Best Stocks for 2019: Viper Energy Is Down But Not Out

Editor’s note: This column is part of our Best Stocks for 2019 contest. Neil George’s pick for the contest is Viper Energy Partners (NASDAQ:VNOM).

Viper Energy, my favorite petroleum stock, is set up dramatically different from a traditional exploration and production company. It doesn’t explore or develop a single oil or gas well. Instead, VNOM stock is merely the landlord of oil and gas-laden properties primarily in the Permian Basin which leases out the land to production companies and collects leases and royalties.

Petroleum prices never, ever keep going in one direction for long. There is a constant flow of supply and demand estimates and news and analysis that send prices for crude oil and natural gas up or down day by day and week by week.

Think of it this way, if petroleum products were on a continued upward and onward price path — it would eventually reach stratospheric prices which would force the market to adapt by adopting other alternatives. Or if petroleum product did an uninterrupted slip and slide — the market price would eventually either hit zero or less than zero giving the market reason to take notice and to adopt petroleum products for new and expanded usage.

So, zero or infinity pricing just isn’t in the cards for petroleum products. Rather than placing bets on oil soaring or plummeting , I’ve focused primarily for the longer-term on companies that go about their businesses whether crude oil prices are popping or dropping.

And this brings me to Viper Energy.

VNOM: The Landlord of the Permian

VNOM stock was set up as a passthrough limited partnership that went to the public market in 2014. It was set up by Diamondback Energy (NASDAQ:FANG) to hold petroleum properties in the U.S., primarily in the West Texas Permian Basin.

And its tenants include many of the leading exploration and production companies such as Devon Energy (NYSE:DVN), BP (NYSE:BP), Anadarko Petroleum (NYSE:APC) and many others.

And in turn, it focuses on keeping an eye on its tenants and working interest owners while looking to expand those interests from existing assets or by acquiring additional assets.

In May of 2018, Viper changed its form of incorporation from a passthrough to a regular corporation. This is like many other passthroughs that want to be able to attract more institutional and fund investors that have limits on how much that they can have invested in passthroughs. It also provides the opportunity to increase its investments in further field assets over time providing growth opportunities for investors.

VNOM Stock by the Numbers

Given the structure of the company, margins are very fat with operating margins running at 70.30%. And the return on assets is at 9.90% which reflects still underutilized properties. And the return on shareholder equity is at 15.80%. And by looking at the overall capital deployed by the company so far, it is earning a return running at 21.20%.

VNOM stocks has piles of cash with a current ratio (cash against near term liabilities) of 10.80x. And its debts are low at only 24.80% of assets, primarily to fund its operations more smoothly as needed in between new acquisitions and further development of working interest operators.

With the recent diminished market enthusiasm for oil and gas companies, the shares have given up some of their gains from earlier this year. But still, year to date VNOM stock has generated a return off 17.57% compared to the S&P 500 Energy Sector Index’s return of 13.32% and the general S&P 500 Index’s return of 17.57%.

Though that’s not very good for the best stocks contest (VNOM is currently in 6th place), it misses the longer-haul consistent performance for shareholders with the trailing three years seeing a return of 97.92% for an average annual equivalent return of 25.56%. This compares very well against the general S&P Energy Index at only 3.66% and the general S&P 500 Index at 52.32%. And remember, all of this came with both ups and downs for the petroleum market.

And yet, despite the performance and the underlying assets, the stock remains a value right now.

The stock is valued at a mere 2.28 times its book value — which includes so much of the yet to be leased and developed properties. And with loads of cash for expansion of its property assets, there’s a lot more to come for the growth of this company. This means more upside for VNOM stock over the course of 2019. It’s down, but it’s not out.

Now I’ve presented one of my favorite stocks in the petroleum industry, perhaps you might like to see more of my market research and recommendations. For a look at my Profitable Investing, click here.

Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.


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