Granite Ridge Resources, Inc (NYSE:GRNT) Q4 2023 Earnings Call Transcript
Granite Ridge Resources, Inc (NYSE:GRNT) Q4 2023 Earnings Call Transcript March 8, 2024
Granite Ridge Resources, Inc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome everyone to Granite Ridge Resources Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the call over to Wes Harris, Investor Relations Representative for Granite Ridge.
Wes Harris: Thank you, operator, and good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Luke Brandenberg, our President and Chief Executive Officer, who will provide an overview of key matters for the fourth quarter and full year, as well as an outlook for 2024. We'll 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 directly comparable GAAP financial measures is available in our earnings release that is posted on our website. Finally, as a reminder, this conference call is being recorded.
A replay and transcript will be made available on our website following today's call. With that, I'll turn it over to Luke.
Luke Brandenberg: All 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 finetune your model, I'll ask that you bear with me. We had three 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 everyone 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 seven new team members in the past 12 months, and from a standing start, achieved nine corporate [SOX] (ph) milestones and implemented 140 different controls. On the investor front, it has been a whirlwind of a 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 is up 10x from last January, research coverage is up from 1 to 4, and the number of reported shareholders is up over 5x from year-end '22 to year-end '23. Another data point I liked is from a trip to New York for investor meetings earlier this year. We brought 25 pitchbooks with us for ten meetings, and two 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, onto 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 be it 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 net 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 does 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 three acquisitions, two in the Haynesville and one in the Eagle Ford, five opportunities developed through our traditional non-op or what we call our burgers and beer strategy, including three in the Delaware and two in the Eagle Ford, and two 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 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 and 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 at an operator 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 into three 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 two.
The second is acquisitions or consolidating the consolidators. These come in different shapes and sizes that 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, they are typically one transaction at a time. Our strategic partnerships, on the other hand are of a larger scale where we benefit from our partner's future business development efforts through ROFR, AMI, or joint venture type structures. The strategic partnership we talk about most is with a 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 two 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%, if 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 the deals that are closed or that are agreed to on a high probability of 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 at $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 cost. Our current outlook for LOE is $6.50 to $7.50 per barrel of oil equivalent, production and 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: 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 cost 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 to 25,250 Boe per day of production for 2024, which represents an increase of approximately 7% from 2023. 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: Thank you, Tyler. A gentleman that I'm humbled to call a mentor recently shared with me that as 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 for the best risk-adjusted returns. Our job is the E. The market's 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 0.5 turn of debt, and had production growth of over 20% with a higher share price.
But for now, trading at less than 3 times, Granite Ridge is quite the bargain. We had insider buying in every open window in 2023, myself 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?
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