Executive Network Partnering Corp

NYSE:GRNT

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome, everyone, to Granite Ridge Resources' Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]I will now turn the call over to Wes Harris, Investor Relations representative for Granite Ridge.

[Wes Harris, executive]

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 fourth quarter and full year as well as an outlook for 2024. We will then turn the call over to Tyler Farquharson, our Chief Financial Officer, who will review our financial results and discuss other matters. Luke will then return to provide some closing comments before we open the call up to questions.Today's conference call will contain 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'd 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 direct 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.With that, I'll turn it over to Luke.

[Luke Brandenberg, executive]

Right. Thank you, Wes, and thank you to everyone for joining today's call. It's fun to see both familiar and new names on the screen as our call participation climbs quarter-over-quarter. We appreciate each of you sharing your time with us. 2023 was a record year on many fronts for Granite Ridge. My plan for this call is to start high level and to zoom in from there. So for those of you that are fully up to speed and just looking to fine-tune your model, I'll ask that you bear with me.We have 3 primary objectives going into 2023: strengthen the organization, make the company more investable and continue our legacy of driving value for investors by generating, evaluating and investing in opportunities with the best risk-adjusted returns. And I'm proud to say that we made great strides on all the above. On the organizational front, it has been quite the heavy lift transitioning from a private to a public company. This has touched virtually every member of the organization. And by touched, I really mean created additional work streams. I'd like to start by thanking every one on our team for stepping up to the challenge to make sure that things are not just done but that they are done right.To put some numbers to this, we added 7 new team members in the past 12 months. And from a standing start, achieved 9 corporate [ SOx ] milestones and implemented 140 different controls. On the investor front, it has been a whirlwind of the year. I joke that in my past life in private equity, I used to go to where the oil was, which made Southwest Airlines my airline of choice. But as a public company, I now spend more time going to where the money is, with over 150 meetings from Southern California to the Pacific Northwest and from the Northeast down to Miami and many spots in between. I quickly found my way to status on American Airlines.With roughly 3,700 public companies, it is on us to give investors like you a reason to care about Granite Ridge. So between investor meetings, banks that are kind to have us at the conferences, and a secondary offering that demonstrated that our largest shareholder continues to be willing to make the hard decisions, Granite Ridge continues to become more investable. We maintained our $0.11 per quarter dividend or $0.44 per annum and bought back $36 million of stock, and I would note that we do not have a repurchase program in place currently.Trading volume was up 10x from last January, research coverage is up from 1x to 4x, and the number of reported shareholders is up over 5x from year end '22 to year end '23. Another data point I like is from a trip to New York for investor meetings earlier this year. We brought 25 pitchbooks with us for 10 meetings and 2 days later, we brought all 25 books home. Meetings are changing from the what is Granite Ridge to more rapid fire Q&A with folks that are generally up to speed on the company.We still have wood to chop, on more than one occasion, the PM of larger institutions told us that they'd like to buy Granite Ridge in their personal account, but the trading volume is a challenge for the fund to take a position. So in addition to consistent execution, we will continue to pound the pavement to spread the Granite Ridge story, and I hope to see many of you this year.Now on to the assets. Tyler will get into more of the details in a moment, but I would like to share some of the highlights. We started 2023, expecting 9% year-over-year production growth and turned in 23%, including over 26,000 barrels of oil equivalent per day for the fourth quarter. While some of that beat was from new investments made in 2023, most of it came from acceleration and solid execution from our operating partners. Despite significantly lower hydrocarbon prices in 2023 over 2022, we generated $305 million of adjusted EBITDAX and increased proved reserves by 6% year-over-year.At Granite Ridge, we drive value by quickly recycling that cash flow into opportunities with the best risk-adjusted returns, with investments in 308 gross wells in 2023 and roughly 20 to 30 deals a year, cash flow did not sit on the balance sheet long. As in the past, I want to thank everyone involved, including our amazing internal folks, outstanding operating partners and solid team of supporting external professionals for their continued hard work and dedication.Now I'd like to talk a bit about what we did with that cash flow. In 2023, we had $298 million of operating cash flow before working capital changes. We estimate that maintenance CapEx for the year or drilling and completion dollars necessary to keep production flat from '22 to '23, was $175 million. That left $123 million of discretionary cash flow to drive shareholder returns. If you compare that to our enterprise value, it is a 14% yield. Now what we did with $123 million in '23 was to pay $59 million in dividends, spend $36 million repurchasing shares