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Viper Energy Partners LP (VNOM) Q2 2019 Earnings Call Transcript

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Viper Energy Partners LP  (NASDAQ: VNOM)
Q2 2019 Earnings Call
Jul. 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Viper Energy Partners' Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Adam Lawlis, Vice President of Investor Relations.

Adam Lawlis -- Vice President, Investor Relations

Thank you, May. Good morning, and welcome to Viper Energy Partners' second quarter 2019 conference call. During our call today, we will reference an updated investment presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO; and Kaes Van't Hof, 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'll now turn the call over to Travis Stice.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Adam. Welcome everyone, and thank you for listening to Viper Energy Partners second quarter 2019 conference call. To begin I want to highlight the unparalleled total return and value proposition Viper Energy Partners presents today. Not only versus our peers in the energy sector, but also versus the broader investment universe. First, Viper offers high margin growth with zero capital expenditures required to achieve that growth, a combination which leads directly to unmatched corporate returns and free cash flow.

Viper has now in aggregate distributed over $6.50 per unit since our IPO. Our operators have significant inventory and undeveloped resource remaining on Viper's current asset base, providing years of embedded organic growth at no additional capital cost to Viper. Looking at traditional investment metrics such as earnings growth, margins, return on capital, free cash flow yield and leverage, Viper transcends other potential investment vehicles in offering a strong combination of each.

Second I would like to narrow in on our second quarter results and the announced drop down transaction from Diamondback, both of which reinforce Viper's differentiated position in the minerals space and increase our high degree of confidence in generating continued per unit volume and distribution growth for many years at almost any commodity price.

Looking at our second quarter results specifically, Viper experienced record levels of gross activity across our acreage position, as represented by the nearly 200 wells that were turned to production. This activity speaks to the quality of Viper's premium acreage position in the Permian and is highlighted by 20% year-over-year production growth in the second quarter versus 2018. It is important to note that Viper elects to take concentration risk in core areas of the Permian that enable long lateral development. We believe this concentrated acreage will continue to lead to outsized growth over time, as it should be developed first in operators drilling plants.

Lastly, Viper announced yesterday it had entered into a definitive agreement to acquire certain mineral and royalty interests from Diamondback, our sponsor, through a drop down transaction. This transaction will be immediately accreted to Viper on a cash flow per share, production per million units and net asset value per share. Equally as important, this acquisition adds substantial scale to Viper and increases total acreage operated by Diamondback at Viper by roughly 80% to more than 50% overall. This line of sight to future development on our acreage in alignment with our sponsor Diamondback only further distinguishes Viper's business model versus our peers.

In closing, I want to highlight that our business development operation continues to consolidate the fragmented private minerals market in the Permian. Having completed 74 transactions for $127 million during the first half of the year. Our focus on a creative acquisitions combined with our best-in-class cost structure will enable continued distribution growth in the coming quarters with strong organic growth in the back half of 2019, to be driven by large high interest pads completed by Diamondback in Spanish Trail and the addition of the drop down production in the fourth quarter.

To close, Viper continues to grow production reserves, acreage and net asset value on a per unit basis, leading to high return on capital and a growing distribution.

Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Welles Fitzpatrick of SunTrust. Your line is open.

Welles Fitzpatrick -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, good morning and congrats on the dually creative drop down.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Welles.

Welles Fitzpatrick -- SunTrust Robinson Humphrey, Inc. -- Analyst

My first question is on cash taxes, does the drop down push that forward to maybe early 2021? And have you guys thought about extending the NOL agreement with Diamondback? And if so ,whether any consideration would be given?

Kaes Van't Hof -- President

Hey, Welles we're a long way from that NOL agreement running out. I don't think the drop down impacts it much. There's a significant amount of factors that go into that agreement and NOLs are calculated yearly based on production, oil price, amount of acquisitions we do, there's a significant amount of items that go into that.

