Granite Ridge Resources, Inc. (GRNT) Earnings Call Transcript & Summary

And the time to join us for our fireside chat with Luke Brandenberg, Chief Executive Officer of Granite Ridge Resources. Before we begin, I would like to remind participants that today's discussion could include forward-looking statements as of today, March 13, 2024. Please refer Granite Ridge's disclosures regarding such statements which can be found under the Investor Relations tab of the company on page. With that a little bit of housekeeping out of the way, Luke, I'd like to welcome you and thank you for taking the time to join us today.

Absolutely. Thanks for having me, Jeff, and thanks for getting the forward-looking statements out of the way. When I start my remarks with that, I'll lose pretty darn quick.

People who may not be as familiar with Granite Ridge's business model is predicated on capital allocation framework, which is designed to fund growth in the underlying asset base and return cash to shareholders through a fixed dividend. Management seems to execute the plan while maintaining a leverage ratio of less than 0.5x adjusted EBITDA. Ownership of nonoperating working interest in oil and gas properties in major U.S. producing basins form a nucleus of Granite Ridge's asset base. And to execute the plan, the company seeks to leverage its long-standing relationships with public and private operators to expose shareholders to development opportunities with attractive returns. Luke, Granite Ridge's -- if you all have described Granite Ridge's business model as a publicly traded private equity company. Can you just kind of talk about how you think about that concept with respect to a public E&P company?

Yes, certainly. So when I think about the private equity world, and most of my career was done on the private equity side about a dozen years. And really, why do people invest in private equity? I think it's for a few things. One, they want to get access to the highest rate of return projects across the U.S. They like the diversification. You partner with a private equity firm, you invest in a private equity firm. They generally have teams in multiple basins, and they're looking for the best rate of return often on the development side. And that's really what we do. If you look at the Granite Ridge portfolio, we're diversified across the Bakken, Haynesville, DJ, Eagle Ford and largely in the Permian. And what we're pursuing is these near-term development opportunities. From a rate of return perspective, private equity is generally chasing a gross 25% rate of return. That's what we're shooting for as well when we're looking at projects. And so we're very similar there. A couple of the key differences, as I talked about publicly traded private equity. Some of the pros, I'd say, from Granite Ridge are in a private equity firm, you generally have an 8-, 10-year fund life, and you're locked up. We as a public company, we can offer daily liquidity. Additionally, a public company just is required to have a lot more transparency. And so you've got filings, you've got press releases, a lot of detail on what's going on behind the scenes. So in a lot of ways, we do look like publicly-traded private equity, but it's also something that's more approachable for the general investor. Most of your private equity investors are large institutions, writing multimillion-dollar checks. But Granite Ridge, you can come in and buy a share today and get a yield right out of the gate. And so I think the publicly traded private equity is something different. Your typical public company has 1, 2 maybe at most 3 focus areas, but primarily 1 or 2. So they don't necessarily have that diversification, but that's something that we offer and really pride ourselves on and something that is a core tenet of how we built the business and how we'll continue to grow it.

How have you adapted the capital allocation frame model in the context of the private equity concept?

Yes. So one thing that we do as we think about relative to private equity, private equities firm job is to invest new equity. That's what their investors pay them to do. And so that's their primary source of capital is new equity. We're as for Granite Ridge, our primary source of capital is really internally generated cash flow. It's your cheapest source of capital. And that, along with debt, as you mentioned, with about half a turn target. That's our primary source of capital. And so for us, last year, we did about $305 million of EBITDA. When we look at our opportunity set, it needs to line up with that source of capital. So that's one of the ways that we've really adapted to have, again, more of a different market with a lower cost of capital just to provide a differentiated option for investors.

The asset base consists of non-operating working interest and that's really the strategy going forward. Can you talk about why non-operated assets fit Granite Ridge's strategy?

Yes, I can. I think non-op is pretty misunderstood and really non-ops changed a lot. Like a lot of things, frankly, across the world. horizontal drilling has really changed non-op. And what that means is non-op of old, if you think about your grandparents non-op, it was a lot of sitting under your desk and waiting for an AFE to come in. And that's not what non-op is, not dissimilar for minerals, horizontal drilling dramatically changed the non-op market. And the primary reason is a risk of non-op is you don't necessarily control the timing. And what we're doing things that I anticipate that we'll talk about later in this conversation and mitigate that, but you don't fully control the timing. And so that was always a challenge. That was a knock on minerals. That was a knock on non-op. The horizontal drilling changed that for a couple of reasons. At one point, you think you were drilling wells on 20-acre spacing, maybe less, okay? So what does that mean? That means you look at a map and you could just throw a dart and you have as good a chance of guessing where somebody is going to drill their next well. If you're a non-op, well, now you're drilling 2-mile and 3-mile units. I mean you have units that are nearly a couple of thousand acres in size. And so when you have that unit and somebody's drilling, you can look at the math and look at the puzzle pieces and you have a lot more ability to predict where the next unit is going to be, and you can make sure you're building a position that will be inside of those units. It really gives you a lot more opportunity. Additionally, because those units are larger, as you put together a material position, then all of a sudden, you can really be a partner for the operators. You're not just somebody that's in the way that they have to deal with. You could be a value-added partner to these folks. And what does that look like? It's trades. A big piece of our business is understanding the pieces on the map and how can you trade those to help accelerate development? Because that's the goal. The goal is to accelerate development, turn inventory to cash flow. And so the horizontal drilling really changed what that looks like and really opened up the opportunity set for non-op and help to derisk that timing component in a way that back in 2013, when our predecessor coming at Grey Rock started, they were early. They were some of the first institutional capital chasing non-op. Now across the board, you have a lot more sophisticated investors, institutions chasing non-op as well as multiple public companies.

