Granite Ridge Resources, Inc.

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. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn call over to Wes Harris, Investor Relations Representative for Granite Ridge.

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 Brandenburg, our President and Chief Executive Officer, who will provide an overview of key matters for the second quarter 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. 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. These and other risks are described in yesterday's press release and are 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. So with that, I'll turn the call over to Luke. Luke?

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. 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. 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 or roughly 400 unique deals a year. Year to date, we've already screened and or evaluated over 400 deals, representing over $10 billion in potential capital opportunities. We closed 10 transactions in the first half of the year, seven of which were in the Permian, and one transaction each in the Eagleford, Hainesville, and DJ Basin. 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 one-two punch of Warren Exchange and Russell Index Edition at the end of June removed an overhang and has more than doubled previous volume. 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 spoke three months ago on our first quarter 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 Hainesville 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. On the CapEx side, we are not changing our development capital guidance, but we are increasing our guidance on inventory acquisitions, which in the past I've referred to as opportunity capture, by $5 million. Now, as a reminder, while our team continues to pursue new opportunities, we do not guide the future investments. The $50 million 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 third quarter will be an exciting one. We anticipate that about three quarters of our remaining wells to be turned to sales as well as about three-quarters of our remaining development CapEx will occur in the quarter. So with that, I'll turn it over to Tyler to discuss our financial results in more detail.

Tyler?

Thanks, Luke, and good morning, everyone. During the second quarter, we reported net income of 7 cents per diluted share and adjusted net income of 19 cents 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 2023. 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. Per unit lease operating costs for the quarter were $7.31 per BOE, an increase compared to the first quarter due to a combination of several factors, including the addition of acquired producing properties, higher saltwater disposal costs, increased work over 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&A expense for the second quarter was $4.08 per BOE. Included in our G&A expense was $400,000 of non-cash stock-based compensation and $2.5 million in warrant exchange transaction costs. Adjusting for these items, our recurring cash G&A expense was $5.1 million or $2.60 per BOE. We continue to expect full year 2023 recurring cash G&A to be in the range of $20 million to $22 million, excluding the $2.5 million 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 12.2 net wells in progress at quarter end. Our full year expectation of 19 to 21 net wells placed on production is unchanged. Capital spending during the quarter was right on track. During the quarter, we deployed $63 million of capital, including $7.5 million of acquisitions. And year to date, our spending total is $189 million, including $42 million of acquisitions. We're increasing our annual capital guidance by $5 million to reflect these recently closed transactions. Our total capital spending guidance is now $280 million to $310 million for 2023. We have also continued our ongoing quarterly cash dividend program. During the quarter, the Board declared an $0.11 per share dividend, which represents an approximate 6.1% dividend yield measured against Wednesday's closing price. Looking at our $50 million stock buyback plan, during the second quarter, we repurchased 661,000 shares at an aggregate cost of 4.1 million. As of June 30th, we have repurchased a total of 960,000 shares at a cost of $6.0 million. Our stock repurchase plan is authorized through the end of 2023 and will be evaluated later this year. And finally, we ended the second quarter with $55 million drawn on our revolving credit facility. With availability of $95 million on the revolver and cash of $14 million, our ending liquidity was $109 million. I'll now hand it back to Luke for his closing comments.

Luke? 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 frack designs, but rather to source and evaluate opportunities and allocate capital to deals with the best risk-adjusted returns. Our objective is to tighten the band of outcomes in oil and gas investing through 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 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?

At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile our Q&A roster. Your first question comes from the line of Phillips Johnson with Capital One. Your line is open.

Hey, guys. Thanks, and happy Friday. My first question pertains to M&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 you know granite ridge would be a true partner in the in the development plans of a larger acreage footprint uh similar to kind of what one of your public uh 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 yeah good morning philips and thanks for the question uh the answer is absolutely in fact we put

offers in on maybe a couple deals that look like that thus far you know in 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 you know in small chunks over time but in terms of a larger format acquisition now we are in conversation with several folks due to that as well you know one thing when we we look at that um our 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 tell you is we're talking a lot of the private equity firms and private equity fundraising is not as large in quantity as 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. But the idea there is, and the reason I like the private equity focus, is that if 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 their capex is going to go to the asset that we're invested in. If they choose to stop drilling, it probably makes sense for us as well. So we like that view or the regular dialogue with the private equity firms. Right now, a lot of the packages on the A&D market, you've had a bit of an impasse just because it's so darn hard to buy PDP when, you know, our cost of debt went from 3.5% to 8.5%. And so it's just tough to buy PDP at PD10, which is still what a lot of sellers want. So haven't transacted on any, but that's a long-winded way of saying we like the concept We like what our peer has done there. I think they're driving a lot of value doing that, and we are certainly exploring it as well.

Yeah, 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?

Yeah, it's a great question. So one thing that we've talked about from 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 growth. So this year with a small bump in guidance, we're looking at about a 13% year over year production growth. I anticipate something And around that range, again, a high single digit to low double digit is what we look at internally.

