Good day and welcome to the Granite Ridge Resources Second Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your touchstone phone. Please note this call is being recorded. I would like to turn the call over to James Masters, Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Tyler Farkerson, 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. 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. way. 2026 is the last year we plan to invest ahead of our free cash flow, and every dollar we are putting to work is building towards the free cash flow inflection we have laid out for 2027. This quarter advanced that plan on the fronts that matter most. We brought new wells online, we added high return inventory to feed our growth, but we kept our balance sheet strong while maintaining our dividend quarter's numbers reflect that progress production was 32,044 barrels of oil equivalent per day 51 oil and we generated 79.6 million dollars of adjustment tax with strong early results from the 7.2 net wells we turned in line late in the quarter but the real story is not the quarter the trajectory we are getting closer to that inflection and we are executing the plan to get there. Our operator partnership platform continues to be the standout. The advantage starts with how the deals are sourced. Through Admiral Permian Resources and our other operating partners, we fund development on acreage that is captured through our partners' own leasing, ground game, and operator relationships, rather than competing for it in broadly marketed packages where prices get bid up. Because we bring the capital and our partners bring the operational footprint, and the local deal flow we see opportunities that never reach an auction and we underwrite each one directly to our return threshold before we ever commit a dollar that is what lets us add inventory at entry cost well below what marketed deals command and unlike a traditional non-operator you control the pace and the capital we're not simply along for the right on someone else's drilling schedule we capture operator level economics and inventory without carrying a full standalone operating cost structure that combination proprietary sourcing plus real control is what separates us from a passive non-off it is difficult for others to replicate during the quarter we closed 27 transactions primarily across the permian and utica for 28 million dollars including future carry obligations and added 21.9 net undeveloped locations toward it. We ended the period with 175 gross or 14 net wells in process. Let me put one of those deals in context because it really shows what our flagship operating partner admiral actually does. Large public producers in the Permian regularly end up with development work that must get done well and on a firm timeline, but that does not fit neatly into their own rig schedule or capital plans. Rather than pull their rigs and crews off other priorities, they hand the work to a partner who can execute it for them. Admiral is that partner, and we provide the capital behind it. In the first half of the year, Admiral took on a project for a large Permian operator that called for nine long lateral wells, each stretching 10,000 to 15,000 feet, or roughly two to three miles, all of which had to be drilled, completed, and producing by the end of 2026. That's a very aggressive schedule. Using two rigs Admiral already had running, they folded the project into their existing program and built a facility and infrastructure plan to hit the deadline. I believe that ability, taking on a large, complex development and delivering it quickly and reliably, is what makes operators want to work with Admiral, and it is a differentiated strength of the partnership. This is exactly the repeatable, high-graded deal flow the platform was built to generate. Our sourcing funnel did exactly what it was built to do in the first half of 2020. We reviewed 363 opportunities, advanced 84 to underwriting, and closed 44, a conversion of about 12% that shows we are holding our screening discipline in the face of abundant deal flow. Our operator partnerships did the heavy lifting, driving about 78% of our first-half deal capital, led by Admiral in the Delaware, alongside a steady non-operated ground game that layered in smaller, high-return interest in the Utica. This is a low-cost inventory replacement we have built this company around. We are adding high-quality locations faster than we drill them at entry costs that support returns above our 25% thresholds. Two items we're addressing directly, and both are ones we understand and are actively managing. First, lease operating expense. For the second quarter in a row, LOE ran above plan, driven primarily by water handling in the Permian and by higher early life costs on our newer pads. We are resetting our full-year LOE guidance higher. Kyle will take you through the new range and the path we see toward lower per-unit costs. Second half volumes come online and our newer areas mature. Second, natural gas. Permian realization stayed soft this quarter on continued Waha basis weakness we expected the more important point is what is happening underneath new takeaways finally catching up to Permian gas supply the Hueber and some pipeline began moving gas mid-year continues to ramp towards full service with additional large scale capacity falling behind it and Waha prices have already firmed off their lows as these projects have come online Supply also keeps growing, so we're not calling the problem solved, but Permian Takeaway is clearly improving, and as at-basis firms, we expect our natural gas revenue to strengthen throughout the back half of the year. We have hedged our basis through the first quarter of 2028, protecting our downside risk. Either item changes our trajectory, and both are moving in the right direction. Let me also give you our read on the macro, because it frames how we are built to compete. Public markets are largely pricing oil to revert to a lower long-term level, and energy equities broadly reflect that skepticism. We do not need to win that debate to win. We underwrite every acquisition and every operator partnership well at the strip to a full-cycle return above 25%. So if prices simply hold near current levels, longer than the market expects, that is upside embedded in our portfolio that we did not pay for. And if prices fall, our hedge book protects our cash flow, our balance sheet, and our dividend. Beyond our hedges, the program itself is built to flex in both directions. And given the macro uncertainty, we believe this flexibility is critically important. While we're to weaken and hold below roughly $65, we could pull back an estimated 40% to 50% of our development budget while protecting our base business and our dividend. And if conditions warranted leaning in, we have the ability to accelerate. Every incremental well still has to clear our full cycle return hurdle at the strip before we fund it. That discipline is what lets us stay on offense through a volatile tape instead of reacting to it. Stepping back, our strategy is working. Our traditional non-operative business continues to generate steady cash flow from an asset base that affords diversification and optionality, while our operator partnerships are compounding our inventory and growth. We are in a position of strength, and every dollar we are deploying is building that base that carries us towards our 2027 framework, durable growth, double-digit free cash flow yield, and a sustainable dividend. Let me be specific about why 2027 is the term. The capital we are investing this year builds a production base that steps up meaningfully next year. As those volumes come online, covering gas realizations and lower per-unit costs widen our cash margins, so our free cash flow grows faster than our capital program. That combination, or production at wider margins, against a roughly steady level of investment, is what converts this year's outspend into sustainable free cash flow in 2020.

