Acreage in partnership with proven operators across leading basins. Michael?
Thank you for having us today. We're excited to be here and present. This is our first time to join one of your programs, and you know, we're excited about the format and the platform and you know, look forward to meeting some great investors here today. So Granite Ridge, we are a non-op upstream strategy, as Mark said. Non-op implies that we are actively participating in the development of oil and gas wells in the United States, but we do not manage drilling rigs. We do not manage completion crews. We are passive investors in non-op wells that are operated by what we see as being best-in-class on both the private side and the public side of the industry.
Non-op is strategically important for us because it allows us to really focus on diversification. As you can see on the current slide, we have assets across the Lower 48 in the primary oil and gas basins that you'll hear all the big companies, all the big public and private companies talking about. We have assets in the Bakken, the DJ, the Permian, the Haynesville, the Eagle Ford, and recently we moved into the Utica. What is additionally unique about this asset base is that we are diversified on both a commodity standpoint, we're about 50/50 oil and gas. As you can see from the most recent quarter production, and on an SEC proved reserve basis.
And we have a substantial amount of operators here in these basins that are both private and public. Here's a snapshot of our most recent proved reserves that is available publicly for investors, and you can see, close to the far right, we have a percentage private. So this is important for us, 'cause the public companies, they do a great service, they have the transparency that investors want, but there's also a large subset of extremely talented private companies that are doing great work, expanding basins, exploring resources, and ultimately will get acquired by these public companies. And you know, our CEO has publicly stated, we love to partner with these private companies, because if we can get in with them, then we can be a part of, you know, potentially their exit.
Some private equity buys, we wanna be there, and when they exit, we wanna have the option to exit as well. We like the economic resource and exposure there to join these private companies as they operate in some of the premier basins in the Lower 48. Going back one slide, you know, who is Granite Ridge? What is Granite Ridge? Right now, we are an income stock. We're yielding a little over 7% at current levels. We are a production stock. We are growing our production year over year. Relative to our peers, we have a strong balance sheet. This is a focus of ours, to remain conservative in managing our balance sheet.
That way, when the ups and downs of the commodity cycle do hit, we are strong, we're gonna be strong to weather that storm, whereas our peers may not be. And we also trade at a relative value to our peers. Most of our peers are in the four to five times range, and we're currently trading around three times. So where is this business going? Right now, we are non-op, a more traditional non-op, where we control little to no decision-making or timing or spending of capital or bringing the production online. And in our opinion, this is the reason why the non-op strategy typically trades at a discount to operated companies.
So what we've done is we're actually allocating some of our capital to form partnerships with private companies in the basins that I mentioned earlier, to allow us to remain non-op in the sense that we're providing capital and not having to run rigs, but we are the sole capital provider for multiple private teams right now in West Texas, where we've kinda stepped in as a private equity partner, more or less. There's this window of opportunity for us as a public company, where fundraising in the oil and gas private equity sector is down. Investments in the private equity sector are down. Consolidation is happening.
There is a window to put our money with really talented private teams that have a track record of success, to fill the void that private equity has opened up, and step in as a partner where we can remain non-op, but have more control in the deployment of capital and ultimately, the turning of wells into production. This is important for a few reasons. Non-op, it's a great business. You can make great returns investing in projects across the Lower forty-eight, but you don't control timing. It can feel lumpy. It looks lumpy. We provide guidance, but we provide guidance in a way that forces us to be more conservative with the way we see the future, because ultimately, we don't control the timing of development or production.
Our partners do, and they do a great job with it. But as a public investor, when you look at our company, not having good insight into what we're expecting over the next 12-18 months, it can be tough, and we acknowledge that. So something that we've been doing is we've found partners, we've acquired acreage, and we picked up a rig last October. And what this strategy allows us to do is, through these partnerships, we have the ability to predict our expenditures, our production timing more thoughtfully and more accurately.
So that as a company, as we transition, as you see on the slide from the far left over to the far right, over time, our ability to guide and disclose to where we think our spending and production levels are gonna be in any given period of time, is gonna increase. We feel like that is gonna gain more trust from our investor base, and ultimately to what we expect would be a trading multiple more in line with our peers on the operating side of the spectrum. Trading multiples. This is what we see the landscape being right now. On the far right, you see Granite Ridge and where we trade. You see the different categories that we've got checked or comments around.
