Thank you, Errol. Good morning, everyone. Thank you for joining us today. Thanks to Three Part Advisors for putting on yet another outstanding event. We're really glad to participate this year and appreciate everybody's interest. Let's see if this works. Yep. Okay. It is my pleasure to present on behalf of Granite Ridge . As he said, my name is James Masters, the Vice President of Investor Relations at Granite Ridge . I've spent my entire career in oil and gas finance and investor relations, and I've seen up cycles. I've participated in the down cycles, and I can honestly say I've never worked for a company quite like Granite Ridge . This company, as I think you'll see, is tailor-made for the macro environment that we're in right now. We're creating shareholder value through smart investing, disciplined capital allocation, and steady growth in the U.S. energy development space.
What I want to do today is walk you through who we are, the macro backdrop that we currently see, frankly, why do we exist, and how do we invest? At the end of that, I want you to see why we believe Granite Ridge is so well positioned for the current market. My goal is to keep this straightforward, but also give you a feel for the conviction that we have in our strategy. As we move into the presentation, I want you to take away this: at Granite Ridge , our vision is very simple. It's to become the leading public investment platform for U.S. energy development. How do we get there? We get there by investing alongside proven high-quality management teams to capture undervalued near-term opportunities.
By doing so with discipline, every project we underwrite delivers or is aimed to deliver a greater than 25% full-cycle return. This discipline has fueled asset growth over time, and importantly, it's paired with two principles that we never compromise: one, a commitment to the dividend, and two, a strong balance sheet. For us, those are the pillars of value creation. Granite Ridge strategy is simple, it's repeatable, and it's disciplined. We invest for returns, we protect the balance sheet, and we share value with our shareholders. When you think of Granite Ridge , I want you to think diversification. For a small-cap producer or frankly a small-cap company in any sector, diversification is a big edge. It gives us optionality to invest in good markets and bad, and provide a natural balance and a hedge against volatility.
We're also diversified across six premier basins with 65 operating partners, but we're also concentrated where it counts in the Permian Basin. Nearly 2/3 of our second quarter production came from the Permian, which is the heart of U.S. energy growth. I'd like to also point out that our commodity mix is 50% oil and 50% natural gas, which gives us tremendous optionality throughout the commodity cycles. I'd like to ground you with four numbers when it comes to Granite Ridge Resources, because these four numbers tell you a lot about who we are. Number one is growth. You'll see in that top left box, production growth of 28% year- over- year. Our production guidance reflects that. We raised our full-year production guidance after the second quarter earnings by 10%. We've been seeing tremendous results in our operating portfolio.
Alongside that production growth is significant cash flow growth year- over- year. Next is the balance sheet. We've been growing significantly, but we are laser-focused on maintaining a rock-solid balance sheet. Our leverage ratio right now is 0.8x net debt to trailing 12-month EBITDAX, and we have a comfort level there at 1-1.25 . We feel like we are underleveraged relative to our target and underleveraged relative to our peers. Third, yield. Our fixed dividend today represents about an 8%–9% dividend yield. Finally, value. We're trading at just a little over 2.6x this year's EBITDA. Put together, that's growth, that's balance sheet strength, it's yield, and it's value, all in one package. That combination is rare in small-cap energy companies, no matter the industry. Let's zoom out. I said I was going to talk about the macro backdrop.
If we're going to fashion ourselves in an investment platform, I'd like you to know why we think we exist. Why does it matter in today's market? We're not an oil and gas producer as traditionally defined, and we look at the market and we're trying to find opportunities for our investment thesis to move forward. I want to make this very clear, we are U.S. energy bulls, and the next three slides will show you why. First, activity levels in U.S. shale have dropped meaningfully since 2022. Rig counts are down, frac spreads are down, and both remain well below pre-COVID levels, 30% lower in U.S. rig count and 45% lower in frac spreads. Activity is simply not keeping pace with what we saw a few years ago. When activity stays low for this long, supply follows, which is why we're seeing U.S. supply growth has stalled.