and reinvest $29 million in growth projects.Additionally, we spent an incremental $151 million of cash and credit facility borrowings for $180 million invested for growth and ended the year with leverage of only 0.3x below our target of 0.5x or around $150 million. In 2024, so long as the opportunity set justifies, I'll expect that we will continue to draw on our credit facility until we hit that 0.5x target, and then we'll bounce around the $150 million level.Diving into the fourth quarter, now we put out a press release in early February, outlining our A&D activity, including 3 acquisitions, 2 in the Haynesville and 1 in the Eagle Ford, 5 opportunities developed through our traditional non-offer what we call our burgers and beer strategy, including 3 in the Delaware and 2 in the Eagle Ford and 2 deals with a strategic partner in the Delaware Basin that we call controlled CapEx, where we are the largest interest owner and have full control over development timing.The fourth quarter also benefited from another great period of execution by our operating partners, in which they turned 80 gross or 4.6 net wells to sales, which contributed to the production beat. A recent significant development was our closing in late December on the sale of certain Permian Basin assets to Vital Energy for a consideration of about 1.1 million shares of Vital stock worth about $54 million today. The assets we sold consisted of approximately 1,658 net acres and 45 gross or 9.9 net producing wells that contributed about 1,700 barrels of oil equivalent per day of production for the full year '23 and approximately 1,500 barrels per day for the fourth quarter of '23.Now while we are typically not a seller of assets, we are always open to evaluating compelling rate of return transactions that enhance shareholder value. This deal did exactly that. Simply put, our long-term partnership with the Henry family allowed us to buy in at a non-op discount and tag along to sell it and operate a premium. We will see how Vital stock performs, we're certainly rooting for them, and I expect that we exit that position this year and recycle the capital into development opportunities with higher rates of return than the production that we sold.We made a point to mention strategic partnerships on just about every call, as this is a real differentiator for our company. As a reminder, we group our opportunity set in the 3 buckets. The first is traditional non-op or what we call burgers and beer. These are typically smaller deals under good operators in good areas with line of sight to development in the next year or 2. The second is acquisitions or consolidating the consolidators. These come in different shapes and sizes, but are typically either packages of non-op or buying alongside an operating partner. The third bucket is strategic partnerships.I would broadly describe this as more than just a deal. While our burgers and beer deals are generated based on relationships, there are typically one transaction at a time. Our strategic partnerships on the other hand, are of a larger scale where we benefit from our partners' future business development efforts through ROFR, AMI or joint venture type structures. The strategic partnership we talked about most is with the private operator out of Midland, where our partnership gives us control of the assets such that we control development timing. After spending almost a year building inventory, we picked up 2 rigs in November to initially develop 5.5 net wells in the Delaware Basin. Those wells were drilled through the end of January, and our partner absolutely nailed it, coming in roughly 15% under AFE. We expect completions will begin late this month or early next with a turn to sales late in the second quarter.So turning to our outlook for 2024. We currently expect production levels to range between 23,250 and 25,250 barrels of oil equivalent per day, an approximate 7% increase at the midpoint from the '23 levels adjusted for the divestiture of the assets to Vital. As usual, our production will be lumpy. We expect a bit of decline from the fourth quarter to the first quarter, maybe 5% if you adjust for the vital sale, though that may look more like 10% of comparing fourth quarter reported to first quarter reported.We expect production will begin to ramp in the third quarter as we anticipate our first controlled CapEx pad with our strategic partner that I mentioned earlier to come online late in the second quarter. On the acquisition side, and I'll note that this number includes both inventory and production acquisitions, as we have in the past, we only guide to deals that are closed or they're agreed to and not a high probability to close. Right now, that number sits at $35 million, but we expect that will increase as our business development efforts continue to generate attractive opportunities.On the development CapEx side, we currently see line of sight to between $230 million and $250 million of drilling and completion and expect to turn 22 to 24 net wells to sales for the year. That brings us to total CapEx of $265 million to $285 million. We expect that to be slightly front-half loaded with just over 50% of the CapEx in the first half of the year and just over half of that in the first quarter.We also look forward to keeping a continued close eye on controlling costs. Our current outlook for LOE is $6.50 to $7.50 per barrel of oil equivalent, production in ad valorem taxes range from 7% to 8% and cash G&A of $23 million to $26 million. A couple of other data points that may be relevant for the year are that we believe 2024 maintenance CapEx to be $175 million to $200 million, and we expect our production-based corporate annual decline to be in the low-40%.So with that, I'll turn it over to Tyler to discuss our financial results in more detail. Tyler?

