Granite Ridge Resources Q1 2023 Earnings Call Transcript

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May 12, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome everyone to Granite Ridge Resources First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I will now 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 Grant Ridge Resources. We will begin our call with comments from Luke Brandenburg, President and Chief Executive Officer, who will provide an overview of key matters for the Q1 and our updated outlook for 20 We will then turn the call over to Tyler Forkerson, 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.

Speaker 1

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, 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 SEC. This conference call also includes references to certain non GAAP financial measures.

Speaker 1

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. 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. We're pleased with our results for the Q1 of 2023, which provide us with a solid start to the year. Our success during the period was driven by strong execution on our 2023 business plan as our team continues to work closely with our proven operating partners in multiple key basins across the country. Highlights for the Q1 include a 5% increase in net production from last quarter to approximately 23,200 barrels of oil equivalent per day, including 46% oil, revenue of $91,000,000 and net income of $37,000,000 Adjusted EBITDAX and adjusted net income of $71,000,000 $27,000,000 respectively and liquidity of $136,000,000 including $11,000,000 of cash at the end of the period.

Speaker 2

Looking specifically at our production results, on our year end 2022 earnings call, We discussed that we anticipated a slight production decline of around 5% from the 4th quarter. Driving this view was the Expectation that some flush production for 2022 would roll off and that 2023 net turn to sales were weighted towards the back half of the year. Our actual Q1 'twenty three production results ended up coming in about 10% higher than our projections due to outperformance on some of our newer gas wells and a handful of high interest wells coming online late in Q1 versus early in 2nd. In total, Our operating partners turned 78 wells to sales during the Q1. This equated to 5.9 net wells for Greater Ridge.

Speaker 2

Of the 78 gross wells, 59% were in the Permian, 17% were in the DJ, 13% were in the Bakken and 11% were in the Eagle Ford. During the Q1, we spent $91,000,000 on drilling and completion CapEx net to Granite Ridge or said another way, excluding drilling carries. Tyler will provide additional details in his comments, but I will say that D and C CapEx for the quarter came in quite a bit hotter than expected. As I mentioned, much of the delta was due to acceleration of wells scheduled to come online in the Q2 that actually came online in the first, which is great, Other than when you're trying to model a company quarterly that is. The remainder of spending during the quarter included $17,000,000 of opportunity capture.

Speaker 2

As a reminder, opportunity capture is basically anything that grows our undeveloped inventory, think acquisitions of undeveloped acreage, Leasing, drilling carries and most of the deals that we target through strategic partnerships. Of that $17,000,000 89% was in the Delaware And 70% of the capital in the Delaware was through a strategic partnership. We also closed on $18,000,000 DJ PDP package. While we are not typically focused on oil weighted PDP deals in this price environment, this is a transaction that we have been working on since last March that took a while to get to the finish line. Turning to our outlook for full year 2023.

Speaker 2

In our continued effort to provide more and better information, We are bifurcating our guidance between opportunity capturePDP acquisitions and D and C CapEx. On the D and C CapEx side, we are increasing guidance by $25,000,000 at the midpoint to a range from $230,000,000 to 260,000,000 About half of that increase is new D and C generated by our burgers and beer game. I would note that we do not anticipate seeing material production from most of the new CapEx until 2024. The other half is a combination of cost inflation from wells that were AFE'd in early to mid-twenty 22 and unforecasted activity. On the inflation side, we believe that we've realized most of that hit in the Q1.

Speaker 2

It seems that wells AFE ed in late 2022 and after are coming in around AFE. Finally, we increased our guided net wells by 1 to a range of Our view of $45,000,000 for opportunity capture and PDP acquisitions remains unchanged. That includes the $18,000,000 DJ deal and $17,000,000 of opportunity capture year to date, plus roughly $10,000,000 that we have committed but not yet spent. Our full year capital spending outlook does not include any dollars for uncommitted acquisitions or opportunity capture, so I note our team continues to As a result of the stronger than anticipated PDP performance we have seen to date in the Permian and Haynesville And wells coming online sooner than expected during the Q1, we're increasing our full year 2023 production outlook by 500 barrels equivalent per day to a range of 21,000 to 23,000 barrels of oil equivalent per day, including 49% oil. So with that, I'll turn it over to Tyler to discuss our financial results in more detail.

