Granite Ridge Resources Q2 2023 Earnings Call Transcript

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August 11, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome, everyone, to Granite Ridge Resources Second Quarter 2023 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. A question and answer session will follow the formal presentation. Thank you. It is now my pleasure to turn the call over to Wes Harris, Investor Relations representative for Granite Ridge.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Luke Brandenburg, our President and Chief Executive Officer, who will provide an overview of key matters for the Q2 and our outlook for the remainder of 2023. We'll 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 the call up for questions.

Speaker 1

Today's conference call contains certain projections and other forward looking statements within the meaning of federal securities laws. These statements are subject to risks 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.

Speaker 1

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 call is being recorded. A replay and transcript will be made available on our website following today's call.

Speaker 1

So with that, I'll turn the call over to Luke. Luke?

Speaker 2

Thank you, Wes, and good morning, everyone. We appreciate you joining us for today's call. This was a solid quarter for Granite Ridge. From a results perspective, I'll steal a term Tyler used in our board meeting and call it workmanlike. Across the board, Results were in line to slightly better than our internal expectations.

Speaker 2

Production was a bit better, which led to a bit higher adjusted EBITDAX. CapEx and wells turned to sales were roughly in line. It almost seems boring, but as a new public company, boring can be good and a lot of hard work went into creating this boring in a good way outcome. I'd like to thank our team for all their efforts over the past quarter as well as our operating partners. An immense amount of time and energy went into turning nearly well a day to sales.

Speaker 2

We greatly appreciate it. A particularly bright spot of the quarter was our business development and deal evaluation efforts. Historically, we have seen about a deal a day for roughly 400 unique deals a year. Year to date, we've already screened and or evaluated over 400 deals, representing over $10,000,000,000 of potential capital opportunities. We closed 10 transactions in the first half of the year, 7 of which were in the Permian and 1 transaction each in the Eagle Ford, Haynesville and DJ Basin.

Speaker 2

A few of those Permian transactions are part of the strategic partnership leg to our opportunity set stool, where we make a more concentrated allocation in core areas with our strategic partners. We mitigate this concentration risk with higher expected returns and more insight into development timing. We look forward to sharing more on our strategic partnership initiative in the coming quarters. In addition to solid execution across the board, I'm pleased with the progress we have made on several of our key initiatives. While we still have wood to chop to increase trading volume, the 1 two punch of Warren Exchange and Russell Index addition at the end of June removed an overhang and has more than doubled previous volume.

Speaker 2

We continue to increase investor visibility at conferences and non deal roadshows, and we are really starting to hit our stride as a public company. It's great to see some of this progress reflected in the share price as we are up roughly 35% since we've Spoke 3 months ago on our Q1 earnings call. Now with the table set, I'll turn to our outlook for the full year 2023. As a result of stronger than expected well performance in the Haynesville and Permian, we are increasing the low end of our 2023 production guidance by 500 barrels of oil equivalent per day. This takes the midpoint up to 22,250 barrels of oil equivalent or a 13% increase over the full year 2022.

Speaker 2

On the CapEx side, we are not changing our development capital guidance, But we are increasing our guidance on inventory acquisitions, which I in the past have referred to as opportunity capture by $5,000,000 Now as a reminder, while our team continues to pursue new opportunities, we do not guide the future investments. The $50,000,000 guide for inventory acquisitions And production acquisitions are deals that have either closed or where we have executed definitive agreements. As mentioned on the previous call, our development CapEx for 2023 is front half loaded, but our turn to sales count is back half loaded. The Q3 will be an exciting one. We anticipate that about 3 quarters of our remaining wells to be turned to sales as well as about 3 quarters of our remaining development CapEx will occur in the quarter.

Speaker 2

So with that, I'll turn it over to Tyler to discuss our financial results in more detail. Tyler?

Speaker 3

Thanks, Luke, and good morning, everyone. During the Q2, we reported net income of $0.07 per diluted share and adjusted net income of $0.19 per diluted share. Our average daily production for the quarter was 21,500 BOE per day, a 13% increase year over year and a 7% decrease quarter over quarter. Looking forward, we expect this quarter's production volume to be our low point for the year with production growth anticipated during the second half of twenty twenty three. And as Luke mentioned, we tightened our production guidance range and increased our midpoint for the year to 22,250 BOE per day, which now represents 13% growth compared to last year.

