Q3 2023 Viper Energy Partners LP Earnings Call
Participants
Adam T. Lawlis; VP of IR of Viper Energy Partners GP LLC; Viper Energy Partners LP
Austen Gilfillian
Matthew Kaes Van’t Hof; President of Viper Energy Partners GP LLC; Viper Energy Partners LP
Travis D. Stice; CEO & Director of Viper Energy Partners GP LLC; Viper Energy Partners LP
Derrick Lee Whitfield; MD of E&P & Senior Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division
Leo Paul Mariani; MD; ROTH MKM Partners, LLC, Research Division
Neal David Dingmann; MD; Truist Securities, Inc., Research Division
Paul Michael Diamond; Research Analyst; Citigroup Inc., Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Viper Energy Partners Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to Adam Lawlis, Vice President of Investor Relations. Please go ahead.
Adam T. Lawlis
Thank you, Antoine. Good morning, and welcome to Viper Energy Partners' Third Quarter 2023 Conference Call.
During our call today, we will reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO; Kaes Van'’t Hof, President; and Austen Gilfillian, General Manager.
During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
I'll now turn the call over to Travis Stice.
Travis D. Stice
Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' Third Quarter 2023 Conference Call. .
There were several important updates made yesterday with our earnings announcement, so I will start with our upcoming conversion into a Delaware corporation first.
The Board of Directors approved the conversion on November 2, and we expect that it will become effective on November 13. When completed, this conversion will deliver increased corporate governance rights to our limited partners and is intended to position Viper, such that the value of our mineral and royalty assets can be fully recognized.
Further on that point, we expect the conversion to result in an increase in Viper's trading liquidity and potential investor universe. Given Viper's current status as a partnership, we estimate that approximately 2% of our public float is held by index funds. This compares to a select group of our peers averaging around 30% ownership.
Fundamentally, we believe this conversion is the right thing to do for our unitholders and that it will provide numerous benefits, but the foundation of the decision is to fully highlight the advantage nature of mineral ownership and the unique value proposition that Viper presents within the space.
As a separate, recent event, Viper announced last week the closing of our GRP acquisition. This acquisition was a truly unique opportunity, and that it checked all the boxes we look for in an acquisition, immediate accretion to all relevant financial metrics, substantial undeveloped inventory to support long-term returns and significant scale that results in a pro forma business that is both bigger and better.
What differentiates this acquisition, however, is both the quantity and quality of the undeveloped inventory, particularly in the Northern Midland Basin. Following the closing of this acquisition, Viper now owns roughly 32,000 net royalty acres in the Permian Basin, and our production will be over 25,000 barrels of oil per day.
Looking ahead, we have an unparalleled growth runway of high-quality, undeveloped acreage. And as the largest player in the public minerals market, we expect to play a meaningful role in consolidating the highly fragmented space as high-value proposition opportunities like GRP present themselves.
Turning to the results of the business. The third quarter was another strong quarter for Viper, as production grew roughly 5% for the second consecutive quarter. While growth will not always be ratable from quarter-to-quarter, given we own varying interest in what is mostly large-scale development in the Permian Basin, we expect the trend of meaningful growth on an annual basis to continue, as evidenced by their preliminary full year 2024 production guidance that we provided.
Additionally, during the third quarter, Viper announced an almost $100 million leased bonds, which will allow for the future development of deeper zones on certain acreage in the Midland Basin. As mentioned in our rationale for converting into a corporation, there are many structural advantages to mineral ownership beyond just the cost-free royalties, and this significant lease bonus is just one specific example.
As owners and lessors of the subsurface property, modern lease terms can dictate development requirements of operators. And when those terms are not met, leases can expire and have the full development rights revert back to us as the mineral owner. As deeper zones are tested throughout the basin, we believe this is an advantage that will only be further highlighted in the years to come.
As a final point, Viper remains committed to a sustainable and growing return of capital through cash distributions over the long term. We have the balance sheet strength, durable cash flow profile and undeveloped inventory base to support many years of significant return of capital through the cycle.
Activity on our asset base continues to be strong, and we believe we are positioned to execute on opportunistic M&A to further complement what is already a unique value proposition, both in terms of return on and return of capital.
