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Morningstar | Viper Energy Partners Reports Respectable First Quarter; We Expect Results to Improve From Here

Viper Energy Partners reported a respectable first quarter that was impacted somewhat negatively by the timing of parent Diamondback's drilling activity, but we expect results to recover over the next few quarters. Management reaffirmed its full-year guidance of 20,000 to 23,000 barrels of oil equivalent a day (boe/d), matching our expectations. We don't expect any material changes to our $36 fair value estimate or narrow moat rating.

Production of 19,042 boe/d (67% oil) declined uncharacteristically 6% from the prior quarter. Similarly, EBITDA fell to $57 million from $68 million sequentially. The primary culprit was a slowdown in Spanish Trail production, as Diamondback completed an eight-well paid in October 2018 and has yet to complete any new wells. We believe the decline was partially related to realized pricing, as Viper earned about 82%-83% of WTI during the last two quarters versus 94%-95% of WTI during 2017. The larger discounts are likely due to Diamondback's pipeline pricing at fixed differentials, which should change going forward as the new pipeline contracts taking effect in the second quarter imply pricing closer to 90% of WTI. Diamondback plans to drill another 17 wells across Viper's acreage in the remainder of 2019, which we believe supports management guidance.

Acquisition activity also remained at fairly healthy levels supported by an equity issuance during the quarter. At the end of 2018, Viper had $411 million outstanding on its $555 million credit facility, and it made $83 million in acquisitions during the quarter, which would have put its leverage at $494 million, nearly exhausting its credit availability. As a result, we're not surprised to see the $340 million equity issuance in February 2019, and those proceeds being applied to the credit facility. Now, credit facility availability is back at $398 million, which provides enough capacity to continue to pursue acreage acquisitions for a few more quarters at the current pace. The equity issuance is needed as well because Viper pays out its excess cash as distributions, as evidenced by the $10 million in remaining cash at the end of the quarter. Our 2019 acquisition forecast does not anticipate a dropdown from Diamondback, which remains a possibility. We would expect an additional equity issuance with any Diamondback dropdown as the 2018 dropdown from Diamondback was at a cost of $175 million.