[Tyler Farquharson, executive]

Thanks, Luke, and good morning, everyone. 2023 proved to be an exceptional year of performance for Granite Ridge. We delivered company records on multiple fronts and are well positioned to continue that momentum into 2024. For the full year, we delivered oil production above the high end of our guidance while placing a record number of wells online. Overall, we were able to grow our oil volumes by 14% and our total production by 23% year-over-year. In the fourth quarter, we achieved a company record exceeding 26,000 barrels of oil equivalent per day and exited the year with a strong balance sheet and liquidity to continue our capital deployment and shareholder return plans. We are proud of our accomplishments during 2023 and look forward to future performance in 2024, with a record 16 net wells in process at year end.Diving a bit deeper into our results for the quarter, our average daily production grew 18% from the prior year's quarter to 26,000 barrels of oil equivalent per day, driven by continued strong performance from recent wells turned to sales and new wells placed online in the Permian and Eagle Ford during the quarter. Our adjusted EBITDA was $81.8 million for the quarter, which was substantially flat with the third quarter despite a lower pricing environment.Adjusted EPS was $0.20 per diluted share for the fourth quarter, in line with analyst expectations. Per unit lease operating costs were $6.43 per BOE, an 8% decrease compared to the third quarter. Full year came in at $6.82 per BOE, which was well within our guided range of $6.50 to $7.50 per BOE. Production and ad valorem taxes for both the fourth quarter and full year were 7% of sales at the low end of our guidance of 7% to 8% of sales.G&A expense for the fourth quarter was $2.54 per BOE, which included $349,000 of non-cash stock-based compensation. Adjusting for this, our recurring cash G&A expense was $5.7 million or $2.39 per BOE. During the quarter, our operating partners completed and placed on production a total of 80 gross or 4.6 net wells with nearly 60% of the activity occurring in the Permian Basin. An additional 212 gross or 16 net wells were in progress at year end, representing nearly 70% of our expected 2024 delivery.Capital spending during the quarter was $78 million, including $28 million of acquisitions. Full year spending totaled $363 million, including $79 million of acquisitions across nearly 30 transactions. In December, we completed the sale of certain of our Permian assets to Vital Energy for approximately 1.1 million shares of common and preferred stock and expect to fully monetize these shares later this summer. The divested 9.9 net producing wells contributed approximately 1,700 barrels of oil equivalent per day to our 2023 results. 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 7.3% dividend yield measured against Wednesday's closing price.In addition, as of December 31, we repurchased a total of 5.7 million shares at a cost of approximately $36 million. Finally, over the past few months, we've added a number of defensive hedges to where we now have approximately 60% of our oil and 50% of our gas PDP hedged for 2024.Turning to our 2024 outlook, we provided our initial 2024 guidance and anticipate a production range of 23,250,000 to 25,250 BOE per day of production for 2024, which represents an increase of approximately 7% from 2023. We -- in total, we expect 22 to 24 net wells to be placed online during 2024 with half of those wells being placed online by our operating partner in the Delaware Basin. As Luke outlined, the initial results from that activity has been very encouraging with our operating partner delivering results ahead of AFE performance expectations.Overall, we expect a production decline of 5% during the first half of 2024 before additional wells are placed online during the summer, resulting in total annual growth of approximately 7% versus 2023. Our total capital expenditures are expected to be between $265 million and $285 million, including $35 million of budgeted acquisitions that are either closed or in the process of closing.I will now hand it back to Luke for his closing comments. Luke?

[Luke Brandenberg, executive]

Thank you, Tyler. A gentleman that I'm humbled to call a mentor recently shared with me that it's a public company, you have P for price and E for earnings. Our job is the E. The market's job is the P. And eventually, the market always rewards consistent E with P. So what does that mean for 2024, focus on the E and likely not in a splashy way but in a workmanlike fashion, continue to demonstrate the value of our adaptable, resilient business model, continue to strengthen the organization and make the business more investable and patiently allocate capital to the best risk-adjusted returns.Our job is the E, the market job is the P. As we continue to execute quarter-over-quarter, eventually, the market will reward our company that currently yields over 7%, has less than half a turn of debt and had production growth of over 20% with a higher share price. But for now, trading at less than 3x Granite Ridge is quite the bargain. We had insider buying in every open window in 2023, are self included. So to our current shareholders, thank you for your support. And to those on the sidelines, we hope that you'll join us.With that, we're happy to answer any questions that folks may have on today's call. Operator?

