Adam Lawlis - Director, IR Travis Stice - CEO Kaes Van't Hof - President Tracy Dick - CFO

Jason Wangler - Imperial Capital Gordon Douthat - Wells Fargo Neal Dingmann - SunTrust Faisel Khan - Citigroup Jeff Grampp - Northland Capital Markets Philip Stuart - Scotia Howard Weil

Thank you, Carmen. Good morning, and welcome to Viper Energy Partners fourth quarter 2017 conference call.

During our call today, we will reference an updated investor presentation, which can be found on Viper's website. Representing Viper today are Travis Stice, CEO; Tracy Dick, CFO; and Kaes Van't Hof, 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 on our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.

Thank you, Adam. Welcome, everyone, and thank you for listening to Viper Energy Partners' fourth quarter 2017 conference call.

2017, was a truly transformational year for Viper. We grew production by over 70%, increased our asset based by over 60%, and our set to distribute another company record distribution.

On February 26th, Viper will distribute $0.46 per unit to unitholders of record at the close of business on February 19th. This distribution is up 78% year-over-year and 36% quarter-over-quarter, and it is attributable to organic growth on existing assets as well as accretive acquisitions closed in recent quarters.

Viper closed 112 deals for over $340 million in 2017, adding roughly 3150 net royalty acreage to our asset base. This movement continued into 2018, with the closing of our first out-of-basin acquisition with an immediately accretive entrance and what we believe to be the core of the core in the Eagle Ford Shale.

With the addition of this acreage along with other deals that have closed today in 2018, Viper's footprint now stands at over 10,400 net royalty acres. As a result, we are initiating average production guidance for the first half of 2018 of 14,000 to 15,000 BOEs a day, as well as full year 2018 production guidance of 14,500 to 16,000 BOEs a day.

The midpoint for the full year 2018 guidance represents a 38% increase year-over-year. I'll now turn the call over to Kaes.

Thank you, Travis. Moving ahead to slide five, we take a look by at 2017 performance and introduce our 2018 outlook.

We also show the range of our 2018 distribution given current guidance range and various commodity prices. Fourth quarter oil production grew 3% quarter-over-quarter.

However, October production was impacted by the completion of an 8-well pad in our largest field Spanish trail, which makes up a significant portion of Viper production. November and December volumes returned expectations and averaged over 13,000 BOEs per day.

Setting this up for continued growth into 2018. As our sponsor Diamondback increase its pad sizes in Spanish trail, a field that that is less than 25% of Diamondback's overall production.

Viper production will continue to grow, we will have larger monthly impacts due to these larger pads sizes. Further, we have accounted for this in our 2018 guidance.

On slide six, we show our production per million units outstanding overtime. As you can see, Viper has significantly outperformed public royalty peers due to the high organic growth embedded in the mostly undeveloped, unconventional assets we required in the Permian Basin.

Unlike working interest E&Ps, Viper does not need to reinvest cash flow to grow. Distribution simply grows a direct result of operators reinvesting their cash how to grow on their acreage for Viper owned minerals.

Slide seven shows Viper's distribution growth compared to all energy focused MLPs since the first quarter of 2016. Over this time period, Viper's distribution has tripled.

Slide eight depicts Viper's production per million units outstanding since going public in 2014, which has outpaced the growth of production in the Permian Basin by over three times. Viper's goal has continued this rate of growth and distributions by continuing to acquire minerals that have active or visible future development.

Even if Viper were to simply grow the estimated Permian Basin growth rate, our yield would grow to 10% by year-end 2019 at today's prices. This distribution growth only assumes organic growth.

Acquisitions further enhance opportunities for unitholders. Slide nine shows the growth of the company's production acreage and proved developed producing reserves on both the consolidated and per unit basis.

These per unit metrics are vital to our analysis of acquisition opportunities. Production per million units and thereby distributions need to rise pro forma for acquisitions.

Slide 10 illustrates Viper's position as an industry leader in both return on and return of capital. Since going public, Viper has distributed over $3.50 in aggregate to unitholders.

The fourth quarter was an exceptional question for Viper with respect to both of these measures. Allowing us to achieve an average return on capital employed of over 14% for the full year 2017, well in excess of our estimated cost of capital.

The next few slides give an update on Viper's acreage position and inventory. On slide 12 and 13, we break down some of the details of our entry into the Eagle Ford Shale.

