Granite Ridge Resources, Inc (GRNT) Q3 2026 Earnings Report, Transcript and Summary

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 speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-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, Vice President of Investor Relations. Sir, please begin.

Thank you, operator, and good morning, everyone. Appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Tyler S. 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 R. Kyle Kettler, our Chief Financial 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, including adjusted free cash flow. Information reconciling these measures to the most directly comparable GAAP measures are 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 will 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 8% from the second quarter. Oil volumes grew 16%. Adjusted EBITDAX rose 35% sequentially to $107 million And our cash flow before working capital changes covered our drilling and completion capital for the quarter. We are also taking 3 steps today that reflect where the business is going. First, our Board has authorized a share repurchase program of up to $35 million 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 operative partnerships and we are excited to name our third operating partner in the Permian. RedTalon Creek Resources. Kyle will take you through the first 2. Let me start with the quarter and the platform. Third quarter production averaged 34.6 thousand 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 EBITDAX growth was natural gas price realization. Our realized gas price rose from $1.12 per Mcf in the second quarter to $3.46 in the third quarter, as Waha basis recovered. Tyler will walk you through that in detail, because it is a real change in our cash flow. Our operator partnership platform remains the core of our strategy. Strategy. And attracts the majority of our 2026 drilling and completion capital. The advantage starts with sourcing, Our partners find and assemble acreage to 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 thresholds. And we control the pace. That is how we have 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. RedTalon Creek Resources is a Midland based operator Our partnership with them is focused on the Midland Basin. The core of the group worked at Jerry Resources, where they drilled, completed, and produced more than 200 horizontal wells between 2014 and 2024. Arete's management has helped build 5 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. We are going to take the free ports the same way Admiral does. His 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 spud its first well under our partnership in October and we expect them to run a rig during 2027. Outside the Permian, have built a non-operator position in the Utica Shale that we are increasingly proud of. We hold about 6.3 thousand net acres, and produce about 3 thousand net BOE per day from our interest in over 100 gross producing wells. We built this position from scratch over the past 2 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 8 net locations, 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 x 12 month EBITDA multiple. While there is 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% at the strip. And in today's backward market, those long dated barrels are priced at $70 or below. We are 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 Tyler will lay out. Stepping back, the plan is working. Our traditional non-op business generates steady cash flow across 6 basins, and our operator partnerships are compounding inventory and growth. Through the first 9 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, I will turn it over to Tyler.

Thank you, Tyler. Good morning, everyone. This is our strongest quarter of adjusted EBITDAX since we have been a public company. And I will spend most of my time on what that means for 2027. But first, the results. Oil and natural gas sales were $177 million On a GAAP basis, reported a net loss of $10.1 million or $0.08 per share driven by a $52.7 million loss on commodity derivatives. Of which $31.8 million was unrealized. Adjusted net income was $22.6 million or $0.17 per diluted share. Adjusted EBITDAX was $107 million up 36% from $78.6 million a year ago. and 35% from $79.6 million last quarter. Cash flow from operations was $87.7 million or $96.6 million 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 BOE, down from $10.27 per BOE 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 ad valorem taxes were $10.3 million or 6% of sales, Cash G&A was $8.7 million or $2.73 per BOE. We invested $90.8 million of drilling and completion capital and $19 million of acquisition capital during the quarter. We ended the quarter with $42.7 million of cash $130 million drawn on our revolving credit facility, $341 million of principal on our 8.75% senior unsecured notes. Net debt was $417 million and leverage improved to 1.3x from 1.4x last quarter. Liquidity was $287 million Now, for natural gas. Waha bases held through the quarter and gas sales came in at $30 million up from $9.6 million in the second quarter. Waha recovered from record lows in the second quarter as new Permian takeaway came on. And our realized price tripled. A note on how we report, we use 2 stream reporting. So NGL revenue is shown in the natural gas revenue line on our financial statements. On that basis, our realized natural gas price went from 38% of Henry Hub in the second quarter to 121% of Henry Hub in the third quarter. We expect continued strength from Waha bases and NGL pricing in the fourth quarter. Higher natural gas pricing helps but 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 mid midpoint of our original guidance. Actual gas volumes will come in lower for 2 reasons. Gas that was shut in during the quarter due to Waha prices in the second quarter, while Waha prices 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 our new range of 34 thousand to 35 thousand BOE per day. in a higher oil mix now at 51.5% to 52.5%. We also raised our LOE guidance to $9.25 to $9.75 per BOE and our cash G&A from $28 million to $30 million. For the fourth quarter, we expect higher ore 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 cash flow 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 paid $0.11 dividend per share 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 of our common stock through year end 2027. The program does 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 are 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 EBITDAX trajectory of our business. The incremental EBITDAX from moderate production growth higher oil volume weight and hedges rolling off, we see 2027 EBITDAX well in excess of the third quarter annualized EBITDAX. With that, I will turn it back over to you, Tyler.