Second, reinvestment rates are rising. In other words, it's taking more capital to hold production flat. That tells you something about the quality of the asset base industry-wide. It's deteriorating. Third, well productivity is declining. This is one of the industry's worst kept secrets over the past several years, and the data is now confirming what I think everybody was whispering about over the last several years. Tier one inventory is getting drilled out. Tier two and Tier three is really what's left, and those wells simply don't perform the same as the Tier one inventory did. Put it all together, what do you have? You have less activity, you have higher reinvestment rates, and you have lower well productivity. That's a recipe for an undersupplied market and higher commodity prices. What does that mean for Granite Ridge ? We think that means opportunity.
While others are pulling back, we are investing. We focus on short cycle development with clear line of sight to returns. We underwrite to 25% IRRs, and we consistently hit those marks. While the industry contracts, Granite Ridge is growing by double digits. I want to move on to what we do. Let me make this very simple for you because we don't look like a traditional oil and gas company, but in a lot of ways we do. Our assets generate cash flow. We have over 3,100 gross wells across the country, and that generates as of 2024 over $300 million of cash flow. Our deal engine is robust. We have a vigorous business development process. Last year, we screened over 650 transactions, and we have a tremendous lens into U.S. onshore deal flow.
We allocate capital based on the highest risk-adjusted rate of returns, as I said before, targeting a greater than 25% full cycle return. We prioritize our shareholders. We offer a fixed dividend. We're driving significant production and cash flow growth, and we're doing it all with conservative leverage, less than 1x net debt to EBITDAX. That's it. It's four steps. It's very simple. We generate cash, we screen opportunities, we invest with discipline, and we return value. Wash, rinse, and repeat. It's simple, but it works. How do we invest? We've talked about why we invest, we've talked about how we do it, and now, drilling down a little bit more, we have two strategies. The first strategy is operator partnerships, and the second is traditional non-op. Now, I want to break this down very simply.
Operator partnerships are controlled investments with proven value creators in their area of expertise. Think of it as asset-level private equity. We enter into asset-level partnerships with these operators. We fund the majority working interest in a development project, and we retain control over the spending and the timing. Our partners operate, but we control the capital. That's about control, and it's about pace. It's about timing. Traditional non-op is different. Traditional non-op are minority working interests in core areas managed by blue chip operators. If you remember the first slide, we had a number of logos on that slide of many companies that you recognize. This is about diversification. It's about taking small slices of thousands of wells across the country. This gives us breadth, and it gives us balance. You can think of it this way: operator partnerships gives us control, whereas non-op gives us diversification.
Or said even another way, operator partnerships is our growth engine, and non-op is our cash cow. How's it going? What does this look like for Granite Ridge , our track record? I'll show you my favorite slide. Since 2017, Granite Ridge has delivered a 47% compounded annual growth rate in production. Over that entire period, the company's leverage has never exceeded 1x net debt to EBITDAX. That's extraordinary in the oil and gas sector. Many companies have grown, but they loaded up on debt. Others stayed conservative, but they didn't grow. Granite Ridge has done both. We have strong growth, we have disciplined leverage, and I think that's proof that our model works. Moving on to capital efficiency, this is a word you're going to hear in the oil and gas sector. It's certainly significant to us and all of our peers.
I want to demonstrate that for the last nine consecutive quarters, our development CapEx has stayed under $80 million. At the same time, our production has grown at a 17% CAGR. Said another way, our production is growing faster than the capital that is required to maintain flat production. This we believe is the recipe for our value creation. That wedge between the maintenance CapEx and the actual growth is where we see the value getting created. Over time, that's going to compound into significant shareholder alpha. That's why we talk so much about capital efficiency. It's not just a buzzword, it's the math behind long-term value creation. As we move on to Slide 11, we want to talk about consistency. Efficiency is key, but we believe consistency matters too. Granite Ridge has invested more than $1 billion in oil and gas development over the past decade.
Through up cycles and down cycles, and through it all, our strategy has remained the same. We keep deal sizes small, well under $10 million on average, which means we don't take concentration risk. We don't bet the farm on one deal or one basin. Instead, we compound results deal by deal, cycle by cycle. This is how we've built Granite Ridge over the past decade into what it is today. It's disciplined, it's repeatable investing. Let me talk a little bit more about operator partnerships. It really is, as I said, the growth engine for Granite Ridge as we move forward. I want to create kind of an understanding of the backdrop as to why the company evolved its strategy into the operator partnerships. This slide shows a significant decline in private equity fundraising for natural resources over the past decade.