We acquired 681 net royalty acres primarily in DeWitt and Karnes County for roughly $123 million. This oil weighted acquisition is significantly accretive on a cash flow basis and is highlighted by active visible development by major well capitalized operators who have publicly disclosed multi-year growth plans.

We expect this acquisition to conservatively produce about 900 BOEs a day in 2018. At today's commodity prices, if deal yields north of 14% massively accretive to Viper's current yield.

Our strategy has not changed, we will continue to focus on acquiring minerals in the Permian Basin, but we'll selectively look for sizable acquisitions in oil weighted basins with cash flow accretion and forward visibility, all of which described this acquisition. Slide 14 shows the transformational acquisitions made across the Permian Basin since the end of 2016.

The company increased its acreage position by over 3,000 net royalty acres across the 128 deals, bringing our total Permian footprint to over 9700 net royalty acres. Slide 15 and 16 give more details about Viper's inventory across the Permian Basin.

Both Diamondback-operated and third-party operated acreage throughout the oil weighted counties in the Permian. Slide 16 also shows the breakdown of Viper's exposure to permits currently on file from some of the most active operators in the Permian and Eagle Ford.

Switching slide 17, we depict the mineral assets currently being held by Diamondback, which continues to grow. We've plan on dropping these assets down to Viper from Diamondback when production has reached a point where the DOB accretive to the distribution for Viper's unit holders.

With these comments now complete, I will turn the call over to Tracy.

Thank you, Kaes. Viper's fourth quarter 2017 net income was $42.1 million or $0.37 per diluted share.

Our operating income for the quarter was $59.2 million, up 39% from $42.5 million in the third quarter of 2017. Viper's average realized price per BOE for the fourth quarter was $43.76.

During the quarter, our cash G&A costs were $0.77 per BOE, while non-cash G&A costs were $0.31 per BOE. As shown on slide 19, Viper ended the fourth quarter with a net cash balance of $24 million and liquidity of $331 million.

Also, on slide 19, we provided our updated guidance for the next six months as well as full year 2018. Viper is initiating first half 2018 average production guidance of 14,000 to 15,000 BOE per day.

The midpoint of which is up 17% from fourth quarter 2017 production. We're also initiating full year 2018 production guidance of 14,500 to 16,000 BOE per day, which is an increase of 38% year-over-year.

These comments complete, I'll turn the call back over to Travis.

Thank you, Tracy. In closing, we look to continue to be an industry leader in terms of return on and return of capital.

Viper's continued growth is a direct result of organic growth on our existing asset base and selected accretive acquisition strategy. We look forward to maintaining our momentum in 2018 by continuing to grow our distributions, production and reserves on a per unit basis.

Operator, please open the lines for questions.

Good morning, guys.

Good morning, Jason.

I was curious on the fourth quarter just the lease bonus was pretty significant, everything else kind of checked out, but just curious if you can maybe talk about what that was and how we should think about going forward?

Jason, this is Kaes. That was a pleasant surprise, because we do buy in tier 1 very attractive areas in the Permian.

Operators going to want to continue to hold their leases and, in this instance, a significant portion of a section, the lease had expired, and the operator paid $9 million to retain that lease or extend that lease and with that, we also got a - multi-year, a multi-well commitment over the next 18 months. So, it's not something that we plan our business on, but it is a pleasant surprise and something that's started to occur more often as we've grown our third-party presence.

Sure, certainly agree. And then as you talk about the drop down visibility from Diamondback, I know they haven't given us 2018 activity and things, but as you look at those positions and you guys obviously had the acreage all around it, can you may be talk about the activity levels kind of you are seeing in those nearby regions or just kind of what your outlook is in 2018 as far as seeing those properties in the development states?

Yes. I won't commit too many details but, around numbers Diamondback ran about two rigs on the Brigham Properties last year in Picas [ph] Colony and this year we are planning on running about four or five rigs for a majority of the year on that acreage.

So, cash flow should start to grow with those rigs starting work now early in the year and cash flow will grow through the midpoint of the year, which we anticipate then on a forward basis, there could be some version of the drop down, now sizing is still to be determined, because the position has grown, we've bought more minerals at the Diamondback level, but we anticipate because of the active development coming this year that there will be some version of a drop down through 2018.

Okay, great. Thank you, I'll turn it back.

