Granite Ridge Resources, Inc (NYSE:GRNT) Q3 2023 Earnings Call Transcript

Granite Ridge Resources, Inc (NYSE:GRNT) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Granite Ridge Resources Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. [Operator Instructions] Thank you. Wes Harris, Investor Relations Representative for Granite Ridge. You may begin your conference.

Wes Harris : Thank you, operator. And good morning, everyone. We appreciate your interest in Granite Ridge resources. We will begin our call with comments from Luke Brandenberg, our President and Chief Executive Officer, who will provide an overview of key matters for the third quarter and our outlook for the remainder of 2023. We will then turn the call over to Tyler Farquharson, our Chief Financial Officer, who will review our financial results. Luke will then return to provide some closing comments before we open up the call for questions. Today’s conference call contains certain projections and other forward looking statements within the meaning of federal securities laws. These statements are subject to risk and uncertainties that may cause actual results to differ from those expressed or implied in these statements.

We would ask that you also review the cautionary statement in our earnings release. Granite Ridge disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward looking statements. These and other risks are described in yesterday’s press release and our filings with the Securities and Exchange Commission. This conference call also includes references to certain non-GAAP financial measures. Information reconciling non-GAAP financial measures discussed to the most directly comparable GAAP financial measures is available in our earnings release that is posted on our website. Finally, as a reminder, this conference call is being recorded.

A replay and transcript will be made available on our website following today’s call. So with that, I’ll turn the call over to Luke. Luke?

Luke Brandenberg: Thank you, Wes. And thanks to everyone for joining our third quarter call. A lot of excitement over here as we crossed the one year mark as a public company a couple of weeks ago. By dialing into this call, you are all part of the celebration and I hope that you’ll join me in one, thanking our team for all their hard work to continue to grow the business and to complete the transition from private to public; our legal, accounting and banking partners are keeping the wheels of capitalism turning. The folks on the research and IR side are helping us to spread the granite rich story; our operating partners for fighting the good fight in the field every day and finally, for our investors for trusting us to be good stewards of your capital.

Now this is one of those fun quarters to talk about. On the asset side, we outperformed our internal expectations. On the business side, we’re firing on all cylinders and on the corporate side, the company is more investable than ever. My plan for this morning is to walk through each of those in a little more detail then to discuss how this impacts the remainder of 2023. And while we plan to issue 2024 guidance when we report yearend earnings in March, I would also like to share a bit about where we see 2024 heading. Starting with the assets, we want to give credit where credit is due to our operating partners for a great quarter of execution. These folks turned 77 gross or just over 8.5 net wells to sales this quarter, which drove over 20% quarter-over-quarter production growth.

A lot of moving pieces in 77 gross wells, but ultimately two development units led to the beat. We had 3.5 net wells in the core Delaware unit that turned to sales a month earlier than expected and came in under budget. Additionally, we have one net well in a Haynesville unit that hit the trifecta by coming in about a month early, exceeding internal production expectations and coming in significantly under AFV. Now, before I shift to the business, I should mention something about costs. While we have seen green shoots of costs coming in below expectations, we are not modeling and cost declines going forward. On the business side, the opportunity set continues to be robust, both on the traditional non-op or burgers and beers front, as well as the controlled CapEx or strategic partnership front.

We have closed on 23 transactions year-to-date and have another handful that we expect to close by the end of the year. These deals represent a nice blend of flowing production, near-term development and longer dated inventory. Seven of these are in the controlled CapEx or strategic partnership leg of our business development stool. As a reminder, these are opportunities where we take a controlling interest in well-defined areas through direct partnership with proven operators. These are higher concentration investments when we mitigate that concentration risk with higher expected returns and full control over development timing. Finally, I’ll turn to the corporate side. Our big event for the quarter was a secondary sale of about 8 million shares from our largest shareholders.

As this was all secondary, Granite Ridge did not make the determination to sell, nor did we receive any proceeds, but the offering did a lot to make GRNT more investible. We have seen a material increase in trading volume. We added over 40 new investors and we significantly increased research coverage with Bank of America, Water Tower and Stephens picking up coverage post-offering. Phillips at Capital One was a bit lonely as a consensus of one, and we sure appreciate all of you sharing your time and mind share with us. Now, all these benefits did not come without a cost. While we’ve recovered a bit, the secondary pricing was painful. But in addition to the trading volume increase, broader investor base and increase in research coverage, the offering demonstrated that our largest shareholder continues to be willing to make the hard decisions in order to make Granite Ridge more investible.

Turning our attention to our updated outlook for full year 2023, we’re making some adjustments to the full year to account for the third quarter outperformance. The first one is production, where we are increasing both the low and the high end of our 2023 production guidance by a 1,000 barrels of oil equivalent per day. This takes the midpoint up to 23,250 barrels of oil equivalent per day or about an 18% increase over the full year 2022 and a 4% higher than the midpoint of our previous full year 2023 guidance. A couple of things to keep in mind here. First, while some of the third quarter production beat was due to outperformance, some of it was due to acceleration, meaning less volumes from those wells in the fourth quarter. We mentioned in a previous call that the third quarter will be the high point for the year.

