Co-authored by Long Player
Viper Energy Partners LP (NASDAQ:VNOM) is a mineral royalty corporation established by Diamondback Energy (FANG). The company specializes in acquiring and owning mineral and royalty interests in oil and gas properties, primarily in the Permian Basin in West Texas.
VNOM has traditionally been seen as a growth and income investment. With oil prices now on the rise, there is potential for appreciation in the future. Additionally, management plans to convert the partnership into a corporation by the end of the year, which is expected to increase valuation and boost stock prices throughout future business cycles.
While currently structured as a partnership, VNOM has previously elected to be taxed as a C-Corp, resulting in investors receiving Form 1099 instead of a K-1.
The company’s growth trajectory is set to continue, thanks to its strategic acquisition of royalty interests in high-quality acreage. Unlike other companies that purchase interests in broad areas and wait for development, VNOM carefully selects acreage that is expected to be developed, leading to rapid production growth.
As a royalty company, VNOM avoids exploration and development risks and instead collects a percentage of the oil produced. This low-risk model allows for substantial production growth while minimizing capital costs.
Diamondback Energy, the main operator and controlling company, provides Viper Energy Partners with excellent visibility into future development plans. The company’s payout ratio and acquisition strategy remain consistent, with shareholders having the opportunity to vote on significant decisions.
VNOM aims to maintain a cautious approach to debt ratios and prioritize debt repayment. The company’s payout structure has shifted to a 75% payout, allowing for more flexibility in managing debt and pursuing strategic acquisitions. Shareholders benefit from both a variable distribution and stock repurchases, which enhance future cash flow and demonstrate management’s confidence in the stock’s value.
Robust Growth Prospects
VNOM’s rapid production growth is expected to continue as the company maintains a disciplined approach to acreage selection. The company’s low production costs, driven by Diamondback’s efficiency, contribute to VNOM’s ability to generate substantial cash flow for shareholders.
Despite its impressive growth, VNOM remains focused on maintaining a strong balance sheet and living within its means, which has become increasingly important in the current market environment. This responsible approach aligns with investors’ preferences and leads to higher valuations.
VNOM’s ability to pay a base distribution even under challenging industry conditions speaks to the resilience of its low-cost business model. Rising oil prices are expected to further enhance the variable distribution over time. While management may prioritize stock repurchases over distributions during periods of low stock prices, the resulting reduction in outstanding shares ultimately benefits future distributions.
With its robust production growth and shareholder-friendly policies, VNOM offers an attractive investment opportunity. The company’s strategic approach to royalty acquisitions, coupled with the potential for rising oil prices, positions it well for future cash flow generation. Investors who can navigate the variable distribution and stock repurchases stand to benefit from VNOM’s strong yield for years to come.
In the second quarter, VNOM increased its base distribution, repurchased common stock, and demonstrated a strong cash flow available to shareholders. As oil prices continue to strengthen, the potential for increased returns to shareholders grows. Considering these factors, it’s clear why Viper Energy is an enticing investment option.