Falcon Minerals Corporation (FLMN) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Falcon Minerals Third Quarter 2018 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.

Good morning, everyone, and thank you for joining us for today's call to discuss Falcon's third quarter 2018 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 contains words such as 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, which we expect to file early next week and our annual report, Form 10-K. And I'd 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 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've provided a reconciliation to non-GAAP measures we refer to in our public disclosures such as adjusted EBITDA and cash available for dividends.

Lastly, Falcon will be participating in several upcoming investor conferences, including the RBC Capital Energy Conference (sic) [RBC Capital Markets Conference] on November 14 in Dallas; the Jefferies Energy Conference on November 28 in Houston; the Crédit Suisse Minerals Conference on December 4 in New York; and the Capital One Energy Conference on December 5 in New Orleans.

With that, I'd like to turn the call over to our CEO, Daniel Herz, for his remarks. Daniel?

Thanks, Brian. Good morning, everyone, and welcome to the inaugural Falcon Minerals Corporation's earnings call. As Plato once said, the beginning is the most important part of the work, and we think we begin with great assets. Our core position in the Eagle Ford shale requires 0 CapEx, benefits from some of the best operators in the United States and has nearly a 90% EBITDA margin. As a reminder, Falcon Minerals' asset base covers approximately 250,000 gross unit acres in the absolute core of the core of the Eagle Ford shale in Karnes, DeWitt and Gonzalez counties.

Our top three operators, which account for more than 90% of our value are ConocoPhillips, EOG and BP. As many of you know, each of these three operators has emphasized, yet again, over the last couple of weeks, their focus and great success in the Eagle Ford. Conoco, already our largest producer, who had announced it was growing its Eagle Ford production by 88% from 2017 to 2020, announced that it moves yet another rig to the Eagle Ford from the Permian. Conoco, with its Generation 4 frac design, has also seen its wells perform significantly above type curves.

BP, of course just closed on its acquisition of the BHP U.S. onshore assets, announced on its third quarter earnings call that it would get to work with its newly acquired Eagle Ford assets as early as the fourth quarter. Then, on its third quarter earnings call, Devon Energy, BP's joint venture partner, said that it expects to move a third rig on to the Eagle Ford position. Finally, on EOG's third quarter earnings call, it increased its guidance of how many wells -- how many Eagle Ford wells it plans to complete this year. Importantly, EOG completes far more wells in the Eagle Ford than in any other play in the United States, which is of course a leading indicator of its view of the highly favorable economics of the play. All of this augurs very well for the short, medium and long-term value of our assets at Falcon Minerals.

Moving into the specifics of our business, we are extremely pleased that we benefit from Louisiana Light Sweet crude pricing, or LLS pricing as it is known. Just yesterday, LLS pricing was approximately $70 per barrel, over $8 above WTI. Obviously, that is very favorable and gives us and our producers a significant benefit relative to other basins. As of November 5, we had 177 line-of-sight wells, which effectively is our pipeline of wells we expect to come online over the next 6 months. This pipeline of new wells remains robust and should provide us significant new volumes in the coming periods.

During the third quarter, our producers turned in line 46 new wells. Included in those new wells are 4 of 5 wells Conoco brought online in which we have a 10% net revenue interest. These 4 10% net revenue interest wells came online in August. And as Jeff Brotman, our Chief Financial Officer, will describe, our accounting revenues and volumes did not recognize the benefit of those wells. As such, we have provided adjusted volumes for the third quarter, which were approximately 6,100 barrels of oil equivalent per day. These new wells, of course, position our asset base well for the fourth quarter and as I mentioned, one of the wells isn't even online yet.

With respect to Hooks Ranch, our asset of which we own an approximate 22.5% royalty interest is 89% undeveloped and operated by ConocoPhillips. We continue to see robust production exceeding our type curve. This should not be a surprise given Conoco's commentary. Of course, this should bode extremely well for the value of our undeveloped property as Conoco continues to enhance and evolve their development and is seeing better and better results across their positions. Conoco has not yet permitted their next group of wells on Hooks Ranch. As they have continued to monitor the results of their first 6 wells and is considering further enhancements to their drilling and completion designs, Conoco's historical approach has been to develop its first group of wells on the property and then monitor those results for approximately 9 months. This approach provides Conoco the information they need to consider their further enhancements. Historically, Conoco then moves forward with their next phase of development of the properties. As a reminder, we are now approaching the end of that 9-month period. Accordingly, I remain optimistic that Conoco will permit their next batch of wells on Hooks Ranch over the next several months, and we will see first production of these wells in the middle of 2019.

