Granite Ridge Resources, Inc. 2026 Q2 Earnings Call

Good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Tyler Farquharson, our President and Chief Executive Officer, who will review the quarter's results and company strategy. He'll then turn the call over to Kyle Kettler, our Chief Financial Officer, to review our financial results in greater detail. Tyler will then return to provide closing comments before we open the call for questions. Today's conference call contains certain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied. We ask that you review the cautionary statement in our earnings release. Granite Ridge disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Accordingly, you should not place undue reliance on these statements. These and other risks are described in our press release and our filings with the Securities and Exchange Commission. This call also includes references to certain non-GAAP financial measures. Information reconciling these measures to the most directly comparable GAAP measures is available in our earnings release on our website. Finally, this call is being recorded. A replay and transcript will be available on our website following today's call. With that, I'll turn the call over to Tyler.

Thank you, James. Good morning, everyone. Let me start with the most important takeaway. 2026 is the last year we plan to invest ahead of our free cash flow. Every dollar we are putting to work is building towards the free cash flow inflection we have laid out for 2027. This quarter advanced that plan on the fronts that matter most. We brought new wells online. We added high return inventory to feed our growth. We kept our balance sheet strong while maintaining our dividend. The quarter's numbers reflect that progress. Production was 32,044 barrels of oil equivalent per day, 51% oil, and we generated $79.6 million of adjusted EBITDA with strong early results from the 7.2 net wells we turned in line late in the quarter. The real story is not the quarter, it's the trajectory.

We are getting closer to that inflection. We are executing the plan to get there. Our operated partnership platform continues to be the standout. The advantage starts with how the deals are sourced. Through Admiral Permian Resources and our other operating partners, we fund development on acreage that is captured through our partners' own leasing, ground game, and operator relationships, rather than competing for it in broadly marketed packages where prices get bid up. Because we bring the capital and our partners bring the operational footprint and the local deal flow, we see opportunities that never reach an auction. We underwrite each one directly to our return threshold before we ever commit a dollar. That is what lets us add inventory at entry cost well below what marketed deals command. Unlike a traditional non-operator, we control the pace and the capital.

We are not simply along for the ride on someone else's drilling schedule. We capture operator-level economics and inventory without carrying a full standalone operating cost structure. That combination, proprietary sourcing plus real control, is what separates us from a passive non-op and is difficult for others to replicate. During the quarter, we closed 27 transactions, primarily across the Permian and Utica for $28 million, including future carry obligations. We added 21.9 net undeveloped locations to our inventory. We ended the period with 175 gross, or 14 net wells in process. Let me put one of those deals in context, because it really shows what our flagship operating partner, Admiral, actually does. Large public producers in the Permian regularly end up with development work that must get done well and on a firm timeline, but that does not fit neatly into their own rig schedule or capital plans.

Rather than pull their rigs and crews off other priorities, they hand the work to a partner who can execute it for them. Admiral is that partner. We provide the capital behind it. In the first half of the year, Admiral took on a project for a large Permian operator that called for nine long lateral wells, each stretching 10,000 to 15,000 feet, or roughly two to three miles. All of which had to be drilled, completed, and producing by the end of 2026. That is a very aggressive schedule. Using two rigs Admiral already had running, they folded the project into their existing program and built the facility and infrastructure plan to hit the deadline. We believe that ability, taking on a large, complex development and delivering it quickly and reliably is what make operators want to work with Admiral. It is a differentiated strength of the partnership.

This is exactly the repeatable, high-graded deal flow the platform was built to generate. Our sourcing funnel did exactly what it was built to do in the first half of 2026. We reviewed 363 opportunities, advanced 84 to underwriting. We closed 44, a conversion of about 12% that shows we are holding our screening discipline in the face of abundant deal flow. Our operator partnerships did the heavy lifting, driving about 78% of our first half deal capital, led by Admiral in the Delaware, alongside a steady non-operated ground game that layered in smaller, high return interest in the Utica. This is the low-cost inventory replacement we have built this company around. We are adding high-quality locations faster than we drill them at entry costs that support returns above our 25% threshold at the strip. Two items worth addressing directly. Both are ones we understand and are actively managing.

