Viper(VNOM) - 2022 Q3 - Quarterly Report

Glossary of Oil and Natural Gas Terms Glossary of Certain Other Terms Cautionary Statement Regarding Forward-Looking Statements PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and detailed notes for the periods ended September 30, 2022 Condensed Consolidated Balance Sheets The balance sheet reflects a slight decrease in total assets, a reduction in long-term debt, and an increase in total equity Condensed Consolidated Balance Sheets | Metric | Sep 30, 2022 (In thousands) | Dec 31, 2021 (In thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $11,616 | $39,448 | | Royalty income receivable (net) | $94,215 | $68,568 | | Property, net | $2,810,671 | $2,920,115 | | Long-term debt, net | $669,638 | $776,727 | | Total assets | $2,985,757 | $3,034,021 | | Total equity | $2,290,913 | $2,232,828 | Condensed Consolidated Statements of Operations The statements of operations show substantial year-over-year growth in royalty income and net income driven by favorable commodity prices Condensed Consolidated Statements of Operations | Metric | 3 Months Ended Sep 30, 2022 (In thousands) | 3 Months Ended Sep 30, 2021 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2021 (In thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Royalty income | $219,909 | $127,649 | $651,828 | $337,619 | | Total operating income | $221,617 | $128,004 | $662,842 | $339,130 | | Net income (loss) | $210,102 | $73,445 | $509,763 | $139,682 | | Net income (loss) attributable to Viper Energy Partners LP | $79,340 | $16,832 | $129,967 | $18,474 | | Basic EPS | $1.06 | $0.26 | $1.70 | $0.28 | Condensed Consolidated Statements of Changes to Unitholders' Equity This statement details movements in unitholders' equity, reflecting an increase influenced by net income and common unit repurchases Condensed Consolidated Statements of Changes to Unitholders' Equity | Metric | Dec 31, 2021 (In thousands) | Sep 30, 2022 (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total equity | $2,232,828 | $2,290,913 | | Common units outstanding | 78,546 | 74,156 | | Repurchased units (9 months ended Sep 30, 2022) | N/A | $(118,932) | Condensed Consolidated Statements of Cash Flows Cash flow statements indicate strong growth in operating cash flow, alongside significant cash used for financing activities Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2021 (In thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by operating activities | $513,241 | $199,672 | | Net cash provided by (used in) investing activities | $19,611 | $(6,728) | | Net cash provided by (used in) financing activities | $(560,684) | $(140,525) | | Net increase (decrease) in cash and cash equivalents | $(27,832) | $52,419 | Condensed Notes to Consolidated Financial Statements These notes provide essential context for the financial statements, covering accounting policies, acquisitions, debt, and other key details Note 1. ORGANIZATION AND BASIS OF PRESENTATION - Viper Energy Partners LP is a publicly traded Delaware limited partnership focused on owning and acquiring mineral and royalty interests in oil and natural gas properties, primarily in the Permian Basin[28] - Diamondback Energy, Inc. beneficially owns approximately 55% of the Partnership's total limited partner units outstanding and controls the General Partner[29] Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Management's estimates and assumptions are particularly challenging in the oil and natural gas industry due to volatility in prices, influenced by factors such as COVID-19, the war in Ukraine, and OPEC actions[33][34] - Accrued liabilities at September 30, 2022, totaled $24,173k, including interest payable ($9,694k), ad valorem taxes payable ($11,075k), and derivative instruments payable ($2,252k)[40] - No recent accounting pronouncements not yet adopted are expected to have a material effect on the Partnership[42] Note 3. REVENUE FROM CONTRACTS WITH CUSTOMERS - Royalty income is recognized when control of the product is transferred to the purchaser, based on the Partnership's percentage ownership share of revenue, net of deductions[43] Royalty Income by Product Type (In thousands) | Product Type | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Oil income | $167,934 | $100,154 | $514,180 | $272,450 | | Natural gas income | $28,638 | $12,074 | $67,621 | $30,651 | | Natural gas liquids income | $23,337 | $15,421 | $70,027 | $34,518 | | Total royalty income | $219,909 | $127,649 | $651,828 | $337,619 | Note 4. ACQUISITIONS AND DIVESTITURES - In Q3 2022, the Partnership acquired 165 net royalty acres in the Permian Basin for approximately $40.1 million[45] - In Q3 2022, the Partnership divested 93 net royalty acres in the Delaware Basin for an aggregate sales price of $29.9 million[46] - The 2021 Swallowtail Acquisition involved acquiring 2,313 net royalty acres, primarily in the Northern Midland Basin, for approximately 15.25 million common units and $225.3 million in cash[47] Note 5. OIL AND NATURAL GAS INTERESTS - No impairment expense was recorded on the Partnership's oil and natural gas interests for the three and nine months ended September 30, 2022 and 2021, based on quarterly