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Edited Transcript of VNOM earnings conference call or presentation 6-Feb-19 3:00pm GMT

Q4 2018 Viper Energy Partners LP Earnings Call

Midland Feb 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Viper Energy Partners LP earnings conference call or presentation Wednesday, February 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam T. Lawlis

Viper Energy Partners LP - Director, IR

* Kaes Van’t Hof

Viper Energy Partners LP - President

* Teresa L. Dick

Viper Energy Partners LP - Executive VP, CFO & Assistant Secretary

* Travis D. Stice

Viper Energy Partners LP - CEO & Director

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Conference Call Participants

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* Eli Jacob Rassow-Kantor

IFS Securities, Inc., Research Division - MD

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey Scott Grampp

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Jordan Levy

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Philip Stuart

Scotia Howard Weil, Research Division - Associate

* Timothy A. Rezvan

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Viper Energy Partners' Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Adam Lawlis, Director of Investor Relations. Sir, you may begin.

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Adam T. Lawlis, Viper Energy Partners LP - Director, IR [2]

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Thank you, Shanelle. Good morning, and welcome to Viper Energy Partners' Fourth Quarter 2018 Conference Call. During our call today, we will reference an updated investment presentation, which can be found on our website. Representing Viper today are Travis Stice, CEO; Tracy Dick, CFO; and Kaes Van't Hof, 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 will now turn the call over to Travis Stice.

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Travis D. Stice, Viper Energy Partners LP - CEO & Director [3]

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Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' Fourth Quarter 2018 Conference Call. 2018 was a transformational year at Viper Energy Partners for many reasons. First, we completed our conversion to a taxable entity, which enabled us to present our market-leading investment opportunity to a significantly expanded investor universe, while also showcasing a unique tax strategy due to our relationship with our parent company, Diamondback. Second, we continued to execute on our strategy of delivering unmatched return on and return of capital as we generated a full year return on capital employed of over 15% and increased our annual distribution by over 50%, while also growing reserves 65% and production 57% year-over-year. Lastly, our acquisition machine continued to consolidate Tier 1 properties as we closed 88 accretive deals for $615 million and grew our asset base by over 5,000 net royalty acres or 55% year-over-year.

Moving to 2019, we continue to see healthy activity levels across our acreage position as represented by the 40 rigs currently operating on our properties. As a result, we are providing full year 2019 production guidance that implies 25% annual organic growth without the need to spend $1 of capital to achieve this growth, and while providing investors with a high single-digit implied free cash flow yield. In an industry where capital discipline is now a common universal theme, Viper offers an unmatched combination of both organic growth and free cash flow yield.

Our ability to forecast multiple years of organic growth due to our relationship with Diamondback, our largely undeveloped acreage position and our continued accretive acquisition strategy and drop-down visibility from Diamondback are important catalysts for our distribution and per-unit metrics to continue to improve even in a flat commodity price environment for many years to come.

I'll now turn the call over to Kaes.

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Kaes Van’t Hof, Viper Energy Partners LP - President [4]

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Thank you, Travis. Turning to Slide 6, we show our 2018 annual growth on several key financial metrics as well as give an update on our rolling 6-month and annual production guidance. Importantly, we show a range of estimated 2019 distributions based on our full year production guidance and a range of realized oil prices.

Slides 7 through 9 showcase the differential business model and investment opportunity presented by Viper. As shown on Slide 7, Viper offers an unmatched combination of growth and free cash flow yield versus energy industry peers and across multiple yield-based alternatives, some of which traded significantly higher multiples than Viper.

Assuming flat year-over-year commodity prices in 2019, Viper is estimated to provide roughly 25% organic production growth and a 7% free cash flow yield, all without spending $1 of capital. It is important to note that Viper's full year production guidance is typically conservative in nature, given the limited visibility to third-party operations beyond the next 6 months. With that said, we feel a high degree of confidence in our expected [returns] in the first half of the year and at a macro level, expect that the Permian as a whole will see increased activity levels in the back half of 2019, which is not currently accounted for in our full year guidance.