Now let's talk on Grey Rock for a minute. As you mentioned, they control the predecessor assets that were contributed to Granite Wash -- I'm sorry, Granite Ridge. Grey Rock began investing in assets several years ago. In the formation of Granite Ridge through the SPAC merger, master services agreement was put in place to manage a lot of the engineering and accounting and financial reporting functions of Granite Ridge. Can you talk about how that agreement benefits Granite Ridge and leverages some of the experience and relationships that Grey Rock has?

Yes, I can. And Jeff, if you don't mind, I may actually rewind and share just a little bit about how Granite Ridge came to be because I think it's an important part of the story and the question. So you got to rewind back to 2013 and 3 gentlemen, Matt Miller, Griffin Perry and Kirk Lazarine had an idea. They had the concept, as I discussed, that hey, horizontal drilling has really changed non-op,but the institutional community has not adopted it yet. You started to see institutional capital flow into minerals, which has historically been more of a family office space, but it hasn't done so in non-op. And they said, you know what, this is really an underserved market. Let's go out and raise funds to go buy non-op assets and drive value that way. And so they did. So back in '13, they raised their first fund, ultimately raised Fund II, Fund III and then in kind of late '22, they raised a Fund IV. Well, back in '21, COVID was really -- did a lot -- it had an impact on a lot of folks in the energy space, but it was eye opening for non-op because one of those challenges is you learn in finance 101, you have to match the duration of your assets with your liabilities. And one thing we learned in investing is you have to match the duration of your investments without your capital. And COVID had a big impact on that because all of a sudden, your time line to an exit was elongated for a significant amount of time. And so as Grey Rock looked at that, they said, "Hey, if we could put these things together and form a public company, we could really get off this fun treadmill and we can broaden our opportunity set to deals that have more longer life to them." And so they decided to take it public. So Granite Ridge is really Grey rocks Funds 1, 2 and 3 that went public. I mentioned that they had a Fund IV as well, but had just been raised at this time. So what we have today, Granite Ridge, Grey Rock, it's really all one group. We have one front door, we're in the same floor. We don't have nametags or anything. It's all one company. Any deal comes in the same front door. But the way that it's structured, Grant Ridge gets 75% of any opportunity that comes in the door and Grey Rock gets up to 25%. And so what that means is Granite Ridge and Grey Rock combined, what we get to benefit from the experience of folks that just about wrote the book on institutional non-op investing and doing it for over a decade. And so it's not only the people that we have, the knowledge base but it's the information. In over 3,100 wells and having all of that data, which contributes daily as we continue to underwrite deals. But the other piece is it's the relationships. This is a relationship business. It is still -- you think about an opportunity that gets generated in Midland. A lot of times, those deals don't leave Midland, right? They don't leave Midland. And if they do, there's probably something wrong with it. And that's how we look at it. And so you have to build relationships, you have to have boots on the ground in Midland. We call our traditional non-op strategy in burgers and beer. And why is that? It's deals done over burgers and beer in Midland, but again, these are relationship driven. So the MSA, the partnership between Grey Rock and Granite Ridge allows us to benefit from the experience, the knowledge base, the information and then also those relationships, which is just a dramatic driver of value that I think is probably underappreciated.

Luke, I want to touch on one thing you mentioned, which was the notion that horizontal drilling changed the non-op market. As you talked about that, I was thinking did it change it from something akin to checkers to chest whereas companies that are drilling horizontal wells and ever longer laterals are trying to work their land positions. It just puts a lot more non-operated interests in play because they're trying to tie up more acreage into a drilling unit and yet the person with the idea or the biggest share is going to control operations of the well. Is that what's driven some of the proliferation of non opportunities?

Yes, I haven't thought about it in that exact terms, but Jeff, I may steal that from me, you're playing chess, not checkers. I mean that's a great way to look at it because that's a huge piece in a lot of areas. It's the guy who has the biggest working interest that ultimately has control. And so by making trades here and there, we could be value-add. We could be value-add to these operators to make sure that we got them over the hump. And the benefit to us is we're partnering with folks that are very knowledgeable that are experienced and have great track records in an area. And by being a good partner to them, we can help accelerate development, which helps us. And so it really I like that chess versus checkers, I'm probably going to steal that. So I'll give you credit though.