Good morning, everybody. Just a question on your recent Eagle Ford acquisition and some more bigger picture I guess in that.

How do you view the opportunity set within Permian kind of where your core areas are versus outside the Permian both on availability of potential acquisition opportunities and also from a relative valuation standpoint between the Permian and outside the Permian?

Yes, Gordon, probably we won't go down the road on answering valuation questions, but I can tell you strategically that we are going continue at the Viper level to be opportunistic and look at deals even outside the Permian that are sizable enough and visible enough that they can won our attention at the same time maintaining that strategy that Kaes outlined. Those oil weighted basins under active development and confident operators, I think while Diamondback is singularly focused on the Permian, Viper remains opportunistic in evaluating these minerals consistent with that stated strategy.

That said, the pipeline is full we are really excited about the opportunities that we see here in the Permian Basin and we think there is plenty of runway in front of us.

Yes, as Travis said, I mean I think it's in hand, we're staffed to continue to block up the Permian, and there has been no shortage of opportunities in the Permian, in this instance we saw a very unique opportunity and a sizable acquisition outside the Permian and in an oil weighted basins with a lot of visibility and that's what attracted us to this particular deal.

Okay. And you've mentioned, the growth through both organic distribution growth, organic opportunity that you have on your existing asset base and also both by the M&A activity, but just wondering is there an optimal level of scale that, if you look down the road three, five years or beyond, how you do see your asset base evolving?

Yes, we have been very consistent in our communication that as long as we can find accretive deals, whether it's a yield or cash flow, but the ways that continue to give us those type of accretive opportunities we are going to continue to grow and there is not a certain size, cap or anything else that we put a strategy around. We think that opportunity set is so robust not only here in Permian but quite honestly around these other major oil producing basins that there is just lots of opportunities in front of us.

All right. Thank you.

Thanks, Gordon.

Morning, guys. Kaes, I just want hit on one thing you said, you talk a bit about and I know you gave the guidance earlier or yesterday just on the oil sort of split and is that just something you will see for the next couple of quarters or maybe just talk about how you see sort of the oil ratio going forward for once you blend in the Eagle Ford, a bit of the Eagle Ford properties as well.

Yes, so we released our first oil guidance this year to provide some clarity around that, and we anticipate being between about 71% to 75% oil for the year. Looking at Q3, we were in the high '16 and Q4 we return to about 72% so on a long-term basis we think that low to mid '17s is the right number for us.

Okay. And then the drop down opportunity, is that now that you more active there obviously with other regulatory I mean is that kind of the key that you then waiting on or I'm just wondering when you do a drop down like that is it when you look at that is it generally that in pieces when you drop the whole thing, I just want to, how we should expect that later in the year?

I think it will be done in pieces just because of how much we've purchase with the same level. We purchased the original assets from Brigham and then we've done some buying on our own of sizable acquisitions without current development.

So, because the forward calendar looks pretty full and looks like production is going to grow on those minerals assets then we can size the drop down appropriately. That is primarily accretive to our existing yield.

And that's really the governor for us. We need to do a deal that is immediately accretive in the following quarter to Viper unit holders.

Okay. And then just lastly, I think it's run on slide seven, where you show the distribution growth, is there sort of a target growth I mean you bumped the distribution of slightly I don't know is it on that coverage metrics or how do you look at to see which you'll continue to boost that distribution?

Yeah, I mean our strategy hasn't changed which still distribute a 100% of available cash or operating cash flow for the quarter, every quarter. So really, it's valuable on Permian production in oil price, for every dollar in oil price, investors get $0.90 and for every percentage increase in production that's going to be a corresponding percentage increase in the distributions.

Got it. Thanks guys for the deals.

Thanks, Neal.

Thanks, good morning, guys. I just want to make sure how many acquisitions in the Eagle Ford the CSS strategic sort of rational behind it.

Is it concerning as it all that might divert from sort of the pure play story of Viper itself?

No, because as I mentioned in my earlier comments, the Viper story has always been about acquiring assets and oil weighted basins that have under that are currently being developed and have confident operators. And while this is the first one that we've been able to close in an out-of-basin Permian we've made - over the years, we've made multiple offers and multiple basins as we've try to do accretive deals.

