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Viper Strikes Us as a Unique Proposition

Viper Strikes Us as a Unique Proposition

Stephen Ellis: Viper Energy Partners I think is a very unique and interesting firm. It is a mineral rights royalty firm, which means it receives a percentage of whatever the drilling operator earns off the well. This means it’s an extremely profitable business model, far more so than most in the oil patch and certainly differentiated from the rest of the industry.

So, three things to highlight. First, its narrow economic moat based on cost-of-entry moat source. This is because Viper acquired a number of highly profitable blocks of acreage a few years ago before productivity improvements in the Permian were established, which means the acreage has increased in value over time.

Second, the Diamondback relationship. What this basically means is as the acreage has dropped down from Diamondback to Viper, it is immediately prioritized on the drilling schedule by Diamondback. This reserves a level of financial security for Viper.

Three, hedging. Unlike some E&Ps, Viper does not hedge, which means that as oil prices become more volatile in the short term, Viper’s revenue and therefore profit would be certainly more volatile than most.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Stephen Ellis

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Stephen Ellis is an energy and utilities strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc., covering midstream companies. Ellis is a former member of Morningstar’s China Economic Committee, which provides research on the long-term outlook for the Chinese economy.

Before assuming his current role in 2017, he was director of equity research for financial services and a senior equity analyst. He is also a former editor of the Morningstar Opportunistic Investor newsletter and a former member of the Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic MoatTM and Moat TrendTM ratings issued by Morningstar.

Prior to joining Morningstar in 2007, he worked as a freelance analyst for The Motley Fool and spent three years working in project and financial analysis for Environmental Systems Research Institute (ESRI), a supplier of geographic information system software and geodatabase management applications.

He holds a bachelor’s degree in business administration and a master’s degree in business administration from the University of Redlands.

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