Notably, in the initial phase of development, there was significant time taken with the landowner to work out of the pad locations after initial permitting. Given that such work is completed, I would expect the timing of permit to turned in line to be similar to our average period of 157 days. We believe the Hooks Ranch is some of the best undeveloped acreage in Eagle Ford shale and offers a large, almost entirely undrilled position available for manufacturing like development.

I would also like to speak to all the work that is being accomplished in building our organization. We have made some key hires, I'm very pleased to report, including Stephen Pilatzke, our Chief Accounting Officer; Mike Downs, our Vice President of Operation; Irene Deck, Vice President of Land, who will be joining us on December 10; and of course, Austin Frey from Viper Energy Partners as our Vice President of Reservoir Engineering among others. Austin will be critical to our evaluation of large and small acquisitions in the top oil-weighted place in United States. Specifically, Austin has extensive experience in the Eagle Ford shale and the Permian Basin, where we are focused on growth.

I'm very pleased to report that we've already closed on our first organic acquisition. As we move forward, I will refer to small on the ground acquisitions as organic acquisitions, and I will refer to large transactions as strategic acquisitions. Again, as a reminder, we've a great base asset, and I believe we do not need to make any acquisitions to increase our value. Frankly, I believe our current stock price does not reflect the intrinsic value per share of our business. As such, any acquisitions we make surely increase our net asset value per share. We can and may simply let our operators continue their drilling and reap the benefits of their work. With that said, I believe there is an opportunity to consolidate a highly fragmented mineral space and add significant net asset value per share.

We have been busy pursuing both organic as well as strategic acquisitions. Our core principle for acquisitions is that we acquire assets in top oil-weighted plays, which likely means the Eagle Ford shale and the Permian Basin that we are in the core of the play, have top-tier operators and have clear line of sight on development. Our first organic acquisition was for approximately $650,000, was located in Karnes County and operated by Marathon. If we choose to, there are a significant number of acquisition opportunities for us to pursue, both large and small. We will be very focused and disciplined in our approach to acquisitions, and we are only evaluating deals that fit our thesis of core of the core top oil-weighted plays.

I'm confident that we are well positioned to acquire top-tier mineral assets if we choose. Given the very limited buyer universe for large mineral packages, I believe we are one of only a few companies who are capable of more sizable transactions. As such, there remains a healthy private to public arbitrage for us to benefit from. Again, we are in a happy position that we have a highly valuable base business and do not need to acquire anything.

Now before I turn the call over to Jeff Brotman, I would like to highlight a few financial elements. Again, I'd like to highlight a few financial elements. As many of you know, we declared our first quarterly dividend for the third quarter prorated from closing through September 30 of $0.095 or $0.90 annualized.

Now I would like to address our expectations for the fourth quarter of 2018 and 2019. We're very pleased with how the business is performing. The fourth quarter will benefit from 4 of 5 high net revenue interest wells that came online in the middle of the third quarter. And due to our accounting methodology, we did not recognize production or revenue from those 4 high net revenue interest wells in the third quarter. With those wells and all of the other activity across our position, we expect volumes for the fourth quarter to be in a range of 6,100 boe per day to 6,500 boe per day.

Furthermore, with our 177 line-of-sight wells, we've strong visibility into the first half of 2019, included in those 177 wells are significant number of higher net revenue interest wells. This gives me a high degree of confidence as we move into 2019. Based on this and the very favorable backdrop of our operators' activity, we remain confident in our 2019 projections and are reaffirming our previously provided 2019 forecast. Note that even if we did not have any new Hooks Ranch wells connected in 2019, we still would expect over $1.05 per share of free cash flow to shareholders.

