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

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Granite Ridge Resources third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone keypad. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. James Master, Vice President of Investor Relations. Sir, please begin. Thank you, Operator, and good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Tyler Farquharson, 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. Granted 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-gap financial measures including adjusted free cash flow information reconciling these measures to the most directly comparable gap 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 for the last year we have told you that 2026 is the final year we invest ahead of our cash flow and that 2027 is the turn this quarter you can start to see the turn in our numbers average daily production grew eight percent from the second quarter oil volumes grew 16 percent adjusted even dax rose 35 percent sequentially to 107.3 million dollars and our cashflow before working capital changes covered our drilling and completion capital for the quarter we are also taking three steps today that reflect where the business is going first our board has authorized a share repurchase program of up to 35 million dollars second we are putting a clear definition of adjusted free cash flow in front of you along with the order in which we intend to use it third we continue to evaluate our operating partnerships and we are excited to name our third operating partner in the permian the red tank creek resources kyle will take you through the first two let me start with the quarter in the platform third quarter production averaged 34 641 barrels of oil equivalent per day 55 of it was oil we placed 9.2 net wells online most of them in the permian and we ended the quarter with 14.6 net wells in process the other major driver to our quarter over quarter even tax growth was natural gas price realization i realized gas price rose from 1.12 per mcf in the second quarter to 3.46 in the third quarter as waha bases recovered kyle will walk you through that in detail because it's a real change in our cash flow our operator partnership platform remains the core of our strategy and it directs the majority of our 2026 drilling and completion capital The advantage starts with sourcing. Our partners find and assemble acreage through their own leasing, ground game, and operator relationships, so we see opportunities that never reach a marketed process. We provide the capital. We underwrite every opportunity to our return threshold, and we control the pace. That is how we've consistently added inventory for under $2.5 million per net Permian location, well below where marketed deals command. Admiral Permian Resources has been the flagship of that platform. Today, we are introducing another partner. Red Tank Creek Resources is a Midland-based operator. Our partnership with them is focused on the Midland Basin. The core of the group worked at Henry Resources, where they drilled, completed, and produced more than 200 horizontal wells between 2014 and 2024. Arete's management has helped build five Permian Basin ventures, including Bold Energy 1, 2, and 3, and Oxbow Petroleum, and its business development team has executed more than $8 billion of upstream transactions. Arete Creek works the same way Admiral does. Its land team builds positions through grassroots, leasing, and joint ventures with large overlapping asset managers. we provide the capital and we control what gets drilled and when arete spot its first well under our partnership in october and we expect them to run a rig during 2027. outside the permian we have built a non-operator position in the utica shale that we're increasingly proud of we hold about 6 300 net acres and produce about 3 000 net boe per day from our interest in over 100 gross producing wells. We built this position from scratch over the past two years through a high volume of small deals and count these opportunities among the most economic in our portfolio. During the quarter, we closed 20 acquisitions for $19 million, adding eight net locations at an average entry cost of about $2.4 million per net location. Also, we divested over $20 million of oil and gas properties in the DJ Basin at a 3.8x forward next 12-month EBITDA multiple. While there's been a lot of volatility at the front end of the oil curve, we continue to plan our business around the back of the curve. Every acquisition and every operator partnership well has to clear a full cycle return above 25% percent at the strip. And in today's backward market, those long-dated barrels are priced at $70 or below. We're not going to chase near-term prices or pay up for assets based on where the front month is trading. Instead, we will continue to seek longer-dated development opportunities farther out on the curve, keep our hedge program disciplined, and direct any excess cash to the priorities Kyle will lay out. Stepping back, the plan is working. Our traditional non-op business generates steady cash flow across six basins, and our operating partnerships are compounding inventory and growth. Through the first nine months of the year, our cash flow before capital changes has funded our development capital. Dividends and acquisitions have been funded from the balance sheet but in 2027 that changes we expect adjusted free cash flow to fund the dividend and the rest of our capital allocation priorities leverage falling as our cash flow grows with that we'll turn it over to kyle thank you tyler and good morning everyone this is our strongest quarter of adjusted eva dax since we've been a public company and i'll spend most of my time on what that means for 2027 but first the results Oil and natural gas sales were $177.2 million. On a gap basis, we reported a net loss of $10.1 million, or $0.08 per share, driven by a $52.7 million loss on commodities derivatives, of which $31.8 million was unrealized. Adjusted net income was $22.6 million,or $0,017 per diluted share. The adjusted EBITDAX was $107.3 million, up 