Operator, please open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Neal Dingmann from Truist Securities.
Neal David Dingmann
My first question, guys, is just on the lease bonus. Is that the impressive one you all recently received? I'm just wondering, could you speak to if all that bonus was tied likely to the deeper zones? And wondering, do you all believe you have -- many of your other assets have potential for similar type bonuses maybe in those type of areas?
Matthew Kaes Van’t Hof
Yes, Neal, good question. I'll answer part of it and give it to Austen to talk about the rest of the asset base.
I think, high level, we kind of added a slide in the deck to kind of show that even in an area like Spanish Trail, highly developed on the traditional [Wolfberry] play that we all know, but now moving back in and developing Barnett, Woodford and some of the Wolfcamp D across the position, the mineral honor gets the benefit there, right? They get a lease bonus and they get a royalty on all of the new zones.
So I think we're going to be slow to test it. I think it was a convenient time to get that lease done between Diamondback and Viper as it provided a lot of cash to Viper to help close the GRP deal. But I think just generally, we're trying to highlight that we own a lot of minerals in the Midland Basin, and there's a lot left to do in terms of other zones, deeper zones, shallower zones. And all of that benefits the mineral owner, whether you can model it today or not.
And Austen, do you want to talk about the asset base?
Austen Gilfillian
Yes. No, the monitoring and enforcing these type of returns is a really important part of what we do now, especially kind of where we are in the industry and in these modern leases and some of the terms that they could have. So this specific lease with Spanish Trail represented about 10% of our total net acres.
When we kind of go through and look at the lease -- specific lease provisions that are included across the acreage that we own, we estimate about 50% of our acreage had a similar lease language, that where if the deeper rights haven't been developed that, that acreage would kind of fall out and will become available. So I don't think that's a story for tomorrow, but certainly, as things play out over time and the zone becomes more developed and it kind of expands across the basin, I think it's something that you'll see more about going forward.
Neal David Dingmann
Yes, I like that upside. And then just a quick second one on cap allocation. I'm just wondering, given the current leverage post the deal and obviously, the great production guide for next year, I'm just wondering, any thoughts on -- if capital allocation would change? Or will that payout type continue?
Matthew Kaes Van’t Hof
No. It's a good question, too. I mean I think our payout philosophy is the same. 75% of free cash flow goes to equity, 25% goes to the balance sheet. We know we put a good amount of cash in this GRP deal, but we have the balance sheet capacity to do it. We also have kind of a small balance on our revolver after closing the deal. So that will be easy debt paydown.
And kind of strip prices, we're still going to be likely below 1x leverage at the end of 2024, even if we do pay out 75% to equity. I think Viper is kind of gone back and forth on how we're returning capital to shareholders. I think we'd probably prefer to distribute more cash via the fixed plus variable distribution than buybacks, but there might be opportunities to buy back stock in unique situations over the coming year. But I think our preference on that 75% that gets returned shareholders or unitholders is through the base plus variable dividend.
Operator
Our next question comes from Derrick Whitfield from Stifel.
Derrick Lee Whitfield
With respect to the recent GRP acquisition, this was one of the first we've seen you pursue where there wasn't a Diamondback angle or immediate Diamondback angle. Thinking about your prepared remarks and consolidation opportunities you're seeing, could you speak to what you're seeing in deal flow and the bid-ask spreads for minerals, which could lead to incremental opportunities?
Matthew Kaes Van’t Hof
Yes, I'll talk about the GRP deal and Austen can talk about the market right now. I mean this deal was kind of the one we've been waiting for. This team built this asset base over 8 or 10 years. And I think it can be best summed up very unique in that it'd be impossible to build that position today, and so we needed to buy that position.
And the reason why we like it is it's a lot of -- the Midland Basin is the core asset. There's a lot of undeveloped units in the Midland Basin, and it's all in acreage that we would cover. So while there isn't a huge Diamondback-operated component to it, we put our operator hat on and said, "Would we like to own exposure to the core of the basin under competent operators like Pioneer, Endeavor, now Exxon, et cetera?" And that is second to none and in our mind, can't be built through the ground game. And so we used our size and scale to be able to put a good amount of cash in the deal and get it across the finish line.
