Viper Energy Partners (VNOM) has reported sustained organic production growth and the successful completion of the Tumbleweed acquisition in its Third Quarter 2024 Earnings Call. Travis Stice, the CEO, outlined the company's disciplined consolidation strategy of high-quality mineral and royalty assets. The recent merger between Diamondback (NASDAQ:FANG) and Endeavor, which closed in the third quarter, is expected to bolster Viper's operations due to Endeavor's significant role on Viper's assets.
VNOM has seen a substantial increase in work-in-progress wells, especially in Diamondback-operated areas, setting the stage for future growth. The company's shareholder return policy aims to distribute roughly 75% of available cash, supported by a business model with no capital or operating costs.
Stice also touched on the company's leverage strategy, targeting manageable levels while maintaining a strong competitive position in the mid-cap E&P sector. The Endeavor transaction, VNOM's largest to date, aims to reduce debt quickly after completion, with prospects for further acquisitions in late 2025.
Key Takeaways
- Viper Energy Partners (VNOM) focuses on organic growth and completed the Tumbleweed acquisition.
- The company's strategy includes consolidating mineral and royalty assets, enhanced by the Diamondback and Endeavor merger.
- VNOM reported an increase in work-in-progress wells, promising growth in upcoming quarters.
- The shareholder return policy remains at distributing 75% of cash available for distribution.
- VNOM was added to the S&P MidCap 400 in September 2024, reflecting its growth and strategic execution.
- The company's leverage strategy targets a manageable 1.5 times on a pro forma basis.
- VNOM's unique cash flow structure allows for significant deleveraging, with 75% allocated to equity and 25% to debt repayment.
- The Endeavor deal, VNOM's largest transaction, is expected to reduce debt and position the company for future consolidations.
Company Outlook
- VNOM is positioned for further consolidation opportunities in the fragmented mineral space.
- The company aims to pursue additional high-quality mineral asset acquisitions in late 2025.
Bearish Highlights
- The Endeavor drop-down resulted in a modest increase in leverage, potentially up to 1.5 times.
Bullish Highlights
- VNOM's strategy and unique position attract significant mineral holders' interest, providing liquidity options and tax deferral advantages.
Misses
- The earnings call did not highlight any specific misses or shortfalls in VNOM's performance or outlook.
Q&A Highlights
- CEO Travis Stice invited further inquiries from participants, indicating openness to discuss VNOM's strategy and operations.
In summary, Viper Energy Partners is charting a course for growth through strategic acquisitions and organic production. The company's disciplined approach to consolidating mineral and royalty assets, coupled with a favorable shareholder return policy, positions VNOM well within the mid-cap E&P market. With a focus on maintaining manageable leverage and leveraging its unique business model for deleveraging, VNOM is poised to capitalize on future consolidation opportunities while attracting interest from significant mineral holders.
InvestingPro Insights
Viper Energy Partners' (VNOM) strategic positioning and recent performance align well with several key metrics and insights from InvestingPro. The company's market capitalization stands at $10.4 billion, reflecting its significant presence in the mid-cap E&P sector, as mentioned in the earnings call.
VNOM's strong financial health is evident from InvestingPro data, which shows that liquid assets exceed short-term obligations. This aligns with the company's strategy to maintain manageable leverage levels, as discussed by CEO Travis Stice. Additionally, VNOM operates with a moderate level of debt, supporting its ability to pursue acquisitions like the recent Tumbleweed deal while maintaining financial flexibility.
The company's impressive performance is reflected in its stock price, which is trading near its 52-week high with a strong return of 79.4% over the last year. This performance underscores the market's confidence in VNOM's growth strategy and execution. The high return over the past year and the strong 23.86% return over the last three months align with the company's reported organic growth and successful acquisitions.
InvestingPro Tips highlight that VNOM stock generally trades with low price volatility, which may appeal to investors seeking stability in the often-volatile energy sector. Moreover, analysts predict the company will be profitable this year, supporting the positive outlook presented in the earnings call.
It's worth noting that VNOM is trading at a high P/E ratio relative to near-term earnings growth, with a P/E ratio of 23.7 and a PEG ratio of 12.86. This suggests that investors are pricing in significant future growth, possibly based on the company's acquisition strategy and the potential benefits from the Diamondback and Endeavor merger.
For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips for VNOM, providing a deeper understanding of the company's financial position and market performance.
Full transcript - Viper Energy Ut (NASDAQ:VNOM) Q3 2024:
Operator: Good day, and thank you for standing by. Welcome to the Viper Energy Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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 Lawlis, VP of Investor Relations. Please go ahead.
Adam Lawlis: Thank you, Stephen. Good morning, and welcome to Viper Energy Partners third quarter 2024 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, Kaes Van't Hof, President; and Austen Gilfillian, Vice President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial conditions, 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 Stice.
