Granite Ridge Resources, Inc. (GRNT) Earnings Call Transcript

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Granite Ridge Resources' Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. James Master, Vice President of Investor Relations. Sir, please begin.

Thank you, operator, and good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Tyler Farkison, our President and Chief Executive Officer, who will review the quarter's results and company strategy. He will then turn the call over to Kyle Kettler, our Chief Financial Officer, to review our financial results in greater detail. Tyler will then return to provide closing comments before we open 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. We ask that you 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 these statements. These and other risks are described in our press release and our filings with the Securities and Exchange Commission. This call also includes references to certain non-GAAP financial measures, including adjusted free cash flow. information reconciling these measures to the most directly comparable GAAP measures is available in our earnings release on our website. Finally, this call is being recorded, and a replay and transcript will be available on our website following today's call. With that, I'll turn the call over to Tyler.

Thank you, James, and good morning, everyone. Let me start with the most important takeaway -- for the last year, we have told you that 2026 is the final year we invest ahead of our cash flow and that 2027 is the turn. This quarter, you can start to see the turn in our numbers. Average daily production grew 8% from the second quarter. Oil volumes grew 16%. Adjusted EBITDA taxrose 35% sequentially to $107.3 million. and our cash flow before working capital changes covered our drilling and completion capital for the quarter. We are also taking 3 steps today that reflect where the business is going. First, our board has authorized a share repurchase program of up to $35 million. Second, we are putting a clearer definition of adjusted free cash flow in front of you, along with the order in which we intend to use it. Third, we continue to evaluate our operating partnerships, and we are excited to name our third operating partner in the Permian and retake free resources. Kyle will take you through the first 2. Let me start with the quarter in the platform. Third quarter production averaged 34,641 barrels of oil equivalent per day, 55% of it was oil. We placed 9.2 net wells online, most of them in the Permian, and we ended the quarter with 14.6 net wells in process. The other major driver to our quarter-over-quarter EBITDAX growth was natural gas price realization. Our realized gas price was from $1.12 per Mcf in the second quarter to $3.46 in the third quarter as Waha basis recovered. Kyle will walk you through that in detail because it's a real change in our cash flow. Our operator partnership platform remains the core of our strategy and it directs the majority of our 2026 drilling and completion capital. The advantage starts from sourcing, our partners find and assemble acreage to their own leasing, ground game and operator relationships, so we see opportunities that never reach a marketed process. We provide the capital -- we underwrite every opportunity to our return threshold, and we control the pace. That is how we've consistently added inventory for under $2.5 million per net Permian location well below where marketed deals command. Admiral Permian Resources has been the flagship of that platform. Today, we are introducing another partner. retic Creek Resources is a Midland-based operator our partnership with them is focused on the Midland Basin. The core of the group worked at Henry Resources where they drilled, completed and produced more than 200 horizontal wells between 2014 and 2024. We retails management has helped build 5 Permian Basin ventures, including Bold Energy, 1, 2 and 3 and OxboPetroleum, and its business development team has executed more than $8 billion of upstream transactions. retaking Freeport's the same way Admiral does. This land team builds positions through grassroots leasing and joint ventures with large overlapping asset managers. We provide the capital that we control what is drilled and win. Arete spud its first well under our partnership in October, and we expect them to run a rig during 2027. Outside the Permian, we have built a nonoperated position in the Utica Shale that we're increasingly proud of. We hold about 6,300 net acres and produce about 3,000 net BOE per day from our interest in over 100 gross producing wells. We built this position from scratch over the past 2 years through a high volume of small deals and count these opportunities among the most economic in our portfolio. During the quarter, we closed 20 acquisitions for $19 million adding 8 net locations at an average entry cost of about $2.4 million per net location. Also, we divested over $20 million of oil and gas properties in the DJ Basin at a 3.8x forward next 12-month EBITDA multiple. While there's been a lot of volatility at the front end of the , we continue to plan our business around the back of the curve. Every acquisition and every operator partnership well has to clear a full cycle return above 25% at the strip. And in today's backward market, those long-dated barrels are priced at $70 or below. We're not going to chase near-term prices or pay up for assets based on where the front month is trading. Instead, we will continue to seek longer-dated development opportunities further out on the curve. keep our hedge program discipline and direct any excess cash to the priorities Kyle will lay out. Stepping back, the plan is working. Our traditional non-op business generates steady cash flow across 6 basins and our operator partnerships are compounding inventory and growth. Through the first 9 months of the year, our cash flow before capital changes, has funded our development capital. Dividends and acquisitions have been funded from the balance sheet, but in 2027, that changes. We expect adjusted free cash flow to fund the dividend and the rest of our capital allocation priorities, leverage falling as our cash flow grows. With that, I'll turn it over to Kyle.

Thank you, Tyler, and good morning, everyone. This is our strongest quarter of adjusted EBITDAX since we've been a public company, and I'll spend most of my time on what that means for 2027. But first, the results. Oil and natural gas sales were $177.2 million. On a GAAP basis, we reported a net loss of $10.1 million or $0.08 per share driven by a $52.7 million loss on commodities derivatives, of which $31.8 million was unrealized. Adjusted net income was $22.6 million or $0.17 per diluted share. Adjusted EBITDAX was $107.3 million, up 36% and from $78.6 million a year ago and 35% from $79.6 million last quarter. Cash flow from operations was $87 million or $96.6 million before working capital changes. Our unhedged realized price was $55.60 per BOE and $49.4 per BOE, excluding settled derivatives. LOE was $30.1 million or $9.43 per BOE down from $10.27 per BOE in the second quarter. Last quarter, we said we expected per unit cost to improve sequentially as new volumes came on and they did. But LOE is still high, mainly from saltwater disposal costs tied to higher water cuts and flowback, along with related surface equipment rentals and contract labor. Production and ad valorem taxes were $10.3 million or 6% of sales. Cash G&A was $8.7 million or $2.73 per BOE. We invested $90.8 million of drilling and completion capital weight and hedges rolling off -- we see 2027 EBITDAX well in excess of the third quarter annualized EBITDAX. With that, I'll turn it back over to you, Tyler.

