Good morning, everyone. I'm Steve Ferazani, an analyst at Sidoti . I see the room is still filling in, so I'll give it a few seconds before I start the presentation and turn it over to our next presenter. Just to remind everyone, before we get started, we should have a few minutes for Q&A afterward. I think it'll be a very informative presentation. If you have any questions, you just press that Q&A button at the bottom of your screen, type in the question, and we'll get to absolutely as many as we can, time permitting. With that, please welcome Granite Ridge Resources. The ticker is GRNT. So happy to have CEO Luke Brandenberg with us this afternoon—this morning, sorry. Trying to speed through the day. Welcome, Luke, and thanks so much for being here. Let me turn it over to you for the presentation.
Great. Thank you, Steve, a nd thanks to the whole Sidoti team. Really appreciate you having us here a nd thanks to everyone for joining us. Look forward to sharing a bit about the Granite Ridge story. I thought the way I'd take this this morning is, you know, maybe flip through the deck in about 15-20 minutes and leave some time for Q&A. Let me just start with, what are we doing? What are we doing here? What's our goal? Our objective as Granite Ridge is to provide public investors with private equity-like exposure, but with daily liquidity-enhanced alignment. So I'm going to talk about how we do that. But first, let me just give you Granite Ridge as a glance. We're a publicly traded company. Fortunately, the slide's a bit out- of- date. We've performed a bit better since then.
But, you know, call it an approaching $900 million market cap, about a $1 billion enterprise- value company, a nd we are a diversified U.S.-only gas company. We've got assets across six major basins in the U.S., primarily Permian-focused, as you'll see. That's where most of our production and most of our reserves are. But really, we like to talk about diversification as being an output. We don't start the year with a budget of, "Hey, we want to be 60% Permian, 15% Bakken." We are economic animals, as we like to say. Our real job is to find compelling opportunities. We have got an asset that generates cash flow. Let's use that cash flow to find compelling opportunities and allocate them to the best deals. We'll talk more about that in a second. But let me just give you a bit of Granite Ridge by the numbers.
To date of this presentation, we were a 9% stock. Unfortunately, stock price has gone up, so the yield is closer to 7% now. A yielding stock, that's important to us. We really value that dividend, and we are committed to defending it. We also offer production growth. We're looking at 16% production growth year- over- year, which is something I don't think you'll see as much in a lot of companies. We do all that while underpinning this dividend and production growth with a strong balance sheet. Our leverage ratio is about 0.7x debt to trailing EBITDA. If you looked at the whole list of capital and gas companies, the average is closer to 1.2. We are very conservative by that metric. We traded at a discount. We traded at a discount to our peers.
We're trading around three times earnings, which, again, if I were to tell you a company's got a 9% dividend, strong asset growth, and a good balance sheet, it's trading at sub-3, you'd think it's a steal, and I do, too. Let me tell you about our opportunity set. We really group this opportunity set in a couple of primary buckets. We've got our operated partnerships and our traditional non-op. I'll hit those at a high level, and I'll double-click on them here in a second. Let's start with traditional non-op. This has taken minority oil and gas investments, real property interest in core areas managed by experienced operators. What does that mean? That means taking 5%, 10% under a well drilled by EOG in the Permian. That's what that means. That's a core piece of our business.
It's really how we started the business and continues to be important to us today. Operated partnerships is one where we take the same underwriting approach, which is, let's look at the subsurface first. What's a well going to produce? Then what's it going to cost? And then when do we think that well gets drilled? Same underwriting and operator partnerships, but instead of a minority interest, these are controlled investments where the majority investor in these assets with partners that we've selected that have demonstrated an ability to drive value. We partner with these folks. We control everything about these operations from what gets drilled, when it gets drilled. I'd say it's more concentrated capital investments in areas that we have high conviction. This has really been a growth area for us lately. We'll talk about that in a second.
I want to hit real quick before we get under this. I talked about leverage early. You're going to see me talk about this throughout the presentation about this theme of conservative DNA. I mentioned the average mid-cap company has about 1.2 times leverage. For us, we've [audio distortion] at 1.25. That's kind of a red line test. Do not cross. Our ceiling is the average. That just goes to show the conservative DNA we've had. This isn't a new, you know, come-to-Jesus moment for us. If you look back over the really the history of our business, both public and private, we've never gone above one times. In fact, during COVID, we paid down our debt fully. We really have a conservative DNA in this business and have a demonstrated ability to grow the asset.