Speaker 3

Per unit lease operating costs for the quarter were $7.34 per BOE, an increase compared to the Q1 due to a combination of several factors, Including the addition of acquired producing properties, higher saltwater disposal costs, increased workover expenses and lower production. For 2023, we continue to expect LOE of $6.50 to $7.50 per BOE. Production and ad valorem taxes came in at 7% of sales and our view for 2023 of 7% to 8% of sales remains unchanged. G and A expense for the Q2 was $4.08 per BOE. Included in our G and A expense was $400,000 of non cash stock based compensation and $2,500,000 in warrant exchange transaction costs.

Speaker 3

Adjusting for these items, our recurring cash G and A expense was $5,100,000 or $2.60 per BOE. We continue to expect full year 2023 recurring cash G and A to be in the range of $20,000,000 to $22,000,000 excluding the $2,500,000 in warrant exchange transaction costs. Our operating partners completed and placed on production a total of 79 gross 5.5 net wells with 90% of that activity occurring in the DJ and Permian Basins. At quarter end, we had an additional 186 gross or 12 point 2 net wells in progress at quarter end. Our full year expectation of 19 to 21 net wells placed on production is unchanged.

Speaker 3

Capital spending during the quarter was right on track. During the quarter, we deployed $63,000,000 of capital, including $7,500,000 of acquisitions. And year to date, our spending totals $189,000,000 including $42,000,000 of acquisitions. We're increasing our annual capital guidance by $5,000,000 to reflect These recently closed transactions. Our total capital spending guidance is now $280,000,000 to $310,000,000 for 2023.

Speaker 3

We 6.1 percent dividend yield measured against Wednesday's closing price. Looking at our $50,000,000 stock buyback During the Q2, we repurchased 661,000 shares at an aggregate cost of $4,100,000 As of June 30, we have repurchased a total of 960,000 shares at a cost of $6,000,000 Our stock repurchase plan is authorized through the end of 2023 and will be evaluated later this year. And finally, we ended the 2nd quarter with $55,000,000 drawn on our revolving credit facility. With availability of $95,000,000 on the revolver and cash $14,000,000 Our ending liquidity was $109,000,000 I'll now hand it back to Luke for his closing comments. Luke?

Speaker 2

Thank you, Tyler. As we have discussed on previous calls, Granite Ridge is a bit different in the public world in that we are a hybrid. On the one hand, we are an oil and gas company as all our assets are oil and gas real property interests. On the other hand, We're more of an investment firm, but one with daily liquidity and greater investor alignment as our day to day job is not picking drilling locations or frac designs, but rather to source and evaluate opportunities and allocate capital to deals with the best risk adjusted returns. Our objective It's to tighten the band of outcomes in oil and gas investing through high diversification, low leverage and disciplined investment decision making.

Speaker 2

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 like to conclude by thanking our shareholders for your continued support. And to investors that we do not yet have a relationship with, We look forward to the opportunity to share our story and our plans to deliver meaningful shareholder returns, both in the near future and long term. So with that, we are happy to answer any questions folks may have on today's calls. Operator?

Operator

Your first question comes from the line of Phillips Johnson with Capital One. Your line is open.

Speaker 4

Hey, guys. Thanks and happy Friday. My first question pertains to M and A. Luke, I wanted to Maybe flesh out some of your comments about strategic partnerships that you mentioned in your prepared remarks. I'm wondering if you guys Have looked at or plan to look at any larger size deals where Granite Ridge would be a true partner in the development plans of A larger acreage footprint, similar to kind of what one of your public non op peers has done recently as opposed to sort of the more Traditional non op deals where you're more of a passive working interest owner?

Speaker 2

Yes. Good morning, folks, and thanks for the question. The answer is Absolutely. In fact, we put offers in on maybe a couple of deals that look like that thus far. On the strategic partnership, that's more of Almost a private equity type model where we're really partnering directly with a team that's going out to build an asset In small chunks over time, but in terms of a larger format acquisition, we are in conversation with several folks to do that as well.

