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Falcon Minerals Corporation (FLMN)
Q1 2019 Earnings Call
May. 07, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. Welcome to the Falcon Minerals first-quarter 2019 earnings results call and webcast. Today's call is being recorded. [Operator instructions] It is now my pleasure to turn the floor over to Brian Begley with Falcon Minerals.
Sir, you may begin.
Brian Begley -- Vice President of Investor Relations
Good morning, everyone, and thank you for joining us for today's call to discuss Falcon's first-quarter 2019 results. With us, today on the call is our president and chief executive officer, Daniel Herz; and our chief financial officer, Jeff Brotman. Before we begin, I would like to remind everyone that during this call, we'll make certain forward-looking statements. And in its context, forward-looking statements often address our expected future business and financial performance and financial conditions and also contain words like expects, anticipates and similar words or phrases.
Forward-looking statements by their nature address matters that are uncertain and are subject to certain risks and uncertainties, which can cause actual results to differ materially from those projected in the forward-looking statements. We discussed these risks in the quarterly report on Form 10-Q, which we filed later this week; and our annual report on Form 10-K. I also like to caution you not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligations to publicly update our forward-looking statements or to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances after the date hereof or reflect the occurrence of unanticipated events.
Additionally, in our earnings release, we have provided a reconciliation to the non-GAAP measures we refer to in our public disclosures such as adjusted EBITDA and pro forma free cash flow. With that, I'll turn the call over to our CEO, Daniel Herz, for his remarks. Daniel?
Daniel Herz -- President and Chief Executive Officer
Thanks, Brian. Welcome, everyone, and thank you for joining the Falcon Minerals Corporation first-quarter 2019 earnings call. As you will hear throughout my remarks, I believe we are extremely well-positioned to deliver value to our shareholders in the short, medium and long term. I expect Falcon will be able to deliver these returns by generating substantial free cash flow and delivering on significant embedded growth, as well as executing on highly accretive, organic and strategic acquisitions.
I expect that we will drive growth and return value to shareholders by way of increased cash flow and a robust dividend. Although the energy industry in a way reminds me of Mark Twain's quote, "If you don't like the weather in New England, just wait a few minutes." The oil and gas sector, and specifically oil prices, have felt similarly volatile with prices falling, then rising and then pulling back of late. Through all of this, we at Falcon find ourselves in an enviable position, with great stability and a clear line of sight on growth as we move forward in 2019 and into 2020. For those who are new to to Falcon Minerals, we received, on average, approximately 1.35% of the revenue generated from over 1,750 producing wells, drilled and operated by best-in-class energy companies across approximately 256,000 gross unit acres in the core of the Eagle Ford Shale in Karnes, DeWitt and Gonzales counties in South Texas.
Falcon received this revenue without having to invest a single dollar in capital expenditures for the development of new wells. Furthermore, our operating expenses are extremely low, less than $8.50 per barrel, resulting in a total cash operating margin of greater than 80%. These high cash margin assets, coupled with zero capital expenditures, provide our shareholders with great stability and allows us to pay a strong dividend. In addition to our substantial base of core of the core assets, we expect significant growth in production and cash flow over the coming years from the organic development of the approximately 3,000 undeveloped locations with returns of greater than 100% to our operators.
Now to our operators. Our primary operators are ConocoPhillips, EOG and BP/Devon, which comprise of greater than the 90 -- greater than 90% of our expected value. Each of these operators has recently reaffirmed its commitment to growth and/or significant development in the Eagle Ford shale. Conoco, in its first-quarter earnings call, reaffirmed that it would resume Eagle Ford growth in the second half of 2019, resulting in full-year Eagle Ford growth of approximately 19%.
As a reminder, Conoco paused its growth in the first half of 2019, as it had been ahead of previously provided guidance, given the substantial outperformance of its wells. Furthermore, Conoco progressed in the first quarter by bringing online its first multi-well pad utilizing a new completion design, which it expects will capture even more resources generating more cash flow for royalty owners, including Falcon Minerals. BP and Devon, joint venture partners, both reaffirmed in their first-quarter commentary the importance of the Eagle Ford shale and will be operating 4 rigs across our position as we move through this year, double -- at double the historic 2 rigs the joint ventures had operated prior to BP's acquisition late last year of BHP's Eagle Ford assets. Furthermore, Devon is currently bringing online its first Austin Chalk well and initially sees over 200 potential Austin Chalk locations on its acreage position.
