Granite Ridge Resources: Free Cash Flow May Be Close To Zero In 2024 (NYSE:GRNT)

Granite Ridge Resources, Inc. (NYSE:GRNT) delivered Q1 2024 production results that were slightly ahead of expectations. Due to weaker commodity prices though, it is now projected to have around $2 million in cash burn in 2024 before dividends, while its net debt may go up by $60 million after factoring in dividends.

Granite Ridge is also looking at selling its roughly 1.1 million shares of Vital Energy (VTLE) to help pay down its debt. These shares have decreased in value a bit since I last looked at Granite Ridge, though, contributing to a slight reduction in my estimate of Granite Ridge’s value to $7.75 per share.

Q1 2024 Results

Granite Ridge’s Q1 2024 production ended up at 23,842 BOEPD, including 10,650 barrels per day in oil production (45% oil cut). This was approximately 3% lower than its Q4 2023 production, pro forma for its divestiture of some Permian assets to Vital Energy.

Granite Ridge maintained its full-year guidance for 2024 and also indicated that its Q1 2024 performance beat internal projections by approximately 2%.

Granite Ridge’s base decline rate is fairly high due to its rapid prior production growth. That contributed to its free cash flow being around negative $1 million in Q1 2024 before working capital changes.

Granite Ridge also mentioned that it closed a number of Permian oil and gas acquisitions (included in its $35 million acquisition budget) that gave it another 2.5 net locations for $6.8 million (inclusive of expected future carry). These locations are also expected to require $23 million in future development capex. Granite Ridge noted that the average price of $2.7 million per net location was higher than its target of around $2 million, but that these are also high-quality locations.

2024 Outlook

Granite Ridge also expects its oil cut to increase later in the year and potentially hit 50% near the end of 2024, so the 47% oil cut for the full-year still appears to be reasonable despite the 45% oil cut in Q1 2024.

Granite Ridge exceeded its total production expectations by 2% in Q1 2024, but also mentioned that some of its dry gas production was expected to be deferred from Q2 2024 until later in the year. It now expects roughly flat production growth during the next two quarters, with production rising in Q4 2024.

Thus, I am continuing to model Granite Ridge’s 2024 results at 24,250 BOEPD (47% oil).

Granite Ridge’s realized oil price was relatively strong in Q1 2024, although that was largely due to lumpiness, and it expects roughly negative $2 to benchmark WTI oil prices over a longer period of time. I have assumed a negative $1.50 differential for 2024, with Q2 to Q4 around negative $2.00.

Granite Ridge’s realized natural gas price wasn’t quite as strong, though, at around a 31 cent discount to Henry Hub for Q1 2024.

The current strip for 2024 is a bit over $79 WTI oil and $2.60 Henry Hub natural gas. At those commodity prices, I estimate that Granite Ridge will generate $401 million in revenues net of $12 million in positive hedge value.

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I now expect Granite Ridge to have approximately $2 million in cash burn in 2024 before dividends.

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This could result in $60 million in cash burn after dividends, which would increase Granite Ridge’s net debt to $160 million at the end of 2024. Granite Ridge’s leverage would be 0.6x, close to its longer-term target of 0.5x.

Granite’s ownership of approximately 1.1 million Vital shares is worth around $46 million currently, and Granite mentioned that it is looking to exit its position in an “orderly fashion” during 2024 to help pay down its debt. Selling that stake could reduce its leverage to around 0.4x.

Credit Facility Update

Granite Ridge’s semi-annual borrowing base redetermination was completed in April 2024, resulting in an increase in its borrowing base from $275 million to $300 million. The company’s borrowing base previously was reduced from $325 million to $275 million in November 2023.

Granite Ridge also increased its aggregate elected commitments from $240 million to $300 million. In November 2023, it had raised the aggregate elected commitments from $150 million to $240 million.

As well, Granite Ridge announced that nine new banks were added to its lending syndicate.

Granite Ridge appears to have a decent amount of liquidity with its $300 million aggregate elected commitments compared to projected year-end net debt of $160 million (before the sale of Vital shares).

Notes On Valuation

I have reduced my estimate of Granite Ridge’s value by $0.25 per share to a new estimate of $7.75 per share. This continues to be based on long-term (after 2024) $75 WTI oil and $3.75 Henry Hub natural gas.

I have reduced Granite Ridge’s estimated value due to lower free cash flow projections, with oil prices down $2 to $3 compared to when I looked at it before. I’ve also modeled its realized natural gas price a bit lower due to wider differentials.

Granite Ridge’s estimated value is also affected by Vital Energy’s shares trading at around $42 now, compared to around $54 when I previously looked at Granite Ridge. I believe that Vital’s shares have some upside from current levels, but Granite Ridge is looking to monetize those shares relatively soon.

Granite Ridge’s Q1 2024 results were solid, with production coming in 2% higher than its expectations. It didn’t change its full-year guidance (as some of its dry gas production is being deferred later into 2024), but that early performance bodes well for its ability to at least meet oil production expectations for the full-year.

Conclusion

Granite Ridge’s Q1 2024 results were solid, with production slightly exceeding expectations. Granite Ridge’s free cash flow (before dividends) is expected to be close to zero for the full-year though, and after dividends its net debt may increase by $60 million during 2024. This doesn’t include any proceeds from Granite Ridge’s potential sale of its stake in Vital Energy, though.

Future years should see improved free cash flow for Granite Ridge as its base decline rate moderates and its oil cut increases. Granite Ridge anticipates its oil cut staying above 50% in future years.

I now estimate Granite Ridge’s value at $7.75 per share. The value of its Vital Energy shares have gone down by around $13 million since I looked at it last, and weaker commodity prices have also affected Granite Ridge’s projected 2024 free cash flow.