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Viper Energy Should Continue to See Strong Cash Flow Growth in Q3

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Cash flow from operations growth

Viper Energy Partners (VNOM), a mineral interest MLP, has seen strong cash flow from operations growth in recent quarters, and the trend is expected to continue in the next quarter as well. 

The partnership is expected to post cash flow from operations of $83.7 million in the third quarter, a rise of 157.0% YoY (year-over-year) and 33.0% sequentially.

VNOM’s strong YoY and sequential growth is expected to be driven by higher production and higher realized sales prices. The partnership expects its average daily production to be 17.5–19.0 Mboepd (thousand barrels of oil equivalent per day) in the third quarter, 46.8% higher than in the same quarter last year and 11.8% higher than in the previous quarter. The partnership’s realized sales prices may be slightly affected by the widening of the WTI Cushing–WTI Midland spread.

Valuation

Viper Energy Partners was trading at a forward price-to-cash flow from operations multiple of 15.9x on October 17, lower than the historical average of 19.9x but higher than those of most exploration and production companies and the industry median of 5.2x. Viper Energy Partners’ premium valuation reflects its high return on capital employed and its high operating margins.

Analysts’ recommendations

A total of 100.0% of analysts have rated Viper Energy Partners as a “buy.” Oppenheimer recently initiated coverage on VNOM with an “outperform” rating, which is equivalent to a “buy.” 

Overall, VNOM has seen six rating updates since the start of this year, including three new coverage initiations, two upgrades, and one downgrade. VNOM’s average target price of $44.1 implies a potential upside of ~18% from its current price level.

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