Granite Ridge Resources, Inc. Q4 FY2022 Earnings Call

Good morning, and welcome to Granite Ridge Resources Fourth Quarter and Full-Year 2022 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.

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, President and Chief Executive Officer, who will provide an overview of key matters for the fourth quarter and full-year 2022. We will then turn the call over to Tyler Farquharson, Chief Financial Officer, who will review our financial results. Luke will then return to discuss our future plans and outlook before we open up the call for questions. I would also note that we have posted an updated company presentation to our website. 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. Additional information on factors that could cause results to differ is available in the Company's 10-K, that was filed yesterday. We would ask that you review it in the cautionary statement in our earnings release; a replay and transcript will be made available on our website following today's call. Granite Ridge disclaims any intention or obligation to update or review 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 in our filings with the SEC. 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. So with that, I'll turn the call over to Luke Brandenberg, our President and Chief Executive Officer. Luke?

Thank you, Wes, and good morning, everyone. Before I jump into our results, I'd like to say that we really do appreciate you joining us for today's call. We are a young public company with a lot of work to do to get our story out. What a great story it is. 2023 marks our 10-year anniversary of pursuing a non-op strategy. We were one of the first groups to do so with institutional capital, specifically in areas like the Permian and Eagle Ford. So while we are new to the public, we have been creating value for private investors and non-op for years. Our business is built on a solid foundation. The opportunity set is there and we have the right team on the field to execute. The future is bright for Granite Ridge. With that, we are pleased to report outstanding fourth quarter and full-year results for 2022. Our outperformance is a direct result of the hard work of our network of proven operators across the country and our dedicated team of professionals that I am fortunate to work with. To all I say, thank you for your continued focus and dedication. Our 2022 fourth quarter was successful on many fronts and we look forward to leveraging that success as we execute on our 2023 business plan. Highlights for the fourth quarter include a 45% year-over-year increase in net production to just under 22,000 barrels of oil equivalent per day, including 52% of oil. Revenue growth of 46% from the prior year period and year-over-year growth in adjusted EBITDAX and adjusted net income of 59% and 72%, respectively. During the fourth quarter, our operating partners turned 88 wells to sales, which equated to 6.2 net wells for Granite Ridge. On a full-year basis, our operating partners turned 265 wells to sales, which equated to 20.8 net wells for Granite Ridge. The success we have seen in the development campaigns across our targeted portfolio of assets contributed to material full-year 2022 operational and financial outperformance, including a 22% increase in net production to just under 20,000 barrels of oil equivalent per day, including 51% oil, revenue of $497 million, which is now 71% higher than the 2021 total and adjusted EBITDAX and adjusted net income growth of 74% and 118%, respectively. We ended 2022 with a fortress balance sheet that included no debt and liquidity of $201 million, including $51 million of cash. Our continued success in 2022 was also reflected in our year-end SEC total proved reserves, which grew 16% over the prior year to 51 million barrels of oil equivalent, including a 50-50 balanced mix of oil and natural gas. This increase in reserves represents an all-in replacement ratio of 1.9x of production for the year. Looking at the mix of our total proved reserves at year-end, 60% were proved developed producing, 1% were proved developed non-producing, and 39% were proved undeveloped. I would also note that the PV-10 of our total proved reserves using SEC prices grew 100% to $1.6 billion. The diversification in our assets can be clearly seen when sorting our total proved reserves by region. At year-end 2022, 57% of our total proved reserves were located in the Permian, 16% were in the Eagle Ford, 10% were in the Haynesville, 10% were in the Bakken, and 7% were in the DJ. Now we'll turn to our outlook for 2023. The past handful of months have been a time of integration and now we pivot to acceleration. We anticipate capital expenditures of $260 million to $270 million during the year and we expect to turn 18 to 20 net wells to sales. That CapEx number includes drilling and completion dollars as well as about $46 million of acquisitions and opportunity capture that has been spent or committed year-to-date. It does not include any dollars for uncommitted acquisitions or opportunity capture. But I will note that our team continues to pursue new growth opportunities. On the D&C CapEx front, we expect roughly 60% to occur in the first half of the year with roughly 60% of that coming in the second quarter. We expect full-year 2023 production of 20,500 to 22,500 barrels of oil equivalent per day, including 50% oil. At the midpoint, that represents a 9% increase over full-year 2022 production, which we believe is a responsible level of growth. For the first quarter, we anticipate a slight production decline of around 5% from our fourth quarter numbers as some flush production from 2022 rolls off and our 2023 net turn to sales are weighted towards the back half of the year. So with that, I'll ask Tyler to discuss our financial results in more detail. Tyler?

