Participants

Adam Lawlis; Investor Relations; Viper Energy Inc

Travis Stice; Chief Executive Officer, Director; Viper Energy Inc

Kaes Van't Hof; President, Director; Viper Energy Inc

Al Barkmann; Executive VP & Chief Engineer of Viper Energy Partners GP LLC; Viper Energy Inc

Austen Gilfillian; Vice President; Viper Energy Inc

Neal Dingmann; Analyst; Truist Securities

Chris Baker; Analyst; Evercore ISI

Betty Jiang; Analyst; Barclays

Paul Diamond; Analyst; Citi

Derrick Whitfield; Analyst; Stifel Nicolaus and Company, Incorporated

Leo Mariani; Analyst; Roth MKM

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Viper Energy First Quarter 2024 earnings conference call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question. You will need to press star one one on your telephone keypad. At this time, I would like to turn the conference over to Mr. Adam Lawlis, Vice President of Investor Relations. Sir, please begin.

Adam Lawlis

Yes, good morning and welcome to Viper Energy First 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 Travis Stice, CEO, Kaes Van’t Hof, President and Austin deal filling Vice 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 business. 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 and 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.

Travis Stice

Thank you, Adam, and welcome, everyone, and thank you for listening to Viper Energy's First Quarter 2024 Conference Call. First quarter was a strong start to the year for Viper in the period, which uniquely highlighted the benefits of Viper's business model and high-quality assets. Despite commodity prices declining during the quarter. Viper's continued production growth, along with our best in class cost structure, allow for us to increase our cash available for distribution per share quarter over quarter. Importantly, as a result of our strong financial and operational results. Our Board has declared a combined base plus variable dividend for the first quarter of $0.59 a share. Looking specifically at operations both activity and well productivity trends across our acreage position continue to be encouraging. As a result, we have initiated production guidance for the second quarter that implies over 3% growth relative to the first quarter. It is important to note that this guidance takes into account the divestiture of our non Permian assets losing their production contribution for two months of the quarter on a pro forma basis. So including the loss of roughly 450 barrels of oil per day from the divestiture, our true organic growth quarter over quarter is expected to be almost 5%. Additionally, we have also provided updated production guidance for the full year 2024 forward, while the midpoint of this guidance range has been reduced by 250 barrels of oil per day versus our previous guidance range. That loss is entirely attributable to the loss of the production contribution from the non Permian assets for the remaining seven months of 2024.
For a further point on the continued strong activity levels across our acreage position, the implied average production for the second half of 2024 represents a roughly 2% increase relative to the midpoint of our second quarter production guidance range.
Looking more long-term at potential inventory expansion during the first quarter, Diamondback completed its first test of the Wolfcamp D in Spanish Trail with two wells being turned to production of these two wells, only one was developed under an existing Wolfcamp B well as to test vertical communication between the two zones. To date, we have seen similar performance between the two wells and therefore, believe that there's enough vertical separation between the two zones to limit the current child effect. The initial takeaway is that the Wolfcamp D in Spanish Trail can be effectively developed below existing Wolfcamp B wells. And while they are not the highest returning projects in Diamondback's portfolio. They can't compete for capital over the next several years, especially inclusive of fiber's high NRI in the existing infrastructure that's in place. This test derisks a substantial amount of net inventory for Viper. And as a result, it gives confidence to an extended outlook for potential organic production growth.
Separately, we have increased our guidance for cash G&A slightly as a result of increased costs associated with our conversion to a corporation. But we continue to run our business extremely efficiently and with peer-leading per unit costs, our continued best in class cash margins and free cash flow generation, along with the previously detailed organic production growth should enable Viper to continue to return a substantial amount of capital to our shareholders, primarily through our base plus variable dividend. Operator, please open the line for questions.

Question and Answer Session

Operator

Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star one one. Again, once again, if you have a question or comment at this time, please press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Neal Dingmann from Truist Securities. Your line is and

Neal Dingmann

more and Travis and team into in the past other nice quarter. Travis. My first question is on capital allocation for you or Kaes specifically your thoughts on potentially lowering the payout ratio until the leverage declines as you did on it over and saying, I'm just wondering maybe secondly, there, how in the future you all would view buybacks versus dividends in this vehicle. As I know, some mineral investors continue to prefer more exclusively dividends?