As you see on the left plot, upstream private equity fundraising for natural resources has collapsed. Whereas 10 years ago, they were averaging $25 billion of private equity capital raised per year, over the last three, it's $8 billion of capital for the natural resources space. That's a 70% decline in fundraising for oil and gas development. On the right-hand side, you see far fewer teams receiving private equity fundraising. If 10 years ago you were averaging over 100 management teams funded per year to capture oil and gas development opportunities, today it's less than 20. That's an 80% decline. That has left a significant gap in upstream oil and gas development, and we believe that has created a significantly compelling opportunity for operated assets, and we have stepped in to fill that gap.
In our second quarter results, we announced two of our newest operating partners, and we've been very excited to begin to demonstrate and talk about their results. We've partnered with Admiral Permian Resources in the Delaware Basin and Petro Legacy Energy in the Midland. With Admiral, we've invested nearly $180 million of development capital across 38 wells and have generated right at our target return, 24% full cycle IRR. Admiral now represents about 7,000 net BOE per day to Granite Ridge, which is approximately 22% of our total production. They're running a two-rig drilling program with significant inventory ahead. Petro Legacy is a little bit earlier stage. They're focused on the Northern Midland Basin, but spudding their first four wells this month with 16 more expected in 2026. Both Admiral and Petro Legacy are proof that this model works.
We provide the capital, they provide the operational expertise, and together we're creating significant value. We're not stopping there. We've recently signed two more partners, both confidential for now, but they will be expanding their footprint also in the Permian Basin. Why does this matter? We think it's a unique opportunity. Entry costs are compelling, returns are strong, and the competition for capital is low. This is the best environment for upstream investing that Granite Ridge has seen in years, and we're taking advantage of it. As I move to the next slide, this is a bit of a drill down into Admiral and Petro Legacy. You see the net locations acquired over the past four quarters. We've gone from 14.5- 52 in just four quarters. I look forward to giving this presentation again in a quarter or two.
You're going to see that continue to go up and to the right. Net production in the middle, as I said, about 7,000 barrels a day net to Granite Ridge. Petro Legacy will begin to add production here. In future quarters, you're going to see another color on this plot as we drive additional value from Petro Legacy's efforts. Very excited about the momentum that we're seeing from these two operators. As I said, the two confidential partners, we look forward to making known who they are here in subsequent quarters and seeing their contributions as well. I want to be clear, we have not left the non-op market. We still believe it's a significant opportunity for Granite Ridge. The space is really a massive opportunity set. In 2024, about $105 billion was spent on U.S. shale.
Roughly a quarter of that was non-operated working interest capital, which is a huge opportunity, a huge market for Granite Ridge to exploit. We continue to dedicate about 40% of our budget to non-op. We evaluate deals every week. We focus our capital in areas where we see strong returns, particularly the Delaware Basin in the Permian and the Utica Shale in Appalachia. Non-op remains a core strength because it is exposure to hundreds and hundreds of wells managed by top operators where we don't take on any concentration risk. We'll continue to invest significantly in non-op, but really the growth engine, as I mentioned, remains in the operator partnerships. How's it all going? How do we stack up against our peers?
Granite Ridge has has been public for about three years, so we're probably one of the newer entrants on this chart, but we're really pleased with how we stack up. Amongst the small-cap energy universe, Granite Ridge is top quartile across return on capital employed, production growth, leverage, and dividend yield. We're only three years into being a public company, as I mentioned. We're really proud of this performance. We think it's differentiated, and the proof is in the pudding on kind of the investment thesis and the operational efforts that we've undertaken. Looking at 2025, we are really shaping up to have the strongest year of our company's history. We expect to close more than 50 deals this year, expanding our inventory by 74 net locations, which at current drilling pace is approximately three years of inventory. We've seen a very robust business development pipeline.
Transactions have been very exciting and attractive for our deal engine. Our capital allocation remains consistent, about 70% to development, 30% to acquisitions, and nearly everything comes through proprietary deal channels. You'll see in that chart on the left, our marketed deals account for less than 5% of our closed opportunities. We have a very rigorous process and significant business development efforts across the country. I'd like to point out too that no single deal contributes more than 20% of our budget. That means diversification and risk management all built into the overall acquisition budget. We expect in 2025 production of about 32,000 BOE per day, which is up 28% year- over- year on $410 million of total capital. Two-thirds of that will go to operator partnerships with the Permian Basin, specifically the Delaware Basin, at the center of that activity.
