Business Context and Reporting Period
Granite Ridge Resources, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The reported financial statements are those of Grey Rock Energy Fund III, the accounting predecessor, because Granite Ridge had no operations before the October 24, 2022 business combination with Executive Network Partnering Corporation and GREP. Accordingly, the historical results are not necessarily indicative of Granite Ridge’s post-combination results.
The business is focused on non-operated working interests in upstream oil and natural gas assets across the Eagle Ford, Permian, Denver-Julesburg and Bakken basins. Fund III participated in 977 gross and 58 net producing wells at September 30, 2022, compared with 862 gross and 46 net wells at December 31, 2021.
Key Financial Metrics
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|---|---|
| Oil, natural gas and related sales | $90.2 million | $55.7 million | $263.3 million | $142.6 million |
| Net operating income | $37.1 million | $32.0 million | $157.4 million | $75.7 million |
| Net income | $42.7 million | $25.1 million | $137.0 million | $56.7 million |
| Net margin | 47.4% | 45.1% | 52.1% | 39.7% |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $179.7 million | $91.9 million |
Operating income margin was approximately 41.2% in the third quarter and 59.8% for the first nine months of 2022. These calculated margins are based on reported revenue and net operating income.
- Third-quarter operating expenses were $53.1 million, including $39.9 million of depletion and accretion, $6.4 million of lease operating expense, $5.1 million of production taxes and $1.8 million of general and administrative expense.
- Nine-month operating expenses were $105.9 million, including $70.5 million of depletion and accretion.
- Average daily production was 12,259 Boe in the third quarter and 11,615 Boe for the first nine months, compared with 10,895 Boe and 10,531 Boe, respectively, in the prior-year periods.
- At September 30, 2022, cash was $6.4 million, working capital surplus was approximately $70.9 million and total assets were $478.1 million.
- There was no outstanding debt at September 30, 2022. The predecessor revolving facility had a $100.0 million borrowing base and was terminated on October 24, 2022.
- Property and equipment, net, increased to $381.9 million from $278.4 million at December 31, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue increased 62% in the third quarter and 85% for the first nine months, driven by higher commodity prices and production growth. For the first nine months, production increased 10% and realized prices excluding settled derivatives increased 67%.
- Average NYMEX oil prices increased 32% in the third quarter and 51% for the first nine months. Average NYMEX natural gas prices increased 84% and 100%, respectively.
- Oil sales increased to $61.6 million in the third quarter and $197.3 million for the first nine months; natural gas and related product sales increased to $28.6 million and $65.9 million, respectively.
- Lease operating expense increased 76% in the third quarter and 88% for the first nine months. Per-Boe lease operating expense increased to $5.77 and $5.05, respectively, primarily due to Permian gas processing fees and higher commodity-related costs.
- Depletion and accretion expense increased 152% in the third quarter and 54% for the first nine months, reflecting higher production and higher depletion rates per Boe.
- Third-quarter derivative results improved to a $6.1 million gain from a $6.6 million loss, primarily because of unrealized gains. The nine-month derivative loss was $19.1 million, compared with an $18.1 million loss in the prior-year period.
- Cash flow from operations increased 96% to $179.7 million. Investing cash use increased to $150.7 million, primarily for property development and acquisitions, while financing cash use was $29.9 million compared with $44.1 million of financing inflows in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management budgeted approximately $50.0 million of capital expenditures for the remainder of 2022. Approximately $15.8 million of capital expenditures were accrued at September 30, 2022, and an additional approximately $50.0 million of development commitments had been made for wells selected for participation.
- Management expected cash flow from operations and available borrowing capacity to fund capital expenditures, operating expenses and other liquidity needs for at least the next 12 months, while noting that additional capital may be required for acquisitions or increased drilling activity.
- On October 24, 2022, Granite Ridge entered into a new senior secured revolving credit agreement with $150.0 million of elected commitments, an initial $325.0 million borrowing base and a $1.0 billion maximum revolving credit amount. No borrowings or letters of credit were outstanding at the disclosure date.
- The board declared an initial dividend of $0.08 per share payable December 15, 2022. Management stated an intent to pay at least $60 million annually, currently equivalent to approximately $0.45 per share annually.
- Commodity derivatives covered a substantial portion of expected production, generally 50% to 75% for 12 to 24 months. At September 30, 2022, derivative assets totaled $5.2 million and derivative liabilities totaled $3.9 million, for a net derivative asset of approximately $1.2 million.
- Key risks include oil and natural gas price volatility, derivative settlement losses and counterparty exposure, dependence on third-party operators, infrastructure and supply-chain constraints, inflation in oilfield costs, reserve-estimation uncertainty, environmental and regulatory matters, geopolitical disruption, cyber risk and limited control over non-operated assets.
- The Partnership had no material pending legal proceedings. It was subject to potential regulatory and environmental contingencies, and asset retirement obligations were $2.2 million at September 30, 2022.
- Management could not conclude, without unreasonable effort or expense, whether disclosure controls and procedures were effective as of September 30, 2022 because public-company controls were still being designed and implemented following the business combination.
Investor Verification Items
- Reconcile post-combination Granite Ridge results with the predecessor financial statements, recognizing that the filing excludes the material effects of the October 24, 2022 transaction.
- Verify the new credit agreement’s borrowing base, covenant requirements, future redeterminations and actual post-closing borrowings.
- Assess the sustainability of cash flow and margins after commodity prices, derivative settlements, depletion rates and lease operating costs normalize.
- Review the timing and funding of the approximately $50.0 million of additional development commitments and the 2022 capital expenditure budget.
- Evaluate the effect of hedges on realized prices and future upside, including the disclosed derivative volumes and contract-price ranges.
- Confirm the dividend policy, share count, and ability to fund the stated minimum annual dividend after capital expenditures and other obligations.