VIPER ENERGY, INC.
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of
Fitch also affirmed
'BB-'/'RR4'. The Rating Outlook is Stable.
The ratings were placed Under Criteria Observation (UCO) on
Viper's ratings reflect its non-operated status, high-margin cost structure, through-the-cycle positive FCF after dividends, and strong credit metrics with sub-1.5x debt/EBITDA throughout the base case. Offsetting factors include the company's relatively small asset base and volumetric risks from third-party operators.
Key Rating Drivers
Uplift from Linkage with Parent: Under Fitch's new parent-subsidiary linkage criteria, Viper's IDR receives a one-notch uplift (same as prior criteria) due to the moderate linkage between the company and its higher rated parent, Diamondback. The linkage reflects the lack of strong legal ties (debt guarantees, cross defaults), weaker strategic ties given Viper's low overall financial contribution and moderate operational ties since the companies have integrated management personnel and Diamondback generates stronger unit economics on Viper acreage.
Unique Asset Base: Viper's asset base is unique relative to growth-oriented independent E&Ps; the company is the leading public consolidator of royalty mineral ownership across the Permian. Viper's net royalty acreage is highly contiguous and largely undeveloped (less than 30% developed in the Midland and less than 20% developed in the
Distribution Policy Provides Flexibility: Management's variable distribution rate of 70% of free cash flow rewards shareholders, while the remaining 30% provides Viper additional financial flexibility and capital optionality. The company's high margin profile and lack of capital costs supports robust FCF generation at Fitch's price deck.
Fitch expects post-dividend FCF to be allocated toward repayment of the revolver in the near term, and believes a portion could be used for M&A funding in the medium term, reducing the company's dependency on capital markets. Fitch does not expect the distribution rate to reach its previous level of 100%, but recognizes a payout increase could have negative implications for future M&A growth and funding.
Fitch believes this linkage provides a production floor and drives Viper's production growth through the forecast. Fitch expects Viper's production growth from third party operators to remain in the low to midsingle-digit range.
In general, Viper has strong insight into Diamondback's volumes and drilling plans, reducing volumetric and cash flow risks, and considerably less visibility and certainty around volumes from third party non-operated interests. Consolidation of mineral interests on third party acreage could result in additional cash flow risk in the longer term. Viper attempts to offset this risk by targeting royalty interests on acreage that is highly contiguous and core to targeted third party operators.
Equity Weighted M&A: Viper has conservatively funded its M&A activity, approximately 75% equity-linked since its IPO in 2014. Fitch believes Viper will continue to fund M&A, over the longer term, through revolver borrowings, positive free cash flow and equity issuances. Near-to-medium term M&A will likely focus on Diamondback acreage; however, Fitch recognizes the number of sizeable transactions could be limited given increased basin consolidation since 2020. Fitch believes continued equity offerings could potentially reduce Diamondback's ownership stake, which may weaken the Diamondback/Viper linkage.
Sub-1.5x Leverage Metrics: Fitch forecasts Viper's debt/EBITDA ratio to reach 1.0x in 2022 at Fitch's
Near-Term Hedging Program: Fitch expects Viper to maintain a near-term focused hedge program, which provides protection from sudden downward price movements. Currently, the company has collars for 8,000 boepd at a weighted average floor of
As leverage continues to improve, Fitch believes management will reduce overall hedge coverage, but will continue to retain extreme downside protection through puts in order to maintain liquidity, fund distributions and repay debt.
Derivation Summary
Viper is an independent E&P focused on owning the mineral interests of the liquids-oriented
As a minerals owner, Viper has minimal operating costs, which results in a Fitch calculated unhedged cash netback of
Viper's high unhedged cash netbacks and no capital expenditures result in a best in class FFO margin, albeit at a much smaller amount. Viper's MLP-linked distributions historically resulted in a neutral FCF profile, but the current 70% distribution rate should facilitate positive FCF going forward.
On a debt/EBITDA basis, Fitch forecasts Viper's pro forma leverage at 1.0x in 2022, which trends below 1.5x in the outer years of the base case at mid-cycle prices, as revolver borrowings are reduced. Debt/EBITDA metrics are in line with the 'BB' category thresholds and Permian-focused E&P peer group.
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer include:
WTI oil price of
Double-digit production growth in 2022, followed by single digit thereafter;
Distribution rate of 70% in 2022 and thereafter;
Free cash flow after dividends used to repay revolver borrowings;
No material M&A activity through the forecast.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increased size and scale resulting in mid-cycle FFO at or above
Mid-cycle debt/EBITDA maintained below 2.0x on a sustained basis;
Leverage sensitivities are consistent with higher-rated peers and are unlikely to change upon future rating upgrades.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Production trending below 15-20 mboe/d and/or increased volumetric risk;
Erosion in Diamondback's credit profile, or material reduction in parent support for Viper (on an ownership, acreage and/or production basis);
Change in financial policy, particularly publicly stated leverage targets and M&A funding appetite;
Mid-cycle debt/EBITDA above 3.0x on a sustained basis;
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: At 1Q22, Viper had cash on hand of
Simple Debt Structure: Viper's senior secured revolver matures in
Distribution Limitations: Viper's distributions are limited by the indenture under the company's 5.375% senior unsecured notes due 2027. Outside of the builder basket, Viper is able to make restricted payments as long as leverage is under 3.0x. Additionally, to the extent the company is above 3.0x, Viper has a general basket up to the greater of
Issuer Profile
Viper owns the oil and gas mineral, royalty, overriding royalty, and similar interests operated by its parent company
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Viper has an ESG Relevance Score of '4' for Group Structure, as the company has a complex group structure. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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