Viper Energy, Inc.

Good day, and thank you for standing by. Welcome to the FIFER Energy Second 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 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 the 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, Chip Steele, Investor Relations Director. Chip, please go ahead.

Thank you, Felicia. Good morning, and welcome to Viper Energy's second 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 Kay Spanthoff, 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. The reconciliations with the 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 second quarter 2025 conference call. Despite oil price volatility in the second quarter, Viper delivered strong oil production growth, both on an absolute and per share basis. After closing the transformative drop-down transaction from Diamondback on May 1st, we remain excited and highly confident about the meaningful organic growth that Diamondback can drive on our concentrated royalty assets over both the short and the long term. This symbiotic relationship uniquely positions Viper as one of the few companies in North American energy that is expected to deliver organic growth over the coming quarters and years. As previously announced during the second quarter, we also announced a definitive agreement for VIPER to acquire CTO royalties in an all equity transaction. CTO will be hosting their shareholder meeting to vote on a proposal to approve the merger on August 18th, and if approved, we expect to close the merger shortly following the meeting. As a reminder, this transaction has substantial scale and inventory depth. for Viper that will support our production profile over the next decade while also offering meaningful and immediate financial accretion. Following the expected close of the CITIO acquisition later this month, we remain highly confident in our organic growth trajectory that it will continue into 2026 at current prices, led by over 15% expected year-over-year growth in our Diamondback-operated net oil production. We expect full year 2026 average production to increase by a mid-single-digit percentage from our expected pro forma Q4 2025 production levels, which is the first quarter of VIPER plus CTO consolidated. Importantly, based on this production outlook, we would expect our oil production per share for full year 2026 to be approximately 15% higher than full year 2025, highlighting the unique combination of organic growth, and accretive acquisitions. Moving to return of capital, we are going to return 56 cents a share to stockholders this quarter, primarily in the form of our base plus variable dividend, which represents 75% of our cash available for distribution. As announced with the CTO acquisition, our pro forma net debt target is $1.5 billion, which represents approximately one turn of leverage at $50 WTI based on expected pro forma production levels. We're committed to maintaining a fortress balance sheet, but we see $1.5 billion as the right amount of permanent leverage for Viper as a royalty business, given we have limited operating costs and no capex. Therefore, in the coming quarters and years, should net debt be at or below $1.5 billion, stockholders should expect us to return all excess cash up to 100% of available cash for distribution generated in a quarter. In conclusion, we continue to believe that VIPER presents a differentiated investment opportunity within the broader energy space. Our relationship with Diamondback remains strong and a distinct competitive advantage for VIPER. We believe VIPER's unique ability to deliver sustained per share growth with zero capital and only limited operating costs will result in a differential ability to return increasing amounts of capital to our shareholders over the long term. And the proposed CTO acquisition only enhances our position as we look to compete with mid and large cap E&Ps for investor dollars, attention, and access to capital. Operator, please open the line for questions.

Thank you. At this time, we'll 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 the line of Chris Baker of Evercore. Chris, please go ahead.

Yeah, thanks. Kay's, you know, great to see the commitment to returning 100% of cash flow once you get to that $1.5 billion target. maybe just help frame up the flexibility in terms of the path toward that target, whether it be organically or with perhaps non-core asset sales?

Yeah, good question, Chris. I think there are a couple ways to go about that. I mean, the base case is the business can be generating a lot of free cash if we split that that return 75-25 between equity and the balance sheet, you know, we naturally get down to that $1.5 billion, you know, fairly quickly post CTO close. You know, I think we're probably, you know, we mentioned some of the non-Permian assets could be considered non-core to us, and there's been a lot of inbound interest that we, you know, haven't been able to do anything about because the deal hasn't closed yet, but I think it would be logical for us to look at an asset or two outside of the basin to kind of accelerate that. I think we feel really good about the balance sheet where it is today. I think we're also very cognizant of where the stock's trading, and I think it's extremely undervalued versus what we expect the growth profile to look like over the coming years. So I think we're going to balance a mix of probably a couple non-core asset sales combined with free cash generation, but also a heavy dose of buybacks here when we're permitted to post-close.