And I'm not in any way implying that the opportunity set is not here in the Permian in fact quite the opposite, but as I highlighted I think we're just trying to be smart managers of this assets and be opportunistic when we can find deals that immediately added the distribution, and that's what we've done here, and we'll continue to be opportunistic. You can compare and contrast that to Diamondback and as I mentioned Diamondback is singularly focused here in the Permian where we do get credit for being a pure play guy.

I think if we can do deals at the Viper level that adds the distribution, our unitholders will be happy.

Okay, fair enough. And then on the 8-well pad that impacted production.

So, what was the - what you guys expect it was the gross volume expect out of that 8-well pad when it's fully up and running?

Yes, that's more of a Diamondback question. I think what was unique about this that Diamondback traditionally develops, had been developing Spanish trail in a 3 to 4-well pad and this was a 8-well pad and as Kaes highlighted, while there was a material impact at the Viper level because you had not only those 8-wells are waiting for production command, you had the corresponding water out effect for all the offset wells, but we are pleased that the volumes came back in November and December and now that we see that Diamondback is shifting to more multi-well pad developments, as Kaes also highlighted we've included that in our forward guidance.

Does that make things little more lumpy as just sort of move through the year if you are waiting for larger pads to come online, does that make the volume sort of little bit more volatile over the course of the year?

At the Viper level, it could but again, that's why we don't guide towards the quarters. We tried as articulated as we could describe for you what we think the next six months volume forecast is going to be.

And yeah for me at any time and point over that six-month period, we could be up or down from the midpoint of that guidance. But we spend a lot of time and effort with our reservoir engineers trying to get an accurate forecast what the volumes are going to be, and we put that in our guidance.

And taking into account all of these different parameters that we understand.

Okay. Thanks a lot.

Appreciate the time.

1 Thanks, Faisel.

Good morning, guys. Just kind of sticking with the Eagle Ford acquisition and Travis as you've pointed out certainly nothing new to the story about looking out-of-basin.

But I'm kind a curious just a little bit of background there on. What was kind of that missing piece that kind a prevented you guys from getting a deal across the finish line over the prior few years versus this opportunity that you guys were able to cross the finish line on.

Well again, if you go back and look at the review words I'm saying about making these deals being opportunistic and doing deals where the distributions go up. It took some time on this particular asset for operators to get out there and drive the volumes up, so that we can make an accretive deal as we've described.

Just on that acquisition front, we're never going to go out and acquire scattered minerals and these other basins. We're really focused on large concentrated positions oil weighted that we have really good visibility on future cash flows.

And that's what we've done here in this Eagle Ford acquisition. New growth profile operators, those are kind of the - what we govern ourselves with.

And I think that ties back to the opportunity set in the Permian as well. We've looked at a lot of deals over the last two years, that were early in their development or had very little or no development in the Permian.

And now we're revisiting those deals given that active development has begun and primarily in the Delaware basin. I think that the opportunity set for us to do a deal that's accretive on yield as well as NAV and our NAV workups that we do has now risen versus in the past.

Jeff. We always strive to make our story as simple as it can.

And that's sort of another governing principle; we're not going to do acquisitions that are complicated. That are scattered and forecast future cash flows and what we've done here in the Eagle Ford is the exact opposite of all that.

It's a simple story. You get operators and they're publicly stating what their growth plans are for those.

The economics that are being produced there as capital allocators. We know the operators are going to develop this asset, because it's in probably the top-10% of their overall portfolio.

So, we're very confident that this is a really good deal for our unitholders.

Okay, great. Appreciate all those comments.

And just for a follow-up, I noticed relative to last quarter there seem to be a pretty substantial jump in the permit count that you guys quoted, but rig count was actually a little bit down. Can you guys just kind of help us understand that divergence.

And is it fair to kind of look at that big jump in permits as a sign of maybe we should where we should think the rig counts is heading?

Yeah, it's tough to take a lot out of that. We like to provide that data as just to show what kind of exposure we have to the large operators.

I think from our forecasting perspective, we don't necessarily forecast all permits become production. We're really look at wells that a rein the ground, where the rigs that are operating today and thus primarily.

But the increasing permit count is a function of one, our purchases of third party acreage where we have exposure to a lot of third parties outside of Diamondback and two, the increased permit count from Diamondback as well.

And I'll tell you Jeff from a macro perspective, if you just look at the Permian in whole at once, you'll see the permits cycle was authorized. And so, this uptick in permits across the Permian really started in the fourth quarter of last year and you're seeing it continue into the first quarter of this year, which is in direct correlation to the oil price.

