Viper Energy, Inc.

Good day and thank you for standing by. Welcome to the Viper Energy First Quarter 2025 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you, 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 now like to hand the conference over to your speaker today, Chip Seale, Investor Relations Director. Please go ahead.

Thank you, Michelle. Good morning and welcome to Viper Energy's First 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 Case Van Toft, CEO, and Austin Gilfillan, 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. Reconciliations with these appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I will now turn the call over to Case.

Thank you, Chip. Welcome, everyone, and thank you for listening to Viper Energy's First Quarter 2025 conference call. The first quarter was a strong quarter for Viper with both oil and total production above the high end of their respective guidance ranges. Unfortunately, since the end of the first quarter, we've entered a period of lower commodity prices and significant market volatility. With that said, Viper is very well positioned to endure this period of volatility given our high pre-cash flow margins and high quality assets. As previously announced, we are excited the transformative drop-down transaction between Viper and Diamondback closed on May 1st. As a result of the conservative financing of this transaction, as well as Viper's continued strong financial and operating results, we expect leverage to remain below one times even in a sustained $50 per barrel WTI environment. Given the strength of our balance sheet, we will look to use this period of volatility to our advantage where we can, as highlighted by the opportunistic share repurchases we have been able to make so far this quarter. As a reminder, we issued approximately 28 million shares in a primary equity offering in January to fund the cash consideration of the drop-down. While the net proceeds of roughly $1.3 billion from the offering resulted in a meaningfully deleveraging transaction for Viper, we didn't receive any of the production or cash flow from the acquired assets during the quarter given the timing of the closing of the drop-down this quarter. So as a result, our Q1 dividend of $0.57 was roughly $0.07 lower than it would have been otherwise in our prior share count. While in previous situations, similar situations, we have decided to true up the dividend for the share issuance, this quarter given the current market volatility, we have decided to retain the roughly $25 million of incremental capital to keep on the balance sheet and apply to future capital allocation decisions. Looking ahead, despite the potential for sustained weakness in commodity prices and reduced activity levels, we expect Viper's production to remain durable, and as such, we are maintaining our previous guidance for oil production for the back-up of 2025. The symbiotic relationship between Diamondback and Viper is highlighted during times like these where Diamondback continues to focus its development on wells where Viper owns high royalty interests and therefore enhances Diamondback's consolidated capital efficiency. Further, the roughly 45% of Viper's current production that is operated by third parties is predominantly exposed to well-capitalized operators in the best parts of the Permian Basin, led by ExxonMobil operating almost half of our third-party production. In conclusion, we continue to believe that Viper presents a differentiated investment opportunity with zero capital and operating costs, alignment with a parent company that has helped Viper deliver consistent organic growth, and a current size of scale that positions us as a consolidator of choice in what remains a highly fragmented minerals and royalty space. Following the recent closing of the drop-down, Viper now ranks amongst the largest U.S. independent E&Ps, and we believe the unique attributes of the business model will continue to be recognized by the market over time as our uniquely durable cash flow profile becomes increasingly differentiated. Operator, now open the line for questions.

Thank you. As a reminder to ask a question, if you would like to, please press star 1-1 on your telephone. If you would like to remove yourself, please press star 1-1 again. One moment for our first question. Our first question is going to come from the line of Greta Durfick with Goldman Sachs. Your line is open. Please go ahead.

Good morning, all, and thank you for taking my questions. My first is on M&A. You know, Viper has continued to lean into M&A this year alongside the drop-down. Do the changes to the broader macro environment influence your willingness to lean into M&A at this point, or do they change your view on the opportunity set for incremental M&A from here?

I wouldn't say the macro impacts our desire to continue to consolidate the minerals market. You know, I think what happens in minerals is, you know, because there's no capex associated with, you know, the development of minerals or owning minerals, sometimes deals are harder to come by in more volatile environments on the minerals side. So, you know, I think we've been able to do some pretty large deals through pass-down cycles. You know, notably we did the swallow tail deal in 2022, which had a lot of Diamondback, or sorry, 2021, which had a lot of Diamondback-operated production. You know, deals like that make a lot of sense, but I think we're going to kind of sift through this volatility here for a couple months and then see, you know, who's willing to transact on the other side of it.

