James Davolos of Horizon Kinetics presented his in-depth investment thesis on Viper Energy Partners (US: VNOM) at Best Ideas 2019.

Thesis summary:

Viper Energy Partners was taken public in 2014 by Diamondback Energy (US: FANG) in order to monetize a royalty position in the Midland Basin on acreage owned and operated by Diamondback. The transaction facilitated an independent valuation for royalty acreage, which requires minimal working capital, as compared to capital-intensive operated acreage. Diamondback maintains a sizable stake in Viper Energy.

In contrast to most public energy “royalty” companies at the time, Viper was the first growth-oriented company, which has been facilitated by drop-down transactions with the parent. Viper has expanded beyond sponsored transactions from the parent and acquired assets from third parties. Royalty acreage has grown by 4.4x since the IPO.

Viper and its peers have limited acquisitions to cash flow accretive deals. This has resulted in an accretive acquisition mechanism, whereby the company can purchase acreage at a 50+% discount to the implied value of the acreage.

A critical variable to this compounding mechanism is capital structure; historically the company has only utilized short-term debt in the form of a revolving credit facility to close acquisitions. Subsequently, the company issued shares to pay down the revolver. To the extent that the company can issue shares at a material premium to the acquired acreage, the transactions are accretive on a cash flow and NAV basis.

Based on trailing distributions, Viper trades at a forward distribution yield of ~8%. While declines in oil prices will impact this rate in the short term, James expects organic production growth and hub basis differentials to mitigate the impact over the next year.

Listen to this session:

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About the instructor:

James Davolos is a Portfolio Manager at Horizon Kinetics LLC. He serves as Co‐Portfolio Manager to the Kinetics Internet Fund, an equity fund with approximately $150 million in assets, and he is an investment team member of the Kinetics Paradigm Fund, Kinetics Alternative Income Fund, Kinetics Global Fund, Kinetics Small Cap Opportunities Fund, and Kinetics Market Opportunities Fund, all of which are a series of Kinetics Mutual Funds, Inc. James is also directly responsible for a variety of custom and concentrated equity managed account strategies, is a Co‐Portfolio Manager on certain private funds, and is on the investment team across the core managed account strategies. He is a member of the Firm’s Investment Committee and Research Team, and is actively involved in research, valuation and portfolio allocation for many of the Firm’s high conviction investments. James joined the Firm in 2005 as a research analyst. He earned his undergraduate degree (B.B.A.) from Loyola University of Maryland in 2005, and his Master’s in Business Administrator (M.B.A.) from New York University in 2016.