Viper Energy Partners (Nasdaq: VNOM) is currently trading for $25 per unit.
I say “unit” instead of “share” because Viper is structured as a master limited partnership (MLP). That means it returns a lot of cash to unitholders.
If the price of West Texas Intermediate oil averages $70 per barrel this year, Viper is expected to distribute $2.76 per unit to investors.
A $2.76 distribution on a $25 stock price equates to an 11% distribution yield.
I like that double-digit return!
I also like everything else that I know about Viper…
Viper is what’s known as a royalty stream MLP. And it’s appealing based on both what it does have and what it doesn’t have.
Let me start with what it doesn’t have: a large number of employees, significant overhead expenses or a need for any spending on capital expenditures.
Viper doesn’t really need to spend much money because the partnership doesn’t really “do” anything. It just owns the mineral rights to oil-rich land in the Permian Basin. Nothing else.
It is beautifully simple.
And beautifully profitable.
Owning those mineral rights means oil producers that are drilling for oil on Viper’s land pay Viper a royalty of approximately 20% of the revenue they generate.
Viper is basically like the taxman. Someone else does all the work, and the taxman gets to take a nice, fat percentage of the income being generated.
So Viper’s business essentially consists of sitting around and waiting for oil producers to send the company a check each month.
The more oil these producers pump out and the higher the price of oil goes, the bigger those checks are for Viper.
With very limited expenses and lots of incoming revenue, Viper has some of the fattest profit margins of any business on the planet.
Last year, on $866 million in revenue, Viper generated an incredible $699 million in cash flow. That means an astounding 80% of the money that came in turned into cash flow that benefits unitholders.
Viper’s current plan is to distribute 75% of its profits to unitholders. That distribution consists of a base $1 per unit per quarter. The rest of the profit is split between unit repurchases and special distributions.
If management believes Viper’s unit price is undervalued, it will buy back units. If not, the additional cash will be paid out in distributions. For example, in the first quarter of this year, the total distribution was $1.33 per unit and the company also repurchased 1.1 million units in the open market.
Two things will influence the size of Viper’s distributions.
The first is the price of oil. The higher the price of oil, the more cash flow that Viper will generate. And more cash flow means larger distributions.
The second is how much oil is being produced on Viper’s land.
The good news here is that Viper’s mineral rights are in the heart of the Permian Basin, and production in this region is expected to continue to grow steadily through 2030 and beyond.
Growing production will drive growing Viper distributions.
With oil prices where they currently are, The Value Meter ranks this incredible business as “Slightly Undervalued.”
If you think oil prices are headed higher, then the value offered by Viper is even better.
I think the best approach to Viper is to put it on your watchlist and wait for a temporary dip in the price of oil.
That would be a great time to add units of Viper at a lower price and then enjoy waiting for the price of oil to rebound – as it always does.