Great. Thank you. And then for my second question, just following up on the updated FAANG guidance and the closing of the drop-down, have the activity assumptions in Reagan County following the Diablo Eagle acquisition changed at all? And if so, could you speak to potential differences in your cash flow assumptions from that development opportunity?

You know, we really started to model completions in that area starting in 2026, so I don't think it's time to change that development program yet. I mean, in talking to the double eagle team we're working with closely to, you know, core up the assets and start drilling wells, you know, they're going to spend a lot of time drilling here in the back half of the year, you know, leading to completions in 2026. So, you know, if the commodity market is still weak, you know, sub-60, certainly sub-50 environment, you know, I would expect that to get pushed out to the right, like many projects in the basin. But, you know, I think in a normalized 60-plus environment we expect that development to occur.

Thank you.

Thank you.

Thank you. One moment for our next question. And our next question is going to come from the line of Paul Diamond with Citi. Your line is open. Please go ahead.

Good morning, all. Thanks for taking the call. Just wanted to touch on a quick one sitting on the third-party opportunity set. I mean, given you guys' footprint across Midland and Delaware, getting pretty balling this. I guess I want to get an idea of, you know, where I guess that next leg of opportunities lay, like once the volatility settles down. Is that Midland? Is that Delaware? Or potentially elsewhere?

Hey, Paul. Yeah, I think we're pretty much agnostic in terms of M&A opportunities between the Midland and the Delaware. I think what you've seen over the past 18 months with GRP first and then Tumbleweed and then now also the drop-down, it was certainly weighted to the Midland Basin. I mean, I think we know the asset really well. We were fortunate to get some pretty highly undeveloped assets that I think are going to support the longer-term growth profile. But, you know, I think we like the Delaware as well, you know, especially not having to cut the capital on what could be some more expensive wells. There's still a lot of resource available there. And there could be some sizable opportunities there as well. So for us, it's going to be more about price and opportunity set. But in the case of the earlier point, right, we're just going to have to step through the volatility and see what becomes available during this volatility or after when we hopefully have more normalized times.

Understood. Appreciate the clarity. Just one quick one on hedging. You guys have been pretty consistent on that through, you know, the last several years. This has also been a relatively directionally stable environment. Does the recent volatility in the macro side, could that potentially shift that, you know, overall strategy? Or is it still pretty locked in and you're comfortable with the current plan?

No, we're still comfortable with the current plan. I mean, the philosophy has always been one, have a fortress balance sheet. So, you know, you don't have to do a ton of hedging or anything drastic, right, with swaps or collars or anything like that. So I think we'll still look to use these deferred premium inputs, you know, still have the unlimited upside and try to protect against the extreme downside. But having the balance sheet that we have today, you know, we look to try to lock in a certain amount of downside protected cash flow so that leverage doesn't kind of blow out in a low commodity price environment. So we're in a great position today and I think we'll stay true to what that strategy has been over the last couple of years.

Understood. Appreciate the clarity. I'll leave it there.

Thanks, Paul.

Thank you. And one moment for our next question. And our next question comes from the line of Derek Wakefield with Texas Capital. Your line is open. Please go ahead.

Good morning, all, and thanks again for your time.

Hey, Derek.

Regarding the down and back investor letter from this morning, you highlighted industry concerns with development at current prices. As you guys think about Vipers exposure, how much of that 10% decrease would you have exposure to assuming that backdrop?

Yeah, I think on a net well basis, it's very minimal. You know, we still see the majority of the wells for projects where Vipers has a high interest getting completed today at the Vipers level. And I think if this persists much longer, it's a different story. But I think generally in these times, we look at consolidated NRIs at the diving back level, and that includes what Vipers has been able to pick up over the years. And usually those projects, given the area that they're in, move to the top of the list. So, you know, I would say no impact for now, which is why we held guidance where it was. But, you know, listen, Derek, we see a -$50 oil environment, and Diamondback and others are cutting more, then it's going to hit Vipers towards the back half of the year and into next year. But I think what we think is, you know, it's going to be a tough couple quarters for the industry. I think price is going to react at some point, you know, due to lower U.S. oil production, and owning assets in the lowest break-even parts of the U.S. is going to be a strategy that pays off for Vipers shareholders.

