Granite Ridge (GRNT) Q1 2025: Operated Partnerships Now 60% of CapEx as Production Jumps 23%

May 9, 2025 | By EarningsIQ Research

Granite Ridge’s Q1 2025 results underscore a strategic tilt toward operated partnerships, now commanding 60% of capital allocation, while diversified production and disciplined capital deployment drive robust margin expansion and cash flow resilience. Management’s focus on flexible, full-cycle returns and dynamic budget control positions GRNT to navigate commodity volatility and sustain growth, even as the oil-gas price spread reshapes basin-level priorities. With guidance reaffirmed and hedges in place, the company’s operational and financial posture remains defensive yet opportunistic heading into H2 2025.

Summary

• Operated Partnership Expansion: Capital allocation to operated partnerships rises to 60%, increasing control and flexibility.
• Margin Resilience: Cost structure improvements and scale efficiencies drive operating margin to 87%.
• Adaptive Capital Stewardship: Management maintains cash flow neutrality and budget agility amid commodity swings.

Performance Analysis

Granite Ridge delivered a 23% year-over-year production increase, hitting over 29,000 barrels of oil equivalent per day (BOE/d), with oil and gas volumes balanced at a 50-50 split. Revenue grew to $122.9 million, reflecting both higher volumes and strong realized gas pricing, which more than doubled gas revenue to $31 million. Adjusted EBITDAX and net income handily surpassed internal targets, with adjusted net income up 89% year-over-year, signaling robust operational leverage and pricing tailwinds in gas-weighted assets.

Cost discipline was a highlight, as lease operating expense (LOE) per BOE fell 13% to $6.17, below the low end of guidance, and general and administrative (G&A) costs declined 5% per BOE. Operating margin improved from 83% to 87%, marking a repeatable cost structure gain as scale benefits accrue. Capital deployment reached $101 million, exceeding consensus due to an opportunistic Delaware Basin acquisition, but management emphasized flexibility and a willingness to defer or cut $30 million in CapEx if price conditions deteriorate.

• Production Outperformance: Early and above-curve well performance, especially in the Delaware and Utica basins, contributed to the “beat.”
• Gas Price Leverage: Natural gas revenue more than doubled on higher realized prices, offsetting oil price softness.
• Cash Flow Neutrality: The base-case $310 million CapEx plan targets 16% production growth while keeping net leverage at 0.7x.

Hedging remains a central pillar, with 75% of production protected through 2026, enabling stability in cash flows and supporting the nearly 9% dividend yield. The company’s liquidity position was further strengthened by a $50 million borrowing base increase, bringing total liquidity to $141 million at quarter-end.

Executive Commentary

Strategic Positioning

1. Operated Partnership Program as Growth Engine

Operated partnerships, joint ventures where GRNT co-manages drilling and operations, are now the primary capital sink, absorbing 60% of total CapEx in 2025, up from 50% last year. This pivot enables full control over timing and scope of drilling, allowing GRNT to flex investment up or down as commodity prices dictate. Management cited “substantial growth in volumes” and a 400% increase in gross operated oil output in the Delaware Basin, validating the model’s scalability and alignment with quality partners. The program is expected to contribute roughly a quarter of total production this year, with further upside as new pads and basins are brought online.

2. Diversification and Capital Discipline

Granite Ridge’s diversified asset base, spanning six U.S. basins, underpins its ability to weather commodity volatility. The portfolio is balanced at 50% oil and 50% gas, insulating cash flows as price cycles diverge. Every opportunity must “compete for capital,” ensuring that only wells meeting strict return thresholds are sanctioned. The company’s willingness to non-consent on subpar proposals and to swiftly defer $30 million in CapEx highlights its commitment to capital discipline and full-cycle returns.

3. Margin Expansion Through Scale

Scaling production has produced tangible cost benefits, with LOE and G&A per BOE both falling as volumes rise. Management emphasized that these are “not one-time savings,” but durable improvements driven by operational leverage and efficiency. Operating margin now stands at 87%, supporting higher cash flow conversion and sustaining the dividend without excessive leverage.

4. Hedging and Financial Flexibility

A robust hedge book covers approximately 75% of production through 2026, with oil and gas floors and ceilings locking in cash flows. The company’s net leverage remains conservative at 0.7x, and a recent borrowing base increase provides ample liquidity to capitalize on market dislocations or opportunistic acquisitions. Management’s approach blends risk mitigation with optionality, ensuring resilience across cycles.