That's what the dark green is, the light green, rather, growing the asset, growing production across different hydrocarbon price cycles while not getting over-levered. Again, what do we do here? We have this neat asset that generates cash flow. You know, we did about $291 million in EBITDA in 2024. Our job, day in and day out, is to source and evaluate opportunities and then to allocate capital to the most compelling risk-adjusted returns. We do all of that while defending the balance sheet and prioritizing shareholders through our dividend. Our business model ultimately, it's kind of different. We're in a lot of ways this publicly traded private equity firm, but it's also pretty simple at the end of the day. We're just looking for the best deals, and that's where we're going to put our money. I mentioned diversification.
I'll talk about that again because diversification, it not only is a risk mitigant, it certainly is that, but it also helps to drive opportunity. I said earlier, we do not start out the year saying, "I want to allocate 60% to the Permian." What we do is make every single deal compete to challenge our land and business development team to bring us opportunities across all these basins. Then we are going to allocate capital to whatever rises to the top. We are agnostic to oil and gas. We are agnostic to basin. We are just looking for the best risk-adjusted returns, primarily underwritten at strip pricing. Let's talk about that. If we are a deal shop, do we have any deals? We do. We have got a lot of deals. We looked at over 650 unique transactions in 2024. That is a lot.
You're talking about multiple new deals coming in the door every business day. That keeps us busy. How do we source these? Here's a neat thing about our business. We've been doing this for over a decade. And through that, we've just built a lot of relationships. We like to talk about from the mailroom to the C-suite. A good deal can come from anywhere, especially if you're thinking about places like West Texas, right? You know, there's an old adage that, you know, a good deal doesn't leave Midland. You got to go to Midland to get it. That's what we do. You build relationships there. We actually jokingly refer to our business development strategy as burgers and beers. The best deals are done over burgers and beers where deals are in Midland and Oklahoma City, Tulsa, Denver, Houston.
This is a high deal -flow business, and it is a low hit -rate business. It's a kiss on a lot of frogs. We close on less than 10% of the deals that we see. Why is that? We're very disciplined. We're disciplined in what we're willing to allocate our capital to. Capital is precious. We're privileged that investors entrust us with their capital. We are very disciplined in how we do this. We've got a phrase, "There's always another deal." We do not get married to any one of these deals. All these deals we passed on, even if it was your baby, that's all right. We're quick to bounce back and get over it and look at the next deal. How do we process all these deals?
You know, this is the slide where I should probably talk about AI and this new whiz-bang tool that we have. But that's not us. What we are, we call ourselves tech-enabled, meaning that we don't ask tech to give us the answers. What we do is leverage technology to help us make better decisions more quickly. We want to empower our engineering team. We want to empower our finance team to be able to evaluate these opportunities as quickly as possible and have the best information available to them at their fingertips. One of the cool things is we're in over 3,100 wells. That's a lot. You get daily production from a lot of these wells. You're talking about an immense number of data points. Those data points are critical when we're underwriting the next opportunity.
We talked about the, you know, the core of our underwriting is what's a well here going to produce? We want to look around the area. Because we're in these wells and we have real daily data, we have a significant information advantage over most folks who aren't in wells proximate to what we're looking at. We always want to make sure that we're getting better every day to better equip our team to make better decisions more quickly. For our underwriting process, maybe I'll give you a peek under the hood of what does a week in Granite Ridge look like. It starts out on Monday with a weekly deal meeting. Any deal that comes in the door that my work came from, it all goes up on the deal board.
Now, some of them, we have a little moniker QK, quick kill, that we know we put it up there, but it's not going to be a fit for us. This is one where we get in the room and we triage all these opportunities that have come across the desk. Let's triage them, identify what makes the most sense, and decide what we're going to spend time on this week. We then dive in, engineering, land, accounting, finance, a ll dive in together to evaluate an opportunity to decide what's this worth to us. Once we actually own that asset, anytime there's a well proposal, so often you'll buy an acre. What you bought is really an option. In that option is whenever, you know, EOG comes to drill, they ask you if you want to participate.