[Operator]

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

[Michael Scialla, analyst]

Wanted to ask about your '24 guidance. I know you said that's based on your development plan, but you know there will be some production from things you acquired during the year and you only budget deals that you expect to close, but you know there'll be more. So as you think about '24 production guidance, I guess, looking back, '23 production came in, I think, 8% above your -- high end of your last year's guidance. Would it be reasonable to believe you'll have some production contribution from things you acquired this year? And is that incremental production from last year from acquisitions and deals that will close in the future, is that a reasonable representation of what could happen this year?

[Luke Brandenberg, executive]

Yes. Good question, Mike. Thanks for asking that. It's something I probably should have clarified a little bit more. But you're right. As we mentioned, we just guide the deals that are closed. And so if I look at last year as an example, I would say that roughly -- what we guided to a year ago, we ended up hitting the high range -- high end of the range of just that, that incremental 8%, that was largely new transactions. So it wouldn't surprise me if you saw that same thing this year, our day job, day in and day out, is really generating, evaluating and [ posing ] on new opportunities. So we hope the opportunity set is there, such that we continue to deploy capital. That's the goal.The goal is to continue to grow that. But what we did last year and we'll continue to do this year is just every quarter, give update on acquisition dollars spent to date or identified to date. And if they justify an increase in net production, we're going to increase that guidance too. But the way that we look at it, we're almost guiding is if we all go on vacation the rest of the year and don't do any more deals, which is certainly not the case. That's not only the lifeblood of the organization, but frankly, it's one of the most fun things as well. So you hit the nail on the head as we continue to do deals.Now as we get later in the year, you may do a new transaction, but you won't get production contribution from that till the following year. So most increase in production for the year will probably be stuff that happens in the next 3, 4, 5 months.

[Michael Scialla, analyst]

And then as a follow-up, Luke, if I heard you right in your prepared remarks, I think you said you did not renew your repurchase program. I just wanted to see if you had a change in thinking on share buybacks?

[Luke Brandenberg, executive]

Yes, that's a great question, too. We implemented the buyback program initially back in December of '22. And the idea there was, we'd recently gone public, we had little to no float. I mean, we were trading in the hundreds of thousands of dollars a day. And so we wanted to have a buyback in place really to make sure there was a bid out there. As the year went on and we continued to pound the pavement, spread the word, but did a secondary to increase trading volume among other things. Trading volume increased, there started to be more of a bid out there. And so that program expired on its own terms at the end of '23 and was not renewed, not because we don't think it's an attractive value, I think like I mentioned, we bought in every single open window. In fact, we've had insider buying $6.25 a share significantly above the current price.So we still think it's a good buy. We're putting our personal money where our mouth is. But corporately, having a share buyback is now a bit counter to the goal of increasing trading volume and liquidity. So we do not have one in place right now. That said, look, if there's a tremendous dislocation in the market at some point this year, we could always change that. But right now, there is no buyback in place.

[Operator]

[Operator Instructions] Our next question comes from the line of John Abbott with Bank of America.

[John Abbott, analyst]

Our first question is really a 2-part question. First, when you look at your inventory in hand, how many years do you think you have? And the second part sort of relates to the production mix guidance you gave for 2024 for oil, which is roughly around 47%. So when you look at your inventory and you look at that mix guidance, how do you think about the trajectory of the oil mix over a multi-year period of time?

[Luke Brandenberg, executive]

Yeah, great question. So when I think about inventory. So I'll hit that in two parts. One thing that I'll tell you is, we're generally conservative and we book inventory. So what I mean by that is, if we go make an acquisition of some leasehold, let's say, we only book internal inventory for locations that were underwriting at that time. And so I'll give you an example. If we bought something in the Delaware basin, Loving County, 3 years ago, we probably would have just booked Bone Springs and [ Wolfcamp A ]. But you fast forward a few years and you've got a lot more active development in the B and the C, but you won't find that in our inventory. So I think it's a conservative booking.If I had to guess, as you know, the SEC proved reserves that we put out there are difficult for non-op because we're limited on what we can book in terms of PUDs, mineral guys face the same challenge. If I had to guess, we've probably got 4 to 5 years of inventory based on our current run rate, which is about 23-ish net wells a year. I think that's conservative. And again, our job, day in and day out, is to continue to replenish that through [ 20, 30 ] transactions a year. But that'd be my best guess.In terms of oil cut, so you bring up a good point. We're going to have a lot of fluctuation in oil cut this year. As we talked about, we put out in the press release a month or so ago, we sold assets to Vital, alongside the opportunity to tag with the Henry folks. And so because of that, I think that you'll see our oil cut go down at the beginning of the year as we sold those oily assets. We also have some relatively new Haynesville wells coming online. But as the year goes on, particularly as some of these pads, through one of our strategic partners come online, I think we'll get more oily.So we're shooting at 47% for the year, but I don't think you'll see a quarter where it's actually 47%. I'd anticipate the first half of the year will be below that first quarter, may be significantly below, probably low-40s, but by the end of the year, you get closer to that 50% and end up around that 47% for the full year.