That is the inflection.

Everything we did this quarter advanced it. As our free cash flow builds, we expect to keep our balance sheet strong, with leverage trending lower as our cash flow grows, while continuing to deploy capital into high-return acquisitions. That, I'll turn it over to Kyle.

Thank you, Tyler, and good morning, everyone. We had a solid quarter financially, with strong cash generation and a balance sheet that gives us real flexibility. Oil and natural gas sales were $149.3 million. On a GAAP basis, net income was $30 million, or $0.23 per diluted share, up from $0.19 a year ago. Adjusted net income was $11.1 million, or $0.09 per diluted share. Adjusted EVA DAX was $79.6 million, up from $75.4 million a year ago. And we generated $55.6 million of cash flow from operations, or $69.5 million before working capital changes. Our unhedged realized price was $51.19 for BOE and $43.39 for BOE, including hedged settled derivatives. LOE was $30 million, or $10.27 for BOE. This compares with $9.57 for BOE during the first quarter. Combined for the first half of 2026, LOE was $9.91 for BOE. We're focused on our operating cost structure and working closely with our operating partners on the details. We're seeing operating costs decline on wells that were turned to production during the end of the quarter. And as a result, we expect per unit cost to turn lower over the second half. However, based on what we've seen so far, we're increasing our LOE guidance for the year to $8.25 to $9.25 for BLE. Looking further out, we expect lower per-unit costs as we scale into 2027, which is a contributing factor to the free cash flow inflection Tyler mentioned. Production and ad valorem taxes were $9.3 million, or 6% of sales, in line with guidance, and G&A was $9.2 million, or $3.14 per BOE, including $1.3 million of non-cash stock-based compensation. We invested $78.5 million in drilling and completions capital and $16.7 million of acquisition capital during the quarter. That $16.7 million reflects the cash we deployed to close 27 transactions, primarily in the Permian and Utica. Including roughly $11 million of associated carry we expect to fund as these wells are developed, our total committed capital is about $28 million, which added 21.9 net undeveloped locations to our inventory. All of it sourced through our operating partners and our ongoing ground game and underwritten to our full cycle return threshold at the strip. Simply put, we're replacing and extending high-quality inventory as we develop it, which is how we sustain growth without paying up and warehousing long-dated drilling inventory. We end the quarter with $44.1 million of cash, $125 million drawn on our revolving credit facility, and $350 million of principal outstanding on our 8-7-8 senior unsecured notes. for net debt of $418 million, Leverage remains conservative at approximately 1.4 times. Before I hand it back, let me offer some color on the second half. On volumes, we expect production to step up modestly in the third quarter and more meaningfully in the fourth, as the wells from our first half of the program come online, with oil rounding out at about 52% of the mix. For the year, we expect volumes within the guidance range, but turning towards the lower end due to shifts in timing, providing a large positive impact to the first quarter of 2027 than initially expected. On cost, we expect per-unit LOE to improve sequentially as new volumes dilute our fixed base. Finally, the third quarter will be the heaviest spending quarter of the year, reflecting the pace of our operating development and continued inventory additions before moderating in fourth quarter. As it relates to pricing, Waha basis was the weakest we've seen it on record, and that is what you see in our $1.12 per MCF realization. We believe the second quarter is a low point, and all things being equal, we expect gas will be a big swing factor in the second half. Gas sales were $9.6 million in the second quarter. If basis holds where it is today, we expect to be north of $30 million in the third quarter before it hedged settlements. The fourth quarter is even better. Our basis hedges improved materially, and we have less volume hedged than in the third quarter. Altogether, ramping production and healthy price utilization set the stage for a compelling 2027. With that, I'll turn it back to you, Tyler.