Speaker 3

Tyler? Thanks, Luke, and good morning, everyone. As Luke discussed, we were pleased to begin 2023 with a solid Q1 and look forward to continued success for the remainder of the year. During the Q1, our average daily production was 23,167 BOE per day, an increase of 46% compared to the Q1 of 2022 and 5% from the Q4, respectively. Production results for the quarter were higher than our internal estimates due to stronger than expected results from PDP wells in the Haynesville And the acceleration of an additional 1.56 net wells that were placed online in the Permian.

Speaker 3

We realized oil prices of $76.14 per barrel and natural gas prices of $2.65 per Mcf, which was approximately 96% of the average Henry Hub price for the quarter. Our lower natural gas price realizations for the period This was 3% lower than the Q1 of 2022 as a substantial year over year production increase was more than offset by lower commodity pricing. Looking at costs for the Q1 and our expectations for 2023. Lease operating expenses were $13,800,000 or $6.61 per BOE. For 2023, we continue to expect LOE to be in the range of $6.50 to $7.50 per BOE.

Speaker 3

Production and ad valorem taxes were 5,700,000 For $2.74 per BOE and 6 percent of sales. Our view for 'twenty three remains unchanged at 7% to 8% of Sales. Our G and A expense for the Q1 was $8,600,000 or $4.11 per BOE. Included in our G and A expense was $1,100,000 in non cash stock based compensation and $1,400,000 in non We continue to expect our full year cash G and A for 2023 to be in the range of $20,000,000 to 22,000,000 We reported net income of $37,900,000 or $0.29 per share for the quarter. Net income was $28,400,000 or $0.21 per share and adjusted EBITDAX was $71,800,000 compared to $69,700,000 for the same period in 2022.

Speaker 3

Total capital spending during the quarter was $126,200,000 consisting of $98,600,000 of development costs and $27,600,000 of acquisitions. As Luke discussed, Our development costs for the quarter were approximately $40,000,000 higher than we expected. Nearly 75% of this variance was due to the acceleration of projects Originally scheduled to turn to sales later in 2023 and additional unforecasted activity from AFEs we received during the period. We also observed an approximate 10% cost overrun on certain projects that recently turned to sales. A majority of those projects were AFE'd in mid-twenty 22 prior to service cost inflations most operators We are now guiding to 2023 capital expenditures of $275,000,000 to $305,000,000 including $45,000,000 of acquisitions and opportunity capture.

Speaker 3

Our well delivery continued to progress steadily during the quarter as we completed and placed on production 5.9 net wells in multiple key basins across the country with a primary focus on the Permian. We also continued our ongoing cash quarterly dividend program by declaring an 0.11 dollars per share dividend during the quarter. Annualized at approximately $0.44 per share, this represents an approximate 7.9 percent dividend yield measured against Wednesday's closing price. In mid December, our Board approved a $50,000,000 stock buyback plan to repurchase shares in the open market. During the Q1, we repurchased 273,000 shares and we will continue to And finally, we ended the quarter with $25,000,000 drawn on our revolving credit facility.

Speaker 3

With availability of $125,000,000 and cash of $10,900,000 our ending liquidity was $135,900,000 I will now hand it back to Luke for his closing comments. Luke? Thanks, Tyler.

Speaker 2

Granite Ridge is unique. On one hand, we're an oil and gas company and that we own oil and gas assets. But on the other hand, our job is not to operate those assets, but rather to reinvest the cash flows they generate into projects with the best risk adjusted returns. In that sense, we're more of an investment firm, but with daily liquidity and greater investor alignment. Our objective is to tighten the band of outcomes in oil and gas investing and to generate asymmetric upside through high diversification, low leverage and disciplined investment underwriting.

