Viper Energy (VNOM) Q2 2026 earnings call transcript

Thank you, Amber. Good morning, and welcome to Viper Energy's second quarter 2026 conference call. During our call today, we may reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Case Vanthoff, CEO, and Austin Guilfelen, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC.

In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I will now turn the call over to Case.

Thank you, Chip. Welcome, everyone, and thank you for listening to Viper's second quarter 2026 conference call. The second quarter continued the trend of strong execution for Viper, Highlighted by steady development activity from both Diamondback and our third-party operators across our asset base. During the quarter, operators turned 691 gross horizontal wealth to production on our acreage, in which Viper owned an average 3% net revenue interest. As a result of this strong activity, as well as our continued execution on our acquisition strategy, We have initiated average production guidance for the third quarter that implies roughly 4.5% growth relative to the second quarter. Importantly, the midpoint of our third quarter guidance implies an approximate 15% annualized growth rate in oil production per share relative to the fourth quarter of 2025.

Strong underlying organic growth combined with accretive acquisitions and opportunistic share repurchases is fundamental to Viper's value creation proposition. Turning to return of capital, for the second quarter we are returning 75% of available cash for distribution to stockholders. This return of capital includes $132 million in share repurchases completing during the quarter, as well as a combined base plus variable dividend of $0.67 a share.

Looking ahead, yesterday we announced an important evolution in our return of capital strategy. Going forward, we will be shifting to a framework which includes a high base dividend and greater flexibility in how we allocate the balance of cash available for distribution. Effective beginning in the third quarter, our board approved a 32% increase to our base dividend, now up to $2 per Class A share on an annual basis. With this increase to the base dividend, we also announced that beginning in the third quarter, we will be removing our previous quarterly commitment to return at least 75% of cash available for distribution.

First and foremost, we believe this new outsized base dividend, rather than a variable payout that fluctuates with commodity prices, best showcases what is truly unique about Viper. At our current share price, the increased base dividend implies an annualized yield of approximately 4.5%. This yield remains meaningfully above the average of our E&P peers and is underpinned by one of the lowest break-evens, dividend break-evens in the sector.

Given our zero required capital expenditures and long-lived asset base, we believe the durability of this dividend should be compared to the most durable business models in the market, not just our energy peers. The base dividend is sacrosanct, and we are committed to prioritizing steady growth of this base dividend over time. Beyond the increased base dividend, we remain committed to returning a significant amount of capital to our shareholders through the cycle. While we are removing the quarterly commitment to return at least 75% of cash available for distribution, there's a solid floor on our returns given the increased base dividend represents approximately 50% of free cash flow at $70 a barrel WTI. However, the flexibility created by retaining excess cash flow during periods of higher commodity prices will allow us to opportunistically repurchase shares, reduce debt, or pursue a disciplined M&A strategy.

There are extremely attractive investment opportunities ahead today for Viper, and we believe that allocating incremental capital through a cyclical lens will create long-term stockholder value. In short, we do not believe the market is currently valuing the variable dividend framework, and as such, I put that mechanism aside for now. In its place, we believe our new capital allocation framework will better highlight the attractiveness of Viper's dividend and enable a more compelling growth outlook to be paired with the existing yield. Operator, please open the line for questions.

Yeah, Betty, a lot in that question. I'll start with the base dividend move. You know, certainly not something we take lightly, and the board, you know, looked at this and the data surrounding this decision in great detail. And we kind of all came to the conclusion that you know the cash distribution yield was not being rewarded by the market And instead we figured that a very high base dividend yield that is higher than majors higher than our E competitors higher than mid E higher than utilities but with a utility level of protection should be something that gets rewarded by the market And, you know, for us to have a 4.5% base dividend yield today at today's stock price that's protected to $30 a barrel, you know, that's about as secure a dividend as you could possibly find in the market, and certainly the most secure you can find in oil and gas.

And, you know, I think what's interesting is that, you know, Viper is a business here that, you know, if you look at slide four, has had a 17% CAGR in per share growth. And that excludes price impacts, right? This is just production per million shares. And Viper's valuation today absolutely does not reflect that reality. And, you know, I think the other interesting thing is, you know, in a year where, you know, people are questioning shale growth and, you know, how much longer can the Permian grow, you got Viper growing, you know, 15% in 2026 with zero reward from the market on that growth. So what we decided is, okay, let's have a big base dividend, and, you know, let's be able to repurchase a lot of shares at these levels, or if, you know, the multiple goes up and the stock performs well, you know, we pull back and use cash for deals or to fortify the balance sheet.

But at the end of the day, this is about freely allocating capital to a business that I think is severely mispriced, particularly relative to its growth profile.

