Viper Energy (VNOM) Valuation Update - Aug 19

[dan_s]

At the time of this post VNOM was trading at $37.36. My valuation is now $53.00.

TipRanks: "In the last 3 months, 12 ranked analysts set 12-month price targets for VNOM. The average price target among the analysts is $52.15." < All 12 of them rate VNOM a BUY or STRONG BUY, which is rare during these "Days of Uncertainty".

Four highly respected energy sector analysts (all rated 5-Star) have updated their prices targets based on the impact of today's merger of Sitio Royalties (STR) into Viper. Their valuations range from $46 by Devin McDermott at Morgan Stanley to $68 by Mark Lear at Piper Sandler.

In my opinion, the merger makes VNOM a "Must Own" stock by every Growth + Income mutual fund that is OK owning oil & gas stocks (i.e. not a fund that is run by Climate Change Wackos). The merger is accretive to cash available for distribution and Diamondback's aggressive drilling program locks in steady production growth.

Viper's most recent fixed + variable dividend was $0.53/share. Viper is currently committed to returning 75% of their cash available for distribution to Class A shareholders as cash dividends and stock buybacks. When Viper reduces debt below $1.5 billion the returns should go up to 100% of cash available for distribution.

My updated forecast/valuation model has been posted to the EPG website.

[KGardiner]

Dan,

Just finished reading the updated VNOM profile. Much appreciated!

One question: How long do you think it will take Viper to get it's debt down to the $1.5 billion level at projected FCF ?

Thanks
Kevin Gardiner

[Petroleum economist]

Kevin, my guess for debt to be below $ 1.5 B would be late 2027/early 2028.
This is assuming that Viper between now and 2028 does not make more acquisitions.

[dan_s]

Viper might sell some of the STR minerals outside of the Permian Basin with proceeds used to move toward their debt repayment goal.

Viper will keep buying bolt-on minerals in the Permian Basin, but I doubt they do anything as big as the STR merger.

I did own STR, so Viper is now one of my Top 3 holdings.

[KGardiner]

Thanks Dan and Harry,
That makes a lot of sense.

I did own both, so the merger means Viper is my 7th largest holding. KRP remains my largest position, but it’s down a bit due to soft gas prices right now.

Kevin

[dan_s]

I also own quite a bit of KRP. It has the highest after-tax yield in our High Yield Income Portfolio.

KRP has higher dividend yield, but VNOM has the most growth potential in the portfolio.

PS: If the Fed finally does reduce interest rates, companies in our High Yield Income Portfolio should get a lot more "love" from older investors (like me) that want steady dividend income.