Devon also has had significant success with the refracking of wells, which have added 1,300 boe per day per well, 12 times what the wells had been producing. In total, Devon has identified 200 refracked candidates with a total of 700 potential refrac locations. We also note that EOG continues to have substantial success in Eagle Ford and considers to play its "workhorse". EOG grew Eagle Ford production 9% last year and sees the potential to grow for at least 10 more years at premium rates of return.
Currently, EOG invests greater than 50% of its Eagle Ford capital in the eastern portion of the play, where we own our minerals, and going forward, beyond 2021, expects to invest nearly 50% of its Eagle Ford capital in that same area. Finally, EOG continues to progress its proprietary enhanced oil recovery program, which should benefit Falcon for many years to come. Later, Jeff Brotman, our chief financial officer, will provide an overview of our financial results. In summary, in the first quarter, we generated net production of approximately 5,782 barrels of oil equivalent per day, adjusted EBITDA of $16.9 million, free cash flow per share of $0.18, provided a dividend of $0.175 per share and generated net income of $0.12 per share.
This has all been accomplished while maintaining a conservative balance sheet with approximately $28.5 million of debt or less than 0.4 times debt-to-annualized EBITDA. In fact, the $28.5 million of debt outstanding is approximately $10 million less than when we closed our merger in August 2018. We currently have approximately 150 line-of-sight wells in various stages of development across our position and have recently seen rig activity increased to 10 rigs from 5 rigs earlier in the year. Yes, we've doubled the number of rigs running across our position where our operators have.
This increase in rig activity is consistent with what we expected and described on our fourth-quarter earnings call and should provide meaningful growth later in 2019. During the first quarter, we had 28 wells turned in-line across our position in South Texas. Importantly, I repeat importantly, those wells had an average net revenue interest or NRI of approximately 0.40%, well below our average 1.35% NRI. With our 150 line-of-sight wells, we have strong visibility over the coming quarters.
And as a result of that visibility, our net revenue interest percentage -- that visibility, we expect and see that our net revenue interest percentage will revert back toward our average NRI of 1.35%. As I have said consistently, we have a very stable base level of production and cash flow from our average-NRI wells and should experience meaningful growth over time from the development of our higher net-revenue interest wells. To this point, we expect an increase in the number of wells completed, along with higher net-revenue interest wells to come online late in the third quarter and into the fourth quarter of 2019. Now with respect to our Hooks Ranch property where we own a 22.5% net revenue interest, I'm pleased to report the initial permitting for the expected next group of wells was publicly filed by ConocoPhillips late last week.
We expect to see development and production from new Hooks Ranch wells in 2019, which should contribute to the fourth quarter. Furthermore, as you can see from the publicly filed permit, the long lateral wells are expected to extend beyond the Hooks' four unit on to an adjacent unit. Importantly to note, the Hooks Ranch lease covers part of the adjacent unit, which means our NRI is nicely above our 1.35% average on that adjacent unit. Simply put, we will receive the benefit of the Hooks Ranch wells plus the benefit of the higher NRI offset unit.
As we focus on year-over-year results and expectations, we see the potential for production growth of 20% to 30% from our current base looking at 2020 as compared to 2019 and a potential for meaningful growth for many years to come. Now coming back to the short term. We provided six-month guidance in our earnings release, which reflects our visibility and confidence in production and other items based on our line-of-sight wells. Our next six month-production range of 5,100 to 5,600 boe per day does not include any new Hooks Ranch wells and should be a trough period in terms of net production this year.
The NRI of our line-of-sight wells will revert back to a more normalized NRI, and we should begin to experience the benefits of the acceleration from ConocoPhillips and BP/Devon and EOG's continued strong level of activity. Additionally, we continue to benefit from pricing based upon Louisiana light sweet crude or LLS. During the first quarter of 2019, LLS averaged over $7 per barrel above WTI. Given the current higher commodity price environment relative to the first quarter of 2019, our production guidance and all other factors, we believe our next six months cash flow will remain strong.
