FA Alpha Daily

This company is fueling the increased gas demand

Global natural gas demand is set to rise significantly over the next decade due to the EU’s REPowerEU plan and the expected increase in electricity generation driven by data centers worldwide. In today’s FA Alpha Daily, we examine how natural gas producers like Viper Energy could benefit from this trend.

FA Alpha Daily:
Wednesday Credit
Powered by Valens Research

The global demand for natural gas is expected to significantly increase over the coming decade driven by several macroeconomic and technological factors.

Following Russia’s invasion of Ukraine in late February 2022, the European Union embarked on its REPowerEU plan to rapidly reduce dependence on Russian natural gas imports, which previously accounted for around 40% of the EU’s total gas imports.

In 2021 alone, the EU imported approximately 155 billion cubic meters (bcm) of natural gas from Russia.

To replace these supplies, the EU has sought to diversify its gas sources and import more liquefied natural gas (LNG) from alternative partners like the United States and Qatar.

Additionally, the continuous growth of data-intensive technologies like artificial intelligence (AI), Internet of Things (IoT), cloud computing, blockchain, and other applications are driving massive increases in data generation and processing loads.

This is resulting in surging electricity demand from data centers worldwide. Data centers already account for around 3% of total U.S. electricity consumption.

Goldman Sachs forecasts a 15% CAGR in data center power demand from 2023-2030, driving data centers to make up 8% of total U.S. power demand by 2030.

40% of the U.S.’ electricity generation currently comes from natural gas plants due to their relatively low capital costs and the ability to quickly adjust output to balance intermittent renewable sources. 

Many utilities are also expanding natural gas infrastructure like pipelines to support rising data center loads from AI models requiring exabytes of processing.

As a result of these macro trends, we expect natural gas to remain a key fuel supporting global economic growth and the energy transition for decades to come. 

Producers with strategic reserves in prolific basins like the Permian stand to benefit tremendously from higher volumes and prices.

One such company is Viper Energy (VNOM), which owns mineral and royalty interests in the Permian Basin of West Texas and New Mexico. 

The company owns mineral and royalty interests representing 34,346 and 34,217 net royalty acres located in some of the most active development areas of the Permian.

This high-quality acreage is held by production and leased to top operators like ExxonMobil (XOM) and Chevron (CVX).

In the first quarter of 2024, Viper reported a notable increase in royalty income, which rose to $205.1 million from $161.1 million in the same period in 2023. 

This was largely driven by growth in production volumes. Average daily oil volumes increased to 25,407 barrels per day (BO/d) from 20,111 BO/d, while average daily combined volumes rose to 46,132 barrels of oil equivalent per day (BOE/d) from 34,967 BOE/d in the prior year period.

With its prospects and favorable tailwinds, the company achieved a 15% Uniform return on assets ‘ROA’ and 35% asset growth.

Despite this, Viper trades at a lowly 12x Uniform P/E with market pricing in a volatile industry and fluctuating oil and gas prices.

While energy price volatility remains a risk, the company’s current valuation may not fully reflect the long-term structural tailwinds.

Near-term upside could be present for Viper if gas prices and demand trends continue to strengthen.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

This analysis of Viper Energy (VNOM)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.

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