Falcon Minerals Corporation (FLMN) Q1 2020 Earnings Call Transcript

Falcon Minerals Corporation (FLMN)
Q1 2020 Earnings Call
May 08, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, and thank you all for joining this Falcon Minerals first-quarter 2020 earnings call. [Operator instructions] To get us started with opening remarks and introductions, I am pleased to turn the floor over to Falcon's CFO, Mr. Bryan Gunderson. Welcome, Bryan.

Bryan Gunderson -- Chief Financial Officer

Good morning, everyone, and thank you for joining today's call to discuss Falcon's first quarter 2020 results. Before we begin, I would like to remind everyone that during this call, we will make certain forward-looking statements. Forward-looking statements often address our expected future business, 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 discuss these risks in the quarterly report on Form 10-Q and our annual report on Form 10-K. I would also like to caution you not to place undue reliance on these forward-looking statements, which reflect management's analysis only as the date hereof. The company undertakes no obligation 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 reconciliation to the non-GAAP measures we referred to in our public disclosures such as adjusted EBITDA and pro forma free cash flow.

Lastly, the company will be attending several virtual investor conferences in the coming weeks, including the RBC Capital Markets Global Energy and Power Virtual Conference; the Stifel 2020 Cross Sector Insight Conference; and the JPMorgan 2020 Energy, Power and Renewables Conference. With that, I'll turn the call over to Falcon's president and chief executive officer, Daniel Herz, for his remarks. Daniel?

Daniel Herz -- President and Chief Executive Officer

Thanks, Bryan. Welcome, everyone, and thank you for joining the Falcon Minerals Corporation first-quarter 2020 earnings call. I hope you're all doing well. Bryan Gunderson, who you just heard from, our chief financial officer, will give the financial report following my remarks.

And we will then take questions. I would like to begin today's call by offering our best wishes to all who are impacted by the COVID-19 pandemic. And we are especially grateful for all of the frontline workers battling this disease. Their heroic work, along with the work of so many others to fight this pandemic and keep America going, inspires us all.

And hopefully, we will soon return to a more normal life. Next, I would like to acknowledge and thank all of my colleagues at Falcon, several of whom have been displaced, for their continuous work and dedication to the success of the business. Even more importantly, I would like to thank this group for their inspiring dedication to supporting their communities during these challenging times. This group has raised tens of thousands of dollars and helped directly and, among other things, helping those in need of food.

I hope everyone who's listening to today's call continues to do whatever you can to help one another. We all must do our part in this challenging period. Now on to business. As we all know, the energy industry is facing significant challenges in what some are calling a Double Black Swan event.

We can spend hours or even days debating the timing of the recovery and the shape, whether it will be a V, U or Nike swoosh or whatever. I believe Plato's quote, "Excess generally causes reaction and produces a change in the opposite direction, whether it be in the seasons or in individuals or in governments," properly characterizes our markets and where we are ultimately headed. While Falcon Minerals is not immune to the current environment, I believe we are particularly well positioned to first weather the storm and then to deliver outsized value to our shareholders. The fact is, we at Falcon Minerals have what most companies during this period envy: one, we have a solid balance sheet; two, we generate substantial free cash flow; three, we have zero capital expenditures; four, we have significant future growth potential that is entirely organic without having to spend a dollar; and five, we have world-class operators, spending the capital that will grow our free cash flow over the medium and long term, and we will deliver that cash flow back to our shareholders.

Now the first quarter of 2020 provides a good indication of the potential that Falcon Minerals has and will have when we get to the other side of this period. During the first quarter, we produced approximately 5,152 barrels of oil equivalent per day or BOE per day, of which 54% was oil. That was an increase of 28% over the fourth quarter of 2019. The first quarter benefited from the connection of four Hooks Ranch wells on February 7.