But really I wanna point you down towards valuation. Not only is Granite Ridge right now trading at a discount to our peers, but you can also see the discount between our peers and our operated peers. This is the opportunity that we see being twofold. One is, as our shareholder base expands, which I'll discuss a little bit more in a second, but also, as we convert our strategy from being pure non-op to being more controlled capital, this is the step change that we hope to see. This is a cyclical business. Things move around, but generally, how we trade and how these peers trade, the number may move around, but the opportunity for step change will always exist. You know, why do we trade at a discount to our peers?
I think it's worth, you know, discussing the vehicle that we've built and created for our investors. Right now, this vehicle is primarily controlled by Grey Rock. Granite Ridge was born out of a business combination with a SPAC in 2022. So as a result of that, and high redemptions in that process, as we became a public company and merged with the SPAC, we ended up with a fairly concentrated ownership base. At the IPO, Grey Rock had roughly 98% of our float outstanding under their control within this voting agreement. Since then, they've done a secondary, and they've pushed shares out in kind to LPs. So as you can see here, they own roughly 52% of our outstanding shares.
And then by our estimates, roughly 20%-25% of the next slug of our outstanding shares in this public float are held by their LPs. So really, when you see the way we trade, we have very limited daily trading volume, so that we look more like a $250 million company rather than a $1 billion company. So over time, as our shareholder base expands from Gray Rock and their LPs, we expect to be able to capture that arbitrage from where we trade to where our peers trade. That's not gonna happen overnight, but it will happen. Notably, fund two for Gray Rock, those shares are gonna be pushed out to LPs by the end of this November, which is the end of the harvest period for fund two.
Fund three holds roughly 55 million shares, and that, the end of that harvest period is April of 2027. It's noted there in the footnotes. But what have we done as a team to help support this shareholder transition over the last 18 months? We are on the road. Luke, Tyler, and myself, we've attended many conferences. We've done non-deal roadshows. We have had over 250 investor and research meetings with close to 200 different unique firms. We've increased our research coverage from 1 to 7, and we hope that number will grow as well over the coming months. You can see the average daily trading volume has increased 12 times over the course of the last year.
And we were also added to the Russell 2000, which has been wonderful for us as we've been able to get a lot of great meetings as we travel on the road because of that addition. So let's visit about the opportunity, as just a way to kinda wrap this up. So we've got a few things going for us. We're diversified, we offer a dividend, we have a conservatively managed balance sheet, and we have a platform that is scalable. So said another way, as we double our growth, we shouldn't see any material increase in our G&A. And so that offers us an incredibly valuable platform for asset growth and shareholder returns going forward.
The best two ways that we see that unfolding is, as the shareholder base broadens and our daily trading value increases, that allows more and more folks to build positions in our name and hold it, which we believe will help us bridge the gap from where we trade now to where our peers trade. And further, our strategic partnerships, specifically our controlled capital program, which should allow us to create a operated wedge within our company, where we are more. We're not literally operating the acreage, but through our partnerships, we have more visibility into the timing of cash flows. We think this is a very viable way for us to eventually bridge the gap between where our peers trade and where operators trade.
Additionally, as we're able to leverage both our fixed cost platform and grow our production wedge, we see a great opportunity to create a public investment vehicle that is just very, very unique. It's not quite a mineral strategy, it's not quite an operator strategy, it's a non-op strategy where we hopefully can change the description of what we're doing from being a asset or, you know, a set of oil and gas wells, and we can get folks to buy into the fact that they're truly investing in a business. We are finding ways to invest our money in creative and thoughtful ways, and creating things, you know, these partnerships and these opportunities that we hope will become a fantastic vehicle for investors to benefit in the near term and the long term.
With that, I'd like to pause for questions.
Thank you, Michael. I guess the first question is, could you compare and maybe contrast your investment criteria as it pertains to your traditional non-op, controlled capital, and any other type of investments the company makes?
Absolutely. Our traditional non-op bucket of evaluations and opportunities, those are gonna fall generally between 20%-25% rates of return, and about a 1.5 ROI. That is a minimum investment hurdle for us to submit bids on those opportunities. That scale changes, of course, as commodity prices get higher or lower, or if the amount of capital that we have to invest in that opportunity is more or less, and also the surety around the development of that asset. So if you know, a drilling rig is on site relative to an opportunity where a drilling rig might come in the next 10 months, will garner different levels of assumptions and hurdles that we will adjust in real time as we're evaluating the opportunity in the bid process.