Feel free, I don't have a copyright on it. Granite Ridge allocates capital basically in threefold -- or their capital allocation model is really threefold. As you mentioned, the burgers and beer concept of blocking and tackling ground game where you're trying to identify and capture drill-rated prospects that will be -- where the drill bit will be there within 2 years roughly. And then there's another concept that you talked about on the most recent earnings call, forming strategic partnerships with experienced developers really on an asset level prospect as opposed to a corporate type partnership. And then lastly, as everybody in the industry looks for acquisition opportunities. But one thing when you think about capital allocation in the concept of scaling the asset base, how did those 3 avenues really play into your thought process? And how can you scale Granite Ridge's asset base?

Yes, it's a great question. And so as we think about, again, capital allocation, you talked about 3 primary buckets. You know the business was really built on that burgers and beer strategy. And I think that's important because what is that, as you mentioned, it's good rock under good operators with a line of sight to development in the next couple of years. And so that means that one operator may be really good in the Permian, but they may not be as good in Appalachia. And so we're able to identify who's the best who we really want to be under and then put positions together there. And I like that we're diversified there because every basin is really its own ecosystem. Basins are hot or cold and really what hot or cold to me from an investment perspective means is money flowing in or money flowing out of it. And so there are opportunities where if you said, "Hey, I'm looking on a full cycle, what's my entry cost plus my development?" You may get better returns in the Bakken versus the Permian and because there's capital going into the Permian and less so in the Bakken. And so we really like that diversification, both in terms of assets. So we're always in the game. I mean we're ultimately economic animals. We're agnostic at the basin. We're looking for the best returns wherever they are. But we're also -- and we have that diversification under operator. And I think that's a key piece of the business is we're partnering with the best folks in every area. We're under 60 operators and more, I guess, about 65% across the U.S. And so we get to see what they're doing. We get to see what they're doing differently, and that's a big benefit for an investor instead of buying 60 different stocks, we can really provide exposure to a lot of operators plus private operators. [indiscernible] is an example out in West Texas. And they're a private operator. They're one of the best. I mean they run more rigs than just about any other company in West Texas. They keep their cost in line and they are just really, really good at what they do. It's challenging for the private investor to get access to [indiscernible], but we can help provide that sort of access. So with that in mind, the burgers and beer strategy, that's really the core -- it's really the core of what the business was and how it was built, and it will continue to be a big piece because it allows us to have that diversification. But as you continue to scale the small working interest under small operators, it's simply just more difficult to scale. And so what we've really thought about is -- what are our strategic advantages. If we were really our capital provider to the space, capital provider to independents that are pursuing in a near-term oil and gas development, what are our strategic advantages, and it really came down to a couple of things. One, we have a permanent capital source. And so we can create a different kind of mousetrap to partner with these operators because we don't have to have an exit in mind. We can build a mousetrap such that we're planning to own these assets in perpetuity. Two, we have a lot of knowledge. In over 3,100 wells, the difference between non-op and minerals or one of them is that in the mineral side, you generally just get a check step. You don't have a lot of the cost details behind it. But in non-op, we get a tremendous amount of data, we get the actual drilling cost data. You have daily production in most instances, you get lifting costs, you get transport cost. So you have a tremendous amount of data from a lot of new data points. And additionally, we have inventory. So we have pieces on the map. And so as we thought about what our strategic advantage is, its how can we use those 3 things to be a better partner, to be a better option for some folks out there. And so you mentioned strategic partnerships. And I think that's something that is really where we're going. I think it's a differentiator. What we've done is we've created a different mousetrap. We'll partner with an operator and we'll be the primary capital source for them. Now these are folks that are proven moneymakers that have demonstrated that they are excellent on the execution side, and they are also just fantastic at finding deals, finding opportunities that other people don't see. And so we partnered with a group out in Midland and went to them and said, "Look, you've been private equity backed in the past, had tremendous success with that. We want to offer you something different. We're not competing with private equity firms. If you want to get a big commitment and get a bunch of overhead coverage and go buy a big asset, that's not the game that we're playing." But for folks that are -- want to stay smaller want to build a long-term oil and gas company versus needing to sell in a few years. We went to this group and said, look, we could provide this permanent capital source. We have a tremendous amount of data that will help you as you're looking at opportunities. And three, we have chips. We have chips on the board to go back to or your chess analogy. We've got pieces on the board that you can block and trade to generate development opportunities. And so we partnered with the group out in Midland and again, really created this new asset level mousetrap that we're proud of, where as they go out and generate opportunities, we're the primary capital partner. And so what this looks like is that they find something, they pay somewhere between 5% and 10% of the cost and then we're the remainder of it. So we're the majority interest owner. So we're the controlling interest owner in that unit, which for us, it means that we have full control of development. We have full control of development timing, which is different, right? That looks more like an operator. So we're kind of bridging the gap between op and non-op, but we're able to maintain that non-op position because we appoint this group as operator, again, they have a tremendous track record. In fact, they just drilled their first pad rig release in January, and they were over 15% under AFE. I mean they absolutely just crushed it. And so this is different for us because now, as a non-op, the knock of "hey, you don't control your timing", we do control this. and we could just be a better capital partner. So we like this. We've been allocating a lot more capital here in this year. We'll probably spend $100 million or more in this controlled CapEx bucket where we're taking more concentrated working interest, same underwriting we've been doing for a decade, but you're just taking more concentrated working interest. And we're mitigating that additional risk by higher expected rate of returns, but then also that full control over development timing. Or if we want to pause, we could pause, if it makes sense to accelerate, we can do that. So I think as you shift that may be 1/3 of the capital we spend this year. But I think if you look forward 5 years, that may be 2/3 or more, if that's a business model that continues to perform like we believe it will.

