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Viper Energy Hasn’t Lost Its Fangs

January 18, 2019

The petroleum market has been nothing but unsettled over the past few months, as many factors have been impacting pricing. It all started with the US stock market, which took quite a spill through the fourth quarter of 2018. Despite encouraging economic news, from the labor market and consumer spending to business investment, stocks have been sold off largely due to fears of slowing profit growth for 2019.

Crude oil took a page from that book of diminished expectations, and traders hit their sell buttons starting in early October. That sent crude sharply lower in the US market, with West Texas Intermediate (WTO) hitting a low of $42.53per barrel on December 24.

And then there is the argument of overall supply and demand. With slowing US profit expectations for companies, it’s been argued that global demand will ebb for crude and send prices lower, including for global oil as measured by Brent crude. Brent’s recent low of per barrel was also registered on December 24.

On the supply front, the Organization of the Petroleum Exporting Countries (OPEC), plus Russia (a partnership sometimes called OPEC+), came to an agreement to cut back on production. This development was initially met with skepticism, but recent shipping reports have confirmed compliance, with the cutbacks particularly coming from Saudi Arabia.

WTI crude oil in the US has since rebounded by 22.06%, to a current $51.91 per barrel, with Brent posting similar gains and trading to a current $60.46 per barrel.

Meanwhile, after surging with colder weather in the US and then giving back some gains, natural gas is now rising further to a current $3.65 per million British Thermal Units (MBTU). Natural gas is up significantly from the lows of last year by 43.14%.

Then this week, we got the weekly production and inventory data for the US petroleum market. Crude inventories were down, but US production is hitting new daily production records.

This brings me to my favored dividend-paying petrol company, Viper Energy (VNOM). This company is not a producer or a toll-taking pipeline operator or a refiner. Instead, it is merely a landlord for the oil- and gas-rich land in the Permian Basin of the US.

As such, it leases out land parcels to exploration and production (E&P) companies and, in turn, collects rent as well as royalty income from oil and gas produced from its lands.

The stock was on a nice ascent until the general stock market slump in the fourth quarter. But since December 24, the stock has rallied by 27.58%. Meanwhile, there have been numerous heavy hedge fund and other fund investors buying into the company.

This came on top of the buying of thousands of additional shares by the President and COO of Diamondback Energy (FANG), which has a significant ownership stake in Viper. As a reminder, Viper was formed in a drop-down transaction from Diamondback’s property and other assets.

Of course, Viper benefits or loses on the general price of oil and gas, as it impacts the value of its royalty payments. But at the same time, since it doesn’t need to commit capital for field development and equipment repair, it doesn’t need to worry about cashflow levels – only that cash comes in. As such, it doesn’t need to hedge against oil and gas prices, which cuts costs.

It has piles of cash on hand, virtually no debt and over-the-top returns on equity and its capital base of land and other assets.

The dividend distribution is, however, dependent on royalty income for each quarter. But it has been firmly on the rise over the past several quarters on both higher petrol prices and further leases of its land.

The last distribution was 58 cents, for a current yield of 7.93%. And the next distribution, payable in late February, is expected to be declared in the first week of next month. It could drop somewhere into the low 40 cent to upper 30 cent range. But even at that level, the yield would be around 5.49% and still quite attractive. Please note that, if petrol remains at levels even close to where it is now, the following payout would be higher.

Furthermore, the royalty revenue from higher natural gas prices will also be bolstered.

The bottom line is that the company is barely levered and has a low level of financial and operating risk right now. This makes for a dividend-paying stock with its fangs firmly on the goal of grabbing more cash for shareholders.