On the controlled capital side, obviously we've got surety over the control and timing of that opportunity, but the concentration risk is there. So we're investing more money in these opportunities with these very accomplished partners. But even though they're a great operator, even though we know exactly what the timing is, because of the amount of capital that we're investing in these opportunities, we do maintain a higher threshold for investing those dollars, and that starts at about a 25% rate of return and, like, a 1.6-1.7. And we've generally been seeing it somewhere between 27% and 32% rates of return, and between a 1.6 and 1.9.
Do you have any size constraints for any one particular deal?
I think the market itself generates its own limits as far as we don't. In the market that we play in, which is really non-marketed deals and opportunities. So said another way, we don't always find it to be a good use of time to participate in the marketed processes that banks are running. Most of our opportunities are gonna be more what we term as burgers and beer, or more relationship-oriented opportunities.
Mm-hmm.
So those are kind of self-limiting in terms of you're not gonna get these $300-$500 million opportunities to invest your capital. Ours are set more between $2.5 million to a traditional non-op, where below that, it's probably not worth our time.
Right.
'Cause it's far, far more competitive, 'cause as the amount of dollars goes down, the number of people who can actually bid on that goes up exponentially. But in that $10-$75 million, maybe even $100 million dollar range, depending on if we're acquiring a. We could acquire acreage with a controlled partner, where we have a full 1,280 in West Texas, and we could land 12 wells in that unit if it were undeveloped. So in that instance, $10 million a well, you're looking at probably $2 million to acquire the acreage, and another $100 million to develop that opportunity. So yeah, our thresholds are really between about $2.5 million and about $100 million for each unique opportunity.
But we're not freewheeling into all these opportunities. These are thoughtful exercises where we are judging opportunities also based, you know, on their economics, but also based on where they fit within our budget.
Right. Now, how are you funding acquisitions and development?
Right now, we're investing all of our cash flow, and we're utilizing a reserve-based loan with a syndicate of about 12 banks. When we exited 2022, the fourth quarter of 2022 was our first as a public company. We exited with about $50 million of cash and no debt, and the primary complaint from investors was: "You don't have scale, and you have too much cash on your books. And if you're seeing high rate of return opportunities, you need to be investing that cash." And since, you know, like I said earlier, we're seeing- we're investing in opportunities that we see as being 20-plus% rates of return, well, those far exceed the cost of our debt.
So if we can go out and acquire the leverage with banking relationships to then invest that capital up to a conservative level, then that's the best way for us to really, you know, build the bottom of the bathtub or the J-curve and come out of that and really start to build scale on the platform that I mentioned earlier, being a fixed-cost platform. So yes, we have been outspending cash flow. The banking partners that we have stepped up and been amazing for us. They love our strategy. They love the way we're managing our balance sheet, and those relationships remain strong as we head into the fall redetermination process. And so yeah, that's how we're funding our opportunities right now.
Now, who do you consider your public company peers, and how do your strategies compare?
Great question. The two peers we find ourselves talking about the most are Northern Oil and Gas, or NOG, and VTS, Vitus. Both are incredible companies with very talented folks at the helm. Vitus focuses on the Bakken, so they are a similar strategy, but they're 100% invested in the Bakken play of North Dakota. So they are... They're highly diversified within that basin, but they are just in one basin. They're a touch smaller than us. They produce a bit more oil, and again, they have an extremely talented, thoughtful team at the helm. But, you know, relative to us, they are focused on one basin. I don't know that they pursue any partnerships like we do.
They're more of the burgers-and-beer strategy focused in North Dakota. And then there's Northern. The Northern has been a trailblazer for non-ops. They have done a tremendous job of creating what they're branding as, you know, a co-buying strategy, where they're partnering with small and mid-cap oil and gas companies to go make acquisitions that may be a little bit above their funding thresholds. The operating partner, that is, not Northern's. And they've been able to do that to leverage their liquidity, their cost of capital, and create scale very quickly in existing and new basins. They recently announced a deal with SM in the Uinta Basin. And, you know, we admire what they're doing.
We have nothing but good things to say about what they're doing, and ultimately, we want them to be as successful as possible because it makes the conversation for us with new investors to be much, much easier. As they see what Northern and Vitesse are doing, that they can look at us and know that it's a strategy that's not radical, and that it's a different way to play the commodity space. But the way NOG is building scale, you know, what Vitesse is doing, we all have things in common, but I think what sets us apart from NOG's co-buying strategy is our controlled capital strategy, where we're sort of, you know, we're getting into assets where there's no existing production, and it's all about developing value through the drill bit.