Luke, essentially, to simplify -- maybe to simplifies what you said, but essentially it puts Granite Ridge in an operator type position through the drilling and stimulation or part of the well's life and let somebody else handle the production bar of the well's life. But when the capital is being spent and the checks are being written and the timing is being decided on, Granite Ridge is in control of that. And yet you don't have to have the kind of scale from a organizational standpoint that an operator might have if you had grown drilling engineers and everybody doing all the things that are required to get wells ready to go and drill and stimulate it. Is that the way to think about it, essentially on lower cost, overhead way to have operator control?

Yes, it's a good way to put it. We partner with the experts. And so we don't have to have the drilling engineers or the regulatory folks of the land administration. We partner with them. Again, in a lot of ways, this goes back to the beginning of the conversation, that publicly traded private equity. What is private equity, generally, they're control investors, where they're investing in teams that are experts in their field and they go develop opportunities. We're doing the same thing. We're just doing it more on a unit-by-unit basis. And it's more near-term development focused versus having an inventory to sell.

And as an asset level partnership, your only interest is in the actual oil or gas that's being produced out of the ground, and there's no financial interest in the partner, and you can continue on and then I presume a lot of it would be success driven like the partner you have in Midland, if you've had success or on this most recent pad, and you could parlay that into additional projects with them. Is that -- and as long as things are working well, it kind of becomes a line of sight to activity.

That's exactly right. So that group, we partnered with him about a year ago, just over a year ago. And the idea was that we wanted to develop enough inventory such that we could pick up a rig and then keep it running. To make sure that we're getting the benefits of giving a consistent rig line versus up and down and up and down. In January, we actually extended that contract for another 3 years just because the partnership has been going great. Like you said, it's all at the asset level. So we fully control the assets, but they control their company. And that's an important piece. When you're working with these entrepreneurs that are really hungry, a lot of them say, you know what, I want to fully control my company, and I want to build a long-term oil and gas company. I don't want to have to sell in several years. I'd rather have a permanent capital source. And so it's really been a neat partnership. We're proud to be a partner with this group. And we're going to look to do more of that. This group is focused in the Permian. And I think there's really opportunities to do this in other basins as well, where your near-term development focus, but we can have control of the timing. So that's a focus for us over the next several years. And I'm excited about it. Frankly, this is a bit of a new mousetrap. But we've gotten inbounds now. Folks in the industry have heard about what we're doing here, and they said, "Hey, would you be interested in that kind of relationship with us?" So it's exciting to hear and this group just continues to generate new opportunities such that we can keep that rig running full time and we're really excited to see what the results bring. That first, pad, I mentioned should be completed maybe May, late May, early June, should come online. So the results will tell the story, but look forward to sharing more about that when we get them.

Luke, The Permian Basin and every producing basin is -- they're all very competitive when it comes to drilling opportunities and with the company that you're partnered with in Midland. I'm wondering just is there -- there's no exclusivity. So the -- do you -- does Granite Ridge look like a competitor to other companies that might be putting together opportunities because of the relationship you have with the existing company in Midland? Or do you still -- are you still looked at as a potentially attractive partner?

Yes, that's a great question. I think that we saw that in private equity world where, particularly in the Permian, call it, 5, 6 years ago, as the land grab was still more of the theme of the day, you have private equity firms with 15-plus teams in the Permian, and they were often looking at the same deal, and that was a challenge. That's something we're very, very sensitive to for a couple of reasons. One, look, we want to make sure that we can always be a good partner and an objective partner and so we would not love to be in a spot where we have folks that are competing over the same deals. So that's not a focus for us. As we look at other basins, it's not areas that are right where our current partners are looking. The other side is that's an easy answer because we don't have unlimited capital. And so if we had 5 teams in the Permian running a rig full time, we'd be doubling our cash flow for the year just with that group. So it's easy for us to say. But our primary focus as we look at new teams. Our group that we partner with now. They're generally in the Delaware Basin. And so we've had conversations with folks in the Midland Basin, the Bakken. I think the Eagle Ford is interesting for the strategy as well. Really for us. What are we looking for outside of the team that we talked about, proven moneymakers, similar view of risk management. You're also looking for assets that have a very tight range of outcomes. We're not in the business of taking subsurface risk. You always have operational risk. And every once in a while, you'll be surprised on subsurface side, but you're really looking for areas that are quiet and predictable and that's a big piece of the business model. So the Eagle Ford is great. Just hard to find opportunities there. It's been picked over. A lot of really good folks in the business down there as well.

