Viper Energy is a unique oil and natural gas stock. Trading under the creative ticker symbol VNOM, the company does not actually produce any barrels of crude. Viper owns mineral interests in the Permian Basin and receives royalties from operators who produce oil and gas on its acreage. The 61%-owned subsidiary of Diamondback Energy has gained 71% this year and Wall Street analysts have taken notice. Goldman Sachs initiated research coverage of Viper on Sunday with a buy rating and a price target of $70, implying 29% further upside from its Friday close of $54.11. Bank of America initiated coverage last week with a buy and a price target of $64, suggesting a return of 18%. The two banks led a $425-million secondary offering of stock for Viper in September. Viper has no capital expenditures and no operational costs beyond general and administration expenses. With fewer costs than traditional exploration and production (E & P) companies, Viper’s shareholder dividend is protected so long as crude oil remains anywhere above $30 per barrel, according to Goldman. “The company is uniquely positioned relative to both oily E & P and mineral interest peers given its pure play Permian exposure, zero capital spending required for drilling and completion operations, strong line of sight into long-term estimates given close relationship with FANG and significant return of capital framework,” Goldman analyst Neil Mehta told clients in a research note Sunday. Viper commits 75% of its available cash to shareholders through base and variable dividends as well share buybacks, according to Goldman. The company is normally able to turn 80% of its earnings before interest, tax, depreciation and amortization into free cash flow, compared with traditional exploration and production companies that average about 40%. And Viper’s relationship with Diamondback separates it from other royalty companies, according to Bank of America. “More than half of Viper’s mineral rights derive from Diamondback operated leases – and they are expected to provide more than a decade of low single digit oil production growth,” analyst Kalei Akamine told clients on Nov. 26. “This differentiates VNOM from peers which currently have no growth and no more than one year of production visibility,” Akamine said. VNOM YTD mountain Viper shares in 2024.