Speaker 2

One thing when we look at that, Our goal is to try to stay away from more of the larger banker marketed processes. We just haven't seen as much value there. We see more value in the smaller kind of one off deals. And so one thing that I'd tell you is we're talking a lot of the private equity firms. And as private equity fundraising is not as large in quantities it was several years ago, The thought is that we could potentially be a really interesting capital partner for folks that are going out looking to make an acquisition And don't necessarily have the capital to compete with a lot of the SMID caps.

Speaker 2

But the idea there is and the reason I like the private equity focus is that Those guys buy the asset, that's probably the only asset that they own. And so we have a good line of sight that 100% of the CapEx is going to go to the asset that we're invested in. If they choose to soft drilling, it probably makes sense for us as So we like that view or the regular dialogue with the private equity firms. Right now, a lot of the packages on the A and D market, you've had A bit of an impasse just because it's so darn hard to buy PDP when cost of debt went from 3.5% to 8.5%. And so it's just tough to buy PDP at PV-ten, which is still what a lot of sellers want.

Speaker 2

So haven't transacted on any, but that's a long winded way of saying we like Concept, we like what our peers done there. I think they're driving a lot of value doing that and we are certainly exploring it as well.

Speaker 4

Yes, sounds good. That's really good color. Thanks. And then it's obviously early to talk 24, but Maybe just from a high level perspective, how should we think about what your production growth rate might look like next year? And just kind of thinking maybe longer term, What do you think is the right production growth rate for a company of your size?

Speaker 5

Yes, it's

Speaker 2

a great question. So one thing that we've talked about from At a CapEx standpoint, we're generally targeting reinvesting pretty much all of our free cash flow. And so What that looks like at a high level is maybe high single digit to low double digit year over year production So this year with a small bump in guidance, we're looking at about a 13% year over year production growth. I anticipate something around that range, again, high single digit to low double digit is what we look at internally.

Speaker 4

Okay, great.

Speaker 5

Thanks, Luke. You got it.

Speaker 2

Thanks, Phillips. Have a great weekend. You too.

Operator

Your next question comes from the line of Jeff Grampp with Alliance Global Partners. Your line is open.

Speaker 6

Good morning, guys. Appreciate the time.

Speaker 7

Yes. Good morning.

Speaker 6

So maybe kind of building off that last Luca, it sounded like I think you said target reinvesting all of the free cash to focus on growing that top line at attractive returns. I wanted to tie that into the dividend policy. You guys are a newly public company, so no real Precedent, I guess, in terms of when you and the Board, kind of review that policy. Is it fair to think that the focus is more on growing the asset base Versus say the dividend, or do you think there's a dividend growth story here in kind of the near medium term? Just I guess how do you guys see that fitting in, and the overall kind of shareholder return framework for you guys?

Speaker 2

Yes, it's a great question. It's something that I'd say is a primary point of conversation at our Board meetings. At a high level, the idea is if we can continue to find opportunities that meet our return targets, We think that allocating capital there and increasing production is a better use of capital. We're getting a better full cycle return for the investors. That said, if we go through a slow period where we're not able to put capital to work, we certainly have If you ignore, let's say, growth CapEx, there's free cash flow available to allocate your growth or to allocate the dividend.

Speaker 2

To date, we haven't had a lot of conversation about increasing the dividend, to be honest with you, and I think that's driven by 1, just Deal flow that in terms of volume is as great as we've probably ever seen. And I'd also tell you we are Looking forward to allocating some more chunkier capital bites through our strategic partnerships And those are really exciting to us. So again, we've not talked about increasing the dividend, but a piece of that too is we always want to make sure that the dividend This one makes us interesting to the broader investor group and specifically the retail investor. But 2, we love having a dividend that we can very easily defend. One of the things that we look at from a hedging perspective is, I want to make sure that I can cover my dividend and keep production roughly flat for at least 18 months at a Price deck that's just not sustainable where folks aren't making money.