Thank you, Luke, and good morning, everyone. Echoing Luke's comments, we were very pleased with our financial results for the fourth quarter and full-year 2022 and look forward to our continued growth in 2023. During the fourth quarter, our average daily production was 22,031 barrels of oil equivalent per day, an increase of 45% and 17% compared to the fourth quarter of 2021 and sequentially over the last quarter respectively. As a reminder, we report our production on a two-stream basis rolling the revenue realized from natural gas liquid sales into our natural gas revenue. We realized oil prices of $83.32 per barrel or approximately 101% of the benchmark WTI average for the quarter and natural gas prices of $4.97 per Mcf, which was approximately 80% of the average Henry Hub price for the quarter. This was moderately lower than our realized natural gas pricing for the third quarter due to widening gas basis differentials, weaker NGL prices and a larger percentage of gas production coming from the Haynesville. The overall result was oil and natural gas revenues of $116.3 million for the quarter, which was 46% higher than the fourth quarter of 2021. Turning to costs for the fourth quarter and our expectations for 2023. Lease operating expenses were $14.4 million or $7.11 per BOE. For 2023, we are looking at LOE of $6.50 to $7.50 per BOE. Production and ad valorem taxes were $9.8 million or $4.86 per BOE or 8% of sales. For 2023, we expect them to be in the range of 7% to 8% of sales and depletion and accretion expense was $21.7 million or $10.68 per BOE. Our cash G&A expense for the fourth quarter was $6.5 million or $3.19 per BOE. Our cash G&A for the fourth quarter included $2.1 million of non-recurring costs incurred in preparation of our Form S-1 filed in January 2023, and transaction-related expenses in connection with the formation of Granite Ridge in October 2022. Included in our G&A, our cost directly attributable to Granite Ridge and the management fee from our master services agreement with Grey Rock. As a reminder, the MSA is $10 million per year or $2.5 million per quarter and covers approximately 20 Grey Rock employees that provide various services to Granite Ridge. We currently expect our full-year cash G&A for 2023 to be in the range of $20 million to $22 million. We reported net income of $56.6 million or $0.43 per share for the quarter. Adjusted net income was $50.7 million or $0.38 per share, which was approximately 72% higher than adjusted net income of $29.5 million or $0.22 per share for the fourth quarter of 2021. And finally, adjusted EBITDAX was $83.2 million compared to $52.5 million for the same period in 2021, contributing to the 58% year-over-year growth in adjusted EBITDAX was a 45% increase in production and a 21% increase in realized oil prices that were partially offset by a 26% decrease in realized natural gas prices. Capital expenditures during the quarter totaled $91.7 million. Our well delivery accelerated during the quarter as we completed and placed on production 6.2 net wells, nearly 60% of which were in the Permian. This was a dramatic increase from the 3.2 net wells we turned to sales in the third quarter and contributed to our production gains versus prior periods. At year-end, we had an additional 16.7 net wells in progress of which we expect approximately one-third to be placed on production in the first half of 2023. As Luke already covered, we are guiding to 2023 capital expenditures of $260 million to $270 million, including $46 million of opportunity capture that occurred through last week. We do not guide to additional opportunity capture beyond what has already occurred to date. We initiated our ongoing quarterly cash dividend targeted at $60 million annually or $0.11 per share per quarter during the fourth quarter. Annualized at approximately $0.44 per share, this represents an approximate 9% dividend yield measured against the current price as of this past Friday, March 24. In mid-December, our Board approved a $50 million stock buyback plan to repurchase shares in the open market. During the last half of December, we repurchased a little over 25,000 shares and we continue to repurchase shares during the first quarter as we viewed Granite Ridge as undervalued given our lower risk non-op business model supported by a diversified asset base and production mix located in key prolific producing basins across the U.S. Finally, turning to the balance sheet. As of year-end, we had no borrowings under the revolving credit facility that we entered into this past October with an availability of $150 million on the revolver and cash of $51 million, we began this year with liquidity of $201 million. As such, we remain in a strong position to continue to execute on opportunities to strategically expand the business through acquisitions and other immediately accretive transactions that complement our current business and increase value for all shareholders.

