SEC Filing | Viper Energy Partners LP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-36505

Viper Energy Partners LP

(Exact Name of Registrant As Specified in Its Charter)

46-5001985

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification Number)

500 West Texas

Suite 1200

Midland,

79701

(Address of principal executive offices)

(Zip code)

(432) 221-7400

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Units	VNOM	The Nasdaq Stock Market LLC
		(NASDAQ Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2020, the registrant had outstanding 67,844,370 common units representing limited partner interests and 90,709,946 Class B units representing limited partner interests.

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VIPER ENERGY PARTNERS LP

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2020

TABLE OF CONTENTS


			Page
Glossary of Oil and Natural Gas Terms			ii
Glossary of Certain Other Terms			iii
Cautionary Statement Regarding Forward-Looking Statements			iv

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)			1
Consolidated Balance Sheets			1
Consolidated Statements of Operations			2
Consolidated Statements of Changes to Unitholders’ Equity			3
Consolidated Statements of Cash Flows			5
Condensed Notes to Consolidated Financial Statements			5

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations			18

Item 3. Quantitative and Qualitative Disclosures about Market Risk			30

Item 4. Controls and Procedures			31

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			32

Item 1A. Risk Factors			32

Item 6. Exhibits			33

Signatures			34

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GLOSSARY OF OIL AND NATURAL GAS TERMS

The following is a glossary of certain oil and gas terms that are used in this Quarterly Report on Form 10-Q (this “report”):



Basin			A large depression on the earth’s surface in which sediments accumulate.
Bbl or barrel			One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.

BOE			One barrel of crude oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil.
BOE/d			BOE per day.
British Thermal Unit or Btu			The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Condensate			Liquid hydrocarbons associated with the production of a primarily natural gas reserve.
Crude oil			Liquid hydrocarbons retrieved from geological structures underground to be refined into fuel sources.













Fracturing			The process of creating and preserving a fracture or system of fractures in a reservoir rock typically by injecting a fluid under pressure through a wellbore and into the targeted formation.


Horizontal wells			Wells drilled directionally horizontal to allow for development of structures not reachable through traditional vertical drilling mechanisms.

MBbls			Thousand barrels of crude oil or other liquid hydrocarbons.
MBOE			One thousand barrels of crude oil equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mcf			One thousand cubic feet of natural gas.

Mineral interests			The interests in ownership of the resource and mineral rights, giving an owner the right to profit from the extracted resources.
MMBtu			One million British Thermal Units.





Net royalty acres			Gross acreage multiplied by the average royalty interest.
Oil and natural gas properties			Tracts of land consisting of properties to be developed for oil and natural gas resource extraction.
Operator			The individual or company responsible for the exploration and/or production of an oil or natural gas well or lease.





Prospect			A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved reserves			The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.


Reserves			The estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to the market and all permits and financing required to implement the project. Reserves are not assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).
Reservoir			A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or crude oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty interest			An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development, which may be subject to expiration.






WTI			West Texas Intermediate.

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GLOSSARY OF CERTAIN OTHER TERMS

The following is a glossary of certain other terms that are used in this report:



Diamondback			Diamondback Energy, Inc., a Delaware corporation.
Exchange Act			The Securities Exchange Act of 1934, as amended.
GAAP			Accounting principles generally accepted in the United States.
General Partner			Viper Energy Partners GP LLC, a Delaware limited liability company, and the General Partner of the Partnership.

IPO			The Partnership’s initial public offering.
LTIP			Viper Energy Partners LP Long Term Incentive Plan.
NYMEX			New York Mercantile Exchange.
Operating Company			Viper Energy Partners LLC, a Delaware limited liability company and a consolidated subsidiary of Viper Energy Partners LP.
Partnership			Viper Energy Partners LP, a Delaware limited partnership.
Partnership agreement			The first amended and restated agreement of limited partnership, dated June 23, 2014, entered into by the General Partner and Diamondback in connection with the closing of the IPO.