Importantly to note, it took a few weeks for those wells to clean up as is typical, and we saw Falcon's production rise to over 5,500 barrels of oil equivalent per day in March. Furthermore, the Hooks wells continued to produce at or near the March levels in April. As a reminder, we [Audio gap] present net revenue interest across the Hooks Ranch, which remains over 75% undeveloped, is operated by Conocophillips and is among their best-performing acreage. This production drove free cash flow of $9.4 million or $0.11 per share for the first quarter, which would imply an approximate 20% annualized free cash flow yield based on the current share price.

I point this out again in the context of the earning potential of Falcon Minerals. Given the uncertainty of the energy markets, and our desire to maintain a strong balance sheet through this period, the board decided to reduce the payout ratio this quarter to 23% and pay a dividend of $0.025. Our view is that moving through this period with balance sheet strength is essential and will allow us to thrive and get back to substantial cash payout levels in the future. Now let's talk about the future and our expectations.

ConocoPhillips and EOG have announced that they will be voluntarily curtailing and deferring production in the U.S. as they do not want to sell their oil at depressed levels. We view this as favorable to our value proposition and are well aligned with both ConocoPhillips and EOG. ConocoPhillips further announced that they plan to continue to run four rigs in the Eagle Ford, which will represent greater than 50% of Conoco's total rigs running in the Lower 48.

EOG continues to highlight the economics of the Eagle Ford Shale position, a very good Eagle Ford shale position, calling it its bellwether asset. More specifically, EOG plans to continue to run three rigs and three frac crews and turn in line approximately 118 wells throughout the remainder of 2020. Conoco and EOG's continued commitment to run four and three rigs, respectively, in the Eagle Ford, turn wells in line and build DUCs should support future growth beyond even our current robust line-of-sight wells. Devon Energy, BP's joint venture partner, has secured substantially all of its sales in the Eagle Ford for May and June.

As RS Energy noted in an Eagle Ford Shale piece earlier this week, the approximately 250,000 gross unit acres in which we own minerals is one of the most economically attractive areas in the U.S. And specifically, Conoco and EOG have highly attractive undeveloped locations even at low oil prices in the Eagle Ford as well as EOG having additional attractive undeveloped locations in the Austin Chalk. Continuing on with our expectations over the short term. On March 12, almost two months ago, we implemented aggressive G&A reductions to manage through what we thought would be a difficult period.

Those G&A reductions started with my election to reduce my cash compensation for 2020 by approximately 50% and the Board reducing its cash compensation. We believe it is vital that in this uncertain time that leadership is the first to make meaningful cuts in order to reduce cash costs. In total, we now estimate a reduction in G&A for 2020 of approximately 20%, as compared to full year 2019. Falcon is going to benefit over time from having the largest, best capitalized and well-run operators prosecuting their multiyear development plans across our position.

This challenging period will demonstrate Falcon's strength. We are currently benefiting from our producers' strength as they curtail production and preserve our reserves for a better commodity price environment. That should provide even greater value to all of our shareholders over time. When we emerge from the current oil market challenges, and we will emerge, Falcon is positioned better than ever.

We currently have 2.41 net line-of-sight wells, of which 1.71 are DUCs or waiting to be connected. And as I noted earlier, this number will continue to rise as ConocoPhillips continues to build DUCs in the Eagle Ford and across our position. To date, in total, we estimate that our operators have already invested over $300 million across our position in these wells. Additionally, we will benefit from the volumes that are curtailed when they come back online.

Furthermore, as I mentioned earlier, we still have over 75% of our Hooks Ranch yet to be developed. We are encouraged about the potential for higher natural gas prices as about 30% of our production is natural gas. Additionally, as a reminder, we own mineral interests covering about 75,000 gross unit acres in the core of the Marcellus Shale or approximately 1,530 net royalty acres, which implies an approximate 2% net revenue interest. This offers further potential upside to Falcon moving forward.

Now let me summarize the medium- and long-term value proposition of Falcon Minerals. And this is important. When we forecast our business, even in downside scenarios, over the next five years at current strip pricing, including current market conditions, only turning in line line-of-sight wells through the end of 2021; and then in 2022, returning to historical average barrels turned online; and only two four-well Hooks Ranch pads brought online during that five-year period, we still generate free cash flow in that downside scenario that equates to approximately our current share price. And we will still at that point have over 75% of Hooks Ranch undeveloped as well as years of additional inventory.

