VNOM - NASDAQ

Good day, and thank you for standing by. Welcome to the Viper Energy Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Chip Seale, Investor Relations Director. Chip, please go ahead.

[Operator Instructions] The first question comes from the line of Chris Baker of Evercore.

The next question comes from the line of Betty Jiang of Barclays.

I want to ask about the third-party operator activities. It's quite impressive considering the broader industry slowdown that you're seeing more activities running on the third-party assets and increased backlog. Just want to see what you -- any color on that dynamic? And do you think that level of activity is sustainable?

Yes. Good question, Betty. I think it's a couple of things. One, going back to last quarter, when we were kind of in the midst of some of the heightened volatility, we highlighted for stand-alone Viper, what our exposure is to third-party operators. And really, the bulk of the existing production and activity is just a handful of really large caps, namely being Exxon, Oxy, EOG and Conoco. So I think those operators are folks that you would expect to stay pretty consistent with their development plan kind of through periods of volatility. So that's benefited us. Secondly, too, you're kind of seeing some of these concentrated assets that we've acquired and some of the recent acquisitions, getting some activity on them. So it's really been more of a drive in net activity while gross activity has been relatively flat. And then the third thing that I would flag, and you can kind of see it showing up in one of the pie charts on Slide 12 is we're starting to see some of the benefit in those numbers from the Double Eagle development on the Reagan County asset that they have that development agreement in place with Diamondback to drive some growth on what was a very concentrated asset in the drop-down.

Great color. So a follow-up to that is, if I look at your 2026 production growth outlook of the mid-single-digit growth, under the -- I believe that's really underpinned by Diamondback operated activities. Based on what you currently see with the third-party activity, do you think -- could there be upside to that growth trajectory in '26?

Yes, Betty, so that mid-single digits is really 3,000 or 4,000 barrels a day of growth, if you think about it on an absolute basis, which is entirely driven by the growth that we see coming from the Diamondback operated side. So as we look at it today, if you maintain like historical permit conversions and timing and such, I think current activity on the third-party side would be a little bit of growth actually relative to the baseline of being flat, but a lot of things can change, and there's certainly a lot of volatility in the market. So we're still kind of guiding to third-party volumes staying flat, but we are really encouraged by the activity levels that we've seen over the past couple of months.

The next question comes from the line of Neil Mehta of Goldman Sachs.

The next question comes from the line of Paul Diamond of Citi.

Just wanted to quickly touch base on -- so the 1.5 net debt target, once hit even without any asset dispositions, does that shift your hedge strategy at all? Do you feel a need to maintain current levels? Or could we see that moderate a little bit? Or how would you -- I guess, how do you think about that post hitting that target?

Yes, Paul, we've always kind of thought about our hedging strategy as locking in a certain amount of downside protected cash flow that even if things really go south, you have some level of protection and leverage isn't going to blow out on you. So I think we'll continue to hedge probably in this consistent form of the deferred premium puts. So really, just as debt goes down or net debt goes down, you just need to hedge less barrels to lock in the required amount of downside protected cash flow to solve for a cap on leverage.

The next question comes from the line of Derrick Whitfield of Texas Capital.

The next question comes from the line of Aaron Bilkoski of TD Cowen.

So your presentation outlines an expected 5.9% NRI in Diamondback-operated wells through 2029. I guess my question is, do you expect that NRI to be fairly consistent across those years? Or do you anticipate a higher NRI in 2026 and see that taper off in the later years?

Yes, Aaron, I think really the important metric is the net well count, and as we think about that, on the Diamondback operated side, it's really a function of two things. It's one, your exposure to total Diamondback gross activity levels, and then secondly, your NRI within those wells. So we kind of laid this detail out with the drop-down given we have such increased alignment with the Diamondback development plan over an extended period of time given the overlap of that drop-down acreage. So you'll kind of see on Slide 11, thinking about around 25 net wells per year over this time period. I would say that certainly will be a touch front weighted. So if you think about '26 and '27, that will be biased to touch higher than that, and that's really going to drive a couple of thousand barrels a day of growth that we're talking about on an absolute basis, but really over a 5-year period, it's going to be pretty consistent exposure to whatever Diamondback's development plan is going to be, and that really underscores the confidence we have in the long-term production growth outlook.

The next question comes from the line of Leo Mariani of ROTH.

Yes. I wanted to touch base on the debt target here. Do you guys anticipate hitting that? It sounds like in the relatively near future. Do you think that's going to happen here in the first half of '26? And then could you also just talk about the strategy of sort of dividends versus buybacks? Obviously, it sounds like you want to step up the buyback here given the weakness in the shares on a relative basis. But do you also see room for dividend increases in the back half of the year given the accretion from the mergers?

Yes, Leo, I mean, I think it's reasonable to expect that the Board will look at the base dividend and increasing that sometime in the next quarter or two on top of that, just free cash flow growth overall from production growth and the accretion of the deal starts to roll through as well, and I think importantly, this $1.5 billion net debt target and just saying, hey, we're not going to hold on to a bunch of cash on top of that number. If we're at that net debt number, we're giving the cash back to shareholders, and I think that once that starts flowing through numbers, people are going to realize how much cash they're going to get back from Viper over the next couple of years is going to be significant.