Speaker 2

So why should you care about us? I could talk all morning about the virtues of our near zero leverage, low cost, non op model And how our diversification across hydrocarbon type basin operator generates a more attractive risk adjusted return profile. For how taking a smaller piece of a larger number of wells makes it easier for us to replace inventory than most operators. Or I could talk about how we provide public investors access to private operators that control some of the best inventory, particularly in the Permian. But the real reason to care about Granite Ridge is that we are cheap on just about any metric you can throw at us.

Speaker 2

As I mentioned on the last call, we trade like a company with a little cash flow and a lot of debt and the opposite is true. We are a fundamentally strong business that I believe would trade a lot higher were it not for our technical challenges of private equity overhang and limited trading volume. We will solve this. There may be some volatility along the way, but anyone willing to take a bet on us today will be rewarded with a roughly 8% dividend And I believe real multiple expansion as we solve both our technical challenges and continue to build on our solid foundation. In closing, we appreciate the continued support of our shareholders and we look forward to keeping everyone apprised of our progress.

Speaker 2

So with that, we're happy to answer any questions folks may have on today's call. Operator?

Operator

Thank Your first question comes from the line of Phillips Johnston with Capital One. Please go ahead.

Speaker 4

Hey, guys. Thank you. First question, I guess, is on CapEx. As you've mentioned, it came in a little bit higher than you expected, mainly because some Wells got pulled into Q1 from Q2, spent more than 40% of the budget, I think, in Q1. How confident are you that CapEx should moderate in the remaining three quarters of the year?

Speaker 4

And what's driving that decrease?

Speaker 3

Yes. So, hey, Phillips, it's Tyler. So, we did have some acceleration into the Q1 of activity that we thought would occur In the Q2 and as you'll recall, most of our projects are scheduled to turn to sales in the Q3 of this year. So really, that's where leading up to that is where the bulk of our capital will be spent. So I think what you'll see is, we've had some More capital than expected in the Q1, but that was really just a shift from the Q2.

Speaker 3

And then by the time we get through and leading up to the Q3, I think you'll start to see our CapEx moderate.

Speaker 4

Okay. So in terms of the cadence by quarter, It's not going to be sort of a ratable kind of $55,000,000 per quarter. It's a little bit higher than that in Q2 and then the back half of the year should be A little bit lower. Is that right? Yes.

Speaker 3

Exactly. We still expect a pretty high level of spend in the Q2 and then it should.

Speaker 4

Yes, okay. That makes sense. And then just, I guess, on the rationale for the slightly higher well count and CapEx budget for the year, I Recognize obviously Q1 was a heavy CapEx quarter, but you did tap into your cash balance and the revolver in order to fund The fixed dividend, at current strip prices, I don't think that's going to be necessary for the rest of the year even with the higher CapEx budget. But If prices continue to weaken, would you guys plan to continue to fund the dividend by drawing down on the revolver or would you look to Got activity in order to sort of prevent that from happening.

Speaker 2

Yes, Phillips, this is Luke. Thanks for the question. We would plan to stick with that dividend. We like the fixed dividend. We think that's an important piece of the business model and an important piece of the story.

Speaker 2

So the plan was to keep the dividend fixed. And as we see production coming on from a lot of these wells, you're paying down your debt balance from there later on in the year.

Speaker 4

Yes. Okay. Thanks, guys. Thank you.

Operator

Your next question comes from the line of Jeff Grampp with Alliance Global Partners. Please go ahead.

Speaker 5

Good morning, Luke and Tali. Thanks for the time.

Speaker 6

I was curious To dig in on this DJ PDP package that you guys closed on, I guess, for one, since it sounds like it had been in the works For a while, can you confirm whether or not that was included in the original guide and that's therefore that's kind of apples to apples as it relates to that specific asset? And then maybe curious given that you guys are not traditionally PDP buyers, what maybe was Interesting enough about this package to get you guys moving forward with that? Thanks.