You get a second opportunity, another bite at the apple to say, "Yes, I want to participate," or, "No, I don't." Every single one of those, we hand engineer. Say we hand engineer. Our engineers actually look at it. It's not a computer, but they are using computers. We are just, very frankly, we're good at what we do. I asked the team to put this little bar at the bottom. I said, "Okay, if we're, how do we show the investors that if our job is, you know, capturing deals, well, that's easy to show or at least to capture opportunities, but evaluating, how do we show we're any good?" We looked at 1,000 wells that we participated in. We looked at what our engineers underwrote. What do they think that well is going to produce and what did it actually produce? We were 99%.
That's pretty darn good. Really proud of the team that we built. And we're very consistent and very, very high quality. I want to talk about capital allocation. That's ultimately what we do is, again, we allocate capital. And our capital allocation will shift as the market environment, as the opportunity set shifts. Ten years ago, we started this business and non-op. So again, that 5%-10% under EOG was trading at a tremendous discount to operated, you know, maybe 50% discount to buy a non-op asset versus operated. When that well gets drilled, the single well returns are the same. It's just, what are you willing to pay for that inventory? And inventory was at a big discount. So we spent most of our capital there. As time has gone on, you've seen a couple of things happen. One, the non-op space has gotten a lot more competitive.
A lot of folks that are doing minerals have started doing non-op. A lot of family offices have gotten into non-op investing. A big driver is some of the tax benefits from accelerated depreciation. The returns have been driven down in that traditional non-op space. At the same time, private equity, it was a big funder of operated partnerships. One, they've had significant decline in fundraising. Two, the firms have started allocating more dollars to fewer teams such that the small operated assets are left with a dearth of capital. The competition is way less. Now, it's fierce, don't mistake me, but it's way less. We have started allocating more capital recently to these operated partnerships. We talked about that at a high level. This is control investments with partners that we've selected that have proven experience in their area of expertise.
Right now, this is all in the Permian. We've got two teams. We have a third that we're about to sign up that will also be Permian-focused. Fortunately, Permian's a big basin. We're very cognizant to not have our folks stepping on each other. That can erode trust, and eroding trust is the death knell in this business. But we love this business. We target a full cycle return of 25% or better. So that's what's it costs to buy the inventory, w hat's it costs to drill the well. We looked at our first, you know, 38 wells, six projects, about 24%. Not there, but pretty darn close. This has been a big growth area. I want you to look in the bottom right. So this strategy started at nothing, right? We started it out of nothing two- and- a- half years ago.
Now, this year, it's going to be about 25% of our production, slightly more than that, it would be my guess, slightly less. That's big. From 0 to 25% in a couple of years. Next year, we anticipate that to continue to increase. This is the growth engine given where the current opportunity set is. This is one team that's done this. Our second team is going to pick up a rig this year. Third one, likely later this year as well, maybe early next year. If we stack up deals like this, this is where the growth comes from. We believe that this is the highest return growth that we can generate. We really like this. We believe that we're getting better returns.
You know, no offense to any bankers on the phone, but if you're an investment banker and you're selling an asset, those guys are really good at what they do. They find folks that are willing to pay the highest price or effectively take the lowest rate of return. We like this, w e think this is a better rate of return, a nd this is really our growth engine. That's not to say we're abandoning traditional non-op. The traditional non-op market is immense. You know, we spend about $105 billion a year drilling oil and gas shale wells. You know, of that, about a quarter is non-op. It's not the operator. Publicly traded firms may account for about $2 billion of CapEx, but there's a $24 billion sandbox. That's the sandbox in traditional non-op.
Right now, the prices, the competition has made it less competitive for us because the returns have been driven down. We continue to allocate capital here. This is a core piece of the business. We also get a lot of information from that. We love this space. I'll hit strategy real quick for us. Actually, you know what? I'm going to skip to, I'm just going to hit strategy in a second. I want to talk about hedging for a second because hedging is a big piece, particularly in this volatile environment. We came into this year 90% hedged of our current production. We think that's important. Hedging for us is not a tool to bet on prices. It's a risk mitigant.
