Yahoo Finance Granite Ridge Resources, Inc (NYSE:GRNT) Q1 2024 Earnings Call Transcript
Granite Ridge Resources, Inc (NYSE:GRNT) Q1 2024 Earnings Call Transcript May 10, 2024
Granite Ridge Resources, Inc isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome everyone to Granite Ridge Resources First Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to Wes Harris, Investor Relations [Technical Difficulty]
Wes Harris: Thank you, operator, and good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Luke Brandenberg, our President and Chief Executive Officer, who will provide an overview of key matters for the first quarter and an outlook for 2024. We will then turn the call over to Tyler Farquharson, our Chief Financial Officer, who will review our financial results. Luke will then return to provide some closing comments before we open 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 in 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 a transcript will be made available on our website following today's call. So with that, I'll turn the call over to Luke. Luke?
Luke Brandenberg: Thank you, Wes, and appreciate everyone joining this call. It seems like we just did this, but I'm always glad to have an opportunity to share an update on the Granite Ridge story. The first quarter built on our track record of workmen-like quarters. Nothing flashy, just continued solid execution. Today I'd like to talk about some of our accomplishments, things to look forward to, and share a bit more about what our strategic partnership initiative looks like as we continue to bridge the gap between operated and non-op. I'll start with the credit side. We announced last month that we successfully expanded our credit facility to both a $300 million borrowing base and elected commitment. The bigger story is that we were successful in fully syndicating the facility, taking it from six to 14 banks.
Commitments came in nearly 2 times our target, and with the financial strength and capacity of our partners, we believe we can triple our credit facility within this group. Now, this expansion does not change our views on leverage. We still target net debt to EBITDA of 0.5 times and expect that will bounce between about a third turn and two-thirds of a turn. To put round numbers to that based on about $300 million of trailing EBITDA, I expect we will balance between $100 million to $200 million of net debt and average around $150 million or less. I want to extend a heartfelt thank you to our existing banking relationships and for your support and I'm excited to welcome our new banking partners. I'll now briefly hit on Vital. As I mentioned, last quarter, we received 1.1 million shares of VTLE, about 50-50 common and preferred when we sold certain Permian assets to Vital as part of a tag right we had on Vital's acquisition of assets from Henry Resources.
This was a compelling opportunity to sell production at an operator premium and we will look to exit this position in an orderly fashion this year and pay down debt to ultimately recycle the proceeds into development opportunities. Now let's talk about results. Tyler will get into the details, but I'd like to hit on the results as compared to our expectations as well as what we are looking at for the coming quarters. Production came in slightly higher than expected at 23,800 barrels of oil equivalent per day. That was down 8% from last quarter's reported compared with an expected 10% decline. Now both of those are unadjusted for the sale to Vital. Adjusted numbers, or as Tyler likes to call it, same-store sales, are down 3% compared to an expected 5%.
Primary drivers for the beat, albeit minor, are a bit about performance on the oil side offset by deferrals on the gas side. That is a theme we expect more of as some of our operating partners have elected to defer dry gas production in this price environment, specifically in the Haynesville and Dry Gas Eagle Ford. This may impact our gas production for the year, but we have opportunities in the works to reallocate that capital to oil-weighted projects expected to come online this year. We will keep you in the loop on that as the year progresses. We turned an adjusted EBITDAX of $64 million, which was a bit higher than expected due to help on both oil prices and production. On the deal front, we closed four transactions during the quarter, all were in the Permian and the vast majority in the Delaware side.
Total entry, including carries was $6.8 million for 2.5 net locations. That equates to $2.7 million per net location, which is a bit higher than our target of closer to $2 million, but note, not all net locations are created equal in terms of both quality and development timing. All 2.5 of these net locations have either been turned to sales or are in process, including a 1.4 net well pad that we are drilling through our controlled capital strategy. Additionally, we have nine deals that have either closed since quarter end or are fully agreed to and in the documentation stage with an aggregate entry including carries of $20 million across 10.5 net locations. While each of these transactions are accounted for in our acquisitions guidance number, I would note that not all $20 million will hit in 2024, as some of those carry dollars will go out the door in subsequent years.
On the production side, I mentioned in March that we expected to see a ramp beginning in the third quarter. The deferral of some dry gas production that we had expected to come online in the second quarter, which we are happy about, by the way, will likely slow-down that timeline. We now expect production to be roughly flat for the next couple of quarters prior to a ramp in the fourth. On the CapEx side, the second quarter should be roughly a quarter of our D&C CapEx for the year, but it is setting up to be our largest quarter of acquisitions for the year. It can be tough to tell if a deal will close on June 30th or July 1st, but based on deals closed quarter-to-date and those expected to close in the next two months, we are looking at about 75% of 2024 acquisition CapEx hitting in the second quarter.
Note, this number includes both cash paid in the quarter and carry dollars that hit in the quarter. I'll wrap up by talking a little more about our strategic partnership strategy. We define a strategic partnership as more than just a deal, in other words, a partnership that gives Granite Ridge access to broader deal flow or more control over development timing. Ideally, it is both or what we call controlled capital. With controlled capital, our deal flow broadens to include operated opportunities where we have control, specifically development timing. Controlled capital not only represents operated inventory that we can develop with a strategic partner, it opens the door to a broader set of asset buyers as we could sell drilling units to operators looking to add inventory.
Operating inventory trades at a premium and will allow us to further build the case that Granite Ridge is undervalued from both a business and some of the parts value. To put some numbers to this, Granite Ridge controls inventory of 40 gross or 21.9 net operated locations in the Permian. In Loving County, we plan to turn to sales a pad of 5.5 net single-mile wells early next month and a second pad of 1.4 net single-mile wells late in the third quarter. We are currently running one rig through a strategic partner and plan to pick up a second later this year. Traditional non-op is the cornerstone of the Granite Ridge Foundation, but controlled CapEx is where we are going. While we now expect controlled CapEx to be upwards of 40% of our 2024 D&C, our goal is for a super-majority of our capital to be controlled in the next several years.