So, I don't think that's an issue we need to think about today. I think we have a lot of running room left to go. I think, as you think about how Diamondback and Viper have worked symbiotically over the past four, five years, we expect that relationship to continue and to do the right thing for both shareholders.

Welles Fitzpatrick -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, perfect. That makes sense. And then we've seen, I guess, a pretty mild slowdown, especially in the core areas on the rig count in the Permian. Can you talk to the mineral market now, has it seen any softening from that slowdown, or is it still pretty hot in the areas you guys are active?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, I think prices have softened a little bit. Mineral prices though are pretty sticky relative to oil price or activity levels. A mineral owner doesn't have to sell their minerals. So, there's not a forced sale there. So, they can be pretty sticky with their price expectations.

For us, we've just had to stay disciplined and we've got a lot of competition perk up over the last four, five years. And I think we have a very defined strategy and that separates us from some of these peers that are either private or now becoming public.

Welles Fitzpatrick -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, perfect. And then just one last one. And this one seems extremely cut and dry, but I just want to clarify, because we keep getting questions. The roll up of this Carlyle Fund that has zero effect on the JV and zero effect on the mineral acres et cetera. That's the correct interpretation, isn't it?

Kaes Van't Hof -- President

Yeah, that's correct.

Welles Fitzpatrick -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, perfect. Thanks. That's all I head.

Travis D. Stice -- Chief Executive Officer and Director

Thanks Welles.

Operator

Our next question comes from Tim Howard of Stifel. Your line is open.

Timothy Howard -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Hi, thanks for taking the question. Could you speak to the financing of the drop down kind of the mix of debt and equity and maybe to the long term leverage target at Viper, as you kind of increase your scale?

Kaes Van't Hof -- President

Hey, Tim. Yeah. So, you know, from a long term perspective, whether it's Diamondback, Viper or Rattler or consolidated, you know, we're never going to go above 2-times debt-to-EBITDA well that's on a consolidated basis or at each of the subs. Now I think with this drop down, what's unique about it is, is the amount of cash flow that we add to our, you know, our next 12 months in 2020 projections at Viper.

And now Viper is in a position to probably put some permanent financing, maybe a turn of leverage of permanent financing, given the size and scale that we've achieved at the business. Now, it's very important that the parent borrowing costs come down and, you know, Diamondback, we feel is an investment grade company and on its way and that will naturally bring down the borrowing costs of the sub.

So, as we thought about the debt and equity split, I think, the Diamondback Board really likes owning a lot of Viper and this brings Diamondback's ownership and Viper upto 60%. And it also gives some cash consideration to Diamondback without getting to fund this deal with equity.

Timothy Howard -- Stifel, Nicolaus & Company, Incorporated -- Analyst

That's helpful. Thanks. And then pivoting to the organic growth profile in kind of 2020 and beyond, how are you guys thinking about that?

Kaes Van't Hof -- President

Well, I think what's great here, Tim, is that doing this deal, which is a massive deal for Viper increases the Diamondback operated position by 80% and it's all in areas, where Diamondback is operating. So, I think as you think about the long term growth rate of Viper, the two businesses, Diamondback and Viper should grow almost in concert. Now, Viper will have the benefit of doing some acquisitions on third-party acreage, which should drive that growth rate up, up a little bit over the long term as well.

Timothy Howard -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay, got it. And then as it relates to third-party M&A, is it more on an opportunistic basis, or do you have a target every quarter or year?

Kaes Van't Hof -- President

Yeah, I don't like putting out targets. I mean, we certainly have goals to continue to consolidate the private minerals market. We've set our machine up at viper on a very unique way and that we can -- we have a ground game. We can close 40 -- 40 acquisitions in a quarter, even if they're small -- small check sizes. So, I think we're set up to do a $700 million drop down. But,today we're closing $200,000 and $300,000 deals that add up and make a big difference, especially under Diamondback operated acreage.

Timothy Howard -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Got it. Thanks and congrats on the deal.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Tim.

