Participants

Kaes Van't Hof; President; Viper Energy Partners LLC

Presentation

Operator

Good day and thank you for standing by. Welcome to the Viper Energy fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
(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, Chip Seale, director of investor relations. Please go ahead.

Thank you, Lauren. Good morning and welcome to Viper Energy's fourth quarter 2024 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 Kaes Van’t Hof, CEO, and Austin Gilfillan, 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-gap 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 Kaes.

Kaes Van't Hof

Thank you, Chip. I'd like to also note that Travis Dice, outgoing CEO, is joining us for one more Viper call here, so it's good to have him in the room as well. But welcome everyone. Thanks for listening to our fourth quarter 2024 conference calls. The fourth quarter concluded as a landmark year for Viper. For the full year, we continue to deliver strong organic production growth on our legacy assets and successfully executed on our differentiated acquisition strategy.
Looking ahead, we continue to be excited about the transformative dropdown transaction between Viper and Diamondback that was previously announced, and we recently closed the separate Quinn Ranch acquisition a couple of Fridays ago. On the dropdown, specifically, this transaction is unique in its value proposition to Viper, given the alignment it provides with Diamondback's expected development over the years to come and the resulting organic growth that can be driven by Diamondback's drill bit.
Further on this point, on a pro forma basis, Viper's expects to own an interest in approximately 75% of Diamondback's expected completions over the next five years, with an average 6% NRI within those walls. This is greater alignment than we have realized over the past eight years on average and is now going to be applied on a much larger scale.
Looking at the forward outlook in more detail, we have initiated average daily production guidance for Q1 of 2025 of 30,000 to 31,000 barrels of oil per day. And upon the assumed closing of the dropdown expected in Q2 of 2025, we expect to run rate daily average oil production of 48,000 barrels of oil a day. Importantly, we also have the unique visibility to further growth in 2026. As our diamondback operated production is expected to increase to approximately 31,000 barrels a day, up from approximately 27,000 barrels a day in 2025.
Of note, this production growth does not take into account the expected accelerated development of Diamondback's Southern Midland Basin acreage that was agreed to in the recent double equal acquisition of the Diamondback level. The pending dropdown includes a substantial amount of royalty acreage in Reagan County, mostly via concentrated interests and completely undeveloped units, so this acceleration would bring forward significant NAV for Viper.
In conclusion, we continue to believe that Viper presents a differentiated investment opportunity with zero capital and operating costs, alignment with our parent operating company that has helped us deliver consistent organic growth and a current size and scale that positions us to be the consolidator of choice in what we feel remains a highly fragmented minerals market, particularly in the Permian Basin.
Pro forum for the drop-down, Viper will rank amongst the largest US independent EMPs, and we believe the unique attributes to this business model will continue to be recognized by the market over time as our durable cash flow profile becomes increasingly differentiated.
Operator, please open the line for questions.

Question and Answer Session

Operator

Thank you. At this time we will conduct the question and answer session.
(Operator Instructions)
Our first question comes from the line of Neil Dingman with Trust securities. Your line is now open.

Morning guys. Kaes already congratulating you, so I just want to congratulate Austin. Nice, well thought of. My first question, guys, is just on the announced Kerry with Double Eagle. You mentioned this morning, I think, on the Venom or I'm sorry, on the Diamondback call is that I think you said Kys maybe around 50% of this plan could benefit Venom. I'm just wondering, could you discuss maybe anything around potential timing and just what you're meaning by the potential upside from this for Venom.

Kaes Van't Hof

Yeah, we're still working out all the details and timing, can be dependent upon where the rigs get moving down there in the southern portion of our acreage, but, high level, we expect at least $50 million of upside to viper from a capsule perspective and, call it [$70] oil in 2026. I expect that number probably grows a bit in the coming years, but as we as we start to get more clarity on timing and interest, we'll update the market, I think we have an opportunity also to buy a lot of minerals down there in Reagan County.
It seems to be a part, an emerging part of the basin where, there hasn't been as many as many deals today, so Austin and his team are actively looking at opportunities down there.
Thank you.

And then maybe try since your last call, I just love to hear for your last on this one, if you still believe sort of the post large drop and just all the acquisitions you guys have been successful is just wondering when you still look at Venom, do you still believe that the opportunities are as good as ever and maybe what other incremental accomplishments do you think still lies ahead for us and the team?