I'll now hand it back to Luke for his closing comments. Thank you, Tyler. It has been a busy handful of months since we went public in late October, and market sentiment continues to evolve as it relates to the energy industry. During this period, I have been pleased to have a significant number of conversations with current and prospective shareholders about why we believe Granite Ridge is a differentiated investment vehicle for capitalizing on the significant benefits afforded by the upstream oil and gas sector. We believe Granite Ridge is uniquely positioned on multiple fronts. First and foremost, our non-op business model materially decreases risks for investors as we participate in a smaller portion of a larger number of wells compared to operators in the business. This provides the opportunity to materially diversify our asset position in premier basins across the U.S. The execution of that strategy has resulted in our current ownership interest in more than 2,350 wells across the Permian, Eagle Ford, Haynesville, Bakken, and DJ. Our business development efforts are focused on high-quality, near-term drilling inventory that drives more immediate value to our shareholders than long-dated inventory. Finally, our non-op business model allows us to carry less overhead as we partner with the best operators in each basin versus building an internal operations team. Our fortress balance sheet is also key for the company. We are committed to ensuring that we maintain a conservative leverage profile which serves us well given the cyclical nature and inherent volatility of the oil and gas sector. As a non-op, we have the ability to elect to participate in development activity on a well-by-well basis, and we are not burdened by long-term contracts for drilling obligations common to operators. We also enjoy increased flexibility related to hedging obligations. We continue to view Granite Ridge as unique given the small number of public companies that focus exclusively on non-operated properties. Granite Ridge provides the public investor exposure to core areas of production under the best operators, both public and private, through a vehicle with low leverage that is built for responsible long-term growth. We will continue to partner with private operators, many of which have some of the country's best drilling inventory, particularly in the Permian. As such, we provide public investors access to first-class private operators that would have been previously inaccessible to traditional upstream investors. We are committed to the ongoing and long-term return of capital to our shareholders, and our business model is ideally suited to ensure our success in this regard. We have built a business that will comfortably provide $60 million of annual cash dividends to our shareholders. Recognizing the volatility of the oil and gas sector, we've also implemented an opportunistic share repurchase program that we have and will continue to execute on as appropriate. Supporting our overall strategy is our focus on responsible growth in our areas of operation over time. We clearly recognize that the oil and gas industry is cyclical and the pricing of hydrocarbons is volatile. As such, we will continue to place emphasis on adding assets to our portfolio at a reasonable pace that supports our cost structure, which is highly fixed and requires minimal overhead increases to support incremental production growth. I'm going to go a bit off script here to wrap up. Our stock performance year-to-date has been poor. We are trading like a company with little cash flow and a lot of debt when the opposite is true. We have a technical challenge from our 80% private equity overhang, but one day that will be behind us, and in the meantime, we look extremely cheap at less than 2x trailing 12 months adjusted EBITDAX and approaching a 9% dividend yield. So with that, we are happy to answer any questions folks may have on today's call.

Our first question will come from Phillips Johnston with Capital One. Please go ahead.

Hey, guys. Thanks. Just a few questions about the CapEx guidance for 2023. First, just on the $92 million D&C budget. What are you guys assuming for well cost inflation this year? Whether it's relative to the full-year 2022 average or the Q4 exit rate?

Hey. Good morning, Phillips, and thanks for being the inaugural question for Granite Ridge earnings call. I appreciate that question. On the inflation side, it's pretty interesting, we're doing analysis of that this morning and really looking at kind of D&C CapEx inflation really on an annual basis over the past several years and we saw a pretty material increase as you'd expect from 2020 to 2021 to 2022. The interesting piece is when we looked at CapEx inflation from 2022 wells versus AFEs that we have in hand right now for wells that are in process. And those are up quite a bit in areas like the Haynesville and then we're seeing still upwards of 20% from 2022 numbers, but they're really starting to flatten out in the Permian. On average, it may be a high-single-digit inflation at most. But then you see in other areas like the Bakken have actually come down quite a bit. So on the whole, I think that the number that you'd see is slightly up. But it's a single-digit type number when comparing to what we actually saw in 2022.

Okay, perfect. That's helpful. And then just for the 18 to 20 net wells planned for the year, pretty similar to last year's well count, just wondering about the mix maybe by region. Would you expect it to be fairly similar to last year at around 60-ish percent for Permian and call it, 15% to 20% for both Eagle Ford and Haynesville with the rest kind of split between the Bakken?

