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What Makes Viper Energy Partners among Top MLP Picks for 2018?

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Viper Energy Partners

Viper Energy Partners (VNOM), the royalty and mineral interest owner MLP, has risen more than 40% in the past year. It was among the top MLP gainers last year. VNOM could be a top performer in 2018. Except for valuations, it rates high on all fronts, including leverage, earnings growth, and distribution growth. Its high valuations and high commodity price exposure could make it slightly less promising than Noble Midstream Partners (NBLX) and EQT Midstream Partners (EQM). We looked at these two MLPs in Parts 2 and 3 of this series.

Valuations

VNOM was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 13.3x as of January 5, 2018. That’s higher than the peer median of 10.9x. However, its current multiple is still lower than the historical average of 16.6x. Its current distribution yield of 5.8% is higher than the historical average of 5.5%.

Leverage

Viper Energy Partners has the lowest leverage among the MLPs, which is a big plus for the partnership. Its net debt-to-EBITDA multiple was 0.25x at the end of the third quarter of 2017.

Earnings growth

Viper Energy Partners is expected to post a ~116% YoY (year-over-year) EBITDA growth in 2017. The partnership’s strong EBITDA growth could be driven by strong production growth from drilling activity in the Permian Basin and strong crude oil prices. It’s expected to post an EBITDA CAGR (compound annual growth rate) of 29.5% during the 2018–2020 period. That’s expected to translate to distribution CAGR of 28.1% during the same period.

Analyst recommendations

All the analysts surveyed by Reuters rate VNOM a “buy.” Credit Suisse last initiated coverage on VNOM in December 2017 and assigned an outperform rating, which is equivalent to a “buy.” VNOM’s peer Black Stone Minerals (BSM) has “buy” ratings from 80% of the analysts. VNOM’s average target price of $25.10 implies an 8% upside potential from the current price level.

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