Speaker 1

Yes, you got it. And thanks again for the call and

Speaker 2

the question, Jeff. So Yes, that was one that we had talked about in the Q4 call as well. We started talking to this group in March of 'twenty two. It was just A long conversation. Ultimately, they were a motivated seller.

Speaker 2

They weren't in a buying necessarily, but it was their only asset in the area. And really, we were the most logical buyer. So it was a long slowdown that got to the finish line. So from a value perspective, it made a lot of sense. I'd say that we underwrote that at pricing that was around or maybe even a little bit more attractive In terms of the lower price than now.

Speaker 2

So that's a deal that we like, but it's not something we spend a lot of time on. I wouldn't anticipate A lot of TDP acquisitions going forward on the oil side. Now on the gas side, that could be interesting, but haven't seen a lot of folks willing to sell at $2 gas point yet. So We are sniffing around in that market, but have not seen the gap between buyers and sellers narrow just quite yet.

Speaker 6

Got it. That's helpful. Thank you. And as it relates to the CapEx guidance again, since the opportunity capture component Basically, it was reiterated. Is it fair to conclude, that this is really more of an acceleration, if you will, within the existing asset base Relative to original expectations, I think Tyler also mentioned maybe there was a little bit of cost overruns as well.

Speaker 6

I don't know if that's that easy to bifurcate kind of well cost Change assumptions versus an acceleration, but just hoping to get a little bit more clarity on kind of the original guide versus the update.

Speaker 2

Yes, you got it. So a couple of things. There was some cost increase on the D and C side, But on the opportunity capture, so one thing to note about that, we guide towards deals that are closed and then also deals we've committed to. Sometimes some of those deals include a wellbore carry as part of the consideration. And so a funny thing is that 45 is Really flat quarter over quarter in terms of what we're guiding to, but the components of that 45 are not necessarily the same.

Speaker 2

And so one thing that we saw is some wells that we had carried interest associated with, so we were going to pay a carry as part of those. Some of those wells were pushed until 2024, so they went out of the guidance, but then we had some new deals that were generated from our burgers and beer game That will be drilled in, call it, late 3rd, early 4th quarter and likely come online in 2024. So The components of that, again, continue to move around. And so it is consistent, but it is different deals. So I'm not sure if that exactly gets to your question or not.

Speaker 6

Got it. No, that's helpful. I think it's, there's kind of a subset within that opportunity capture that can be a little bit fluid given that you guys are talking about deals that haven't yet closed. So that's, I understand that. Okay.

Speaker 6

And if I can just sneak one more in on the burgers and beer side of things, when we're thinking about that, that opportunity set, Is that primarily, kind of on the AFE side of things where you're exposed to say a single well or are you guys acquiring Say minority interest within an entire DSU and therefore also acquiring future development opportunities or is it kind of both? And I guess Just kind of curious if you compare and contrast those 2 opportunity sets?

Speaker 2

Certainly. So there is some that I would say is the wellbore But not much. Now in terms of deal flow that we see, a lot of it is Welbert only. But in terms of deals that we are interested in, allocate capital to, that's pretty low. So if I look at the opportunity capture side for this quarter, for example, the vast majority of that Was really acreage and deals related to one of our strategic partnerships.

Speaker 2

And so there we will Everything, all the inventory in the project, we certainly prefer those wellbore only. You've got a lot higher allocation to a single well. You don't have the upside, so there's less bailout. On the flip side though, some of those wellbore only deals, they're Often with larger operators who have a lot larger supply chains and are very consistent In terms of their drilling and completion costs, so it's kind of a balance. When you're working with smaller deals, more concentrated bets, You're generally expecting a higher rate of return, but you may have more variability there.

Speaker 2

So it's a balancing act. But again, the short answer is our focus is On opportunities where we like the single well economics, but we're also getting upside in terms of additional zones with it. And so that's more leasing than just wellbore only.

Speaker 5

Okay, understood. Thanks for the time, guys.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Jeff Robertson with Water Tower Research. Please go ahead.