As I've previously indicated, we have a number of factors including LLS pricing, high net revenue interest wells and increasingly favorable results from the Eagle Ford to name a few items that protect and provide us significant cash flow, which I expect will be returned to our shareholders through a robust dividend. It has been an active first 10 weeks here at Falcon Minerals, and we are just getting started.

Now I would like to turn the call over to our Chief Financial Officer, Jeff Brotman. Jeff?

Thank you, Daniel. Let me begin by discussing the accounting methods for the business combination that resulted in Falcon Minerals Corporation 10 weeks ago. Since all of the revenue-generating assets of the business were contributed by Royal Energy and for other reasons, the transaction was treated as a reverse capital -- recapitalization with Royal as the accounting acquirer for financial reporting purposes. Therefore, our consolidated financial results show pre-August 23 results of Royal as the company's historic information. That information contains results for Royal subsidiaries that were not acquired by Falcon.

In sum, our financial statements reflect: one, the historical operating results of Royal prior to the transaction; two, the combined results of the company Falcon Minerals Operating Partnership, LP and Royal following the transactions; three, the assets, liabilities and partners' capital of Royal at their historical cost; and four, the company's equity and earnings per share presented for the period from the closing date of the business combination. Most of the Royal interest that were not contributed to Falcon are classified as held for sale and are presented separately in the December 31, 2017, consolidated balance sheet of the company.

In addition, the amounts attributed to the non-contributed entities related to the transaction are shown only in a net amount as discontinued operations in this quarter's financial statements, so that the assets, liabilities, revenues and expenses that you see in those financial statements and notes are only related to the activities that Falcon still has. I also want to briefly review how Falcon recognizes its revenue and production. We use the entitlement method, which means that royalty revenues and expenses deducted by the producer are recognized based on actual production shown in settlement statements that we received from the producer. However, such settlement statements may not be received for 30 to 90 days after the production is delivered. Therefore, we must estimate and accrue our royalty revenues and related expenses for the months for which we have not received the actual production statements and payments. Our estimates are based on average production over a preceding 2- to 3-month period applied to then current realizable prices. Because of this methodology, our accruals will not capture production that may have commenced during a reporting period but for which we have not received any settlement statements or payments. We record the differences between our estimates and the actual amounts received in the period a payment is received from the producer.

For the third quarter, Falcon's consolidated royalty revenues were $23.8 million and its adjusted EBITDA was $21.3 million. GAAP operating income was $16.8 million and GAAP net income was $15.6 million. We ended the third quarter with $12.9 million of cash and cash equivalents. We have borrowing capacity of $115 million under our revolving credit facility and only $38 million outstanding, thus adding an additional $77 million of liquidity. By annualizing our third quarter consolidated EBITDA, it results in an EBITDA to net debt ratio of 29.4%.

With that, I will now hand the call back to Daniel.

Thanks, Jeff. That was great. We -- I just want to say, we can all be confident in our core position in the Eagle Ford shale, which, as I said earlier, requires 0 CapEx, benefits from some of the best operators in the United States, has a 90% EBITDA margin and the great benefit of LLS pricing. In fact, I'm more excited today about our asset base than ever.

Keith, we're now ready for questions.

(Operator Instructions) We'll take our first question from Jeff Grampp with Northland Capital Markets.

I guess first off, just wanted to dive into kind of the back half '18 numbers and then into '19. Can you, maybe, expand a little bit on, I guess, some timing uncertainty on Hooks Ranch? And -- but I guess kind of counter to that is some of the recent commentary from some of your other operators. So can you, maybe, just expand a little bit on some of the factors that or maybe causing a little bit of a slowdown in the very near term here, just thinking '18? And what gives you guys confidence that the '19 outlook is still going to come in as originally expected?