Thanks, Kyle. Let me close with three points. First, our operator partnership platform is delivering. It is giving us proprietary access to high-return inventory and executing it well, and is the engine of our growth. Second, we are well-positioned to execute the remainder of our 2026 plan. Our leverage remains within our target range. Our liquidity is ample, and we have paid a dividend every quarter since becoming a public company. Everything we are doing this year is building towards our 2027 framework of attractive growth, a double-digit free cash flow yield, and sustainable dividend coverage. We expect strong exit production approaching 40,000 BOE per day, continued improvement in our per-unit costs, and steady progress toward the point where this platform funds itself. We are confident in where we are headed, and we are looking forward to delivering. Third, Grayrock has advised us that it intends to distribute a portion of its Granite Ridge shares to its limited partners in the third quarter. If that distribution is completed, Grayrock's ownership will fall below 50%, and Granite Ridge will no longer be a controlled company. We view that as a positive development. It broadens our shareholder base, increases our public float and trading liquidity, increases our transition to a fully independent governance structure. We will provide additional details on size and timing as those are finalized. With that, operator, we'll open the line for questions.

Thank you. As a reminder, if you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself from the queue, Please press star 11 again. Our first question comes from John Annis with Texas Capital. Your line is open.

Hey, good morning, guys, and thanks for taking my questions. For my first one, you've reaffirmed that 2026 should be the final outspend year before a free cash flow inflection in 2027. I wanted to ask, what are the most important assumptions underlying that outlook, and what commodity prices do you need to generate that double-digit free cash flow yield outlined in the presentation?

Morning, John. Thanks for the call, or thanks for the question. So, yeah, 27, the way we're thinking about 27 from a commodity perspective is $65 oil. So, you know, we're north of that now. 2027 is in the low 70s right now. So we've got some cushion there. So, $65 oil to be able to deliver, you know, what we've laid out, which is 10% free cash flow yield, one-and-a-quarter coverage on our dividend, leverage in the one-and-a-quarter range, and production growth in the high single digits.

I'll add in the high single-digit production growth couples with we have substantial hedge losses in 2026. We expect those to go away in 2027. So that should be a pickup there. And then, as you probably saw in our results, the law hospital basis difference has been pretty rough in the first half of the year. That's subsiding, and it looks like that's going to stay about the same through 2027, expanding gas revenues.

I appreciate that, Caller. Maybe for my follow-up, digging more into your prepared remarks, one of the advantages you've highlighted with the operated partnership strategy is greater control of capital allocation and development timing. If commodity prices were to move materially higher or lower, how quickly and maybe to what extent could you flex activity levels up or down within the operated portfolio?

Yeah, I think very quickly. So we have, you know, additional inventory on the upside. You know, there's additional inventory that we have scheduled out for out years that we can pull forward. I think that's an exercise that can happen, you know, very quickly. It's obviously harder to slow down activity. But what we've looked at so far, at least for 2027, we have plenty of capacity to be able to pull down our inventory and our spend rate below our maintenance capital level of $250 million. So I think there's flexibility on both sides, and it's something we keep an eye on, especially with all the volatility right now on commodity prices.

I appreciate the time. Great update.

Thank you. Our next question comes from Jeff Gramp with Northland Capital Markets. Your line is open.

Good morning, guys. Thanks for the time. With the transition to free cash expected next year, how do you anticipate that affecting the inventory capture strategy that you guys have been so successful at? Does that kind of artificially put a ceiling on the amount of capital you guys would be willing to put to work in that market? Or should we do that as kind of a, I don't know, secondary discretionary bucket of capital allocation outside of the free cash goal that's maybe more tied to development-oriented capital?