Yes. Good question. So Permian, we expect to be a little north of 60%, maybe 65% at this time. Eagle Ford, our Eagle Ford operations are interesting because our real main driver there is one of the strategic partnerships that we have. And so we have a chunk of your working interest there. So I think that your Eagle Ford wells could be closer to 15-ish percent. And then your delta is going to be some Haynesville wells coming online early this year, and some in the Bakken maybe a little over in net well, but really our Midland basin has dropped off a lot. We are going to be less than one net well there. Really that's just a factor of the continued consolidation in the Midland. There are a lot of good folks out there doing that. So I'd say our strategy has slowed down in the Midland relative to Delaware.

Yes. Okay. And then if I could maybe sneak one more in for Tyler. The $46 million acquisitions and opportunity capture budget. I think you mentioned that's kind of what's been spent or committed year-to-date. So obviously that number is going to creep higher throughout the year. How should we think about what that number might eventually grow to by the end of this year?

Yes. So that number does have opportunity capture that's occurred basically through the end of the first quarter. There was a larger acquisition included in that number that we closed in January. Then our typical opportunity capture, as well as it also includes any additional carry or wells that are expected to turn to sales throughout the year. So we'd expect it to move up. I don't think it's – I would not expect that to be our quarterly run rate. So I think for the full year, it would increase, but I wouldn't expect it to radically increase with what we saw in Q4. I think for that number expected cash flow is for the year. So I think that would be the first spot where we were going to maybe shift some of our spending to outer years versus spending more in the current period.

Great. Thanks guys. Appreciate it.

Okay. Thank you.

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

Good morning, guys. Thanks for the time. Maybe building on the last topic on the acquisitions, any detail you guys would be comfortable sharing in terms of the location of the assets, any production or kind of near-term development expectations, anything you guys could share would be helpful?

Yes. I'd say most of our acquisition dollars. and good morning by the way, look forward to seeing you in California next week. Most of our real focus is on active areas where the rates are, so most of that will be in play in West Texas, specifically in the Delaware basin. And really what we're targeting are assets where we anticipate development within the next couple of years. One of the challenges about non-op is it’s difficult for us to get proved reserve credit for any inventory and must be on one year, but certainly beyond two. And so that's really our focus; where can we get high-quality and near-term inventory. Most of that's in the Delaware. Another place we put a little bit of capital is in the DJ basin. You have less competition up there. The competition is high quality, and so it doesn't mean you're stealing things up there. But we are seeing some opportunities that have a shorter cycle time. So whereas in the Permian, we may be buying acreage from wells, we hope will be online in 12 months. And in the DJ basin occasionally, you may be buying inventory under units that have a rig onsite, resulting in a shorter cycle time there. Really the biggest driver for us though is again, buying in front of the drill bit. And so while we've done some smaller production acquisitions, that's not really a primary focus going forward, especially with hydrocarbon prices on the oil side.

Got it. That's really helpful. And sticking on the Delaware, I think the slide deck referenced a strategic partnership. Can you discuss that a bit more? I mean, it sounds like that's part of the broader acquisition strategy. But maybe just give us some more details to the extent you guys can share any details there? Thank you.

Yes. You got it, Jeff. That's really our primary growth focus for us is the strategic partnerships. So really what that looks like is finding a capital partner, an operator that we're excited about and know well, that is looking for a different source of capital or maybe a more flexible source of capital. The goal is to provide a creative, constructive solution for them. We found a group based out of Midland, a really high-quality team that has been doing this for a long time. They were historically private equity backed and had a lot of success. They were looking for a different source of capital. Private equity fundraising has really dropped off in the past five years. While we still have fantastic assets with private equity backed companies, the strategy has shifted more towards building larger businesses. This partnership is an opportunity to work with those focused on smaller unit-by-unit development. What it looks like is we select the team, we are side-by-side in evaluating opportunities, and we work together on the drilling plan. From a non-op perspective, we're able to mitigate a lot of historical challenges with non-op and have more control over the timing, development pace, and zones that we're drilling. Look, we can't do a lot of these, but they are strategic bets that we are making with teams we trust and areas we like. So that's an exciting area for us. For the public investor, it looks like private equity exposure with daily liquidity and more alignment with the investor. This is a neat strategy that Tyler and I are focusing on as we can drive significant growth in this area while maintaining the successful base business we've built over the past decade.

Understood. That's really helpful. I appreciate the time, guys.

You got it.

We have no further questions at this time. I'll turn the conference back to management for any closing remarks.

Thank you, Regina. Just want to again, thank everybody for being on our call. This is an exciting time for us, our first public earnings call to take Q&A. So just very much appreciate your time and your interest in Granite Ridge. We’d love to chat with you and look forward to many more calls in the future.

Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.