Sure. Thanks, Jeff. I do not -- I don't think of it the way you just characterized it. I think the business is performing today as our expectation when we closed 10 weeks ago and add our expectations over the periods before that. What I think and I see the volumes that existed during the third quarter, that exist in the fourth quarter, the high net revenue interest wells that are contained in 177 line-of-sight wells, the fact that we have 177 line-of-sight wells, the business is really hitting on all cylinders. And when I look at the fact that we generated and distributed annualized $0.90 for the prorated period and of course, if you look at our fourth quarter production guidance that we gave, of course, that would imply a higher free cash flow or dividend available -- cash available for dividend in the fourth quarter, we really see the business since we've taken it over performing quite nicely, everything as far as the operators' activity permitting at or above expectations and really leading us to great confidence for the fourth quarter, which we're obviously well into already, and then into the first half and beyond of 2019. So I think we're quite satisfied with where the business sits today, the free cash flow we're generating and where we're headed. And again, I guess I just would point out Conoco announced -- Conoco is planning to grow production 25% compounded annually through 2020, but then on top of that, they've been ahead of their type curves, which should suggest that they may be ahead of those guidance numbers. They've moved another rig from the Permian to the Eagle Ford. EOG is -- I mentioned in my remarks, if you listen to it again, what they said on their call, they're completing even more wells in 2018 than they had guided. Very -- and then BP is just -- they just closed like last week or 2 weeks ago, and they're already talking about how they're accelerating their Eagle Ford development, and we can see their permitting activity picking up. So all of this, and I haven't talked about enhanced oil recovery, but all of this bodes extremely well for 2019 and beyond. But even in the fourth quarter, we look at the fourth quarter as what should be a very, very good quarter with the benefit of those volumes, which came online in the middle of August where we -- in our 10% net revenue interest wells, which will get the benefit of those revenues in the fourth quarter.

Okay, great. I appreciate that. That's helpful, Daniel. And can you talk -- you mentioned in your prepared remarks you guys already closed on your first kind of organic acquisition. Can you, maybe, give us a little bit more detail, to the extent you can, location, size and anything you are comfortable putting out? And then maybe just taking a step back, can you talk about kind of deal flow over the last couple of months as you guys have closed the transaction here?

Sure. So as I mentioned Karnes County, it's very small. It's -- I mentioned it because it's indicative of the type of opportunities we're seeing. It was roughly $650,000 in size. If you look at the price per net royalty acre, it's extremely attractive and extremely accretive. There were -- there are some producing wells. Importantly, there are some DUCs that are coming online, drilled but not yet completed that are coming online over a short period of time. That'll add a small -- that'll add some production to the fourth quarter and into 2019. It's not material though. Again, it's just indicative of what's available to us. As far as the deal flow, I -- it is incredible, the amount of opportunities that are available to us. I think it's exciting to be, if I may say, the new kid on the block. Every -- I'd say almost everybody that we're aware of, of size has reached out to us or we've reached out to them. I say of size on the organic, these are small ranch owners or mineral owners, we know them all. We're working in really evaluating the opportunities, but we're going to be very disciplined in what we buy and make sure that it's strategic, it's core of the core top operators, clear line of sight on development and it's, I think, very exciting where we can add a lot of undeveloped properties with existing cash flow that should continue to really buoy our growth for many, many years.

Right. That sounds really positive. And then last one for me, just on the personnel front. Sounds like you guys have been busy behind the scenes adding some more folks. Would you say that, that exercise is largely accomplished? Or do you think you still have some more operational back office, et cetera type folks that you'd like to add to the team?

I would say we -- I never want to say mission accomplished because you never want to say that. But I would say we've got the core team here, give or take, it's a fantastic group. As you know, Jeff, we've talked about, I think, everybody on this call should know, we are going to be very disciplined with our G&A, and we're going to have a very efficient staff. So we have the team. The team is -- I would say as good as it gets when it's comes to public reporting, it's as good as it gets when it comes to evaluating both small and large transactions and then integrating those transactions. So we've a great team. We've a great team to effectuate our plans. Yes. So I guess the last piece I would add, which I wouldn't bore everybody with, but many people know, I am deeply committed to being on the leading edge of technology and having technology that one reduces our cost by not having 5 to 10 different platforms, where you're paying lots for licensing fees, but rather having 1 or 2 core platforms and then using that technology to have a highly predictive model to assess where we should be acquiring minerals, both on the organic and strategic side. So we've the best view as to where operators are going. And then, I think, as I said, that can also make us most efficient from a G&A standpoint. But again, I don't want to bore everybody with my -- that type of detail.

