Viper Energy Q2 FY26 earnings call VNOM

Viper Energy has fundamentally shifted its capital allocation strategy, moving away from a fixed 75% cash available for distribution commitment and a variable dividend. The new framework centers on a significantly increased base dividend of $2 per Class A share annually, representing a 32% increase, which the company believes offers a highly secure yield of approximately 4.5% at current share prices. This change provides greater flexibility to allocate excess cash flow towards opportunistic share repurchases, debt reduction, or disciplined M&A, aiming to create long-term shareholder value.

Management believes the market was not adequately valuing the previous variable dividend framework or Viper's strong organic growth profile. The new strategy is designed to highlight the durability and attractiveness of Viper's dividend, which is protected down to $30/barrel WTI, and to pair it with a more compelling growth outlook. The company aims to be valued against S&P 500 comps, emphasizing its growth and capital efficiency.

Viper continues to demonstrate strong organic growth, with 691 gross horizontal wells turned to production on its acreage during Q2 FY26. The Q3 FY26 production guidance implies approximately 4.5% sequential growth, and an impressive 15% annualized oil production per share growth rate relative to Q4 FY25. This growth is driven by steady development activity from both Diamondback and third-party operators, with a focus on high-quality undeveloped acreage in the Permian Basin.

The company sees a robust M&A market, particularly for larger deals, and aims to play a significant role. The new capital allocation framework, by retaining excess cash, allows for self-funding of deals without relying on equity markets for every transaction. While opportunistic, M&A decisions will be weighed against share repurchases, especially given the current perceived undervaluation of Viper's stock.

Viper completed $132 million in share repurchases during Q2 FY26 and plans to continue aggressive buybacks when the stock is deemed undervalued. Management expressed frustration with the market's valuation of Viper, which trades at a lower multiple than some non-commodity exposed royalty streams despite its 17% CAGR in per share growth and strong Permian exposure.

Leasing activity in deep benches, particularly the Woodford and Delaware formations, has significantly increased over the last few quarters. Viper has invested $25 million to $30 million in lease bonuses for deep pay, representing about one-third of its total leasing effort. This activity is expected to translate into more production growth within a three-year timeframe as operators develop these minerals.

Diamondback plans significant development in high Net Revenue Interest (NRI) areas for Viper, such as the Barnett and Spanish Trail. A full pad targeting these areas is expected to be a top-decile project in terms of return and NPV for the combined inventory. Successful execution here is anticipated to lead to rapid development of these areas, further boosting Viper's net exposure and production.