Viper Energy Stock: Increased Potential For Lease Bonus Payments (NASDAQ:VNOM)

Viper Energy (NASDAQ:VNOM) converted to a Delaware corporation from a Delaware partnership and also changed its name from Viper Energy Partners as part of that move. This is expected to result in Viper’s inclusion in more indices, resulting in more of its public float being held by index funds.

Viper also announced a large amount of lease bonus income in Q3 2023, with a nearly $100 million lease bonus payment coming in for deeper rights to its Spanish Trail acreage.

Although this is expected to be Viper’s largest lease bonus payment, there is the potential for additional smaller lease bonus payments for deep zone rights. I was only modeling around $15 million per year in lease bonus payments for Viper before, and have increased this to $40 million per year now (on average). This additional lease bonus income would result in a post-tax increase of $0.11 per share to Viper’s free cash flow.

Due to the increase in modelled lease bonus payments, I have increased my estimate of Viper’s value to $35 to $36 per share, compared to my prior estimate of $34 per unit value (when it was a limited partnership).

Switch To Delaware Corporation

Viper is now a Delaware corporation, having converted from a Delaware partnership in mid-November 2023. This change makes Viper eligible to be included in various indices, which should increase the percentage of Viper’s shares that are owned by index funds. Viper noted that before the conversion, only 2% of its public float was held by index funds, compared to 30% for its peer group. Investors will continue to receive 1099-DIV forms as Viper has chosen to been taxed as a corporation since 2018.

Lease Bonuses

Viper reported $97.4 million in lease bonus income in Q3 2023. This added up to around $0.60 per unit at the time and helped fund part of Viper’s GRP acquisition. This lease bonus involves rights to deeper zones in its Spanish Trail acreage (operated by Diamondback). Viper previously reported (in 2015) having an over 20% NRI in Spanish Trail’s 15,460 gross acres, so Spanish Trail accounts for approximately 10% of Viper’s total net royalty acres.

Viper noted during its Q3 2023 earnings call that around 50% of its acreage has lease terms where the development rights to the deeper zones can return back to Viper if various development requirements aren’t met.

Viper doesn’t expect any other near-term lease bonus payments to be as large as the nearly $100 million Spanish Trail payment, which was sizable due to the combination of high NRI and significant gross acreage involved. However, this is a potential source of income for Viper that I have underestimated before.

Updated 2024 Outlook And Valuation

The current strip for 2024 is around $76 WTI oil and $2.55 Henry Hub natural gas. At that current strip and the midpoint of Viper’s 2024 production expectations, I now project that Viper can generate $878 million in revenues after hedges for 2024.

This includes an increase in my projections for lease bonus and other income (from $15 million to $40 million per year).

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Based on current strip prices, Viper is now projected to generate $620 million in free cash flow in 2024 (including the amount attributable to Diamondback’s non-controlling 56% interest in Viper). This is $3.50 per share in free cash flow based on 177 million common shares outstanding after its most recent share repurchase announcement.

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Viper has been maintaining a 75% payout ratio, which would allow it to return approximately $2.63 per share to shareholders in 2024 in the form of dividends and share repurchases.

I have also increased my estimate of Viper’s value to $35 to $36 per share to reflect the impact of the modeled increase in lease bonus payments. The $25 million per year modeled increase would result in a $0.11 per share increase in free cash flow after factoring in income taxes.

Conclusion

Viper Energy received nearly $100 million in lease bonus payments in Q3 2023. This was related to deeper zone rights with its Spanish Trail acreage. This was a large transaction that involved approximately 10% of Viper’s net royalty acres. However, Viper does expect some potential for further smaller lease bonus payments for deep rights on other parts of its acreage.

I have thus increased my modeled lease income for Viper by $25 million per year. This increase helps support a higher estimated value of approximately $35 to $36 per share for Viper in a long-term $75 WTI oil environment.