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Why Investors Should Hold on to Viper Energy Stock Right Now

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Viper Energy Partners LP (VNOM - Free Report) is well poised for growth on the back of production potential and massive net royalty acres in prolific resources. However, low crude price environment continues to be a concern.

Midland, TX-based Viper Energy is a variable distribution MLP and a subsidiary of Diamondback Energy, Inc. (FANG - Free Report) — an independent oil and gas exploration and production company. The partnership has mineral interests in prolific oil-rich shale plays like the Eagle Ford and Permian Basin. Notably, it beat earnings estimates thrice and missed once in the last four quarters. An average earnings surprise of 142.9% was recorded during this time period.

Viper Energy Partners LP Price and EPS Surprise

Viper Energy Partners LP Price and EPS Surprise

Viper Energy Partners LP price-eps-surprise | Viper Energy Partners LP Quote

Let’s take a closer look at the factors that substantiate its Zacks Rank #3 (Hold).

What’s Favoring the Stock?

Viper Energy generates strong and steady royalty income from mineral interests in the Eagle Ford and Permian Basin. Currently, the partnership has 24,714 net royalty acres in these resources, with 14 operating rigs. Thus, it is well poised to boost production volumes. For 2020, the partnership has narrowed the average production guidance to 25.25-26.25 thousand barrels of oil equivalent per day (MBoe/d), suggesting a rise from 21.50 MBoe/d reported in 2019. Importantly, Viper Energy is well positioned to boost production volumes on an inventory of 485 gross horizontal wells that are in the process of active development.

The partnership is not exposed to further downturn in crude oil prices. This is because it has hedged the majority of crude volumes that will be produced for the remainder of 2020 and 2021. Even if the price of crude oil trades at $30 per barrel for the rest of 2020, the partnership is projected to generate annualized free cash flow of more than $100 million in second-half 2020. It expects free cash flow in the band of $175-$150 million, assuming oil price at around $30 per barrel. This suggests an increase from $96 million of free cash flow in 2019.

Viper Energy entered into 88 accords in 2018, including the first drop-down of Pecos County mineral resources from its parent company, Diamondback. The partnership expects more drop-down of assets to follow from the additional 1,186 net royalty acres in Pecos and Reeves counties that are owned by Diamondback. The expansion strategy is likely to generate more royalty income from the partnership and be accretive to unitholders.

Hurdles in Growth Path

As of Jun 30, 2020, Viper Energy’s cash and cash equivalents were recorded at only $9.7 million, down from first-quarter’s $40.3 million. It reported net long-term debt of $630.5 million at second quarter-end. Weakness in upstream operations owing to coronavirus-induced weak oil prices raises uncertainty regarding the partnership’s ability to pay a portion of long-term debt that is due for settlement after 12 months.

The coronavirus pandemic has been denting global energy demand, thereby dragging down oil price to the bearish territory. Since Viper Energy has mineral interests in North American oil and gas resources, weakness in the commodity pricing scenario is hurting the bottom line.

The partnership was authorized by the board of directors of its general partner to make cash distribution of 3 cents per common unit for the June quarter of 2020. The new distribution reflects a sequential decline of roughly 70%.

To Sum Up

Despite significant prospects, lower oil price realizations led by coronavirus-dented energy demand is concerning for Viper Energy. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Stocks to Consider

Some better-ranked players in the energy space include Noble Energy, Inc. and Royal Dutch Shell plc , each holding a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Noble Energy’s bottom line for 2021 is expected to surge 58.5% year over year.

Shell’s bottom line for 2021 is expected to rise 112.5% year over year.

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