ceiling tests[51] Oil and Natural Gas Interests (In thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Oil and natural gas interests, gross | $3,493,979 | $3,513,590 | | Accumulated depletion and impairment | $(688,996) | $(599,163) | | Oil and natural gas interests, net | $2,804,983 | $2,914,427 | | Total net royalty acres | 26,789 | 27,027 | Note 6. DEBT - During the nine months ended September 30, 2022, the Partnership repurchased $49.6 million principal amount of outstanding Notes for $49.0 million cash[53] - As of September 30, 2022, the Operating Company had $245.0 million outstanding borrowings and $255.0 million available under its $500.0 million revolving credit facility[54][56] Long-term Debt (In thousands) | Debt Type | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | 5.375% senior unsecured notes due 2027 | $430,350 | $479,938 | | Revolving credit facility | $245,000 | $304,000 | | Total long-term debt | $669,638 | $776,727 | Note 7. UNITHOLDERS' EQUITY AND DISTRIBUTIONS - As of September 30, 2022, Diamondback beneficially owned approximately 55% of the Partnership's total limited partner units outstanding[57] - The common unit repurchase program was approved to acquire up to $750.0 million of outstanding common units, with $561.0 million remaining available as of September 30, 2022[58] - A new distribution policy, effective Q3 2022, consists of a base and variable distribution, taking into account capital returned via the unit buyback program, and excludes one-time lease bonus payments from available cash calculation[59] Note 8. EARNINGS PER COMMON UNIT Earnings Per Common Unit (In thousands, except per unit amounts) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) attributable to the period | $79,340 | $16,832 | $129,967 | $18,474 | | Net income (loss) per common unit, basic | $1.06 | $0.26 | $1.70 | $0.28 | | Net income (loss) per common unit, diluted | $1.06 | $0.26 | $1.70 | $0.28 | Note 9. INCOME TAXES - The Partnership recognized a discrete income tax benefit of $49.7 million in Q3 2022 due to a partial release of its valuation allowance on deferred tax assets, driven by recent cumulative income and expected future taxable income[69] - As of September 30, 2022, the Partnership had a deferred tax asset of $152.7 million offset by an allowance of $103.0 million[69] Provision for (Benefit from) Income Taxes (In thousands, except for tax rate) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for (benefit from) income taxes | $(46,409) | $906 | $(37,597) | $941 | | Effective tax rate | (28.4)% | 1.2% | (8.0)% | 0.7% | Note 10. DERIVATIVES - The Partnership uses fixed price swap contracts, fixed price basis swap contracts, and costless collars to reduce price volatility associated with royalty income[74] - As of September 30, 2022, the Partnership had costless collars, put options, and basis swaps outstanding for oil and natural gas[74][81] Gains and Losses on Derivative Instruments (In thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gain (loss) on derivative instruments | $882 | $(9,599) | $(19,366) | $(70,649) | | Net cash receipts (payments) on derivatives | $(10,263) | $(25,306) | $(27,292) | $(61,188) | Note 11. FAIR VALUE MEASUREMENTS - Derivative contracts are measured internally using Level 2 inputs (established commodity futures price strips, notional volumes, and time to maturity)[91] - The fair value of the revolving credit facility approximates its carrying value (Level 2), while the fair value of the 5.375% senior notes due 2027 is determined using quoted market prices (Level 1)[97] Net Fair Value of Derivative Instruments (In thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Current Derivative assets | $4,686 | $0 | | Non-current Derivative assets | $839 | $0 | | Current Derivative liabilities | $891 | $3,417 | | Non-current Derivative liabilities | $125 | $0 | Note 12. COMMITMENTS AND CONTINGENCIES - Management believes that none of the pending legal proceedings, disputes, or claims will have a material adverse effect on the Partnership's financial condition, results of operations, or cash flows[100] Note 13. SUBSEQUENT EVENTS - On November 3, 2022, a cash distribution for Q3 2022 of $0.49 per common unit was approved, consisting of a $0.25 base and a $0.24 variable distribution[102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operational performance, commodity prices, and liquidity strategies Overview - Viper Energy Partners LP is a publicly traded Delaware limited partnership focused on owning and acquiring mineral and royalty interests in oil and natural gas properties, primarily in the Permian Basin[105] - The Partnership operates in one reportable segment and has been treated as a corporation for U.S. federal income tax purposes since May 10, 2018[105] Recent Developments - Commodity prices for oil, natural gas, and natural gas liquids remain highly volatile due to global economic activity, geopolitical events (e.g., war in Ukraine), and OPEC+ actions[106] - No impairment was recorded on proved oil and natural gas interests for Q3 2022, despite average oil price decreases, due to favorable industry conditions[107] - In Q3 2022, the Partnership acquired 165 net