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What Could Drive Viper Energy Partners’ EBITDA Growth in Q2?

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Earnings growth

Viper Energy Partners (VNOM), a mineral interest MLP, has seen strong earnings growth in recent quarters, and the trend is expected to continue. It’s expected to post EBITDA of $61.7 million in the second quarter of 2018. That represents an 86% YoY (year-over-year) increase and an 8.4% rise sequentially. VNOM

VNOM’s strong YoY and sequential growth are expected to be driven by higher production and higher realized sales prices. It expects its average daily production to be 15.5 MBoe/d (thousand barrels of oil equivalent per day) in Q2 2018, which is 47.7% higher than Q2 2017 and 9.8% higher sequentially.

On the other hand, crude oil averaged $67.90 per barrel in Q2 2018 compared to $48.20 per barrel in Q2 2017. VNOM’s realized sales prices might be slightly impacted by the widening of the WTI Cushing–WTI Midland spread.

Its operating margins are expected to remain stable or improve in the second quarter. Its cash margin was $44.40 per barrel, or 90%, in the first quarter.

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Valuation

Viper Energy Partners was trading at a forward EV[1. enterprise value]-to-EBITDA multiple of 13.7x as of July 23. That’s higher than its historical one-year average of 12.7x. It’s also higher than most Permian-based E&P (exploration and production) companies. Its premium valuation reflects its high return on capital employed, which was 17% at the end of the first quarter.

VNOM is trading at a premium to its one-year average. However, it’s still trading at a discount to its three-year average. That might indicate a buying opportunity for the stock, considering its strong presence in the prolific Permian Basin, strong distribution growth guidance, low leverage, and support from its sponsor Diamondback Energy (FANG). VNOM is expected to benefit from the simplification of its capital structure in the long term.

Analyst recommendations

About 87% of analysts rate Viper Energy Partners a “buy,” and the remaining 13.3% rate it a “hold.” TD Securities recently initiated coverage on VNOM with a “buy” rating. VNOM’s average target price of $36 implies a ~15% upside potential from its current price.

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