8-K: Viper Energy to Acquire Mineral and Royalty Interests from Diamondback Energy in $4.45 Billion Drop Down Transaction

Viper Energy, Inc., a subsidiary of Diamondback Energy, Inc., announces a definitive agreement to acquire mineral and royalty interests from Diamondback for $1 billion in cash and 69.6 million OpCo units, valued at $4.45 billion.

Summary

• Viper Energy, Inc. (VNOM), a subsidiary of Diamondback Energy, Inc. (FANG), has entered into a definitive agreement to acquire certain mineral and royalty interests from Diamondback for $1 billion in cash and 69.6 million OpCo units.
• The transaction, referred to as a 'Drop Down,' is valued at $4.45 billion based on Viper's stock price as of January 24, 2025.
• The cash portion of the transaction is expected to be funded through a combination of cash on hand, borrowings under Viper's credit facility, and proceeds from one or more capital markets transactions.
• The acquired assets include approximately 22,847 net royalty acres in the Permian Basin with an average net royalty interest of approximately 2.8% and current oil production of approximately 17,097 BO/d.
• The transaction is expected to close in the second quarter of 2025, subject to customary closing conditions and approval by Viper's stockholders.
• Viper has also entered into a separate agreement to acquire mineral and royalty interests from Morita Ranches Minerals LLC for approximately $211 million in cash and approximately 2.4 million OpCo units.
• Viper expects Diamondback to complete roughly 300-325 gross locations on the acquired properties in 2026 with an estimated average ~6.0% NRI; expected to drive an increase in Diamondback-operated production from an average of approximately of 11,000 bo/d in 2025 to approximately 14,000 bo/d in 2026.
• The Quinn Ranch Acquisition is expected to close during the first quarter of 2025.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with a significant acquisition expected to drive future growth and financial benefits. The conservative financing and reduced leverage further contribute to the positive sentiment.

Positives

• The acquisition is expected to be accretive to cash available for distribution per Class A share immediately upon closing.
• The transaction is conservatively financed and reduces Viper's pro forma leverage to below 1.0x.
• The acquisition furthers Viper's alignment with Diamondback's expected development plan.
• The pro forma size and scale provided to Viper enhances its advantage in the minerals and royalty market.
• The company expects to own an interest in approximately 75% of the total amount of gross wells that Diamondback would plan to develop over the next five years at today's activity levels.
• Total inventory of Diamondback-operated locations with a greater than 10% IRR at $50 WTI of approximately 334 net locations.
• Approximately 60,200 NRAs in the Permian Basin, approximately 36,300 of which are operated by Diamondback; represents increases of approximately 70% and 90%, respectively.
• Maintaining return of capital commitment of at least 75% of cash available for distribution.
• Conservative leverage of <1.0x expected at year-end 2025 based on current commodity prices.

Negatives

• The transaction is subject to customary closing conditions, including stockholder approval, which introduces uncertainty.
• The cash portion of the transaction requires Viper to utilize cash on hand, borrowings, and potentially issue new capital, which could impact its financial flexibility.
• The company is exposed to risks described in Item 1A of Viper's Annual Report on Form 10-K, filed with the SEC on February 22, 2024, subsequent Forms 10-Q and 8-K and other filings Viper makes with the SEC.

Risks

• The completion of the pending acquisitions on anticipated terms and timing or at all, including obtaining the requisite regulatory and stockholder approvals for the Pending Drop Down.
• Uncertainties as to whether the pending acquisitions, if consummated, will achieve their anticipated benefits within the expected time periods or at all.
• Risks described in Item 1A of Viper's Annual Report on Form 10-K, filed with the SEC on February 22, 2024, subsequent Forms 10-Q and 8-K and other filings Viper makes with the SEC.

Future Outlook

Upon the assumed closing of the Drop Down during Q2 2025, expect average daily production for the balance of 2025 in the range of 47,000 to 49,000 bo/d (85,000 to 88,000 boe/d); the midpoint is approximately 61% higher than standalone Viper's Q4 2024 average daily oil production.

Management Comments

• This transaction, combined with the Quinn Ranch Acquisition, furthers Viper's alignment with Diamondback's expected development plan and positions Viper to continue to deliver organic growth driven by the Diamondback drillbit for multiple years ahead, stated Travis Stice, Chief Executive Officer of Viper.
• In addition to being immediately accretive to all relevant financial metrics, this conservatively financed transaction also reduces Viper's pro forma leverage to below 1.0x, Mr. Stice continued.
• Looking ahead, Viper's leading scale and fortress balance sheet will enable the Company to continue to opportunistically consolidate the highly fragmented minerals market through a disciplined and focused approach.

Industry Context

This announcement reflects a broader trend of consolidation and strategic alignment within the oil and gas industry, particularly in the Permian Basin, where companies are seeking to optimize their asset portfolios and enhance operational efficiencies.

Comparison to Industry Standards

• The transaction is similar to other drop-down transactions seen in the industry, such as those involving other publicly traded mineral and royalty companies.
• The valuation metrics will likely be compared to those of peers like Black Stone Minerals, L.P. (BSM) and Kimbell Royalty Partners, LP (KRP) to assess the fairness of the deal.
• The expected production growth and financial accretion will be benchmarked against industry standards and analyst expectations for royalty companies.

Related Party Transactions

• The Drop Down transaction is a related party transaction between Viper Energy and Diamondback Energy.
• The transaction was negotiated for the Company by the Audit Committee of its Board of Directors, which consists solely of independent directors and is appointed by the Board of Directors to oversee all related party transactions.

Stakeholder Impact

• Shareholders: The transaction is expected to be accretive to cash available for distribution per Class A share.
• Employees: No specific impact on employees is mentioned.
• Customers: No specific impact on customers is mentioned.
• Suppliers: No specific impact on suppliers is mentioned.
• Creditors: The transaction is conservatively financed and reduces Viper's pro forma leverage.

Next Steps

• Viper to seek stockholder approval for the Drop Down transaction.
• Viper to secure funding for the cash portion of the transaction.
• Viper and Diamondback to satisfy customary closing conditions.
• Viper to close the Drop Down transaction in the second quarter of 2025.
• Viper to close the Quinn Ranch Acquisition during the first quarter of 2025.

Key Dates