Kaes Van't Hof

Yeah, look, we're, it's almost an embarrassment of riches, the amount of talent that's assembled on this Viper team. But what's even more exciting than that is just the runway in front of these guys, when we took this company public, gosh, it's been a long time ago, [10 years], we always had a vision. That it could be in the situation we're in today. It just took us a while to figure out what was the right structure to be able to get it there, but I think this is a category killing company, and it's refreshing to see talent and opportunity coincide in the way that it that it's doing here at Viper Energy Partners.
Thank you, Neil, for giving me the chance to mention that.

I couldn't agree more. Thank you all.

Operator

Thank you. One moment for our next question.
Our next question comes from the line of Neil Mehta with Goldman Sachs and Co. Your line is now open.

Yeah, twice in a day, lucky me here. So, case travels, I'm just curious for your perspective on, the payouts. So you've got, the guide for 75% to 100% and just your perspective given the strength of the balance sheet, where do you see the likely, payout over the next couple of years and what are the parameters that you're watching to be on the lower end or the higher end of that range?

Kaes Van't Hof

Yeah, Neil, it's a great question because when we started this business, it was a 100% pass through, and we distributed every dollar we made every quarter. What that, what happened with that situation is that that made us rely on the capital markets. For doing deals, right, so we had to do equity deals. We had to lean on the balance sheet any time we wanted to dot in acquisitions.
And now since we've gone back to 75% of free cash returns, it's still a very high number, but for mineral business I think it makes a lot of sense. But that leaves 25% of our free cash flow, a number that's now growing pretty significantly with the drop down, to continue to do deals, the little deals that add up under the diamondback drill bit.
But, we don't have to go, do a big marketed trade to get those deals done. So I really like 75% for Viper. I mean, we've certainly been vocal that the base dividend needs to grow and we're prioritizing the variable dividend over repurchases. But there have been times over the past 10 years where repurchases made a lot of sense for Viper. So, we have that that ability, and, in my mind, that would be an ability to lean in above 75% if there was.
Extreme volatility, in the market. So really a very flexible business model I think after the large equity raise for the for the drop down where the balance sheets in a really good position, to either, grow the business or keep returning more capital.

Okay, thanks guys and then obviously double eagle transaction done on the other side of the house will that create some opportunities for potential drop downs here, into Viper.

Yeah, the drop-down opportunity is probably small on that. I think they have a 76% effective NRI, so we could do what we did with Endeavor where we go carve out the excess NRI and create an override for Viper.
So, I would say it's a small opportunity. What's more exciting probably for us is the Reagan County opportunity that case. Line with the accelerated development of the large overrides we got from the drop down and then also kind of having a new playground down there to go poke around and TRY to buy some minerals where there hasn't been much activity or buying over the course of the last, really, the history of the Permian with the horizontal development that's occurred down there.

Alright thanks Austin thanks team.

Kaes Van't Hof

Thank you.

Operator

Thank you.
Our next question comes from the line of Kalei Akamine with Bank of America. Your line is now open.

Hey, good morning, guys. Just one for me here, kind of thinking about your data center plans and that development is currently taking place at Bang, but wondering if you think that's the right vehicle to maximize the value of that development. When you kind of look at your peers in the royalty space, it seems like royalty with surface rights seems to be a business model that the market really likes here. Any thoughts on dropping that piece down in Venom?

Kaes Van't Hof

Yeah, we're certainly not blind to the, what's going on in the market on the surface side, we kind of said it on the on the dime back call. In my mind, the surface is the smallest piece of the value chain of data centre developer in the basin, but I think the market certainly has a different view, I think for us, there's more value in surface being in the operator's hands and being able to move things around and not worry about intercompany relationships.
When trying to develop our assets, so it probably stays in Diamond back for now, and we keep Viper as a pure play royalty company, we went to three public [stake] companies once before, and I think we're good at two, so we'll probably stay with Viper and Diamondback for now.

Got it thanks guys.

Kaes Van't Hof

Thank you.

Operator

Thank you. One moment for our next question.
Our next question comes from Paul Diamond with Citi. Your line is now open.

Thank you. Good morning, thanks for taking the call. I just want to get an idea of where you guys' kind of think about the right level and the split between Fang versus other operators in your long-term operational profile. Any shift in that after the recent drop downs, or is it still pretty much opportunistic?

Kaes Van't Hof

Yeah, the relationship is certainly what differentiates Viper and it got significantly larger with the dropdown, I think we want to continue to grow the Viper business, which is what we want, would like to do. It's naturally going to be harder to do it 100% under the fang drill bit, but I think, generally we'll always have the support system of, knowing where the majority of our development is coming from, the timing of that development, which is --.
Yeah, I think the key differentiator at Viper, but I think over time some of these larger packages that that might come available in the basin, we'll have a piece of, operations through Diamondback but not the majority like the drop down. So, I think over time it's probably.
It probably, dissipates a bit, but that also means the multiple we should be paying for those assets is probably lower.

