Preparing To Capitalize On Permian Basin Opportunities In The Coming Years

Key Takeaways

• The transformative transaction with Diamondback and Quinn Ranch acquisition positions Viper for significant production growth and increased future earnings.
  
• Viper's strategic capital allocation, including cash returns and share repurchases, aims to enhance net margins and potentially increase earnings per share.
  
• Viper Energy's reliance on Diamondback, market conditions, and future acquisitions creates significant risks to earnings and financial performance amidst fluctuating oil prices.

Catalysts

Owns and acquires mineral and royalty interests in oil and natural gas properties in the Permian Basin, North America.

• The transformative Drop Down transaction between Viper and Diamondback is expected to provide significant alignment with Diamondback’s development over the next five years, leading to substantial organic production growth and impacting future revenue positively.
  
• The recent Quinn Ranch acquisition, along with other growth strategies, positions Viper to take advantage of undeveloped acreage, particularly in the Permian Basin. This potential development acceleration contributes to increased NAV and could boost future earnings.
  
• Viper now expects to own an interest in approximately 75% of Diamondback's expected completions, with an average 6% NRI, which might lead to improved net margins through scale advantages and enhanced operational efficiencies.
  
• Projected significant production growth is anticipated upon the closing of the Drop Down in Q2 of 2025, with a production increase forecasted for 2026 – these developments should help escalate future revenue streams.
  
• The strategic flexibility in capital allocation, aiming to balance the cash return program with potential share repurchases, suggests a careful approach to managing the balance sheet, which could enhance net margins by optimizing capital efficiency and potentially increasing earnings per share (EPS).

Viper Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Viper Energy's revenue will grow by 21.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.0% today to 25.7% in 3 years time.
• Analysts expect earnings to reach $371.8 million (and earnings per share of $3.05) by about March 2028, up from $359.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.9x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Viper Energy Future Earnings Per Share Growth

Risks

• The success of Viper Energy's growth strategy is heavily reliant on the operational and financial performance of Diamondback, which presents a risk if there are any challenges or underperformance from Diamondback that could negatively impact Viper's future revenues and earnings.
  
• The planned Drop Down transaction involves significant changes in operational scale and integration, which carry the risk of execution challenges that could adversely affect Viper's net margins and overall financial performance.
  
• A substantial reliance on future acquisitions and consolidation in a highly fragmented minerals market introduces potential risks related to valuation, integration, and capital deployment, which could impact cash flows and net margins.
  
• Fluctuations in oil prices can materially affect Viper's expected cash flow and dividend distributions, given their reliance on substantial royalty income from oil production, potentially impacting earnings and investor returns.
  
• The company's strategy includes non-GAAP financial measures and assumptions that may not accurately reflect future performance under changing market conditions, posing risks to reported revenues and net margins if actual results vary.

Valuation

• The analysts have a consensus price target of $59.214 for Viper Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $72.0, and the most bearish reporting a price target of just $51.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $371.8 million, and it would be trading on a PE ratio of 52.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of $43.79, the analyst price target of $59.21 is 26.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.