Kaes Van't Hof

Yes, good. Good question, Neal, and welcome to the call. I think for us the capital allocation philosophy at Viper, it remains a focus on cash distribution over of that. I think there have been times of stress over the past few years where we've allocated much more capital to the buyback versus the cash distribution. And that has been are very value accretive deal for Viper shareholders. Listen, stocks performed well. I mean, we still think there's a lot of value to be to be earned and on the mineral business. But right now, we're probably leaning more towards cash versus versus buybacks as you can see in the first quarter. And I think we're also continuing to grow that base distribution consistently on kind of a semiannual basis, and that will continue as well.
And on your question on debt reduction and the percent of free cash returned the business on the mineral side to generate it generates pure free cash flow. So it's very easy to delever. I think generally that the first quarter had some working capital headwinds as well as we did a couple of small deals in the Permian second quarter should see net debt go down pretty significantly with free cash generation as well as on the sales and on Permian assets. So we comfortably use business near a turn of leverage at year end as income a turn of leverage for mineral businesses is a very conservative funding structure. I think the but the part of that part of the job of our team over the course of this year and into next is as this business gets bigger, we should trying to earn a lower cost of capital with the public bond investors, the rating agencies as they start to understand the pure free cash flow nature of this business.

Neal Dingmann

Quick details and then just a quick follow-up on the mineral position. I was looking at the slides continue to notice the dollar position you have in Martin County. So my question there is just would you take over once you take over the Endeavour acreage?
Well, activity, there stay relatively the same. I mean, given what you have under the pro forma company or do you anticipate potential a little bit of change here? I just trying to figure out how much really you have to dial back exclusively versus sort of what you have with the combination here?

Kaes Van't Hof

I mean, I think I think for Viper, you know that exposure to that area is going to be huge for the future future growth of the business. That area, obviously, some of the best rock in United States continues to get better, continues to add more zones. That's kind of where we've been seeing really good Wolfcamp D results. I think pro forma with Endeavour, the combination there is going to be one of the best places to drill for oil in the United States with some combination of longer laterals, big pad, high mineral interest, that's going to be kind of the focal point. We're going to have a majority of our rigs in that Martin County area.

Neal Dingmann

Yes, that's I was wondering, I mean, I guess there is potential for lease bonuses and all that just for something down the future, right?

Kaes Van't Hof

Yes. Well. I mean, listen, I think there's potential for refinances across Viper's position. We've seen that a bit with the Barnett and Woodford leasing taking off here. There's been some Wolfcamp D leasing taking off because that's not always been held up for more vertical Wolfberry days.
And just your thoughts about the benefits to the mineral business view on minerals, you own every piece of every barrel of oil produced in that. And that's a section or unit forever regardless of if it's, as you know, primary development, secondary zones, who knows what happens you know down the road. That's just the beauty of being a mineral owner.

Neal Dingmann

A great point. Thank you all.

Kaes Van't Hof

Thanks, Neil.

Operator

Thank you. Our next question or comment comes from the line of Chris BAKER from Evercore ISI. Baker, your line is now open

Chris Baker

for your morning guys. And just was hoping you could talk a little bit more about the Wolfcamp D. I'm just any additional color you can share on early results plans for testing and maybe just how that fits into sort of the broader organic inventory opportunity set that you guys see today?

Kaes Van't Hof

Chris, we're going I'll Hartmann our chief engineer, respond to that question.

Al Barkmann

Yes, Chris, I know this was a test the process of the WD. in Spanish Trail like we mentioned in the opening remarks, we kind of wanted to test the performance of the D under existing Wolfcamp B wells. And then without that, and really, really pleased with the initial performance here, both of those wells I feed above 1,000 barrels a day, and you know, really kind of tracking on top of each other. So we don't we don't think we're seeing any degradation from the Wolfcamp B wells being on cost. And I think that's something that the returns are obviously uplifted with the Viper ownership it at the same level and so I think that's something that we'll continue to do anyway across that position.

Chris Baker

Great, thanks. And then just as a follow up on the other question, I think we keep getting is just realizing it's early days, but I'm maybe just frame up the opportunities on the M&A front, realizing there's likely a big drop-down coming a little bit more visibility in terms of on when that deal will close.
But just you just remind us in terms of just big picture, sort of check the type, you know, data points in terms of leverage? And just how to think about that, at least from where we are, if possible?