Okay, great. Thanks, Luke. You got it. Thanks, Bill. Have a great weekend. You too.

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

Morning, guys. Appreciate the time. Yeah, I think you're morning. So maybe kind of building off that last commentary, Luke, 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 in the overall kind of shareholder return framework for you guys?

Yeah, it's a great question. It's something that I'd say is a primary point of conversation in our board meetings. You know, 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. To date, we haven't had a lot of conversations about increasing the dividend, to be honest with you. And I think that's driven by one, 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 is is one, makes it interesting to the broader investor group and specifically the retail investor. But two, 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. 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 sits us in a good spot where people can really count on that.

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 know, 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 and deal flow to?

Yeah, it's a good question. I'd say it's all of the above. I do think there's a few more inbounds 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, you know, 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, you know, every couple, three weeks. They're just incredible on the BD side. And so, you know, 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, you know, change slash increase. So we're seeing deals that are chunkier in nature, which is exciting for us. You know, if you think about the predecessor company, you know, we were limited in the scale of an investment in any one deal by the fund size. Now that we have the public company, you've got a lot more consolidated cash flow to reinvest. It allows us to take some of these more, you know, concentrated investments in deals where we can mitigate some of that concentration risk, as I mentioned earlier, from higher interest. and also having more control and more insight over the timing. So, you know, the deal closed there. The competition's up as well. So I wouldn't suggest that just because the deal closed up, you know, 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've been on. But the number's 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.

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 flows 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 kind of given the choppiness in the commodity pricing the last several months? Or I guess just looking for some commentary in terms of the overall quality of the deals that you guys are seeing.

Yeah, 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 first quarter, we were just truly getting blown out of the water on 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'll tell you another piece is that I'd say because of some of these deals, it's more concentrated bets. 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.

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

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question is from Jeff Robertson with Water Tower Research. Your line is open.

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

Thanks for calling in, Jeff. So what I'd tell you is we have pretty darn good insight for maybe, you know, nine months. With some of these strategic partnerships, you have a little bit more insight, quite frankly. But generally, you know, 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 nine months, you have pretty darn good visibility. For 12 months, you have... decent visibility it gets a little bit tougher after that and so a couple comments on that one is you know a big benefit it just come down this for a decade and the immense data set that we still is there's there's just a lot of data to suggest when you know an operator is going to come back i'll use you know esg og for an example you know we have a very good data set 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 maybe they drill the pad next door So that allows us to try to predict what's going to happen, you know, beyond that 12-month period. You know, the other thing that I'd say is after 12 months, I'm not sure the operator even knows. You know, 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 they're These guys are very smart. And so, again, nine 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 that timing of those cash flows as well.

Secondly, Luke, is there some seasonality to the blocking and tackling acquisition type strategy as operators refresh their budgets and send out AFEs to their non-op partners?

Yeah, it's a good question. The seasonality is really at the end of the year. So we'll see this in the fourth quarter, but specifically like November and December. So you have several operators, you know, who have a big non-off position. And what they'll do on a regular basis is they'll, you know, we call it the wellbore only market. It's a market that we follow regularly. There was a time years and years ago where there was not a lot of buyers in that market. So we actually put some dollars to work there. Now we typically get blown out of the water constantly, but we follow, you know, 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, you know, say an operator in the Permian may send every week, oh, AFEs that have $30 to $40 million of capex. Well, come November or December, they're sending out AFPs that have $100, $150 million of capex. So you definitely do see that towards the tail end. 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, et cetera. So we risk those there, but we like to keep a good pulse on it because It will be cyclical, but the only predictable cyclicality is that, you know, late in the fourth quarter. But sometimes, you know, you'll have a month like April, hypothetically speaking, where a lot of the competitors have run out of money, maybe they got distracted, maybe their kids were on spring break, and you can get a good bill. So we, again, keep a close eye.

Thank you.

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

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 second half commodity deck is, let's say, you know, materially or somewhat better than the first half, do you think that that helps flow or impedes flow in terms of basically volume and also what people want to get from you?

Yeah, 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 leaned into deals because they were really seeing the consensus was pretty balled up around higher back hat pricing. And we weren't really doing that. For us, when we're evaluating opportunities, we're generally just looking at strip. And we'll look at above strip, below strip. You want to see where a deal breaks and where it sinks to make sure that you're not right on the line there. 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 were leaning into it. I think there's a scenario where now that you've seen that rise in prices, uh, specifically on the oil side, we'll gas that as well, um, that folks are, you know, more bidding strip and they're not leaning into it as much. And so that may help us, um, 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 interest rate increase. And then also just the, a lot of uncertainty about hydrocarbon prices. I 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 unoptimistic, but I think that could happen.

All right. Thanks. Appreciate it. Yes, sir.

There are no further questions at this time. Ladies and gentlemen, thank you for participating on today's conference call. This concludes today's call. You may now disconnect.