Speaker 2

And we really like that, the dividend where we sit right now. We feel that for at least 18 months and keep production flat, you can cover the dividend and that sets us in a good spot where people can really count on that.

Speaker 6

Great. I appreciate that commentary. And on the acquisition side, any sense for attributing that Increase in deal flow, is that just a broader industry dynamic that you guys see at play? Is there a function of You guys now being public and maybe having a little bit more kind of brand recognition for people who didn't know you guys. What would you kind of attribute that step change in deal flow to?

Speaker 7

Yes, it's a good question. I'd say

Speaker 2

it's all the above. I do think there's a few more in balance now that we're public. I think just across the board, non op is becoming a sector that's Better understood and folks are more excited about that. But another piece of it too is through our strategic partnerships, we've really broadened Our BD team, if you will, one of the companies that we partner with, I mean, my goodness, these guys are bringing in, it seems like a new, Truly, unmarketed deal that they're coming up with every couple of 3 weeks. They're just incredible on the BD side.

Speaker 2

And We're looping that into the number of deals that we're looking at, but it's neat to see that not only is the volume up, but again based on the Strategic partnership comment, the character of the deals has changedincreased. So we're seeing deals that are chunkier in nature, which is exciting for us. If you think about the predecessor company, we're limited in the scale of an investment in any one deal about the fund size. Now that We have the public company, you've got a lot more consolidated cash flow to reinvest, allows us to take some of these more Concentrating investments in deals where we can mitigate some of that concentration risk as I mentioned earlier from higher expected returns and then also Having more control and more insight over the timing. So the deal flows there, the competition is up as well.

Speaker 2

So I wouldn't suggest that just because deal flow is up, there's a lot of low hanging fruit out there. It's a slog, it's tough work and We get blown away on frankly a good number of the deals that we bid on. But the number is up, the character is changing and I'd say the expected return on the transactions that we are doing has increased. So a lot to be encouraged about.

Speaker 6

Great, great. And just a follow-up last one related to that point. It looks like the budget for this year on the acquisition front isn't Drastically different than what you guys have executed on over the last couple of years, ballpark speaking, but deal flow is way up. So Would you say that you guys are just kind of having a higher return threshold than years past? Is it conservatism just given the choppiness in the commodity pricing in the last several months?

Speaker 6

Or I guess, just looking for some commentary in terms of the overall quality of the deals that you guys are seeing?

Speaker 2

Yes. I'd say a part of it goes back to the competition side, particularly in the first half of the year. And really in the Q1, we were just truly getting blown out of the water A lot of deals and so I'm not sure if it was just new money chasing the non op space that was really trying to put capital to work. That was a component of it. I'd tell you another piece is that, I'd say because of some of these deals, it's more concentrated bets.

Speaker 2

There's a lot more CapEx In some of these associated with that entry cost. And so while the quantity of dollars spent in inventory acquisition May not be dramatically higher. In some of these cases, the CapEx on the back end of those dollars is higher. And so whenever we're looking at the full cycle investment, Those dollars are going up.

Speaker 6

Understood. That makes a lot of sense. All right. Thanks for the time, guys. Cool.

Speaker 7

Thanks for the question. Have a good one.

Operator

Your next question is from Jeff Robertson with Water Tower Research. Your line is open.

Speaker 1

Thanks. Good morning. Luke, just following up on Philip's question about production growth. When do you start to get good line of sight into your operators' plans for 2024?

Speaker 2

Yes. Thanks for calling in, Jeff. So what I'd tell you is we have pretty darn good insight For maybe the next 9 months, with some of these strategic partnerships, you have

Speaker 3

a little bit more insight and a lot more,

Speaker 2

quite frankly. But early, particularly because so many of the wells that we're participating in are pad development, so there's a lot of lead time that goes into it. I'd say for 9 months, you have pretty darn good visibility. For 12 months, you have decent visibility. It gets a little bit tougher after that.