We'll take our next question from Jeffrey Campbell with Tuohy Brothers.

Congratulations on the public jump here. My first question is once Conoco gets through its study period that you articulated really clearly in your remarks, what sort of development rate would you expect at Hooks Ranch based on prior history?

We would expect that what's embedded in our numbers is effectively a 2 pad, 12 well per year pace. I think there is a possibility we end up seeing that accelerated, which is obviously very good from all of our perspective, but we wanted to take a conservative approach, and we think 12 wells per year is a case that's consistent with what we think they'll do.

That's very helpful. Going back to the subject of acquisitions, you articulated the kind of place you want to be, adding the people you want to work with. I just wanted additionally, is there any specific hot bias for hiring interest wells? Or are you just going to get whatever you think is accretive as it comes along?

No. It's a very good question. It's a really important strategic question as are we focused in narrow areas with higher net revenue interest or are we focused on a broader position with a lower net revenue interest in. I have to tell you it will depend on the opportunity. What you can know is number one, we've a great asset with the business that we have today, which is going to grow its free cash flow per share over the coming years and that's very, very good. We have the best operators, we're in the core of the play, it's fantastic. So we don't have to do any acquisitions. But if we do larger strategic acquisitions, they will be core of the core, they will have top operators in clear line of sight on development, so -- and they will be top oil-weighted plays, Eagle Ford and maybe Permian. So as far as the specifics with respect to higher net revenue interest, I would be happy to buy a large ranch with a higher net revenue interest if I had clear line of sight on development. On the other hand, only a larger position that's absolutely core with a smaller net revenue interest, we're okay with that as well, but it must be accretive to net asset value per share, that's our core principle.

That was an excellent explanation, I appreciate that. And I'd like to ask one last question, it's kind of a high-level question and it's really at the risk of kind of saying all stupid, and I think it's a reasonable question I ask for people that aren't really familiar with the space and the question is, since the Eagle Ford is going great guns, what motivates royalty owners to sell any of their interest to Falcon or to anybody else?

Sure. It's a very good question and there have been a significant number of royalty transactions over the last half dozen years or so. And it's -- I mean it's an interesting -- it's really an interesting position in that. If I am a royalty owner and let's say I inherited my royalty from my parents, who inherited it from their parents, and my interest is now a small percentage of what was once a large percentage spread amongst a lot of cousins, but -- and that percentage throws off today, let's say $100,000 a year, and I get a check for $8,000 a month and someone's coming in and offering me $500,000, that's obviously a lot of money to me, and I might not know things may be going well, and I hear they're going well, but $500,000 at the end of the day is a way to pay for my children's -- all my children's college education that may be a way for me to retire and there are a lot of people across our position who are constantly considering selling their mineral interest and bringing forward that value is important to them. Now let's -- I mean I don't want to -- it's not like I'm suggesting people are giving it away, these mineral owners know that they are sitting on something valuable. It just may be that we have a longer-term view or maybe even a better view, which speaks to technology in our predictive view of where development is heading. We may have a better view or more value on a longer-term view on that value of their minerals and owners. I hope that's helpful. Let me add one other piece -- Jeffrey, let me add one other piece, which is probably the biggest piece. I should have started with this. We acquired this business from Blackstone, the private equity firm. Blackstone is fantastic. They're not unique. In that there are half a dozen to a dozen larger private equity firms not as good as Blackstone as far as I'm concerned, but there are large private equity firms, who over the last 6 to 10 years have accumulated large mineral positions, and they sit here today and they don't have an exit for their minerals business. There's only a few public minerals companies. We are one of the largest. I think, we're probably the second largest C corp in the United States. And so there's only a few ways to exit. And as you know Jeffrey, we, of course, have bought and sold tens of billions of dollars as a management team to and from these great private equity firms. And I think they know us extremely well, and we see this as a very natural buyer from those firms if they meet our criteria.

We'll take our next question from Vedula Murti with Avon Capital.

I'm wondering, first thing, in terms of the statement about the 2019 outlook with regards to Hooks Ranch, what's actually in the 2019 outlook that you provided previously that you were reaffirming today versus that statement? What's kind of the variance? And how is that being offset? Or is it simply more of a conservatism? Or can you explain that a bit?

