Private Equity Growth Strategy in a Public E&P Company
Granite Ridge was formed in 2022 to execute a private equity investment strategy in a public company vehicle. The strategy is to allocate capital to non-operated oil and natural gas development opportunities in order to grow the company’s underlying asset base and support its common stock dividend. Grey Rock Investment Partners contributed the assets of three investment funds to facilitate Granite Ridge’s business combination transaction with Executive Network Partnering Corporation (ENPC). Grey Rock grew production on the contributed assets to ~22,000 BOE/d in 4Q22 from zero when it began deploying capital in its first fund in 2014. Granite Ridge owns a diverse set of assets in five major US onshore producing regions, including the Permian, Eagle Ford, Bakken, Haynesvillle, and DJ Basin. Operators include a who’s who list of premier public and private companies. Proved reserves at year-end 2022 totaled 50.5 MMBOE (50% oil/61% natural gas), with a PV-10 value of ~$1.6 billion. The Permian Basin accounted for 45% of production and 58% of revenue during 2Q23. Management expects to evolve its capital allocation model over the next couple of years to gain more control over Granite Ridge’s growth trajectory. The company is intent on increasing exposure to strategic asset-level partnerships with proven private operators. Partnerships would provide Granite Ridge with the ability to cause development activity thereby increasing visibility into its production trajectory. Over the next couple of years, management expects to increase capital allocation to partnerships to ~75% from around ~25% this year. The midpoint of management’s FY23 production guidance range implies 13% Y/Y growth. Management indicated a +/-10% Y/Y production growth goal in FY24. Our FY23 and FY24 adjusted EBITDA estimates are $297 million and $329 million. Our estimates suggest the company can execute its capital program and fund the current dividend, while maintaining a conservative leverage ratio. The shares are trading at 2.8x/2.5x our FY23/FY24 adjusted EBITDA estimates. The current annualized dividend of $0.44/share equates to a 7.4% yield. Based on FactSet consensus estimates, Granite Ridge trades at a discount to a group of peers on an EV/EBITDA multiple basis.
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