5. Responsive Capital Allocation

Budget flexibility remains central, as management reaffirmed a base-case CapEx of $310 million but retains the ability to accelerate or curtail spending depending on price signals. With maintenance capital at less than two-thirds of budget, GRNT can quickly pivot between growth and preservation modes, supporting both shareholder returns and asset growth.

Key Considerations

Granite Ridge’s Q1 results reflect the benefits of scale, disciplined capital allocation, and a diversified portfolio that is increasingly weighted toward operated partnerships. The company’s strategy is shaped by a willingness to dynamically reallocate capital, pursue only high-return wells, and maintain robust financial flexibility in a volatile macro environment.

Key Considerations:

• Operated Partnership Leverage: Majority of CapEx is now directed to operated partnerships, giving GRNT more control over project timing and capital pacing.
• Gas Price Upside: Strength in natural gas pricing is driving higher-than-expected revenue and influencing basin-level capital deployment, especially in the Hainesville and Dry Gas Eagleford.
• Cost Structure Advantage: Sustained LOE and G&A reductions are expanding margins and underpinning cash flow resilience, supporting both growth and dividends.
• Capital Flexibility: Management can quickly cut or defer $30 million in CapEx if market conditions weaken, preserving balance sheet strength.
• Dividend Sustainability: The company maintains a nearly 9% dividend yield, funded by cash flow and supported by conservative leverage, though some investors remain wary of borrowing to cover payouts in volatile periods.

Risks

Commodity price volatility remains the dominant risk, with management closely monitoring oil and gas prices and prepared to defer capital if returns fall below thresholds. While the hedge book provides near-term protection, sustained weakness in oil prices or a reversal in gas momentum could pressure cash flows, dividend coverage, and growth targets. Additionally, the increased weighting to operated partnerships, while offering control, also exposes GRNT to execution risk and potential cost overruns relative to non-op investments.

Forward Outlook

For Q2 2025, Granite Ridge guided to:

• Production consistent with Q1 levels, with a modest uptick expected in the second half.
• Capital spending in line with Q1, with a more measured pace in H2 as capital efficiency remains a focus.

For full-year 2025, management reaffirmed guidance:

• Production of 28,000 to 30,000 BOE/d, with oil at 52% of the mix.
• LOE trending toward the low end of the $6.25 to $7.25 per BOE range.

Management emphasized ongoing vigilance on hydrocarbon prices and a willingness to adjust capital allocation as needed:

• Operated partnership activity can be deferred or scaled up based on price signals.
• Non-op participation remains selective, with strict underwriting discipline.

Takeaways

Granite Ridge’s Q1 2025 performance demonstrates that scale, diversification, and disciplined capital allocation can drive both growth and margin resilience in a volatile commodity environment. The shift to operated partnerships increases control and flexibility, while a robust hedge book and conservative leverage provide downside protection.

• Strategic Capital Shift: The move to allocate 60% of CapEx to operated partnerships marks a material evolution in GRNT’s growth model, prioritizing control and adaptability.
• Margin and Cash Flow Defensibility: Durable cost reductions and hedging underpin stable cash flows and dividend coverage, even as price cycles diverge between oil and gas.
• Investor Watchpoint: Monitor how the operated partnership program scales and whether gas pricing tailwinds persist, as both will shape growth, returns, and capital deployment in the second half of 2025.

Conclusion

Granite Ridge enters the remainder of 2025 with a flexible, diversified operating model and a clear focus on capital discipline and full-cycle returns. The pivot toward operated partnerships and ongoing cost structure gains position the company to navigate volatility, defend margins, and pursue growth where returns are compelling. Investors should watch for further developments in partnership execution and basin-level capital shifts as price dynamics evolve.

Industry Read-Through

Granite Ridge’s results highlight a broader trend among upstream independents: increased willingness to shift capital toward operated partnerships and joint ventures to gain control over cash flow timing and project pacing. The pronounced benefit of gas price strength, especially for diversified portfolios, is a theme likely to play out across the sector, with basin-level capital allocation becoming more dynamic as oil-gas spreads shift. The company’s disciplined approach to non-op participation and readiness to defer CapEx is a signal to peers that flexibility and strict return hurdles are increasingly critical in volatile markets. Dividend sustainability and hedging remain central investor concerns across the E&P space.

GRNT Energy Oil & Gas Partnerships Production Hedging Dividend Capital Allocation