Furthermore, in that downside scenario, our net asset value is multiples of our current share price. I believe this is an unmatched value proposition in the mineral space. In conclusion, Falcon Minerals is well-positioned to withstand this type of energy environment and then thrive. We have a solid balance sheet, free cash flow, zero capital expenditures, future growth with no capital spending and world-class operators developing the position, driving free cash flow back to you, our shareholders.

That is Falcon. I will now turn the call over to Bryan to give the financial report. Bryan?

Bryan Gunderson -- Chief Financial Officer

Thanks, Daniel. Production for the first quarter was 5,152 BOE per day. Falcon's oil volumes were 54% of total production and 60% of total Eagle Ford volumes for the period. Our assets generated $13.6 million in royalty revenue during the period.

Of that $13.6 million in revenue, Falcon will return approximately $2.1 million back to its shareholders through the form of a quarterly dividend, inclusive of the amounts paid to the noncontrolling interest. Falcon's net realized price for oil during the first quarter was $43.10 per barrel. Average realized price for natural gas was $1.94 per Mcf. So our NGL realizations averaged $14.05 per barrel.

Total cash operating costs were $3.6 million. Looking at the component pieces. Ad valorem and production taxes were approximately $0.8 million for the quarter. This reflects $0.5 million decrease compared to the prior quarter, which is due to lower production taxes as a result of lower realized prices.

Marketing and transportation expense was $0.4 million for the quarter. Cash G&A expense was approximately $2.3 million for the first quarter. Cash G&A declined compared to the fourth quarter 2019 and does not reflect the full benefit of the cost-cutting measures adopted on March 12, 2020. Cash G&A excludes approximately $0.7 million of noncash stock compensation expense recognized in period.

Adjusted EBITDA for the first quarter was $10.1 million, up 13% from $8.9 million reported in the fourth quarter of 2019. Falcon's first quarter GAAP net income was $2.2 million on a stand-alone basis and $4.5 million, including noncontrolling interests. GAAP income tax expense was $0.4 million for the quarter, which consists entirely of deferred income tax expense related to the amortization of our deferred tax asset on the balance sheet. Falcon's effective tax rate, which consists entirely of deferred income tax expense mentioned previously, was approximately 9% for the first quarter versus a federal income tax rate of 21%.

The company incurred no amounts related to the current period income tax expense, and therefore, incurred no cash income taxes in the first quarter 2020. This is primarily due to the tax benefit of the basis step-up related to our assets that Falcon acquired as part of the transaction with Royal Resources in 2018. In addition, due to the stepped-up basis in our assets, we expect to benefit from a cash income tax perspective for the foreseeable future. At the end of the first quarter, Falcon had $45.3 million outstanding on its revolving credit facility and $2.2 million of cash on hand, resulting in a net debt of approximately $43.1 million at the end of the first quarter.

Falcon's net debt-to-LTM EBITDA ratio at the end of the first quarter was 0.95x. Effective May 1, 2020, in connection with the company's spring redetermination, the borrowing base decreased from $90 million to $70 million. Yesterday, Falcon declared a first quarter dividend of $0.025 per share. The dividend will be paid on June 8, 2020, for shareholders of record on May 25, 2020.

As I mentioned on the fourth quarter call, 80% of the dividends paid to Class A shareholders during 2019 were classified as non-dividend distributions, and therefore, represent a reduction of basis rather than ordinary income. Non-dividend distributions are treated as a reduction of basis until such time that the investors basis is fully recovered. Falcon generates non-dividend distributions due to the company's high payout ratio coupled with the step-up in the tax basis of Falcon's mineral interest that was received as part of the transaction with Royal Resources in 2018. Falcon expects that greater than 50% of the dividends paid to Class A shareholders during 2020 will be classified as non-dividend distributions in 2020.

