Granite Ridge Resources, Inc. quarterly report, Q2 FY2023

Granite Ridge Resources, Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

Granite Ridge 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 filing covers the quarter and six months ended June 30, 2023. The 2022 comparative periods reflect the historical combined Funds, while Granite Ridge became a public corporation following the October 24, 2022 business combination.

Key financial metrics

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Oil and natural gas revenue	$87.6 million	$150.3 million	$178.9 million	$244.1 million
Net operating income	$23.9 million	$99.4 million	$53.3 million	$160.7 million
Net income	$8.7 million	$93.3 million	$45.6 million	$125.7 million
Diluted EPS	$0.07	$0.70	$0.34	$0.95
Operating cash flow	Not separately disclosed	Not separately disclosed	$155.7 million	$137.3 million
Capital expenditures for oil and gas properties	Not separately disclosed	Not separately disclosed	$182.3 million	$85.0 million
Net cash used in investing	Not separately disclosed	Not separately disclosed	$211.8 million	$104.2 million

Q2 net margin was approximately 10.0%, compared with 62.1% in Q2 2022. Six-month net margin was approximately 25.5%, compared with 51.5% in the prior-year period. Production increased to 21,557 Boe per day in Q2 from 19,090 Boe per day, while average realized price before settled derivatives declined to $44.63 per Boe from $86.51 per Boe.

Balance sheet, debt and liquidity

Cash was $14.5 million at June 30, 2023, down from $50.8 million at December 31, 2022.
Long-term debt was $55.0 million, compared with no debt at year-end 2022. The company also had $0.3 million of letters of credit.
The revolving credit facility had a $325.0 million borrowing base, $150.0 million of elected commitments and $94.7 million of committed availability at quarter-end.
Management reported total liquidity of $109.2 million, consisting of cash and committed borrowing availability.
The company was in compliance with its credit agreement covenants, including a maximum 3.00-to-1.00 leverage ratio and minimum 1.00-to-1.00 current ratio.
Total assets were $873.3 million and stockholders’ equity was $652.3 million at June 30, 2023.

Material changes versus the prior comparable period

Revenue declined 42% in Q2 and 27% for the six-month period, primarily because of substantially lower oil and natural gas prices. Production growth partially offset the price decline.
Net income declined 91% in Q2 and 64% for the six-month period. The comparison was also affected by the transition from partnership taxation to corporate taxation after the business combination.
Lease operating expense increased 51% in Q2 and 57% for the six-month period, driven by a larger well base, higher service costs, saltwater disposal, repairs, maintenance and workover activity.
General and administrative expense increased to $8.0 million in Q2 and $16.6 million for the six-month period, including $2.5 million of warrant-exchange costs, management service fees of $2.5 million in Q2 and $5.0 million year to date, and stock-based compensation.
Commodity derivative results improved to a $1.2 million gain in Q2 and a $14.5 million gain for the six-month period, compared with losses in the prior-year periods. Cash receipts from commodity derivatives were $8.0 million in Q2 and $14.4 million year to date.
Operating cash flow increased $18.4 million year to date despite lower sales, primarily because derivative settlements shifted from $24.9 million of payments in 2022 to $14.4 million of receipts in 2023.
Capital investment increased materially, with $189.4 million of costs incurred for oil and gas properties during the first six months, including $157.3 million of development costs and $32.1 million of acquisitions.

Guidance, outlook, commentary and unusual items

Management increased planned 2023 capital expenditures by $25 million to a range of $275 million to $305 million, including $45 million of identified oil and gas property acquisitions.
Management expects cash on hand, operating cash flow and available credit capacity to fund budgeted capital expenditures and operating needs for at least the next twelve months, but noted that additional capital may be required for strategic acquisitions or increased drilling activity.
The company completed a warrant exchange on June 22, 2023, issuing 2.5 million shares for 9.9 million warrants. The remaining 462,940 warrants were converted into shares in July 2023, leaving no warrants outstanding.
The warrant exchange generated a $11.0 million Q2 fair-value loss and $5.7 million loss for the six-month period, while $2.5 million of directly related transaction costs were recorded in general and administrative expense.
The company paid $29.3 million of dividends during the first six months, or $0.22 per share, and repurchased $5.9 million of common stock. Future dividends remain subject to board discretion.
Commodity hedges at June 30, 2023 covered portions of future oil and natural gas production through 2025. Subsequent to quarter-end, the company added oil collars covering 342,000 barrels in Q4 2023 and 521,000 barrels in 2024.
The company reported no material legal proceedings and no material changes to previously disclosed risk factors.

Principal risks and control matters

Results are highly sensitive to oil and natural gas prices, production volumes, derivative valuations, interest rates, service costs and reserve estimates.
All wells are operated by third parties, leaving Granite Ridge dependent on operators’ development, production and capital-allocation decisions.
The secured revolving facility is subject to borrowing-base redeterminations, financial covenants and restrictions on dividends, acquisitions, additional debt, asset sales and hedging.
Management concluded that disclosure controls and procedures were not effective as of June 30, 2023 because of material weaknesses involving depletion calculations, accounting and classification of acquisitions, and information-technology access controls and segregation of duties. Remediation was in progress.
A 10% increase in average commodity prices would have reduced the fair value of commodity derivatives by approximately $7.6 million at June 30, 2023. A one-percentage-point increase in interest rates would increase annual interest expense by approximately $0.6 million on the reported debt balance.

Investor verification checklist

Verify the sustainability of production growth and whether lower commodity prices continue to pressure revenue and margins.
Reconcile the $275 million–$305 million capital-spending plan with operating cash flow, borrowing-base capacity and expected leverage.
Review hedge volumes, pricing floors and ceilings, derivative mark-to-market exposure and future settlement obligations.
Assess the effect of the warrant exchange and July conversions on diluted share count and shareholder dilution.
Monitor remediation of the material weaknesses in depletion, acquisition accounting and IT general controls.
Review the credit agreement’s next borrowing-base redetermination and compliance with leverage and liquidity covenants.
Evaluate the recurring level of management fees, compensation, professional costs and other general and administrative expenses.