Understood. Makes perfect sense. And actually just to kind of port tends to my second question, given the increased scale, how do you all think about or has been any evolution, how do you think about, kind of the correct balance sheet, like any interest in you levering quickly or more comfortable taking out a bit more debt, just your thoughts around that.

Kaes Van't Hof

Yeah, I think the mineral business certainly has the capacity to take on more leverage. I just don't think the market or the or the rating agencies have come around to that idea. So, I think we're still going to run the business, fairly lowly levered, and I think Viper's kind of cost of capital overall has come down significantly. Well, the fact that we're able to do a $1.2 billion dollar follow on deal.
Viper, when, five or six years ago we could barely raise $100 million has helped us a lot and so, leverage plays a part, but we need the rating agency support to keep moving up the rating scale and have access to that capital. While not getting over our skis on leverage.

Understood, thanks for your time. I'll leave it there.

Operator

Thank you. Our next question comes from the line of Derek Whitfield with Texas Capital. Your line is now open.

Kaes Van't Hof

Hey, good morning again guys.

Travis Kay, again, congrats on what you've built it Dominant back end Viper, and congrats Austin on the opportunity you have ahead of you.
My first question, really wanted to kind of think through, some of the deeper intervals and opportunities that you guys have across the basin, well, clearly the drop downs and double eagle acceleration are going to drive the near term growth for Venom.
Could you comment on how close the returns are with these deeper intervals versus the more traditional wolf camp and spray berry zones, and further, are there leasing an activity tailwinds over the next two years that you see forming?

Kaes Van't Hof

Yeah, Derek, I think you know when you think about the resource expansion story at Viper, we definitely do that as, a compelling story over the next few years, looking at the returns kind of as a parent company, I think we've moved in the right direction on the cost side and, probably.
In the next two to three years, we think it's going to be pretty competitive with the core development that we're doing today.

And there's on the leasing front it's definitely something that we've kind of seen across our position, we signed a big lease on the deep rights with Diack for Spanish Trail a couple years ago. You know that that was certainly unique given we owned 100% of the minerals and it was such a contiguous block of acreage. Kind of what we've seen now is operators. Leasing the acreage or putting it together on an as needed basis, not too many people want to get too much acreage from aggregated and have the clock running with the lease expirations and such on that front.
So, I think it'll be a story that we see play out over the next couple of years and the lease bonus that we have with the modern-day lease clauses will just kind of be a slight tailwind to the story and the normal royalty string that we receive.

And then on my follow up, and I'm going to perhaps reframe the previous surface question. What are your thoughts on the opportunity in the Midland Basin for surface ownership where you have material upstream water multi assets?
And while surface ownership definitely helps from a leasing perspective with data centres, the bigger opportunity that we see on the Delaware side is really on the water sourcing and royalty on water handling.

Kaes Van't Hof

Yeah, I mean, I think it's certainly another leg of the stool that, people are playing in the basin, it's good to see the water business get probably more attention than it used to get, we used to have a public subsidiary that was a water business that, we had a hard time getting people on the calls for, but, I think it's just natural that as the working interest gets consolidated, the minerals gets consolidated. People start to look for opportunities on the surface, and royalties play an important part of that.

Derek, for us, I think, the important part of the business for us is to own the best rock and let, activity and capital come to us as a result of that, right? So I think you can have the argument of that being able to provide the water or the surface kind of you on the on the mineral side and maybe that's true to an extent, but for us with the relationship with Diamondback and then just trying to own the highest quality rock in the basin, I think we feel very confident and, the activity levels that we'll be able to generate just by, focusing on that element.
Thanks great update guys.

Kaes Van't Hof

Thank you.

Operator

(Operator Instructions)
Our next question comes from the line of Tim Rezvan with KeyBank Capital Markets. Your line is now open.

Good morning, folks, and thanks for taking my question. And also, congrats to everybody on the on the news on the promotions and on the retirement, Travis. I wanted to ask Kays on repurchases. You have over $400 million of capacity. I would argue you're basically going to be there on the leverage side by the middle of 2025.
So, amid a pretty tough tape for a lot of energy companies, Viper trading down to the mid-40s, kind of what's, what are the thoughts on repurchases and, if we see more of a downdraft in the stock for macro reasons, are you incentivized to get active.