This outlook gives us confidence that Granite Ridge will continue to deliver growth, yield, and value for our shareholders. Let me close with this. Granite Ridge doesn't look like your typical E&P company, and that is by design. We're an investment platform built for scale, diversification, and disciplined returns. Our diversified asset base and two-pronged strategy gives us balance and a natural hedge against market volatility, and our strong balance sheet and liquidity allow us to invest through the cycles. Finally, our fixed dividend reflects our commitment to sharing value with our shareholders while we grow the asset base. In short, I'd like to leave you with Granite Ridge means growth, it means yield, it means value, all backed by financial discipline. Thanks for your time. Appreciate your interest in Granite Ridge, and thank you again to Three Part Advisors for the opportunity to present today.
With that, I'll open the floor to questions, and thank you for your interest. Yes, sir.
In your operator partnerships, what kind of wells do you get in from them? How does that all work? How much comes to Granite Ridge?
You bet. The way the operator partnership model works is think of it as an asset-level partnership with a private operator. We sign what's called a JDA with them, and it's basically a J oint Development Agreement. We have a ROFR on basically anything that company looks at. They have to bring it to us first. We go through our traditional underwriting process. We ensure that whatever project that this company has brought to us is going to net a 25% full-cycle return to Granite Ridge . If we agree with them and we go out to fund that project, we'll take anywhere from 90%- 95% of the working interest of that project. Our partner will put in the rest. I call it a $100 million project. That's significant capital for our partners.
We're looking for proven management teams that have built and flipped oil and gas assets in their area of focus for private equity, typically. They have significant of their own personal wealth to put into the project. We'll fund the lion's share of it. Generally, the way it works is there's an ROI hurdle that once that management team or once the project has hit that ROI hurdle, they revert into a certain proportion of our majority working interest. We basically take that as a tranche-by-tranche investment cycle. It keeps our management teams engaged. It keeps them looking for opportunities and building out inventory and opportunities for themselves and for Granite Ridge .
there no other burdens other than the landowner quality that this company does?
Yeah, that's correct. It really is the working interest is where our relationship kind of begins and ends. We take our proportionate percentages of the project, as does the operator, and then they back into a piece of ours once we hit an ROI hurdle. Yes, sir.
You explained something about, unless someone's familiar with how all these smaller LinkedIn fund companies operate here.
Sure.
Debt goes up every quarter. Is that like how the states work? Like every quarter, debt goes up and up and up. Do you ever pay it down or?
Yeah, no, that's a good question. As I said before, you know, I've been in the industry for 20 years, and that's typically been the model, is debt goes up and up and up. That doesn't usually go down. No, but I think Granite Ridge , you know, we are investing for scale right now. We believe that that's kind of our number one priority, to get bigger and see some of those economies of scale. We're going to continue to outspend cash flow until we get to that target leverage profile of 1-1.25x net debt to EBITDA. We're at 0.8x right , so we feel like we've got some room there. Really, we're just going to continue to do that until we get to that level, and then we'll probably moderate spending.
Also, you know, our cash flow is going to continue to grow pretty significantly between now and then. As far as paying back that debt, you know, I think we're going to feel really comfortable in that one to one and a quarter time turn of leverage. I don't foresee us, you know, really pushing that down again. We'll get to that level, and we'll stay there and live within cash flow.
I'm doing this story, so forgive my ignorance. You own the land, and then the other people drill up?
We lease the acreage. Yes, you are acquiring leasehold. With our partners, they come in with the operational side of the business and run the rigs and develop the asset. I'm sorry? Yes.
There was a slide you had where they had bar graphs where you had percentages and what your competitors are doing to who your main competitors are. That graph where you have growth and yield.
Yeah, great question. What's on this slide are small and mid-cap oil and gas producers. I would say none of these companies have the business model that is unique to Granite Ridge. These are all generally oil and gas producers that have a defined area of development, whether it be the Permian or the Utica or other areas. They're typically the operator that are running the rigs and the frac crews to develop the oil and gas asset. That said, I will say two of the peers on this list include Northern Oil and Gas and Vitesse Energy. They're more of a traditional non-operated oil and gas producer. They, like our one strategy, basically take minority working interests in projects under more established operators. That's kind of their traditional business model.