Yeah, that's great. And then I guess just hitting on that last point, how are you thinking about the mix of buyback versus variable on top of the base dividend? Is it fair to think that we could see most of that variable cut in favor of buyback, just given where the stock is today?

Yeah, I mean, I think we're going to have to look at how many days we're allowed to buy back before a buyback window closes and when the CITIO deal actually does close, which we expect in the coming weeks. But, yeah, I mean, I think generally we prefer that Viper be a distribution vehicle, but when there are these dislocations, I think it's great to have a pure free cash flow vehicle to be able to allocate more cash to customers other forms of return of capital without worrying about, you know, CapEx commitments.

Great. Thanks, guys.

One moment for your next question. The next question comes from the line of Betty Jiang of Barclays. Betty, please go ahead. Thank you.

Good morning again. I want to ask about the service. third party operated activities, it's quite impressive, considering the broader industry slowdown that you're seeing more activities running on the third party assets and increased backlog. Just want to see what you any color on that dynamic? And do you think that level of activity is sustainable?

Yeah, good question, Betty. I think it's a couple of things. One, going back to last quarter when we were kind of in the midst of some of the heightened volatility, we highlighted for standalone viper what our exposure is to third-party operators. And really the bulk of the existing production and activity is just a handful of really large caps, namely being Exxon, Oxy, EOG, and Conoco. I think those operators are folks that you would expect to stay pretty consistent with their development plan through periods of volatility. That's benefited us. Secondly, too, you're seeing some of these concentrated assets that we've acquired and some of the recent acquisitions of getting some activity on them. It's really been more of a drive in net activity, while gross activity has been relatively flat. And then the third thing that I would flag, and you can kind of see it showing up in one of the pie charts on Slack 12, is we're starting to see some of the benefit in those numbers from the double legal development on the Reagan County asset that, you know, they have that development agreement in place with Diane Bagg to drive some growth on what was a very concentrated asset in the drop down.

Great color. Thanks. So a follow up to that is, If I look at your 2026 production growth outlook of the mid-single-digit growth, I believe that's really underpinned by down-and-back operator activities. Based on what you currently see with a third-party activity, do you think could there be upside to that growth trajectory in 2026?

Yeah, I think so. So that mid-single-digit is really 3,000 or 4,000 growth a day of growth if you're thinking about it on an absolute basis. which is entirely driven by the growth that we see coming from the Dimebag operated side. So as we look at it today, if you maintain historical permit conversions and timing and such, I think current activity on the third-party side would be a little bit of growth, actually, relative to the baseline of being flat. But, you know, a lot of things can change, and there's certainly a lot of volatility in the market, so we're still kind of guiding to third-party volume staying flat. But we are really encouraged by the activity levels that we've seen over the past couple months.

That's great. Thank you. One moment for your next question. The next question comes from the line of Neil Mehta of Goldman Sachs. Neil, please go ahead.

Yeah, good morning, team. I just want your perspective on some of the non-core, or I should say non-permeant stuff in the CTO portfolio. Your perspective on, you know, how are you evaluating how much of that ultimately stays versus gets monetized and, you know, This has historically been a Permian pure play asset. How important is that for you as you think about the long-term of the business?

Yeah, Neil, I mean, I think we still see our combined business as a long-term Permian-only business. But I think, you know, we've done a lot of deals over the past years. And in some instances, we've, you know, sold assets immediately post-close and to pay down debt or just to clean up the asset base. I think in this situation, given that it's minerals and it's, you know, really, you know, heavily PDP-weighted, we're probably going to be pretty patient on some of the larger positions, particularly, you know, knowing that the buyer universe is strong, but, you know, the buyer universe is going to underwrite strip, and with the strip weak, we don't have to sell assets here. It might be... might be patient waiting to sell some of the larger positions over the next few years.