Internally, we’re looking at about a 7% production decline from the third to the fourth quarter. The second thing I would point out is while our oil production outperformed expectations a bit year-to-date, the outperformance has primarily been on the gas side. With that, we are taking our oil waiting for the year down to 47%. On the 2023 CapEx side, we are increasing our inventory acquisition and producing property acquisition bucket up from $50 million to $90 million. As a reminder, we only guide the transactions that are either closed or in definitive dots, not the future deals. The incremental $40 million is new deals since the last call that we have closed or expect to close by year end. About half of the $40 million increase is one acquisition in the Haynesville, and roughly a quarter of the increase is a couple of opportunistic diversified PDP buys.

Now, while we are not typically buyers of PDP, part of the thesis for going public was that there may be some long in the tooth funds that may need to divest assets. We were able to offer ease and certainty of close in exchange for an attractive valuation. On the drilling side, we are taking the midpoint up $15 million. This is due primarily to beginning operations with a strategic partner during the fourth quarter, as well as some acceleration of wells that we thought would come online in 2024, but that we now expect in 2023. That acceleration has the impact of increasing 2023 net turn to sales, but we do not expect much in the way of production from this increase in well activity as they will be turned on so late in the year. Before I pass the ball to Tyler, I’ll wrap up with a few thoughts on 2024.

From a capital allocation standpoint, we have previously mentioned that our normal course of business debt target is half a turn to leverage. We are sitting at about a quarter turn now. So long as the opportunity set justifies it, our Board has been supportive of reinvesting all of our post-dividing cash flow and borrowing to fund compelling new opportunities. Once we get closer to that half a turn of leverage, I expect that you’ll see us live within cash flow. The other thing I would note is where drilling dollars are going. As our strategic partnership program continues to gain traction, we will begin to have full control over the timing of some of our drilling capital. If we want to pause, we can pause. If we believe that conditions are right to accelerate, we can accelerate.

Based on what we’re seeing for 2024, we expect that roughly a quarter of our drilling dollars will be controlled. And with success, we hope to increase that in future years. So with that, I’ll turn it over to Tyler to discuss our financial results in more detail. Tyler?

Tyler Farquharson: Thanks, Luke. And good morning, everyone. During the third quarter, our Q3 average daily production was above the high end of our internal estimates at 26,433 BOE per day, a 20% increase compared to Q3 of 2022 and 23% higher than this year’s second quarter. Both oil and natural gas volumes were higher versus Q2, as we experienced favorable timing adjustments on key wells in the Permian and Haynesville and production outperformance on gas wells recently turned to sales in the Haynesville. As Luke mentioned, we increased our full year 2023 production midpoint of guidance to 23,250 BOE per day, which represents 18% growth, compared to last year. Our adjusted EBITDA was $83.2 million in Q3, up 19% from this year’s second quarter.

Adjusted EPS was $0.21 per diluted share for the quarter. Non-cash depletion and accretion expense for the third quarter totaled $44.3 million, impacting adjusted EPS by $0.33 per share. Third quarter oil differential of negative $3.89 per barrel was higher than our historical trend due to less favorable local market pricing in the Bakken. Natural gas price realizations during the quarter were 99% of benchmark prices, lower than our historical trend and a result of weaker shoulder month pricing and lower NGL value net of processing costs. Per unit lease operating costs were $6.96 per BOE, a 5% decrease compared to the second quarter and within our guided range of $6.50 to $7.50 per BOE. Production and ad valorem taxes were 7% of sales, with our view for the remainder of 2023 unchanged at 7% to 8% of sales.

G&A expense for the third quarter was $2.16 per BOE. Included in our third quarter G&A expense was $379,000 of non-cash stock-based compensation. Adjusting for this, our recurring cash G&A expense was $4.9 million or $2 per BOE. We continue to expect full year 2023 recurring cash G&A to be in the range of $20 to $22 million, excluding the $2.5 million in warrant exchange transaction costs incurred in the second quarter. Our operating partners completed and placed on production a total of 77 gross or 8.6 net wells with nearly two-thirds of the activity occurring in the Permian Basin. An additional 196 gross or 10.6 net wells were in progress at quarter end. We are increasing our full year expectation by two net wells on the low and high end to now target 21 to 23 net wells placed on production during full year 2023.

Capital spending during the quarter was $95.1 million, including $20.1 million of acquisitions. Year-to-date, our spending totals $284.6 million, including $62.4 million of acquisitions. Primarily to reflect an increased level of company acquisitions, as well as the expanded development efforts by our operating partners on their respective acreage, we are increasing the midpoint of our annual capital guidance by $55 million. Our total capital spending guidance is now $345 million to $355 million for 2023. We also continued our ongoing quarterly cash dividend. During the quarter, the Board declared an $0.11 per share dividend that on an annualized basis represents a 7.2% dividend yield measured against Wednesday’s closing price. In addition, we also repurchased 869,000 shares at an aggregate cost of $6.3 million during the quarter.