SEC			United States Securities and Exchange Commission.
Securities Act			The Securities Act of 1933, as amended.
Wells Fargo			Wells Fargo Bank, National Association.

iii

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular, the factors discussed in this report, including those detailed under Part II. Item 1A. Risk Factors in this report, our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, could affect our actual results and cause our actual results to differ materially from expectations, estimates or assumptions expressed, forecasted or implied in such forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our” or “the Partnership” are intended to mean the business and operations of the Partnership and its consolidated subsidiary, Viper Energy Partners LLC (the “Operating Company”).

Forward-looking statements may include statements about:

•the volatility of realized oil and natural gas prices and the extent and duration of price reductions and increased production by the Organization of the Petroleum Exporting Countries, or OPEC, members and other oil exporting nations;

•the threat, occurrence, potential duration or other implications of epidemic or pandemic diseases, including the recent outbreak of a highly transmissible and pathogenic strain of coronavirus, or COVID-19, or any government responses to such occurrence or threat;

•logistical challenges and the supply chain disruptions during the ongoing COVID-19 pandemic;

•changes in general economic, business or industry conditions;

•conditions in the capital, financial and credit markets;

•conditions of the U.S. oil and natural gas industry and the effect of U.S. energy, monetary and trade policies;

•U.S. and global economic conditions and political and economic developments, including the outcome of the U.S. presidential election and resulting energy and environmental policies;

•our ability to execute our business and financial strategies;

•the level of production on our properties;

•regional supply and demand factors, delays, curtailments or interruptions of production, and any government order, rule or regulation that may impose production limits on properties in which we have mineral and royalty interest;

•actions taken by third party operators on our mineral and royalty acreage;

•our ability to replace our oil and natural gas reserves;

•our ability to identify, complete and effectively integrate acquisitions of properties or businesses;

•competition in the oil and natural gas industry;

•the ability of our operators to obtain capital or financing needed for development and exploration operations;

•title defects in the properties in which we invest;

•uncertainties with respect to identified drilling locations and estimates of reserves;

•the availability or cost of rigs, equipment, raw materials, supplies, oilfield services or personnel;

•restrictions on the use of water;

•the availability of transportation, pipeline and storage facilities;

•the ability of our operators to comply with applicable governmental laws and regulations and to obtain permits and governmental approvals;

•federal and state legislative and regulatory initiatives relating to hydraulic fracturing;

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•future operating results;

•future distributions to eligible unitholders;

•impact of potential impairment charges;

•exploration and development drilling prospects, inventories, projects and programs;

•operating hazards faced by our operators;

•the ability of our operators to keep pace with technological advancements;

•the effect of existing and future laws and government regulations;

•terrorist attacks and cyber threats;

•the effects of future litigation; and

•certain other factors discussed elsewhere in this report.

All forward-looking statements speak only as of the date of this report or, if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities laws. You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Viper Energy Partners LP

Consolidated Balance Sheets

(Unaudited)


	June 30,		December 31,
	2020		2019
	(In thousands, except unit amounts)
Assets
Current assets:
Cash and cash equivalents	$	9,663	$	3,602

Royalty income receivable (net of allowance for credit losses)	32,118		58,089
Royalty income receivable—related party	917		10,576

Other current assets	482		397
Total current assets	43,180		72,664
Property:
Oil and natural gas interests, full cost method of accounting ($1,480,346 and $1,551,767 excluded from depletion at June 30, 2020 and December 31, 2019, respectively)	2,933,731		2,868,459
Land	5,688		5,688
Accumulated depletion and impairment	(373,898)		(326,474)
Property, net	2,565,521		2,547,673


Deferred tax asset (net of allowance)	—		142,466
Other assets	15,572		22,823
Total assets	$	2,624,273	$	2,785,626
Liabilities and Unitholders’ Equity
Current liabilities:
Accounts payable	$	11	$	—
Accounts payable—related party	—		150
Accrued liabilities	12,439		13,282
Derivative instruments	33,956		—
Total current liabilities	46,406		13,432
Long-term debt, net	630,507		586,774