royalty acres for $40.1 million and divested 93 net royalty acres for $29.9 million, bringing total net royalty acres to 26,789[108] - A new distribution policy, effective Q3 2022, includes a base and variable distribution, excluding one-time lease bonus payments from available cash calculation[109] - Third-party operated net wells turned to production in Q3 2022 reached their highest level since Q2 2019, with Diamondback-operated full-year 2023 oil production expected to increase by approximately 10% compared to 2022[110] Gross Well Information (Q3 2022 and as of Oct 20, 2022) | Metric | Diamondback Operated | Third Party Operated | Total | | :------------------------------------------ | :------------------- | :------------------- | :---- | | Horizontal wells turned to production (Q3 2022) | 52 | 221 | 273 | | Horizontal producing well count (as of Oct 20, 2022) | 1,504 | 4,838 | 6,342 | | Horizontal active development well count (as of Oct 20, 2022) | 95 | 475 | 570 | | Line of sight wells (as of Oct 20, 2022) | 166 | 354 | 520 | Comparison of the Three Months Ended September 30, 2022 and June 30, 2022 - Total operating income decreased from $239,322k in Q2 2022 to $221,617k in Q3 2022[115] - Royalty income decreased by $18.9 million QoQ, primarily due to lower average oil and natural gas liquids prices, partially offset by a 4% increase in production volumes[119] - Depletion expense decreased by $1.5 million (5%) due to a reduction in the average depletion rate, influenced by higher SEC oil and natural gas prices in reserve calculations[121] - A gain of $882k on derivative instruments was recorded in Q3 2022, compared to a loss of $1,889k in Q2 2022, as market prices decreased below strike prices on open contracts[122][123] - Income tax expense decreased by $52.6 million QoQ, primarily due to a partial reduction of the valuation allowance against deferred tax assets and lower pre-tax net income[124] Production Data (QoQ) | Metric | Q3 2022 | Q2 2022 | Change | | :-------------------------- | :------ | :------ | :----- | | Oil (MBbls) | 1,828 | 1,798 | +30 | | Natural gas (MMcf) | 4,086 | 3,898 | +188 | | Natural gas liquids (MBbls) | 664 | 607 | +57 | | Combined volumes (MBOE) | 3,173 | 3,054 | +119 | | Average daily combined volumes (BOE/d) | 34,489 | 33,560 | +929 | Average Sales Prices (QoQ) | Metric | Q3 2022 | Q2 2022 | Change | | :---------------------- | :------ | :------ | :----- | | Oil ($/Bbl) | $91.87 | $106.34 | -$14.47 | | Natural gas ($/Mcf) | $7.01 | $6.10 | +$0.91 | | Natural gas liquids ($/Bbl) | $35.15 | $39.28 | -$4.13 | | Combined ($/BOE) | $69.31 | $78.20 | -$8.89 | Comparison of the Nine Months Ended September 30, 2022 and 2021 - Total operating income increased from $339,130k in 9M 2021 to $662,842k in 9M 2022[125] - Royalty income increased by $314.2 million YoY, with $240.9 million attributed to strong commodity prices and $73.3 million to a 23% increase in production volumes, largely from the Swallowtail Acquisition[129][130] - Lease bonus income increased significantly due to leasing assets acquired in the Swallowtail Acquisition to Diamondback in Q1 2022[131] - Depletion expense increased by $15.6 million (21%) due to production growth, despite a decrease in the average depletion rate from higher SEC oil and natural gas prices[133] - Net interest expense increased by $6.0 million due to higher average outstanding borrowings and interest rates on the revolving credit facility[136] - A $37.6 million income tax benefit in 9M 2022 resulted from a partial reduction in the valuation allowance against deferred tax assets, partially offset by increased current tax expense[137] Production Data (YoY) | Metric | 9M 2022 | 9M 2021 | Change | | :-------------------------- | :------ | :------ | :----- | | Oil (MBbls) | 5,259 | 4,378 | +881 | | Natural gas (MMcf) | 11,713 | 9,828 | +1,885 | | Natural gas liquids (MBbls) | 1,857 | 1,359 | +498 | | Combined volumes (MBOE) | 9,068 | 7,375 | +1,693 | | Average daily combined volumes (BOE/d) | 33,216 | 27,015 | +6,201 | Average Sales Prices (YoY) | Metric | 9M 2022 | 9M 2021 | Change | | :---------------------- | :------ | :------ | :----- | | Oil ($/Bbl) | $97.77 | $62.23 | +$35.54 | | Natural gas ($/Mcf) | $5.77 | $3.12 | +$2.65 | | Natural gas liquids ($/Bbl) | $37.71 | $25.40 | +$12.31 | | Combined ($/BOE) | $71.88 | $45.78 | +$26.10 | Liquidity and Capital Resources - As of September 30, 2022, the Partnership had $266.6 million in liquidity, comprising $11.6 million in cash and cash equivalents and $255.0 million available under the Operating Company's credit agreement[138] - Primary sources of liquidity include cash flows from operations, asset sales, equity and debt offerings, and borrowings under the credit agreement[138] - Primary uses of cash are distributions to unitholders, debt repayments, capital expenditures for mineral and royalty interests, and common unit repurchases[138] - Net cash provided by operating activities significantly increased during the nine months ended September 30, 2022, driven by higher royalty and lease bonus income and decreased derivative settlements[144] - Net cash provided by investing activities in 9M 2022 ($19,611k) was