Granite Ridge Resources, Inc. — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Granite Ridge Resources, Inc. is a non-operated oil and natural gas exploration and production company with interests across the Permian, Eagle Ford, Bakken, Haynesville and Denver-Julesburg basins. The company participates in wells operated by third parties and funds its proportionate share of development and operating costs.
This unaudited Form 10-Q covers the three months ended March 31, 2024, with comparisons to the three months ended March 31, 2023. The company reports one operating segment and operates in the United States.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Oil and natural gas sales | $89.0 million | $91.3 million | Down 3% |
| Net income | $16.2 million | $36.9 million | Down 56% |
| Basic and diluted EPS | $0.12 | $0.28 | Down $0.16 |
| Net operating income | $19.6 million | $29.4 million | Down 33% |
| Net cash from operating activities | $68.7 million | $81.5 million | Down 16% |
| Capital expenditures | $69.7 million | $105.6 million | Down 34% |
| Acquisitions of oil and gas properties | $2.6 million | $24.4 million | Down 89% |
| Dividends paid | $14.3 million | $14.6 million | Down 2% |
Net operating margin was approximately 22.0% in Q1 2024 versus 32.2% in Q1 2023. Net margin was approximately 18.2% versus 40.4%, reflecting lower operating income, a commodity-derivative loss and higher interest expense.
- Oil sales increased to $75.8 million from $73.5 million, while natural gas sales declined to $13.2 million from $17.8 million.
- Oil production increased to 969 MBbl from 965 MBbl; natural gas production increased to 7,203 MMcf from 6,720 MMcf. Total production increased to 2,170 MBoe from 2,085 MBoe.
- Average realized oil price before settled derivatives increased to $78.17 per barrel from $76.14. Average realized natural gas price declined to $1.84 per Mcf from $2.65.
- Realized price including settled derivatives declined to $42.27 per Boe from $46.85 per Boe.
- Lease operating expense increased 12% to $15.5 million, and depletion and accretion increased 21% to $40.9 million.
- General and administrative expense decreased 24% to $6.5 million, primarily due to lower stock-based compensation and professional and legal costs.
- Income tax expense was $4.8 million, with an effective tax rate of 23.0%, compared with $10.8 million and 22.6% in the prior-year period.
Liquidity, Debt and Cash Flow
- Cash and restricted cash increased to $21.1 million at March 31, 2024 from $10.7 million at December 31, 2023; cash alone was $20.8 million.
- Operating cash flow of $68.7 million was largely offset by $71.0 million of investing cash outflows, resulting primarily from development capital expenditures.
- Financing activities provided $12.7 million, including $27.5 million of credit-facility borrowings, partially offset by dividends and treasury-stock purchases.
- Long-term debt increased to $137.5 million from $110.0 million at year-end 2023. The company had $0.3 million of outstanding letters of credit and reported $102.2 million of borrowing availability at March 31, 2024.
- Total liquidity, including cash and committed borrowing availability, was approximately $123.0 million at March 31, 2024.
- The revolving credit agreement includes a maximum leverage ratio of 3.00 to 1.00 and a minimum current ratio of 1.00 to 1.00. The company reported compliance with all required covenants.
- On April 1, 2024, the credit facility was amended to increase the borrowing base from $275.0 million to $300.0 million and elected commitments from $240.0 million to $300.0 million. Bank of America replaced Texas Capital Bank as administrative agent.
Material Changes Versus Q1 2023
- Revenue declined modestly despite higher production because lower natural gas prices outweighed higher oil prices and increased volumes.
- Profitability declined materially as operating expenses increased, the company recorded a $3.2 million loss on commodity derivatives compared with a $13.3 million gain, and interest expense increased to $3.2 million from $0.3 million.
- The prior-year period included a $5.3 million gain from changes in the fair value of common-stock warrants; no warrants remained outstanding in Q1 2024.
- Q1 2024 included a $7.8 million unrealized gain on Vital Energy common and preferred equity investments.
- Production increased and net producing wells rose to 181.34 from 152.18, reflecting drilling success and acquisitions, partially offset by natural declines and the December 2023 Permian asset sale to Vital Energy.
- Unproved-property impairment of $0.7 million was recorded in the Permian Basin because the operator no longer intended to drill certain locations.
- The company paid a quarterly dividend of $0.11 per share. The prior stock repurchase program terminated December 31, 2023; Q1 2024 share withholding purchases were for employee tax obligations rather than the former repurchase program.
Guidance, Outlook, Risks and Unusual Items
- Management budgeted approximately $265 million to $285 million of 2024 capital expenditures, including approximately $35 million for oil and gas property acquisitions. Spending may be deferred or increased based on commodity prices, costs, financing availability and drilling opportunities.
- Management believes cash on hand, operating cash flow and available credit capacity will fund budgeted capital expenditures and operating expenses for at least the next twelve months, although additional capital may be sought for acquisitions or accelerated drilling.
- Commodity prices remain the primary earnings and cash-flow risk. Average Q1 NYMEX prices were $77.50 per barrel for oil and $2.15 per Mcf for natural gas, compared with $75.99 and $2.77, respectively, in Q1 2023.
- At March 31, 2024, commodity derivatives had a net balance-sheet fair value of approximately $6.4 million, consisting of current derivative assets, net of offsets, and a noncurrent derivative liability. A 10% increase in average commodity prices would have reduced derivative fair value by approximately $10.5 million.
- The company is exposed to variable interest rates; a 1% increase in rates on $137.5 million of debt would increase annual interest expense by approximately $1.4 million.
- As a non-operator, the company depends on third-party operators for drilling, completion, production and infrastructure decisions and generally has limited control over their activities.
- Other risks include commodity-price volatility, reserve-estimate uncertainty, infrastructure and transportation constraints, regulatory and environmental changes, cyber risks, geopolitical events, counterparty risk and limited liquidity or trading in the company’s securities.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the post-April 1, 2024 borrowing base, elected commitments, outstanding debt, interest-rate margins and covenant headroom.
- Assess whether projected 2024 capital expenditures of $265 million to $285 million can be funded without materially increasing debt or reducing dividends.
- Review the composition, liquidity restrictions and conversion terms of the $58.2 million Vital Energy equity investment, including the scheduled preferred-shareholder vote referenced in the filing.
- Monitor the effect of natural gas prices, oil and gas differentials, derivative settlements and mark-to-market changes on cash flow and earnings.
- Evaluate the operating and financial performance of third-party operators, including drilling pace, production declines, infrastructure access and cost inflation.
- Review reserve estimates and impairment sensitivity, particularly for unproved Permian properties and assets affected by changes in commodity prices or operator plans.
- Verify dividend sustainability and the board’s discretion regarding future dividend payments.