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Viper Energy Might Be the Last Good Energy Stock

It’s the morning after Election Day in the U.S., and while there are pundits far and wide making their opinions known about potential outcomes, there isn’t a definitive call for control of the US Senate and White House.

We’ve all been living with the election hanging over us since the primaries started in 2019, and frankly, I’m ready to talk about something else.

There’s been a lot of talk about the eventual end of fossil fuel use lately, for example, and I think it’s worth considering whether it’s worth owning oil and natural gas stocks anymore.

I say, if it’s the right stock, the answer is “yes.”

Petroleum is still a vital necessity for transportation. Cars, trucks, trains, planes and ships all are still fueled up by refined petroleum products. And this may and will change over a long time, but not for a long time.

Natural gas is still a vital resource for chemicals and other related products that are mission critical for nearly every facet of the economy. And as a power source, natural gas is the absolutely required go-to for even green energy utilities when wind, solar and other alternative power sources aren’t working or aren’t enough.

I’m not going to make a bullish case for oil and gas companies. But they’re still necessary, and Viper Energy (NASDAQ:VNOM) is one company worth owning.

The Case Is for Cash Flows and Assets

Viper Energy owns thousands upon thousands of acres of mineral-rich land throughout the heartland of US oil and gas fields in the Permian Basin and Eagle Ford Shale. It was formed and became a public company back in 2014 by Diamondback Energy (NASDAQ:FANG), a leading petroleum company, to hold and own underlying land assets and related royalty rights.

It owns the land and mineral rights that are in turn leased out to tenants that conduct exploration and production (E&P) activities to produce oil and natural gas. The tenants pay Viper lease expenses as well as royalties on all mineral production on Viper’s land.

Viper then is the most risk-adverse company in the E&P market. It has not a dime in operational expenses in the fields. And it has no capital expenditures (CAPEX) for any of its properties. That means other than office space for management to run the company and office stuff, the company just owns land and collects rent and royalties. And of course, it keeps an eye on its tenants and works to attract more and better tenants over time.

Diamondback is the largest operator on Viper’s land currently running 51%-52% of all active wells. And the rest of the E&P operators are major and experienced companies in the oil and gas business, including fracking technologies.

The stock has been sold off because of a variety of factors. Oil prices are down from recent highs in 2018 in the $70 range to below $40 per barrel for West Texas Intermediate (WTI). And while this number is not far off of the five-year average of $50, it is still well below where many producers want and need to be more profitable.

But I’ve kept Viper. The company has very valuable assets in its land and royalty and related interests. And with little to no operational and CAPEX expenses, it makes for a great cash cow asset of a company.

Out of the land holdings of the company, less than 25% of all of the mineral acreage has been developed and is operational. That means that more than 75% of the land and related assets are there to be leased out and developed over time. Or if not, those very valuable land and mineral rights can be sold off for a massive amount of cash.

The company has little exposure to oil and gas prices. But it does matter in that as oil and gas rise in market price, royalty income goes up. And if prices drop or remain lower, then royalty income will be less.

This is why, ahead of the market challenges in spot and forward trading for oil and gas, Viper took out a series of hedging transactions. These were done to provide some potential offsets to possible drops in oil and gas prices impacting royalty payments.

The company also has piles of cash amounting to over 500% of near-term liabilities going out one year alone. And it has very little debt at only 21.1% of assets, which are carried on the company’s balance sheet at arguably discounted values based on some third-party industry analysis I’ve gone through.

A Dramatic Recovery After Earnings

Viper Energy just reported for the third quarter, and it was pretty good. Thanks to Diamondback’s (FANG) operations, production of minerals on a barrel of oil equivalent (BOE) increased significantly over the past year, and it’s projecting further improvement for the current quarter.

The stock is still way down with the general energy market, but it has recovered 48.3% since March of this year. And this includes a dramatic investor surge in buying over the past week, moving the stock up 11.5%.

Viper Energy Total Return — Source: Bloomberg Finance, L.P.

Viper still carries the continued risk of Diamondback and other tenant operators slowing down operations on the land. And there is the further risk of shutting wells as well as defaulting on wells and shut-in expenses. However, the company continues to have a handle on these risks and keeps a first-hand on the ground ongoing review of its tenants.

It’s a value based on its land and mineral assets along with lots of cash and little debt. All those factors mark it as a “buy” in my book, but don’t take too large a position. Consider this a niche investment.

On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/viper-energy-might-be-the-last-good-energy-stock/.

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