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Permian Driller Viper IPO Exceeds Expectations, but Ohio-Focused Eclipse Fails to Impress

Diamondback Energy Inc.'s unique Permian Basin subsidiary Viper Energy Partners LP on Monday completed its better-than-anticipated initial public offering (IPO), which was continuing to draw enthusiastic investors to begin the week.

Viper, the first U.S.-listed master limited partnership whose revenue would be derived only from owning mineral rights, debuted on Nasdaq last Wednesday priced at $26.00/unit and ended up 24% to $32.35. Viper continued to strengthen Monday, closing at $34.82.

The partnership would pay a variable distribution based on the revenue it receives from its royalty interests, according to Tudor, Pickering, Holt Inc., senior co-manager. In other words, its rights entitle it to royalty payments from drillers operating in those areas.

Viper currently has minerals rights on more than 14,800 acres on the Texas side of the Permian, with an average 21% royalty interest in production.

"We are opening the door for what we feel like is an acquisitive opportunity that's very unique," CEO Travis Stice said in an online presentation ahead of the IPO. Stice formerly was a top executive at Permian operator Laredo Petroleum Holdings Inc. and at ConocoPhillips.

The operator plans to pay around $1.10/unit in quarterly dividends through June 2015. Based on last Wednesday's closing price, that would equate to an annual dividend yield of about 3.3%.

Diamondback quickly is becoming a Permian operator with some scale in the Wolfberry trend. In February it held more than 67,000 net acres in the basin, 99% operated (see Shale DailyFeb. 19). Proved reserves were 67% oil, with 47% proved developed.

Diamondback (FANG) would be the majority owner (93%). FANG and Viper (VNOM) only are going to get better, said Topeka Capital Markets (TCM) analyst Gabriele Sorbora. TCM raised its price target on FANG to $100 from $86 "following last week's significantly better than anticipated pricing," Sorbora wrote Monday. "At Friday’s closing price, the VNOM enterprise value implies an approximately $2.1 billion valuation, more than 75% above our previous expectation of approximately $1.2 billion."

FANG shares "have outperformed," but we believe this top-tier management team will continue to execute and grow the company via accretive transactions. Furthermore, with its high netbacks, we model FANG to achieve free cash flow late next year, which is a reason shares should trade at a premium."

Meanwhile, Appalachia-based independent Eclipse Resources Inc. failed to impress in its New York Stock Exchange debut on Friday, and it ended Monday down again, closing at $25.26. The State College, PA-based driller had more than 227,200 net acres in Eastern Ohio at the end of March with 109.6 Bcfe of estimated proved reserves, mostly natural gas.

Eclipse had priced its IPO of 30.3 million shares at $27.00, the low end of an expected range to $30.00 (see Shale DailyMay 9). On a strong day for the markets, the stock on Friday fell 4.63% ($1.25) to end at $25.75. The offering is scheduled to close on Wednesday. The explorer had expected to net around $545.2 million to pay down debt. The selling shareholder was Eclipse Resource Holdings, which has the interests of private equity EnCap Investments LP and the management team.

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