Of course, none of this incorporates the significant organic acquisition opportunities that we have been pursuing and executing upon. We have a robust mineral-acquisition effort under way and find ourselves as a leader in consolidation in the Eagle Ford shale. We are targeting approximately $10 million per quarter of highly accretive organic acquisitions and achieved that in the first quarter, as I described on last quarter's call. We have and will remain extremely disciplined in our organic acquisition effort and expect transactions to be accretive to net asset value per share, as well as cash flow per share.
We will also continue to focus our organic acquisition in our core-operating area, as we believe owning in the core of the core of a top oil play driven by top operators provides substantial returns with extremely low risk. We carry the same philosophy to pursuing and considering strategic acquisitions. We believe that today, we have highly valuable assets that will produce significant cash flow and thus do not need to make any acquisitions. This puts us in a very good position as a purchaser since we can choose what we want to acquire and maintain discipline in doing so.
If we were to make a strategic acquisition, I would expect it to be in the core of the core of the top oil-weighted play, likely in the Eagle Ford or Permian, driven by top operators with a clear line of sight on growth. Furthermore, I would expect any acquisition to add meaningful value to our shareholders in the short, medium and long term. We, at Falcon, do see a significant opportunity to be one of the leading consolidators of minerals in these top basins through strategic acquisitions. In conclusion, I'm very pleased with how Falcon Minerals is performing and is positioned to benefit from the accelerated development and commitment of ConocoPhillips, EOG and BP/Devon, which should drive our future growth.I will now hand the call over to Jeff Brotman to cover our financial results.
Jeff?
Jeffrey Brotman -- Chief Financial Officer
Thank you, Daniel. Falcon's first-quarter 2019 adjusted EBITDA was $16.9 million, which was up 4% from the first quarter of 2018. Our GAAP net income was $11.3 million or $0.12 per Class A common share. Falcon ended the first quarter with working capital of $15.6 million and liquidity of $89.6 million, consisting of $86.5 million available on our line of credit and our cash balance of $3.1 million.
As we have mentioned on our fourth-quarter earnings call in late February, Falcon completed two acquisitions during the quarter at a total cost of $9.7 million utilizing available cash and our line of credit. As Daniel noted, our line of credit today is approximately $10 million less than it was when we completed the business combination in August 2018, and in addition to the distributions we've made, we've acquired over $10 million of acquisitions through our liquidity. Our G&A expenses for the first quarter were $2.5 million. This includes between $500,000 and $600,000 of accounting, legal, reserve report and other expenses related to our year-end audit and 10-K preparation that will not be replicated in the remaining three quarters of 2019.
Our board of directors declared our first-quarter dividend of $0.175 per share yesterday. This dividend will be paid on May 29 to shareholders of record as of May 17. With these comments complete, I'll now turn the call back to Daniel.
Daniel Herz -- President and Chief Executive Officer
Thanks, Jeff. Aaron, let's open the call up for questions.
Questions & Answers:
Operator
[Operator instructions] Our first question is coming from Jeff Gramp with Northland Capital Markets.Your line is open.
Jeff Gramp -- Northland Capital Markets -- Analyst
Good morning Daniel. Thanks for the time.
Daniel Herz -- President and Chief Executive Officer
Morning Jeff. Nice to speak to you.
Jeff Gramp -- Northland Capital Markets -- Analyst
Yes, likewise. I'm curious, Daniel. I guess maybe helping us kind of understand or rationalize how you think about the next couple of quarters? I guess on one end, we see your rig count doubled on your assets over the last few months. But based on guidance, your production will be kind of flattish, maybe a little bit down next couple of quarters.
Is that just a function of having that abnormally low NRI on 1Q wells? Or there are some other, I guess, factors that play timing related or otherwise that are kind of impacting the next quarter or two relative to the longer-term line of sight, which looks pretty good?
Daniel Herz -- President and Chief Executive Officer
Yes. I think you've described this well. We have a -- I think a very strong line of sight and visibility over really now the next year-plus, but certainly, the next six months with our 150 line-of-sight wells, what those wells are, what the NRI is. And that should drive meaningful growth in our production as we head through this year.
With that said, there is a timing delay relative to those higher or more normalized NRI wells coming online, followed by higher NRI wells coming online, as I mentioned, late in the third quarter followed in all likelihood by Hooks Ranch wells coming online in production later this year. So from my perspective, we have -- are in a position to grow meaningfully as we head into the later part of this year.