Derivative instruments	5,875		—
Total liabilities	682,788		600,206
Commitments and contingencies (Note 12)

Unitholders’ equity:
General partner	849		889
Common units (67,831,342 units issued and outstanding as of June 30, 2020 and 67,805,707 units issued and outstanding as of December 31, 2019)	728,149		929,116
Class B units (90,709,946 units issued and outstanding as of June 30, 2020 and December 31, 2019)	1,080		1,130
Total Viper Energy Partners LP unitholders’ equity	730,078		931,135
Non-controlling interest	1,211,407		1,254,285
Total equity	1,941,485		2,185,420
Total liabilities and unitholders’ equity	$	2,624,273	$	2,785,626

See accompanying notes to consolidated financial statements.

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Viper Energy Partners LP

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands, except per unit amounts)
Operating income:
Royalty income	$	32,444	$	70,442	$	109,273	$	130,870
Lease bonus income	23		1,749		1,645		2,909

Other operating income	202		3		443		5
Total operating income	32,669		72,194		111,361		133,784
Costs and expenses:
Production and ad valorem taxes	3,110		4,389		9,257		8,081

Depletion	22,782		16,512		47,424		32,711

General and administrative expenses	1,683		1,723		4,349		3,418

Total costs and expenses	27,575		22,624		61,030		44,210
Income from operations	5,094		49,570		50,331		89,574
Other income (expense):
Interest expense, net	(7,669)		(2,713)		(16,632)		(7,262)


Loss on derivative instruments, net	(34,443)		—		(42,385)		—
Gain (loss) on revaluation of investment	3,443		50		(6,677)		3,642
Other income, net	519		547		923		1,203
Total other expense, net	(38,150)		(2,116)		(64,771)		(2,417)
(Loss) income before income taxes	(33,056)		47,454		(14,440)		87,157
Provision for (benefit from) income taxes	—		180		142,466		(34,428)
Net (loss) income	(33,056)		47,274		(156,906)		121,585
Net (loss) income attributable to non-controlling interest	(11,304)		45,009		7,015		85,541
Net (loss) income attributable to Viper Energy Partners LP	$	(21,752)	$	2,265	$	(163,921)	$	36,044

Net (loss) income attributable to common limited partner units:
Basic	$	(0.32)	$	0.04	$	(2.42)	$	0.61
Diluted	$	(0.32)	$	0.04	$	(2.42)	$	0.61
Weighted average number of common limited partner units outstanding:
Basic	67,831		62,628		67,827		59,058
Diluted	67,831		62,664		67,827		59,094

See accompanying notes to consolidated financial statements.

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Viper Energy Partners LP

Consolidated Statements of Changes to Unitholders' Equity

(Unaudited)


	Limited Partners												General Partner		Non-Controlling Interest
	Common			Class B			Amount		Amount
	Units	Amount		Units	Amount									Total
	(In thousands)
Balance at December 31, 2019	67,806	$	929,116	90,710	$	1,130	$	889	$	1,254,285	$	2,185,420







Unit-based compensation	42	387		—	—		—		—		387



Distribution equivalent rights payments	—	(20)		—	—		—		—		(20)
Distributions to public	—	(30,194)		—	—		—		—		(30,194)
Distributions to Diamondback	—	(329)		—	(25)		—		(40,819)		(41,173)
Distributions to General Partner	—	—		—	—		(20)		—		(20)

Units repurchased for tax withholding	(17)	(383)		—	—		—		—		(383)
Net (loss) income	—	(142,169)		—	—		—		18,319		(123,850)
Balance at March 31, 2020	67,831	756,408		90,710	1,105		869		1,231,785		1,990,167




Unit-based compensation	—	283		—	—		—		—		283
Distribution equivalent rights payments	—	(4)		—	—		—		—		(4)



Distributions to public	—	(6,710)		—	—		—		—		(6,710)
Distributions to Diamondback	—	(76)		—	(25)		—		(9,074)		(9,175)
Distributions to General Partner	—	—		—	—		(20)		—		(20)


Net loss	—	(21,752)		—	—		—		(11,304)		(33,056)
Balance at June 30, 2020	67,831	$	728,149	90,710	$	1,080	$	849	$	1,211,407	$	1,941,485

See accompanying notes to consolidated financial statements.

