Executive Summary / Key Takeaways

• Granite Ridge Resources is strategically evolving from a traditional non-operated model to a "Publicly Traded Private Equity" approach, blending non-op diversification with operator-like control and higher return targets through Operated Partnerships.
• The company delivered strong Q1 2025 results, with production up 23% year-over-year to over 29,000 BOE/d, driven by both traditional non-op outperformance and significant growth in the Operated Partnership program, leading to improved per-unit costs and operating margins.
• GRNT is reaffirming its 2025 guidance, targeting 16% production growth at the midpoint (58,000 BOE/d) with a base capital budget of $300-$320 million, allocating approximately 60% to its higher-control Operated Partnerships.
• A robust balance sheet, including a recently increased $375 million borrowing base and low leverage (0.7x net debt to EBITDAX), provides significant liquidity and flexibility to navigate market volatility and potentially accelerate future development.
• The company maintains a fixed quarterly dividend of $0.11 per share, offering a compelling yield, and views conservative leverage as a tool to accelerate accretive growth and cash flows beyond what could be funded solely by cash flow after the dividend.

The Evolution of Granite Ridge: From Private Roots to Publicly Traded Private Equity

Granite Ridge Resources traces its origins back to 2014, operating initially as a private oil and gas investment firm. Over a decade in the private arena, the company cultivated a diversified portfolio, acquiring interests in over 3,100 wells across six prolific unconventional basins in the United States. This history instilled an investment-driven approach to oil and gas development, characterized by rigorous underwriting and a blend of non-control and controlled investment strategies.

The company's transition to a publicly traded entity in October 2022 marked a new phase, bringing enhanced liquidity and visibility. While its foundation remained rooted in a substantial traditional non-operated portfolio, Granite Ridge recognized a shift in the market landscape. Increased competition in the non-operated space, coupled with an exodus of private capital, presented opportunities for higher returns in smaller, controlled deals. This insight catalyzed a strategic pivot, leading to the formalization and expansion of what the company now terms "Operated Partnerships."

This strategic evolution is not merely a change in terminology but a fundamental reshaping of the business model. Granite Ridge aims to bridge the gap between traditional non-op and operated E&P companies. By partnering with proven operators and holding a majority working interest, Granite Ridge gains significant control over capital allocation, development timing, and well design – capabilities typically reserved for operators. This model, which management describes as "Publicly Traded Private Equity," leverages the agility and investment acumen of a private equity firm within a public structure, targeting full-cycle project rates of return of 25% or better. This differentiated approach is viewed as a competitive advantage, allowing Granite Ridge to access opportunities and structures that may not be available to traditional players.

In the competitive U.S. oil and gas landscape, dominated by large independents like EOG Resources (EOG), Occidental Petroleum (OXY), Devon Energy (DVN), and ConocoPhillips (COP), Granite Ridge operates at a significantly smaller scale. While larger peers benefit from massive scale, integrated operations, and extensive R&D in physical drilling/completion technologies, Granite Ridge's competitive edge lies in its specialized investment model and underwriting capabilities. Its "technology," in this context, is its ability to identify, underwrite, and structure these Operated Partnerships, leveraging an extensive proprietary data set built over a decade. This allows for potentially faster entry into niche plays and a more targeted approach to risk management compared to the broader strategies of larger E&Ps. For instance, early Operated Partnership projects have demonstrated CapEx coming in approximately 15% under budget, and the model targets IRRs significantly higher than typical non-op returns. While larger competitors may achieve greater efficiency through scale (e.g., potentially lower per-unit operating costs or faster drilling times across vast programs), Granite Ridge's model aims for superior returns on a project-by-project basis and greater control over its capital deployment pace, mitigating some of the timing risks inherent in traditional non-op. The company's ability to use its existing acreage positions as currency in trades also provides a unique tool for capturing inventory compared to purely cash-based competitors.

Performance Reflecting Strategic Execution

The strategic emphasis on Operated Partnerships, alongside continued strength in the traditional non-op portfolio, is beginning to translate into tangible results. The first quarter of 2025 demonstrated strong performance, exceeding internal projections. Total revenue increased by a notable 38% compared to the same period in 2024, reaching $122.9 million. This was primarily fueled by a 23% year-over-year increase in average daily production, which climbed to 29,245 BOE/d.

Breaking down production, oil volumes saw a significant 39% jump to 14,752 Bbl/d, while natural gas production increased by 10% to 86,960 Mcf/d. This growth was a direct result of both traditional non-op wells coming online earlier than anticipated or outperforming expectations, and substantial volume contributions from the burgeoning Operated Partnership program. Management highlighted that one Operated Partnership in the Delaware Basin alone has increased its gross daily operated oil production by 400% over the past year, reaching approximately 10,000 barrels per day.

The increased scale and production volumes contributed to improved cost efficiency. Lease operating expenses (LOE) in Q1 2025 were $6.17 per BOE, a 13% reduction compared to Q1 2024. This per-unit cost improvement, alongside higher revenues, drove an expansion in the operating margin from 83% to 87% year-over-year. General and administrative (G&A) expenses also benefited from scale, decreasing 5% per BOE to $2.84.

