Granite Ridge Resources Third Quarter 2026 Earnings Conference Call - GRANITE RIDGE RESOURCES INC

Financial Performance:

• Oil and natural gas sales reached $177.2 million; GAAP net loss was $10.1 million ($0.08/share), driven by a $52.7 million commodity derivatives loss ($31.8 million unrealized).
• Adjusted net income was $22.6 million ($0.017/share); Adjusted EBITDAX rose 35% sequentially to $107.3 million and 36% year-over-year to $107.3 million.
• Cash flow from operations was $87.7 million ($96.6 million before working capital changes); Adjusted free cash flow (AFCF) generated was $13.7 million, defined as operating cash flow before working capital changes less development capital expenditures.
• Average daily production grew 8% sequentially to 34,641 BOE/day, with oil volumes up 16% (55% oil mix) and realized gas prices tripling to $3.46/Mcf.
• Leasing and Operating Expenses (LOE) declined to $9.43/BOE from $10.27/BOE, though guidance was raised to $9.25–$9.75/BOE for Q4 2026 due to saltwater disposal costs.
• Balance sheet liquidity stood at $287.4 million with $42.7 million in cash; leverage improved to 1.3x from 1.4x last quarter, supported by $130 million drawn on the revolver and $341.3 million in senior notes.
• Cash flow before working capital changes fully covered drilling and completion capital for the quarter.

Guidance and Future Outlook:

• Full-year 2026 production guidance raised to 34,000–35,000 BOE/day (down from previous guidance due to DJ divestiture and Q2 gas shut-ins), with oil mix targeting 51.5–52.5%.
• Full-year 2026 LOE guidance raised to $9.25–$9.75/BOE; Cash G&A guidance raised to $28–$30 million for Q4.
• 2027 expected to be the "turn" year where AFCF funds the dividend and capital allocation priorities, with EBITDA anticipated to exceed Q3 2026 annualized levels.
• Management targets ~10% year-over-year production growth in 2027, weighted toward oil, with CapEx expected to be flat year-over-year despite cost inflation.
• No specific 2027 numerical guidance provided; will be disclosed with Q4 results, assuming moderate production growth, higher oil weight, and rolling off hedges.

Business Segments and Product Lines:

• Operator Partnerships: Introduced "Red Tank Creek Resources" as a third Permian partner focusing on the Midland Basin; expects a full rig run in 2027 after securing ~40 gross locations.
• Drilling & Completions: Placed 9.2 net wells online in Q3; ended with 14.6 net wells in process; 90% of development capital directed to the operator partnership platform.
• Acquisitions: Closed 20 deals for $19 million adding 8 net locations at an average entry cost of ~$2.4 million/location; higher cost attributed to longer laterals in the Utica Shale (15,000–20,000 ft vs. 10,000 ft in Permian).
• Divestitures: Sold DJ Basin properties for >$20 million at 3.8x forward 12-month EBITDA, reducing gas-concentrated, low-working-interest assets.
• Non-Operator: Maintained ~6,300 net acres in the Utica Shale, producing ~3,000 BOE/day from >100 gross wells.
• Capital Allocation: Board authorized a $35 million share repurchase program through year-end 2027; dividend remains $0.11/share quarterly.

Market and Competitive Landscape:

• Strategy prioritizes "back of the curve" barrels priced at $70 or below, aiming for >25% full-cycle returns at the strip rather than chasing front-month price spikes.
• Waha natural gas basis recovered significantly from record lows in Q2 to $3.46/Mcf in Q3, boosting realized prices and NGL revenue.
• Company maintains competitive advantage by sourcing inventory via operator partners, capturing Permian locations for under $2.5 million/net, well below marketed deal premiums.
• Market positioning emphasizes control over development pace and underwriting quality, with Admiral and Red Tank Creek leveraging grassroots leasing and joint ventures.

Risks and Challenges:

• Operating Costs: LOE remains elevated due to higher water cuts, saltwater disposal costs, and surface equipment rentals; costs are expected to be higher in aggregate in 2027 despite per-unit efficiency hopes.
• Commodity Volatility: Exposure to oil and gas price fluctuations, though mitigated by disciplined hedging and focus on long-dated strip pricing.
• Debt Management: High debt principal ($341.3M) and revolver draw require monitoring to maintain balance sheet safety, though leverage is naturally trending down with EBITDA growth.
• Regulatory/Market Risks: Standard risks associated with commodity derivatives and forward-looking statements as detailed in SEC filings and earnings release.

Management Commentary and Tone:

• Tone is highly confident and optimistic, characterizing Q3 as the beginning of the "turn" from investment-heavy to cash-flow-positive operations.
• Management emphasizes the success of the operator partnership platform in generating controllable growth and low-cost inventory.
• Explicit focus on capital discipline, defined AFCF framework, and a "steady hand" approach to capital allocation (Dividend -> Acquisitions -> Buybacks).
• CEO Tyler Farquharson highlighted the completion of the transition to a non-controlled company following Grey Rock distributions, increasing trading liquidity.

Analyst Questions and Answers:

• Production/CapEx: Confirmed 2027 outlook includes ~10% production growth and flat CapEx YoY, with EBITDA growth driven by volume and higher oil mix.
• Partner Quality: Red Tank Creek cited as highly experienced (200+ wells drilled, $8B transactions), capable of sourcing proprietary Midland inventory.
• Share Repurchases: Management confirmed the $35M authorization is likely to be fully utilized given the stock trades at <2.5x 2027 consensus estimates; potential to increase authorization later.
• Future Partnerships: Interest in adding more partners in late 2027/2028, with several undisclosed programs in development alongside the Utica non-op business.
• Asset Dispositions: Divestiture of DJ assets viewed as a "cleanup" of small working interests; no systematic plan to monetize the non-op portfolio, though opportunistic sales continue.
• Cost Management: Acknowledged 2027 LOE per unit may remain high due to new wells ramping up, but aggregate efficiency is expected to improve over time as new wells are drilled.

Other Key Points:

• Corporate Governance: Granite Ridge is no longer a "controlled company" following Grey Rock's distribution of 14 million shares; transition to a fully independent board is underway.
• Definition of AFCF: Established a clear, peer-comparable metric for Adjusted Free Cash Flow to enhance transparency on cash generation available for dividends and buybacks.
• Strategic Pivot: Moved away from chasing near-term oil price volatility to focus on long-term, cost-efficient inventory development with strict return thresholds.
• Utica Expansion: Highlighted the strategic success of the Utica Shale non-operator position, built via high-volume small deals at attractive entry costs.