First, lease operating expense. For the second quarter in a row, LOE ran above plan, driven primarily by water handling in the Permian and by higher early life cost on our newer pads. We are resetting our full-year LOE guidance higher. Kyle will take you through the new range and the path we see toward lower per unit costs as second half volumes come online and our newer areas mature. Second, natural gas. Permian realization stayed soft this quarter on continued Waha basis weakness, which we expected. The more important point is what is happening underneath. New takeaway is finally catching up to Permian gas supply. The Hugh Brinson Pipeline began moving gas midyear and continues to ramp towards full service, with additional large-scale capacity following behind it. Waha prices have already firmed off their lows as these projects have come online.

Supply also keeps growing, we're not calling the problem solved, Permian takeaway is clearly improving, and as that basis firms, we expect our natural gas revenue to strengthen throughout the back half of the year. We have hedged our basis through the first quarter of 2028, protecting our downside risk. Neither item changes our trajectory, both are moving in the right direction. Let me also give you our read on the macro because it frames how we are built to compete. Public markets are largely pricing oil to revert to a lower long-term level, energy equities broadly reflect that skepticism. We do not need to win that debate to win. We underwrite every acquisition and every operator partnership well at the strip to a full cycle return above 25%.

If prices simply hold near current levels longer than the market expects, that is upside embedded in our portfolio that we did not pay for. If prices fall, our hedge book protects our cash flow, our balance sheet and our dividend. Beyond our hedges, the program itself is built to flex in both directions. Given the macro uncertainty, we believe this flexibility is critically important. If oil were to weaken and hold below roughly $65, we could pull back an estimated 40%-50% of our development budget while protecting our base business and our dividend. If conditions warranted leaning in, we have the ability to accelerate. Every incremental well still has to clear our full cycle return hurdle at the strip before we fund it. That discipline is what lets us stay on offense through a volatile tape instead of reacting to it.

Stepping back, our strategy is working. Our traditional non-operated business continues to generate steady cash flow from an asset base that affords diversification and optionality, while our operated partnerships are compounding our inventory and our growth. We are in a position of strength, every dollar we are deploying is building that base that carries us towards our 2027 framework: durable growth, double-digit free cash flow yield, and a sustainable dividend. Let me be specific about why 2027 is the term. The capital we are investing this year builds a production base that steps up meaningfully next year. As those volumes come online, covering gas realizations and lower per unit costs widen our cash margins. Our free cash flow grows faster than our capital program.

That combination, more production at wider margins against a roughly steady level of investment, is what converts this year's outspend into sustainable free cash flow in 2027. That is the inflection. Everything we did this quarter advanced it. As our free cash flow builds, we expect to keep our balance sheet strong with leverage trending lower as our cash flow grows while continuing to deploy capital into high return acquisitions. With that, I'll turn it over to Kyle.

Thank you, Tyler, and good morning, everyone. We had a solid quarter financially with strong cash generation and a balance sheet that gives us real flexibility. Oil and natural gas sales were $149.3 million. On a GAAP basis, net income was $30 million, or $0.23 per diluted share, up from $0.19 a year ago. Adjusted net income was $11.1 million or $0.09 per diluted share. Adjusted EBITDAX was $79.6 million, up from $75.4 million a year ago. We generated $55.6 million of cash flow from operations or $69.5 million before working capital changes. Our unhedged realized price was $51.19 per BOE and $43.39 per BOE, including hedged settled derivatives. LOE was $30 million, or $10.27 per BOE. This compares with $9.57 per BOE during the first quarter. Combined for the first half of 2026, LOE was $9.91 per BOE.