Austen Gilfillian
Yes, Derrick, there's been quite a few deals that have come to market and have transacted this year. We've really been pretty selective in the last couple of years, with the primary focus on Diamondback operated like you mentioned, or secondarily, as Kaes kind of highlighted, if it doesn't have the high Diamondback-operated percentage, then it's just really high-quality acres with clear undeveloped inventory where we can have that confidence in what the long-term development is going to look like. .
I think going forward, it's going to be a similar viewpoint for us, and we see an opportunity for quite a few more deals to come to market. But for us, it's always a pretty high hurdle given the quality of acres that we have today, the development that we see going forward, and it kind of has to compete for that, right? Just being accretive day 1, not enough for us. We kind of have to have confidence in that development outlook over year 2, year 3, year 4, et cetera. And that's always the hardest hurdle to clear.
Matthew Kaes Van’t Hof
And one last comment on the Diamondback-operated piece. It certainly has been beneficial to have that Diamondback-Viper relationship for a significant amount of our production. As the business has gotten bigger, and we chased the same decline rates that the E&Ps do, it's been -- it's harder to find sizable packages under Diamondback that will move the needle for the next 5, 6, 7 years.
So I think, generally, we have a great position operated by Diamondback, but the next leg of the stool is going to be undeveloped units, particularly in the Midland Basin, like what we found with GRP that drive growth into the next decade.
Derrick Lee Whitfield
Perhaps actually picking up with where you ended there, Kaes, because I think the opportunity that you guys have the deep rights under Spanish Trail could be quite remarkable. But I would love to -- if you guys could share what the opportunity you see with the Woodford and Barnett and those at present? And how soon you could see meaningful activity and that would clearly benefit Viper given the elevated NRIs you have in that area?
Matthew Kaes Van’t Hof
Yes. There's certainly a lot of industry activity in the Barnett and Woodford. And traditionally, our mentality has been to be a fast follower. But I think there will be some tests, particularly operated by Diamondback, in the next 12 to 24 months. .
I don't think it will move to full-scale development until kind of 2025, 2026, but all indications are pointing to those zones being very productive covering a lot of the basin. And it works at a price, right? It's going to be a little more expensive to the operator. Wearing my Viper hat, we don't really care as long as there's a lot of resource. And I think all indications are pointing towards significant resource in those deeper zones.
Operator
Our next question comes from Paul Diamond from Citi.
Paul Michael Diamond
Just a quick one on the Delaware corp conversion. You talked about currently 2% of the public float is held by index funds versus about 30% by peers. Just wanted to get a little bit deeper on that to see how you guys are envisioning any trend towards that higher rate post conversion?
Matthew Kaes Van’t Hof
Yes, great question. We've done a little bit of work on it. The deals -- the conversion is supposed to close next Monday, and then we'll be a corporation. There's some details in there for shareholders, so they know what's going on. But from what we can tell, there's a couple of indices that we could be eligible for even before the end of the year. And those are pretty significant indices.
I think Vanguard-related indices as well as then eventually some of the S&P-related indices. And as the market knows, that's a lot of buying for a company that has a lower public float. And so we're going to start working with them right away after getting this thing closed and getting as many indices as possible and kind of follow the path of hopefully, what Diamondback followed years ago as that business grew and got more exposure to large index funds. And do you want to add anything there, Austen?
Austen Gilfillian
Yes, Paul, the main pretty benchmarks are kind of your S&P Chris and Russell, S&P and Chris quarterly rebalanced this. So they'll both [decline] middle of December. So the conversion will be done by then. So we'll be in communicating with them and see if that's something that can happen this year. And then Russell does the rebalance annually in June.
And then additionally, you'll have something that's more criteria-based or subjective, like the S&P 600, where we'll have to have some communication with them. But all signs point to being eligible right away and hopefully getting included pretty soon. But certainly, we meet the criteria now as being a corporation as opposed to being a partnership.
Matthew Kaes Van’t Hof
Yes. And the strategy there is also exposure, right? There's a lot of other investors that, I think, are limited in their exposure to minerals. And we've already had some success converting some shareholders -- potential shareholders on the road to look at the story.
