Viper(US:VNOM)2021-08-03 19:16Financial Data and Key Metrics Changes - Viper Energy Partners generated over $75 million in free cash flow during Q2 2021, marking a strong performance supported by a best-in-class cost structure [7] - The distribution to common unitholders was increased to 70% of cash available for distribution, representing a 32% increase from the first quarter distribution to $0.33 per unit [7][11] - The company expects to generate roughly $320 million of annualized free cash flow in the second half of 2021, assuming a WTI price of $65 [9] - For the first half of 2022, Viper anticipates generating over $360 million of annualized free cash flow, equating to greater than 11% free cash flow yield as a percentage of enterprise value [10] Business Line Data and Key Metrics Changes - Viper's production outlook for 2021 was increased, with average production guidance for the second half of 2021 implying almost 16,000 barrels per day at the midpoint [8] - The company highlighted strong production supported by concentrated exposure to Diamondback's Midland Basin development plan and increased activity from third-party operators [6] Market Data and Key Metrics Changes - The company noted a rise in rig count and net well perspective in the forward outlook for non-operated properties, indicating a positive trend in market activity [30] Company Strategy and Development Direction - Viper plans to retain 30% of its cash flow for acquiring Diamondback-operated minerals and unit buybacks, reflecting a strategic focus on growth while maintaining a strong balance sheet [11][15] - The acquisition strategy is centered around understanding the parent company's future development plans, allowing Viper to leverage this knowledge for further exposure [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the activity levels from Diamondback for the remainder of the year, particularly in Q4, with several large pads expected to come online [30][46] - The company aims to under-promise and over-deliver, maintaining a conservative approach to guidance while being optimistic about production levels [46] Other Important Information - The company has a unique tax structure, with 80% of the 2021 dividend estimated to constitute a nontaxable reduction to taxed barrels, although this is expected to decrease in 2022 due to rising commodity prices [33][34] - Viper is not currently exploring solar and wind royalties due to limited surface ownership, but acknowledges the positive industry trend towards ESG metrics [39][40] Q&A Session Summary Question: Cash flow allocation and acquisition strategy - Management indicated a focus on retaining 30% of cash flow for acquisitions and unit buybacks, with a cautious approach to leveraging [15][16] Question: Hedging strategy for 2022 - The company is targeting a hedging strategy that maintains leverage below 2 times while ensuring sufficient cash flow distribution to unitholders [17][18] Question: Confidence in activity levels beyond Diamondback - Management expressed confidence in Diamondback's activity levels and noted a rise in rig count, indicating stable future operations [29][30] Question: Tax structure changes with higher commodity prices - The tax structure is expected to provide 80% tax protection in 2022, down from 100% in previous years due to rising commodity prices [34] Question: M&A visibility and planning - The company is focused on acquiring minerals with visibility into development plans for the next 12 to 24 months, aiming for cost-effective purchases [35][36] Question: Production outlook for Q3 and Q4 - Management expects Q3 production to be lighter than Q2 but anticipates a strong exit rate in Q4 due to upcoming large Diamondback pads [46][47]