primarily from divestitures, a shift from net cash used in 9M 2021 ($(6,728)k) which was mainly for acquisitions[145] - Net cash used in financing activities increased in 9M 2022 ($560,684k) due to $333.7 million in distributions, $118.9 million in common unit repurchases, and $49.0 million in senior note repurchases[146] Capital Requirements - The common unit repurchase program authorization was increased to $750.0 million on July 26, 2022, with $561.0 million remaining available as of September 30, 2022[151] - A cash distribution of $0.49 per common unit for Q3 2022 was approved, comprising a $0.25 base and a $0.24 variable dividend[152] Critical Accounting Estimates - There have been no changes to critical accounting estimates from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[154] Recent Accounting Pronouncements - No recent accounting pronouncements not yet adopted are expected to have a material effect on the Partnership[155][42] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to commodity price and interest rate risks and details the strategies used to manage them Commodity Price Risk - The Partnership's major market risk exposure is to the volatile pricing of oil and natural gas production, influenced by global economic and geopolitical factors[157][158] - The Partnership uses fixed price swap contracts, fixed price basis swap contracts, and costless collars with put and call options to reduce price volatility[159] - As of September 30, 2022, a 10% increase in forward curves would increase the net asset derivative position by $0.6 million to $5.1 million, while a 10% decrease would reduce it by $0.3 million to $4.2 million[160] Credit Risk - The Partnership is exposed to credit risk due to the concentration of royalty income and receivables with a limited number of significant purchasers and producers, without requiring collateral[161] Interest Rate Risk - The Partnership is subject to market risk from changes in interest rates on its indebtedness under the Operating Company's revolving credit facility, which carries a floating rate[162] - The weighted average interest rate on the revolving credit facility was 4.75% for the three months and 3.53% for the nine months ended September 30, 2022[162] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control - The Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2022[164] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2022[165] PART II. OTHER INFORMATION Item 1. Legal Proceedings Management assesses that pending legal proceedings will not have a material adverse effect on the company's financial condition - The Partnership is involved in routine litigation, disputes, and claims arising in the ordinary course of business[167] - Management believes that none of the pending matters, if decided adversely, will have a material adverse effect on the Partnership's financial condition, results of operations, or cash flows[167] Item 1A. Risk Factors This section states that no material changes have occurred to the risk factors previously disclosed in the Annual Report on Form 10-K - The business faces many risks, as discussed in the Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent Quarterly Reports on Form 10-Q[168][169] - There have been no material changes in the Partnership's risk factors from those previously described[169] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details common unit repurchase activity for the quarter and confirms no unregistered sales of equity securities occurred - There were no unregistered sales of equity securities during the period[170] - On July 26, 2022, the common unit repurchase program authorization was increased from $250.0 million to $750.0 million[173] Common Unit Repurchase Activity (Three Months Ended September 30, 2022) | Period | Total Number of Units Purchased | Average Price Paid Per Unit | Approximate Dollar Value of Units that May Yet Be Purchased Under the Plan (In thousands) | | :-------------------------------- | :---------------------------- | :-------------------------- | :------------------------------------------------------------------------------------ | | July 1, 2022 - July 31, 2022 | 760,000 | $26.51 | $591,618 | | August 1, 2022 - August 31, 2022 | 529,972 | $29.37 | $576,050 | | September 1, 2022 - September 30, 2022 | 527,745 | $28.44 | $561,043 | | Total | 1,817,717 | $27.91 | | Item 6. Exhibits This section provides a comprehensive list of all exhibits filed with the Form 10-Q, including agreements and certifications - Exhibits include the Purchase and Sale Agreement, Certificate of Limited Partnership, Amended and Restated Agreement of Limited Partnership, and various amendments[174] - Certifications of the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1) are filed herewith[174][175] - The financial information from the Quarterly Report is formatted in Inline XBRL as Exhibit 101[174] Signatures This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the Form 10-Q report - The report was duly signed on November 8, 2022, by Travis D. Stice, Chief Executive Officer, and Teresa L. Dick, Chief Financial Officer, on behalf of Viper Energy Partners GP LLC, its General Partner[178][179]