You know, as a company that's actively growing, it's asset-based growing production, we like to, to some, not aggressively, but lean into hedging to defend those cash flows to make sure we have the capital to grow. If we hedge 90% of our production at the beginning of the year, that probably ends up being 60% of what we think our total production will be. You're going to see us continue to be constructive on hedging. We're currently about 75% of current production is hedged through the end of next year of both oil and gas. Kind of a slide deck without some comps, right? How do we compare to our competitors? This is something else that we're really proud of. We have a strong yield. We have strong production growth. We do all that while we're being conservatively levered. We think that's important.
That's what we focus on. Those three things are really our guiding star. Let's talk about our strategic plan. How are we allocating capital this year? We did about $291 million of EBITDA last year. I'll say, let's assume we're talking about a 16% production increase year- over- year. Let's assume for a second that production and cash flows are linear. They're not necessarily, but in this case, gas prices are up. Oil prices are down a bit, but we're highly hedged. Let's say they are. That puts us at around $330 million of cash flow for this year. Take out maybe $20 million interest. That puts us at about $310 million. That $310 million is our capital budget. We think this year we're roughly cash flow neutral.
We think about the cash flow that comes in is equal to the capital we spend on CapEx. That changes every second as commodity prices change, but that's roughly what we're targeting. Incremental to that, we have a dividend that's just under $60 million. So we actually started this year with two plans. We had the base case, which looked like this, and we had an accelerated case. That accelerated case was, you know, maybe another $60-$80 million of capital, called a $380 million plan. That was early March. With the volatility that we saw from Liberation Day and others, we've decided to remove that accelerated case from the plan, but maintain our base case. What are we doing? We're not hitting the brakes. To use a car example, we're not hitting the brakes. We're just not accelerating. We're more on cruise control.
We're going to maintain this business where we believe that we can take our cash flow, we can pay our dividend, we can maintain production and grow mid- to- high single digits within cash flow. Given the opportunity set in front of us, we're willing to take on conservative leverage to grow at a more accelerated pace. That's the 16% production growth you're seeing this year, primarily coming from that operated partnership strategy. I talked at you real fast. Normally, I try to have more than 20 minutes, but I want to leave time for questions because that's a fun part of these. Steve, I'll turn it over to you to double-click on anything I could do a better job of describing.
Thanks so much, Luke. Covered a lot of ground in the 20 minutes.
We do have quite a few questions, but do have about 10 minutes remaining. If you do have a question, we should be able to get to them. Press that Q&A button at the bottom of your screen, type them in, and I'll start asking. Let me get started with probably the most obvious question given the presentation, which is, when you look at deals, how you weight importance in terms of, say, how you're deciding on a basin versus a top operator that you might like a lot? How are you considering the various factors? Or is it just a math problem?
Yeah, I'd say the simple answer is it's a math problem, but let's take this for an example. We say that we're agnostic. That doesn't mean that we don't take every single one of those factors into account.
Whenever we're trying to figure out what's the best risk-adjusted return, you know, one neat thing is we have real-time data on costs from different operators. One operator is going to have a different cost structure than the other. We can factor all of that in, but ultimately, it's a rate of return target. We're really trying to achieve that 25% rate of return on our operated partnership on a full-cycle basis, over 20% on the traditional non-op side. We primarily look at strip pricing when we're underwriting, but we also look to see, "Hey, where would I not drill this?" I really want to know that. Where does it break? It's good to know where it sings. At $100 oil, it's going to sing. I want to know where it breaks too, where I would not actually develop that location.
I'm not willing to allocate capital. We take all those things into account. Some operators are significantly better than others. They're cheaper. Some are better partners for us. That comes into play as well. Ultimately, we're agnostic. The diversification is just an output, but we do want to see deals from all over. Some basins are hotter or colder based on cash little inflows or outflows that aren't necessarily tied to returns. We like to capitalize on that arbitrage.
Makes sense. You talked about being hydrocarbon agnostic as well. A lot of folks are getting more bullish around gas right now, given LNG export capacity, you know, data centers, electric. Do you take a view on long-term commodity prices or you're just looking at the strip?