Jeff Gramp -- Northland Capital Markets -- Analyst
OK. Great. Great, really helpful. And for my follow up, you guys recently added an ex-ConocoPhillips executive to your Board.
I'm wondering if you can touch a bit on his selection and maybe what you like about what he brings to the Board and to what you guys are doing at Falcon?
Daniel Herz -- President and Chief Executive Officer
Thanks, Jeff. We are super excited to have Al Hirshberg join the Board of Falcon. As Jeff mentioned, Al has a nice history in senior management at ConocoPhillips. As I think I'd said before, we consider Conoco, BP/Devon, EOG our producers as partners.
We maintain strong dialogue with our partners, all of our partners or we certainly like to. Having Al join the board, we think his experience, both at Conoco and certainly at Conoco but also for years before that, in the energy space will help provide a great insight in the Eagle Ford shale and in all likelihood, beyond the Eagle Ford shale as well. And I would say Al is all around a good person.
Operator
And our next question comes from Betty Jiang with Credit Suisse.
Betty Jiang -- Credit Suisse -- Analyst
I was wondering given the growth, projecting growth from Hooks Ranch starting in 4Q '19, what do we need to see from the permit timing perspective for you to get comfort on that? I know we only have one permit today, but how many more is expected and roughly timing on that?
Daniel Herz -- President and Chief Executive Officer
A very good question. Good morning, Betty, nice to speak to you. So I want to be careful in not getting ahead of our partners at Conoco and in their activity. We have seen 25 wells recently by Conoco, more than 25 wells that are under 60 days from permit to spud.
And as I think I mentioned on the last call and I think their first permit indicates -- we as a mineral owner have regular discussions, and it's appropriate to have regular discussions with the producers related to their development. So without getting ahead of what Conoco's doing and what Conoco's going to be permitting, I would simply say stay tuned. We remain -- yes, we certainly are excited by the filing Friday, and it's consistent with what we've described, I think, to you all and certainly, we expect more to come. And so I simply ask you to stay tuned over the near term and reiterate that we see impact later this year.
Betty Jiang -- Credit Suisse -- Analyst
Hoping that these filings are going to concerning -- on the website. Can -- and then maybe if we can talk about the 20% to 30% growth trajectory for 2020. Perhaps how much of that is driven by your confidence level at Hooks Ranch growth? And how much of it is organic growth elsewhere in the portfolio as you have related to the 10 rigs that's currently running on the asset?
Daniel Herz -- President and Chief Executive Officer
Sure. We -- I think we've tried to take a measured approach with our forecasting. I wouldn't even -- yes, I would say that we look at probably last 12 months average rig activity across our position, use that number not -- yes, what could be the most recent number but a more moderate number, we assume simply our average NRI. Sometimes, we'll have more.
Sometimes, we'll have less. And then we layer on top of that our known development or what we know to be coming from a specific number of wells and a specific NRI of those wells, which certainly, we have 150. We also have strong visibility on Hooks Ranch. And so I think when we put that all together, that's where we generate the 20% to 30% growth in 2020 as compared to 2019.
Betty Jiang -- Credit Suisse -- Analyst
That's helpful. And then one last one for me. Of the 150 line-of-sight wells, could you give a sense of what percentage of that is from -- drove by completed backlog that will be more impactful for near-term production? Or is there a DUC versus permit split?
Daniel Herz -- President and Chief Executive Officer
Yes. So I have a -- yes, I have the numbers in front of me. We have not historically given that granularity, as you know. I would tell you we've seen -- and I'll be -- I'll continue to be a bit vague here.
We've seen a continued increase, steady increase in permitting activity. We've seen that in increasing in wells drilled to total depth waiting on completion. And yes, we've seen at the same time a nice -- in the second quarter a nice level of activity of conversion of DUCs to PDP. So all of it's working quite well together, which leads us to the confidence in the guidance that we've given in the range of the 5,100 to 5,600 boe per day.
I know that's not as specific as you would like, but that's a -- that's the level of comfort I -- that we're able to provide, Betty.
Operator
And our next question comes from Tim Howard with Stifel. You may proceed.
Tim Howard -- Stifel Financial Corp. -- Analyst
thanks for taking the question. I was wondering if you could speak to the first pad at Hooks Ranch that was completed. I know it's kind of before you on the asset, but anything to view there from the first permit to when that was flowing? I know you kind of using that timeline to apply it to the fourth Q -- quarter expectation for the said pad. And I'm also trying to figure out the timing of these pads? It seems like that would be about 15 to 16 months in between.