Thanks, Kyle. Let me close with 3 points. First, the inflection is underway. Volumes are growing, oil mix is rising, gas realizations have covered and our cash flow is caught up with our development spending. We defined adjusted free cash flow plainly and told you how we will use it. Second, our operator partnership platform is broadening. With that roll now Retake Creek, have 2 Permian partners sourcing attractively priced locations that extend our controlled development runway. Third, Gray Roth. In August, affiliates of Gray Rock distributed 14 million Brant Ridge shares with the limited partners of Gray Rock Energy Fund III. IROC ownership is now approximately 39% and and Granite Ridge is no longer a controlled company. We are completing the transition to a majority independent Board and fully independent committees within the periods that ICC standards provide. Gray Rock has indicated that it expects additional distributions. The size and timing of any future distributions are at Gray Rock's discretion, we would refer you to BraRock's Section 13D filings. We view the first distribution as a healthy step. It expanded our float and has meaningfully increased trading liquidity and which makes Brandon reach more investable for a broader set of institutions. We are excited about where this company is headed and we look forward to delivering on it. With that, operator, we'll open the line for questions.

[Operator Instructions] Our first question or comment comes from the line of Michael Scialla from Stephens.

I wanted to get some high-level thoughts, Kyle, you mentioned the slide showing where you think EBITDA will land. Just some of the assumptions built into that production, I guess, should we be thinking kind of high single-digit growth and CapEx kind of flattish year-over-year? Is that fair? Any more you could offer on that?

That's a completely fair assessment of it. we're targeting just about 10% production growth year-on-year. I think we have a little bit extra weighting on the oil side and that production growth. And then if you take into consideration our hedge book rolling off, those are the really 3 kind of simple key things to look at to pencil out where 2026, Q3 '26 annualized EBITDA goes into '27 estimated on that page.

Great. Appreciate that. And Tyler, you mentioned the changes with great rock and changes on the board. Anything we should expect in terms of changes with direction of the company with those.

The short answer is no, not at all. The Board is completely committed to the strategy that we have laid out. You've seen us transform the business over the past couple of years to be more focused on controllable development via the operator partners. We now have 4 partners. We'll continue to add partners in the future. That's been very successful for us. We've been able to capture inventory at less than $2.5 million per net location in the Permian, which we think is a pretty good value. So we're moving into a little more maturity with Admiral, obviously, running 2 rigs, but we're excited now that Retake Creek is picking up a rig with us. We've actually drilled a handful of wells with them. already this quarter, and then we expect to run a rig full time with them starting in 2027. So the Board is fully committed to the strategy.

Our next question or comment comes from the line of Derek Whitfield from Texas Capital.

I wanted to start with your rate partnership disclosure. How would you characterize the depth of their gross locations, their ability to continue to source inventory and how the quality of the inventory compares versus your average -- the average of your partnerships?

Yes, you bet. So first, the Renta Creek team is very accomplished on both the commercial side as well as the development side. a large portion of the team came out of Henry Resources. They had a very successful exit a few years ago. chunks of the team have also been involved with various entities that they've built and flipped over the years. They've drilled over 200 horizontal wells over 10 years. So the development front execution side very accomplished. On the commercial side, equally as accomplished. their business development team and commercial sourcing team is closed over $8 billion of transactions. That is incredible. This is a Midland-based team. They have very deep networks based in Midland. So we're highly confident in their ability to source opportunity that's more proprietary in nature, and we'll continue to build on what we've done with the Admiral team sourcing opportunity from those types of markets as well. So we're about a year into it with a retake Creek. We like to let teams have some time to build up some inventory in front of them. We're proud to report that Arete's already secured at least half a dozen or so DSUs, 40-something gross locations and has enough for us to commit to picking up a rig with them in 2027. I fully expect them to be able to continue to add a lot more inventory to what they currently have just like our admiral team. So this is a development strategy first. I'd like to talk about Admiral and Rete is hitting singles over and over again, but driving in a lot of runs. So this is -- they will be focused on the Midland Basin. That's not to say that they won't do deals in other parts of the Permian Basin, but where we expect them to find opportunities in the Midland Basin, and they've done a heck of a job so far.

Great color. And as my follow-up, I wanted to shift over to your buyback authorization it would seem on our math, which is clearly share price dependent that you guys could buy back a substantial amount of Gray Rock's future distributions. Is that a fair read based on where those lie today?

Yes, absolutely. We set the authorization of $35 million to start with. Obviously, where the stock is trading, we're trading at less than 2.5x consensus. I think if you look at where we think cash flow potential is for next year, we're trading at even less than that. So we'd love to own more of this company. We set the authorization at $35 million initially. We'll see how that goes. It's completely opportunistic. as Kyle mentioned, and the Board can come back in the future and raise that or cancel it at any time. So -- we wanted to kind of dip our toe in the water here to start with. We set it pretty low. It's about 5%-ish of current market cap. But we'd love to own more of this business, certainly with where -- the current consensus numbers are at less than 2.5x '27, and we think '27 should even north of where consensus currently is. So Yes. But you're right, we could buy a lot more.

Our next question or comment comes from the line of Jeff Grant from Northland Capital Markets.