Great point. Great question. That's a key question of underwriting the business, right? Here's what I'd say.
We primarily look at strip. We do look where it sings and where it breaks. We also want to be practical, what we view to be practical and how we look at this. What does practical mean? To me, the long-term price of a hydrocarbon should be what's the cost or what's the price at which the operator can make money, the oilfield service company can make money, can service their equipment, but you do not have demand destruction. That is the important dynamic. For oil and gas, what is that? You know, for us, I think oil, that is probably somewhere $70-$75 where you have those things. Gas, that is probably somewhere around $3.50. We do keep that in mind.
I'll tell you right now, I'm not buying gas inventory that doesn't work below $3.50, even though strip tells me I can get that three years from now. I'm not going to hedge that inventory in the ground. I am a bit more conservative on the gas side. On the counter, I'm a bit more constructive on the oil side. I'm not underwriting to $70 oil, especially in this price environment, but I do look at that as a potential opportunity as we try to really evaluate all the different levers we could pull on a deal.
Okay. You mentioned Liberation Day and a lot, everything was shaken a little bit by that, and maybe we're settling a little bit here. Can you talk about what deal flow looks like post-Liberation Day? Has it changed sharply?
It has not changed practically at all, which is interesting. What I will say is the character of the deal, of the deal flow, the volume has been higher than ever, but I don't know that I'd say the quality has been higher than ever. That traditional non-op side, especially when prices get challenged, you do start to see some maybe lower quality stuff come out there. They were going to drill it because it worked at $70. Now that doesn't make as much sense, t heir cash flow's down. That's not a focus area for us. We've really been leaning into the operated partnerships there because they're in core areas of the Permian where we know we feel comfortable and we know we can control timing and costs.
Okay. That makes sense.
When we think about switching over to this operated model, I would think it requires more expertise, more experience level to tackle that side. Is that true? Can you talk about, you know, what you guys bring to the table on the operator side?
Great question. A couple of things. Whether I'm underwriting a traditional non-op or an operated deal, again, it's the same underwriting. Looking at the subsurface, looking at the cost, and then the operator that control the timing. Here's why this is a great fit for us. We are publicly traded private equity. We were a private equity firm. If you look across our halls, we look like an oil and gas company. It's oil and gas engineers, oil and gas landmen, oil and gas accountants that have come from oil and gas companies that are now more on the investing side.
We are really perfectly designed. My whole career was investing back in teams on the energy side. We really have a cool group of folks that have come together that have the perfect backgrounds to do just this because we have the engineers to make sure that we actually understand all the risks that we are undertaking. We have the finance folks that have made careers in risk management and capital allocation. We are pretty unique in this, by the way. I do not know that you have another public company, and outside of a few private equity firms, even private equity firms that have the balance of technical expertise and financial capital allocation experience that really makes this a perfect opportunity for us and one that I am personally fired up about because I love this business model.
I think this is a great growth platform, and I truly think we're generating better returns than what we're seeing in just a, you know, asset-level acquisition market.
Is there a benefit to having more control? You can make the decision when to drill?
Yes, absolutely. It helps not only in just managing capital from a public perspective, but we try to view this company like it's private. Let's not go to the whims of quarter- to- quarter. Let's make the best decision for this asset. Yes, having control is good. For example, there are times where volatility around Liberation Day, you know, another company may have had wells that are in process that, it's hard to slow down that machine.
For us, with the wells that we're working on with one of our operated partners, you know, we called and said, "Hey, does it make sense to drill these wells, but not complete them? Let's have this conversation right now and come up with contingency plans based on what happens." You do have a lot more control over that. We think that's been a tremendous positive. It allows us to accelerate when it makes sense to, but also to slow down. If we were to see sub-$60 oil for a while, we can very quickly slow down without losing inventory.
That raised an interesting question. Obviously, it's coming up a lot.
Does it make sense given that drilling expenses are almost certainly going lower as we see some rigs come out for where you have a very small operating base to just build up the ducks, drill them at a lower cost right now, or can you do that within your and then complete them later? Can you do that within the current capital structure?