Is that kind of how we should be thinking about future pads coming online?
Daniel Herz -- President and Chief Executive Officer
Really good questions, Tim. Nice to speak to you. So we follow on a weekly basis. The -- I mean all amounts of data that we can gather, and we use, I would say, relatively sophisticated data analytics.
And then we follow average time by operator from permit to spud, from spud to total depth and from total depth to completion and then completion to turned in-line, so that we have number of days on average on a rolling 12-month period for each operator to be able to statistically analyze what timing should be as far as drilled to production -- or permit to production, I should say. With respect to Hooks, the initial -- so the initial or the pad that came online in March of last year, the six-well pad, they -- that did take longer as there were, I would say, timing issues in building that pad with the landowner. And so that timing was about, call it, 365 days. Given the configuration and the plans, as I think have begun to be put forward publicly, we would not anticipate those issues because as we would see it, there is an existing pad so there isn't the timing of trying to come to an agreement on building a new location.
Furthermore, because one's not building a new location that, of course, impacts timing as far as spudding and drilling and completing a well, all of that is very good. I'd say further to your point about having not owned the well at the time, we have done our part to build our relationships, as I mentioned, with our various partners. And hopefully, that's true with our shareholders, our banks or -- but also our producers where we do have regular, and I say regular, it could be daily, could be weekly, might be a little less, but regular dialogue with our producers to have insight and visibility on the activity. And that's really a mutual benefit.
It's not just a benefit to us but also a benefit as producers do at times need waivers agreements to cross-unit boundaries, etc. And having those relationships are mutually beneficial, and one of the benefits we have is visibility of timing of development. I hope that's helpful, Tim.
Tim Howard -- Stifel Financial Corp. -- Analyst
That absolutely is. And then just one quick on just kind of the financial side. It seems like the payout ratio was a little high than the 90% this quarter. Is there any thoughts on kind of how we're measuring that going forward?
Daniel Herz -- President and Chief Executive Officer
Yes. So want just to be clear what we've -- and I know there's some question exactly what our payout ratio will be, but what we've said consistently is that we will pay greater than 90% as a payout ratio. This quarter, Jeff, was 98%?
Jeff Brotman -- Chief Financial Officer
Yes. That's right.
Daniel Herz -- President and Chief Executive Officer
And so that's as we think about it in the band of greater than 90%. So I would expect it to continue. And if one -- if I were modeling it, for ease of modeling, I might say 95%, but I just assume it's going to be 90% and 100%.
Tim Howard -- Stifel Financial Corp. -- Analyst
Sounds great. Thank you so much.
Daniel Herz -- President and Chief Executive Officer
Thanks, Tim.
Operator
And our next question comes from TJ Schultz with RBC Capital. Your line is open.
TJ Schultz -- RBC Capital Markets -- Analyst
Hey, good morning. I just first wanted to get a little bit more color on the Hooks Ranch offset that you described. Was there anything different than what you expected on the plan there or in the permit? Or is it really kind of what you expected on Hooks Ranch in your NRI there and just a longer lateral is potential upside to you all given the above-average NRI in the offset?
Daniel Herz -- President and Chief Executive Officer
So the initial permit for the wells that we expect is absolutely consistent with what we expected, and I think what I alluded to on the last earnings call. So everything is progressing exactly as we had expected and planned, and -- number one. Number two, to your point about the longer lateral, and we did not describe this or I think described it specifically. But if you go back and look closely at my remarks from last quarter, maybe you can imply, but we do have in that offsetting unit where we'll have that longer lateral, we will have a high NRI as compared to our average 1.35%.
So it's to your point, that's very much upside to the average 1.35%. It goes back to Betty's question about modeling forecasted growth and what we embed in that forecast. So from our perspective, this is all as planned but all we think very, very good stuff and bodes very well for -- as we move through 2019 and into 2020. And again, coupling that with Conoco's general commentary of growing approximately 20% year over year, really all second-half driven.
And then BP is moving to four rigs as compared to historical two rigs. All of this is, I think, setting up extremely well for us. And that doesn't embed what we think is a huge opportunity on the acquisition side as we really build this business and I think transform it over time.