Speaker 2

And so a couple of comments on that. One is a big benefit of just kind of done this for a decade and the immense data set that we built There's just a lot of data to suggest when an operator is going to come back. I'll use Yes, EOG for an example. We have a very good data set that suggests, okay, they'll come in, they'll drill these zones, they'll typically wait a certain amount of time and then maybe they drill the different depth, They drill the pad next door. So that allows us to try to predict what's going to happen beyond that 12 month period.

Speaker 2

The other thing that I'd tell you is After 12 months, I'm not sure the operator even knows. They can certainly make the model say whatever it says, but the fact is most of these operators can adapt. And so they try not to set things in stone. They're going to adapt based on how their inventory changes, what hydrocarbon prices look like. And so these guys are very smart.

Speaker 2

And so again, 9 to 12 months is really where we feel pretty good about it, More so on the strategic partnerships, which is something that we like about that as we can feel a little bit better about

Speaker 5

that timing of those cash flows as well. Secondly, Luke, is there

Speaker 1

some seasonality to the blocking and tackling acquisition type strategy as Operator refresh their budgets and send out AFEs to their non op partners?

Speaker 7

Yes, it's a good question.

Speaker 2

The seasonality is really at the end of the year. So we'll see this in the Q4, but Specifically like November December, so you have several operators who have a big non op position. And what they'll do on a regular basis is they'll Well, we'd call it the wellbore only market. It's a market that we follow. There was a time years years ago where there was not a lot of buyers in that market.

Speaker 2

And so we actually put some dollars to work there now. We typically get blown out of the water constantly, but We followed, we'll put a bid in now and again when we have the capacity. But that market is where you really see the seasonality and that later in the year, They operate in the Permian, they send every week, no AFEs that have $30,000,000 to $40,000,000 of CapEx. Well, come November or December, they're sending out AFTs at $100,000,000 $150,000,000 of CapEx. So you definitely do see that towards the tail end.

Speaker 2

Again, we're not particularly competitive in that market. There's a lot of folks that play in that for different reasons, for tax reasons, IDCs, etcetera. So we are still there, but we like to keep a good pulse on it because it will be cyclical, but the only Predictable cyclicality is that late in the Q4, but sometimes you'll have a month like April, Hypothetically speaking, where a lot of

Speaker 5

the competitors have run out of

Speaker 2

money, maybe they got distracted, maybe their kids were on spring break And you can get a good feel, so we can keep a feel fine.

Speaker 1

Thank you.

Operator

Your next question is from the line of Carter Dunlap with Dunlap Equity Management. Your line is open.

Speaker 8

Hi, guys. I know there's been a lot of questions about deal flow, but I'm just kind of curious about just one factor. I mean, if we thought that 2nd half commodity deck is, let's say, materially or somewhat better than the first half. Do you think that helps flow or impedes flow in terms of basically volume and also what people want to get from you?

Speaker 2

Yes, it's a good question. What I'm hoping, Carter, is that in the first half, I think you have more optimism about prices. And so you may have had folks that lead into deals because they were really seeing the consensus was pretty balled up around Higher back half pricing. And we weren't really doing that. For us, when we're evaluating opportunities, we're generally I'm just looking at strip and we'll look at above strip, below strip, you want to see where a deal breaks and where it seems to make sure that you're Not right on the line there.

Speaker 2

But generally, we're investing at strip and we like to use strip because if you invest across the cycle, You're going to tighten that band of outcomes by putting a lot of bets to work at different strip prices. I think we lost a lot of deals because Folks, we're leaning into it. I think there's a scenario where now that you've seen that rise in prices, specifically on the oil side or gas side as well, That folks are more bidding strip and they're not leaning into it as much. And so that may help us On the price side, the PDP is really the big one there. And I mentioned earlier, PDP is just so hard to transact on and there's environments where you had a material Trade increase and then also just a lot of uncertainty about hydrocarbon prices.

Speaker 5

I

Speaker 2

think that now that we've seen a bit of that run up, There may be a little bit more maybe a smaller gap between buyers and sellers that's maybe an optimistic, but I think that could happen.

Speaker 8

All right. Thanks. Appreciate

Speaker 5

it. Yes, sir.

Operator

There are no further questions at this time. Ladies and gentlemen, thank you for participating on today's conference call.

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