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Viper Energy Partners LP

Consolidated Statements of Changes to Unitholders' Equity - Continued

(Unaudited)


	Limited Partners												General Partner		Non-Controlling Interest
	Common			Class B			Amount		Amount
	Units	Amount		Units	Amount									Total
	(In thousands)
Balance at December 31, 2018	51,654	$	540,112	72,419	$	990	$	1,000	$	694,940	$	1,237,042



Net proceeds from the issuance of common units - public	10,925	340,648		—	—		—		—		340,648



Unit-based compensation	60	405		—	—		—		—		405



Distributions to public	—	(25,970)		—	—		—		—		(25,970)
Distributions to Diamondback	—	(392)		—	—		—		(36,934)		(37,326)
Distributions to General Partner	—	(20)		—	—		—		—		(20)
Change in ownership of consolidated subsidiaries, net	—	(71,195)		—	—		—		90,120		18,925
Units repurchased for tax withholding	(11)	(353)		—	—		—		—		(353)
Net income	—	33,779		—	—		—		40,532		74,311
Balance at March 31, 2019	62,628	817,014		72,419	990		1,000		788,658		1,607,662



Offering costs	—	(9)		—	—		—		—		(9)
Unit-based compensation	—	472		—	—		—		—		472



Distributions to public	—	(23,521)		—	—		—		—		(23,521)
Distributions to Diamondback	—	(298)		—	—		—		(27,519)		(27,817)
Distributions to General Partner	—	(20)		—	—		—		—		(20)


Net income	—	2,265		—	—		—		45,009		47,274
Balance at June 30, 2019	62,628	$	795,903	72,419	$	990	$	1,000	$	806,148	$	1,604,041

See accompanying notes to consolidated financial statements.

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Viper Energy Partners LP

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2020		2019
	(In thousands)
Cash flows from operating activities:
Net (loss) income	$	(156,906)	$	121,585
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for (benefit from) income taxes	142,466		(34,536)
Depletion	47,424		32,711

Loss on derivative instruments, net	42,385		—
Net cash payments on derivatives	(2,554)		—

Gain on extinguishment of debt	(14)		—
Loss (gain) on revaluation of investment	6,677		(3,642)
Amortization of debt issuance costs	1,152		441
Non-cash unit-based compensation	670		877

Changes in operating assets and liabilities:

Royalty income receivable, net	25,971		(7,996)
Royalty income receivable—related party	9,659		(5,549)


Accounts payable and accrued liabilities	(832)		(2,238)

Accounts payable—related party	(150)		—
Income tax payable	—		108
Other current assets	(85)		(41)
Net cash provided by operating activities	115,863		101,720
Cash flows from investing activities:

Acquisitions of oil and natural gas interests	(65,272)		(125,231)



Funds held in escrow	—		(13,215)


Net cash used in investing activities	(65,272)		(138,446)
Cash flows from financing activities:
Proceeds from borrowings under credit facility	92,000		171,000
Repayment on credit facility	(35,000)		(369,500)

Debt issuance costs	(44)		(258)
Repayment of senior notes	(13,787)		—
Proceeds from public offerings	—		340,860
Public offering costs	—		(221)



Units purchased for tax withholding	(383)		(353)
Distributions to General Partner	(40)		(40)
Distributions to public	(36,928)		(49,491)
Distributions to Diamondback	(50,348)		(65,143)
Net cash (used in) provided by financing activities	(44,530)		26,854
Net increase (decrease) in cash	6,061		(9,872)
Cash and cash equivalents at beginning of period	3,602		22,676
Cash and cash equivalents at end of period	$	9,663	$	12,804

Supplemental disclosure of cash flow information:
Interest paid	$	17,918	$	2,382

See accompanying notes to consolidated financial statements.