36% from $78.6 million a year ago, and 35% from $79.6 billion last quarter. Cash flow from operations was $87.7 million, or $96.6 trillion before working capital changes. Our unhedged realized price was $55.60 per BOE and $49.04 per BOe, excluding settled derivatives. LOE was $30.1 million, or $9.43 per BO E, down from $10.27 per BO e in the second quarter. Last quarter, we said we expected per-unit cost to improve sequentially as new volumes came on, and they did. But LOE is still high, mainly from saltwater disposal costs tied to higher water cuts and flowback, along with related surface equipment rentals and contract labor. production and avalorum taxes were 10.3 million dollars or six percent of sales cash g a was 8.7 million dollars or 2.73 cents per boe we invested 90.8 million dollars of drilling completion capital and 19 million dollars of acquisition capital during the quarter we ended the quarter with 42.7 million dollars of cash 130 million drawn on our revolving credit facility and 341.3 million dollars of principal on our eight and seven eighths senior unsecured notes that debt was 416.6 million dollars and leverage improved to 1.3 times from 1.4 times last quarter liquidity was 287.4 million dollars now natural gas waha bases held through the quarter and gas sales came in at 30 million dollars up from 9.6 million dollars in the second quarter waha recovered from record lows in the second quarter as new permian takeaway came on and i realized price tripled a note on how we report we use two stream reporting so ngl revenue is shown in the natural gas revenue line on our financial statements on that basis i realized natural gas price went from 38 of henry hub in the second quarter to 121 of henri hub in the third quarter we expect continued strength from waha bases and ngl pricing in the fourth quarter pyro natural gas pricing helps our focus remains on growing oil volumes our mix moved in that direction this quarter from 51 oil in the second quarter to 54.7 in the third for the full year we still expect oil volumes in line with the midpoint of our original guidance natural gas volumes will come in lower for two reasons gas that was shut in during the quarter due to waha prices in the second quarter while waha prizes were at their low and our gas weighted dj divestiture that closed in september that nets out to a lower top end on production guidance in a new range of 34 000 to 35 000 boe per day in a higher oil mix now at 51.5 to 52.5 percent we also raised our loe guidance to nine dollars and 25 cents to 9.75 cents for boe and our cash gna from 28 to 30 million dollars for the fourth quarter we expect higher oil volumes than we did in the third quarter with oil growing faster than gas we also expect development capital expenditures modestly higher as well accounting for cost inflation which should put us at the high end of our guidance range for 2026. let me move to adjusted free cash flow we define adjusted free cash flow as operating cash flow before changes in working capital less development capital expenditures acquisitions are not included in that number on that basis we generated 13.7 million of adjusted free cash flow in the third quarter we think this definition of adjusted free cashflow will enhance the comparability to our peers and provide a clear framework for how we will use our adjusted free-cash flow here's how we intend to use it first the dividend we've paid a 11 cent dividend per shares every quarter since becoming a public company second acquisitions that clear our full cycle return threshold at strip and third opportunistic share repurchases our board authorized a repurchase of up to 35 million dollars of our common stock through year-end 2027. the program did not obligate us to buy any shares and may be suspended or discontinued at any time we will fund the program with adjusted free cash flow and within the limits of our credit agreement and our senior notes finally 2027 we're not providing 2027 guidance today we expect to do that with our fourth quarter results but we want to talk to you about the cash generation in the business and the assumptions behind it on page 13 of our investor presentation you will see the eva dax trajectory of our business then criminal eva dax from moderate production growth higher oil volume weight and hedges rolling off we see 2027 eva dax well in excess of third quarter annualized eva tax with that i'll turn it back over to you tyler thanks kyle let me close with three points first the inflection is underway volumes are growing oil mix is rising gas realizations have recovered and our cash flow is caught up with our development spending we've defined adjusted free cash flow plainly and told you how we will use it second our operator partnership platform is broadening with admiral now arete creek we have two permian partners sourcing attractively priced locations that are extend our controlled development runway Third, Grey Rock. In August, affiliates of Grey Rock distributed 14 million Granite Ridge shares to the limited partners of GreyRock Energy Fund III. Grey Rock's ownership is now approximately 39% and GraniteRidge is no longer a controlled company. We are completing the transition to a majority independent board and fully independent committees within the periods the NICE standards provide. Grayrock has indicated that it expects additional distributions. The size and timing of any future distributions are at Grayrock's discretion, and we would refer you to Grayrock section 13D filings. We view the first distribution as a healthy step. It expanded our float and has meaningfully increased trading liquidity, which makes Granite Ridge more investable for a broader set of institutions. We are excited about where this company is headed, and we look forward to delivering on it. With that, operator, we'll open the line for questions. Yes, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 11 again. Again, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or coment comes from the line of Michael Schiala from Stevens. Your line is now open. Good morning, guys. I wanted to get some high-level thoughts. Kyle, you