pryzmat
The Basic Story
Granite Ridge Resources, Inc. (NYSE:GRNT) is a small cap E&P non-operator with scattered acreage in the Lower 48. They are split roughly 50% oil, 50% natural gas and produce close to 21 MBOEpd. Production comes from the Permian, Haynesville, Eagle Ford, Bakken, and DJ Basin and their operators include a mix of well-known private and public players. Granite generally holds quite small working interests in the wells and a majority of their production is derived from the Permian. The balance sheet is lightly levered, and they offer a stout yield at current pricing.
The 2023 Plan
Management modestly boosted production guidance with the Q2 2023 call due to stronger than expected performance in the Permian and Haynesville. On the mid-point of guidance they see 13% YoY production growth. We note that spending is front-end loaded with well turn in lines set to be a whopping 75% of TILs for the entire occurring in Q3 ’23. This should yield higher volumes in 2H23 vs. 1H23 which is conveniently timed with the recent rise in oil prices. Their plan is to try to allocate free cash (beyond the current dividend) into the ground (their working interest %’s and acquisitions).
Balance Sheet: Very Lightly Levered
- Net debt to last quarter’s annualized EBITDA is < 0.2x.
- The revolver is 37% drawn at this time, but they have no term debt.
Key Event
Earlier this month, the company announced a selling shareholder secondary of 7.1 mm shares. This was their sponsor (Grey Rock) coming out of just over 10% of their shares (and leaving them with just over 50% of the company). The stock fell 33% as the deal was priced at $5.00, and has since made a partial but far from full recovery despite no change to the share count and increase to the float as a P/E owner acts the way a P/E should, stepping methodically out of names as they mature.
Return of Capital
- Dividend – They have a base dividend set currently at $0.11 per share per quarter for a current implied yield of 7.1%. We believe they have no plans to increase the dividend further near term.
- Buyback – They also a $50 mm buyback with $44 mm remaining authorized through YE23. They plan to opportunistically repurchase shares, and we would expect them to go after the buyback more aggressively in the wake of the secondary offering down draft.
Z4 Modeling Thoughts
We’re modeling 2024 as 24 MBOEpd with a 50/50 oil/gas split, their light hedges, and middle of guidance costs, using our $80 oil and $4 natural gas base case. On these parameters, we quickly arrived almost spot on with the consensus for next year. At that level, the name now trades at 2.5x our 2024 estimate. Prior to the secondary announcement the company was trading just over 3x. Again, please note that other than some shares changing hands nothing is really changed with this type of offering and there was no incremental issuance of shares.
Other Items
Hedges
They are lightly hedged for oil and natural gas in 2H23 and 2024. Please see details in the cheat sheet below.
Street Coverage
They are lightly covered by analysts – there were 4 callers on the last conference call, two or three appear to be sell-side analysts, but from what we can tell only one appears to be publishing official numbers at this time.
Short Interest
Short interest is only 3% of float or about 0.6 mm shares (or about 3 days relative to the 20-day average volume).
Insider Buys
We note that some members of management and directors were buying shares in the spring and early summer not far from current levels. We further note that management and directors bought with and after the secondary as well.
Nutshell: We view this as a trading idea
We are generally not fans of the non-operated model just from a control perspective over the long term. It works fine when commodity prices are moving higher but in down markets the decision to participate in wells or go no consent can be tricky. Modeling and providing guidance also can become hazardous as operators don’t all react in the same way to shifts in commodity prices and costs. Nor are we fans of overly play-diversified names with scatter shot looking acreage maps. Larger, blockier chunks of acreage do seem to be more favorable for the non-operator model and having a strong balance sheet (which they do possess) is key. We are generally a long-term shop and as such just generally steer clear of the non ops.
With those caveats out of the way, we see the shareholder sale as a tradable event given the magnitude of the deal gap down and resulting in a steeply discounted valuation. In light of the recent sharp move higher in oil prices that occurred since the sales we see GRNT as even more of an opportunity.
Most of what we do at Z4 Energy Research is long-term oriented. This does not fall into that bucket, but we do like to take opportunistic actions from time to time. Technically speaking, the daily chart is also interesting at current levels, and we’ve taken a Trade Only position (likely a few months hold time) in GRNT with a $5.41 average cost.
Z4 Energy Research www.zmansenergybrain.com
