VNOM - Viper Energy Partners: Moderate Production Growth Expected To Continue

2023-08-17 11:02:58 ET

Summary

• Viper expects moderate production growth in 2H 2023 and 2024.
• This should allow it to generate $0.80 per unit in quarterly distributable cash flow in 2H 2023 at current strip.
• Diamondback-operated volumes are fueling Viper's overall growth.
• Viper Energy Partners plans to change its legal status from a limited partnership to a corporation by the end of 2023.
• This has no effect on taxation status since it elected to be taxed as a corporation in 2018 and has been issuing 1099-DIV forms.

Viper Energy Partners (VNOM) is expecting moderate production growth in 2H 2023 and into 2024. This should allow it to generate around $0.80 per unit in quarterly distributable cash flow in the second half of the year at current strip prices.

Viper is also planning on changing its legal status to a corporation, giving shareholders the ability to vote on various corporate items, and likely increasing its ownership in various index and benchmark funds.

I estimate Viper's value at approximately $32 to $33 per unit at my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas. At $28 per unit, it appears to have a bit more upside compared to when I looked at it in January .

Legal Status Changes

Viper announced plans to change its legal status from a Delaware limited partnership to a Delaware corporation, and is aiming to complete this move by the end of 2023. There will be no change to ownership percentages with the switch from units to shares.

Viper is also planning on adopting a corporate governance structure that will make it eligible for various indices and benchmarks. Shareholders will also be able to vote on items such as electing the Board of Directors in the future.

Viper mentioned that it only has around 1% index ownership currently, compared to around 30% for Diamondback.

Viper will be considered a controlled company since Diamondback owns more than 50% of the voting power of Viper's common stock. At last report, Diamondback owned 57% of Viper's outstanding units.

Viper had previously elected in 2018 to be taxed as a corporation instead of as a pass-through partnership, therefore resulting in unitholders receiving 1099-DIV forms instead of K-1s.

2H 2023 Outlook

Viper currently expects its 2H 2023 production to average approximately 37,660 BOEPD, including 21,860 barrels of oil per day. Viper's Q3 2023 production may be a couple percent higher than its Q4 2023 production, and around 4% higher than its Q2 2023 production.

At current strip (including high-$70s WTI oil), I project Viper to generate $359 million in revenues after hedges in the second half of 2023.

Viper can then generate $260 million in distributable cash flow in 2H 2023, including amounts attributable to its non-controlling interest. This is approximately $1.61 per unit during the second half of the year.

Viper has a 75% payout ratio, resulting in approximately $0.60 per unit to be returned to unitholders each quarter in the second half of the year.

Unit has a $0.27 per unit base quarterly distribution. This adds up to approximately $87 million during the second half of 2023. Another $108 million can go towards unit repurchases and variable dividends, while $65 million can go towards debt reduction.

Estimated Valuation

If we assume continued moderate production growth for Viper, it may be able to average around 39,000 BOEPD (22,500 barrels of oil per day) in 2024 production without any more drop down transactions or acquisitions.

This is roughly 5% to 6% production growth compared to 2023. Viper mentioned expectations for 10% Diamondback-operated net oil production growth in 2024, so production growth from other operators would be roughly flat in this scenario.

At my long-term prices of $75 WTI oil and $3.75 NYMEX gas, Viper would be able to generate approximately $3.31 per unit in distributable cash flow with that level of production.

I estimate Viper's value at around $32 to $33 per unit in that scenario, reflecting a distributable cash flow yield of slightly over 10%.

Viper's actual payout to shareholders/unitholders in the form of dividends/distributions may be more around 7% based on its current price due to its 75% ratio and potential unit repurchases.

Conclusion

I estimate that Viper can generate $1.61 per unit in distributable cash flow in the second half of 2023 at current strip prices. I also expect moderate mid-single digits production growth for Viper in 2024, driven by Diamondback-operated volumes.

I believe that Viper is worth approximately $32 to $33 per unit at my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas. I also believe that Viper's yield (with a 75% payout ratio) could be around 7% from its base and variable dividends, although that will depend on how much it allocates towards unit repurchases.

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