And then on the flip side of the case, you've been very clear about using this asset to consolidate. You have an advantage cost to capital, even if it's undervalued, and you are the logical acquirer of a lot of royalty acreage. Is the opportunity set available and interesting? And how do you weigh that against the intensity of integration around the CITIO asset that you'll need for the next couple of months?

Yeah, I think the integration is going to go pretty quickly. I think CITIO had a very clean business and some of the key employees are hopefully going to join us at some point at Viper. I think the integration won't necessarily be the problem, but I do think as you think about uses of capital, you know, we want to be, you know, patient at the Viper level given that, you know, we've done two large deals in six months. And, you know, we expect those deals to be accretive and we expect the market to reward those deals for being accretive. And that hasn't happened yet. And so I think we need to hit numbers and, you know, be aggressive on our buyback and let things settle out for a little bit before, you doing anything large or strategic right away. There certainly are packages we're very interested in. Most of those are held in private hands, so they're pretty patient. And so I think we need to show a clean quarter or two pro forma for the CTO and show that we're hitting our synergies and hitting our production targets and reducing our share count, all while paying a very large dividend. Awesome.

All right. Thanks, Cates.

Thank you.

Sorry. One moment for your next question. The next question comes from the line of Paul Diamond of Citi. Paul, please go ahead.

Thank you. Good morning, all. Thanks for taking the call. Just wanted to quickly touch base on the 1.5 net debt target. Once hit, even without any asset dispositions, does that shift your hedge strategy at all? Do you feel a need to maintain... current levels or could we see that moderate a little bit or how do you think about that post hitting that target?

Yeah, Paul, we've always kind of thought about our hedging strategy as locking in a certain amount of downside protected cash flow that even if things really go south, you have some level of protection and leverage isn't going to blow out on you. So I think we'll continue to hedge probably in this consistent form of the deferred premium puts. So really, just as debt goes down or net debt goes down, you just need to hedge less barrels to lock in the required amount of downside protected cash flow to solve for a cap on leverage.

Got it. Makes sense. Okay. And then just shifting a little bit, I know you talked about this a touch, but just in the back half of the year post-CDO closing, how should we think about that 75% of distributable cash to be split between the variable versus... Are you thinking about leaning more in that direction, or how do you think about that for between now and year-end?

I think it's all going to be flexible, but there is a lot of cash and capacity to buy back shares here once we close the deal. I think we're just going to have to see how things unfold over the back half of the year. That's the beauty of a pure free cash flow business that's actually growing is that there's capacity to do both. But I think today, I think you're hearing a strong message from us that we would lean into buybacks over a variable today.

Understood. Appreciate the clarity over there.

Thanks, Paul.

One moment for your next question. The next question comes from the line of Derrick Whitfield of Texas Capital. Derrick, please go ahead.

Good morning, all, and thanks again for your time. Thanks, Derrick. For my first question, I wanted to focus on the CDO acquisition. While it's hard to fully attribute stock performance to any specific development, Venom hasn't performed several of its peers since the announcement. Are there any aspects of the acquisition that you feel are unappreciated by investors?

Yeah, I mean, listen, I think the size and scale of the combined business is misunderstood, right? It's hard to model mineral businesses because you have a small interest in a significant number of wells. But I think if you combine the visibility we have with the Diamondback drill bit and the financial accretion associated with the trade, you start to see numbers go up. And, you know, listen, our job is to make – the business look cheap by executing on either growth or reduction in share count. And, you know, over time, the market's a weighing machine versus a voting machine. And, you know, these higher per share metrics tend to prove out to be the right way to run a business long term. So I think while we often get stuck in the malaise of the short term, the long term path is very bright.

Great. In past calls, CTO management has highlighted the substantial investment it has made in back office efforts to identify underpayment of royalties. I've been thinking about the levers that you guys have to pull for accretion. How much of that exists within Venom?

