Viper Energy, Inc.

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 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. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. 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 Lawless, 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 Tsai, CEO, Case Vantoff, President, and Austin Gilfillan, 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 Stutz.

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 wool per day of quarterly production from the non-permeant 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 Vipers high concentration royalty acreage. In addition to the strong operational and financial results announced yesterday, we also announced that Vipers Board of Directors has approved an 11 percent increase in our annual base dividend, which highlights the Board's belief in 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 Vipa. 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 also 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. 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 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. The first question comes from Neil Dingman with Truist. Go ahead, your line is open.

Morning, all 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 some of the asset sales. So I'm just wondering, are you assuming much, you know, kind of on a go forward or with this forecast, are you assuming much change in rig count or we assume the majority of this upside is coming from the operational efficiencies like we're seeing over at Fang?

Yeah, I mean, good question, Neil. You know, I think high level, as you think about when we start the year, we don't have as much visibility on non-fang operated properties. And as the year goes on, that visibility increases. You know, I think part of it is, you know, the efficiency piece. I think we always kind of expected a pretty big ramp in the back half of the year with some significant fang wells or fang pads coming on and That gives us a lot of confidence in the third quarter, and then 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, you want to add anything to that? Yeah, now the divestiture, as a reminder, that was doing about 450 barrels four per day, and that divestiture closed May 1st. So we got one month of contribution in the second quarter, but have updated the full year guidance to reflect the loss of that production contribution. And to Kate's point, we only guide to what we can see. So we have pretty good visibility to the back half of the year on the non-op side. On the Diamond Bank operated side, halfway through the year, we've only had about 40 to 45% of the net Diamond Bank locations turn to production. So we'll see a pretty significant ramp in activity and production there as we progress through the next two quarters.

You know, Neil, 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 vipers, minerals, but also you heard Diamondback talk about these additional zones that we didn't formerly think were Tier 1 zones at the Diamondback level, but now we're confident, you know, in the Upper Sprayberry and the Wolf Camp D, that those zones are going to you know, start contributing as well, too. All of those are positive read-throughs, you know, for Viper. And, again, I emphasize it in my prepared remarks, but, you know, with Viper having a, you know, below a $30 WTI break-even price, that's a pretty stunning statistic.

Great addition to that, Travis. And then my second question is just on capital allocations specifically. Do you view Venom's payout, maybe for Kay's options, as opportunistic as Fang, or given the mineral structure, are you more inclined to stick with the base and variable dividends?

I think the feedback from investors and our board has been to lean more towards the cash distribution model, but also continuing to grow that base dividend. I think we moved 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're probably third behind base dividend, variable dividend, and then buybacks, kind of the opposite at Diamondback. But there will be times of stress in this very cyclical industry where buybacks make a ton of sense, like when we started buying back shares at the end of end of 2020 and into 2021, but right now we're very comfortable with the high distribution model.

Thanks, guys.

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

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

Yeah, that's a good question, Betty. I mean, we obviously track the RIC count, but much more important for us is the work in progress and line of site wells, and then when you look at what percentage of those are converted, and then also kind of the cycle times to be converted. So the recount will fluctuate day by day, week by week, but we haven't really seen any change in the conversion rates to cycle times. So with those work in progress and line of site 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 part of next year.

I think the other thing to think about, Betty, is also net rigs. You could have a lot of gross rig exposure at half a percent interest across 100 wells, but if you think about the exposure we have to the Diamondback development plan, that's where your net rigs and your net work-in-progress wells that we have a differential line of sight to really give us an advantage.

Now that makes a lot of sense. And then just a follow up on the Diamondback portion of the percentage of total activity, 2Q is a bit light on Diamondback side. So going forward, the backlog, Diamondback accounts for roughly 50% of the backlog. So should that, should we expect that to revert higher back to that 50% level?

Yeah, 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. And really, you know, you kind of get a little bit of that lumpiness with the large pad sizes. So, I mean, right now, you know, we have a 24-well Diamondback pad with, you know, 9% to 10% viper NRI being turned to production. So, it's not always rainable, but, you know, we do see the big increase coming in the back half of the year, and it'll kind of revert to being more Diamondback growth-driven here now versus, you know, the first half having a lot of upside from the third-party piece.

Great. Thank you for the call, Eric.

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, Alfred. I should take my question. Just a quick one for you is kind of think about portfolio optimization in coming quarters. I guess, where do you all see the kind of the right mix going forward, you know, at current and kind of looking to the next year as far as the breakdown between, you know, opportunities across, whether it's from, you know, within FANG or elsewhere in the private market or in the third-party market?

Yeah, I mean, you know, I think we're trying to position ourselves to be, you know, the consolidator of choice in the Permian. I think you saw how we treated the non-core or non-Permian assets associated with the GRP deal. We kind of monetized those very quickly for a quick gain, but really I think generally the significant opportunities under Diamondback that would move the needle for Viper production are fewer and further between. Obviously the potential drop down from Endeavor merger is the biggest and most visible. But on a Diamondback standalone basis, there's not a lot of Spanish trails sitting out there. But that's why we've kind of moved to this portfolio effect of looking at really good rock that we covet at the Diamondback level or the Viper level with deals like GRP. And that's a deal that's – it was a billion-dollar deal that's tough to get done in the mineral space today. So I think we're positioning ourselves to – 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 the 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 all see those cycle times have obviously been trending positively? How, I guess, how linear should we expect that to be in coming quarters and years in your view of

Matt, we don't really model an improvement from here, so we're constantly watching operators by county or even more precise geographic region than that, and then also looking at path size as well 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, you know, work in progress in line of site wells and cycle time is improved, then that might just be a little bit of upside to the guidance as we currently have it modeled on.

Understood. Appreciate the clarity. Thanks for your time.

Stand by 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 kind of, you know, do some prep work, you know, ahead of time to maybe try to get that you know, deal to fruition a little sooner? I know there's kind of a lot of land work that needs to kind of get done in the background, or do you really have to kind of wait for the deal to close to get on that? And then I guess just, you know, is there any kind of high-level expectation on, you know, when that might happen? Do you guys anticipate that, you know, that big deal could happen kind of by middle of next year?

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

Okay. No, that's helpful. I mean, is it fair to say just based on your kind of prepared comments that you walked through on some of the M&A stuff that, you know, that the smaller deals, just kind of the little stuff has kind of been a little more competitive and it's really these, you know, really big deals that you might see out there that are third party and then kind of the drop down here from Endeavor. That's the type of things we should expect, you know, Venom to focus on.

Yeah, 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 I think you'd be shocked to see how many kind of $20 to $50 million mineral funds there are that you never see on the outside. So those competitors are very aggressive on smaller deals. They probably take a little more risk on undeveloped acreage and timing. And we kind of see our spot in the food chain as, you know, being the aggregator of those aggregators and being able to, you know, come to an opportunity with, you know, a real amount of cash, a real amount of market access, a real amount of liquidity. And so 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 unit holders.

Okay. Thanks, guys.

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.