| October 30, 2020 Viper Energy (VNOM) 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 (FANG), a leading petroleum company, to hold and own underlying land assets and related royalty rights. The basic premise of the company is that 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 a current $35.45 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. 
West Texas Intermediate (WTI) Oil Price—Source: Bloomberg Finance, L.P. In addition, global economic lockdowns as well as plain old economic slumps resulting in falling demand for both upstream (at wellheads) through to midstream (pipelines) and downstream (refineries & consumers) continue to weigh on petroleum stocks. 
S&P Energy Index Price—Source: Bloomberg Finance, L.P. The companies and their stocks inside the S&P Energy Index have lost 50.2% in price over the trailing year, particularly during the general economic and market plunge in February and March of this year. And the building demand for ESG (Environmental, Social & Governance) investments by institutions and their cohorts is driving divestment from petroleum and related stocks and companies. But oil and gas aren't going away from the energy mix of the US and globe for a long time to come. Petroleum is a vital necessity for transportation. Cars, trucks, trains, planes and ships all are 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 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. Not Making a Bull Case for Petrol, Just Cash Flows & Assets Now, I am not making a bull market case for oil and gas companies. I have sold off nearly all of the energy stocks a while ago from the model portfolios with specific exceptions. Enterprise Product Partners (EPD) and Kinder Morgan (KMI) are both midstream pipeline toll takers with ample assets that gather, transport and distribute natural gas and petroleum and related products to eager customers. Revenue for EPD, while down in the second quarter, snapped quickly back and continues its positive growth for the past several years. KMI has a similar record both for this year and for years past. And both remain committed to distributing more dividend income from their profits into 2021 and beyond. I have also 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. And many of the hedges were done in zero-cost transactions of synthetic and derived security transactions. A great deal of these hedges go through not just 2020 but through 2021. The land assets, including all of the undeveloped properties as well as royalty, working interests and other assets, are valued right now at a discount to the market value of the shares of the company by 37%. And I have been reading some geology and industry appraisals of the assets and properties that put the net intrinsic value of the company at more than 205% of the market value of the company. The company 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. On an operational basis, given its structure it has little current expenses so that operational margin is huge at 64.9%. But with lower royalty and other payments, the return on capital is a negative 3.6%, which includes a lot of the capital that is not fully deployed. There is 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. The tax-advantaged dividend distributions are now quite low, given the current petroleum market conditions, at 1.7%. But I still see a lot of value in the intrinsic assets of the company right now. And I will be looking at the quarterly report next week for further information and guidance. For now, I am moving Viper Energy from the Total Return Portfolio to the Niche Investments portfolio. The company and the stock have a lot to offer, but I need some more proof of both the industry, the market, its tenants and the company's plans. VNOM is a buy under a revised price of $8.00, ideally for a tax-free account. All My Best, 
Neil George | 
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