Thank you for that question, I'm glad you asked it. From a production standpoint, all we've done relative -- we have our guidance, which we believe and reiterated. But with respect to the $1.05 plus of free cash flow per share, if there is no Hooks Ranch development in 2019, all we've done is remove the Hooks Ranch development, which, within our model, as I said before, is 12 wells -- 2 pads, 12 wells on Hooks Ranch. So the only variance is the removal of those Hooks Ranch wells. Very importantly, which I think underlies your question is that we have not adjusted for the favorable results we're seeing from Conoco's wells, which would exclude Hooks Ranch, but we're not seeing -- we're not including any of those favorable results. We are not accelerating development from EOG, as EOG is now completing more wells in the Eagle Ford, and we're not accelerating or enhancing any of the development from BP taking over the BHP assets, which simply held constant that previous guidance, but removed the Hooks Ranch production from there.

So to follow up on that and what is the -- I guess, the cash flow effect of that removal from your model that will be more than offset by all the factors you just highlighted?

I'm not sure I followed -- what is -- I'm not sure I follow the question?

The Hooks Ranch wells that you removed from your model had a certain cash flow and production effect that is no longer there, that will be more than offset by the factors you highlighted. But can you specifically tell us how much cash flow in production was removed from your model associated with -- from Hooks Ranch just for conservatism? And also, isn't that simply something that is being conservative, it's not -- and could easily return if you could also elaborate on that?

Thank you for that. We've not removed it from our model or our guidance. We've provided guidance, it's in our investor presentation. I suggest everybody look at that investor presentation, that includes Hooks Ranch. That is what we believe is going to happen based on our best estimates today, which is why we reaffirm that and that should drive substantial growth beyond the fourth quarter and into 2019 and beyond. So we feel very good about those numbers. Hooks Ranch has been fantastic, outperformed type curve. Conoco, I imagine, is very pleased with the results there. It's a great undeveloped property that Conoco, I would expect will come in Permian and develop in 2019. With that said, what we wanted to do for illustrative purposes and frankly because, I think, everybody needed to understand it even if Hooks Ranch didn't come on, this business is still going to generate $1.05 plus of free cash flow per share, which means that if Hooks Ranch comes on, it will be even more than that by a good amount, which, I think, says that -- and we can all have our views, but I think says that our stock is significantly undervalued.

Okay. Then in terms of 2019 outlook, you can -- you had a average run rate for the year of 7,600 per day in your last investor deck. As we are exiting basically 4Q, 61 to 65, is 7,600 for -- the average for 2019 still your line of sight?

That's -- yes, that's why we are -- that is why we are reaffirming our 2019 guidance numbers. And to the extent anything changes for better or for worse, we, of course, will -- we will, of course, talk to the market about that, but with Hooks Ranch coming on with those 177 line-of-sight wells, which include higher net revenue interest wells, we feel we have a very strong line of sight in the fourth quarter and then into 2019. We feel very good about where we sit today and where we're headed in 2019.

Okay. And you did mention something about obviously valuation. I mean, can you talk a little bit right now in terms of -- versus the peer group and other folks that you've highlighted in your previous presentations? And at this point kind of your situation there?

Sure. I think that this is a developing -- I mean, I think this is a developing subsector within energy. It's -- there's a limited set of peers. We're, of course, a C corp. We look at Viper Energy Partners who became a check the box effectively a C corp earlier this year. We think they have a great asset base. We think if you look at their reserves per net royalty acre, there are -- you look at their growth, they are probably our best comp and of course they trade at a significantly higher multiple than us. Now they, of course, have a parent company, which has -- they've received drop-downs from and have other benefits, but I think on the flip side, we have the benefit of a team that's solely focused on growing the value of Falcon Minerals. And so I think we have our pluses and minuses, but we certainly look at -- if you look at reserves per net royalty acres, you look at year-over-year production growth, you look at core of the core play, plays they really are our peer, there's of course others, but others are really a broader set based on kind of dividends and don't really have the characteristics we have. We are a core of the core oil-weighted play and tying top tiers with top operators, and we love that. And today, it's Eagle Ford and I don't think there's a better place you can be in this business than the Eagle Ford shale today.