Again, Falcon expects that more than half of our distributions made during 2020 will not be comprised of taxable dividend income. And instead, it will generally result in a nontaxable reduction to the tax basis of shareholders' common shares. The reduced tax basis will potentially increase the shareholders' capital gain or decrease the shareholders' capital loss when the shareholders sell their common shares. As Daniel mentioned, $0.025 dividend payment reflects a payout ratio of 23% of pro forma free cash flow.

Pro forma free cash flow per share was approximately $0.11 per share for the period. We define pro forma free cash flow as adjusted EBITDA inclusive of noncontrolling interests less interest expense and pro forma cash income taxes. Our estimate of pro forma free cash flow for the first quarter 2020 did not include an amount for pro forma cash income taxes. Falcon did not have taxable income for the first quarter due to a decrease in average realized prices and as mentioned previously, utilization of the tax benefit from a stepped-up asset basis resulting from the Royal transaction in 2018.

Given ongoing uncertainty, continued market volatility and expected production curtailments over the coming months, Falcon's original 2020 guidance should not be relied upon. Further guidance has been temporarily suspended. During this suspension, the company may provide periodic updates as appropriate. As noted in our press release, Falcon is updating the company's full year 2020 cash G&A guidance to $7.25 million to $7.75 million, which reflects approximately 20% reduction from cash G&A for the full year 2019.

With that, I will now turn the call back over to Daniel. Daniel?

Daniel Herz -- President and Chief Executive Officer

Thanks, Bryan. Jim, why don't we open the call up for questions?

Questions & Answers:

Operator

[Operator instructions] Gentleman, we'll hear first from Brian Downey with Citigroup.

Brian Downey -- Citi -- Analyst

Good morning gentlemen. I hope you're well. I wanted to start with a question digging in on the dividend payout policy. So retaining cash flow makes sense in the current uncertain commodity price environment.

But I'm curious how either you or the Board is thinking about approaching that payout ratio going forward. Is there a particular stress case leverage ratio or absolute net debt you're targeting or anything above and beyond the balance sheet before getting back to a higher payout ratio at some point?

Daniel Herz -- President and Chief Executive Officer

Yes. Thanks, Brian. I hope you're doing well as well. So the company was built to pay out substantially all of our free cash flow, and that's what we intend to do over time.

I expect that we'll be back to doing that when we see the economic and energy market return to a more stable environment. We're pleased that we're fortunate to have a solid balance sheet under one time levered. And so it really is simply about getting back to a more stable economic and energy environment. And then I would expect that we'll see our payout ratio return to its traditional level of 90% plus.

Brian Downey -- Citi -- Analyst

Got it. That's helpful. And then as you mentioned in the prepared remarks, a good portion of your current line-of-sight development is currently in the waiting-on-completion bucket. As you try to dimension operator plans, any sense for the completion pace there? Or what commodity price or macro environment conditions do you think operators will need to lead to a more pronounced level of completions there?

Daniel Herz -- President and Chief Executive Officer

Yes. I like that question. We spend, of course, a lot of time thinking about that as a team internally and really dissecting what operators are saying publicly, what they're saying to us. And we're in, we think, a very good position in the core of the Eagle Ford, in the Karnes trough.

RS Energy, I mentioned this in my remarks, put out a nice piece earlier this week that ConocoPhillips and EOG's position, which really covers our 250,000 gross unit acres, has some of the most economic locations in the U.S. And so we expect to see completions and wells coming online in the second half of this year and into 2021. We run conservative cases, of course. But I think the best indication is really looking to EOG's commentary that they anticipate 118 additional wells coming online in the Eagle Ford from this point forward in the year.

I think that's a reasonable guide as to what others may do. But the reason we pulled our guidance really is a function of wanting to be conservative and not put forward aggressive guidance given the uncertainty in the marketplace today. But I guess, Brian, I would say being aligned with Conoco and EOG and BP-Devon in the core of the Eagle Ford is exactly where I want to be. And not having our resources and our reserves wasted at low commodity prices, that's -- we think that puts us in a uniquely strong position and will really benefit our shareholders meaningfully over time.

Thank you for your question, Brian.