To make our returns be what our investors need to support the growth of a public company, that's where we think we need to be spending our capital right now, and we're excited about our partnerships, but you know, at the same time, we're really excited about what NOG and VTS are doing at the same time.
How do you plan for lower commodity price environments, or to maybe said another way, to kinda insulate the company from, you know, fluctuations in commodity prices?
Right, yeah. Our balance sheet, I mentioned earlier, we're focused on managing, you know, a conservative leverage profile. Most of our peers are gonna be between one, one and a half, one and three-quarter times on a trailing 12-month leverage basis. You know, when commodity prices turn, that one and a half times, it can turn to three very quickly. And so we've all been in this business a long time with regards to our management team, and we know how fast that can change as the commodity cycle changes. So conservative balance sheet is one, and then, which goes in lockstep with our ability to borrow capital, we also gain the ability to hedge our commodities or our commodity exposure.
So we've got hedges in place to cover at least 50% of our group production over the next 18 months for both oil and gas. Gas has gone a little bit above and a little bit beyond that, just because we don't feel super comfortable with where the future gas curve, you know, where it sits relative to where we think it may end up. So we've gone a little bit above and a little bit beyond that 18 months and 50% on the gas side. But yeah, conservative balance sheet and hedging as much cash flow as we can to be protected, but also, you know, create optionality for the upside cycle in both oil and gas.
Now, what is your projection for growth in G&A expense as your company grows?
Great question. I've said it a couple times, but I wasn't super specific, but we, you know, we're guiding to about $23 million-$25 million a year of G&A this year. You know, I'll give you two examples or thoughts about that. In our opinion, if we were to double our production overnight, we would not have to appreciably increase our G&A by any material amount. Maybe we'd add a landman, maybe we'd add an accountant, but generally, the platform that we have is built to handle growth. What's the whole point of this strategy and mineral strategies is, we don't need to add drilling engineers or completion engineers or health and safety employees or.
You know, Sure, as the asset base grows, as we may have to manage more leases, more producing wellbores, as we have more, you know, as our production grows, we'll have more cash flow to invest, so we'll need more opportunities in the pipeline to evaluate and prosecute on. And so we will be adding people eventually, but we won't, we won't have to make huge increases, even if we double or tripled our production overnight. Another example would be, you know, recently we entered the Utica Shale, and we didn't have to add a single person to do that. So I think that shows the flexibility and how quickly we can pivot to new economic opportunities, even if they're in a new basin. We don't have to increase our staffing to do that.
So I think it's just amazing what this team has done and what we've built, and our ability to manage the pipeline we have with the people we have, I think, is really unique, not just to us, but also the strategy.
And then just lastly, during the second quarter call, it was mentioned that Granite Ridge can grow production, you know, mid to high single digits annually out of cash flow, and that you've been drawing down a conservative amount of debt to invest in growth, which could potentially drive double-digit growth in 2025. So could you just talk a little bit about managing the balance sheet to accommodate growth, and maybe what the longer term production profile might look like?
Sure. You know, I can't necessarily comment on production beyond Luke's words from the earnings call, but I think it's important to highlight, as we've outspent our cash flow, I think, you know, it's very clear that after that call, you know, we increased our guidance, and Luke's messaging, I think was right on in terms of we have been investing steadily this year. We are outspending cash flow, but while it doesn't show up in this year's production guidance, you know, our dollars invested in this controlled capital strategy, it has a little bit longer lead time, right? The first project that we brought online with our controlled capital partner in West Texas came online in June. We bought the acreage in May of 2023.
We picked up a rig in October of 2023. We drilled and completed eight wells and brought those wells online in June, right? So you're talking a 10 to 12-month lead time, and so you're investing, and you don't see the fruits of that labor until June of this year. So we're going through the same cycle with all of the other opportunities that we've brought online, or sorry, that we've brought in-house with these teams. So we're... You know, at one point, we were running two rigs last fall and earlier this year. So I think the highlight of what Luke is saying is that we have increased our guidance, but not our per- but not our production, and we didn't see a negative reaction from our investor base.
And I think that's because they trust the fact that we have been investing. They understand the transition to this new strategy, and they're gonna be patient to see what we can deliver on next year, which we're all excited about. And you know, our ability to prosecute on this strategy has opened the door for new partnerships all over the place. So we're having great conversations with new partners, and sometimes the partnership doesn't work for them specifically, but you know, now we've got common ground to easily strike deals in the future. So it's just been great, and we're very excited about next year and the investment that we've made this year with our partners.
Michael, thank you so much for your participation and-