Participants

Chip Seale Seale; Director of Investor Relations; Viper Energy Partners LLC

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

Greta Drefke; Analyst; Goldman Sachs

Paul Diamond; Analyst; Citi

Derek Whitfield; Analyst; Texas Capital

Zachary Chafitz; Analyst; JP Morgan Securities

Leo Mariani; Analyst; Roth Capital Partners

Tim Rezvan; Analyst; KeyBanc Capital Markets Inc.

Presentation

Operator

Good day and thank you for standing by. Welcome to the Viper Energy first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chip Seale, Investor Relations Director. Please go ahead.

Chip Seale Seale

Thank you, [Michelle]. Good morning and welcome to Viper Energy's first quarter 2025 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 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 EFCC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with these 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. Welcome, everyone, and thank you for listening to Viper Energy's first quarter 2025 conference call. The first quarter was a strong quarter for Viper, with both oil and total production above the high end of their respective guidance ranges. Unfortunately, since the end of the first quarter, we've entered a period of lower commodity prices and significant market volatility.
With that said, Viper is very well positioned to endure this period of volatility, given our high free cash flow margins and high-quality assets. As previously announced, we are excited the transformative drop-down transaction between Viper and Diamondback closed on May 1.
As a result of the conservative financing of this transaction, as well as Viper's continued strong financial and operating results, we expect leverage to remain below 1 time even in a sustained $50 per barrel WTI environment.
Given the strength of our balance sheet, we will look to use this period of volatility to our advantage where we can. It's highlighted by the opportunistic share repurchases we've been able to make so far this quarter. As a reminder, we issued approximately $28 million shares in a primary equity offering in January to fund the cash consideration of the dropdown.
Well, the net proceeds of roughly $1.3 billion from the offering resulted in a meaningfully deleveraging transactions for Viper. We didn't receive any of the production or cash flow from the acquired assets during the quarter, given the timing of the closing of the drop-down this quarter. So, as a result, our Q1 dividend of $0.57 was roughly $0.07 lower than it would have been otherwise in our prior share count.
While in previous situations, we similar situations, we have decided to re up the dividend for the share issuance, this quarter, given the current market volatility, we've decided to retain the roughly $25 million of incremental capital, to keep on the balance sheet, and apply to future capital allocation decisions.
Looking ahead, despite the potential for sustained weakness in commodity prices and reduced activity levels, we expect Viper's production to remain durable, and as such, we are maintaining our previous guidance for oil production for the backup of 2025.
The symbiotic relationship between Diamondback and Viper is highlighted during times like these, where Diamondback continues to focus on its development, focuses its development on wells. [Revivals] owns high royalty interests, and therefore enhances Diamondback's consolidated capital efficiency.
Further, the roughly 45% of Viper's current production that is operated by third parties is predominantly exposed to well capitalized operators in the best parts of the Permian Basin, led by ExxonMobil operating almost half of our third-party production.
In conclusion, we continue to believe that Viper presents a differentiated investment opportunity with zero capital and operating costs, alignment with the parent company that has helped Viper deliver consistent organic growth and a current size and scale that positions us as a consolidator of choice in what remains a highly fragmented minerals and royalty space.
Following the recent closing of the dropdown, Viper now ranks among the largest US independent EMPs, and we believe the unique attributes of the business model will continue to be recognized by the market over time as our uniquely durable cash flow profile becomes increasingly differentiated. Operator, now open the line for questions.

Story Continues

Question and Answer Session

Operator

(Operator Instructions)
Greta Drefke, Goldman Sachs.

Greta Drefke

Good morning thank you for taking my questions. My first is on M&A. Viper has continued to lean into M&A this year alongside the drop down. Do the changes to the broader macro environment influence your willingness to lean into M&A at this point, or do they change your view on the op opportunity set for incremental M&A from here?