Kaes Van't Hof

Yeah, Tim good question. I think the repurchase plan is still there. There's still a lot of capacity, especially for Viper sizes. I think we'd start to see some weakness or continued weakness to move away from the priority of returning cash to shareholders through the base plus variable, but it's there for a reason and capital allocation is something we pride ourselves on and I think we're going to.
We have a I don't know. I wouldn't call it a short term holder in in in cap that may monetize at some point, and you'd expect us to participate in that deal. So, the repurchase plan is there. I haven't really thought we haven't really thought about it for a while at Viper, but it's certainly something to dust off if we continue to see weakness across the space.

Okay, I appreciate that response. And then, on the next my follow-up case on the fan call and prepared comments, you've talked about, a greater opportunity for consolidation in minerals versus EMPs. There's been a lot of chatter in the mineral space about large packages kind of on the market. So, I was curious kind of what you're seeing from your seat that kind of, drove that commentary and is it fair to say, Viper is going to be as active as anybody at this point.

Kaes Van't Hof

Yeah, I think Viper's in in a really good position, we in the last two years we've done, $2 billion and $0.01 billion deals that that I think surprised the market or not the public market, but our competitors, one of which had a lot of Diamondback activity that we could, through our drill bit, buy down the multiple, and I think what we did in that deal was we put a pretty unique structure by giving them OpCo units to defer their tax liability, and that structure got a lot of attention from a lot of mineral portfolios around the basin that.
They hadn't really thought about that as their potential exit. So, I think what Viper offers now is an ability to, give someone a significant amount of cash without compromising our balance sheet, but also, if we do give out equity, it could be in the form of a deferred tax format through the opco structure.
Get on.

No, that's right, and I think the lucky position that we're in, Tim, is that we also don't have to buy every deal, there are quite a few sizeable packages we've seen the size of packages get bigger over the last couple years, but we've been opportunistic and, we've been able to buy packages that are free to day one but also add duration. To, kind of the cash flow profile as we see it.
So given the organic growth that we see on the for the next couple years, mainly driven to the diamondback drill bed, certainly don't feel the need to do anything. And with the balance sheet where it is today, that just allows us to be opportunistic for the for the right opportunity when it comes available.

Okay, thanks for the comments.

Kaes Van't Hof

Thanks.

Operator

Thank you.
Our next question comes from the line of Leo Mariani with Roth. Your line is now open.

Yeah, hi guys, maybe just wanted to kind of ask the M&A question a little bit, differently here. So, do you see maybe kind of significant opportunities, out there, today, in the space and. Do you still see the the minerals landscape is just incredibly fragmented? Obviously, as you pointed out, there's been significant consolidation on the upstream operator side, but just trying to get a little better sense of the landscape there.
I mean, we kind of like, 5% into the consolidation and there's still just a lot of smaller kind of owners of minerals kind of running around there that you guys see as an opportunity, and obviously, you've got a very strong balance sheet right now as you pointed out.

Kaes Van't Hof

Yeah, you, I think from an innings perspective, if you think about BIer pro forma for the drop-down, Biker is going to do about round numbers, 50,000 barrels of oil per day of production.
If the pery is producing 6 million barrels a day of production at a 25% royalty, there's 1.5 million barrels per day of royalty barrels available to be consolidated. And we're, the largest. Public mineral holder from a from a production perspective and we're only, 3.3% of the total [permion]. So, you know there's certainly some minerals that will never sell or never turn over.
But if you just think about the size of the prize there just in this basin, there's significant opportunity ahead whereas on the upstream side, if you add, the top five or six operators together from a gross production perspective, you're getting closer to 60%, 65%, 70% of the total production in the basin. Okay.

Okay, those where very helpful stats really much appreciate that. And obviously, you folks are getting the Endeavor deal. I'm sure prosecutor right now anticipating a second quarter close, certainly that that deal is pretty creative. As I'm looking at the dividend for the company, if we assume that all prices don't really change much, call them, $70. I mean, it looks to me like we should get some. Some nice accretion on the dividend, post the close of that deal is that generally how you guys are looking at it as well?

Kaes Van't Hof

Yeah, we agree, I think the kind of the next. Dole for Viper is on a normalized on a normalized price basis is, can we get to $1 per share of distributable cash flow each quarter, and I think, with the drop down, as well as the expected organic growth, I think that's a near term possibility and 75% of that going back to shareholders is a nice is a nice yield today. Very good thank you.
Thanks Leo.

Operator

Thank you.
This concludes the question-and-answer session. I would now like to turn it back to Kaes Van’t Hof, CEO, for closing remarks.

Kaes Van't Hof

Thank you, guys, for joining the Viper call today. If you have any questions. Where to find us and appreciate the time.

Operator

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