Travis Stice: Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy's third quarter 2024 conference call. The third quarter marked a continuation of Viper delivering on its differentiated strategy and value proposition, and was highlighted by both continued organic production growth on our legacy asset base, and the closing of the Tumbleweed acquisition. As we prepare to head into 2025, we look forward to further delivering on our strategy of consolidating high-quality mineral and royalty assets, through a disciplined focused approach. Looking specifically at current operations, activity remains strong across our acreage position, as represented by the substantial amount of work-in-progress and line-of-sight wells, and we continue to benefit from Diamondback's large-scale development of our high concentration royalty acreage. Importantly, Diamondback's merger with Endeavor, which closed during the third quarter, only enhanced this alignment as Endeavor was previously the second largest third-party operator on Viper's royalty assets in terms of both production and acreage. Bigger picture, we continue to believe that Viper presents, a differentiated investment opportunity with zero capital or operating costs. Alignment with a parent operating company that has helped Viper delivered consistent organic growth, and a current size and scale that positions us as a strategic consolidator in what remains a highly fragmented minerals, and royalty space. In addition to these attributes, our market presence and acquisition strategy has been greatly enhanced now that we are one year post conversion to a Delaware corporation. Looking back 12 months later, we've witnessed a dramatic change in our investor base, and trading liquidity. On this point, Viper was added to the S&P MidCap 400 in September following being added to the Russell 1000 during the second quarter, both of which are milestones that demonstrate the continued execution of our strategy in highlighting, the advantage 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.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Neal Dingmann of Truist Securities. Your line is now open.
Neal Dingmann: Morning Travis. Thanks for the time. Travis, my question for you and the team, is on your future well activity. Specifically, last quarter, you guys talked about, I think, 81 gross paying wells in the 5.1% royalty interest and then 249 remaining with the 1.1%. So my question is, when you look at your fourth quarter guide of the 29.5 BO per day, and then you think about '25 production. I'm just wondering, is this based on sort of a similar thing versus other operators split? And would you anticipate the royalty interest of either of these changing much next year?
Austen Gilfillian: Neal, this is Austen. So a couple of points on that. Really as it relates to the work in progress and line of sight wells that we disclose. So as you can see kind of in the current stats with activity, we had a pretty material step-up in the work in progress wells on the Diamondback operated side. So that's really the legacy Diamondback and legacy Viper acreage, particularly so in Robertson Ranch there in Northeast Martin County. So that's going to drive a lot of the growth that we're going to see over the next two or three quarters. And then you kind of on the tailwind of that have a big step up on the line of sight wells, coming from the third-party side. So we added about five to six net wells in that bucket from the Tumbleweed acquisition. So we've got a pretty good portfolio effect now kind of following that growth on the Diamondback side. We're going to see a pretty big step up on the third-party side. So overall, feeling pretty good about activity. And then, you know, not to mention as [Dynavac] continues to high grade the activity plan post Endeavor and post Tumbleweed, we have a lot of that growth coming in 2026 that we talked about along with the Tumbleweed acquisition.
Neal Dingmann: No, for that activity. Thanks, Austen. Then second question, just quickly on shareholder return and capital allocation specifically. Is the goal to continue to pay out roughly around 85% of cash available for distribution. And I'm just wondering how do you pair this with what you consider to be sort of appropriate debt repayment quarterly?
Travis Stice: Yes, good question. I think the third quarter was a little unique, because of the amount of shares added for the Tumbleweed acquisition, particularly a good amount of shares added on October 1 in early Q4. I think what we decided to do as a Board and the management team was to continue to be shareholder-friendly and make our shareholders whole for their participation and ownership of Viper through the third quarter. So the 83% was kind of a one-off. It's 8% higher than the 75% minimum commitment. But we felt it was necessary, particularly for the added 10 million shares in October to make our Q3 investors whole. So sticking with 75%, I think it's a really good number for this business. The base dividend well protected down to $30 a barrel, which is as low as anything in the space. That's going to continue to grow. And our breakeven at Viper is going to continue to decrease as well as we continue to build size and scale and grow this business.
Neal Dingmann: Makes sense. Thanks guys.
Travis Stice: Thank you, Neal.
Operator: Thank you. Our next question comes from the line of Betty Jiang of Barclays (LON:BARC). Your line is now open.
Betty Jiang: Hello. Good morning again. I wanted to talk - ask about the Endeavour mineral drop-down just given such a significant event for Viper. Can we just talk through the timing and how you're thinking about the funding of that drop? How much debt could you take on at the Viper level? And how does that - how should we be thinking about Diamondback's share exposure on that mineral activity side and the implication of growth from there?
