Granite Ridge (GRNT) Q2 2025: Production Surges 37% as Operated Partnerships Expand Permian Inventory

2025-08-08 | By EarningsIQ Research

Granite Ridge’s Q2 marked an inflection point, with production and cash flow outpacing expectations as the company leaned into its Operator Partnership Strategy and accelerated acquisitions in the Permian and Appalachian basins. Leadership transition did not disrupt execution, with new CEO Tyler Parkinson doubling down on inventory expansion and capital deployment. Full-year guidance was raised for both production and capital spending, signaling a continued appetite for growth and a willingness to outspend cash flow to secure long-term value.

Summary

• Operator Partnership Strategy Drives Outperformance: Aggressive capital allocation to operated partnerships and off-market acquisitions expanded high-quality inventory.
• Production Mix Shifts Toward Oilier Assets: Permian-driven growth increased oil’s share of production, supporting cash flow resilience.
• Balance Sheet Flexibility Enables Growth Focus: Management signaled comfort with higher leverage to capture current acquisition opportunities.

Performance Analysis

Granite Ridge delivered a standout quarter, with production volumes up 37% year over year to 31,576 barrels of oil equivalent per day (BOE/d), fueled by a 46% surge in oil output and 28% growth in natural gas. Revenue climbed 20% as volume gains more than offset lower realized oil prices, which fell to $61.41 per barrel from $77.84 a year ago. Natural gas realized pricing improved, providing a partial offset to oil price declines.

Operating cash flow before working capital changes rose to $69.5 million, supporting both capital programs and a maintained quarterly dividend. Capital expenditures reached $87 million in Q2 alone, with $77 million on development and $10 million on acquisitions. Year-to-date, total capex including acquisitions hit $193 million, reflecting accelerated project timing and opportunistic inventory additions.

• Cost Structure Pressured by Delaware Basin Activity: Lease operating expenses rose to $7 per BOE, reflecting higher service and saltwater disposal costs as Delaware production increased.
• G&A Temporarily Elevated: General and administrative costs included $2.8 million in non-recurring items tied to leadership transition and capital markets activity, but underlying expense discipline remains intact.
• Leverage Remains Conservative: Net debt increased due to acquisition outlays, but the leverage ratio stayed at 0.8x net debt to adjusted EBITDA, well within management’s comfort zone.

Management’s willingness to outspend cash flow to secure long-dated inventory signals a strategic pivot toward scale, enabled by a strong liquidity position and supportive credit markets.

Executive Commentary

Strategic Positioning

1. Operator Partnership Strategy Accelerates Value Creation

Granite Ridge’s operated partnership model, where the company funds experienced teams to develop oil and gas assets, is central to its growth thesis. Partnerships with Admiral Permian Resources and Petro Legacy, among others, now account for a growing share of production (22% from Admiral alone) and inventory. Two new partners were added this quarter, expanding the opportunity set and deal flow. This approach leverages private market dislocation, as private equity capital has retreated, enabling Granite Ridge to aggregate smaller, attractively priced deals that larger players overlook.

2. Opportunistic Acquisitions Extend Growth Runway

Acquisition capital is being deployed aggressively, with $44 million spent year-to-date and a further $120 million targeted for 2025. Nearly 80% of new capital is earmarked for the Permian Basin, with the remainder focused on Appalachia. Every transaction sourced has been off-market, reflecting the effectiveness of the company’s business development engine and ability to secure inventory at $1.7 million per location—an entry cost well below recent market averages.

3. Production Mix and Hedging Underpin Cash Flow Stability

The portfolio remains balanced between oil and gas, but the current growth cycle is skewed toward oilier Permian assets, which support higher margins and cash flow. Approximately 75% of production is hedged, mitigating commodity price volatility and supporting the dividend. This risk management discipline is critical given recent oil price softness and ongoing macro uncertainty.

4. Capital Allocation Prioritizes Scale Over Near-Term Free Cash Flow

Management is comfortable outspending cash flow in the near term, as long as leverage remains within the 1.0 to 1.25x range. The rationale is clear: current market conditions provide a rare window to add duration and scale at attractive economics. Once the inventory base is sufficiently extended, the company expects to pivot toward greater free cash flow neutrality.