I guess one last thing. How are you seeing in terms of your percentage of liquids versus natural gas in terms of your production?

Yes. It's a good question. It will -- we will bounce around a little bit quarter-to-quarter based on these wells coming online. I would expect that we're at the low end of -- I would expect more oil as we're moving forward kind of over the coming periods, which is more consistent with our average over the last few years. So I again, I think, it bounces around quarter-to-quarter, but I'd expect more oil as a percentage of our volumes than this quarter and that's what we're currently seeing.

We'll take our next question from Lin Shen with Hite.

I think you're right, the stock price has been trading very undervalued given -- as there are a lot of factors. But I'm just wondering, when you just think about shareholder returns, will their share buyback be ever on the table? Will you consider what are the best ways to use cash, either pay out dividend or reinvest?

Always nice to talk to you and always good questions. I mean, this is -- we're 10 weeks into our company being public. So I mean I can only tell you our philosophy has always been everything is always on the table whatever it is to maximize value for shareholders. It's been our history and I firmly expect that to continue to be. We are all firmly aligned in doing whatever we all believe is going to drive the value per share.

(Operator Instructions) We'll go next to Paul Bagley with Fiduciary Capital.

I would like Mr. Brotman to address the factors indicating that the fully diluted shares are 1/2 the curve. You show $0.06 per share and then fully diluted $0.03. And I'd like to know what the factors are in that. I'd like to know since Blackstone is considerably under water, what's going to happen to those shares? And I'd like to know when you're going to adjust the warrant exercise price and how that will be announced?

Sure. Let me address each of those in order. The difference, the fully dilution is actually based upon Blackstone. As you know, we're an up C corporation, which means that all of our assets and revenues are generated at Falcon Minerals Operating Partnership of which Falcon Minerals Corporation owns a little bit more than 50% and the Royal entities, primarily Blackstone, owns a little bit less than 50%. On a consolidated basis, we show all of the revenues, expenses, assets and liabilities, but on a -- when we get down, if you see our net income attributable to shareholders, unitholders, that's only at the Falcon Minerals Corporation level. The fully diluted would be an assumption that all of the Blackstone and other Royal contributors operating partnership units would be converted, which they have the absolute right to do into shares of Falcon Minerals Corporation. And so that's why it's approximately 1/2 of the basic lines up as a fully diluted. On the second part, as far as what Blackstone is going to do, I would not be so presumptuous as to speculate it that they're pretty sophisticated people, and I think that they'll figure out they have a very big investment in this company. I think that they are very sensible on their capital allocation and their patience and their -- as you know that they have significant board representation, and we are fully aligned with them. As to the third question that you had regarding the warrant strike price, the way that our warrants work is they have a strike price of $11.50. That strike price is reduced penny for penny for anything that's what's called an extraordinary dividend. An extraordinary dividend is dividends that we pay in cash over a 365-day period that exceeds $0.50. When we get in subsequent quarters to the point where we have exceeded $0.50, then any subsequent dividends will be extraordinary and then we evaluate it on each quarter thereafter with the 365-day look back, but those extraordinary dividends will reduce the strike price.

Our next question comes from Mike Breard with Hodges Capital.

Is your first quarter, I mean your September quarter earnings report, we still have all kinds of miscellaneous type items, I mean it doesn't reflect your true earnings as a corporation. Does this balance -- actually dividends you paid, does that reflect what you would have earned certainly on a pro forma basis for the quarter versus the actual report?

Yes, it does. Exactly. Thank you for allowing us to clarify that, Mike. Yes, the $0.095, which is annualized $0.90, is based on what the business actually generated on a pro forma basis.

And it appears we have no further questions. I will return the floor to Daniel Herz for closing remarks.

Right. Thank you, Keith, and thank you, everyone, for joining our earnings call, our inaugural earnings call at Falcon Minerals. We look forward to hopefully seeing many of you over the coming weeks at the various conferences Brian spoke about. Or if not, we'll speak to you next quarter. Thank you.

And this will conclude today's program. Thanks for your participation. You may now disconnect.