Operator

[Operator instructions] Well, next, we'll hear from Derrick Whitfield at Stifel.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Good morning.

Daniel Herz -- President and Chief Executive Officer

Good morning Derrick.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Perhaps for Daniel, you referenced Conoco curtailments in your prepared remarks regarding Q2 production. What's your sense on if these curtailments impacted your production? And more broadly, are you aware of any material curtailments of production at present? And I certainly ask this question, understanding the challenge associated with forward guidance in this environment.

Daniel Herz -- President and Chief Executive Officer

Sure. Thanks, Derrick. And so number one, I guess, we're pleased, as I mentioned, that March, we had volumes average in excess of 5,500 BOE per day. We're entering this period in a relatively strong position with both existing volumes, as well as significant line of sight and DUCs.

We have not seen any curtailments across our position to date. And as I also mentioned, Hooks Ranch, we saw at a flat level to more than nearly flat level to March, which we view as very favorable for Hooks Ranch production as well as creating a solid base for the second quarter.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Great. And as my follow-up, while M&A is likely of secondary importance in the current environment, I wanted to ask if you could share your views on the M&A environment in both deal flow and seller expectations as M&A could present a near- to medium-term opportunity for your business?

Daniel Herz -- President and Chief Executive Officer

Sure. And as you know, Derrick, that's a subject I enjoy talking about and addressing. So there has been billions of dollars invested, as you know, by private equity firms in putting together positions in minerals companies and building minerals companies, and those businesses will need an exit over time. And so we see, potentially over the medium term and probably less likely the short-term, activity ramping back up.

From our perspective though, one, the seller's expectations remain robust, and rightfully so. This is an asset class that's highly valuable, where if it's in the best areas, there will be activity over time. There will be production over time and likely growth over time. And so sellers' expectations will remain, I think, relatively high and they'll be patient.

From Falcon's perspective specifically, we look at our business. And I really tried to very clearly lay out how when we run our downside case that we see free cash flow that's equal to our current share price over the next five years at current strip pricing. And so when we think of acquisitions, it has to be fantastic. We have a great asset base that's going to generate a ton of cash flow.

Our net asset value is multiples of where we trade. And so for us to do anything, it can't just be accretive to the dividend or the free cash flow. Anybody can buy in this business accretive free cash flow asset given the decline profile. What we buy has to be intrinsically accretive across all metrics, starting with net asset value per share, the quality of the asset to operators as well as free cash flow.

So when we think about our business, we think about the value that we have. And anything over time that we would do would have to add meaningfully to what we have.

Operator

Jeff Grampp with Northland. Your line is open.

Jeff Grampp -- Northland Capital Markets -- Analyst

Good morning guys.

Daniel Herz -- President and Chief Executive Officer

Good morning Jeff.

Jeff Grampp -- Northland Capital Markets -- Analyst

Was curious Daniel, appreciate you bringing up the Marcellus gas exposure that you guys have. Are you seeing any prospects of development on that in 2020? And maybe a related topic is that a potential acquisition market for you guys, do you spend any time up there? Or is it predominantly equal for any acquisition development that you might pursue?

Daniel Herz -- President and Chief Executive Officer

Yes. So we actually have rigs running on our position by the operators that you would expect, the biggest and the best. We expect a number of wells online late this year. And I bring it up as real upside if gas prices move higher.

But yes, we have activity on our position. Currently, we've steadily seen activity. As far as acquiring additional minerals up there, we have a fantastic land team, very small. As a reminder, we only have 10 full-time employees.

But they have actively and they've been very active in the market for years in Appalachia, and it's a market we keep very close tabs on.

Jeff Grampp -- Northland Capital Markets -- Analyst

Got it. And for my follow-up, I was curious if we look at your DUC inventory, do you know, depending on the level of granularity you want to get into on the call, how that kind of breaks out in terms of operators? Or maybe at least directionally, is it any different from kind of traditional weightings that maybe being heavily Conoco-weighted and then maybe a combination of Devon, BP, EOG and those types of folks?