Yeah. No, I mean, it's certainly, you know, there's somewhat of a ceiling that gets put on it. But, you know, right now we've been very successful on that front. We've added inventory at about a two-to-one rate versus what we're developing, so it's been very successful. I continue to expect that we'd, you know, be spending on extending our inventory. We probably have five to six years of inventory right now. That's a pretty good level for us. I don't really want to get too long inventory and have to warehouse that on the balance sheet. But if we did add, you know, another couple years of inventory, I think that would be, you know, great for, you know, the business. So, I do, you know, we had a big spend on acquisition activity in 2025. We spent over $125 million in 2025. This year, we'll probably spend about 50. Next year, I'd probably expect to spend on a similar level.

That really helps. I appreciate that. And I guess sticking on the acreage capture opportunity, it seems like you guys continue to be really active in the Utica kind of half-stopping the operative partnership model. Can you talk about the runway there in terms of kind of, I guess, continued opportunities at prices that make sense for you guys? Is that an area we should continue to expect to be a focus?

Yeah, absolutely. So that's our number one spot for our traditional non-op spending. So 90% of our business, capital spending-wise, has been going into operative partnerships over the past few quarters. The rest of that has almost been exclusively going to Utica. That's been tremendous for us over the past 18 months. I think we're close to 6,000 net acres now in that basin across, you know, that 18-month build. And it's a spot where we're continuing to see lots of deal flow. We closed – we kind of look at them in groups of closings. We had four separate closings in the second quarter that included multiple, you know, transactions in each one of those closings. We're still seeing tons of deal flow in Utica. We added, you know, a couple net wells, a few hundred net acres. Those economics look great. The well performance has been great. We now have, I think, over 80 wells online in our portfolio out there with, you know, at least a year and a half of data. And, you know, everything is looking good from the productivity standpoint. So, yes, it's an area where we'd like to continue to spend dollars in the non-op business, you know, continuing success.

All right. Sounds great, and I appreciate those details.

Thank you. Our next question comes from Phillips Johnston with Capital One. Your line is open.

Hey, thanks for the time. Appreciate the details on slide nine about your lower entry prices in the Permian. It's pretty compelling. Just one question for me as a follow-up on the uptick in LOE that Kyle will throw. The updated guidance implies the run rate should kick down to, you know, around 750 to 850 per VOE in the back half of the year from around 10 or so in the first half. You've obviously cited a few factors for the uptick, and you've referenced that production is expected to ramp in the second half, which should obviously help on that fixed cost component. But what gives you the confidence that those unit costs should moderate for the remainder of the year? And then can you ultimately talk about which region specifically drove the elevated costs in the first half of the year?

Sure, of course. We're seeing a few things. I think, first of all, just to be open with you, we are seeing elevated costs. So we've increased guidance over the course of the year by $1.50 per BOE, which is about 20 percent, a little over 20 percent. So we are seeing some increased costs on the lease operating expense front. But we're seeing a couple of other things which give us confidence that that run rate we saw in the first half will come off. We've been working pretty close with our operating partners to understand the intricacies of the cost structure there. and we're already seeing um least operating costs on a barrel equivalent coming down um on top of that um there's a denominator issue in the first half of the year waha went significantly negative um we saw some shut-ins uh for high gor areas and some gas in oriented areas and so that's created a bit of a denominator effect which we've seen and we're pulling that out and thinking about what it looks like for the second half of the year so those those two items give us comfort that we'll see it coming off sequentially okay great that makes sense and i think last quarter

you guys referenced some non-recurring recognition of uh mbc delinquent freeze how big of a fact that is in our first quarter numbers yes there was a write-off um of our mbc that impacted loe and flow through loe okay so so that was a that was the first quarter event and it didn't affect Q2. That's correct. Okay. Thanks, guys. Appreciate it.

Thank you. Thank you. Our next question comes from Michael Schiala with Stevens. Your line is open.

Hi. Good morning. It's a lot of really good detail on Admiral in the slide deck. I want to see if you could talk to whatever extent you could on the third and fourth partnerships, where those are and when we might learn a little bit more about them.