[John Abbott, analyst]

And then for the follow-up question, Tyler, this is for you. So, with the Vital shares and preferred that you -- that Granite owns, in the event that they were sold, is there any tax leakage?

[Tyler Farquharson, executive]

So, during 2023, we did recognize a tax gain from the divestiture of those assets. So, moving forward, if we sell those shares later this year and there's a gain from that point, there would be some additional tax leakage just on the sale. So we would expect to sell these above where we received them in December 21st. So I would expect a small taxable impact in 2024.

[Operator]

Our next question comes from the line of Michael Scialla with Stephens.

[Michael Scialla, analyst]

Just want to get your thoughts on -- I know you did a couple of Haynesville acquisitions in the fourth quarter. You mentioned, Luke, you've got some Haynesville wells coming online. I guess, given where gas prices are below $2, your thoughts on the Haynesville here and your thoughts on any future wells getting drilled in that play, is there a risk to that with the commodity where it is?

[Luke Brandenberg, executive]

Yes, that's a good question. With the gas price environment, there's 2 sides to that coin. One is I don't really want to drill a lot of gas wells right now on the flip side, I'd love to acquire gas inventory molecules in the ground at these prices, not necessarily at the strip. And so the Haynesville deals in the fourth quarter, that was a unique deal. We have an operator that we're very close with, and we had an opportunity to buy in alongside them, both transactions with the same group. And the neat thing there is we have real line of sight into their development plan. We knew what their plans were, and they're like-minded. They're not going to put 3 rigs on the asset and drill it all up at sub-$2 gas price. So that was really just an opportunity to partner with fantastic firm that we're excited about.We do have some wells coming online. I think that asset came with some [ ducts ] that they may complete just because on a half cycle basis, it made a ton of sense. But generally speaking, I wouldn't anticipate that we'll put a lot of new drilling dollars into that until we see stronger gas price environment. Look, we're continuing to try to buy molecules in the ground. It's just -- it's tough. You enter that weird spot where if you run strip pricing, then you say, gosh, this inventory looks really good, but it doesn't look good unless the price is 3x the current spot. We struggle with that. We haven't put a lot of money to work in gas other than this where we did have that partnership, and we had good line of sight in the development plan. But we'll keep looking and we'll keep looking. This would be a good time to buy gas, I think, but not necessarily to drill it.

[Michael Scialla, analyst]

And I wanted to ask about -- I think you closed on -- you mentioned 2 strategic partnerships during the quarter in the Permian. Is that with the same partner you've had there for a while in Midland Basin or either of those with somebody new?

[Luke Brandenberg, executive]

Yes. So this -- the one that we've referenced there, it's group out of Midland. And most of our assets, they are really in the Delaware, a lot of Loving County. But that's a neat one. We talked about it a bit, but we really initially formalized that partnership back in early '23. And the objective was to run a rig full time. That was really our goal working together. And so we -- those guys are just impressive what they continue to dig up. And we were able to build an inventory such that we felt comfortable that we could keep a rig running full time. And so we ended up picking up a rig in November. We actually have 2 rigs running right now, but that's more opportunistic just making sure that we can hit some drilling deadlines where we capture the deal because of the ability to spud quickly.But that group -- that's going to be a pretty big piece of our budget this year. I've got a 1/3 of our CapEx, if not more, for the year we'll be in that strategic partnership where the neat thing for us is we have full control over development timing. So if we see a significant change in the environment such that we want to pause, that's great. And that third will go down dramatically.On the flip side, if the market just continues to strengthen, we can accelerate development. We have a strong inventory there, and we could even pick up another rig. So that's exciting for us. I mentioned that we drilled the first -- it's about 5.5 wells net to us, finished drilling in January. And I mean, unbelievable how these guys executed we're really pumped and those wells are going to get completed end of this month, early next and come online late second quarter.So we're in approve it mode there. I think what we're doing is different. I think it's exciting. It's really bridging the gap between op and non-op. And we look forward to having more results to share with the market on why this is really a differentiator and how it will continue to be a driver of value for us going forward.

[Operator]

There are no further questions at this time. This concludes today's call. You may now disconnect.