Viper Energy In A Good Position To Benefit From Higher Oil Prices

Viper Energy Partners LP (NASDAQ: VNOM) is poised to benefit from higher oil prices as it would boost its margins, according to a note from Wunderlich which maintained its Buy rating and $20 price target.

Viper Energy reported solid third quarter production and more growth expected through 2017.The company’s production grew 16 percent sequentially to 6,255 boe/day.

“We believe VNOM is in a good position to take advantage of these increases as its margins widen further with positive oil prices, cash flows move higher and cause VNOM's distributions to move up nicely,” analyst Jason Wangler wrote in a note.

The analyst expects for further increases in production as its largest  holder, Diamondback Energy is ramping up its rig activity that should bode well for Viper on its Midland and Delaware positions. These increases, alongside healthier oil prices, should drive strong cash flows and distributions going forward.

“VNOM is a bit of an anomaly, and hence an opportunity, in our view, in that its royalty acreage/production require no capital or operating costs. This gives VNOM industry leading margins at any oil price of about 90% and therefore as prices increase, the distributable cash flows move higher while if oil prices are weak, VNOM still achieves a margin,” Wangler noted.

Wangler is bullish on the stock as the stock looks attractive from both a yield and valuation perspective. The analyst forecasts VNOM's yield to increase to about 7 percent from 5 percent in the coming quarters based on higher oil prices and increased production.

At time of writing, units of Viper Energy rose 2.52 percent to $16.67.