TJ Schultz -- RBC Capital Markets -- Analyst
OK. Great. That's helpful. And maybe just to that last point, kind of bigger picture question.
So we saw another mineral company go public recently. Just curious on your view on how the public mineral asset class is kind of developing more from the perspective of the competitive landscape. When you think about M&A and think about the privates that need to exit, any change to how you are thinking about their willingness to sell into the existing public mineral companies as consolidators versus their appetite to go the IPO route? Just anything there.
Daniel Herz -- President and Chief Executive Officer
It's extremely exciting. We welcome Brigham, great management team and so it's very, very good. And I really -- I started 20 years ago focused on the MLP space when the entire public sector was sub-$5 billion. And if you look at the C-Corp MLP space in the float, it's of similar size today.
And we all know that there's $500 billion, maybe $590 billion of minerals that are available in the United States. So yes, that is a very small portion that's in the public hands. Let's just say, it's 11 billion including Blackstone Minerals, which is an MLP. So that's 2% roughly of minerals that are in public hands.
There is a huge opportunity for consolidation from privately owned to publicly owned. And frankly, I think you'll see many more mineral companies come public because there's such a great opportunity and such value in owning minerals. Today, it's -- I mean the fact that there's like four or five of us is just such a small group. There's just a huge opportunity for each one of us to do big things.
And if you look at each, one of us were all different. A few of us might be more similar, but if you look at for us, when we're focused on the core of the core of a top oil-weighted basin, that's the Eagle Ford and the Permian as I see it. We're competing with a few other people, and there's billions and billions of dollars of minerals that are owned by private equity firms that will need to be divested. There's billions and billions of dollars in those areas, which are owned by private mineral owners, which are and will be sold.
So the depth of the market is so great. Having more public companies shot -- shed a light on this space. And yes, to me, it just creates a greater and greater opportunity. And I think as we execute and our peers to execute on our growth, the public investors, more public investors will come into this space, which will further drive our valuation.
And the multiple we trade at and inversely can reduce our yield because we have a business that throws off a ton of cash flow and extremely high margins that requires zero capex. And so it's just a fantastic business and business model, and having more attention on the space is very good and the amount of acquisitions. It's not that it's unlimited, but it's an unbelievable amount relative to how few buyers there are. Thanks for allowing -- indulging me, TJ.
TJ Schultz -- RBC Capital Markets -- Analyst
Oh, great. i appreciate the time. Thanks for that. Thanks for the color there.
Operator
And we will take our next question from Jeffrey Campbell with Tuohy Brothers.
Jeffrey Campbell -- Tuohy Brothers -- Analyst
I just wanted to first just try to get a little color on the low NRI stuff. I'm just wondering did this represent the impact of a majority of production from a specific operator? Or it represents a specific acreage area that just happen to have lower interest?
Daniel Herz -- President and Chief Executive Officer
Yes. So sometimes, you end up having lower NRIs. This isn't a -- this is not a specific operator. It's not a specific area.
It just happen to be a period where we had lower NRIs hit.Now I want to just clarify for those who maybe a little bit newer to the space. The NRIs across our position from the producer's perspectives are about the same. It just is our portion ownership in those units and it just so happened that we had a period where we had lower NRIs. Most importantly, going forward, we have clear line of sight on our NRIs reverting back to our average of around 1.35%.
So we're set up to end up in a very good position. And really, as you move further into the year, we have visibility on high NRI locations being developed. And then, of course, there's Hooks Ranch, which is our highest NRI position at 22.5%.
Jeffrey Campbell -- Tuohy Brothers -- Analyst
OK. Thank you. I was just curious, the earlier Hooks Ranch wells, did they utilize Conoco's newest completion vintage that we're hearing all about now? And if not, has it indicated that Hooks Ranch is a candidate for their completion scheme?
Daniel Herz -- President and Chief Executive Officer
Sure. So they utilized the Vintage 4 completion design on last year's Hooks -- six Hooks Ranch wells. That Vintage 4 is a very -- and has been a very favorable completion design. They -- in fact, those six wells have been in the top 10% in cumulative production of any Conoco wells drilled in the Eagle Ford shale.