Travis Stice: Yes, Betty, good question. I think there are some things we can say as we continue to do a lot of work on the drop-down. I don't think we can give you perfect detail on everything. I think that's going to be up to the two boards to decide cash stock mix. I do think overall, though, both boards, and management teams are very aligned that, it's not prudent to lever up the sub in exchange for cash upstairs at the parent. So I think you can assume a modest leverage increase that, gets paid down very quickly. On the cash side, I also think you can assume that Viper's done a lot of cap raises over the last 1.5 years and has continued to build its float, and the ability to raise equity capital in the market and also reward those investors that participated in those capital raises. We've had three successful deals here over the last year, and that momentum is very important for future success. And then, I think we also recognize the size of the trade means Diamondback is going to have to take back some equity. But taking back equity has been well rewarded for Diamondback shareholders as well. So I think that mix is going to stay. It's going to be a mix of those three things. I think there's work to do on value and accretion. And as we said on the Diamondback call, this is the number one priority for both businesses, to get this done and move on to more corporate development opportunities after that.
Betty Jiang: I appreciate that. I look forward to more details around that. And my follow-up is thinking through the impact of the Endeavour merger on the visibility Viper has on Diamondback activity. I think the Tumble acquisition really highlighted the power of the symbiotic relationship with Diamondback and providing that visibility out to 2026 onwards. With the Endeavour merger, how much work have you guys done so far? And optimizing the Diamondback activity to give more visibility on the Viper mineral assets?
Travis Stice: Yes. Better, it's definitely been a work in progress kind of with the Viper land and business development teams, stacking hands with the Diamondback land, and planning teams right, to see where Viper owns kind of concentrated interest in undeveloped units and kind of see where those can slide into the pro forma development plan. And also how that might impact future acquisition opportunities, which is what we highlighted in the Tumbleweed deal. So kind of I was mentioning to Neal's question. You haven't really seen those show up in, either what's classified and what's in progress or line of sight wells yet, just given the lead times on the project side. But it's definitely something that the teams are working on together, and I think would be a toe wind to 2026 and beyond, because as we mentioned, Endeavor was previously the second largest third-party operator on Viper - acreage position. So definitely a sizable opportunity set to kind of high-grade development plans.
Betty Jiang: I appreciate that. Thank you.
Travis Stice: Thanks Betty.
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Leo Mariani of ROTH. Your line is now open.
Leo Mariani: Hi guys. Totally appreciate that it's going to take some time for you guys to figure out the consideration in terms of cash stock mix, for the Endeavor drop-down. But I guess I just wanted to talk about sort of leverage parameters. I mean you did mention you will increase leverage at VNOM somewhat and then attempt to kind of quickly pay that down over time, to kind of get back in line. Is there kind of like a max leverage number you think about for VNOM as you're kind of working through some of that math and calculation?
Travis Stice: Yes, Leo, I think 1.5 turns on a pro forma basis seems reasonable. We can debate what oil price that needs to be at, but somewhere around there because you think about the size of the business pro forma and the ability of the business to delever both from either growth or debt paydown is - it's pretty unique, right? 75% of free cash goes to equity, 25% goes to the balance sheet. But at the end of the day, that cash flow stream is 100% free cash unlike an E&P that has a reinvestment rate. So I think a 1.5-ish on a pro forma basis that can come down very quickly makes a ton of sense. I think with Viper's increased size and scale, we're starting to get more attention from the rating agencies appropriately so, moving up the rating scale and improving our overall cost of capital. So Viper is going to be a big business with a lot of free cash. And I think we have a goal of this business being a comp to mid-cap E&Ps as the E&P universe continues to shrink. There's less and less Permian pure plays. Well, look at this business called Viper with no CapEx, but exposure to some of the best rock in North America and the best operators in North America.
Leo Mariani: Okay. That makes a lot of sense for sure. And obviously, just looking at the Endeavor deal, obviously, it looks like it will be the largest transaction in Viper history. Obviously, the plan will be to paydown debt shortly after that. But you guys also mentioned that this will just continue to increase the size and scale of VNOM and maybe make the company in an even better position to do more consolidation over time. So just kind of curious if the drop happens sometime in the first part of '25, do you envision that VNOM will be in a position to look at other deals as we get later on in '25? And you obviously have a nice multiple advantage, I think, versus the other public equities in the mineral space. But just wanted to see if you could give us kind of an update on how do you think about other deals post drop? And do you think there's still a lot out there available? And what's the landscape for other deals in the space?
Travis Stice: Yes. I mean I think certainly, the business has been rewarded this year and rightfully so. And while I won't comment on specific opportunities, I will say that there is a larger opportunity set out there for high-quality mineral assets to be consolidated. I'll also say that our unique size and structural advantages that we offered Tumbleweed caught the attention of a lot of significant mineral holders around the basin that, recognize that Viper can raise a good amount of cash. But also give them something in the form of like we gave the OpCo units where they can defer taxes and still essentially hold an interest in mineral rights, but in a public setting where they can get liquidity. So I think those deals sparked a lot of interest. We're going to be picky. I think, we have a very unique market position, and we don't take that for granted.
Leo Mariani: Okay. I appreciate that.
Travis Stice: Thanks, Leo.
Operator: Thank you. I am showing no further questions at this time. I would now like to turn it back to Travis Stice, CEO, for closing remarks.
Travis Stice: Thank you again to everyone participating in today's call. If you have any questions, please contact us using the information provided.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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