Granite Ridge Resources (GRNT) Q2 FY26 earnings call: guidance and Q&A

What are the key assumptions, particularly commodity prices, underlying the 2027 free cash flow inflection and double-digit yield target?

Management stated that the 2027 outlook for a 10% free cash flow yield, 1.25x dividend coverage, 1.25x leverage, and high single-digit production growth is based on a $65 oil price. They noted current 2027 oil prices are in the low $70s, providing a cushion, and anticipate reduced hedge losses and expanding gas revenues in 2027.

“So, 2027, the way we're thinking about 2027 from a commodity perspective is $65 oil. So, we're north of that now. 2027 is in the low $70s right now. So we've got some cushion there. So $65 oil to be able to deliver what we've laid out, which is a 10% free cash flow yield, 1.25x coverage on our dividend, leverage in the 1.25x range, and production growth in the high single digits.”

asked by John Annis · answered by Tyler Farquharson

How quickly can Granite Ridge flex its activity levels up or down within the operated portfolio in response to material commodity price changes?

Management confirmed they can flex activity levels very quickly. For upside, they can pull forward additional inventory. For downside, they have the capacity to reduce their spend rate below the maintenance capital level of $250 million, indicating flexibility in both directions.

“Yes, I think very quickly. So we have additional inventory on the upside. There's additional inventory that we have scheduled out for out years that we can pull forward. Pick up a rig, pull forward some inventory. I think that's an exercise that could happen very quickly. It's obviously harder to slow down activity, but what we've looked at so far, at least for 2027, we have plenty of capacity to be able to pull down our inventory and our spend rate below our maintenance capital level of $250 million.”

asked by John Annis · answered by Tyler Farquharson

Will the transition to free cash flow in 2027 put a ceiling on the amount of capital allocated to inventory capture, or is it a separate bucket?

Management acknowledged there is 'somewhat of a ceiling' but highlighted their success in adding inventory at a 2-to-1 rate. They currently have 5-6 years of inventory. They expect acquisition spend to be around $50 million in 2026 and a similar level in 2027, a reduction from $125 million in 2025.

“Yes, no, I mean, it's certainly, you know, there's somewhat of a ceiling that gets put on it. But right now, we've been very successful on that front. We've added inventory at about a 2-to-1 rate versus what we're developing. So it's been very successful. I'd continue to expect that we'd be spending on extending our inventory. We probably have five to six years of inventory right now.”

asked by Jeff Grampp · answered by Tyler Farquharson

Can management discuss the runway for continued opportunities in the Utica basin and its focus going forward?

Utica is the primary focus for traditional non-operated spending, with 90% of business capital going to operator partnerships and the remainder almost exclusively to Utica. They have accumulated close to 6,000 net acres in the basin over the past 18 months and have over 80 wells online with strong productivity data, indicating continued success and investment in the area.

“Yes, absolutely. So that's our number one spot for our traditional non-op spending. 90% of our business capital spending-wise has been going into operative partnerships over the past few quarters. The rest of that has almost been exclusively going to Utica. It's been tremendous for us over the past 18 months. I think we're close to 6,000 net acres now in that basin across that 18-month period.”

asked by Jeff Grampp · answered by Tyler Farquharson

What gives management confidence that LOE unit costs will moderate in H2, and which regions drove elevated costs in H1?

Management expressed confidence due to close collaboration with operating partners, already observing a decline in LOE per barrel equivalent. They also cited a 'denominator issue' in H1 from negative Waha prices and shut-ins in gas-oriented areas, which is expected to improve. Elevated costs were primarily from Permian water handling and higher early life costs on newer pads.

“We're seeing a few things. I think, first of all, just to be open with you, we are seeing elevated costs. So we've increased guidance over the course of the year by $1.50 per BOE, which is about 20%, a little over 20%. So we are seeing some increased costs on the lease operating expense front. But we're seeing a couple of other things which give us confidence that that run rate we saw in the first half will come off.”

asked by Phillips Johnston · answered by Unknown Executive

Can management provide more details on the third and fourth operator partnerships?

Both new partnerships are Permian-focused. Team 3 is a geologic-led team exploring emerging benches in the Permian Basin, currently conducting appraisal work. Team 4, added in Q4 2025, is an inventory aggregation development play similar to Admiral, primarily focused on the Midland Basin, and is ahead of schedule on inventory capture. More information, including potential 2027 development plans, is expected later this year.

“Yes, I think probably later this year we'll be in a position to share a lot more information on those partners. We've generally talked about what they're doing, so I can kind of walk you through the strategy at least for each one of them. So they're both Permian based or Permian focused. One of the teams is an emerging play, geologic-led team, looking at things in the Permian Basin, emerging benches within the basin.”

asked by Michael Scialla · answered by Tyler Farquharson

How would Granite Ridge prioritize its free cash flow in 2027 if the inflection plays out as expected?

Management stated the first priority is to pay the dividend, which they have done for 14 consecutive quarters. Second is to maintain the balance sheet at their long-term target leverage of 1.25x. Beyond that, free cash flow would be allocated to opportunistic expansion through additional inventory acquisitions (market-based) and development activity, with flexibility to accelerate or maintain the current pace depending on commodity prices.

“Yes. So, to pay our dividend. So we paid our dividend every quarter since we've been public, so 14 quarters now. Then balance sheet, we're going to pay the balance sheet at roughly 1.25x. That's our long-term target range. And then beyond that, we'd look to either expand the business through additional inventory acquisitions.”

asked by Michael Scialla · answered by Tyler Farquharson

What is the rough split of the 2027 CapEx envelope between third-party and controlled operator partnerships?

Management expects north of 75% of the 2027 development capital to be allocated to operator partnerships. They noted that in Q2, approximately 93% of their development capital went into operator partners, with the balance going to traditional non-op and Utica.

“You know, it'll probably be north of 75%. So right now it's been, I think this most recent quarter, we were something like 93% of our development capital went into operative partners. The balance of it was traditional non-op and Utica. I expect it to maybe not be that high, but certainly higher than 75% would be going into partnerships next year.”

asked by Christopher Baker · answered by Tyler Farquharson

Can management share any thoughts on the Grey Rock distribution in kind, including cost basis and potential impact on stock support?

Management stated that Grey Rock's fund life is ending in 6-9 months, so the distribution will be methodical over that period. They view it positively for Granite Ridge, expecting increased daily trading volume, liquidity, and removal of an overhang. They noted LPs are accustomed to receiving shares and that Grey Rock's cost basis is low, though the exact value is unknown.

“Yes, you bet. I can share what I can. This is obviously a Grey Rock decision, Grey Rock partnership decision. So we don't control that here at the company, but from what we understand, you know, their fund life, you know, is up in the next six to nine months. So, you know, this will be a methodical distribution of shares over that six to nine months.”

asked by Christopher Baker · answered by Tyler Farquharson