Granite Ridge Resources, Inc. — Q1 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 Denver-Julesburg basins. It relies on third-party operators to develop and produce its wells. This report covers the unaudited quarter ended March 31, 2023. Prior-period results reflect the combined historical Funds before the October 24, 2022 business combination, so some comparisons are affected by the change from partnership to corporate reporting.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Oil and natural gas revenue | $91.3 million | $93.9 million | Down 3% |
| Net operating income | $29.4 million | $61.4 million | Down 52% |
| Net income | $36.9 million | $32.4 million | Up 14% |
| Basic and diluted EPS | $0.28 | $0.24 | Up $0.04 |
| Net operating margin | 32.2% | 65.4% | Down 33.2 points |
| Net margin | 40.4% | 34.6% | Up 5.8 points |
| Cash flow from operations | $81.5 million | $56.1 million | Up $25.4 million |
| Cash used in investing | $(129.9) million | $(43.9) million | Higher spending |
| Cash flow from financing | $8.5 million | $(4.3) million | Improved |
| Ending cash and restricted cash | $11.2 million | $20.0 million | Down $8.8 million |
Net income benefited from a $13.3 million gain on commodity derivatives and a $5.3 million gain from the change in fair value of common stock warrant liabilities. Income before taxes was $47.7 million, and income tax expense was $10.8 million, producing a 22.6% effective tax rate. The company had no comparable income tax expense in Q1 2022 because the predecessor Funds were treated as partnerships.
Production increased to 2,085 thousand barrels of oil equivalent, or 23,167 Boe per day, from 1,424 thousand Boe, or 15,826 Boe per day. Oil production rose to 965 thousand barrels from 771 thousand, while natural gas production increased to 6,720 MMcf from 3,920 MMcf. Net producing wells increased to 152.18 from 122.22.
Average realized prices before settled derivatives declined to $76.14 per oil barrel from $94.15 and to $2.65 per Mcf of natural gas from $5.42. Including settled derivatives, realized prices were $78.16 per oil barrel and $3.31 per Mcf, compared with $85.77 and $5.09, respectively, in Q1 2022.
Material changes versus the prior comparable period
- Revenue declined despite substantially higher production because commodity prices were lower.
- Lease operating expense increased 64% to $13.8 million, partly due to a larger well base, higher service costs and higher transportation and gathering costs under take-in-kind arrangements.
- Depletion and accretion expense increased 110% to $33.9 million, driven primarily by higher production and the company’s asset base.
- General and administrative expense increased 209% to $8.6 million, including $1.1 million of non-cash stock compensation, higher compensation and professional costs, and $2.5 million of Management Services Agreement fees.
- Operating cash flow improved because the company received $6.4 million from commodity derivative settlements, compared with $7.8 million of payments in Q1 2022, and benefited from working-capital movements.
- Investing outflows increased to $129.9 million, including $105.6 million of development capital expenditures and $24.4 million of acquisitions. Property costs incurred, excluding acquisitions, totaled $98.6 million versus $60.9 million.
- The company paid $14.6 million in dividends, or $0.11 per share, and repurchased 273,017 shares for $1.7 million during the quarter.
Debt, liquidity and capital allocation
At March 31, 2023, Granite Ridge had $25.0 million outstanding under its senior secured revolving credit agreement, compared with no debt at December 31, 2022. The facility has $150.0 million of elected commitments, an initial $325.0 million borrowing base and $125.0 million of committed availability at quarter-end. Including $10.9 million of cash, reported liquidity was $135.9 million.
The company was in compliance with its credit agreement covenants, including a maximum leverage ratio of 3.00 to 1.00 and a minimum current ratio of 1.00 to 1.00. Borrowings are subject to variable interest rates, generally based on SOFR or base rates. A one-percentage-point increase in rates on the quarter-end debt balance would increase annual interest expense by approximately $0.3 million.
Management stated that cash on hand, operating cash flow and available borrowing capacity should fund budgeted capital expenditures and operating expenses for at least the next twelve months, although additional capital may be sought and is not assured on favorable terms.
Guidance, outlook, commentary and risks
In May 2023, management increased planned 2023 capital expenditures by $25 million to a range of $275 million to $305 million, including $45 million of identified acquisitions. Spending may be reduced or increased depending on commodity prices, financing availability, drilling and acquisition costs, regulatory approvals and expected returns.
Commodity price exposure remains significant. At March 31, 2023, outstanding hedges covered 777,410 barrels of oil with weighted-average sub-floor, floor and ceiling prices of $61.21, $78.86 and $100.36 per barrel, respectively, and 7,651,421 Mcf of natural gas with a weighted-average floor of $4.27 and ceiling of $5.91 per Mcf. A 10% increase in average commodity prices would have reduced the fair value of commodity derivatives by approximately $6.5 million.
All wells are operated by third parties, leaving the company dependent on operators’ drilling, completion and production decisions. Other significant risks include commodity-price volatility, infrastructure and supply-chain constraints, reserve-estimate uncertainty, interest-rate exposure, regulatory and environmental matters, cyber risks, counterparty risk, limited liquidity and trading in the securities, and the ability to acquire attractive development opportunities.
Management concluded that disclosure controls and procedures were not effective as of March 31, 2023. Material weaknesses remain in controls over depletion calculations, accounting and classification of acquisitions, and information-technology general controls related to user access and segregation of duties. Remediation efforts are underway. No material legal proceedings were reported, and the filing states that there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether production growth and planned capital spending can offset lower oil and natural gas prices and rising per-unit costs.
- The outcome of the spring 2023 borrowing-base redetermination and the company’s continuing compliance with credit agreement covenants.
- Cash funding capacity after planned capital expenditures, dividends, share repurchases and potential acquisitions.
- The sustainability and discretion of the $0.11-per-share dividend and the remaining $48.1 million authorization under the share repurchase program.
- Progress in remediating the material weaknesses in depletion, acquisition accounting and IT access controls.
- The economic impact of the company’s hedge portfolio, including mark-to-market volatility and settlement requirements.
- Comparability of Q1 2022 results, given the October 2022 business combination and predecessor-to-successor reporting structure.