Viper Energy Partners LP (VNOM) Update - Oct 26

[dan_s]

Viper reported Q3 production that beat my forecast. Much higher NGL prices also helped to offset lower that forecast realized oil prices.

“Viper produced a strong third quarter, reflecting a 10% increase in oil production quarter over quarter as operators returned previously curtailed production and Diamondback resumed completion activity in areas where Viper has a significant mineral interest. Diamondback’s forward plan will continue to focus on areas where Viper has a high mineral interest, showcasing the differentiated relationship between the two companies as they navigate this severe industry downturn. With net debt decreasing from peak levels due to strong free cash flow generation, as well as an improved forward outlook for both production and realized pricing, Viper is on track to return a higher percentage of available cash flow to unitholders in the second half of 2020 as compared to the first half,” stated Travis Stice, Chief Executive Officer of Viper’s general partner.
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VNOM has elected to be taxed as a C-Corp. It is one of three minerals companies in our High Yield Income Portfolio that pays "variable" quarterly dividends which go up or down based on the company's distributable cash flow (DCF). Prior to the pandemic, Viper was paying out ~90% of their DCF each quarter, but pulled back in 1H 2020 to focus on paying down debt. As their production increases and commodity prices rise, I expect Viper's dividends to increase to more than $1.25 in 2021. Based on today's share price, that would put next year's yield at ~17%.

[dan_s]

I have updated my forecast/valuation model for Viper and posted it to the EPG website.

Viper actually had to pay to get rid of their natural gas in 1H 2020, so their realized gas price of $0.16/mcf in Q3 is at least heading in the right direction. Natural gas and NGL price differentials are coming down in West Texas. Assuming they get back to a "normal" differential of under $1.00/mcfe, Viper should get a big revenue boost in 2021 from higher gas and NGL prices.

Their realized NGL price increased by 61.7% from Q2 to Q3.

Based on my model and assuming Viper gets back to their goal of paying dividends of 90% of DCF, their 2021 dividends should be $1.50 to $1.60.

On 10/21/2021 Raymond James raised VNOM to a BUY with a price target of $12.00. VNOM's 52-week high of $27.32 is possible if WTI gets back to my estimated "Right Price" of $65/bbl.