue to pay out the 90% plus cash available for distribution and would you consider leaning more into the buybacks?

We did a unique deal in Q4 to buy back a million units from what was given to GRP seller financing. I think that's a unique opportunity to buy back a lot of shares at one time. Viper shareholders have been rewarded for that, you know, from a returns perspective. I think generally, you know, we still believe minerals should be distribution vehicles. You know, we have a fixed distribution that's grown in the last couple years. We have a variable distribution that's probably our second call on, you know, payout. And then behind that is probably repurchases. I think there will be opportunities to repurchase shares in the future, but right now the priority feels to be SHIFTED MORE TOWARDS THE BASE PLUS VARIABLE UNLESS THERE WAS A UNIQUE EVENT LIKE A LARGE SHAREHOLDER SAW IT.

GREAT. THANKS FOR THE TIME.

THANKS, NEIL.

THANK YOU. ONE MOMENT FOR OUR NEXT QUESTION. OUR NEXT QUESTION COMES FROM DEREK WHITFIELD FROM STEEFEL. YOUR LINE IS OPEN.

GOOD MORNING, ALL. HI, DEREK. Wanted to circle back on the topic that came up earlier on your Diamondback call today regarding the increased inclusion of Wolf Camp D in 2024. Is that development focused in your Spanish Trail area or more broadly integrated across your stack development?

You know, it's more broadly integrated across the portfolio, but there is a lot of undeveloped opportunity in Spanish Trail You know, we signed a big lease last year for deep rights, which included a little bit of Wolf Camp D, but mainly Barnett and Woodford across that Spanish Trail position. You know, I think there's a couple wells coming on this year in the Wolf Camp D, which just opens up, you know, the next leg of the stool when it comes to, you know, mineral ownership. I mean, when we first bought Spanish Trail, you know, 10 years ago, it was focused on single bench Wolf Camp D development, maybe some more vertical wells, and now here we are developing, you know, five or six benches and an upside, you know, in the deeper zone. So, you know, at the end of the day, it's always good to be the mineral owner in Texas, and, you know, Viper being a large mineral owner with a well-funded parent operator is in a very good position. And, you know, often laid out in slide 12 of the deck, you know, what that looks like and what the benefit has been to the Viper shareholders in in Spanish Trail from a deal that started with a $400 million purchase 10 years ago.

I agree. Quite amazing. Maybe kind of bridging from that topic, with potential inclusion of Endeavor, are you guys aware of any leases or ranches with materially higher NRIs like Spanish Trail, or is it just uniformly higher from your perspective?

Yeah, there's certainly some opportunities. You know, there's the Quinn Ranch, which we had a little discussion about with Endeavor a few years ago, and they got title to the ranch. But, you know, we know the mineral owner there who owns a significant amount of minerals and someone we should be talking to. But I think those are all kind of opportunities that will open up as we get to work with the Endeavor team on what they have and what we have and putting together what will truly be a kind of world-class resource at the upstream angle and the downstream angle, sorry, the mineral angle.

That's terrific. Thanks for your time. Thanks, Derek.

Thank you. One moment for our next question. Our next question comes from Paul Diamond from Citi. Your line is open.

Good morning, Alex. Taking my call. Just a quick one on kind of the run rate cadence. If we take those 13.4 net wells in active development and kind of run that out, on our numbers we get to pretty close to the high end of guidance pretty quickly for 24. Should we kind of view that as just building a bit of conservatism into it, or is it more just accounting for ongoing volatility in pricing and just operational cadence across the market?

Yeah, Paul, a lot of it's just timing related. So if you think about Q1, right, it's kind of in the lower end of the range, mainly as a result of the lower well count that we saw turn to production in Q4 carrying into the year. So when you think about the full year, we've obviously had this range of 25.5 to 27.5 on oil out there. Since September of last year when we announced the GRP bill, as we've kind of rolled forward a couple months and you look at our net well counts, with current activity. Things have picked up a little bit, so I think that's why I think things may be a little bit higher than we previously thought in the back half of the year. But we're typically pretty conservative when it comes to converting permits to production and, you know, kind of push some of that activity that you see there into the 2025 timeline. But if things stay, you know, with current or with operators' pace of development, then potentially there could be a little bit of upside to our guidance. But, you know, we just got to what we can see and be very confident in today.

Yeah, the beginning of the year is the toughest part for us on getting a full year guide, particularly on the non-off side. I mean, we know the paying side very, very well, and, you know, that moves around slightly. But I think generally we're a little more conservative in what we think gets popped in the second half of the year on the non-off piece.