Daniel Herz -- President and Chief Executive Officer

Just confirming the question, you said the breakdown of the operators in line of sight?

Jeff Grampp -- Northland Capital Markets -- Analyst

Yes. I was specifically curious on DUCs. But if you don't have that off hand, if you want to look at it more on a line-of-sight-level, that works too.

Daniel Herz -- President and Chief Executive Officer

I'm looking at this on a gross and a net basis. But focusing in on the net side, it's quite consistent with how our business breaks down, which is roughly 40% Conoco and, call it, 20% BP-Dev and 20% EOG.

Jeff Grampp -- Northland Capital Markets -- Analyst

Got it. That's perfect. I appreciate the time.

Daniel Herz -- President and Chief Executive Officer

Thank you. Be well.

Operator

Gentlemen, our next question will come from Kyle May at Capital One Securities.

Kyle May -- Capital One Securities, Inc. -- Analyst

Good morning. Appreciate that you haven't seen any production shut-ins yet, but just wondering if we could kind of revisit your near-term expectations. And if you could give us any color on perhaps your anticipation for potential production shut-ins in the second quarter. Or any thoughts there?

Daniel Herz -- President and Chief Executive Officer

Sure, Good morning Kyle. So I mean, again, I want to emphasize just, first, what our operators have highlighted is both Conoco and EOG, their U.S. production shut-ins really between for EOG, thinking about the Delaware and potentially the Eagle Ford, they haven't been specific yet. And then ConocoPhillips talks about the Lower 48.

Certainly, I would imagine disproportionate shut-ins in areas like the Bakken. And Eagle Ford, the Eagle Ford sets up very well given our proximity to the market. So just by way of where our assets are located and the pricing we received, we think we're reasonably well positioned, number one. Number two, exiting March with 5,500 barrels of oil equivalent approximately puts us at a nice mark.

And if you kind of look across what they're saying across the U.S. broadly, 20% to 30% over those couple of months, I think I've seen reports in suggestions that producers are simply looking to shut in, in May and through June. And people expect almost all of oil to be back online that is no more curtailments beginning in July. I think Goldman had a report out either last night or this morning, suggesting 1% of total U.S.

production curtailed beginning in July. So I think we're extremely well positioned. As I said, if we had 20% of our production curtailed in May and June, that would be reasonable. And frankly, I would be pleased to not have sold our oil at depressed levels.

And then to have the benefit of that production coming back at full levels, and some even suggest pressured-up levels above where they had gone off-line into a positive environment, puts us, we think, in a very good position to have stable production in the second half of this year, coupled with EOG's completion activities and 118 wells that they anticipate turning in line. And then the 1.71 DUCs that we have behind that, we feel pretty good about where we're headed late this year and into 2021. I guess one other point, Kyle, is the even strongest commitment, Lilly is Conoco, who continues to operate four rigs, including across our position, in an environment where they're curtailing, they're building DUCs. They highlight the fact that they're building DUCs because they see the benefit of the quick turnaround in bringing those wells online through the recovery.

That's very good for us.

Kyle May -- Capital One Securities, Inc. -- Analyst

Thanks Daniel. That's really helpful. And as my follow-up, wondering, given the current environment, if your thoughts or perspective around hedging has changed at all.

Daniel Herz -- President and Chief Executive Officer

Thank you. So our thoughts really haven't changed in the sense that we're constantly considering and evaluating the best way to maximize value to our shareholders. And so we have constantly and we've historically looked at hedging, reconsidered hedging. And as prices fell, we're happy we didn't hedge as prices fell.

Prices are now and the strip is now in a better position. And so that's very good. We consider and are looking at it very closely. And we're going to do whatever it is to maximize what we think is the value to our shareholders.

Kyle May -- Capital One Securities, Inc. -- Analyst

Got it.

Operator

And our next question will come this morning from Pearce Hammond with Simmons Energy.

Pearce Hammond -- Simmons Energy -- Analyst

Good morning and thanks for taking my questions. And Daniel, thanks for the helpful color on the answers just now on the curtailments. Bryan, my question is, do you have a target for the percent drawn on your revolver that you would like to achieve? And I guess said another way, at what level of debt do you want to reach before you can increase the payout ratio for the dividend?