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Viper Energy Partners LP

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Viper Energy Partners LP (the “Partnership”) is a publicly traded Delaware limited partnership. The Partnership was formed by Diamondback Energy, Inc. (“Diamondback”) on February 27, 2014 to, among other things, own, acquire and exploit oil and natural gas properties in North America. The Partnership is currently focused on owning and acquiring mineral interests and royalty interests in oil and natural gas properties in the Permian Basin and Eagle Ford Shale. Since May 10, 2018, the Partnership has been treated as a corporation for U.S. federal income tax purposes.

As of June 30, 2020, Viper Energy Partners GP LLC (the “General Partner”), held a 100% general partner interest in the Partnership and Diamondback had an approximate 58% limited partner interest in the Partnership. Diamondback owns and controls the General Partner.

Basis of Presentation

The accompanying consolidated financial statements and related notes thereto were prepared in accordance with GAAP. All material intercompany balances and transactions have been eliminated upon consolidation.

These consolidated financial statements have been prepared by the Partnership without audit, pursuant to the rules and regulations of the SEC. They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to SEC rules and regulations, although the Partnership believes the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Partnership’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2019, which contains a summary of the Partnership’s significant accounting policies and other disclosures.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Certain amounts included in or affecting the Partnership’s financial statements and related disclosures must be estimated by management, requiring certain assumptions to be made with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. These estimates and assumptions affect the amounts the Partnership reports for assets and liabilities and the Partnership’s disclosure of contingent assets and liabilities at the date of the financial statements.

Making accurate estimates and assumptions is particularly difficult as the oil and gas industry experiences challenges resulting from negative pricing pressure from the effects of COVID-19 and actions by OPEC members and other exporting nations on the supply and demand in global oil and natural gas markets. Many companies in the oil and natural gas industry have changed near term business plans in response to changing market conditions. The aforementioned circumstances generally increase the estimation uncertainty in the Partnership’s accounting estimates, particularly the accounting estimates involving financial forecasts.

The Partnership evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Partnership considers reasonable in each particular circumstance. Nevertheless, actual results may differ significantly from the Partnership’s estimates. Any effects on the Partnership’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas interests, the recoverability of costs of unevaluated properties, fair value estimates of commodity derivatives, unit–based compensation and estimate of income taxes.

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Viper Energy Partners LP

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

Accounts Receivable

Accounts receivable consist of receivables from oil and natural gas sales. The operators remit payment for production directly to the Partnership. Most payments for production are received within three months after the production date. Payments on new wells added organically or through acquisition may be further delayed due to title opinion work which is required to be completed by the operator before payments are released.

The Partnership adopted Accounting Standards Update (“ASU”) 2016-13 and the subsequent applicable modifications to the rule on January 1, 2020. Accounts receivable are stated at amounts due from purchasers, net of an allowance for expected losses as estimated by the Partnership when collection is deemed doubtful. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Partnership determines its allowance by considering a number of factors, including the Partnership’s previous loss history, the debtor’s current ability to pay its obligation to the Partnership, the condition of the general economy and the industry as a whole. The Partnership writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses. The adoption of ASU 2016-13 did not result in a material change to the Partnership’s allowance, and no cumulative-effect adjustment was made to beginning unitholders’ equity. At June 30, 2020, the Partnership recorded an immaterial allowance for expected losses and did not record such an allowance at December 31, 2019.

Derivative Instruments

The Partnership is required to recognize its derivative instruments on the consolidated balance sheets as assets or liabilities at fair value with such amounts classified as current or long-term based on their anticipated settlement dates. The accounting for the changes in fair value of a derivative depends on the intended use of the derivative and resulting designation. The Partnership has not designated its derivative instruments as hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and recognizes the cash and non-cash change in fair value on derivative instruments for each period in the consolidated statements of operations.

