Who has $197 million of revenue per employee? Granite Ridge Resources $GRNT

Better than Only Fans

One of the metrics that tech companies like to throw around is revenue per employee.  With a modern twist on the world’s oldest profession, Only Fans is the current leader in this aspect with $1.3 billion of annual revenue, and only 42 employees to run the business for $30.9 million of revenue per employee.

But not even sex can beat Granite Ridge Resources (GRNT) with $394 million of trailing twelve month revenue, and two, yes two employees.  I assume those employees are the executive assistants of the CEO and CFO who have been incessantly buying more shares of their not quite a royalty company.

Granite Ridge Resources is a “non op-co” oil and gas explorer and producer.  This means that they don’t do any of the drilling themselves.   Usually a strategic partner will take the operations risk while GRNT will foot the capex bill.   Like a royalty you have the benefit of almost no SG&A, however, unlike a royalty, they do have to spend the development and maintenance capex.  There are plenty of other non op-co’s out there, but GRNT is trying to add a new twist to the business model by finding strategic operating partners who allow GRNT to dictate the drilling plan.  This new business form is being called a “controlling non op-co.”   

A royalty company sits back and hopes that someone comes along and drills on their acreage.  Panhandle Resources (PHX) uses a team of geologists to try and predict where the drilling will happen, and only buy acreage just in front of the drills. Black Stone Minerals (BSM) uses their enormous acreage to muscle operators into committing to a certain number of active wells at all times.  But Granite Ridge Resources is evolving to partner with operators who will allow them to control the program.  Not all of their acreage is this way, but this is the path they are trying to forge.

GRNT uses conservative leverage, 50%, to squeeze a bit more torque for shareholders.  Incentives are about as aligned as incentives can get with such strong insider buying.  And, oil stocks are one of the few sectors that hasn’t rallied at a time when everything else seems a bit more expensive than it was a few weeks ago.  There is a controlling shareholder, Grey Rock Investment Partners, a private equity firm.  Private equity control of a company wouldn’t normally be a huge attraction, butit is still better than Larry Fink control.  It isn’t clear how much of Grey Rock’s money is the personal funds of the co-founders, three of whom, Kirk Lazarine, Perry Griffin, and Matt Miller, sit on Granite’s board and own over 500,000 shares each personally.

Management is using hedges to protect their margins with 50% to 60% of 2024 production hedged.  This provides some stability for this year while oil prices have fallen, and natural gas prices remain in the dumpster.  We will have to see if prices recover soon enough for management to lock in some hedges for 2025, or earnings could fall next year.

Capital allocation has been blended with 2023’s $123 million of operating cash flow minus maintenance capex being split between $59 million of dividends, $36 million of share repurchases, and $29 million for growth capex.  At the current enterprise value of $890 million, that’s a 14% free cash flow yield, of which about half is in the form of dividends, and half in the form of earnings per share growth.

Looking forward, management believes that they should eventually achieve a multiple rerating to be in line with their peers.  A rerating from 2.8x enterprise value to EBITDA to 3.6x to 4.1x would be a 23% to 32% return.  Management’s strategy for this rerating is to just focus on earnings and let time fix the gap.  Conversations with potential investors indicate that limited share float and low volume could be keeping investors away.  I have seen this before in the situation with LandSea Homes (LSEA) that if the large institutional shareholder were to sell shares, it can result in a stock price increase due to the increased liquidity allowing more institutional investment.  

Another potential source of future returns is an increase in either the oil price or the natural gas price. And with the construction of many natural gas export terminals, there are a lot of analysts predicting a natural gas recovery in the next few years.  In 2022, GRNT had earnings per share of $1.97, compared to their current share price of $6.10, so close to a price to earnings ratio of 3x if we return to elevated oil prices.

In Granite Ridge Resources you have a management team with aligned incentives aggressively engaging in insider buying.  A potential multiple rerating as the stock becomes more liquid since their October 2022 IPO.  A 14% free cash flow yield for 2023, which was a weak market for oil and gas.  Upside potential from any increase in oil and gas prices, 2022 had about a 25% free cash flow yield on higher oil prices.  A 7% increase in barrels per day projected for 2024, with a 23% increase in barrels per day in 2023.  And a reduction in share count from 134 million to 130 million.

GRNT’s acreage is diversified, although just as we have seen with other companies, with the depressed price of natural gas, only the Permian with its high oil content is buzzing with activity at the moment.  Despite only 25% of GRNT’s acreage being Permian, 51% of its 2023 barrels of production were from the Permian.  

Management has not renewed their share buyback program once it expired.  The purpose of the program was to provide liquidity for the security after the IPO.  Since IPO, average daily trading volume is up 12x, so the share buyback no longer serves that purpose.  Share buybacks are not an immediate priority for management at the moment.  

Granite Ridge currently owns 1.1 million shares of Vital Energry (VTLE), from an asset swap.  Part of GRNT’s business model is to buy undrilled shale, develop the drilling program, and then sell some of the producing land at a profit so that they can recycle the capital and acquire more acreage.  Management had the plan of selling those shares of VTLE this past summer for a profit, but as we all know, oil stocks have only gone down since then.  It is not clear if management would liquidate the shares at current prices, or if they are waiting for VTLE to trade at over $50 a share again.  You can find my writeup on VTLE here:

I find Granite Ridge Resources a perfectly tolerable oil and gas income stock.  For those investors who avoid limited partnership like Black Stone Minerals, Granite Ridge makes a fine alternative.  While BSM pays a higher dividend, it is unlikely to participate in a multiple rerating.  Granite Ridge currently has about a 7% dividend yield, but grew production at 23% last year, and their peers have a 5% dividend yield, implying a potential multiple rerating for GRNT.  Management has aligned incentives, and believes strongly that the stock is undervalued at the current share price.  As a value degenerate and not an income investor myself, I won’t sell any of my Vermilion Energy (VET) for Granite Ridge.  I still believe that VET’s European natural gas drilling program will lead to excess profits over the next several years, and I recently learned that their lawsuit against the Irish government has more merit than I previously believed.  I had initially dismissed it as futile when I should not have.