I mean, I envision and Travis envision a world where this mineral space and this business is competing with the likes of some of the mid and -- the SMID and mid caps on the E&P side. And this business certainly shows a safer way to play the Permian Basin or oil exposure with no capital requirements and just upside.
Paul Michael Diamond
Understood. I appreciate the clarity there. Just one more quick follow-up, just more on the lease bonus payments. How are you guys envisioning that going forward? Is it more tend to be chunkier? Or do you see it as just a consistent growth over time?
Matthew Kaes Van’t Hof
Well, Spanish Trail's unique, right? I mean this was a unique asset -- a generational asset that doesn't come around very often. So this was certainly the big one. I think it's logical that a lot of the deep rights throughout the basin are going to get leased up over the coming 12 to 24 months. But for us, they'll all be smaller than this large payment, which was a pretty significant amount of acreage.
Operator
Our next question comes from Leo Mariani from ROTH MKM.
Leo Paul Mariani
I wanted to ask whether or not you see any kind of material change in the tax rates for Venom following this kind of corporate conversion? I did see you had this kind of soft sort of not really guidance, but just kind of the numbers that you kind of rolled out for 2024 outside of production where you talk about kind of an effective tax rate. But I know you've got kind of multiple classes of units historically. I know you're going to have maybe more than one class of shares. But just trying to get a sense, are we going to see any material difference in kind of cash taxes in '24 versus '23?
Matthew Kaes Van’t Hof
No, nothing should change at all for the public unitholders that will become public stockholders. So tax position didn't change. And I think they'll just provide them more flow and more liquidity.
Austen Gilfillian
That's why the conversion made so much sense is that we became a tactical partnership back in 2018. And there, for a couple of years, Diamondback is effectively shielding us from corporate taxes, and that agreement ran out end of last year. So here in 2023, we have a partnership with paying full corporate income taxes and getting all the downside effectively being a corporation, but you don't have any of the upsides. So it just made a lot of sense to do that today given in large part, the kind of tax situation that we're in.
Leo Paul Mariani
Okay. That's helpful. And then just wanted to kind of ask on a couple of other sort of numbers here. So I think you guys are kind of expecting production to come down a little bit in the first quarter. I'm assuming that's all just kind of timing-related, but just wanted to maybe get a little color around that.
And then also just noticing that your cash G&A per barrel guidance also came down nicely as well. Is it at a function of spending kind of less than you expected there? Or maybe just perhaps production results have been better? And with the acquisition, you're seeing the BOEs go up and you're just able to spread the cost out over more barrels?
Austen Gilfillian
On the production side, first, reported production will actually go up from Q4 to Q1. Q4, you're going to have 2/3 of contribution from the GRP assets. So we have the midpoint there of 24.5. And then going into the first quarter, actual reported production will go up, given you have a full quarter of those assets contributions.
But we're trying to be intellectually honest there, look at it on a pro forma basis. And that's kind of what we're pointing to there, with a slight sequential decline. And really, in context, that follows back-to-back quarters the 5% growth that we've had here, and it's mainly a result of just kind of the timing of some of these really large Diamondback pads, where we have really high interest.
And we put in Slide 9 of the deck, where we kind of show the visibility to the Diamondback schedule. The way that we kind of see 2024 right now with the Diamondback side is having -- owning an interest in about 60% of Diamondback's completions next year with about a 6.5% interest within those wells, but that will be split roughly 40-60 between first half of the year and the second half of the year.
So still significant growth coming, especially on the Diamondback operative side. Is it mostly significant second half weighted given some of the bigger pads? And then on the cost items, I mean, those are all very minimal. We've kind of been spending $6 million, $7 million, maybe $8 million a year in cash G&A. As production goes up, we grow the business, we're not really having to add any people. So on a per unit basis, but those should continue to trend down even further over time.
Operator
Thank you. At this time, the Q&A session has now ended. I will now turn the call over to Travis Stice for closing remarks.
Travis D. Stice
Thank you again to everyone participating in today's call. If you have any questions, please contact us using the information provided. Thank you.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