Slide 9 provides a detailed assessment of Viper versus precious metals streaming vehicles, which have a very similar business model. Viper owns mineral rights in perpetuity on Tier 1 largely undeveloped acreage with significant remaining reserve life, has a mid-teens corporate return profile with over 90% cash margins and 25% estimated organic growth. All metrics which compare very favorably to the precious metals peers, outside of the disparity of a relative trading multiples.

Slides 11 and 12 highlight the continued success of our acquisition machine and accretive acquisition strategy, which had its most successful year yet in 2018. As shown on Slide 11, since our IPO in 2014, Viper has now closed over $1.2 billion worth of acquisitions across almost 300 transactions, with over $600 million completed in 2018 alone. The opportunity set for acquisitions in the Permian Basin remains extremely robust, and we believe Viper is in a unique position to continue to accumulate Tier 1 acreage through immediately accretive transactions, given our unmatched size, scale and expertise.

Slides 13 and 14 detail a highly undeveloped nature of Viper's acreage position across both the Midland and Delaware basins, and illustrates why we believe Viper can deliver robust organic production growth for many years without the need to complete 1 more acquisition or spend $1 of capital. In total, we estimate our Permian acreage to be roughly 80% undeveloped, and contain over 300 million barrels of net undeveloped resource, using conservative spacing and type curve assumptions.

Moving to Slide 17, we provide an update on the remaining drop-down inventory currently held at Diamondback. Diamondback still owns almost 1,200 net royalty acres in the Southern Delaware Basin, and over 900 net royalty acres in the Midland Basin, or almost 15% of our current acreage position. Over 90% of this acreage is operated by Diamondback, giving Viper a line of sight to years of organic production growth. Additionally, Diamondback's acquisition of Energen Resources has provided another 250 net royalty acres of minerals. And more importantly, a significant amount of production and associated cash flow that qualifies for a drop-down to Viper. We expect to continue working towards the drop-down transaction of some, if not all, of these assets at some point in 2019.

With these comments now complete, I'll turn the call over to Tracy.

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Teresa L. Dick, Viper Energy Partners LP - Executive VP, CFO & Assistant Secretary [5]

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Thank you, Kaes. Viper's fourth quarter 2018 consolidated net income was $40.7 million. Our operating income for the quarter was $73.7 million, up 24% from $59.2 million in the fourth quarter of 2017.

As shown on Slide 19, Viper ended the fourth quarter with a cash balance of $23 million and liquidity of $167 million. Also on Slide 19, we provide details on our updated production and unit cost guidance.

Importantly, Viper is initiating full year 2019 production guidance of 20,000 to 23,000 BOE per day, the midpoint of which implies 24% organic year-over-year growth. Separately, Viper's second and third quarter 2018 distributions, which were the initial distributions after Viper's election to be treated as a taxable entity for federal income tax purposes, were determined to not constitute dividends for U.S. federal income tax purposes. The distributions should instead generally constitute nontaxable reduction to the tax basis.

With these comments complete, I'll turn it back over to Travis.

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Travis D. Stice, Viper Energy Partners LP - CEO & Director [6]

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Thank you, Tracy. In closing, Viper truly stands alone, both in the energy industry and versus other asset classes when it comes to offering a combination of both growth and free cash flow yield. Viper's largely undeveloped asset base consisting of Tier 1 acreage throughout the Permian Basin can support many years of substantial organic growth, and with our high-margin business, will lead directly to continued distribution growth with no capital spending required to generate this growth.

In addition to the robust organic growth potential, we remain excited about the continued execution of our acquisition strategy, including both the consolidation of the private minerals market as well as significant expected drop-down opportunities from our parent company.

Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Neal Dingmann of SunTrust.

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Jordan Levy, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [2]

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This is actually Jordan Levy. Just a quick question for you guys. Post Eagle Ford deal, looking back, wondering how you guys are thinking about that deal after the fact and kind of the opportunity set outside of the Permian, whether it's in the Eagle Ford or another basin? Just curious, Travis or Kaes, or anyone and your thoughts on that.