Yeah, I think probably later this year we'll be in a position to share a lot more information on those partners. You know, we've generally talked about what they're doing, so I can kind of walk you through the strategy at least for each one of them. So they're both permeate-based or permeate-focused. One of the teams is an emerging play geo-led team looking at, you know, things in the Permian Basin, emerging using trims within the basin. So they've put together a pretty, you know, nice acreage block. They're doing some appraisal work on that acreage block now. So we hope to have some results for you later this year on that team. Team 4 we added in Q4 of 2025, so they're brand new, you know, roughly six to nine months in. They are an inventory aggregation development play team, you know, very similar to what Admiral is. They're focused mainly on the Midland Basin, but they are looking, you know, across the Permian, but should be mainly Midland-based activity. I think we're actually ahead of what we expected from an inventory capture standpoint. You know, some of the deals that we closed this quarter were actually with that team four. We typically like to see, you know, a year to 18 months worth of inventory ahead of team four. Or, you know, we want to really talk about them in the public domain, And also, you know, that's kind of the minimum threshold that we need to see in order to think about picking up a rig with a team so that they can keep it, you know, continuously running for a year. So, you know, I think that typically, depending on the teams, you know, can take up to a year. But our Team 4 seems to be, you know, ahead of that schedule. So, you know, hopefully we'll have some information on them later this year and, you know, what we have, you know, potentially planned for them from a development standpoint in 2027.

I appreciate that detail. I want to ask on, Tyler, if the free cash flow inflection plays out next year, as you expect, how you're thinking you would prioritize that free cash flow for next year.

Yeah. So, you know, to our dividend, so we've paid our dividend every quarter since we've been public. So, 14 quarters now. Then balance sheet, we're going to balance sheet at, you know, roughly one in a quarter. That's our long-term target range. And then beyond that, you know, we look to either expand the business through additional inventory acquisitions. You know, that's opportunistic. That's market-based. So, depending on what the market looks like at the time, some could go to asset expansion. and then, you know, depending on the commodity price, you know, development activity to either accelerate the business or, you know, continue at the current pace.

Sounds good.

Thank you. Our next question comes from Chris Baker with Evercore ISI. Your line is open.

Hey, guys. Thanks for the time. Tyler, just another follow-up question on 27. I guess just as you guys think about that CapEx envelope, I'm curious, as you all have progressed these operative partnerships, how much of that spend is for third-party versus the controlled piece?

So how much is inside of operator partnerships do we expect next year?

Yeah. What's the rough split? I'm just curious in terms of what you can control.

Yeah, you know, it'll probably be north of 75%. So right now it's been, I think this most recent quarter, we were something like 93% of our development capital went into Operative Partners. The balance of it was traditional non-op and Utica. I'd expect it to maybe not be that high, but certainly higher than 75% would be going into Operative Partnerships next year.

Okay, so the vast majority. Okay, that's great. As a follow-up, I'd love to get any thoughts you're able to share on the Gray Rock distribution in kind. Anything you can share in terms of cost basis, ability to support the stock. I mean, it looks like just on some simple math that the amount of shares being distributed, you know, would be upwards of 40% of value traded between now and the end of April. So just any color there would be helpful.

Yeah, you bet. I can share what, you know, I can. This is obviously a, you know, Grey Rock decision, Grey Rock partnership decision. So we don't control that here at the company. But from what we understand, you know, their fund life, you know, is up in the next six to nine months. So, you know, this will be a methodical distribution of shares over that six to nine months. You know, we're excited about it from a grant perspective. You know, increases daily trading volume. Liquidity removes the overhang. So, you know, we're excited to get these shares into the public's hands. Greyrock has distributed shares before distribution in 2023 to these same LPs that will be getting shares. you know, over the next six to nine months. So the LPs are, you know, used to getting these shares, have received these shares in the past. You know, I think something like, you know, 40% of the fund, this remaining fund, has already been distributed. So, yeah, you know, we're excited to get started, get these shares moving into the market. And, you know, we think this will be done in a methodical manner, you know, multi-distributions over the next six to nine months.

And just any sense on cost basis? Is it above where the stock's trading today?

No, I don't know exactly. I know these have been, you know, very successful funds. So, you know, their cost basis I know is low.

I don't know exactly where it is, if it's, you know, above or below where we're trading now. but it is a low number okay thank you that thank you I'm sure no further questions at this time this concludes the question-answer session and you may now disconnect thank you for your participation good day