Accrued Liabilities

Accrued liabilities consist of the following:


	June 30,		December 31,
	2020		2019
	(In thousands)
Interest payable	$	4,391	$	6,718
Ad valorem taxes payable	3,324		5,632
Derivatives payable	4,627		—
Other	97		932
Total accrued liabilities	$	12,439	$	13,282

Non-controlling Interest

Non-controlling interest in the accompanying consolidated financial statements represents Diamondback’s ownership in the net assets of the Operating Company. When Diamondback’s relative ownership interest in the Operating Company changes, adjustments to non-controlling interest and common unitholder equity, tax effected, will occur. Because these changes in the Partnership’s ownership interest in the Operating Company did not result in a change of control, the transactions were accounted for as equity transactions under ASC Topic 810, Consolidation, which requires that any differences between the carrying value of the Partnership’s basis in the Operating Company and the fair value of the consideration received are recognized directly in equity and attributed to the controlling interest. In the first quarter of 2019, the Partnership recorded an adjustment to non-controlling interest of $90.1 million, common unitholder equity of $(71.2) million, and deferred tax asset of $18.9 million to reflect the ownership structure that was effective at March 31, 2019. The adjustment had no impact on earnings. See Note 7 - Unitholders' Equity and Partnership Distributions for further discussion of change in ownership.

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Recent Accounting Pronouncements

The Partnership considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed. The following table provides a brief description of recent accounting pronouncements and the Partnership’s analysis of the effects on its financial statements:

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

Recently Adopted Pronouncements

ASU 2016-13, “Financial Instruments - Credit Losses”

This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

Q1 2020

The Partnership adopted this update effective January 1, 2020. The adoption of this update did not have a material impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.

Pronouncements Not Yet Adopted

ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”

This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance.

Q1 2021

This update is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Partnership does not believe the adoption of this standard will have an impact on its financial position, results of operations or liquidity.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Royalty income represents the right to receive revenues from oil, natural gas and natural gas liquids sales obtained by the operator of the wells in which the Partnership owns a royalty interest. Royalty income is recognized at the point control of the product is transferred to the purchaser at the wellhead or at the gas processing facility based on the Partnership’s percentage ownership share of the revenue, net of any deductions for gathering and transportation. Virtually all of the pricing provisions in the Partnership’s contracts are tied to a market index.

The following table disaggregates the Partnership’s total royalty income by product type:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Oil income	$	27,617	$	65,863	$	99,817	$	117,850
Natural gas income	1,234		(1,074)		1,578		2,765
Natural gas liquids income	3,593		5,653		7,878		10,255
Total royalty income	$	32,444	$	70,442	$	109,273	$	130,870

4. ACQUISITIONS

2020 Activity

During the six months ended June 30, 2020, the Partnership acquired, from unrelated third-party sellers, mineral and royalty interests representing 4,948 gross (410 net royalty) acres in the Permian Basin for an aggregate purchase price of approximately $63.4 million, subject to post-closing adjustments. The Partnership funded these acquisitions with cash on hand and borrowings under the Operating Company’s revolving credit facility.

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2019 Activity

During the six months ended June 30, 2019, the Partnership acquired, from unrelated third-party sellers, mineral and royalty interests representing 1,028 net royalty acres for an aggregate purchase price of approximately $126.9 million. The Partnership funded these acquisitions with cash on hand, a portion of the net proceeds from its February 2019 offering of common units and borrowings under the Operating Company’s revolving credit facility.

5. OIL AND NATURAL GAS INTERESTS

Oil and natural gas interests include the following:


	June 30,		December 31,
	2020		2019

	(In thousands)
Oil and natural gas interests:
Subject to depletion	$	1,453,385	$	1,316,692
Not subject to depletion	1,480,346		1,551,767
Gross oil and natural gas interests	2,933,731		2,868,459
Accumulated depletion and impairment	(373,898)		(326,474)
Oil and natural gas interests, net	2,559,833		2,541,985
Land	5,688		5,688
Property, net of accumulated depletion and impairment	$	2,565,521	$	2,547,673

As of June 30, 2020 and December 31, 2019, the Partnership had mineral and royalty interests representing 24,714 and 24,304 net royalty acres, respectively.