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Travis D. Stice, Viper Energy Partners LP - CEO & Director [3]

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Sure, Jordan. We look back at the acquisition in the interim we made with the Eagle Ford, we're extremely pleased with it. In fact, you can look at one of the slides in the deck and see what its current yield is right now. That was an opportunistic trade that we did at that time, and while we're not currently looking significantly outside the Permian Basin, we do feel like we've got an obligation to continue to look. But I'll tell you, Viper's focus is growing the mineral position here in the Permian Basin.

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Jordan Levy, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [4]

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Got you. Great. And then just a quick second question. Looking at Slides 13 and 14, where it shows the amount of undeveloped acreage outstanding in the Midland and Delaware. How does that -- given it's probably toward the lowest it's ever been in terms of developed assets, how do you think about that and in tandem with Viper's growth going forward? And does that equate to higher growth than we've seen before? Are you optimistic about that?

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Kaes Van’t Hof, Viper Energy Partners LP - President [5]

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Yes. We're still very optimistic about our growth profile for the next decade plus. I think the important thing to take away from Slides 13 and 14 is as you model this business long term, we have decades of running room. If these locations are drilled say over the next 15 years, Viper has a huge organic growth runway ahead of us without needing to do another deal. So I think that's kind of been a misunderstood part of the Viper story. So we wanted to add some clarity around just how undeveloped these assets are. Spanish Trail was a very important asset for Viper, when we went public. But now Spanish Trail is 20% of our production, and we have a huge Delaware position that's only 8% developed. So we're pretty excited about the runway and the inventory ahead of us.

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Travis D. Stice, Viper Energy Partners LP - CEO & Director [6]

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And Jordan, I'll just add to that commentary that in our prepared remarks, we emphasized a couple of times 300 million barrels of total resource there, and as Kaes pointed out, decades of future development in front of Viper Energy Partners. But what's again stands unique in this investment space is that all of these resources, all of this development, all of this organic growth occurs without 1 single dollar of capital being required. And I just challenge anyone to find as unique a vehicle as this, with this growth, this yield, where you don't have to spend any money to get it. It's just -- it stands alone.

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Operator [7]

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Our next question comes from the line of Tim Rezvan of Oppenheimer.

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Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [8]

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I was hoping to start, in a worst-case scenario for 2019, if there is pipeline delays and maybe the rig count kind of deteriorates, how many rigs would Diamondback need to run on Viper royalty acreage to sort of support that production guide that you put out?

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Kaes Van’t Hof, Viper Energy Partners LP - President [9]

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Yes, Tim, the baseline for our production guidance or the midpoint of our production guidance is that actual Diamondback drill schedule at the midpoint of Diamondback's guidance plus what we can see over the next 6 months from third-party acreage. So Diamondback operates 40% of the acreage, but it's 60% of the production. So we have a pretty good visibility into that growth. Now Diamondback's taken care of its takeaway position, and we're very confident in our ability to execute on Diamondback's capital program, which supports the midpoint of this guidance here.

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Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [10]

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Okay. I'm just trying to understand. If there is subsequent rig drops, Diamondback's ability or kind of inclination to backstop that growth guidance?

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Kaes Van’t Hof, Viper Energy Partners LP - President [11]

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Yes. Certainly the combined economics of owning the minerals on some of this acreage incentivizes Diamondback to drill on the mineral acreage first. So we feel very confident that Diamondback's midpoint of 20 rigs for the year that we released last December certainly holds up Viper's production for the year.

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Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [12]

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Okay. Okay. Then just moving on to the tax status of your distributions. Certainly, seems like a positive news. How long does that stay in place? Is that sort of a forever item? Or is that really related to the NOLs put up by Diamondback? And what would happen in theory if those NOLs will work through out in 3, 4 years?

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Kaes Van’t Hof, Viper Energy Partners LP - President [13]

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Yes. Well Diamondback's board approved $300 million support for the public unitholders of Viper stock so that our conversion from MLP to a taxable entity did not produce cash taxes, and been more than expected to produce cash taxes for the foreseeable future. Now I can't speak for what happens 4, 5 years down the line, and that's something that we can reassess at a later date. But certainly, over the foreseeable future, pending a large increase in oil price or significant acquisitions, we expect that the dividend income from Viper will be nontaxable.