Kaes Van't Hof

Yes. Chris. I mean, listen, I think we're obviously disappointed the Diamondback endeavor deal has been delayed a bit, but we still have a lot of confidence as we go into closing in Q4. That probably puts the discussions between Viper and Diamondback or Viper and pro forma data back into kind of early 2025. But as you know, we like to move quickly and get things done. I think we're very excited about the opportunity set to put the mineral business from Endeavour with combined with bikers business and create kind of a true category killer in the mineral space, the size and scale that really hasn't been seen to date on top of that, if we did do that deal, we're certainly not looking to lever up the mineral business at the expense of the upstream business. We've never never done that. So we expect that trend to continue. In the interim. We're still looking at deals that Vibra. There's there's been a few packages out there of size that have interested us, we've looked pretty closely and I think we'll continue to be in the fight on those deals. But as you think about the next three to five years of the Viper business model, it's really to be competitive in the 10 figure plus deals that we we tend to be in a league of our own on that on that size.

Chris Baker

Great. Thanks appreciate the color.

Kaes Van't Hof

Thanks, Chris.

Operator

And thank you. Our next question or comment comes from the line of Betty Jiang from Barclays. Mr. Yang, your line is now some are on a Travis case.

Betty Jiang

Maybe a follow up on the Denver and that opportunity, I guess, given the materiality of the EBITDA, the asset you outlined at the time of the acquisition, then just the variety types of mineral interest that's sitting within Dover. How should we be thinking about the size of that drop? Would it be it was one drop or a multiple tranches Yes.

Kaes Van't Hof

Well, first of all, welcome back that it's good to hear your voice and look forward to continuing to cover Viper. I think I can't make any promises right. We've got two boards, you got to have discussions and and look at this business that this deal has closed. I think our intention is probably given the amount and size is to do this all in one fell swoop in. And I think that generally means more exposure to a consistent development plan for a longer period of time. But some again, it's not completely my decision. So we'll see what everyone everyone decides, but kind of be our preference to tell the cleanest story possible.

Betty Jiang

And then one of the key advantages of the Denver market or is it increased visibility on Viper Tivity? Can you remind us what Viper's current exposure to a diverse development program? And if you are able to make any headways to increase your exposure to their activity through just organic leasing and other smaller Metro pick.

Kaes Van't Hof

It would be hard to doing materials to continue to improve on that exposure in a high level right now, about 55% of our production comes from Diamondback. I don't know, I would probably say less than less than 10, probably seven or 8% of our production comes from Endeavour. I do think deals like the GRP. deal had a lot of exposure to both Endeavour and Pioneer units on top of Diamondback's. So yes, I think just generally come in our exposure to ourselves is what we prefer. The second to that would be exposure to good operators like Endeavour like Pioneer and the areas with really good rock and really good line of sight to development.

Betty Jiang

Right. Makes sense you. Thanks. Very.

Operator

Thank you. Our next question or comment comes from the line of Paul diamond from Citi. Mr. Diamond. Your line is now open.

Paul Diamond

Gears a bit on the M&A dialogue to kind of the opportunity set you're seeing in third parties, kind of the smaller deals. I know with the volatility, we've seen some disparity and a bid-ask.
Brad, I just didn't know if you could comment on what you all are seeing.

Kaes Van't Hof

Yes. I mean, I think I missed the first part of the question. I mean, you're kind of talking about the overall M&A environment more often kind of talk about what we've been seeing.

Austen Gilfillian

Yes, I think it's still pretty competitive on what we call a ground game with the smaller deals, you know, call it $50 million and below really especially in the kind of $5 million range. And below. I think what we've seen an evolution in the minerals market rightly interest seven years ago, a lot of private equity money came into the space, and that's kind of where the knife fight fight was you go organically put together position of, but as the industry matured a little bit, you know, you have bigger funds involved now and it kind of all of that capital is rolling up. So we've not seeing a ton of deals transact right directly to the owner anymore. So it just brings more competition on on what's available we were able to get a couple of smaller deals done in first quarter, and that's kind of the benefit we have because of our relationships out here. But like Keith mentioned, before. I think where we see our strategic advantage to report on from an M&A standpoint is going to be on the bigger deals. We can kind of leverage on the side the cost of capital that we have.

Paul Diamond

Understood. Thanks for the clarity. And just one quick follow-up on the 13.8 wells in active development. If we kind of run rate that out, we are we're starting to push the higher end of higher-end production guidance. Just to know if there's anything you guys are seeing in your timing or cadence that would shift that potentially up or down just given basically I'm reading it.

Austen Gilfillian

Yes, we will continue to be pretty conservative with the timing assumptions on the third-party side, right? And we've got great visibility on the direct side of it. And that's what kind of drives a lot of growth into the second half of the year of the big bump that we're going to see from Q1 to Q2 here really is going to come from the third party size and a lot of the high concentration activity that we had underwritten in the GRP deal. But look, I mean, what we have contemplated right now for the rest of the year is third party wells only being turned production that if that have currently been slowed not making any assumptions on permits. So if activity continues to trend at like normal pace of maybe there could be some upside there. But we really don't really want to guide to what we can and what we can control.