As of September 30, we have repurchased a total of $1.8 million shares at a cost of approximately $12.3 million. Subsequent to quarter end, we completed our semi-annual bank redetermination, increasing our elected commitment amount from $150 million to $240 million. Pro forma for this redetermination, our liquidity at the end of Q3 was $161 million, with $85 million drawn on our revolving credit facility. Our leverage ratio at quarter end was approximately a quarter of a turn and below our half turn target. Finally, over the past months, we have added a number of defensive hedges to where we now have approximately 75% of our current PDP hedged for 2024 oil and gas. I’ll now hand it back to Luke for his closing comments. Luke?

Luke Brandenberg : Thank you, Tyler. To sum it up, we are pleased with our third quarter results and believe we are strongly positioned as we enter 2024. And while it may sound like a broken record, I do think it is worth repeating that we believe Granite Ridge’s investment thesis for non-op oil and gas companies differentiated is practically we’re a hybrid oil and gas company and investment firm. Our objective is to tighten the band of outcomes in oil and gas investing with high diversification, low leverage, and disciplined investment decision making. While many of our small cap peers trade more like an asset than a business, we look forward to demonstrating in the public space, as we have in the private space for a decade, that there is real value in the Granite Ridge business above and beyond our asset value.

I’d also like to make the distinction that while we had a decline in stock price from the secondary, we did not have a decline in stock value. This decline in stock price does not increase risk, it decreases it. We have something special here, particularly at this price point. I’ll wrap up by thanking all of our shareholders once again for your continued support. We appreciate. And with that, we’re happy to answer any questions folks may have on today’s call. Operator?

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Q&A Session

Operator: [Operator Instructions] And your first question comes from a line of Michael Ciello from Stephens. Your line is open.

Michael Ciello : Hi, good morning guys. Luke, you mentioned talking – you mentioned you’ve got control of 25% of expenditures, or you think you’re going to for next year. I guess, based on where strip prices are now, when do you think you would hit that leverage target of 0.5 times? And what does that imply for growth next year relative to, call it the high-teens you’ll do this year?

Luke Brandenberg: Yeah, good morning, Mike. Good question. So, from a leverage perspective, at the pace that we’re going, I’d anticipate that we would hit that half-turn target somewhere, call it middle of the year. That would be the best guess at this time. Again, prices will play a pretty big impact on that. As will acceleration on that control capital or strategic partnership side, as I mentioned, we’ll be picking up a rig, and actually two rigs for a short period of time this year. But we’re practically looking at about a rig full-time next year and so that’ll certainly play a role in it.

Michael Ciello : Okay. And can you characterize kind of the percentage of working interests you take in those strategic partnerships versus your typical burgers and beer? And what’s the pipeline of opportunities look like for more of the strategic partnerships?

Luke Brandenberg: Yeah, great question. So, on the burgers and beer side, that varies quite a bit from the DJ base, and where we brought on 32 wells, but only 0.07 net. So very small working interests generally across the DJ. And some areas of the Permian be may be closer to 10%, but on the strategic partnership side, so that gets a lot higher. That’s much more concentrated investments. And so, generally speaking, when we partner with a group, we being Granite Ridge, maybe 95% of the capital in that partnership. Now we generally have 100% control of the drilling unit, so maybe we’re 60%, 70% of that. But net to Granite Ridge, so if you look at the drilling unit, we’re probably somewhere between 50% and 60% typically. So much more concentration there.

And then, as we talked about, we really like the balance there. You have higher concentration, but we expect higher rates of return there. And then also just that control piece, I think it’s really differentiated for what we’re doing. It just gives us the ability to pause if it makes sense, accelerate if it makes sense, and just look a lot more like an operator from that perspective.

Michael Ciello : Great. And then, just one more if I could. You mentioned you’re seeing some green shoots on pricing. You’re not ready to change your official, I guess, well costs for next year. But anything you can say in general on where you think well costs are heading based on what you’ve seen with AFE so far relative to 2023?

Luke Brandenberg: Yeah, I think basin by basin changes a lot. Where we’ve seen the best beats, if you will, is in the Haynesville. And I think a big factor of that was you probably just had a pretty big swing on the pendulum when prices for drilling really ramped in late ‘22. And like a lot of folks just got bit by that, I think you saw companies probably had AFEs a little bit more to make up for that. And we’ve seen them come in under. I mean, in one case we were, gosh, we were almost 20% under, which was tremendous and certainly happy to be partnered with that operator there. But that said, it’s, I could tell you a handful of data points where we beat, but the majority of them were really coming in line pretty darn close to AFE.

So again, there are some green shoots, but, rigs are getting a bit tighter in the Permian than they were six months ago. And so you’re seeing some rig rates that are approaching low 30,000s of dollars a day. And so, I don’t know that we’re seeing any relief there. So I’d say steady as she goes is our expectation as we look towards ‘24.