We can, and we're running that exact analysis kind of real time. In fact, that analysis is changing this week. We have had an increase in prices, not trying to live week to week by any means, but we do want to know what our options are. To date, we did not have any wells come online in the past month, at least not anything of substance.
We were not necessarily ducking wells, but really later this year, we have a lot of wells coming online in this process, in this program. That is where we talked about that. The good thing is you can make that decision pretty quickly in advance. These [Pratt] companies right now, we do not have long-term contracts on drilling or completing, which is great. While they might not like to get the call, "Hey, we are going to duck these wells," you have that flexibility, and that is something that we really enjoy, and we are going to make the decision that needs to be made at the right time. It is important to maintain your relationships with the service companies in the good times too, so they are less frustrated if you do that.
Very fair.
We do have a couple of questions about how your hedging programs work, how sensitive you are to pricing, and could you just talk about the tools you use?
Yeah, you got it. I will hit the hedging real quick. This is a summary of our current hedges. Again, we are about 75%, as you can see here, current PDP as of the date of this deck. O n gas, y ou will see a couple of things. I talked about gas prices. You know, for me, that kind of $3- $3.50 is where you start to make some money in oil and gas. If I can put floors in at that price, I like that. It means I am going to make money with those. That is what you are going to see on the gas side.
In the summers, we're often swapping when the price is compelling, and we'll do more callers in the winter, try to get some of the upside there, or I guess summers and winters in the shoulder season, you're doing more swapping. On the oil side, that has been, the oil prices you're seeing here below what we think makes sense for oil. We view this as much more of a risk mitigant. Again, 75% of our current production is probably closer to 50% of our production for the year if you look at the new wells that are coming online. We like to maintain exposure to that upside while defending the balance sheet and defending the ability to pay the dividend and maintenance CapEx.
My goal is to be able to pay maintenance CapEx, so to drill to not shrink production and to pay the dividend for at least 18 months in a challenging price environment. That's what we're back solving for. This is kind of the output of that back solving.
Understood. Perfect. I know we don't have a ton of time left. I just want to ask about, because you noted the really high dividend yield, despite the fact you have a really clean balance sheet, a pretty conservative approach. Do you think the market's just not, doesn't know the story yet? Are they just comparing you to non-ops and just need to get their hands around what you're doing? Or what do you think, what do you think the hurdle for you is on the investor side?
Yeah, great question. We spend a good amount of time talking to investors.
One, I love it. I really enjoy it. Two, we are a nascent company. We're only a couple of years old. We got to tell the story. We're small cap, which has less eyes often generally. What I would say is I don't know that it's as much as the market doesn't understand it. I would say that energy has lost the benefit of the doubt broadly. Whenever you're trying a new strategy, it's proven. You know what? That is great. Like that is great for us. I mean, again, you look at the operated partnership, we're still in between 2024 and 2025, right? This isn't material yet if you're an investor looking at actual results.
When you see at 2025, if we're able to achieve the 7,000 barrels a day just from that program, if we are able to grow that, you know, nearly double it again next year, we're proving it. I love that because we've built up, I believe, we've built up folks that are in the wings, if you will, that are watching the story. I think they say what we're doing is different, but they want us to prove it. That's a great spot to be because so long as we prove it, which we believe we can, and you can look a [4-and-4] filings, we're personally putting our money where our mouth is. We're out there buying shares as well that we believe in this.
I believe that once we prove it, we will really start to see the benefits of that from shareholders actually converting them from interest to buyers and owners.
Perfect. Probably the right way to end it. We are a little over time. I'd like to thank everyone for joining us for the presentation. Luke, any closing comments before we wrap this up?
I just want to reiterate, thank you so much for joining again. For a small cap company that's still nascent in the public space, there's nothing more meaningful than getting an opportunity to chat with investors. Thank you to Sadodi. Thanks, Steve, for putting this on. Thanks to everyone for your time. It's valuable to us. Please don't ever hesitate to reach out if we could share more about what we're building over here at Granite Ridge.
Fantastic.
CEO, Luke Brandenberg of Granite Ridge Resources. Hope everyone found the half- hour as informative as I did. Hope everyone enjoys the remainder of the conference. Thanks, Luke.
Great. Thanks, Steve.