Okay. Perfect.

Appreciate the time guys, and congrats on all the success.

Thanks Jeff.

Thank you, Jeff.

Good morning, guys. Congrats on again the Eagle Ford deal done.

Can you all talk a little bit more about how that deal came about and if there any other opportunities with that specific party, to further increase - interest percentage on that acreage?

This is a marketed deal which we had actually seen some version of this in the past and came back around and it's probably a smaller percentage of what could be purchased under all that acreage, given that we have about 1% interest across the wide swap acreage. So, you like we do in the Permian, if we buy a deal on Permian in the Permian and are happy with the Ford production outlook in that particular section or in that particular area, we will send our team into to continue to acquire.

So, I think we're going to watch and see the production on this asset and see it grow and continue to be acquisitive if the opportunity presents itself.

Philip, this is just like we talk about the Diamondback level, we don't speculate on future acquisitions, we're kind of give you an idea of what the opportunity set looks like, but you know we would much rather tell you what we have done and say what we're going to do.

Good deal and then I guess, kind of talking about what all you've done, I know the last time we talked, I think you said there were seven employees at Viper, if I look out to kind of consensus cash flow that's meant for 2018, it looks like about $215 million, that's a little over $30 million per employee in cash flow. I looked at all the other E&P companies and mineral insurance companies, but I imagine that's probably the best.

Is there any kind of increased staffing that you all might need to do as you continue to increase your footprint?

Travis does around a pretty lean ship over here, but like I do think we're going to continue to add small staff small percentage of the staff just for you analyzing third-party leases, analyzing production you know and analyzing deals as we continue to be more acquisitive and production growth. But it's a full team effort, I don't necessarily, I can't those employees is full time, the accounting staff spend a lot of time on that as well, so it's not necessarily a true seven total employees, but it is pretty lean shop.

All right, guys. Congrats again.

Thank you.

Yeah, good morning everyone. I just had a question on the organic reserve growth that you showed a pretty impressive or reserve replacement rate for a non-op and I was just wondering how the adds breakout between proved developed in spuds?

It's mostly PDP adds, we only take product on Diamondback operated properties, so there are no spuds on third-party operated properties. So really, it's a majority of the replacement is did in 95 wells on Diamondback operated properties.

You have note, that our PDP percentage is a lot higher than traditional E&Ps, because we book so few spuds at the Viper level.

All right, great. And you know you were talking about potential drop downs from the Brigham properties, I was wondering if any of that was baked into your guidance at this point?

Nothing baked in at this time.

Okay, well congratulations on acquisition and that was all I hand. Thanks.

Thank you, Joel.

Hey good morning guys.

Good morning, Eli.

Given Diamondback's plan from Permian Basin pure play, curious if you expect the recent trend of Viper diversifying away from Diamondback operated acreage to continue once Diamondback's existing royalty assets have been dropped down and if so would that impact how Diamondback thinks about the decision between holding or divesting the Viper LP units?

Thank you, I'll let Travis to answer the question about the LP units, but if you think about the opportunities set, Diamondback they are probably 50,000 net royalty acres underneath the Diamondback operated properties in the Permian, and we only owned about 4000 of those today. So, we have a lot of opportunities for us to continue to buy minerals underneath Diamondback and I think it provides us a very unique advantage on a consolidated basis versus our peers.

So, I'll turn it over to Travis on the LP units.

Yeah, Eli. Diamondback is very comfortable with our ownership in Viper Energy Partners and in plan to maintain where we're at.

The quick question on Diamond operated royalty acreage outside of Spanish trail. Looks like that number kicked down quarter-to-quarter and also the active rig count across Viper's acreage looks like itself quarter-over-quarter.

Just curious as what drive what's driving those reductions?

It's really definition issue. We're going to move all definitions to how many that royalty acres we have as a percentage of total.

We used to define it as a percentage of gross acres. But I feel given that the production comes from a net royalty acre, the percentage of Diamondback operated net royalty acres will be defined as Diamondback operated net royalty's acres divided by total.

Got it. Last one from me.

Just curious what the current net Eagle Ford production is?

About 900 BOEs a day.

Great. Thanks so much.

Thank you, Eli.

Thanks again to everyone participating in today's call. If you had any questions, please contact us using the contact information provided.