Speaker 7

Thanks. Good morning. Luke, a question on the strategic partnership opportunity. Can you talk about how long it takes to mature these relationships and are there certain companies where you would divide assets between a non operated And an operator piece?

Speaker 2

Yes, good question. So, I'd say the strategic partnership just concept, Those really are relationship deals. And so those are to say something that's a year long relationship would be short on that side. These are folks that We've known for a long time and really built a relationship and a trust with. Those deals are pretty unique because from our perspective, We have a non op interest, but because of our partnership and our higher working interest in those, we have a bit more control over the timing.

Speaker 2

And so it's kind of a bridge between OP and OP, which is something that we like. It helps to frankly remove or largely Mitigate one of the largest risk factors with investing in mineral or non op deals, which is not controlling the drill bit. So, these are relationships that take a long time to develop. There has A large trust there, but whenever you build something like that, it's something we're really excited about. The deals with One of our partners in the Delaware in particular, it's just really neat to see from a deal flow perspective, They're very aggressive and just to build deep relationships over time.

Speaker 2

And so some of the projects that they Generate and Bringdas to partner with them on are very short fuse. You got to put a rig on there in 3 months. Some are much longer date Where it's an opportunity that you may have a development plan that lasts 2 years or 3 years. So the types of opportunities vary a lot in But I think the primary takeaways for us and why we like it, we just have a lot more insight Into timing and it really is a partnership. And so it's I think something that helps to bridge that gap between op and non op and really Helps us to be better underwriters and just be sharper whenever we're looking at some of these deals.

Speaker 7

On the timing issue, Luke, do you have a general Rule of thumb or at least a goal of how quickly opportunities might go from undeveloped to actually getting drilled When you invest capital in these types

Speaker 2

of deals? Yes. In the broader strategic partnership bucket, most of those deals We plan to spud within 6 to 12 months at least on an initial tranche. Now some of those, and again one of the benefits of being a larger interest, we have more So you may drill an initial tranche in the primary zones upfront, and then you may plan to come back A year or so later to come drill secondary zones, but we are focused on deals that will quickly turn inventory Cash flow. I think that's a big piece of just our model is we're not really focused on long dated inventory, certainly not looking to pay for long dated inventory.

Speaker 2

We are really focused on inventory that we think will be turned to cash flow within 2 to 3 years, but we want our Primary dollars that first tranche to churn the cash flow within the year.

Speaker 7

Last question, have the recent declines And oil and natural gas prices increase the deal flow as people may look to people that may own non operated pieces just don't want Just say if you would rather spend their money on operated assets or something else?

Speaker 2

Yes, it's a good question. One place that it certainly increased the deal flow is the Haynesville. You have a lot of operators who were non op to other operators. And so when they received well proposals in the Q4 last year, they all elected in. Gas prices look good.

Speaker 2

They were excited to participate. Now it's had a pretty material decline in gas prices and so a lot of operators have non op and other assets You're looking to offload some of that. So I've seen a material increase in Haynesville kind of wellbore deals. That's not a market where we're very competitive, particularly given the fact that they're looking to unload it because the economics aren't near as attractive as they were. But we have seen an increase in deal flow there.

Speaker 2

I don't know that it's really driven an increase in deal flow in Frankly, many of the other basins. I think the deal flow there continues to be strong. From our perspective, we see basically a new deal a day That comes through the shop. And so the way that we look at our deal flow, we see a new deal a day, we bid on about a deal a week and we win a deal every 3 weeks And that's been relatively consistent.

Speaker 8

Great. Thanks for taking my questions. You got it, Jeff.

Operator

There are no further questions at this time. I will turn the call back to Luke Brandenburg, CEO.

Speaker 2

All right. Well, I just want to thank everybody for participating in the call. We are still a nascent public company And it means a lot to have your interest to have your support. We are always available to answer any questions and we will continue our effort to provide more and better information. So Thanks everyone.

Speaker 2

Look forward to talking to you and seeing many of you soon.

Operator

This concludes today's conference call. You may now

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