mentioned 27, the slide showing where you think EBITDA will land. Just some of the assumptions built into that. Production, I guess, should we be thinking kind of high single-digit growth and CapEx kind of flattish year over year? Is that fair? Any more you could offer on that? That's a completely fair assessment of it. we're targeting just about 10% production growth year-on-year. I think we have a little bit extra weighting on the oil side in that production growth. And then if you take into consideration our hedge book rolling off, those are the really three kind of simple key things to look at to the pencil out where 2026, Q3 26 annualized EBITDA goes into a 27 estimated on that page. Great. Appreciate that. And Tyler, you mentioned the changes with Grayrock and changes on the board. Anything we should expect in terms of changes with direction of the company with those? The short answer is no, not at all. The board is completely committed to the strategy that we have laid out. You've seen us transform the business over the past couple of years to be more focused on controllable development via the operator partners. We now have, you know, four partners. We'll continue to have partners in the future. That's been very successful for us. We've been able to capture inventory at, you know, less than $2.5 million per net location in the Permian, which we think is a pretty good value. So, you know, we're moving into a little more maturity with Admiral, obviously, running two rigs, but we're excited now that Arrete Creek is picking up a rig with us. We've actually drilled a handful of wells with them already this quarter, and then we expect to run a rig full-time with them starting in 2027. So, the board is fully committed to the strategy. Very good. Thank you. Thank you. Our next question or comment comes from the line of Derek Whitfield from Texas Capital. Mr. Whitfield, your line is now open. Good morning, and thanks for taking my questions. I wanted to start with your Arate partnership disclosure. How would you characterize the depth of their gross locations, their ability to continue to source inventory, and how the quality of them to where it compares versus the average of your partnerships. Yeah, you bet. So first, the Rente Creek team is very accomplished on both the commercial side as well as the development side. A large portion of the team came out of Henry Resources. They had a very successful exit a few years ago. So, you know, chunks of the team have also been involved with various entities that they've built and flipped over the years. They've drilled over 200 horizontal wells in over 10 years. So, on the development front execution side, very accomplished. On the commercial side, equally as accomplished. Their business development team and commercial sourcing team has closed over $8 billion of transactions. That is incredible. This is a Midland-based team. They have very deep networks based in Midland. So we're highly confident in their ability to source opportunity that's more proprietary in nature and will continue to build on what we've done with the Admiral team, sourcing opportunity from those types of markets as well. So we are about a year into it with Arete Creek. Um, you know, we like to, uh, let teams, you know, have some time to build up some inventory in front of them. Um, yeah, we're proud to report that aretes, you already secured at least, you know, half a dozen or so, uh DSUs, uh you know, 40 something gross locations, um, and you know has enough for us to commit to picking up a rig with them in 2027. Um, I fully expect them to be able to continue to add, you know, a lot more inflammatory to what they currently have, just like our Admiral team. So, this is a, you know, development strategy first. I like to talk about Admiral Ann Arete is, you Know, hitting singles over and over again, but driving in a lot of runs. So, this is, You know, they will be focused on the Midland Basin. That's not to say that they won't do deals, You Know, in other parts of the Permian Basin, but, You where we expect them to find opportunities in the Midland Basin, and they've done a heck of a job so far. Great, Keller. And as my follow-up, I wanted to shift over to your buyback authorization. It would seem on our math, which is clearly share price dependent, that you guys could buy back a substantial amount of Gray Rock's future distributions. Is that a fair read based on where those lie today? Yeah, absolutely. You know, we set the authorization at $35 million to start with. Obviously, with where the stock's trading, we're trading at less than two and a half times, you know, 27 consensus. You know. I think if you look at where we think cash flow potential is for next year, we'll be trading at even less than that. So we'd love to own more of this company. We set the authorisation at $25 million initially. You know we'll see how that goes. It's completely opportunistic, as Kyle mentioned, and the board can come back in the future and raise that or cancel it at any time. We wanted to dip our toe in the water here to start with. We set it pretty low. It's about 5%-ish of current market cap, but we'd love to own more of this business, you know, certainly with where, you know the current consensus numbers are, you know, less than two and a half times 27 and we think, you know, 27 should be north of where consensus currently is. So, yeah, well you're right, we could buy a lot more. That's great. Congrats on the quarter and update. Perfect. Thanks, sir. Thank you. Our next question or comment comes from the line of Jeff Grant from Northwind Capital Markets. Mr. Gramp, your line is now open. Hey, morning, guys. I was curious, Tyler, on the operated partnership front, given kind of the focus and shift here to free cash flow positive and the progress you've made with the partners you have, what's the appetite to add more partnerships? Yeah, we're always, that's a good question. We're always looking at when's the right time to add more, you know, we could. It's something we discuss all the time. I think, you know, I think we'd like to see how 27 goes. We'd like to get, you