VNOM - Viper Energy Partners: Modeling Its Results After Its $1 Billion GRP Acquisition

2023-11-01 23:04:29 ET

Summary

• Viper closed on its approximately $1 billion GRP acquisition.
• I estimate that it will generate $3.51 per unit in 2024 distributable cash flow at current strip prices, a 5% increase compared to its results without the acquisition.
• Interest costs have increased to over $70 million per year now, so I believe Viper will keep its payout ratio at 75% for now to help pay down some debt.
• I estimate Viper's value at $34 per unit in a long-term $75 WTI oil and $3.75 NYMEX gas scenario.

Viper Energy Partners ( VNOM ) just closed on its roughly $1 billion GRP acquisition. I estimate that it can now generate $3.51 per unit in distributable cash flow in 2024 at current strip prices. This is around a 5% increase from my per unit 2024 distributable cash flow estimates without the acquisition (and without the additional interest costs and outstanding common units that have resulted from the acquisition).

I now estimate Viper's value at approximately $34 per unit at long-term $75 WTI oil and $3.75 NYMEX gas. This is also a roughly 5% increase from what I estimated Viper's value at pre-acquisition.

GRP Acquisition

Viper announced a $1.006 billion acquisition (based on the closing price of Viper's common units before the announcement) of mineral and royalty interests from affiliates of GRP Energy Capital and Warwick Capital Partners in September. This will be referred to as the GRP Acquisition going forward.

The consideration from this deal included $750 million in cash and 9.02 million Viper common units (with a market value of $256 million at the time). Viper also sold 7.22 million Viper common units to Diamondback for $200 million, resulting in an average price of $27.72 per unit. This helped fund part of the cash component of the acquisition, along with $400 million in 7.375% unsecured notes due 2031 that it issued.

The GRP acquisition is adding around 4,600 net royalty acres in the Permian Basin and around 2,700 net royalty acres in other major basins. The DJ Basin (approximately 1,500 net royalty acres) accounts for the majority of the acreage from the other major basins. Viper mentions that the Permian Basin accounts for over 90% of the current production and total deal value with the GRP acquisition.

The current production from the GRP acquisition is around 7,000 BOEPD, including 4,000 barrels of oil production per day. This is expected to increase to around 8,500 BOEPD in 2024, including 4,750 barrels of oil production per day, using assumptions that Viper says are more conservative than it typically uses.

Viper noted that the acquisition should provide "greater than 15% unlevered free cash flow yield at current strip prices" when it announced the deal in early September.

Potential 2024 Outlook

Viper has provided preliminary 2024 production guidance for 46,250 BOEPD in total production at guidance midpoint. This includes 26,500 barrels per day in oil production.

At current strip prices (including approximately $78 WTI oil) in 2024, Viper is projected to generate $887 million in revenues after hedges.

The value of Viper's 2024 hedges (outside of its Waha basis hedges) won't change unless there is a quite large move in commodity prices from current strip.

Viper is thus projected to generate $625 million in distributable cash flow in 2024 at current strip prices, inclusive of the amounts attributable to its non-controlling interest.

Viper ends up with approximately 178 million common units outstanding after its GRP acquisition, and before any more unit repurchases. Thus it is now projected to generate $3.51 per unit in distributable cash flow in 2024.

This is comparable to an estimate of approximately $3.35 per unit in distributable cash flow in 2024 without the GRP acquisition.

With Viper's 75% payout ratio, the $3.51 per unit in 2024 distributable cash flow would allow Viper to return around $0.66 per unit to unitholders each quarter. Viper has a $0.27 per unit base quarterly distribution, and the remainder of the return can involve variable dividends and/or unit repurchases.

Notes On Debt

Viper had $641 million in net debt at the end of Q2 2023, including $430 million in outstanding 5.375% notes due 2027.

It may end 2023 with approximately $1.13 billion in net debt after its recent acquisition. Viper added $400 million in 7.375% notes due 2031 to help pay for the acquisition.

Putting 25% of its 2024 distributable cash flow towards debt reduction would reduce its net debt to approximately $975 million by the end of 2024, which would include $145 million in credit facility debt.

Estimated Valuation

At long-term $75 WTI oil and $3.75 NYMEX gas and the midpoint of its 2024 guidance for production, Viper should be able to generate around $3.46 per unit in distributable cash flow. This is also based on interest costs from its year-end 2024 projected debt and 178 million common units outstanding.

I've valued Viper based on a distributable cash flow yield of a bit over 10%, and that translates into an estimated value of $34 per unit for Viper post-acquisition.

Conclusion

Viper's recent acquisition increases its projected 2024 distributable cash flow per unit by approximately 5% after factoring in its additional units and increased interest costs. It is now projected to generate $3.51 per unit in distributable cash flow in 2024 at current strip prices, which would allow it to return $0.66 per unit to shareholders each quarter with a 75% payout ratio.

The acquisition boosts my estimated value for Viper slightly, and I now estimate its value at around $34 per unit based on my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas.

For further details see: