Viper Energy (VNOM) Stock Could Be 36.5% Overvalued After Strong Earnings And Guidance

Viper Energy (VNOM) is back in focus after reporting 109% year on year revenue growth, topping EBITDA and EPS estimates, lifting oil production guidance, and then seeing its stock pull back roughly 10.5%.

See our latest analysis for Viper Energy.

Against this backdrop, Viper Energy’s share price has eased, with a 1-day share price return down 1.55%, a 7-day share price return down 5.15%, and a 30-day share price return down 10.80%. However, the year to date share price return is 12.66% and the 1-year total shareholder return is 11.46%, which may indicate recent profit taking after strong gains rather than a complete shift in the longer term story.

If Viper Energy’s move has you thinking about where the next opportunity might come from in energy and infrastructure, it could be worth scanning 35 power grid technology and infrastructure stocks.

So with Viper Energy reporting strong headline growth, raising production guidance and still trading below some valuation estimates, is the recent pullback giving you a genuine entry point, or is the market already pricing in the company’s future potential?

Most Popular Narrative: 36.5% Overvalued

Viper Energy’s last close at $43.69 sits well above the $32.00 fair value in the most followed narrative, which frames the current share price as rich against its own cash flow and growth assumptions.

This is one of three major benefits the company brings to the table: As I just briefly explained, the company has a high-margin business model, as it does not incur drilling costs. The Permian is home to almost half of all onshore horizontal rigs in the United States. Essentially, it’s the place to be for oil and gas production with elevated reserves and low breakeven prices. In a recent article, I showed the chart below. As we can see, the Permian has mostly undeveloped wells, which bodes well for future production. ImageBloomberg Related to the second advantage, the Permian also benefits from decent infrastructure, a favorable regulatory environment, and lower operational risks compared to emerging basins. Nonetheless, because of elevated production, more infrastructure is needed in the years ahead, which is one of the reasons why I’m also very bullish on the midstream industry.

Read the complete narrative.

The narrative ties Viper Energy’s Permian mineral position to a detailed path for revenue growth, profit margins and future valuation multiples. Curious which assumptions actually drive that $32.00 fair value and why they point to an overvaluation gap at today’s price.

Result: Fair Value of $32.00 (OVERVALUED)

Have a read of the narrative in full and understand what’s behind the forecasts.

However, Viper Energy’s recent net income loss, along with any pullback in Permian drilling activity or infrastructure build out, could quickly challenge the current overvaluation narrative.

Find out about the key risks to this Viper Energy narrative.

Another View: Viper Energy Through the SWS DCF Lens

While the popular narrative pins Viper Energy as 36.5% overvalued at $43.69 versus a $32.00 fair value, the Simply Wall St DCF model presents a very different perspective. On that view, VNOM at $43.69 sits well below an estimated future cash flow value of $124.08, which suggests it may be deeply undervalued rather than stretched.

This kind of gap between a user narrative and a cash flow based model raises a simple question for you as an investor: which set of assumptions about future cash generation feels more realistic, and how comfortable are you if the market ultimately leans toward the other side of that debate?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Viper Energy for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 47 high quality undervalued stocks. If you save a screener we even alert you when new companies match – so you never miss a potential opportunity.

Next Steps

With Viper Energy throwing up mixed signals on value and sentiment, it makes sense to move quickly, check the full set of numbers, and decide where you stand on its risk reward trade off using the 3 key rewards and 2 important warning signs.

Looking for more investment ideas beyond Viper Energy?

If Viper Energy has sharpened your focus, do not stop here. Use the Simply Wall St screener tools to spot other opportunities that fit your style.

This article by Simply Wall St is general in nature. We provide commentary based on historical data
and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your
financial situation. We aim to bring you long-term focused analysis driven by fundamental data.
Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Simply Wall St has no position in any stocks mentioned.

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