On the burgers and beer strategy. Those are typically wells that will be drilled within the next, say, 24 months. Can you just talk about how you, I guess, perpetuate visibility into what that -- what kind of production contribution that type of program can have on Granite Ridge over that -- over 1 year to 2-year time frame.

Yes, that's a tough one. It really is. And so the burgers and beer space is the most volatile space because look, we have real good insight into the next 6 months, maybe 9 months, what's going to happen generally because operators are drilling multi-well pads. And so they have to reach out to us if we're an interest owner send a say [indiscernible] get our approval, and then it takes months and months to drill and complete these wells. But really, once you get beyond 9 months or a year, it starts to get murkier because the fact is if you ask an operator what wells they're going to drill 18 months from now, they don't know. And frankly, they shouldn't know. Hopefully, they're adapting to whatever the market is at that time. But -- so they don't actually know. So whenever we talk about line of sight, what are we looking for? We put together a position that's pretty neat in Reeves County. We've got a little case study on it in our presentation, but we call it the -- they probably wouldn't appreciate this. We call it the fly in the ointment play. But basically, we saw that the EOG was starting to develop a position. They were starting to take leases, they were starting to stake out infrastructure and things like that. And we said, "Hey, this could be a good opportunity." They're putting real capital into this. And so we anticipate that there'll be some line of sight to development in the next couple of years. Now that could have not gotten developed. We could have been wrong there but we felt like we had good information for boots on the ground from relationships to start to put together an acreage position. And what we did, we ended up doing some blocking and trading with EOG to get some units that we developed. We ended up with some units that EOG wasn't the operator on and we ultimately partner with another non-op to bring in [indiscernible] to operate. And so there's just a lot of ways to move those chess pieces to your point, around the Board and win. But the point is you want to see that line of sight to development in a couple of years. And look, sometimes you're going to be wrong. And sometimes, it's going to be quicker than you think. And so that's always a neat part of the business. And frankly, what does that come from? It's one of the benefits of the partnership with Grey Rock, if you ask somebody who hasn't been doing this for a decade, what's EOG's development plan, say they're going to drill a unit. What wells do they drill, when do they come back and what zones do they drill then? They may not have the data to support that versus we're in dozens of EOG pads. And so we know exactly what they did. We know what wells they drilled. We know how long they had them flowing before they brought in a rig to drill the other set of wells. It really is just a data gathering game to try to make the best educated guess that you can, but we've got a lot of information to do it. We had a lot of success there.

The reasonable to think that, that type of program add some efficiency to capital because Granite Ridge does not have to warehouse acreage capital on the balance sheet, waiting for things to be drilled that you basically come in on a relatively short cycle basis.

That is. That's a great point that you make because I think about what do you get when you're buying Granite Ridge, a lot of public companies seems like the public company wants to say they have 10 years of inventory. That's their answer. It's always 10 years. It's always 10 years. We openly admit. We probably don't have 10 years of inventory. We talked about it on the call. It's probably 4 to 5 years of inventory. And so it's not just in time. But it is more near term. So we don't have a lot of capital that's sunk into inventory that may not get developed for a long time that frankly has a limited present value. So when you're buying Granite Ridge, you are buying inventory, but you're not paying a lot with us long term. And the reason is what is an operator's job? What's a public company do? Well, they've got their asset base and their job is to go develop that to the best of their abilities. And then every now and again, they'll go make an acquisition to replenish inventory. That's what you see from a lot of the public operators. A lot of times, they're buying private equity-backed companies to replenish that inventory. So their day job is development and their side hustle is acquisitions that fill up inventory. Well, our day job is the acquisition side. Our day job is constantly replenishing inventory. That's what we're doing at day in and day out is evaluating deals. We see on average 15 or so new deals a week. And a lot of those are deals that are easy to pass on. But it's -- we're in the business of putting capital to work and to good opportunities. And so that's an opportunity for us to make sure, to your point, it's more short-cycle capital that we can deploy. And you don't have as much -- I don't want to call it dead capital, but just capital on the balance sheet that has a low PV with the hopes that [indiscernible] gets developed.

In December, Granite Ridge sold its interest in some Permian Basin assets as a part of a -- I think it might have been an exit strategy or exit transaction by Henry Resources and some of their affiliates. And Granite Ridge took about a little over maybe $1.1 million in common plus preferred stock from Vital Energy. Luke, is that an instance of -- maybe wrapping up a strategic partnership and harvesting the cash flow or the cash from the remaining value of the asset and then be able to recycle it into something that may present hopefully a higher rate of return for Granite Ridge?

