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Viper Strikes Us as a Unique Proposition

This narrow-moat firm benefits from mineral rights royalties, attractive acreage, and its relationship with Diamondback.

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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.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.