5. Financial Flexibility Supports Strategic Agility

Granite Ridge increased its borrowing base to $375 million in Q2, and is exploring further credit market options, including potential high-yield or private credit, to optimize its capital structure. This liquidity ensures the company can continue to pursue attractive acquisitions without sacrificing balance sheet strength.

Key Considerations

This quarter’s results reflect a deliberate shift toward long-term growth and inventory expansion, enabled by a robust balance sheet and a unique business model that blends energy operations with investment management discipline.

Key Considerations:

• Private Capital Retreat Creates Opportunity: The sharp decline in upstream private equity funding since 2018 has left a void Granite Ridge is exploiting through small, off-market deal aggregation.
• Oil-Weighted Growth Enhances Margins: Increased Permian activity is tilting the production mix toward oil, supporting higher realized margins and cash generation.
• Outspending Cash Flow Is a Strategic Choice: Management is transparent about prioritizing inventory growth over immediate free cash flow, as long as leverage remains moderate.
• Non-Recurring Costs Distort G&A Trends: Investors should adjust for $2.8 million in one-time G&A items when assessing underlying expense discipline.
• Hedging Program Shields Downside: With 75% of current production hedged, Granite Ridge is insulated from near-term commodity price swings.

Risks

Granite Ridge’s strategy to outspend cash flow and increase leverage exposes the company to commodity price volatility, especially if acquisition economics deteriorate or if oil prices remain under pressure. Integration of new operated partnerships and successful execution of accelerated development programs are critical; any misstep could impact returns or strain operational oversight. Continued cost inflation, particularly in the Delaware Basin, could pressure margins if not effectively managed.

Forward Outlook

For Q3 2025, Granite Ridge guided to:

• Production modestly above Q2 levels, with further growth expected in Q4 as new wells come online.
• Peak capital spending in Q3, driven by acquisition activity, with a moderation in Q4.

For full-year 2025, management raised guidance:

• Production of 31,000 to 33,000 BOE/d (up 10% at midpoint, implying 28% YoY growth).
• Capital expenditures of $400 to $420 million, reflecting new acquisition opportunities.

Management highlighted several factors that will shape the outlook:

• Continued focus on expanding operated partnerships, potentially increasing rig count to four in 2026.
• Ongoing evaluation of credit market options to support liquidity and optimize capital structure.

Takeaways

Granite Ridge’s unique investment-oriented model is gaining momentum, with strategic deployment of capital into operated partnerships and off-market acquisitions driving both near-term production growth and long-term inventory depth.

• Operator Partnerships Are a Differentiator: The ability to fund proven teams and secure high-return inventory at scale is setting Granite Ridge apart from traditional E&Ps.
• Growth Trumps Near-Term Cash Flow: Management’s willingness to run leverage up to 1.25x signals a clear priority on scale and duration, with free cash flow neutrality a future goal.
• Watch for Execution on Accelerated Development: The next 12 months will test the company’s ability to bring new wells online efficiently and integrate new partner teams.

Conclusion

Granite Ridge’s Q2 results underscore a decisive pivot toward long-term growth, with the company leveraging its investment platform model to capitalize on a rare market window for inventory expansion. Execution on operated partnerships and disciplined risk management will be key to sustaining outperformance as the company leans further into growth.

Industry Read-Through

Granite Ridge’s aggressive acquisition and operated partnership strategy highlights the shifting landscape in upstream energy capital markets. The withdrawal of private equity has created a vacuum that nimble public players can exploit, particularly in the Permian and Appalachian basins. For peers, the message is clear: scale, inventory duration, and access to off-market deals are becoming increasingly important differentiators. Cost discipline and risk management, especially through hedging and balance sheet strength, remain critical as commodity price volatility persists. Other E&Ps may need to rethink capital allocation and partnership models to remain competitive in a market where traditional funding sources have dried up.

GRNT Energy Oil & Gas Acquisitions Permian Production Operator Partnerships Inventory