Viper Energy (VNOM) has drawn investor attention after reporting sharply higher second quarter revenue and net income, paired with increased full year production guidance and a mix of base and variable dividends.

Viper Energy's latest earnings, production update and ongoing share repurchases have coincided with a 1-year total shareholder return of 18.51%. The share price return is up 9.05% year to date despite a weaker 90 day patch.

If you are weighing Viper Energy against other energy related ideas, it can help to scan companies with strong resource exposure using our 30 elite gold producer stocks

After Viper Energy's earnings jump, higher production guidance and ongoing buybacks, investors are effectively choosing between paying up for recent momentum or sitting tight for a potential pullback. Is the current valuation already doing most of the work?

Most Popular Narrative: 32.2% Overvalued

Compared to Viper Energy's last close at $42.29, the most followed narrative pegs fair value at $32.00 per share, which implies a premium at current levels according to Idle.

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 is 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. Image Bloomberg 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 am also very bullish on the midstream industry.

Want to understand why a high margin royalty model, paired with long run Permian production assumptions and future profit multiples, pushes Viper Energy's narrative value below today's price? The full narrative spells out the revenue path, margin profile and terminal assumptions that sit behind that $32.00 figure.

Result: Fair Value of $32.00 (OVERVALUED)

However, Viper Energy's story could be tested by weaker commodity prices or any slowdown in Permian activity, which would challenge the assumed strength of royalty cash flows.

Another View On Viper Energy's Value

While the leading narrative for Viper Energy points to a fair value of $32.00 per share and labels the stock as overvalued, the Simply Wall St DCF model points in the opposite direction. It estimates a future cash flow value of $134.35 per share, which suggests Viper Energy is trading well below that level at $42.29 today. Which set of assumptions do you think better fits how royalty cash flows could play out over time?

For a closer look at how this cash flow based view is built line by line, including growth rates, discount rate and terminal value, 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 52 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

Given the mixed messages around Viper Energy, it makes sense to look at the underlying data yourself and act promptly to form your own view. A helpful place to start is with our breakdown of 3 key rewards and 4 important warning signs

Looking for more investment ideas beyond Viper Energy?

If Viper Energy has sharpened your interest in energy and income opportunities, do not stop here. Use the tools available to keep broadening your watchlist.

• Target steady income opportunities by reviewing companies highlighted in the 10 dividend fortresses that may suit investors who prioritise regular cash returns.
• Hunt for potential mispricing by scanning companies in the screener containing 20 high quality undiscovered gems that combine solid fundamentals with limited market attention.
• Prioritise resilience by checking stocks featured in the 80 resilient stocks with low risk scores that score well on balance sheet strength and risk metrics.

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.