Viper Energy Stock: Fairly Priced For Long-Term $70s WTI Oil (NASDAQ:VNOM)

Viper Energy Partners (NASDAQ:VNOM) appears to be roughly fairly priced for a long-term $70s WTI oil scenario now. It may be able to generate over $4 per unit in distributable cash flow in 2022 at high-$90s WTI oil, leading to $2.82 per unit in distributions with a 70% payout ratio.

At long-term $75 WTI oil, I’d expect Viper to generate a bit over $3 per unit in distributable cash flow, which would roughly support its current unit price.

2022 Outlook

Viper expects to average (based on guidance midpoint) around 30,500 BOEPD in total production during 2022 including around 18,375 barrels per day in oil production. This would be roughly flat oil production growth and -3% total production growth compared to Q4 2021 levels. Viper expects Diamondback related production to grow in the second half of 2022 and into 2023.

At current strip (including high-$90s WTI oil), Viper is projected to generate $795 million in revenues before hedges.

Viper has a modest amount of oil collars covering around 12% of its 2022 oil production at an average ceiling of $85.91 per barrel. It also has deferred premium puts with a $47.50 strike price for oil and collars covering around 51% of its natural gas production at a ceiling of $4.62 per MMBTU. These hedges have around negative $19 million in estimated value at current strip.

Type	Barrels/Mcf	Realized $ Per Barrel/Mcf	Revenue ($ Million)
Oil (Barrels)	6,706,875	$95.00	$637
NGLs (Barrels)	2,057,916	$40.00	$82
Natural Gas [MCF]	14,206,256	$5.00	$71
Lease Bonus and Other Income			$5
Hedge Value			-$19
Total			$776

Viper is projected to have $100 million in cash expenses in 2022, allowing it to generate $676 million in positive cash flow.

	$ Million
Production and Ad Valorem Taxes	$59
Cash G&A	$8
Cash Interest	$33
Total Expenses	$100

Unit Repurchases And Potential Distribution

Viper has continued to repurchase its units, spending $12.4 million to repurchase 0.57 million common units in Q4 2021 at an average of $21.66 per unit. It also purchased 1.5 million common units for approximately $37.3 million in January 2022 as part of a privately negotiated transaction with Blackstone.

This leaves Viper with 77 million common units outstanding and 90.7 million Class B units outstanding. With a 70% payout ratio, it could put $203 million towards debt reduction and unit repurchases in 2022, while distributing $473 million (or $2.82 per unit).

Notes On Valuation

At a long-term WTI oil price of $75 and a long-term NYMEX gas price of $3.75, I estimate that Viper would be worth a bit over $30 per unit as a one-year target price. As noted above, the distribution over the next year is estimated at $2.82 per unit, so the total value in this scenario would be approximately $33.

A change in long-term oil and gas prices of $5 and $0.25, respectively, affects Viper’s estimated value by approximately $2.25 per unit. This also assumes low single digits production growth compared to Viper’s estimated guidance for 2022.

Stronger production growth may add to Viper’s estimated value. For example, a 3% further increase in production (above 31,500 BOEPD) would increase Viper’s estimated value by around $1 in a long-term $75 WTI oil scenario. Viper expects its Swallowtail assets to drive some production growth.

Conclusion

Viper may be able to generate over $4 per unit in distributable cash flow in 2022 at high-$90s WTI oil, which leads to an estimated distribution of $2.82 per unit assuming a 70% payout ratio.

Viper appears to be fairly priced for a longer-term (after 2022) $70s WTI oil scenario, assuming that production growth is around low single digits from 2022 levels. Further upside would depend on either longer-term oil prices being higher than $75 or Viper delivering additional production growth.