Kaes Van't Hof -- President

Thanks, Tim.

Operator

Our next question comes from Gail Nicholson of Stephens. Your line is open.

Gail Nicholson Dodds -- Stephens Inc. -- Analyst

Good morning. With the roller-coaster oil prices that we've experienced over the last 12 months. I just wanted to get some incremental coloring your thoughts on hedges, and how you guys would proceed maybe in 2020 to maybe protect that downside of oil in order to make sure that cash distribution continues to be healthy as you move through your time?

Kaes Van't Hof -- President

Yeah, Gail, there's a lot of discussions internally on hedging. Right now we're an unhedged vehicle. I don't think -- I think it's up to the Board to decide what we're going to do from a hedging philosophy, because it would be a big shift in strategy. If we were to do anything, it would be some downside protection giving -- leaving all upside for our investors.

Gail Nicholson Dodds -- Stephens Inc. -- Analyst

Great. Thank you.

Kaes Van't Hof -- President

Thank you, Gail.

Travis D. Stice -- Chief Executive Officer and Director

Thanks, Gail.

Operator

Our next question comes from Tim Rezvan of Oppenheimer. Your line is open.

Timothy A. Rezvan -- Oppenheimer & Co. Inc. -- Analyst

Hi, good morning, folks. Thanks for taking my call. First question, this is drop now sort of wipe all the legacy Diamondback in energy and minerals. Have they all now been moved down, or is there still kind of a potential queue?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, for all intents and purposes, Tim, this is it. There's some overrides that remained in the southeastern Mexico stuff, but we're -- we held those out because we continue to look for ways to create value on that acreage, but this is essentially it.

Timothy A. Rezvan -- Oppenheimer & Co. Inc. -- Analyst

Okay. Thank you. And then the move, obviously the drop is impactful, Diamondback now controls greater than 50% of the Viper royalties. Was that sort of just a kind of happy coincidence, or was there an idea that you want to control a greater part to have more visibility on growth?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, I think, too. I think that's been an ongoing part of our strategy is, we've executed on acquiring these minerals. Kaes just talked about the machine we have in place and we still like to differentially focus on acquiring minerals under Diamondback operated properties. I think if you look at the other mineral companies out there, you know, this remains a clear differentiator the fact of the relationship the Viper has with its sponsor Diamondback in that, that ability to operate at the Diamondback level and forecast future cash flows is truly unique in this Viper vehicle?

Kaes Van't Hof -- President

Yeah, Tim, I add a little bit of that. I mean, we'd love to own every mineral under Diamondback acreage. Unfortunately, not all of them are for sale. So, we're going to keep looking to acquire minerals under Diamondback, but we also have a machine now, where we are buying third-party minerals with clear visibility at good prices.

Timothy A. Rezvan -- Oppenheimer & Co. Inc. -- Analyst

Okay, that's helpful. And then just one last one, if I can. You nudged up sort of the midpoint of 2019 production guidance. Is that because of activity you're seeing in the field now in well productivity, or is that because of the acquisition? And can you give kind of any ballpark on the anticipated closing date?

Kaes Van't Hof -- President

Yeah, Tim, I think it's fair to assume that the deal closes right at the beginning of the quarter. Certainly we had to raise production guidance for Q4, when that the drop down closes and add to the production of Viper in the fourth quarter. We're going to see a pretty significant jump excluding the drop down from Q2 to Q3 and then some organic growth on top of that into Q4 with the drop down adding significant amount of growth over 4,000 barrels a day on top of that.

Timothy A. Rezvan -- Oppenheimer & Co. Inc. -- Analyst

Okay, thanks. That's all I had.

Operator

The next question comes from Phil Stuart of Scotia Howard Weil. Your line is open.