You've got the blind side of the Admiral mill and the legacy kind of future location center. Then drill, and then it sounds like you're just is there a defined game of life to do those arrangements when they plan?
Yeah, so good question. Admiral and Petro Legacy are kind of in their, I'd say they're still right in the middle of their business development efforts. Admiral s' strategy is to be a solution for the larger operators in the Permian Basin. If they need to flip out of acreage or, you know, get a rig to work because they're going to lose a package, Admiral comes in with kind of sharp elbows and a pretty commercial strategy to secure inventory. They've done a tremendous job with that. As you saw on this slide, they have about 42 net locations acquired to date. As I said, by the end of this year, this chart's going to look a lot different, close to probably double this bar on the 6/30. Admiral s' has secured a tremendous amount of inventory.
They're running two rigs to develop that. Petro Legacy is a little bit more earlier stage than Admiral , but they're working to secure their own wedge of inventory. As far as what's the end game, I think that's the neat part of the operator partnership model. If you think of the private equity closed cycle fund idea, people have to sell within three to five, five to seven years. That's not the way this works. At the working interest asset level perspective, Admiral Permian Resources owns its company. Petro Legacy owns its company. They don't have a private equity overlord telling them when to sell, even if it's not the right time for them to sell their assets. If they want to hold those assets for the next 50 years and give them to their grandkids, they're certainly welcome to do that.
If they want to sell, and they get an attractive multiple, Granite Ridge would be happy to sell alongside them. We're really partnered on the asset development. As far as the corporate direction of those companies, that's entirely up to the management teams.
Yes. What is your staff conceptual, and what's the factor to see some value add about people going to the company?
Yeah, great question. I'd say Granite Ridge looks very much like an operator. You have geologists, you have engineers, you have landmen. What you don't have is the operational element of it. We don't have operations engineers, we're not running rigs, but we are underwriting and evaluating these projects just like an oil and gas producer would. As I said, last year we had 650 deals reviewed in our typical weekly process. I think the number is 1,100 since the beginning of 2024. It's really a deal shop that's evaluating these projects. With 3,000 gross wells across the country, it's a massive data set to be able to look at the opportunities that come through and be able to run analysis and understand what areas are like, what areas we don't, what new well designs are showing increased economics and results.
I would say our G&A budget looks a lot like an operator without the operational piece. The nice thing about that is we have the opportunity to scale really significantly without adding a lot of people. That's going to stay pretty static as we grow because our business truly is a deal engine evaluator and an allocator of capital.
Yes.How many of these properties that Admiral and Petro have, is there very many in the way of format to where?
It's both. I'll say that the Delaware Basin is basically blocked up by seven major operators, so there really isn't a lot of opportunity to go out and organically lease high Tier one level acreage. There is significant opportunity for, we call them special forces. They're really in there, they have the relationships, they're from Midland, and they're, like I said, have pretty sharp elbows and are trying to make deals where maybe others that have more of a static approach aren't able to do. They have a lot of the relationships at Conoco and Chevron and these big operators. When they need a well drilled or a package done and they just don't have it on the drill schedule, Admiral's one of their first calls to figure out how they can make a trade or how they can swap into and out of opportunities.
By taking singles and doubles approach, they've been able to aggregate a fairly nice asset position to begin to develop.
Thank you. Tier one, that's where it is to client.
Yeah.
Tier two, whatever may not be economically attractive to you, those who support maybe 8% of the [audio distortion]
That's an outstanding point. One I'm really intrigued by in this current macro environment because, you know, you see a lot of these companies that have made significant acquisitions over the past five years, and frankly, a lot of them massively overstated the value and the quality of their acreage position. There's a clip of Scott Sheffield at Pioneer basically admitting that, you know, most of their acreage is not, is no longer T ier one, it's Tier two, only a few years after he boasted the most Tier one inventory in the Permian Basin. As I said, that's kind of been the worst kept secret in oil and gas.
I think as we take more of a short cycle development approach and we're calibrating everything to that 25% IRR full cycle, we can, we're in some ways happy to get into a Tier two inventory because we've already calibrated that entry cost. For us, it really is trying to find opportunities to see short cycle line of development, line of sight to development, calibrated at that entry cost and solve problems for these bigger operators that have all that inventory, don't know what to do with it.