Paul Diamond

Understood. Makes perfect sense. Thanks for your time.

Kaes Van't Hof

Thanks for.

Operator

Thank you. Our next question or comment comes from the line of Derrick Whitfield from Stifel. Mr. Whitfield, your line is now open.

Derrick Whitfield

Thank you. Good morning all, and thanks for you, Gary. My first question, I wanted to focus on your expected 2024 production profile after adjusting for the GRP. divest noncore divestitures, your second quarter guide suggests modest upside versus consensus. Is this the production profile you're expecting in your initial 2024 guidance? Or is there possibly some upside now based on the efficiencies we're experiencing at Diamondback?

Austen Gilfillian

Yes, I to say on the time they have been taking the general profile still looks similar to what we expected coming into the year. I mean, I think a little bit of activity was brought forward in Q1 outperformed a bit and kind of normalizing for the divestiture, maybe Q2 looks a little bit better than expected. I mean, sitting here at May first trying to make assumption on what's going to happen in the back half of the year with the third party side. That's just not smart. We want to get super aggressive, but I mean, in a general sense, obviously, activities and brought forward a little bit relative to where it was two months ago on the current backlog of activity, wells is really strong. So I mean, there's been some more some some healthy loan growth throughout the year. We'll just kind of see where the exact numbers shake out as the year plays out.

Kaes Van't Hof

Yes, I would say, Derek, you know, non-op, we always are pretty conservative at the beginning of the year. It seems like there's been some non-op brought forward in the model versus original expectations and and the same pieces kind of right read online within within a month of our expectations.

Derrick Whitfield

Terrific. And with the understanding that your revenues are dominated by oil and we're operating in a pin in a depressed log gas price environment and based on pipeline maintenance and tight egress conditions in? And do your leases protect you against negative gas realizations experienced with third parties?

Austen Gilfillian

Yes. So we won't have negative realizations have passed back to us, you know, and historically, if you just look at like our realizations relative to buying back, for example, fund typically better across the three products at a lot of our leases have cost for royalties on baked in there. And there's some of those operating expenses that that kind of feedback aspects of the arm to lease owner. So I mean it's certainly not bid on the gas side, but you wouldn't expect negative realizations for fiber.

Kaes Van't Hof

It's good to be the mineral are there through great uptake, and thank you, Dr.

Operator

Thank you. Our next question or comment comes from the line of Leo Mariani from Ross MK. Mariano, your line is now.

Leo Mariani

I just wanted to follow up quickly on this cash G&A guidance here on you kind of bumped it up versus where you guys were in kind of mid to late February when you came out with it originally or somebody just you're public, you know, sort of a new kind of organizational structure cost that has come in a little higher than expected as you guys kind of work through the accounting. Just curious as to kind of why have, as you know, tweaked only kind of a handful of months later,

Kaes Van't Hof

they are still relative to the public, a C-Corp oral that has been more successes our go into Viper today, the end of the day, it's a it's a it's a real number on a percentage basis, but $0.2 on a business doing $200 million a quarter of cash flow is minimal and we just don't want to get get it right. The allocation between parents up, particularly as the sub continues to grow and get investor attention and likely will continue to stand on its own two feet.

Leo Mariani

Okay. I appreciate that. And then just obviously, I know you guys have to get the ENDEAVOR deal closed? And sounds like obviously a large transaction could be coming here for Viper. Maybe it's early next year. I guess we'll wait on timing, but how do you think about kind of potential, you know, funding for that, you talked about kind of one times leverage really being a sweet spot, you know, for Viper. Would you kind of go above that temporarily to do kind of a major drop down, you know, from the ENDEAVOR thing combination? And if so, would you kind of prioritize, you know, maybe more debt paydown? Just can you kind of talk us through kind of high level, how you're thinking about kind of the funding part and kind of the limits on leverage?

Kaes Van't Hof

Yes, we did our own where we see parents of consolidated leverage. Some of the expense of the parent doesn't make a ton of sense. We look at leverage consolidated. You know, certainly there's going to be a lot of cash flow that comes with whatever asset does end up. And if it doesn't have advisers' hands, I just think we're going to be responsible stewards of capital, both our upstream business and our mineral business.

Leo Mariani

Okay, thanks.

Kaes Van't Hof

Thank you, Leo.

Operator

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Viper CEO., Mr. Travis Stice.

Travis Stice

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

Operator

Yes, ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect, and everyone have a wonderful day.