Bryan Gunderson -- Chief Financial Officer

I'll take the first part of it, and I'll kick it over to Daniel for the second part. So the answer is, we don't have a specific in-house target about where we want our RBL balance to be other than we want to maintain modest leverage going forward. Daniel and I've been committed to that over the life of the business. Daniel, do you want to speak to the dividend side?

Daniel Herz -- President and Chief Executive Officer

Yes. And we're really different, and I would differentiate us from certain peers who have leverage of size. What we have net $43 million of debt I think it was 0.96 times leverage. Our balance sheet is strong.

Our payout ratio is entirely focused on and dependent on the stability of the economic and energy markets. So as soon as we see some stability there, that's when I would expect us to return to the 90% payout ratio. Hopefully, that will be the next time we speak on an earnings call as we move into August. But we just need to move through this challenging period for the U.S.

and the world.

Pearce Hammond -- Simmons Energy -- Analyst

OK. Thank you Daniel and Brian. And then my follow-up, Bryan, Daniel, can you tell us about the minerals that you bought in the quarter?

Daniel Herz -- President and Chief Executive Officer

Sure. Yes, very small, $2 million. We paid, I think, about one-third of the price that we've historically averaged on a price per net-net acre basis. And so we're going to be extremely cautious and disciplined in buying any minerals.

We have, as I said, a very small team but very good team. And we're engaged in the market. And to the extent there are opportunistic places to buy minerals, we are playing very selective of it.

Pearce Hammond -- Simmons Energy -- Analyst

Great. Thank you very much.

Daniel Herz -- President and Chief Executive Officer

Thanks Pearce.

Operator

Our next question an gentlemen will come from the line of David Snow with Energy Equities, Inc.

Unknown speaker

Hi. Good morning. Yes, I was going to ask about that a little acquisition, too. This breaks your hiatus that was initiated to protect the leverage of the Hooks Ranch.

And I'm curious whether you might find more of these bird nest on the ground in this distressed market that would be possible for you to acquire, given your very approval position and cash management and what the gross acres are and just a little more color on the quality operators and that kind of thing on that deal that you just did.

Daniel Herz -- President and Chief Executive Officer

Sure. So we are frugal. We consider that to be an absolute complement. When you have an asset base like we have that has the inventory that we have, we think being frugal is the right approach.

The asset quality is in line. And I don't want to be overly specific, but the asset quality is in line with our current position. It's in our backyard. Operators are, imagine, highest-quality operators.

And we will continue to look at those opportunities. This did cover 2,000 gross unit acres. It was a very good deal. And I think you're going to see opportunities like those, but it is going to take time.

I've heard others say, three to six months. And we know mineral owners need to see their most recent checks to understand the drop in their cash flow. But we have a very strong relationship in the area we operate with the communities we operate in. And we look at the mineral owners as our partners as they oftentimes retain portions of the minerals.

So we're here to partner with them, and they look at us as a potential source if they need money for whatever reason. And we're here to be partners with them. So we'll continue to be frugal. We'll continue to be engaged with our communities, and we'll see.

It may take more time to see deals like this, but we're hopeful.

Pearce Hammond -- Simmons Energy -- Analyst

And just one last question. Rule of thumb has been, in the past anyway, that royalty acres are worth three times working interest on land...

Operator

Gentlemen, pardon the delay. We'll hear next from Sean Carr at Freestone Capital.

Daniel Herz -- President and Chief Executive Officer

Sean?

Operator

[Operator instructions] We'll move forward next to Welles Fitzpatrick at SunTrust.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

Hey guys. How are you doing?

Daniel Herz -- President and Chief Executive Officer

Doing well. How are you?

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

I apologize in advance if you guys hit on any of this earlier. It's obviously a busy day. The slowdown in acquisitions, should we see that as kind of a run rate for this year? Obviously, a great price. Obviously, you'll have a little bit more capital to play around with the lower distribution.