know, Arete Creek and their rigs stood up. We have a couple of other partners that we haven't discussed with you all yet that are working on some things in the background that we think could start to layer in, you know, in maybe late 27 and 28 and beyond. So, you We're interested in seeing how those develop over the next, call it, six, nine months. So there is some more in the background that we haven't talked with you all about. We talk a lot about the Operator Partnership Platform. Most of our capital goes into that line of business, but we do have a lot going on in the Utica via our traditional non-op business. We really like the returns there. We've built a position over the past year and a half, two years of over 6,000 net acres. We've done it at a very attractive entry cost. You know, that business itself right now is generating about 3,000 BOE a day net to us. We have over 100 gross wells online that we're participating in, and we're continuing to find a ton of opportunity there. So, you know, we have, you Know, the three or four partners that we've, you Now, disclosed publicly. There's a few others that are working in the background, plus we have the Utica program up and running. So there's a lot on the plate. We're really excited about where it's headed, and I think we're happy with where we're at now, and we'll see how 27 goes. Yeah, I'd add, Tyler, to that. The way this operated partnership business model works is we've got 27 and 28 laid out, and we can start thinking about 29, 30, and 31. So, to your point, Jeff, you know, we can always look into doing more work with existing operator partners as they grow and flourish, and we can look at bringing others into the fold. But we're thinking years down the road now because we've got the near term set up for us. Great. Those are super helpful details. My other questions on the acquisitions you guys did in the quarter, it looked like the cost per location went up a bit sequentially. Is that just a function of higher commodity prices driving some increased cost while still making sense from a hurdle rate perspective or any other factors driving those specific locations to be a bit more expensive than the recent averages? Thanks. Yeah. Yeah, no, that's a good question. And, you know, $2.5 million per net location is still extremely incredible in our view, and, you Know, it just continues to build on our track record of what we've been doing the past couple of years in that space. But, you Now, specifically, to answer your question, we did 20 deals during the quarter or close 20 deals. During the quarter, there was a higher, I just mentioned, you You know, how proud we are of the Utica program. there was a higher percentage this quarter of transactions that closed in the Utica. So those wells in the Udica are, you know, a 15,000, you know, 20,000 foot average lateral versus what we're buying in the Permian is normalized to a 10,000-foot lateral. So that's, you know, that's the difference. We're just getting more lateral feed. But on a per-foot basis uh you know it's all been uh consistent uh in in line uh with where we've been all right perfect that makes that makes a ton of sense thank you guys you bet thank you again ladies and gentlemen if you have a question or comment at this time please press star one one on your telephone keypad i'm sure no additional questions in the key oh we have a question, a follow-up from Mr. Michael Schiala from Stevens. Your line is now open, sir. Yeah. You mentioned, Tyler, that you sold some DJ assets. Just wondering anything else that you could be potentially looking to divest? You know, all of that is opportunistic, right? We're not looking to systematically dispose of any assets, but we do have a large non-operative footprint across six different basins, thousands of wells. So from time to time, there's opportunities that come across our desk that make a lot of sense. I think Kyle will walk you through some of the multiples on why that made sense to us. But, you know, from my standpoint, we're always evaluating things in the non-op portfolio. Again, it's a huge footprint. So from time to time, there are things that are interesting, but it's not a larger strategy of monetizing assets. Yeah, I'd add that this was largely, I would say, kind of a cleanup exercise. It was about 800 gross wells, so a good proportion of producing wells, but very small working interest. highly gas-concentrated asset, too. And so, it made sense just from where we're taking the portfolio to shed those assets. And it worked out that we got a really good multiple of forward EBITDA at 3.8 times. Makes sense. I wanted to ask on your LOE, came down a bit in the third quarter from second quarter on a per BOE basis. How are you thinking about op costs for 2027? Should we anticipate with the growth that continues to come down or just any colleagues you can add there? You know, we still consider the dollar per BOe high. We're going to see aggregate costs going up just because we have production going up. We've increased guidance on LOE as a result. I think as we have, I guess you can think about like we had about 18 wells come online the first three quarters of this year, and we've got a number of them coming on the fourth quarter and then growth in 27. So I think, as we drill more, that number is going to hopefully come off and be closer to where we are in guidance. Got it. And on your leverage, it looks like it's going to come down naturally, I guess, with the EBITDA growth next year. Do you have any plans to try and reduce debt, or do you just kind of let that leverage come down, naturally? um you know it we are fortunate it looks like um with the trajectory of ebitda leverage on a on a debt to ebitdo basis is going to come down um pretty materially um i'd say we we got free cash flow going into 2027 that's going to compete with everything else um but we do want to watch it closely and keep a pretty safe balance sheet sure makes sense thanks guys Thanks, sir. Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks. Nope. Thank you, operator. Thank you everybody. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.