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Operator [14]

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Our next question comes from the line of Jeff Grampp of Northland Capital.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [15]

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I wanted Kaes to talk maybe a little bit more on the drop-down strategy. And can you guys talk to maybe the extent to which drop-downs may be predicated on success on your third-party acquisition strategy, say to maybe manage how many acquisitions or the dollar amount that you guys feel comfortable doing within a certain time frame? And then can you also touch on your interest in given equity to Diamondback in any drop-down scenarios such that they maintain that kind of 50% to 60% type of ownership?

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Kaes Van’t Hof, Viper Energy Partners LP - President [16]

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Yes. Jeff, I can't speak for the Diamondback and the Viper boards on how they're going to negotiate this transaction. But certainly, if you think about Diamondback growing within cash flow, having a significant and growing dividend, we don't necessarily need the cash at the Diamondback level. And we really like our 59% ownership of Viper. And I think, over time that should logically get larger. Now speaking to the drop-downs, we certainly understand that these assets should be in the Viper vehicle, especially the minerals and the (inaudible) that we carve off from the Energen acquisition. We want to get that done as quickly as possible so as to continue to execute on the synergies that we presented at the Diamondback level 6 months ago. So we're actively working on it. It's a very sizable drop-down, so we want to get it right. But certainly, it's something we're actively working on. And back to your other question about other acquisitions, I think those 2 discussions are mutually exclusive. The drop-down is one particular work stream we're working on and want to get done. But the other side of the business, it's $100 million or so a quarter of acquisitions that we've done over the last 10 quarters, and we certainly expect that to continue to carry forward.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [17]

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All right. Great. That's really helpful. I appreciate that. And for my follow-up and -- perhaps this is maybe more of a Diamondback question as well. But can you guys touch at all on -- about activity levels of assets where Energen has those higher NRIs? I know you guys disclosed the average of 77%. But I assume there may be areas where it's higher or lower or whatnot. I guess, I'm trying to get a sense of the $60 million to $80 million of cash flow that you guys disclosed on those -- that excess NRI. Do you think that's growing faster or slower or maybe similar to what Diamondback's overall production's been guided to in '19? And any way to kind of give us a flavor for that?

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Kaes Van’t Hof, Viper Energy Partners LP - President [18]

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It's tough. I would assume it's equal to what Diamondback's growth is. We're sorting through the detail. Some sections will have a better NRI than others, and that's the key. The key work being done is to rightsize this drop-down, and make sure it's, one, accretive to Viper, but, two, in areas where Diamondback is actively developing over the next 5 years.

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Operator [19]

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Our next question comes from the line of Eli Kantor of IFS Securities.

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Eli Jacob Rassow-Kantor, IFS Securities, Inc., Research Division - MD [20]

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Can you give some color on how the size of the private minerals market has changed relative to a year ago? And what inning you think we're in, in terms of seeing the minerals change hands from private owners to public companies?

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Kaes Van’t Hof, Viper Energy Partners LP - President [21]

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That's a good question. I'd like to liken the opportunity set to -- assuming that there are 5 million good Permian acres, that would make their -- the availability of 1.25 million Viper acres, as we define it, available to change hands. Certainly, not all those minerals are going to change hands. There's some families and ranches in the Permian that -- they're going to hold their minerals forever. But if you look at that 1.25 million-acre opportunity set, Viper only owns 15,000 of those. And we're the largest public vehicle in the space. So I can say we're in the first or second inning. We've certainly seen the mineral space evolve. We have a lot of small mineral buyers and owners that are now bringing us deals on a regular basis. So the opportunity set for us has only increased over the past couple of years.

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Eli Jacob Rassow-Kantor, IFS Securities, Inc., Research Division - MD [22]

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And then as far as the uptake in rig activity, obviously, you guys disclosed relative to the third quarter. It looks like most of that increase was from private operated -- privately operated rigs. Can you talk about -- are there any specific areas either geographically or stratigraphically where those rigs are focused?