So should we kind of model that flat? Or maybe does that even accelerate if you can pick some more stuff off of that type of return?

Daniel Herz -- President and Chief Executive Officer

I think erring on the side of conservatism, Welles, is the right approach. As David, the previous person asking questions mentioned, we're frugal, we think. And we're very focused on our balance sheet as anybody and everybody should be across any industry at this point. And so from a modeling standpoint, if you want to assume flat, that's fair.

If you want to assume zero, that's fair as well. And we'll be opportunistic. But understand that for us to buy something, it really has to be fantastic, knowing how strong our current asset base is and how frankly undervalued we see our current equity.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK. Perfect. And then any thoughts on the announced Conoco shut-ins? a, does that impact you? and b, health how long can one of your lessors or lessors shut in wells and declare force majeure before that lease actually lapses and you might have a revenue opportunity on the bonus side?

Daniel Herz -- President and Chief Executive Officer

Sure, Welles. And we did address that earlier but I'm happy to answer it again, but take a look at the transcript to confirm consistency. Essentially, we're very pleased with our producers not selling our reserves at depressed levels. We have not seen any shut-ins to date.

We're exiting the first quarter at 5,500-plus BOE per day. So we're starting from a very strong position. Conoco and EOG have not been specific with respect to where they may shut in. Certainly, for someone like Conoco, the Bakken obviously seems much more attractive given the favorable pricing we receive, given our location premium.

So I think we're in a very favorable position. I think both have considered shut-ins potentially or are going to shut in in certain areas in May and in June. And then we expect to see those volumes really come back as they've discussed it. And that puts us in, we think, a very good position for the second half, coupled with EOG's completion activity, Conoco's continued drilling with four rigs, including across our position in building DUCs and then the 1.71 net DUCs that we have on our position plus the additional line-of-sight wells.

We think we're in a pretty good spot.

Operator

[Operator instructions] Next we'll hear from Jeffrey Campbell at Tuohy Brothers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Daniel and Bryan, it's good to hear your voices. I assume you're doing pretty well or you wouldn't be here and same for me.

Bryan Gunderson -- Chief Financial Officer

We are indeed.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Great. Was the restrained first quarter '20 payout made in part to enable some level of payout during the expected trough period during the second and third quarter?

Daniel Herz -- President and Chief Executive Officer

I mean I think we would have maintained a nice dividend during those periods as well regardless. But yes, I think, one, it has to do with being prudent managers and always protecting the balance sheet, especially when you're in the midst of a global pandemic. So one, it's just being protective. And two, we certainly think when you look at this conservative payout ratio, that puts us in a nice position for Q2, Q3 and the remainder of the year from a dividend standpoint.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

And my follow-up is, your overall nat gas production is not insubstantial. And prices are trending higher. I just wondered, do you have any kind of revenue sensitivity for upward movements in NYMEX prices that you could share? Or we could get that off-line if you don't have it handy.

Daniel Herz -- President and Chief Executive Officer

Yes. I mean why don't we follow up off-line on that. I mean we have 30% as you point out, 30% of our volumes are from natural gas. So it is quite helpful if we see natural gas prices trend higher.

And as, of course, people are now noting, does offer, in a way, a bit of a hedge against oil prices with the associated natural gas that comes from development of oil wells. So Bryan will follow up with you for specific sensitivities. That's not hard.

Operator

And Mr. Herz, Mr. Gunderson, at this time, we have no signals from the audience. I'll turn it back to you both for any additional or closing remarks that you have.

Daniel Herz -- President and Chief Executive Officer

Great. Thank you, Jim. Thank you, everybody, for joining. We wish you all well, be safe, and please try to help another person today.

We'll speak to you soon. Bye-bye.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Bryan Gunderson -- Chief Financial Officer

Daniel Herz -- President and Chief Executive Officer

Brian Downey -- Citi -- Analyst

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Jeff Grampp -- Northland Capital Markets -- Analyst

Kyle May -- Capital One Securities, Inc. -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

Unknown speaker

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

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