Yeah, so let me add a couple things to the rest of the original comments I made. You know, I think the other point of this evolution is this is, you know, Viper. Viper's growing up into a real company and a real business that, you know, should be valued relative to S&P 500, you know, comps. And, you know, that's our stated goal. And I think it's just a natural evolution from, and this ties to your other question, but evolution from the distribution model where we distributed all of our cash every quarter and needed to rely on equity financing to grow the business. Well, now, you know, as an investor, you can say my 4.5% base dividend is set and growing and safe.

But these guys, you know, the company now has flexibility to allocate the rest of the free cash to either deals or repurchase shares or the balance sheet, depending on which is the best value creation opportunity for the business. And, you know, that kind of ties to the market we're in today. You know, I've never seen an A&D market, certainly on the larger side of deals, that's been more available and the opportunity set so large. So, you know, we obviously did the Riverbend deal. There's a lot of deals in the market. We don't need to buy all these deals. But naturally, if we have an advantage in our modeling or, you know, what we see in the asset base, I think those deals, you know, should naturally come to us.

And I think this flexibility in terms of base dividend going up, but less, you know, more cash to play around with, you know, gives us an opportunity to put more cash in deals or, you know, not have to tap the equity markets for every deal.

That makes sense. Thank you.

Yeah, I mean, you know, listen, Neil, I think there's going to be quarters where we distribute all of our free cash in the form of, you know, You know, buying back shares plus a big base dividend, you know, when the market isn't rewarding Viper for the growth prospects we put out there. I think, you know, this is a market today where we've been in the market almost every day since, you know, over the last two or three months buying back shares, and, you know, if the stock doesn't respond, we're going to keep buying back and, you know, and shrink the share count. So, you know, tying to the other side of the equation, you know, it's been frustrating to watch Viper's valuation versus other royalty-like models in the basin, right?

This is a pure free cash flow stream that's a bet on Permian Basin technology, productivity, activity, and growth. And to see Viper trade where it trades relative to some of the non-commodity exposed royalty streams in this basin is flummoxing to me. So our mindset, you know, was basically, let's put a big base dividend in place and let's buy back shares. If the market doesn't realize the value, you know, we're just going to keep buying them back. And, you know, that also applies to Diamondback. Diamondback's a large shareholder of Viper, And Diamondback has a lot of free cash to do things with, too. And that could be buying more of Viper, because I just think we're pounding the table that relative to what else is out there, this is the best value proposition in E&P land.

We're in the Permian in general.

I think generally you know we like buying these you know puts just to protect the extreme downside You know obviously there a huge gap between and oil where the base dividend is protected today but we set the base dividend to grow and to grow meaningfully on a percentage basis And I think as production grows as share count shrinks as debt gets reduced or as we do deals that are accretive that provides more capacity for the base dividend to grow So I think two different sides of the equation, but generally the base dividend needs to grow, and we still like the puts in place to protect that extreme downside.

Yeah, Paul, I think the big emergence over the last couple quarters has been, at least from a leasing perspective, on the Woodford and the Delaware. So we've had, you know, five or six quarters now where we've been extremely active leasing the Barnett and the Midland Basin. But the Woodford on the Delaware side has really picked up over the last couple quarters. And I think if you look, you know, from probably the early part of 2025 to what we've done in the first half of 2026, it's pretty evenly split. You know, I think everything in the door now, we're probably $25 to $30 million of lease bonuses just on deep rights there, which is about a third of our total leasing effort over that time period.

And, you know, that money up front is good, but that also typically means a three-year clock for operators to go start developing those minerals. So I think it's going to equate to more production growth over that time period as well.

Morning, Derek.

Yeah, Derek, it's certainly strong. So if you just look at Q2 and then compare that to the guys for Q3, we incorporate the 2,000 barrels a day of production contribution from the riverbend assets, but that still implies 1,000 barrels a day of quarter-over-quarter growth on purely an organic basis. You know, I mean, you can kind of do the math as well on what might be implied in Q4, and I think the takeaway there will be continued organic growth. So I think it sets us up for a really strong second half of the year, and I think slide five of the investor presentation for the first time lays out explicitly what Permian production was for Viper.

Going back to the fourth quarter of last year, as well as the first quarter of this year, stripping out the noise associated with the non-permean divestiture, all in, you're looking at about high single-digit organic growth in 2026. I don't know if we'll maintain that level on a percentage basis going into next year, but certainly the line of sight we have in terms of activity is going to support some modest growth off the exit rate this year.

I think generally, you know, it's pretty consistent. There's really three parts of the equation. One is, what is Diamondback gross activity levels? Two, what is Viper's exposure to that gross activity levels? And three, what is our average NRI within those wells? So we've been extremely consistent, you know, going back over five years now, capturing about 75 to 80 percent of Diamondback's gross activity with around a 6 percent average NRI. I mean, that gets skewed, and you benefit from certain wells where you own the full royalty and get a 25% NRI.

