Shifting To Operated Partnerships Will Strengthen Control And Stabilize Earnings

Key Takeaways

• Strategic shift toward majority-operated partnerships aims to optimize returns and improve net margins by enhancing control over capital allocation and development timing.
  
• Systematic hedging approach stabilizes earnings and shields margins from commodity price fluctuations, ensuring financial stability through 2026.
  
• Market volatility and hydrocarbon price changes could challenge Granite Ridge's financial plans, impacting revenue growth and investor confidence amidst strategic and operational shifts.

Catalysts

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

• Granite Ridge Resources is shifting its strategy to focus more on operated partnerships, where they hold majority working interest and have control over capital allocation, development timing, and well design. This is expected to optimize returns and increase their revenue.
  
• The company's strategic pivot to operate 60% of its CapEx in operated partnerships in 2025 is anticipated to yield higher returns, thereby potentially improving net margins by achieving targeted full cycle returns of over 25%.
  
• The expected production growth of 16% in 2025, largely driven by Permian operated partnerships, could enhance revenue and possibly improve earnings.
  
• The potential additional $60 million to $80 million in development CapEx, focused on inventory in hand, is projected to support significant production growth in the early part of 2026, which could enhance future earnings.
  
• The adoption of a systematic hedging strategy, with 90% of current production hedged through 2026, is likely to stabilize earnings and protect margins against commodity price volatility.

Granite Ridge Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Granite Ridge Resources's revenue will grow by 22.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $150.6 million (and earnings per share of $1.17) by about March 2028, up from $18.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.2x on those 2028 earnings, down from 43.2x today. This future PE is lower than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Granite Ridge Resources Future Earnings Per Share Growth

Risks

• Potential market volatility and changes in hydrocarbon prices could impact Granite Ridge's ability to fund capital plans and maintain revenue growth, especially if they rely on favorable conditions to proceed with additional CapEx and development projects.
  
• The company's strategy to increase leverage might conflict with their traditionally conservative approach, and market perceptions of increased debt could affect investor confidence, ultimately impacting net margins and earnings.
  
• The transition from non-operated to more operated partnerships, while providing more control, also introduces execution risks and increased complexity in operations management, which could affect operational efficiency and net income.
  
• Increased competition in the non-operated oil and gas sector and compressed valuation discounts may lead to higher acquisition costs, impacting investment returns and net earnings.
  
• Dependence on existing partners for non-operated projects might limit flexibility and adaptability, potentially affecting production timing and cash flow, given changes in partner strategies or market dynamics.

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 2028, revenues will be $660.9 million, earnings will come to $150.6 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of $6.12, the analyst price target of $7.56 is 19.0% 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.