Financially, this operational strength resulted in adjusted EBITDAX of $91 million and adjusted net income of $28.9 million, or $0.22 per share, an 89% increase year-over-year. Operating cash flow before working capital changes stood at $86.7 million. While the company recorded a loss on commodity derivatives ($14.9 million) due to mark-to-market changes and saw increased interest expense ($5.0 million) due to higher debt balances, the underlying operational performance remained robust.

Capital allocation in Q1 2025 reflected the strategic priorities, with $66.7 million invested in drilling and completions and $34.7 million in acquisitions, primarily focused on building inventory within the Permian-focused Operated Partnerships.

Outlook and Strategic Trajectory

Looking ahead, Granite Ridge is reaffirming its 2025 guidance, signaling confidence in its strategic execution and asset base despite prevailing market volatility. The company projects average daily production for the year to be between 58,000 BOE/d at the midpoint, representing a substantial 16% increase compared to 2024. Oil is expected to constitute approximately 52% of this production mix.

The capital budget for 2025 is set at a base case of $300 million to $320 million. This decision to proceed with the base case, rather than a previously considered accelerated scenario, was explicitly linked by management to recent market volatility, particularly the fluctuations in hydrocarbon prices. Approximately 60% of this planned capital expenditure is allocated to the Operated Partnership program, underscoring its central role in the company's growth strategy. The remaining capital is directed towards high-graded opportunities within the traditional non-op portfolio.

Management anticipates Q2 2025 production to remain consistent with Q1 levels, with a modest increase expected in the second half of the year as new wells from the capital program come online. Capital spending in Q2 is projected to be broadly in line with Q1, with a more measured pace planned for the latter half of the year.

The company's financial flexibility remains a key strength supporting this outlook. As of March 31, 2025, liquidity stood at $90.8 million. Subsequent to the quarter, on April 29, 2025, the borrowing base and elected commitments under the Credit Agreement were increased from $325 million to $375 million, boosting pro forma liquidity to $140.8 million. With $250 million of debt outstanding at quarter-end, the company maintains a conservative leverage ratio of 0.7x net debt to adjusted EBITDAX, well below its stated target range.

While the base budget is set, management noted the potential for an additional $60 million to $80 million in development CapEx in 2025, weighted towards the fourth quarter. This potential acceleration is contingent on market conditions and funding availability and would primarily impact production growth in early 2026 rather than significantly altering the 2025 trajectory. The company is evaluating various non-dilutive debt financing options to potentially fund such acceleration.

Granite Ridge also continues its commitment to returning capital to shareholders through a fixed quarterly cash dividend of $0.11 per share. Management views this dividend, which offers a compelling yield, as sustainable alongside mid-to-high single-digit production growth from cash flow. The use of conservative leverage is framed as a means to fund the accelerated growth (targeting mid-teens) and bring forward cash flows.

Risks and Considerations

Despite the positive outlook and strategic momentum, Granite Ridge faces inherent risks common to the oil and gas industry, as well as specific challenges related to its business model. Commodity price volatility remains a primary concern, directly impacting revenues and the economics of future drilling opportunities. While the company utilizes diversification across basins and hedges approximately 75% of its production through 2026 to mitigate this risk, significant price declines could still necessitate adjustments to capital spending plans, as evidenced by the decision to adopt the base case budget for 2025 and the identification of deferrable CapEx.

As a non-operator for a significant portion of its portfolio, Granite Ridge remains dependent on the operational decisions and execution of third-party partners. While the shift to Operated Partnerships provides greater control, it still relies on the capabilities of the operating partner teams. The company's concentration of assets in specific basins also exposes it to regional factors like infrastructure constraints or regulatory changes.

Geopolitical risks, including ongoing conflicts and trade policies such as tariffs, could impact global energy markets and potentially increase operating costs, although management does not currently anticipate a material impact on cash taxes or income tax expense from recent U.S. tax law changes like the Inflation Reduction Act.

The inherent uncertainty in reserve estimation also presents a risk, as revisions could impact future production forecasts and asset valuations. Furthermore, while the company's unique "Publicly Traded Private Equity" model is seen as a strength, gaining broader market recognition and achieving a potential re-rating depends on consistent execution and effectively communicating its value proposition to a wider investor base.

Conclusion

Granite Ridge Resources is executing a deliberate strategic transformation, leveraging its private equity roots and extensive data set to build a differentiated "Publicly Traded Private Equity" model. By increasing allocation to Operated Partnerships, the company is gaining greater control over its destiny, targeting higher full-cycle returns, and driving significant production growth. The strong performance in Q1 2025, marked by increased production, improved cost efficiency, and robust profitability, provides early validation of this strategy.

With a solid balance sheet, ample liquidity, and a commitment to conservative leverage, Granite Ridge is well-positioned to fund its ambitious 2025 capital program, which targets 16% production growth. The company's diversified asset base and hedging program offer resilience against market volatility, while the flexibility embedded in its budget allows for adaptation if conditions change. The fixed dividend provides a consistent return to shareholders as the company pursues accretive growth. While challenges inherent in the industry and its specific model persist, Granite Ridge's unique approach to capital allocation and partnership building presents a compelling narrative for investors seeking exposure to U.S. unconventional plays through a structure designed for both growth and disciplined returns.