Yes. That was a cool deal, Jeff. I'm glad you brought that up. So what that looks like. We've been partners with the Henry family for a long time, and Henry is just well known, well respected, has a fantastic track record of operating Permian. One of their strategies internally as they build their business was they didn't want to be more than 50% generally of a well. And so they would go sell down the rest of it. That's just how they manage risk internally. And so we built a relationship there and have the opportunity to come in on some of their projects. We were a good partner to them. We were able to provide them data from other wells in the area. They look at new projects. And so we have a really good partner to them. So whenever they find a new project, they didn't go out and hire an investment bank to try to sell down that 50%. They went to a small group of folks that they knew. And so we were really privileged to be in several different areas that Henry had. And so as part of that partnership, we had an opportunity to sell alongside them. We had tag-along rights when they sold. So truth be told we didn't know they were looking to sell. But we see the announcement and we knew that we had a tag and quickly thereafter we get a call from Vital, said, you got this tag. Are you interested in selling. And so we looked at the asset, and for us, we thought that our piece of the asset, and we weren't part of the whole Henry deal, by the way. But our piece was generally fully developed. We didn't have a lot of inventory value on our books for it, so it was just mostly production. And they paid us a price that we thought was very attractive to sell production. And so one, that's one of the benefits of non-op and really these kind of broader strategic partnerships. Can you get additional rights. We were able to buy in at a non-op discount and we're able to sell at the operator premium. So that was a neat opportunity and the valuation was such. It's exactly like you said, we could sell that production and then we can recycle those dollars into higher rate of return development opportunities. So that was a neat deal for us. I'm really glad that we have that opportunity, but it's just one of the ways to win and non-op that I don't think it's fully appreciated as well.

The oil and gas industry is constantly consolidating. And it hasn't just been in the last 9 months. But in the last 9 months, there's been probably more than $200 billion worth of M&A transaction announced in upstream, including everything from Exxon agreement to buy Pioneer to some of the smaller -- actually, some of the very large private equity exits like Diamondback and endeavor. But I'm wondering when you see these big headline transactions trade and even some of the smaller ones trade, can you talk about what kind of impact that has on the part of the market that Granite Ridge plays in?

Yes, I'd say -- and you know what I'll do, I'll tell you, I don't know. But I'll talk out of both sides of my mouth on the pros and the cons. Okay? So the cons, you could think of it and say, well, the bigger a company is, the less relevant that the bits and pieces and the details that Grant Ridge place in is. That's one side. But I'll tell you, every company is unique. Every company is unique has its own DNA, has it's own strategy. Let's use 2 of the examples that have happened recently. So Diamondback buys Endeavor, okay? We'll Diamondback -- Diamondback has its roots as a small company, and they really built that company through acquisitions and doing deals. They are extremely commercial. Not that Endeavor was not. In fact, not say that at all. They were a great partner and they were a hell of a company to be under. They were really, really good at what they did. But I'd tell you, from our perspective, Diamondback has more folks that are looking at these smaller unit-by-unit deals. And talking about trades. And so I think that, that will be a pro for us. We have a great relationship with Diamondback. They're a fantastic low-cost operator. And there's folks that we already have relationships with, that we've been doing trades with for years and now they have more chips to trade with. And so I'm very encouraged about that. The other one you mentioned was Exxon Pioneer. That's one where it's so funny. These majors get a bad rap a lot for not focusing on the details and just being so macro. But Pioneer was an interesting one. They didn't like to operate unless they had 90-plus percent working interest. Not to say they never did, but that's generally what they did. And so from a non-op perspective, there just wasn't a ton to be done with Pioneer. They had such a massive acreage position, and they didn't want to operate unless they were just so, so high that I couldn't have a 10% position under Pioneer because that would never get developed. Versus Exxon is less focused on that. We see Exxon operate with 50% working interest. And so that deal may actually create more opportunity as well. And so we're encouraged by all this. The good thing is, this is just such a relationship game. And again, back to the partnership with Grey Rock and really what they built, they built a mousetrap that's adaptable, that's scalable and is really focused on these relationships that is companies move, getting gobbled up by bigger companies. These relationships will go with it. And we're really encouraged that transactions but get transactions and so that there'll be more to come.

There's always a question about -- and it's one of Granite Ridge's capital allocation buckets. But it's kind of the portfolio acquisition. And I think you've talked about it before as maybe a portfolio from a private equity sponsor. But just talk about how a bigger acquisition, which I presume would be more PDP heavy competes with the kind of returns that you're seeking as you move around the -- back to the chessboard analogy, there are burgers and beer type opportunities for the strategic partnerships.