They've done some pretty interesting things on the automation side that we're really excited to bring into our business. You know, I think they've had to do it out of necessity given the number of wells they have interest in, and that's why we have a lot of confidence that, you know, we'll be able to integrate that very quickly. I mean, I think in general, right, a lot of the administrative functions throughout our business in EMP and in minerals, you know, the AI revolution and machine learning are going to be two very important pieces to, review 35,000 wells a month to make sure you're getting paid right. And I think it'll accrue to our shareholders' benefit long-term as well.

That's great. I'll leave it there.

One moment for your next question. The next question comes from the line of Aaron Vilkoski of TD Cowan. Aaron, please go ahead.

Thanks. Good morning, guys. So your presentation outlines an expected 5.9% NRI in Diamondback-operated wells through 2029. I guess my question is, do you expect that NRI to be fairly consistent across those years, or do you anticipate a higher NRI in 2026 than see that taper off in the later years?

Yeah, Aaron, I think really the important metric is the net well count. And as we think about that, on the Diamondback-operated side, it's really a function of two things. It's one, your exposure to total dynamic growth activity levels, and then secondly, your NRI within those wells. So, we kind of laid this detail out with the drop-down given we have such increased alignment with the dynamic development plan over an extended period of time given the overlap of that drop-down acreage. So, you'll kind of see on slide 11, thinking about around 25 net wells per year over this time period. I would say that that certainly will be a touch front-weighted. So if you think about 26 and 27, that'll be biased a touch higher than that. And that's really going to drive the couple thousand barrels a day of growth that we're talking about on an absolute basis. But really, over a five-year period, it's going to be pretty consistent exposure to whatever Dynavex development plan is going to be. And that really underscores the confidence we have in the long-term production growth outlook.

Perfect. Thank you very much.

One moment for our last question. The next question comes from the line of Leo Mariani of Roth. Leo, please go ahead.

Yeah, I wanted to touch base on the debt target here. Do you guys anticipate hitting that? It sounds like in the relatively near future. Do you think that's going to happen here in the first half of 26? And then could you also just talk about the strategy of sort of dividends and you know, versus buybacks? Obviously, it sounds like you want to step up the buyback here, given the weakness in the shares on a relative basis, but do you also see room for dividend increases in the back half of the year, given the accretion from the mergers?

Yeah, Leo, I mean, I think it's reasonable to expect that the board will look at the base dividend and increasing that, you know, sometime in the next quarter or two, but on top of that, just free cash flow growth overall from production growth and the accretion of the deal starts to roll through as well. I think importantly, this $1.5 billion net debt target and just saying, hey, we're not going to hold on to a bunch of cash on top of that number. If we're at that net debt number, we're giving the cash back to shareholders. I think that once that starts flowing through numbers, people are going to realize how much cash they're going to get back from Viper over the next couple years is going to be significant.

Okay. And then on the M&A side, obviously it sounds like you've got a lot to still digest here. You haven't closed CTO yet. You kind of made a comment here that perhaps you take it a little bit slower as you want to get maybe the stock price up a bit to kind of fully reflect the benefits of the acquisition, so I understand maybe you don't have as much desire in the very near term, but can you talk about availability of deals out there? Are you seeing packages that are transacting? Obviously, all prices have settled down a little bit after a pretty tumultuous second quarter.

Yeah, it's been pretty quiet for us, but, you know, it's probably because we've been doing this, you know, this large deal. You know, I think most importantly, you know, As I said earlier in the call, we did two transformative deals in six months. We expect our investors to make money on those deals, and that's why we're kind of signaling that we'd like to be patient on M&A and make sure our investors are made whole on the accretion that we all expect to come. Okay, thanks. Thanks, Leo.

This concludes the question and answer session. I would now like to turn it back over to management for closing remarks.

Well, thanks, everybody, for participating in today's call, our second call without air conditioning. And I appreciate you making it shorter than the Diamondback call. Have a good day.

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