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Kaes Van’t Hof, Viper Energy Partners LP - President [23]

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Yes. If you look on Page 11 of our deck, you can see on the right side where the rigs we're operating. So really we like to focus on buying minerals where, us with our Diamondback operator had -- would like to operate, and that's usually in the Northern Midland Basin and the eastern portion of the oily Delaware Basin.

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Eli Jacob Rassow-Kantor, IFS Securities, Inc., Research Division - MD [24]

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So last one from me, and along the same lines. The Central Basin Platform, New Mexico portion of the Delaware Basin and the New Mexico shelf have been areas where, historically, Viper and Diamondback haven't been active. Are there opportunities anywhere in either of those areas where you think you'd see some growth for Viper in the future?

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Travis D. Stice, Viper Energy Partners LP - CEO & Director [25]

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No. I'm sure there are opportunities. We just don't have a lot of G&A dedicated to that acreage. We really like to focus on buying minerals in acreage that we would want to operate at the Diamondback level. And we've been pretty clear at Diamondback that the Central Basin Platform is not part of our go-forward plan. So it's really not part of Viper's either.

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Operator [26]

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(Operator Instructions) Our next question comes from the line of Jason Wangler of Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [27]

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I was just curious, Kaes, maybe on the 40 active drilling rigs. Do you have a flavor for how many of those are drilling kind of the bigger pads these days? I know you guys kind of continue to talk about the increased visibility there. So just curious kind of how you see that rig count breaking down at this point?

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Kaes Van’t Hof, Viper Energy Partners LP - President [28]

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Yes. I'd say that a vast majority of those 40 rigs are drilling multi-well pads. And we gave some clarity on Page 16 of our deck showing where those large pads are. And those wells with the large interest is exactly what we at Viper are looking for in acquisitions. I think that separates us from maybe some other mineral peers that want to own a smaller percentage of a larger area. We'd rather own a high percentage of a smaller area, because it gives us that visibility and ability to forecast.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [29]

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Okay. And then as you look at liquidity, obviously, you've made a bunch of good acquisitions again in the fourth quarter. You still have, obviously, the debt level is very low, and you still have some liquidity, but how do you think about that portion? Would you look at terming some of the debt out? Or is there a plan to repay some? Or just how you think about liquidity going forward? Because you have a lot of options on the table.

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Kaes Van’t Hof, Viper Energy Partners LP - President [30]

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Certainly, our revolver is continuing to increase as reserves in production have increased over the past couple of years. Now it's up to $555 million revolver. I think at some point it's logical to assume that Viper given the strength of its parent company and its investment grade-like balance sheet, to try to term out some debt or term out a turn on Permian leverage at the Viper level.

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Operator [31]

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Our next question comes from the line of Philip Stuart of Scotia Howard Weil.

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Philip Stuart, Scotia Howard Weil, Research Division - Associate [32]

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Just one quick one from me. At the Diamondback level, I know the Quinn Ranch acreage is still kind of a legal uncertainty. But just curious, if at the Viper level, you guys own any minerals under Quinn Ranch? And if not, should Diamondback be successful in winning that lease? Do you see material mineral opportunities on the Quinn Ranch acreage?

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Kaes Van’t Hof, Viper Energy Partners LP - President [33]

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Yes, we do not own anything on that ranch this time. I'll say that anytime Diamondback comes into acreage or acquires acreage whether it's the Ajax deal or the ExL deal, the Energen deal, our Viper team gets very active and they get a much larger sandbox to play with. It's logical to assume that any acreage we buy or trade into at the Diamondback level, becomes priority #1 for our Viper team to buy minerals.

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Operator [34]

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And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Travis Stice, CEO, for closing remarks.

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Travis D. Stice, Viper Energy Partners LP - CEO & Director [35]

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Thanks again to everyone participating in today's call. If you have any questions, please contact us using the contact information provided.

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Operator [36]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.