Yes, it's a great question. We -- the acquisition is something we look at. And we always -- we stay in the market. We want to know what's going on. But we have not been a great buyer on the acquisition side, frankly. And the primary reason is production it's what you mentioned. I think about production, what does production work today? This has been a struggle for us because PV10 has been the metric for production for so long. Well, I used to borrow money at 3%. Now I borrow money at 9%. And so my margin of error, if I'm trying to use leverage on a low-risk asset to try to help my returns is just much, much less. And so it's just tough for us to make returns work when you're buying production. We've just had better luck competing in $5 million to $20 million type deals where it's larger than the small kind of family office folks. They may not want that much concentration. But it's not to the scale of really large format acquisitions. We like that near-term development. That's the focus for us. We just haven't been able to get there on production. The other thing and where we have, by the way, we have done some acquisitions. We announced some in the fourth quarter. I said those were -- are almost always there's some sort of opportunistic angle. We were in a well or several wells. There was a partner in those wells that was looking to sell out. It was kind of a complex partnership such that if they wanted to go sell it to another party, they would have had to get lawyers involved to tell the story. There was a JDA. And so it would just been not impossible for them to sell, but there would have been a cost of selling. And so it was just a heck of a lot cheaper for them to sell us. So we were able to buy that at an attractive return. So that's an acquisition, but there was something unique there. We made an acquisition in the Haynesville alongside a partner that we know very well and just deep personal relationships with that they went and they made an acquisition. It had some production, but it was really more inventory driven. But because of our relationship with that operator, we had a good idea into their drill schedule. They can always change it, but we're like-minded in terms of risk appetite, in terms of when we want to develop. So if there's some sort of angle there, we'll do that. But a lot of these larger deals, I hear the refrain a lot to say, there's just a lot less competition in these bigger deals. And that's right. If you're selling a $200 million package, there's a heck of a lot fewer folks that are able to fund that in a short amount of time. But you talk about competition, I always joke, okay, would you other play basketball against 5 5th graders or one LeBron James. There's a lot less -- fewer competitors when you're playing just LeBron James, but the competition is fierce. And that's what we've seen. We'll bid on a lot of these big deals. And the fact is we lose and oftentimes by pretty high return. We lose by a lot. And so we've just said, you know what, we have better rates of return on the smaller deals, and we're just going to stick to our knitting. If we weren't putting money to work, then, I might step back and say, okay, are we missing something here? Are we missing something by losing those deals, but winning these. The fact is we're just continuing to put as much capital to work as we'd like. So we look at those deals. We put bids on those deals, and we're working very, very hard. But I don't think that's going to be a core area of growth for us, certainly, unless interest rates get to a spot where there's more value to be squeezed out of production.

Turning to the balance sheet. As we talked at the outset that low leverage in is a key tenet of Granite Ridge's business philosophy in maintaining a leverage ratio I think of less than half a turn. Can you just elaborate on how you balance the capital program to maintain and grow the asset base with leverage and also with funding the fixed dividend?

Yes, you got it. So the leverage piece is good about. I mean, capital discipline is just critical. We've learned from our forefathers, how do you get a company in trouble. It's liquidity. It's by not having enough liquidity in challenging times because this is a volatile business. It seems to be more volatile by the year. And so by having low leverage, it really allows you to, one, make sure that you always have capital available for deals, which is a big piece. But then two, it allows you to be on the offensive when other people are on the defensive. And that's a big piece of the strategy. You know COVID is a good example where if you want COVID 1x levered, you woke up and your 3x levered, which didn't mean you were distressed. A lot of those companies were still fine healthy companies, but they weren't buying new assets. They're more focused on their internal assets and paying down debt versus -- we went into COVID with little to no leverage, and there was an asset in the DJ Basin that went for sale in late 2020. It was a private equity fund. It was a very successful fund, but it was the last asset in the fund that was running out of life. So they hired an investment bank through a party. We're the only guys that showed up because we had that leverage capacity. So low leverage is key as we talk about half a turn is the target for us. It's about $150 million based on last year's cash flow, and we'll bounce around above and below that. We may bounce from $100 million to $200 million just from working capital swings as big pad comes on and you put a lot of capital in, but that $150 million is the target. And so capital allocation growth is big. If we're really a provider of capital, if we're publicly traded private equity, capital allocation is what investors need to know. So the way we look at it, again, our sources are internal to generate cash flow and then leverage. First and foremost, we have that fixed dividend. That $0.44 a share, it's a little over 7% now. That's sacrosanct to us. that's an important piece is to make sure that you can do that. I've likened it to tying in the past in the sense that you take that off the top first because if -- in our case, if you want to continue to earn and to justify investor trust, you need to make sure you continue to do what you say you're going to do. So when we look at the remainder, and we really put that into 2 buckets. One is maintenance CapEx. How much is it going to take to keep our production flat year-over-year. And that's something that I don't know if goal is the right word. It's just something that we want to do. We don't want to shrink in this environment. And then the rest is really discretionary CapEx. And what we've done is put all that back into the asset, recycle that cash flow for growth to try to compound returns for our investors. So it's dividend, it's maintenance CapEx and then it's been recycling the rest. What does that mean? We anticipate that with that capital structure that we can grow in the low to mid-single digits, maybe high single digits year-over-year. That's the idea. We actually went into last year saying that same thing. We're projecting 9% growth. We ended up with 23% growth, which is great. I wouldn't anticipate that level of outperformance every year, but we would love to see that. But really, that mid- to high single digits, we think we can do that on the production side while maintaining that dividend.

Well, Luke, since you mentioned forefathers, I think if people think back to the early days of shale when companies spent a tremendous amount of capital to put acreage on the asset base, which meant a capital program needed to be funded to hold the acreage. One differentiating factor, I think, with Granite Ridge's business model is that the leverage on your balance sheet is really on there because it's generating cash flow as opposed to what's on there because it's 1,000 acres in a play that's not going to be drilled for 5 or 10 years.