Kaes Van't Hof

I wouldn't say that the macro impacts our desire to continue to consolidate the minerals market, I think what happens in minerals is, because there's no CapEx associated with, the development of minerals or owning minerals, sometimes deals are harder to come by in more volatile environments on the mineral side. So, I think we've been able to do some pretty large deals through pass down cycles.
Notably we did the swallowtail deal in 2022, which had a lot of Diamondback or 2021, which had a lot of diamondback operating production, deals like that make a lot of sense, but yeah, I think we're going to kind of sift through this volatility here for a couple of months and then see, who's willing to transact on the other side of it.

Greta Drefke

Great, thank you. And then for my second question, just following up on the updated FANG guidance and the closing of the drop down, have the activity assumptions in Reagan County following the job eagle acquisition changed at all? And if so, could you speak to potential differences in your cash flow assumptions from that development opportunity?

Kaes Van't Hof

Yeah, we really started to model the completions in that area starting in 2026. So I don't think it's time to change that development program yet. I mean, in talking to the double eagle team we're working with closely to core up the assets and start drilling wells, they're going to spend a lot of time drilling here in the back half of the year, leading to completions in 2026.
So, if the if the commodity market is still weak, sub-sixty, certainly sub-fifty environment, I would expect that to get pushed out to the right like many projects in the basin, but, I think in a normalized 60 plus environment we expect that that development to occur.

Operator

Thank you.

Kaes Van't Hof

Thank you.

Operator

Paul Diamond, Citi

Paul Diamond

Hi, good morning. Thanks for taking the call. Just wanted to touch on a quick one, sitting on the third-party opportunity set. I mean, giving you guys footprint across Midland and Delaware, it's getting pretty volumist. I guess I want to get an idea of, where I guess the next leg of opportunities lay like once the volatility settles down. Is that Midland , is that Delaware or potentially elsewhere?

Kaes Van't Hof

Hey Paul, yeah, I think we're pretty much diagnostic on terms of in terms of M&A opportunities between the middle and the Delaware. I think what you've seen over the past 18 months with GRP first and then tumbleweed and then now also the drop down, it was certainly weighted to the Midland Basin.
I mean I think we know the asset really well. We were fortunate to get some pretty highly undeveloped assets that I think are going to support the longer term growth profile, but I think we like Delaware as well, especially not having to put up the capital on what could be some more expensive wells, there's still a lot of resources available there and there could be some sizable opportunities there as well.
So, for us it's going to be more about price and opportunity set, but the case it's earlier point, right, we're just going to sift through the volatility and see what becomes available during this during this volatility or after when we hopefully have more normalized times.

Paul Diamond

Understood Appreciate the clarity. Just one quick one on hedging. You guys have been pretty consistent on that through the last several years, but it's also been in a relatively directionally stable environment. Does the recent volatility on the macro side could that potentially shift that overall strategy, or is it still pretty locked in and you're comfortable with the current plan?

Kaes Van't Hof

No, we're so comfortable with the current plan. I mean, philosophy has always been one, have a fortress balance sheet, so you don't have to do a ton of hedging or anything drastic, right, with swaps or collars or anything like that. So, I think we'll still look to use these deferred premium puts.
Still have the unlimited upside and try to protect against the extreme downside. But having the balance sheet that we have today, we look to try to lock in a certain amount of downside protected cash flow, so that leverage doesn't kind of blow out in a low commodity price environment. So, we're in a great position today and I think we'll stay true to what that strategy's been over the last couple of years.

Paul Diamond

Understood. Appreciate the clarity. I'll leave it there.

Kaes Van't Hof

Thanks Paul.

Operator

Derek Whitfield, Texas Capital

Derek Whitfield

Good morning all and thanks again for your time.

Kaes Van't Hof

Hey, Derek.

Derek Whitfield

Regarding the Diamondback investor letter from this morning, you highlighted industry concerns with development at current prices. As you guys think about Viper's exposure, how much of that 10% decrease would you have exposure to assuming that backdrop?

