Granite Ridge Resources, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report rather than a standalone fourth-quarter filing. Historical periods before October 24, 2022 reflect the combined predecessor funds; the Business Combination with ENPC closed on October 24, 2022 and was accounted for as a reverse recapitalization.
Business context
Granite Ridge is a non-operated oil and gas exploration and production company. It owns interests in wells and acreage across the Permian, Eagle Ford, Bakken, Haynesville and DJ basins, while third-party operators control drilling and production activities. At year-end, the Company held interests in 2,357 gross producing wells, or 132.88 net wells, and owned 34,310 net acres, including 7,896 net undeveloped acres.
Financial and operating highlights
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $497.4 million | $290.2 million | +71% |
| Net income | $262.3 million | $108.5 million | +142% |
| Net operating income | $302.1 million | $143.2 million | +111% |
| Net income margin | 52.7% | 37.4% | Expanded |
| Operating margin | 60.7% | 49.4% | Expanded |
| Net cash from operations | $346.4 million | $181.2 million | +91% |
| Net cash used in investing | $230.6 million | $186.0 million | Higher use |
| Net cash used in financing | $76.8 million | $8.5 million provided | Outflow in 2022 |
| Year-end cash | $50.8 million | $11.9 million | +329% |
| Year-end total debt | None | $51.1 million | Debt repaid |
- Production increased to 7.215 million Boe from 5.890 million Boe, and average daily production increased to 19,765 Boe from 16,137 Boe.
- Average realized prices, including settled derivatives, increased to $86.02 per oil barrel from $57.49 and to $6.58 per Mcf of natural gas from $4.62.
- Lease operating expenses increased to $44.7 million from $26.3 million; production and ad valorem taxes increased to $30.6 million from $18.1 million.
- Depletion and accretion expense was $105.8 million, compared with $94.7 million. No impairment expense was recorded in 2022 or 2021.
- The Company recorded a $25.3 million loss on commodity derivatives and paid $42.4 million in net derivative settlements.
- Total assets were $794.8 million and total equity was $622.4 million at December 31, 2022. Current assets were $146.3 million versus current liabilities of $64.1 million.
Cash flow, liquidity and capital structure
Operating cash flow of $346.4 million exceeded the $230.6 million of investing outflows, which primarily comprised $185.5 million of property additions and $49.2 million of property acquisitions. Financing outflows included $51.1 million of net repayments on legacy credit facilities, $10.7 million of dividends, $18.5 million of formation-related expenses and $3.2 million of deferred financing costs.
At year-end, Granite Ridge had $50.8 million of cash and $150.0 million of committed availability under its new secured revolving Credit Agreement, for reported liquidity of approximately $200.8 million. The facility had an initial borrowing base of $325.0 million, a five-year maturity and no outstanding borrowings or letters of credit at year-end. The Company was in compliance with its covenants, including a maximum 3.00-to-1 leverage ratio and minimum 1.00-to-1 current ratio.
Reserves, investment and shareholder returns
- Estimated proved reserves were 50.534 million Boe, consisting of 25.494 million barrels of oil and 150.239 Bcf of natural gas. Approximately 61% were proved developed and 39% were proved undeveloped.
- SEC-price pre-tax PV-10 was $1.559 billion and standardized measure was $1.236 billion, versus $774.4 million of standardized measure in 2021. These values use SEC average prices of $94.14 per barrel of oil and $6.36 per Mcf of natural gas and are not fair values.
- Development costs of approximately $150.7 million converted 13.831 million Boe of proved undeveloped reserves to developed reserves. Estimated future development costs for proved undeveloped reserves were approximately $233.7 million over five years.
- The Board declared a fourth-quarter 2022 dividend of $0.08 per share, totaling $10.7 million. A $0.11 per-share first-quarter 2023 dividend was subsequently declared and paid.
- A $50.0 million share repurchase authorization was approved through December 31, 2023. The Company repurchased 25,920 shares for approximately $0.2 million in 2022.
Guidance, outlook and unusual items
- Management budgeted approximately $260 million to $270 million of 2023 capital expenditures, including approximately $46 million for acquisitions. Spending is discretionary and may be deferred or increased depending on commodity prices, costs, financing and drilling opportunities.
- Management expected cash flow from operations, cash on hand and borrowing availability to fund liquidity needs, planned capital expenditures and operating expenses for at least the next twelve months.
- Commodity derivatives reduced 2022 realized prices but are intended to provide more predictable cash flow. Outstanding year-end 2022 contracts were scheduled to settle by December 31, 2023.
- The Company became subject to corporate income taxes after the Business Combination, resulting in $12.9 million of deferred income tax expense and a $91.6 million deferred tax liability at year-end.
- The Company restated previously issued unaudited financial statements for the three and nine months ended September 30, 2022 because of errors in depletion calculations and the classification of certain acquisitions.
Key risks and contingencies
- Granite Ridge depends entirely on third-party operators for drilling, production, development timing and operating decisions, and operator concentration creates credit and execution risk.
- Revenue, reserves, borrowing capacity and asset values are highly sensitive to oil and natural gas prices, differentials, production volumes, inflation, interest rates and derivative valuations.
- Environmental, methane, climate, hydraulic fracturing, water disposal and induced-seismicity rules may increase costs, delay development or restrict operations.
- Approximately 4,845 net undeveloped acres potentially expired in 2023, with an additional 2,423 net acres potentially expiring in 2024, subject to production, drilling or lease-extension provisions.
- Management identified material weaknesses in controls over depletion calculations, acquisition accounting and IT general controls related to user access. Disclosure controls were ineffective as of December 31, 2022, although management concluded that the audited financial statements were fairly presented after additional procedures.
- The Company relies on Grey Rock Administration under a Management Services Agreement requiring a $10.0 million annual services fee plus reimbursements. The arrangement may create conflicts of interest and dependence on the Manager.
- Decommissioning liabilities, uninsured operational events, transportation constraints, cybersecurity incidents, geopolitical disruptions and financial-counterparty failures could adversely affect liquidity and results.
Most important facts for investors to verify
- Reconcile the annual results with the post-October 24, 2022 public-company period and review the September 30, 2022 restatement.
- Assess remediation of the material weaknesses and the effectiveness of controls in subsequent filings.
- Verify 2023 production, commodity prices, derivative settlements and the effect of hedges on realized prices and cash flow.
- Monitor semiannual borrowing-base redeterminations, covenant compliance and available liquidity under the secured Credit Agreement.
- Compare actual 2023 capital expenditures and acquisitions with the $260 million to $270 million budget and evaluate funding sources.
- Review proved undeveloped reserve conversion, required development spending and acreage expirations.
- Evaluate the sustainability of the dividend and repurchase program after capital spending, derivative settlements, taxes and decommissioning obligations.