Philip Stuart -- Scotia Howard Weil -- Analyst

Good morning, guys. Congrats on getting the deal announced. I really appreciate the incremental data points on slide eight of the investor deck, particularly the anticipated growth completions in 2020 and 2021. Given that you are contemplating the net revenue interest going up in 2021, does that imply that kind of the incremental wells that will be completed over the 2020 level, will primarily be in kind of Spanish Trail North and the Midland area that you've identified on that map?

Kaes Van't Hof -- President

Yeah, I mean, it's actually there's some details beyond that. For instance, you see that in 2019, we only have 30 to 35 wells completed in the rest of the year. But at the beginning of the year, we completed two almost 25% NRI 10,000 foot wells in the Delaware. So, we have pockets of acreage that is very, very concentrated and has significant NRI. And you'll see that, we talk about that on the one of the later pages on Page 14 of our deck, some very high interest wells that are going to be developed into 2020. Naturally given consolidated capital allocation, we're going to keep pushing to do the higher interest pads first. But, there will be some high interest stuff coming on in '19 and '20 and then a significant amount into '21.

Philip Stuart -- Scotia Howard Weil -- Analyst

Good deal. I appreciate the color there. And then I wondered if we could circle back on the Eagle Ford it's been a while since we've gotten a material update there. Obviously, it's very small in kind of the grand scheme of things for the overall Viper picture. But just kind of curious, I think, you guys have had that acreage for about 18 months now. I'm just kind of curious how you view that deal now looking back on it, and if you see any similar opportunities in the Eagle Ford or potentially in the Bakken or other oily kind of lower 48 basins that are kind of peaking your interest right now?

Kaes Van't Hof -- President

Yeah, I mean, I think we timed that deal very well. It's performed at and above our expectations. I think prices performed above our expectations. Volume has been at our expectations of about a 1000 barrels a day pretty consistently. There's been some pretty positive data points from the major operators, Conoco, Devon and a little bit EOG and then picking up some activity in the back half of the year. But for us that's probably going to move a 1000 barrels a day upto 1100 or 1200 barrels a day. So, it will make a huge impact on Viper overall.

Now, talking to the Eagle Ford or the Bakken or other plays, that was a pretty unique deal and a one-off deal. I think all of our G&A today is dedicated to the Permian Basin. And if an extraordinary opportunity comes up outside the basin, then we'll think about it. But really the acquisition machine is -- has become so fluid here in the Permian that we haven't had a reason to leave.

Philip Stuart -- Scotia Howard Weil -- Analyst

All right, guys. Makes sense. I appreciate the time.

Kaes Van't Hof -- President

Thank you, Phil.

Operator

The next question comes from Jason Wangler of Imperial Capital. Your line is open.

Jason Wangler -- Imperial Capital Group LLC -- Analyst

Hey, good morning. I was just curious and you talked a little bit about it already. But do you expect -- you obviously have the visibility of Diamondback, but as you look at the second half of the year, do you expect a slow down in completions and drilling in the Permian to kind of impact your numbers? And does that kind of baked into the guidance that you've put out?

Kaes Van't Hof -- President

Yes, our guidance has everything and we can see baked into it. If you look at our -- we released some new numbers this quarter, which is essentially are net DUCs and net wells in progress. And that number continues to grow for us. So, I think Diamondback is going to pack the mill for Viper here in the back half of the year. And that will outweigh any potential slowdown you might see from other operators.

If you think about how Viper buys deals under other operators, we buy based on lease requirements. So, I don't think operators are giving up leases at this time. So, Viper's forward production is protected by what the lease requires that operator to drill or else they have to pass an extension, or we can potentially lease that acreage to Diamondback, if we wanted to.

Jason Wangler -- Imperial Capital Group LLC -- Analyst

Okay, that's helpful. And just curious, I mean, obviously gas prices have been tough in the Permian. Is there anything much to do to mitigate that on your end? Or is it just simply that it's just going to have to be something that the headwind until some more pipe comes in and hopefully gets a better price?