No, that's a great point. And it's one of the -- I guess, it's a pro and a con. It's a governor that we have. On the non-op side, banks don't often want to lend to inventory when you're non-op because you don't control the development of that. And so if you look at our borrowing base, it's less than what an operator would get because we don't necessarily have control of that inventory. So it's easy to say you absolutely do that on purpose. Part of it is because the banks don't give us as much credit for it. But you're right, the debt is basically all against production. And so we don't get a lot of credit for the inventory side. And so that makes what debt we do have even lower risk. I'm glad you pointed that out.

When we started this fireside chat, Granite Ridge's equity was yielding about 7% based on its current dividend. So it's not like the dividend is low compared to other securities, especially in the energy industry. But I did want you to share your thoughts on dividend growth in the context of executing the business over the next several years.

Yes, I'd love to. And so funny. A lot of people -- you pull up the tear sheet on the company. You've got a 7% dividend, low leverage, at 20% production growth year-over-year. What's wrong? Why is this thing trading at less than 3x or right around 3x based on today. And in my response is, look, nothing wrong with the business. But we do have -- we're a tightly held company. We have a private equity overhang about 52%. And so one of the challenges there is that it's tough for a lot of the larger institutional investors to come in and buy shares of Granite Ridge, at least in a scale that's material to them. I mentioned this on the call, but we were in New York earlier this year and some feedback we got more than one occasion is, "Hey, look, I love this story. I get what you're doing. I think it's different. I don't know exactly what you're worth, but I know you're undervalued, but I can't buy this in the fund because it's going to -- if I need to buy $30 million worth and the trading volume isn't such that I can get in and out of that in a day or two, like I need to. And so I may buy my personal account. But I can't buy it in the fund right now, but I'm going to watch let me know the next time you're in town." And so that's a message that you're actually -- you hate to hear one side of it, but you love to hear it because they recognize the value of the business, they recognize what they're doing, but they all sort of recognize we have a technical challenge on the shareholder base. So why do I tell that story? It's because, look, a healthy company often has a growing dividend. We recognize that, that's a sign of a resilient healthy company that can continue to do what they're doing year-over-year. So we recognize that. I think having dividend growth will be a big piece of it. But really, there's two primary reasons that we haven't grown the dividend yet. And one is look, you mentioned that we're already at 7%. I don't think anybody is not buying Granite Ridge because the dividend is not high enough. I don't think that's what's keeping people out. I think that by increasing the dividend, you're not necessarily increasing the investor universe because those people who aren't buying it aren't doing it because of the dividend, it's just because of the trading volume, and we'll continue to work on that. We've made great strides over the past 12 months. But the growth in dividend doesn't necessarily increase your investor base. The other piece is, we've talked a lot about the strategic partnerships and how we picked up a rig in November with a partner out of Midland. Whenever you pick up a drilling rig, you outspend cash flow for a while and then you get to the point where you're cash flow positive. We're in that cash outflow right now. And so while we're in this kind of period of cash outflow, we think it's better to make sure that we're deploying our capital into growing those assets and continue to recycle versus increasing the dividend. But if you fast forward, look, the trading volume side of things, time will solve that. Time absolutely solves that we keep putting up good numbers quarter-over-quarter, demonstrating that we can do what we say we're going to do. We really do have a resilient business. That will solve itself. And as these strategic partnerships really start to get to that cash flow positive number, I think you'll see us start to increase the dividend and just demonstrate that what we have really is resilient. It really is repeatable and that it's something that people can look to for a long time.

Luke, we've covered a lot of ground today between capital allocation and business philosophy and the balance sheet and the dividend. If you were to summarize how you think about really the total shareholder return package or opportunity with Grant Ridge, what would you say?

Yes, it's a great question. What we really again strive to do is we have about 7% dividend yield right now. We're growing mid- to high single digits year-over-year and hopefully better than that. And so what you do is you have a yield story combined with a growth story, all underpinned by the resilient business model and low leverage. And so I really think that what we have is unique in the marketplace. There's not a focus -- a lot of folks that look just like us. And the other thing that I think is relatively unique is you see an insider buying on this deal in every single open window. And I think that you'll continue to see that. The folks that are really involved in this day in, day out. We believe in what we're doing. We believe that this is different. We think this is a better way to invest in oil and gas, and we're putting our money where our mouth is. So I think it's a differentiated vehicle out there, and we'll continue to pound the pavement and tell the story. It's one of my favorite things about the job is getting to meet new folks. And so I certainly appreciate you doing this, Jeff and give me a forum to talk to a lot of new folks haven't gotten meet in person yet.

Well, Luke, I think you're going to be out in the out some this spring. And so we'll look forward to doing another fireside chat with you at some point in the not-too-distant future. I want to thank you very much for taking the time to join us today.

Well, I'd love to do that, Jeff. And sure, I appreciate you having me. Thanks to you and the Water Tower team.

Thank you.