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We previously wrote about Granite Ridge Resources (NYSE:GRNT) for Seeking Alpha here in September. At that time, we viewed the name as a shorter-term trade opportunity prompted by a downdraft in the shares over a selling shareholder sale. In the interim, oil prices have been weaker than expected and the shares have performed largely in line with poor sentiment in the group. Also in the interim, insiders have been on a buying spree, with management and directors putting their money where their mouth is snapping up discounted shares in the fourth quarter.
On February 2nd, management provided an update on recent divestitures and acquisitions and disclosed a significant 4Q23 production beat and meaningful share repurchases.
4Q23 Asset Sale to Vital Energy (VTLE)~ Cash Flow Acceleration Event:
Granite sold 1,658 net acres with 9.9 net producing wells in the Permian to Vital Energy in exchange for 561,752 VTLE common shares and 541,155 VLTE 2.0% preferred (or about $47 mm). We don’t know the associated volumes with the sale, but our 2024 volumes for modeling purposes were already conservative, and we’ve included the VLTE securities in the cash and marketable securities line for now in the cheat sheet below. We don’t expect GRNT to a long term Vital holder. Management summed this deal up nicely by stating, “This transaction demonstrates one of the many ways to win in the non-op model, in this case selling at an operator premium due to a long-term Strategic Partnership with the Henry family. While we are not typically a seller, the consideration offered was attractive, and the acceleration of cash flow from these producing assets will allow us to compound returns for our investors by recycling capital into development opportunities with higher rates of return.” This aligns well with management’s past commentary regarding high-grading and capital efficiency.
4Q23 Acquisitions ~ More “Bread and Burgers” Activity: The company also announced 10 unique acquisitions with an aggregate up front cost of $34 mm in the quarter, ranging from traditional non-operated acquisitions in the Permian to their controlled capex program via strategic partners to the largest, a producing acreage bolt on in the Haynesville for $24 mm. This is their organic bread and burgers leasing program helping to replace and upgrade inventory along with some light strategic partnership deals.
Better-Than-Expected 4Q23 Preliminary Numbers: Management announced 4Q23 production of 26 MBOEpd (46% oil), essentially flat with the prior quarter’s level and a 19% beat of volumes implied by management’s recently increased full year 2023 guidance of 23.25 MBOEpd on mid. At the time of the third quarter report, we noted it appeared to be conservative given then current operator activity levels and the steep dive 4Q implied to get to the full year number. Analysts must have viewed it as too much of a sequential decline as well and had 4Q23 pegged at 23.75 MBOEpd. At 26 MBOEpd, this represents a 10% beat of the Street. In our view, this is a bit of a “buried lead” given their update addressed assets and divestitures before moving onto 4Q production. While management may not address 2024 guidance officially until the 4Q call in March, they have previously said to look for growth in the high single to low double-digit range. This stronger-than-expected second half of 2023 exit rate gives them a good trajectory to at least meet the Street’s 26 MBOEpd level for 2024.
Management Steps Up Repurchases. Granite Ridge Resources repurchased 3.8 mm or 2.8% of their outstanding shares for an average $6.13 in the quarter. This was also a buried lead in our view, given they had only bought back 1.8 mm shares in the first nine months of 2023. Management previously telegraphed it was not their intention to further increase the already stout dividend in the near term. Our sense is that buying shares back now is a sensible alternative, allowing for future dividend increases with less capital outlay. We like the balanced approach to capital returns and believe that it may help to alleviate some concerns about dividend sustainability at lower commodity price levels.
Balance Sheet Remains Strong. Net debt increased from $79 mm at the end of 3Q to $110 mm as of quarter end. Net debt to annualized 4Q estimated EBITDA should be well below 0.5x when they announce the quarter.
Nutshell: This was a positive update, with a big quarterly production beat and significant share buyback buried amongst their organic leasing program and other details. The shares have been in retreat with oil and the group of late, and our 2024 numbers continue to appear conservative. On our Base 2024 Case, they trade near 2.6x (in line with consensus) and assuming they carry on with the 11 cent share dividend this year, they offer a whopping 8.2% implied yield. Given the strength of the balance sheet, high yield to group, management alignment with shareholders, and expected 2024 growth, we would expect the name to trade about 1 multiple higher relative to current levels when oil prices stabilize later this year.
Z4 Energy Research
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