Ridge's Calculated Investments And Prudent Capital Allocation Poised To Revolutionize Its Revenue And Margins

Key Takeaways

• Strategic shift towards high conviction projects and oil-weighted ventures aims to enhance earnings, revenue, and margins by focusing on compelling returns.
  
• Anticipation of double-digit production growth into 2025 and a 7% annual dividend yield highlights potential for significant revenue growth and investor attraction.
  
• Granite Ridge Resources faces risks from declining hydrocarbon prices, aggressive acquisition strategy, shifting focus to oil-weighted projects, increased capital expenditures, and execution risks in controlled capital development strategy impacting profitability and growth.

Catalysts

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

• Granite Ridge's strategic shift towards increased investment in high conviction projects, specifically through their controlled capital program, is expected to materially impact earnings as they focus on projects with compelling returns. This shift involves concentrated investments in operated projects, making significant contributions to revenue and margins.
  
• The company's ability to adapt by reallocating capital to the most economically advantaged projects, such as shifting towards oil-weighted projects amidst fluctuating hydrocarbon prices, is poised to enhance long-term shareholder value by optimizing production costs and improving net margins.
  
• Granite Ridge's increased development CapEx, particularly in their controlled capital drilling schedule, despite not affecting 2024 production, positions the company for robust growth into 2025. This forward-looking investment strategy is likely to foster substantial increases in production volume and revenue.
  
• The 7% annual dividend yield, underpinned by conservative leverage and hedged cash flow, presents a catalyst for attracting investment and bolstering the stock's value. This reliable dividend, supported by Granite Ridge's financial strategies, contributes positively to the company's valuation by providing a direct return to shareholders.
  
• The anticipation of double-digit production growth into 2025, facilitated by strategic capital allocation towards controlled capital projects and the effect of prudent debt utilization for growth investment, suggests a significant upside potential for revenue and earnings growth. This growth is not currently reflected in the market valuation, indicating the stock may be undervalued.

Assumptions

• Analysts are assuming Granite Ridge Resources's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.3% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $94.2 million (and earnings per share of $0.55) by about September 2027, up from $56.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $47 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2027 earnings, down from 14.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 3.04% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Risks

• The decrease in hydrocarbon prices, specifically a 22% decrease in gas prices and a 2% decrease in oil prices, may adversely affect Granite Ridge's profitability and financial performance, impacting net margins and earnings due to reliance on commodity prices.
  
• Dependence on acquisitions for growth, evidenced by the closing of acquisitions representing a significant number of locations and the increase in inventory acquisitions guidance, could introduce risks related to integration, higher capital expenditures, and the uncertainty of achieving expected returns, potentially impacting revenue and net profit margins if these acquisitions underperform.
  
• The strategy to shift capital to oil-weighted projects due to current hydrocarbon price environments indicates a flexibility that could expose the company to risks if oil prices decline or if there are miscalculations in the projected economic advantages of these projects, potentially affecting revenue and earnings.
  
• An increase in development capital expenditures by $60 million, while aimed at positioning the company for future growth, entails risks related to the efficient allocation and deployment of this capital. If the additional projects do not yield the expected returns, this could impact the company's net margins and profitability.
  
• The controlled capital development strategy, while potentially offering higher returns, also introduces execution risks and the need for successful partnership dynamics. Mismanagement in this area or underperformance of these projects could negatively affect the company's earnings and growth trajectory, especially given the significant portion of development CapEx allocated to these projects.

Valuation

• The analysts have a consensus price target of $7.76 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 $503.7 million, earnings will come to $94.2 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $6.22, the analyst's price target of $7.76 is 19.8% 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.