So this is core of the core Conoco, and it's highly undeveloped, highly conducive to manufacturing and highly conducive as you were seeing from this permit to long laterals, all very, very good for us. As far as their Vintage 5 completion design, their Vintage 5 completion design is focused on maximizing total resource recovery, which effectively means not necessarily driving higher initial rates of production but driving higher ultimate recoveries. And so from our perspective, of course, that's very good, but I think we also have the benefit, and Conoco's talked about this about enhanced oil recovery like EOG and refracking like Devon/BP. We, as mineral owners, are likely to see a lot more production for decades to come through these secondary and tertiary recovery efforts.
So Vintage 5, yes, could be great, should be great, but I think we're set up very well whether it's Vintage 4 or Vintage 5.
Jeffrey Campbell -- Tuohy Brothers -- Analyst
OK. That's a great color. We continue to talk a lot in theory about acquisitions, and I wanted to just ask you. At this time, is it your intention to finance a significant acquisition primarily or entirely with equity? It seems to us that you're keeping debt levels really low.
Is it important offset to the understood limitations to production forecasting?
Daniel Herz -- President and Chief Executive Officer
My expectation is if we were to do a strategic transaction, it would add significant value immediately and over the long term would be of an asset of the quality that we have. And we would maintain a pristine balance sheet to do that. And if we can't find the deal like that, then we'll sit here and benefit from the great asset base and growing production that we have. But I think there is a very real chance that we can find great assets that add significant value on a per-share basis to our shareholders.
Jeffrey Campbell -- Tuohy Brothers -- Analyst
OK. And the last quick one. I was just wondering if you have any observation about BP giving its fourth rig to Devon to operate? The Eagle Ford drilling is new for Devon, but their track record in other basins is quite strong.
Daniel Herz -- President and Chief Executive Officer
Yes. I think it's fantastic. I mean it's -- Devon is a world-class developer of shale originally by way of their Mitchell Energy acquisition. So I don't think you could have a better person than Devon developing alongside BP who has a long history of being a great developer in the Eagle Ford.
So bringing those two companies together with their ability to develop across our position and do it at a multiple of 2x what was historically developed and adding in Austin Chalk development and the refracking, I think it just couldn't be better. It certainly is a lot better than we had been assuming when we completed our combination in August of 2018. And I think -- someone said to me, time takes time, and we have -- we're going to see that time evaporate as we move through the coming months. And all of the benefit that we're talking about come to the forefront by way of production growth and significant production growth and cash flow growth.
Operator
[Operator instructions] Our next question comes from Lin Shen with Hite.
Lin Shen -- HITE Hedge Asset Management -- Analyst
I just want to ask for your second quarter and the third quarter assumption, what -- or the guidance, what are the assumption for your average NRI for second quarter, third quarter?
Daniel Herz -- President and Chief Executive Officer
A very good question. You should assume that we're building back in the second quarter and ultimately getting to late in the third quarter, our average 1.35%. So I would expect not to be quite -- not to be all the way back to 1.35%, but between where we were and 1.35% in the second quarter, building in the third quarter ultimately by the end of the third quarter back at the 1.35% level.
Lin Shen -- HITE Hedge Asset Management -- Analyst
Great. And then you mentioned that we should see the trough of the production. Should we think about the timing of the trough should be Q -- second quarter, so that is third quarter, probably better second quarter? Or when do you think the trough, the timing?
Daniel Herz -- President and Chief Executive Officer
Very fair question, Lin. Yes, I would look at trough in the second quarter, I would.
Operator
And this does conclude the Q&A session. I'd like to turn the floor back over to Daniel Herz for any additional or closing remarks.
Daniel Herz -- President and Chief Executive Officer
Right. Again, thank you, all for joining our first-quarter earnings call. We appreciate the focus, and we look forward to speaking to you all again very soon.
Operator
[Operator signoff]
Duration: 50 minutes
Call participants:
Brian Begley -- Vice President of Investor Relations
Daniel Herz -- President and Chief Executive Officer
Jeffrey Brotman -- Chief Financial Officer
Jeff Gramp -- Northland Capital Markets -- Analyst
Betty Jiang -- Credit Suisse -- Analyst
Tim Howard -- Stifel Financial Corp. -- Analyst
Jeff Brotman -- Chief Financial Officer
TJ Schultz -- RBC Capital Markets -- Analyst
Jeffrey Campbell -- Tuohy Brothers -- Analyst
Lin Shen -- HITE Hedge Asset Management -- Analyst