So I think we still feel confident in maintaining that alignment with Diamondbacks here for the next couple years. And, you know, hopefully we'll have some encouraging results, which we expect to, on that first Spanish Trail Barnett development. And as you get, you know, more gross wells there with those high NRIs, that helps the net exposure quite significantly. Here's what I'll add, you know, wearing kind of two hats here, Derek, is that, you know, if that pad produces how we expect and the costs, you know, come in how we expect, you know, particularly since Diamondback not only has a high working interest in Spanish Trail, but Viper has the high NRI, you know, full section development, the Barnett, will probably move to the top, you know, decile of our combined inventory in terms of rate of return, I'm going to turn the call over to management for prepared remarks.

Yeah, I mean, I think, you know, we did a little under $150 million in Q2. You know, we've kind of continued at a similar daily pace. You know, obviously, it's hard during the blackout window to alter your pace much, but after, you know, the window opens, you know, we'll see where the stock is in the next couple days and be back in the market aggressively. You know, I just, you know, I think we just fundamentally disagree that this should be a double-digit type yield, you know, low double-digit type yield. And I recognize that, you know, oil prices were well above mid-cycle in Q2, but even if you look at a normalized price environment, which is how we look at everything, both Diamondback and Viper, the value proposition is pretty obvious.

So I think generally we'll be ready to step in here in a couple days.

I think, I think for what we can see, you know, there's certainly organic growth potential, you know, beyond 2027, particularly led by, you know, Diamondback development of kind of the Barnett, right? That going to drive the stuff we can see I guess the bet on the rest of the basin is that the basin continues to grow and that we grow relatively higher to the rest of the basin I think as we do our underwriting process for third-party acquisitions, that third-party's inventory and the quality of their inventory goes into our calculus for what we want to buy and what we don't buy. And generally, we've outperformed the growth in the basin by buying minerals in the places that get developed first.

No, that's it, Scott. I mean, I would say generally third-party activity has been pretty consistent from a growth perspective. It kind of moves around quarter to quarter on a net basis. But as Casey just mentioned, we spend a lot of time and effort thinking about it from an operator's perspective of what is the highest returning projects they have ahead of them and how do we get exposure to that. So I think it's certainly not a coincidence in how you've seen our third-party activity trend over the last couple of years, and it's just representative of us targeting the highest quality undeveloped acreage that we can in the Permian Basin, regardless of the operator.

Well, I mean, clearly, you know, the move to more index inclusion was a big benefit to Viper, you know, a couple years ago.

You know, we have our sights set, and we, you know, obviously you guys dream big. You know, we'd like to get into S&P 500 as a goal at some point. I think that opens us up to a broader investor universe. People start to pay more attention to the dividend yield and the size of the company.

I understand the concept that stock buybacks, while a tool, may not be a silver bullet, but I think if you firmly believe you're buying back shares below NAV at a mid-cycle price and a reasonable rate of return, And then, you know, whether someone buys the stock or not should result in value accretion to the rest of the shareholder base, of which Diamondback's a significant shareholder. So there's obviously other tools in the toolkit, but I think being a pure-play mineral company today is still the best position for Viper. I just think it's interesting to see people or investors pay 20-plus times for surface-right royalties in the basin when the biggest mineral owner in the public space that's growing 15% a year trades at half that.

And I just don't think that that makes sense.

Yeah, we've seen rig count trend up. We've seen that in the basin, and we've seen that specific to Viper as well, and really that gets reflected in the work in progress in line of site wells. I talk about this pretty consistently, but really what's most impactful for Viper is the conversion rates of those, what percentage of the permits or the doves get converted to production, and then also how quickly they do that. I think as rig count trends up, those existing permits get converted to production more quickly than potentially we underwrite, and that just brings forward some volume. So I think we've positioned this business really well where we benefit from the growth of Diamondback and their focus on Vipers concentrated mineral interest, and then also kind of a broad base and exposure to other third-party operators and whatever their activity levels may be, and also whatever learning they might have across the entire Crimin base.

And so, yeah, I feel good about third-party asset base and how it's performing, especially here recently with kind of where commodity prices have been.

I think it's a combination of both. We really have gained a lot of traction over the last quarter or two on the ground game. Those are conversations we've always had. I think we've just had a little bit higher success rate on converting those into deals we're closing. So, you know, that's exciting, and it's a pretty core part of our business of bulging up and netting up and, you know, adding value around the edges.

On the bigger packages, you know, there were certainly a lot of calls over the last couple months with sellers seeing where oil prices were, or at least potential sellers. I think Riverbend is reflective of a good type of deal that FedViper can do pretty easily now. The volatility has not been helpful, that's for sure, but I think there's still a really constructive A&D market out there, and Viper expects to play a very significant role within that, but as part of allocating capital today, if you think about all of the different uses, the investment opportunity in buying back shares looks pretty attractive relative to even what M&A might look like.

Thanks, everybody, for your interest in Viper Energy. I think we laid out a very clear future value proposition for our shareholders, and we look forward to delivering on it. So thank you.