Granite Ridge Resources, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Granite Ridge is a non-operated U.S. oil and natural gas exploration and production company with interests across the Permian, Eagle Ford, Bakken, Haynesville and DJ basins. The filing covers the three and nine months ended September 30, 2023. Prior-period results reflect the predecessor Funds and are comparable on a combined historical basis, but Granite Ridge became a taxable corporation following the October 24, 2022 business combination.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $108.4 million | $137.0 million | $287.3 million | $381.1 million |
| Net income | $18.0 million | $80.0 million | $63.6 million | $205.7 million |
| Net income margin | 16.6% | 58.4% | 22.1% | 54.0% |
| Net operating income | $32.6 million | $77.5 million | $85.9 million | $238.2 million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $212.7 million | $251.4 million |
| Capital expenditures and acquisitions | Not separately stated in cash flow | Not separately stated in cash flow | $286.5 million | $175.1 million |
- Q3 diluted earnings per share were $0.13; nine-month diluted earnings per share were $0.48.
- Production increased 20% in Q3 to 26,433 Boe per day and 25% for the first nine months to 23,731 Boe per day. Net producing wells increased to 175.24 from 123.84.
- Realized price per Boe, including settled commodity derivatives, was $46.39 in Q3 and $47.25 for the nine months, compared with $60.18 and $65.76, respectively, in the prior-year periods.
- Q3 operating costs and expenses were $75.8 million, including $44.3 million of depletion and accretion. Lease operating expense increased 37% year over year to $16.9 million.
- Cash was $6.1 million at September 30, 2023, compared with $50.8 million at December 31, 2022. Total assets were $920.6 million and stockholders’ equity was $650.2 million.
- Long-term debt was $85.0 million at September 30, 2023, versus no debt at year-end 2022. The company reported $64.7 million of committed borrowing availability and $70.8 million of total liquidity including cash.
Material changes versus the prior comparable period
- Revenue declined 21% in Q3 and 25% for the nine months, primarily because lower oil and natural gas prices more than offset higher production.
- Net income declined 78% in Q3 and 69% for the nine months. The comparison was affected by lower commodity prices, higher operating expenses, higher depletion, income taxes in 2023, and derivative results.
- Operating cash flow declined $38.7 million for the nine months, while investing cash outflows increased $111.4 million due to higher development spending and acquisitions.
- Q3 commodity derivative results were an $8.1 million loss versus a $3.1 million gain in the prior-year quarter. For the nine months, derivative results improved to a $6.4 million gain from a $30.8 million loss.
- General and administrative expense increased to $5.2 million in Q3 and $21.8 million for the nine months. The nine-month amount included $2.5 million of warrant-exchange costs, $1.8 million of stock-based compensation and $7.5 million of management service fees.
- The company paid $44.1 million of dividends and repurchased $12.1 million of stock during the first nine months. It also completed a warrant exchange, eliminating all outstanding warrants and issuing approximately 2.6 million common shares.
Guidance, outlook, risks and unusual items
- In November 2023, management increased planned 2023 capital expenditures to $345 million-$355 million, including $90 million of identified acquisitions.
- Management believes cash on hand, operating cash flow and available borrowing capacity will fund budgeted capital expenditures and operating expenses for at least the next twelve months, but additional capital may be required for acquisitions or increased drilling activity.
- On November 7, 2023, the credit agreement was amended. The borrowing base decreased from $325 million to $275 million, elected commitments increased to $240 million, and applicable interest-rate margins increased.
- The company was in compliance with its debt covenants at September 30, 2023. The facility requires, among other terms, a leverage ratio no greater than 3.00 to 1.00 and a current ratio of at least 1.00 to 1.00.
- Commodity price volatility is the primary operating risk. A 10% increase in average commodity prices would have reduced the fair value of commodity derivatives by approximately $13.4 million at September 30, 2023. A one-percentage-point increase in interest rates would increase annual interest expense by approximately $0.9 million on the reported debt balance.
- All wells are operated by third parties, leaving Granite Ridge dependent on operators’ drilling, production, infrastructure and financial performance.
- Disclosure controls were ineffective because of material weaknesses involving depletion calculations, acquisition accounting and IT general controls, including user-access segregation of duties. Management is implementing remediation measures.
- The company recorded $1.6 million of abandonment expense related to mechanical problems affecting two wells. No material legal proceedings were reported.
Important facts for investors to verify
- Confirm the effect of the November 2023 borrowing-base reduction, higher borrowing costs and covenant capacity on liquidity.
- Assess whether production growth and the increased capital program can generate adequate returns at current oil and natural gas prices.
- Review the sustainability of dividends and share repurchases given low cash balances, debt-funded spending and the company’s discretionary capital program.
- Monitor remediation of the material weaknesses and whether future filings require corrections to depletion or acquisition accounting.
- Evaluate derivative positions, settlement cash flows and potential earnings volatility from mark-to-market changes.
- Consider the impact of third-party operator decisions, commodity prices, service costs, infrastructure constraints, reserve estimates and regulatory or environmental developments.