Kaes Van't Hof

Yeah, I think on a net well basis it's very minimal, we still see, the majority of the wells for projects where Viper has a high interest getting completed today, at the Viper level now. I think if this persists, much longer, it's a different story, but I think generally in these times, we look at consolidated in our eyes at the Diamondback level, and that includes, what Viper's been able to pick up over the years.
And usually those projects, given the area that they're in, move to the top of the list. So, I would say no impact for now, which is why we, he guidance where it was, but listen, Derek, we see a sub $50 oil environment and Diamondback and others are cutting more than it's going to hit viper towards the back half of the year and into next year.
But I think what we think is, it's going to be a tough couple of quarters for the industry. I think prices are going to react at some point, due to lower US oil production and owning assets in the lowest break-even parts of the US is going to be a strategy that pays off for Viper shareholders.

Derek Whitfield

Absolutely agree case. And then with my second question, just wanted to get a better sense on the quarter over quarter change in activity. If we were to include the acquisition and drops in your four key disclosure, do you have a sense on whether work in progress in line of sight will increase quarter over quarter or kind of we're flattish?

Kaes Van't Hof

Yeah, activity is certainly increasing, especially on the back side as we roll forward and start getting that visibility into what 2026 is going to look like. I mean, notwithstanding, right, some of the pending changes that just outlined, but overall I would say, going through the first quarter into April, we're having pretty strong activity levels.
On the third party side, mainly being led by XOM, EOG and OXY, and then Diamondback, production is really strong today, and we kind of outlined it with a drop down, but has some really concentrated projects there that Diamondback can prioritize and if commodities can hang in there, will certainly lead to some pretty strong growth through 2026.

Derek Whitfield

Great, I'll turn it back to the operator.

Operator

Arun Jayaram, JP Morgan Securities

Zachary Chafitz

Yeah, this is Zach on for Arun. I just wanted to follow up on your prior answer. When the Endeavor dropped down with announced, Viper had talked about 4,000 barrels a day of volume growth on Diamondback operated properties in 2026. Given those changes Diamondback made last night, do you expect any changes to those growth volumes at Viper?

Kaes Van't Hof

Yeah, Zach, I don't see any changes today, right? I still think there's a strong chance that 2026 is stronger than, everybody, is thinking today, we kind of signaled the message that these down cycles tend to happen quickly, and hopefully at a higher low on commodity price.
But if we do persist in the 2026, we are going to continue to focus on areas where, Diamondback and Viper have high NRIs. So, I see no reason to change the thought process on 2026 growth, particularly with what we're doing on, Quinn ranch which we bought earlier this year.
And some of the high, or sorry, yeah, Quinn ransom we bought earlier this year and some of the high NRI projects from both Tumbleweed and, the drop down.

Zachary Chafitz

Thanks Kaes. And my follow up I know XOM is your largest third-party operator, but can you talk about what you're seeing for some of your smaller third parties, just in light of the commodity price volatility? Have you starting to see, some things get pushed to the right there?

Kaes Van't Hof

I haven't seen it at the Venom level, the viper level directly, right? I think what we've seen is more of the anecdotes in the field of, particularly private operators, pushing completions out or dropping track crews and riding this out. So, we advise where we try to buy assets under, acreage positions that we covet.
And that tends to be the higher quality positions operated by large operators like, Diamondback XCOM, OXY, EOG, [Conico], and in our mind those are probably the stickier barrels in in the basin, but the comments we made earlier were more anecdotes about, the smaller operators in the field, making single unit capital allocation decisions.

Zachary Chafitz

Got it. Thanks, guys.

Operator

Leo Mariani, Roth

Leo Mariani

Yeah, I guess, obviously we're looking at, kind of weaker oil market conditions, and I guess we'll see how it plays out. Obviously, you guys mentioned that you kind of held back, some of the first quarter dividend given the weak market conditions. Obviously looks like there's significant, accretion, that's coming from the Endeavor drop down.
You also still envision being able to kind of increase the dividend here over the next, couple quarters, even in this kind of, $60-ish, oil world today, just given the decretion on production and cash flow.