Kaes Van't Hof -- President

Yeah, I think this is going to be a headwind for the Permian for the next three or four years. It's going to be pockets of tightness. Certainly the Henry Hub price hasn't helped, but the diff on top of it is hurting now. Viper posted a negative number for the quarter. There's a little bit of noise in that number and that Viper takes all the realized price. We don't take out gathering, processing and transportation is a separate cost item. So, that would have decreased our negative number a bit. But as an unhedged vehicle, this is what we're living with right now.

Jason Wangler -- Imperial Capital Group LLC -- Analyst

I appreciate the color. Thank you.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Jason.

Operator

The next question comes form William Thompson of Barclays. Your line is open.

William Thompson -- Barclays Bank PLC -- Analyst

Good morning. So, Travis, you gave some helpful visibility on production expectations on the drop down and overall. Slide eight suggest a ramp of activity on legacy Energen and Spanish Trail North through 2021. I recognize you're front running the Diamondback earnings here and plans are maybe an influx.

But just want to get a updated sense on Diamondback activity plans for 2020. Correct me if I'm wrong, but I believe the latest comments within that frame would add about 1 to 2 -- upto 1 to 2 rigs in 2020. Has anything changed your mind given the global demand concerns and investor prioritizing free cash flow over growth?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, William we got a week before Diamondback released its earnings and we'll be able to talk about all that in detail at that time.

William Thompson -- Barclays Bank PLC -- Analyst

All right. Let me try something different though. How do you think your third-party activities? You think third-party activity snaps back in early 2020 following year-end budget exhaustion. I mean, based on rig count data, we've pulled some of your peers continue to drop rigs below expected levels and land rig contractors made some of a bleak outlook. So, obviously rig count is about six months ahead of production, just curious, how do you think some of your peers operate in 2020?

Travis D. Stice -- Chief Executive Officer and Director

Well, I think Kaes laid out a pretty succinct response to that, because we're not forecasting Viper's volumes based on their rig count. Well, we're looking at is the lease requirements and we know that with a high degree of confidence that these third-party operators are not going to let their leases expire. And in the unusual case that they do, that actually is a win for Viper because we can either release it or release it to Diamondback or any other option.

So, I don't think any of those scenarios William are going to impact the way that we forecast the future for Viper.

William Thompson -- Barclays Bank PLC -- Analyst

Okay. And maybe one more for me, just on oil price realization came at the high end of the guidance range. You reiterated the 88% to 90% range for the full year. I recognize the Spanish Trail sale agreement improve again in early 2020, but what are the puts and takes in kind of the high-end and the low end of that range for the remainder of the year?

Kaes Van't Hof -- President

Yeah, I think, the more Spanish Trail production there is the lower will be on that range. So, Spanish Trail is going to pick up in Q3 and Q4 with these large pads coming on. So, we'll probably be closer to the midpoint of that range for the rest of the year. Then as you think about 2020, Spanish Trail deal significantly improves along with a lot of the other Diamondback operated deals, which Viper participates in and so we expect to be at a 100% of WTI or greater in 2020.

William Thompson -- Barclays Bank PLC -- Analyst

All right. It's helpful color. Thank you.

Kaes Van't Hof -- President

Thank you.

Operator

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Travis Stice, CEO.

Travis D. Stice -- Chief Executive Officer and Director

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

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Adam Lawlis -- Vice President, Investor Relations

Travis D. Stice -- Chief Executive Officer and Director

Welles Fitzpatrick -- SunTrust Robinson Humphrey, Inc. -- Analyst

Kaes Van't Hof -- President

Timothy Howard -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Gail Nicholson Dodds -- Stephens Inc. -- Analyst

Timothy A. Rezvan -- Oppenheimer & Co. Inc. -- Analyst

Philip Stuart -- Scotia Howard Weil -- Analyst

Jason Wangler -- Imperial Capital Group LLC -- Analyst

William Thompson -- Barclays Bank PLC -- Analyst

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