Got it. Understood. And just a quick follow-up. Given the kind of proliferation of, you know, M&A across both the mineral side as well as the non-op and just the operators more broadly. Has that really shifted your guys' mind as where you see as like the most attractive deal size? Post-GRP, has it gotten a little bit bigger because you guys are a bit bigger or is it still kind of run the gamut of a different scale in geographies?

I think generally a deal like GRP showed our advantage position because we could do a deal of that size with a significant amount of cash. You know, it's still a knife fight in the basin for smaller deals and, you know, probably what's called sub-20, sub-$10 million deal market. And really, you know, I think we still look at that market, but it's just not a huge piece of our business anymore. I think generally minerals have consolidated into funds that are sizable that we'll need to monetize at some point, and Viper should be, you know, the buyer of those larger positions rather than you know, the blocking and tackling, you know, making a big difference in the story. You know, I think also, Paul, you know, minerals are, in our mind, you know, well behind E&Ps in terms of consolidating. There's going to be, you know, probably more mineral consolidation in the next few years and more names that sell than upstream. I mean, upstream has been consolidating very rapidly. But there's going to be a solid wave of, of mineral positions that monetize big or small. And we want to be positioned to buy the best rock with the best visibility. And that, in our mind, is mainly Permian, if not mainly Midland Basin.

Got it.

Appreciate your time. I'll leave it there.

Thanks, Paul.

Thank you. One moment for our next question. Our next question, I'm confident I know. Leo Mariani from Ross, your line is open.

Hi, I appreciate some of the commentary there on your expectations for the minerals market to consolidate. Obviously, I think you guys laid out on the Endeavor acquisition call that Endeavor has roughly a portfolio that's two-thirds the size of Venom's currently, which obviously is very, very significant. Would you guys be able to kind of just give us a little bit of a high-level plan in terms of how you see that maybe playing out over time to the benefit of Venom? It certainly seems like there's significant drop-down potential. Is that something you think you could evaluate and kind of do multiple deals over kind of a handful of years? I mean, what do you think kind of the high-level game plan is?

Yeah, Leo, I mean, we gave some high-level information on the potential opportunity in the merger deck You know, I'll say that we can't really say much today on timing or sizing, but, you know, very clearly it's a meaningful position that, you know, would differentiate Viper if we could get a deal done at the right time. But, you know, I think we're going to have to leave it up to the pro forma board to decide and get the deal closed. And as you know, we don't move slowly, so we'll get working on it quickly, but can't really give you much until that time comes.

Okay. And then just in terms of, you know, some of the numbers here, I certainly noticed that your G&A is kind of going up, you know, per barrel by a fair amount. I'm assuming that's really just the conversion of the C-Corp and the additional costs that sort of come on that end?

Yeah, I think that's fair. You know, we're not adding a ton of people or anything. You know, we run this business pretty lean, but there are some added costs as we, you know, now allocate, you know, fully between the two, the parent and the sub.

Okay, thanks.

Thank you.

Thank you. One moment for our next question. Our next question comes from Tim Resvin from KeyBank Capital Markets. Your line is open.

Good morning, folks, and thanks for taking my question. I have two questions that are sort of related following up on what's been discussed here. Is it fair to say that despite the endeavor, opportunity, coming around the end of 2024 that you are open and willing to transact in third-party minerals this year? I know in the past, the Diamondback history, you haven't been afraid to stack deals when you see opportunities. So are you sort of continuing to be on the prowl, you know, now and through 2024?

Yeah, well, listen, Tim, I think we want to be selective, but certainly something that looks like GRP like we did last year would be very interesting to us. I think although that deal didn't have all Diamondback operations, there was actually a lot of Endeavor permits and units under it, but that visibility and that quality of remaining units in the Midland Basin costs has a lot of value. If there are deals with a lot of undeveloped value, not just near-term free cash flow accretion, that's something we're going to look at. I just don't have direct visibility into what that is today.

Okay, okay, that's helpful. And then related to that, and as you think longer term on Endeavor, you know, if you bake in the legacy, the acquired easy dog on GRP, leverage looks like a little bit over one times and hard to see a lot of organic be leveraging in a low 70s oil world. So what are your thoughts on the balance sheet and where you are today and maybe where you'd want to be over the medium term to sort of be able to, you know, take down bigger opportunities as they come up? Thank you.

I think a path towards one-times, no matter what the deal looks like, is the right way to look at it. We are distributing 75% of free cash, so there's a more limited amount of free cash to go to the balance sheet on a quarterly basis. Generally, we've proven that the mineral business can delever very quickly. It doesn't mean we're going to lever it up by any means, but security of of pure free cash flow, almost regardless of commodity price, is a pretty unique way to think about leverage in an oil or commodity-based business.

Thank you. Thank you. I'm not showing any further questions in the queue. I'd like to now turn it back to Travis Slice, CEO, for any closing remarks.

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

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.