Absolutely, Greene Case. And then with my second question, just wanted to get a better sense on the -over-quarter change in activity. If we were to include the acquisition and drops in your four-key disclosure, do you have a sense on whether work in progress and monocyte wealth increased -over-quarter or kind of were flattish?

Yeah, activity is certainly increasing, especially on the Diamondback side as we roll forward and start getting that visibility into what 2026 is going to look like. You know, I mean, notwithstanding, right, some of the pending changes that FK's just outlined. But overall, I would say, you know, going through the first quarter into April, you know, we were having pretty strong activity levels on the third-party side, mainly being led by Exxon, EOG, and Oxy. And then Diamondback, you know, production is really strong today, and we kind of outlined it with a drop-down. But I have some really concentrated projects there that Diamondback can prioritize. And if commodities can hang in there, you know, we'll certainly lead to some pretty strong growth through 2026.

Great. I'll turn it back to the operator. Thanks, Derrick.

Thank you. One moment for our next question. Our next question is going to come from the line of Arun Jamarand with JPMorgan Securities. Your line is open. Please go ahead.

Yes, this is Zach for Arun. Just wanted to follow up on your prior answer. With the Endeavor drop-down with amounts, Vyprod talked about 4,000 barrels a day of volume growth on Diamondback-operated properties in 2026. Given those changes Diamondback made last night, do you expect any changes to those growth volumes at Vyprod?

Yes, Zach, I don't see any changes today, right? You know, I still think there's a strong chance that 2026 is stronger than, you know, everybody is thinking today. You know, we've kind of signaled the message that these down cycles tend to happen quickly and hopefully at a higher low on commodity price. But, you know, if we do persist in the 2026, we are going to continue to focus on areas where, you know, Diamondback and Vyprod have high NRI. So I see no reason to change the thought process on 2026 growth, you know, particularly with what we're doing on, you know, Quinn Ranch, which we bought earlier this year, and some of the high, sorry, yeah, Quinn Ranch, which we bought earlier this year and some of the high NRI projects from both Humbleweed and, you know, the Drop Town.

Thanks, Keith. And my follow-up, I know Exxon is your largest third-party operator, but can you talk about what you're seeing from some of your smaller third-parties just in light of the commodity price volatility? Have you started to see some things get pushed to the right there?

I haven't seen it at the Venom level, the Vyprod level directly, right? I think what we've seen is more of the anecdotes in the field of, you know, particularly private operators, you know, pushing completions out or dropping crack crews and, you know, riding this out. So, you know, at Vyprod we try to buy assets under, you know, acreage positions that we covet, and that tends to be the higher quality positions operated by large operators like, you know, Diamondback, Exxon, Oxi, EOG, Conoco, and in our mind those are probably the stickier barrels in the basin, but, you know, the comments we made earlier were more anecdotes about, you know, the smaller operators in the field, you know, making, you know, single-unit capital allocation decisions.

Got it. Thanks,

Jason. Thank you, and one moment for our next question. Our next question is going to come from the line of Leo Mariani with Ross. Your line is open. Please go ahead.

Yeah, again, obviously we're looking at, you know, kind of weaker oil market conditions, and I guess we'll see how it plays out. Obviously you guys mentioned that you kind of held back, you know, some of the first quarter dividend, given the weak market conditions. Obviously it looks like there's significant accretion that's coming from the Endeavor drop-down. Do you all still envision being able to kind of increase the dividend here over the next, you know, couple quarters, you know, even in this kind of, you know, 60-ish dollar, you know, oil world today, just given the accretion on production and cash flow?