Thanks, Tyler. Let me close with 3 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 have defined adjusted free cash flow plainly and told you how we will use it. Second, our operator partnership platform is broadening. With Admiral and Arete, we have 2 Permian partners sourcing attractively priced locations that 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 Grey Rock Energy Fund III. Grey Rock's ownership is now approximately 39% and Granite Ridge is no longer a controlled company. We are completing the transition to a majority independent board and fully independent committees within the periods the NYSE standards provide. Grey Rock has indicated that it expects additional distributions. The size and timing of any future distributions are at Grey Rock's discretion, and we would refer you to Grey Rock's Section 13(d) 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 will open the line for questions.

Yes, sir. Your telephone keypad. If your answer has been. If your question has been answered or you wish to remove yourself from the queue, simply press 11 again. Again, if you have a question or comment at this time, please press 1-1 on your telephone keypad. Our first question or comment comes from the line of Michael Scialla from Stephens. Your line is now open

Good morning, guys. I wanted to get some high level thoughts. Tyler, you mentioned 2027 with 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 is a completely fair assessment of it. We are targeting, yes, 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 really 3 kind of simple key things to look at to pencil out where 2026, Q3 2026 annualized EBITDA goes into 2027 estimated on that page.

And Tyler, you mentioned the changes with Grey Rock and changes on the board. Any changes 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 have 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, 4 partners. We will continue to add partners in the future. that is been very successful for us. We have been able to capture inventory at less than $2.5 million per net location in the Permian, which we think is a pretty good value So we are moving into a little more maturity with Admiral, obviously, running 2 rigs, but we are excited now that RedTalon Creek is picking up a rig with us We have 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. 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. Wanted to start with your Arete partnership disclosure. How would you characterize the depth of their gross locations and their ability to continue to source inventory? And how the quality of inventory compares versus the average of your partnerships.

Yeah. You bet. So first, the Arete team is very accomplished on both the, you know, commercial side as well as the development side. A large portion of the team came out of Jerry Resources. They had a very successful exit a few years ago. You know, chunks of the team have also been involved with various, entities that they have built, and flipped over the years. They have drilled over 200 horizontal wells, you know, over 10 years. So on the development front execution side, very accomplished On the commercial side, equally as accomplished They have. You know, their business development team and commercial sourcing team is over $8 billion of transactions. that is. You know, that is incredible. This is a Midland-based team. They have very deep networks, based in Midland. So you know, we are highly confident in their ability to source opportunity that is more proprietary in nature, and we will continue to build on what we have done with the admiral team. You know, sourcing opportunity from, those types of markets as well. So we are about a year into it with RedTalon Creek. You know, we like to, let teams, you know, have some time to build up some inventory in front of them. You know, we are proud to report that Arete's, you know, already secured at least, you know, half a dozen or so, DSUs. You know, 40-something gross locations, and, you know, has enough for us to commit to, picking up a rig with them in 2027. I fully expect them to be able to continue to add, you know, a lot more inventory 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 and Arete as 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 is not to say that they will not do deals, you know, in other parts of the Permian Basin, but you know, where we expect them to find opportunities in the Midland Basin, and they have done a heck of a job so far. Great color.

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 Grey Rock's future distributions Is that a fair read based on where those lie today?

Yeah. Absolutely. You know, we set the we set the authorization of $35 million to start with. Obviously, with where the stock's trading, we are trading at less than 2.5x, you know, 2027 consensus. You know, I think if you look at where we think cash flow potential is for next year, we are trading at even less than that. So we would love to own more of this company. Set up the authorization at 35 million initially. You know, we will we will see how that goes. it is completely opportunistic. As Tyler mentioned, you know, and the board can come back in the future and raise that or, you know, cancel it at any time. So wanted to kinda dip our toe in the water here to start with. We set it at pretty low. it is about 5%-ish of current market cap. You know? But we. We would love to own more of this business you know, certainly with where you know, the current consensus numbers are at, you know, less than 2.5x 2027. And we think, you know, 2027 should even north of where consensus currently is. So yeah. But you are right. We could buy a lot more that is great. Congrats on the quarter and update.

Perfect. Thanks, sir.

