Cost Management And Permian Expansion Will Improve Future Margins

Key Takeaways

• Increased Controlled Capital allocation and Permian Basin drilling could boost production and future revenue, enhancing operating margins.
  
• Effective cost management and oil-focused production shift may improve net margins, potentially benefiting earnings and shareholder returns.
  
• Heavy reliance on a controlled capital program and future oil production make Granite Ridge Resources vulnerable to market fluctuations and operational setbacks affecting revenue stability.

Catalysts

Operates as a non-operated oil and gas exploration and production company.

• Granite Ridge Resources plans to increase its allocation to the Controlled Capital program, which has shown better-than-expected production and reduced CapEx. This could positively impact future revenues and operating margins by enhancing efficiency in capital deployment and production growth.
  
• Expansion of drilling inventory in the Permian Basin, with a strategic focus on the Midland and Delaware Basins, is expected to drive development and future production growth, impacting both revenue and earnings.
  
• The planned increase in oil production and a shift towards more oil-weighted outputs in 2025 could significantly enhance net margins due to higher oil prices compared to gas.
  
• The company has demonstrated effective cost management with improvements in lease operating costs and G&A expenses, which are expected to support better net margins and earnings.
  
• The anticipated strong cash flow generation from 2025 production growth due to the significant capital deployed in 2024 could lead to enhanced earnings and potential shareholder returns, including dividends or share repurchases.

Granite Ridge Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Granite Ridge Resources's revenue will grow by 18.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 19.7% in 3 years time.
• Analysts expect earnings to reach $117.5 million (and earnings per share of $0.91) by about December 2027, up from $47.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2027 earnings, down from 16.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Granite Ridge Resources Future Earnings Per Share Growth

Risks

• The company's growth is heavily reliant on its Controlled Capital program, which comprises a significant proportion of its capital expenditure. Any underperformance or delays in this program could directly impact revenue and earnings projections.
  
• Expectation of future gas production declines (up to 10% quarter-over-quarter) may affect overall production levels, consequently impacting revenue growth.
  
• A heavy focus on oil production growth in the future, especially from the Permian Basin, suggests potential vulnerability to oil price fluctuations, which could impact net margins and earnings unpredictably.
  
• Significant capital commitments ($150 million worth of capital for projects expected to produce revenue in 2025) mean that any shifts in market conditions or operational setbacks could negatively influence financial outcomes, affecting net income.
  
• The company’s public-private equity model and its unique capital allocation strategy are innovative yet unproven at a larger scale. If market or internal conditions shift unfavorably, this could present risks to long-term revenue stability and profitability.

Valuation

• The analysts have a consensus price target of $7.56 for Granite Ridge Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.8, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $597.1 million, earnings will come to $117.5 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 7.9%.
• Given the current share price of $5.97, the analyst's price target of $7.56 is 21.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.