Yeah, I think at 60, you know, or a flat commodity price, if you run the flat commodity price, Q2 to Q4, whatever that is, you know, distributions are going to grow. You know, obviously a $5 moving oil price can change that pretty quickly, but, you know, the accretion still stands from the drop-down. I think, you know, also importantly, you know, we have balance sheet capacity to do, you know, almost anything we want on the acquisition side. And, you know, lastly, we didn't mention it in the prepared remarks, but, you know, Viper was upgraded to investment grade last week, which is by Fitch. So now we have two investment grade ratings. And so, you know, access to capital at Viper today is kind of unmatched in the mineral space and, you know, something we've been working on for a really long time. And it's good to see that come to fruition, particularly when, you know, capital access is scarce today.

Okay, appreciate that. Maybe just a couple quick ones on some of the numbers here. So seeing that your kind of cash tax guidance is coming down a little bit in the second quarter versus where it was in one queue, so just kind of curious. Maybe there's just some, you know, quarter to quarter, you know, tweaks there. Is there anything to kind of read into a lower cash tax rate with, you know, lower oil prices here? And then on G&A, presumably you guys aren't adding a whole lot of, you know, G&A as a result of the Endeavor deal, but correct me if I'm wrong. And you're obviously getting significant production, so just trying to get a sense that G&A rubber oil should come down nicely here.

Yeah, you know, listen, sadly taxes are down because oil is down. That's as simple as I can frame it. We look forward to paying more taxes when oil goes back up, but on the G&A side usually Q1 is kind of the peak on G&A and it comes down. We've got a model coming down. You know, we run a pretty lean organization at Viper. You know, we are adding some people here and there to help with the administrative side of our business, but, you know, I think you can expect G&A to come down per BOE post drop down. Thank

you.

Thanks, Lidl.

Thank you. And again, if you would like to ask a question at this time, please press star 1-1 on your telephone. And our next question is going to come from the line of Tim Risen with KeyBank Capital Markets. Your line is open. Please go ahead.

Good morning, folks. I wanted to ask on repurchases. I saw that you bottom tick things pretty well in the second quarter, buying below 38. And I know commodity prices are as big a factor as share prices probably in the decision-making process, but can you give any more color on sort of the timing or the intensity? I know with shares of 40 it's back on the table in a big way, so I'm just curious if you have any more details you can provide on your appetite for more this year. Thank you.

Yeah, Tim, you know, I think we've always tried to err on the side of caution on repurchases at Viper, you know, tried to lean more towards being a distribution vehicle, which it seems our investors want. But the volatility here allowed us to kick back into the buyback. And, you know, I think the benefit for Viper is, you know, we still generate a lot of free cash at lower oil prices. I think we have a balance sheet where we wouldn't be afraid to go above 75 percent of free cash distributed in a quarter to lean into buybacks. You know, again, I hope that doesn't happen, but I think we're prepared. You know, I think COVID taught us a lot about our balance sheet, our hedging structure, how we, you know, how we do things. And, you know, we're prepared this time around to lean in if there's continued volatility.

Okay, okay, that's helpful. And then just talking about the balance sheet, do you have a target debt number you want to get to? Because I know with your hedge profile, you can't control leverage as much, but how do you think about the right debt load, you know, post the drop down? Thanks.

Yeah, I don't like saying we're under levered because I do think, you know, there will be opportunities to use cash in deals. But, you know, I think a turn of leverage at $50 oil feels pretty pristine for Viper. But, you know, we could lean in a little bit should there be opportunities, you know, to buy deals with cash in this, in these commodity prices. You know, it tends to be harder to get deals done on the mineral side over upstream when commodity prices are lower. But, you know, we're certainly going to keep trying. Thank you. You know, I think the last thing Tim would say on balance sheet, you know, being investment grade now opens up a whole different opportunity set for, you know, our access to capital and what we can do. We have our 27 notes outstanding that are, you know, essentially callable today. We've been buying back some of them in the market. We've got a small balance on the revolver. I think at the appropriate time, it's going to make sense for us to do a more longer dated, you know, debt transaction at Viper with, you know, without the call protections that you normally get in the high-yield market. So, wait and see on that.

Okay. Thank you.

Thank you. And I would now like to hand the conference back over to Case Van Taff CEO for closing remarks.

Thanks, everybody, for taking the time to listen to our call today. If you have any questions, you know, please reach out. We're always available.

This concludes today's conference call. Thank you for participating. And you may now disconnect. Everyone, have a great day.