Thank you. Our next question or comment comes from the line of Jeffrey Grampp from Northland Capital Markets. Mr. Grampp, your line is now open.

Hey. Good morning, guys. Was curious, Tyler, on the operator partnership front, given kind of the focus and shift here to free cash flow positive and the progress you have made with the partners you have, what is the appetite to add more partnerships?

Yeah. We are always. that is a good question. We are always looking at when is the right time to add more. You know, we could it is something we discuss all the time. I think, you know, we would like to see how 2027 goes We would like to get, you know, Arete and their rigs stood up. We have a couple of other partners that we have not 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 2027 and 2028 and beyond. So, we are interested in, you know, seeing how those develop over the next, call it, 6, 9 months. So there is some more in the background that, you know, we have not, you know, talked with you all about. You know, we talk a lot about the operator partnership platform. Most of our capital goes into that. 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 have built a position over the past 1.5, 2 years of over 6 thousand net acres. We have done it at a very attractive entry cost. You know, that business itself right now is generating about 3 thousand BOE a day net to us. We have over 100 gross wells online that we are participating in, and we are continuing to find a ton of opportunity there. So you know, we have, you know, the 3 or 4 partners that we have you know, disclosed publicly. there is a, you know, a few others that are working in the background, plus we have the Utica program up and running. So there is a lot on the plate. We are really excited about where it is headed. You know, And, you know, I think we are we are happy with where we are at now, and we will see how 2027 goes.

Yeah.

I would add Tyler to that. The way this operated partnership business model works is we have got 2027, 2028 laid out, and we can start thinking about 2029, 2030. So to your point, Jeffrey, we can always look into doing more work with existing operator partners as they as they grow and flourish, and we can look at bringing others into the fold. But we are thinking years down the road now because we have got, the near term set up for us.

Great. that is super helpful details. My other question is on the acquisitions you guys did in the quarter. Looks like the cost per location went up a bit sequentially. Is that just a function of higher commodity prices driving some increased you know, 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 is 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 have been doing the past couple of years in that space. But you know, specifically, to answer your question, we did 20 deals during the quarter or closed 20 deals during the quarter. There was a higher. I just mentioned, 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 Utica are you know, 15 thousand you know, 20 thousand-foot average lateral. Versus what we are buying in the Permian is normalized to a 10 thousand-foot lateral. So that is, you know, that is the difference. We will just get more lateral feet. But on a per foot basis, you know, it is all been, consistent, in line with where we have been. Alright. Perfect. That makes that makes a ton of sense. Thank you, guys.

You bet. Thank you. I am showing no additional questions in the key. Oh, we have a question or a follow-up from Mr. Michael Scialla from Stephens. 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 are not looking to systematically, you know, dispose of any assets. But, you know, we do have a large non-operated footprint across you know, 6 different basins, thousands of wells. So, you know, from time to time, there is opportunities that come across our desk, that make a lot of sense. I think Tyler will walk you through some of the multiples on, you know, why that made sense to us. But from my standpoint, we are always evaluating things in the non-op portfolio. Again, it is a huge footprint. So from time to time, there are things that are interesting, but it is not a larger strategy of monetizing assets.

Yes. I would add that this was largely, I would say, a kind of a cleanup exercise. It was about 800 gross wells, so a good proportion of producing wells with very small working interest. Highly gas concentrated asset too. And so it made sense just from where we are taking the portfolio to shed those assets. And it worked out that we got a really good multiple of forward EBITDA 3.8x.

That makes sense. I wanted to ask on your LOE, it came down a bit in the third quarter from the second quarter on a per BOE basis. Are you thinking about op costs for 2027? Should we anticipate with the growth that it will continue to come down or just any color you can add there?

You know, there is. We still consider the dollar per BOE high. We are gonna see aggregate cost going up just because we have production going up. We have 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 3 quarters of this year, and we have got a number of them coming on fourth quarter and then growth in 2027. So I think as we drill more, that number is hopefully going to come off and be closer to where we are in guidance Got it.

And on your leverage, looks like it is gonna come down naturally, I guess, with the EBITDA growth next year. Do you have any plans to try and reduce debt or you just kind of let that leverage come down naturally?

You know, we are fortunate. It looks like with the trajectory of EBITDA leverage on a on a debt to EBITDA basis, is going to come down pretty materially. I would say we got free cash flow going into 2027. that is gonna compete with everything else, but we do wanna 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 1-1 on your telephone keypad. I am showing no additional questions in the queue at this time. I would like to turn the conference over to management for any closing remarks.

No. 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.