Under the full cost method of accounting, the Partnership is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and gas interests. After performing the ceiling test for the quarter ended June 30, 2020, the Partnership was not required to record an impairment. If the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters, the Partnership will have write-downs in subsequent quarters, which may be material.

6. DEBT

Long-term debt consisted of the following as of the dates indicated:


	June 30,		December 31,
	2020		2019
	(In thousands)
5.375% Senior Notes due 2027	$	485,938	$	500,000
Revolving credit facility	153,500		96,500
Unamortized debt issuance costs	(2,237)		(2,458)
Unamortized discount costs	(6,694)		(7,268)
Total long-term debt	$	630,507	$	586,774

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2027 Senior Notes

On October 16, 2019, the Partnership completed an offering (the “Notes Offering”) of $500.0 million in aggregate principal amount of its 5.375% Senior Notes due 2027 (the “Notes”). The Partnership received net proceeds of approximately $490.0 million from the Notes Offering. The Partnership loaned the gross proceeds to the Operating Company. The Operating Company used the proceeds from the Notes Offering to pay down borrowings under its revolving credit facility. During the second quarter of 2020, the Partnership repurchased $14.1 million of the outstanding principal of the Notes at a cash price ranging from 97.5% to 98.5% of the aggregate principal amount, which resulted in an immaterial gain on extinguishment of debt. As of June 30, 2020, the remaining outstanding principal amount of Notes totaled $485.9 million and will mature on November 1, 2027.

The Operating Company’s Revolving Credit Facility

On July 20, 2018, the Partnership, as guarantor, entered into an amended and restated credit agreement with the Operating Company, as borrower, Wells Fargo National Bank (“Wells Fargo”), as administrative agent, and the other lenders. The credit agreement, as amended to date, provides for a revolving credit facility in the maximum credit amount of $2.0 billion and a borrowing base based on the Operating Company’s oil and natural gas reserves and other factors. The Partnership’s borrowing base was reduced from $775.0 million to $580.0 million during the scheduled semi-annual redetermination in the second quarter of 2020. The borrowing base is scheduled to be re-determined semi-annually in May and November. In addition, the Operating Company and Wells Fargo each may request up to three interim redeterminations of the borrowing base during any 12-month period. As of June 30, 2020, there was $426.5 million available for future borrowings under the Operating Company’s revolving credit facility. During the three and six months ended June 30, 2020, the weighted average interest rates on the Operating Company’s revolving credit facility were 2.41% and 2.82%, respectively. The revolving credit facility will mature on November 1, 2022.

As of June 30, 2020, the Operating Company was in compliance with the financial maintenance covenants under its credit agreement.

7. UNITHOLDERS’ EQUITY AND PARTNERSHIP DISTRIBUTIONS

The Partnership has general partner and limited partner units. At June 30, 2020, the Partnership had a total of 67,831,342 common units issued and outstanding and 90,709,946 Class B units issued and outstanding, of which 731,500 common units and 90,709,946 Class B units were owned by Diamondback, representing approximately 58% of the Partnership’s total units outstanding. The Operating Company units and the Partnership’s Class B units owned by Diamondback are exchangeable from time to time for the Partnership’s common units (that is, one Operating Company unit and one Partnership Class B unit, together, will be exchangeable for one Partnership common unit).

In March 2019, the Partnership completed an underwritten public offering of 10,925,000 common units, which included 1,425,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters. Following this offering, Diamondback owned approximately 54% of the total Partnership units then outstanding. The Partnership received net proceeds from this offering of approximately $340.6 million, after deducting underwriting discounts and commissions and offering expenses. The Partnership used the net proceeds to purchase units of the Operating Company. The Operating Company in turn used the net proceeds to repay a portion of the outstanding borrowings under its revolving credit facility and finance acquisitions during the period.

The following table summarizes the ownership interest in subsidiary changes during the period: