Granite Ridge Resources, Inc.

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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Wes Harris, Investor Relations Representative for Granite Ridge, you may begin your conference.

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 third quarter and our outlook for the remainder of 2023. We will then turn the call over to Tyler Farkerson, 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 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 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?

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 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 for keeping the wheels of capitalism turning, the folks on the research and IR side for helping us to spread the Granite Ridge 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. While we plan to issue 2024 guidance when we report year-end 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 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 three and a half net wells in a core Delaware unit that turned to sales a month earlier than expected and came in under budget. Additionally, we had 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 AFE. 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 in 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, and 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 shareholder. 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 investable. 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 Stevens 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 investable. 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 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 docs, not the future deals. For 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 of 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 if 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 had previously mentioned that our normal course of business debt target is half a turn of 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-dividend 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. 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 the 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? 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 21 cents per diluted share for the quarter. Non-cash depletion and accretion expense for the third quarter totaled 44.3 million, impacting adjusted EPS by 33 cents 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're 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 11 cent 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 semiannual 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? 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. We believe Granite Ridge's investment thesis for non-off oil and gas companies differentiated. 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 did 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 you. And with that, we're happy to answer any questions folks may have on today's call. Operator,

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of Michael Cielo from Stevens. Your line is open.

Hi, good morning, guys. Luke, you mentioned you've got control of 25% of expenditures, or you think you're going to for next year. Based on where strip prices are now, when do you think you would hit that leveraged 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?

Yeah, good morning, Mike, and good question. So from a leveraged perspective, at the pace that we're going, I'd anticipate that we would hit that half-term 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, 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.

Okay, and can you characterize kind of the percentage difference

of working interest you take in those strategic partnerships versus your typical burgers and beer and what's the pipeline of opportunities look like for for more of the strategic partnerships yeah great question so on the the burgers and beer side yeah that varies quite a bit uh from you know the dj base said where you know we brought on 32 wells but only 0.07 net so very small working interest generally across the dj And, you know, some areas of the premium, we 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 may, 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 you know, 60, 70% of that, but net degree in a ridge. So if you look at the drilling unit, you know, we're probably somewhere between 50 and 60% typically. So much more concentration there. 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 a differentiator for what we're doing. 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.

Great, and 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 and where you think well costs are heading based on what you've seen with AFE so far relative to 2023?

Yeah, I think basin by basin changes a lot where we've seen The best beats, if you will, is in the Hainesville, 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 a lot of folks just got bit by that. Nicky Saw Company has 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, 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 the low $30,000 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. I appreciate that. Thanks, Luke. Yes, sir. Thank you.

Your next question comes from a line of Jeff Robertson from Water Tower Research. Your line is open.

Thank you. Good morning. Luke, with what you all have going on, Closing out the year with some of the incremental acquisitions, will that give you some production momentum as you start up or as you head into the first quarter of 2024?

Yeah, good morning, Jeff. So I'd say maybe a little bit, but most of the acquisitions, I referenced the one in the Hainesville that was plus or minus $20 million. That was a little bit of production, but the vast majority of that is inventory-weighted. That said, the group that we partnered with there, they'll actually be completing some wells late this year. And so I'd say we could see a little bit of acceleration, if you will, or increase going into 24 from the $40 million increase. But I don't think it's going to be a ton. Most of that is really inventory weighted, where we may start drilling that next year at some point, but not necessarily immediately. We did have a little bit of a production buy that also mentioned, I guess it was through two transactions that we were just fortunate to really get to capitalize on, hey, there's some late-life funds, and they may need to get out of assets. They're good funds. The fund made money. They just need to exit, and we were just a natural buyer, and we could make it real easy for them, and so we did buy a little bit of production there at valuations that we're very happy with, but it's really de minimis in the big scheme of things.

Is the Hainesville acquisition nearby to the well that was brought in recently under budget and overperforming in terms of production?

No, not particularly. This one is going to be on the Texas side.

Lastly, a question on the partnerships. I think you said you'd like to have one rig year in 2024. Is that one partnership, Luke, or would that be spread over a couple of different projects?

Good question. Glad you asked that. The goal is for each partnership to have effectively a rig full-time. That may not be a whole rig, again, if we're, you know, call it 70% of a unit. You know, you're not multiplying the full rig rate times 365 days, but it is one per group. And so, really, the objective is these guys are putting together deals or getting creative, getting scrappy, and putting together drilling units and stacking one on top of the other, such that they can run a rig full-time and just really try to get some of the benefits of keeping a rig running, as opposed to picking it up and putting it down.

Thank you. Yes, sir. Thanks for the question.

Again, it is star one to ask a question. Your next question comes from a line of John Abbott from Bank of America. Your line is open.

Good morning, and thank you for taking our questions. Just sticking with the strategic partnerships. So if I understand, it's going to be about one rig next year related to basically one partnership, 25% of CapEx. These partnerships, you know, it's... It requires a little bit, since you have a higher working interest, it requires a bit more capital. I guess just starting off here, and I know you want to grow that over time, but as you sort of think about, I mean, how quickly do you want to grow that strategic partnership capital since it is a bit more chunky and you would be looking at a dedicated rig per partnership? Do you want to grow that gradually at 25%, then like 50%, then 75%? Do you want to grow that over a multi-year basis? How do you think about, comfortably as you grow the business, how much strategic capital do you want out there?

Yeah, it's a great question. The way that we look at it, I'd say, truth be told, it's less of a plan of, hey, let's try to get one a year and increase from 25 to 50 to 75. It's really more opportunity-driven. And so our partners here, these are really unique opportunities in the sense that we're not here trying to replace your large private equity firms. That's not the role that we play. It's really for folks who are more focused on putting together kind of drilling unit by drilling unit, not the large format acquisitions. And there are several criteria that really make a good partner for us and allow us to be a good partner for them. A lot of these folks, they need to be proven moneymakers, and that's for two reasons. One, from risk management for us, we know that they know how to build a business, they know how to execute. But the other point is, we're not necessarily covering all the overhead of these groups. So these are folks that are willing to put their own money in a deal, real substantial dollars. You know, if they're, you know, five plus percent, we were running a rig full time, you know, it's over $5 million a year that they're reinvesting. So it's real dollars. So that's a, that's a criteria. The other piece is, again, we're not really competing with private equity in the sense of backing teams. And so a lot of this is really opportunity driven. You know, they're not finding opportunities to keep a rig running full time. You know, those are multi hundred million dollar deals that are generally the world of the, you know, the SMIDCAP guys or the larger private equity firms. These are kind of unit by unit. So when I look at next year, well, maybe let's rewind. We anticipate running a rig basically full-time next year, but we've been working with this team for over a year to get that drill schedule built out. So if today we found a team, it was a great partnership, both sides were really excited about it, and we hit the ground running, they might have identified an initial opportunity, But you're probably a year plus away from really running a rig full time. So that's a bounce around with you there. But ultimately, I'd say it's more opportunity driven than it is a specific formula for layering and one every year. And, you know, we're talking to groups in the Bakken, in the Midland Basin in particular. Those are areas where I think there are could be opportunities to put together units from folks that have had experience there and have deep relationships there. But I wouldn't anticipate next year's capital doubling, even if we shook hands with the team today. That would probably be later next year to early 25 that you're really putting dollars to work with that second team.

Appreciate that, Collar. And then the next question I think goes here to Tyler. And it's really on liquidity and strategic partnerships as well. Now, the opportunity of the strategic partners is more control, more visibility on cash flow, but cash flow can be lumpier. I mean, you have to spend money for these calls. You have to wait for them to come online. And so when you sit and looking at, it looks like you increased your credit facility up to about 240 mil. So I guess when you sort of think about the strategic partnership sort of model and how you think about liquidity that you want to maintain and how do you think about the possibility of further expansion to your revolver over time?

Yeah, so you're right. We did increase our revolver by $90 million added liquidity post quarter. And you know that that's exactly why we did that. We wanted to get ahead of the big ramp up in strategic partnership capital that we expect next year. So I think we're comfortable there in that kind of $250 million range that allows us to start to fund those strategic partnerships and gives us the opportunity to get to our half-turn leverage target while still giving us enough capacity to where if we do end up maybe getting a second team or deploying a team in the bucket or somewhere else, we'd have the capacity to start that process as well. And I think if we were successful on getting a second strategic partnership, we'd have to go back to market to increase our RBL at that point.

Understood. Maybe just a quick follow-up on that. So if you got a second, so the goal, not the goal, but one of the thresholds you've talked about is getting up to 0.5 times leverage. If you got another strategic partner, would that be a situation where you could possibly take leverage up to one times? Or would that not qualify that?

It could. I think we really view, though, going up to one times being more

of a consolidation opportunity, so maybe a larger format transaction where we'd take it up to one times if it had a clear pathway back down to our half-turn target. Yeah, the only thing that I would add on is that if you think about adding a rig, just picking up a rig, right, you get a negative cash flow for a period of time and you get to be cash flow neutral. And so just depending on timing of those two partnerships or three I think you could paint a picture where you certainly would go over half a turn, but you'd want to have real clear line of sight. And frankly, you'd hear us talk about it on calls or in some sort of press release of, you know, hey, we've talked about half a turn. We're going above that. But here's the line of sight to get back to that comfortable level. And the other piece of it, too, a neat thing about the non-off space is because we have control over these, but we're still non-off. If we get to a point where we've got more concentration or more capital than we're comfortable with, You can always sell down a piece of that. That's one of my favorite things about non-op is it's infinitely divisible. If I want to go sell down 20% in a well that we're about to spud, there's a great market for that. And we know those folks well. We compete with them day in and day out. It's a great way to lay off some capital to make sure that we're right-sizing our exposure in a quick way. Appreciate it.

Very, very helpful. Thank you, guys.

You got it. Thank you. Have a great weekend.

Your next question comes from the line of Jeff Robertson from Water Tower Research. Your line is open.

Thanks. Just to follow up on the discussion around partnerships, Luke, why do you think Granite Ridge's capital is a better source of capital for some of the people you all are discussing opportunities with and some of the alternatives they have?

Yeah, it's a great question because, look, I talked about the characteristics of a good strategic partner, and And most private equity firms would probably be chomping at the bit to get to partner with these folks as well. So it's a really good question. The few things that Granite Ridge really offers when we think about how we can be a better partner to these folks are, you know, one, if you think about a partnership with a private equity firm, a lot of times the private equity firms, they not only control the assets, but they also control the company. And most importantly, that means they control when to sell. With our partnerships, everything's at the asset level. And so while we control the asset, we can never make the group sell. They can sell when they want to, or they can hold onto the asset forever, which for a lot of these folks that again, are proven moneymakers that really created some value. They want to build a long term oil and gas company. We're a differentiated group for them. Now, the other thing that we do that we really think is important and different to teams really stands out is when we talk about a deal. with a group, it's really almost a drilling unit by drilling unit basis. And each of those drilling units are their own project. And so the management teams have the opportunity to create value to get into the incentive piece of it on a unit by unit basis versus having to wait for an exit for an entire vehicle. That's a real differentiator. And I think something that separates us and management teams really like is that they can effectively get funding on a project by project basis. We get comfortable with that because, one, we're focused on proven areas, and two, we're doing a lot of these. In addition to the strategic partnerships, we're in many wells over the course of the year, so we're able to diversify our risk across our portfolio. Two main reasons, more control over the company, also getting the opportunity for project-by-project payouts. I think those are two reasons that we can really be a better partner for the right folks.

Just to follow up for Tyler, I think you said, Tyler, about 75% of 2024 PDP production is hedged today. Will Granite Ridge's hedging strategy change as you approach the half-eternal leverage, or will it pretty much be to stay consistent with what it is today?

No, I think we like, even at half-eternal leverage, that's pretty low leverage. So I think that we'd have to go quite a bit higher on the leverage side before we'd consider really adding a lot more hedges and thinking about moving into hedging some of the development opportunities as well. So I think what you'll see from us is just consistency in that 50% to 75% range of current PDP.

Thanks for taking my follow-up.

You got it.

There are no further questions at this time. Mr. Luke Brandenburg, I turn the call back over to you for some final closing remarks.

Excellent. Thanks, Robin. Just want to say thank you to everyone on the call. This is a neat quarter for us. It's fun to talk about and sure appreciate everyone's interest. Tyler and I, we're perpetually on the road and we're always around. And so please don't ever have

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.