zhengzaishuru
Granite Ridge Resources (NYSE:GRNT) increased its 2023 capex budget by approximately $55 million for inventory and production acquisitions as well as a small amount of additional development capex. These moves are expected to mostly benefit 2024 production levels, but will likely result in Granite Ridge reporting negative free cash flow in 2023.
I had previously expected Granite Ridge to end 2023 with around $25 million to $30 million in net debt, helped by a projected $48 million in 2H 2023 free cash flow. I now project Granite Ridge to end up with around $79 million in net debt at the end of 2023, not including the impact of advance share repurchases. This is approximately $50 million more than previously forecasted. Granite Ridge’s debt isn’t a significant concern at this point, although it will likely end up with some cash burn in 2024 if it attempts to noticeably boost production while maintaining its current dividend.
Due to its increased debt and lower near-term commodity prices, I have reduced Granite Ridge’s estimated value to $8.25 per share at long-term (after 2024) $75 WTI oil and $3.75 NYMEX gas. This is a $0.50 per share decrease from my August calculate.
Changes To 2023 Guidance
Granite Ridge increased the midpoint of its full-year 2023 production guidance from 22,250 BOEPD to 23,250 BOEPD. This is a 4.5% boost to its production guidance and it now expects approximately 18% production growth compared to 2022. Granite Ridge’s oil cut guidance has gone down from 49% to 47% though, so its oil production guidance (in barrels per day) is essentially unchanged.
Granite Ridge also increased the midpoint of its 2023 capex guidance from $295 million to $350 million. This $55 million boost was driven by a $40 million boost in its acquisition budget and a $15 million boost in development capex.
The increased production expectations for 2023 are driven by a combination of well outperformance (more for gas production than oil production) and wells turning to sales earlier than expected. The wells coming online earlier than expected means that there are more months of production from those wells in 2023.
Granite Ridge also expects two more wells to be turned to sales in 2023 than it previously expected, but since these wells are coming online late in the year, the impact on 2023 production won’t be very much. The boost to Granite Ridge’s 2023 capex budget will mainly affect 2024 production.
Recent Results
Granite Ridge’s Q3 2023 production ended up at 26,433 BOEPD (46% oil), a 17% boost in oil production and a 23% boost in total production compared to Q2 2023. Granite Ridge’s production is projected to reject by around 7% from Q3 2023 to approximately 24,600 BOEPD in Q4 2023 as the well acceleration also pull forwarded some production volumes from new wells into Q3. It should be noted that Granite Ridge’s updated full-year production guidance range of 22,500 BOEPD to 24,000 BOEPD may be a bit conservative as a -7% production reject from Q3 2023 to Q4 2023 would leave it at over 23,900 BOEPD for the full-year. That would be just slightly under the high-end of its updated guidance range.
Granite Ridge reported $79.3 million in Q3 2023 operating cash flow (before working capital changes) compared to $95.1 million in capex (including $11.9 million in inventory acquisitions).
Granite Ridge has been spending to grow its production, and thus will likely end up with negative free cash flow for the full year. It should be able to create around $15 million in positive free cash flow before dividends in Q4 2023 though. Granite Ridge is currently paying out around $15 million per quarter in dividends.
Debt And Liquidity
Granite Ridge amended its credit agreement in November 2023, resulting in its borrowing base being reduced from $325 million to $275 million, but its aggregate elected commitments being increased from $150 million to $240 million. The interest rate on the credit facility was also increased by 0.5%.
This gives Granite Ridge additional liquidity. Granite Ridge’s net debt was $79 million at the end of Q3 2023 and it is projected to end 2023 with the same amount $79 million in net debt if it doesn’t do any more share repurchases.
Granite Ridge spent $6.3 million repurchasing 0.87 million shares in Q3 2023, and with its share price at under $6 now I can see it repurchasing more shares in Q4 2023 than in Q3 2023.
Thus Granite Ridge may end 2023 with around $85 million to $90 million in net debt after share repurchases. This is around 0.3x its annualized unhedged Q4 2023 EBITDA though, so it should be fine from both a liquidity and leverage perspective.
Estimated Valuation
I previously valued Granite Ridge at $8.75 per share in late-August assuming long-term $75 WTI oil and $3.75 NYMEX gas.
I am reducing Granite Ridge’s estimated value to approximately $8.25 per share based on long-term (after 2024) $75 WTI oil and $3.75 NYMEX gas. The $0.50 per share reduction reflects Granite Ridge’s increased amount of net debt in 2023 and potential for either slower production growth or additional cash burn in 2024.
While I believe that oil and gas prices will rebound later, I also believe that it is appropriate to factor in lower near-term commodity prices. Thus I am using current strip of $70 WTI oil and $2.75 NYMEX gas for 2024.
At those commodity prices, Granite Ridge’s 2024 EBITDA may end up around $290 million if it grows production to around 26,000 BOEPD (high-40s oil percentage) in 2024. This would be high-single digits production growth compared to 2023.
There is a significant chance that Granite Ridge will end up with lower production growth than that in 2024 if commodity prices don’t boost. If Granite Ridge does aim for high-single digits production growth, its free cash flow (after dividends) would likely be negative if it wants to preserve its current dividend.
Conclusion
Granite Ridge increased its 2023 capex budget by $55 million for a combination of acquisitions and additional development. This has resulted in its projected net debt ending up around $85 million to $90 million at the end of 2023, assuming it continues with share repurchases in Q4 2023.
Granite Ridge’s liquidity and leverage situation still looks fine, although there is a risk of a advance boost in debt in 2024 at current strip prices if it wants to grow production in the high-single digits while maintaining its dividend.
Due to lowered near-term free cash flow projections and Granite Ridge’s rising debt, I have reduced its estimated value to $8.25 per share in a long-term $75 WTI oil and $3.75 NYMEX gas environment. There still appears to be a fair bit of upside at its current $6 share price though.