We are bridging the gap between operated and non-operated by demonstrating that non-op does not mean non-control. With that, I'll ask Tyler to dive a bit deeper into the numbers.
Tyler Farquharson: Thanks, Luke, and good morning, everyone. Average daily production for the quarter was 23,800 BOE per day, up 3% compared to reported Q1 of 2023 and up nearly 11% after adjusting for divested assets. We expect production to be flat through the end of the third quarter before increasing in the fourth quarter and exiting 2024 at a high for the year. Our annual production guidance range of 23,250 BOE per day to 25,250 BOE per day remains unchanged and represents 7% midpoint growth for the year after adjusting for divestitures. Oil production mix for the quarter was 45%, lower than our guidance expectation of 47% for the year, but as Luke mentioned, should drift higher throughout the remainder of the year as some of our natural gas-focused operators defer development projects.
Our adjusted EBITDA was $64.5 million and adjusted EPS was $0.12 per diluted share for the first quarter of 2024. Adjusted EBITDA was down 8% from the prior year due to lower natural gas prices and the impact of divested assets. Per unit lease operating costs were $7.13 per BOE and production and ad valorem taxes were 6.5% of sales for this year's first quarter, both of which were within our guidance range for the full year 2024. G&A expense excluding non-cash stock-based compensation was $2.76 per BOE for the quarter. Our annual guidance range of $23 million to $26 million is unchanged. During the quarter, our operating partners completed and placed on production a total of 58 gross or 5.1 net wells, with 57% of the activity occurring in the Eagle Ford and 30% in the Permian Basin.
In total, we continue to expect 22 to 24 net wells to be placed online during 2024, with nearly 80% of those wells being in the Permian Basin. Total capital spending during the first quarter of 2024 was $65 million, including $3 million of acquisitions that closed during the first quarter. For the year, we expect our total capital expenditures to remain in our previously guided range of $265 million to $285 million, including $35 million of budgeted acquisitions. We also continued our ongoing quarterly cash dividend. During the quarter, the Board declared an $0.11 per share cash dividend that on an annualized basis represents a 6.7% dividend yield measured against Tuesday's closing price. Finally, subsequent to quarter end, we successfully completed our semiannual borrowing base redetermination, increasing both our borrowing base and elected commitments to $300 million, and expanding our lender syndicate through the addition of nine new banks.
Our balance sheet remains a strength with pro forma liquidity over $180 million and leverage of 0.4 times net debt to trailing EBITDA, which remains below our half-turn target. I will now hand it back to Luke for his closing comments. Luke?
Luke Brandenberg: Thank you, Tyler. I'll wrap up by sharing some takeaways from our company-wide town hall that I host each quarter. This quarter's theme was that there may be temporary dislocations, but ultimately the law of supply and demand will determine the price of GRNT. I'll start with a temporary dislocation. I believe GRNT is in a period of temporary dislocation due to demand destruction or sustained decline in demand in response to limited supply. In our case, this demand destruction is due to our tightly held shareholder base. We chat with investment firms on a regular basis that seem to buy what we are selling, as demonstrated by their willingness to continue to share their time and follow the story, but our trading volume is not quite enough to meet their investment mandate.
There are plenty of green shoots to point to, but the fact is that time will solve this. We must stay patient and continue to focus on the E or earnings and let the market worry about the P or price. As a management team, we are a bit limited in what we can do on the supply side. Absent issuing shares as part of an acquisition, we do not control the supply of GRNT shares, practically issuing shares is unlikely as it would be tough to find an accretive stock yield given where we currently trade. But there is a lot we can do on the demand front, primarily in two ways. The first is finding more folks to help us tell the Granite Ridge story. Thanks to Steve and Chris at Evercore for picking up coverage and to all the folks that invite us to their conferences and host us for non-deal roadshows.
A list of all our upcoming events can be found in our earnings release. The second is doing the research and pounding the pavement to find investors that we solve a problem for today. As we transition our shareholder base and demonstrate that what we are building is different, repeatable and resilient, I believe that Granite Ridge will re-rate and drive value for investors that put their trust in us. But today there's a particular group of investors that I think we immediately solve a problem for and as generalists, that benchmark to the Russell 2000. The Russell 2000 is now 7.4% energy and has generally been trending up in the past several years. The NAV-driven valuation of small-cap energy can be tough for the generalist investor. Take the recent back and forth with SilverBow and Kimmeridge.
If nothing else, this goes to show that it is difficult to ascribe current value to long-term oil and gas assets. Additionally, with the current reconstitution, according to RBC, several highly traded Russell 2000 energy names may migrate from the Russell 2000 up to the Russell 1000, including Permian Resources, Matador and Civitas. Granite Ridge can be a part of the reallocation solution by providing the purest asset-level exposure to near-term development in a diversified vehicle with low leverage and a current yield of over 6.5%. We are undervalued now, but one day we won't be. It likely won't be a transformative event that causes Granite Ridge to re-rate. It will be a series of many catalysts, transitioning of the shareholder base, increasing trading volume, additional investors showing up on ownership reports, continued workman-like quarters of consistent performance, more and better information on strategic partnerships, and our controlled CapEx strategy.
We believe it will happen, and I invite you to be a part of the Granite Ridge story that the great folks across our organization are working hard to write. Please do not hesitate to reach out, and I hope to see many of you over the next several months. And with that, we're happy to answer any questions folks you may have on today's call. Operator?
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