Kaes Van't Hof

Yeah, I think at $60, or a flat commodity price, if you're on the flat commodity price Q2 to Q4, whatever that is, distributions are going to grow. Obviously a $5 move in oil prices can change that pretty quickly, but the accretion still stands from the from the dropdown. I think, also importantly, we have balance sheet capacity to do.
Almost anything we want on the acquisition side, and lastly, we didn't mention it in the prepared remarks, but Viper was upgraded to investment grade last week which is by Fitch. So now we have two investment grade ratings, and so, access to capital at Viper today is kind of unmatched in the mineral space and something we've been working on for a really long time and it's good to see that come to fruition, particularly when capital access is scarce today.

Leo Mariani

Okay appreciate that. Let me just a couple quick ones on some of the numbers here. So seeing that your kind of cash tax guidance is coming down a little bit in the second quarter, versus where it was, in one queue. So just kind of curious and maybe there's just some, quarter to quarter, tweaks there if there's anything to kind of read into a lower cash tax rate with lower oil prices here.
And then on GNA, presumably you guys aren't adding a whole lot of, GNA, as a result of the Endeavor deal, but correct me if I'm wrong, and you're obviously getting significant production, so just trying to get a sense of GNA barrel should come down nicely here.

Kaes Van't Hof

Yeah, listen, sadly taxes are down because oil's down. That's as simple as I can frame it. We look forward to paying more taxes when oil goes back up, but, on the GNA side, usually Q1 is kind of the peak on GNA and it comes down.
We've got a models coming down, we run a pretty lean organization of Viper, we are adding some people here and there to help with the administrative side of our business, but yeah, I think you could expect GNA to come down per BOE post drop down.

Leo Mariani

Thank you.

Kaes Van't Hof

Thanks.

Operator

(Operator Instructions)
Tim Rezvan, KeyBanc Capital Markets Inc.

Tim Rezvan

Good morning, folks. I wanted to ask on repurchases. I saw that your bottom ticket things pretty well in the second quarter buying below 38. And I know commodity prices are as big a factor as share prices probably in the decision-making process, but can you give any more color on sort of the timing or the intensity?
I know you with shares of 40, it's back on the table in a big way. So, I'm just curious any more details you can provide on your appetite for more this year. Thank you.

Kaes Van't Hof

Yeah, Tim, I think we, we've always tried to err on the side of caution on repurchases of Viper, tried to lean more towards being a distribution vehicle, which it seems our investors want, but the volatility here allowed us to kick back into the, to the buyback and, I think the benefit for Viper is we still generate a lot of free cash at lower oil prices.
I think we have a balance sheet where we wouldn't be afraid to go above 75% of free cash distributed in a quarter to lean in to buybacks. Again, I hope that that doesn't happen, but I think we're prepared. I think COVID taught us a lot about our balance sheet, our hedging structure, how we do things, and we're prepared this time around to lean in if there's a continued volatility.

Tim Rezvan

Okay, that's helpful. And then just talking about the balance sheet, do you have a target debt number you want to get to because I know with your hedge profile, you can't control leverage as much, but how do you think about the right debt load, post the dropdown? Thanks.

Kaes Van't Hof

Yeah, I wouldn't, I don't like saying we're under lever because I do think, there will be opportunities to use cash in deals, but. I think a turn of leverage at $50 oil feels pretty pristine for Viper, but we could lean in a little bit should there be opportunities, to buy deals with cash in this, in these commodity prices.
It tends to be harder to get deals done on the mineral side over upstream when commodity prices are lower, but we're certainly going to keep trying. I think the last thing Tim I'd say on balance sheet, being investment great now opens up a whole different opportunity set for, our access to capital and what we can do, and we have our 27 notes outstanding that are, essentially callable today.
We've been buying back some of them in the market. We got a small balance on the revolver, and I think at the appropriate time, it's going to make sense for us to do a more longer dated debt transaction at Viper with, without the call protections that you normally get in the high yield market. So, wait and see on that.

Tim Rezvan

Okay, thank you.

Operator

Thank you, and I would now like to hand the conference back over to Kaes Van't Hof, CEO, for closing remarks.

Kaes Van't Hof

Thanks everybody for taking the time to listen to our call today. If you have any questions, please reach out. We're always available.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect, everyone, have a great day.

View Comments