Granite Ridge Resources, a name that might not yet ring bells on Wall Street, is quietly executing a strategy that could fundamentally reshape the relationship between operators and non-operators in the oil and gas industry. While most analysts focus on the company's steady production growth and attractive dividend yield, a closer look at their Q1 2024 earnings call transcript reveals a fascinating shift in power dynamics, one that positions Granite Ridge not as a passive investor, but as a strategic orchestrator of development.

For years, the traditional non-operated (non-op) model in oil and gas has been relatively straightforward. Non-op companies invest in drilling projects alongside operators, but relinquish control over development timing and operational decisions. This model has its advantages, allowing for diversification and limiting operational risks. However, it also relegates non-op companies to a passive role, subject to the whims of the operator's drilling schedule and capital allocation priorities.

Granite Ridge, however, is challenging this status quo. Through their "strategic partnership" initiative, they are forging a new path, blurring the lines between operated and non-operated by gaining a significant level of control over development timing, even while technically remaining a non-operator.

This innovative approach, termed "controlled capital," manifests in several ways. First, Granite Ridge is actively partnering with operators, providing the lion's share of the capital for drilling projects in exchange for control over the development timeline. This allows them to capitalize on favorable market conditions and optimize returns, rather than being bound by the operator's potentially conflicting priorities.

Second, they are strategically building inventory in prime oil and gas plays like the Permian Basin, not just through traditional acquisitions, but also through proactive leasehold aggregation. This "boots-on-the-ground" approach allows them to assemble drillable units and then attract operators to develop those units under favorable terms that grant Granite Ridge control over timing.

Shifting Power Dynamics: Controlled Capital Expenditures

This shift in power dynamics is not just anecdotal. It's reflected in the numbers. As per the Q1 2024 earnings call transcript, Granite Ridge's controlled capital strategy accounted for a substantial 40% of their drilling and completion capital expenditures, a significant jump from previous levels. Even more striking is their ambition: the company aims for a super-majority of their capital to be controlled within the next few years. This indicates a fundamental and deliberate change in their business model, moving away from passive non-op investments towards a more active, strategic approach to development.

What's particularly compelling about Granite Ridge's strategy is its appeal to both operators and investors. For operators, the "controlled capital" model offers access to flexible capital and valuable inventory without sacrificing control over their company as a whole. This is especially attractive in the current market where private equity-backed exits are extending, and operators are seeking alternative ways to fund development and incentivize their teams.

For investors, Granite Ridge presents a unique and potentially highly rewarding proposition. Their "controlled capital" strategy combines the diversification and lower operational risk of a non-op model with the higher return potential and strategic flexibility of an operated model. This hybrid approach could unlock significant value, especially as Granite Ridge demonstrates its ability to consistently execute and deliver strong results.

Here's where the hypothesis gets truly interesting. Let's assume Granite Ridge can successfully transition a majority of their capital into "controlled" projects, effectively acting as the development orchestrator for a network of high-quality operators. This could dramatically shift market perceptions of their value. Traditional non-op companies often trade at a discount to operators due to their lack of control and limited upside potential. Granite Ridge, however, by demonstrating that non-op does not equate to non-control, could break free from this valuation constraint.

If the market recognizes Granite Ridge's unique model and its potential to generate superior returns, a re-rating could be on the horizon. Imagine a scenario where Granite Ridge, currently trading at less than 3 times EBITDA, begins to be valued more in line with operated companies that often command multiples in the 5 to 7 times range. This would represent a significant increase in shareholder value, even without factoring in continued production growth and strategic acquisitions.

The potential is immense, but the path is not without its challenges. Granite Ridge will need to continue to execute their "controlled capital" strategy effectively, demonstrating not just the ability to acquire inventory and partner with operators, but also the operational expertise to deliver strong well results and manage development timelines efficiently. They will also need to effectively communicate this complex and nuanced story to investors, highlighting the unique value proposition of their hybrid model and attracting a broader base of shareholders.

The success of Granite Ridge's "controlled capital" strategy remains to be fully seen, but the potential is undeniable. This quiet giant, operating under the radar, may be on the verge of disrupting the oil and gas industry, not with a loud bang, but with a series of strategic partnerships that could fundamentally shift the power dynamics of development and unlock significant value for their shareholders.

"Fun Facts"

"Granite Ridge Resources went public on November 6, 2020."

"The company has only two full-time employees, showcasing its lean and efficient structure."

"As of June 18, 2024, Granite Ridge Resources had a market capitalization of $782.5 million."

"Key Highlights from Q1 2024 Earnings Call (Transcript)"

"Successfully expanded credit facility to a $300 million borrowing base and elected commitment."

"Syndicate expanded from six to fourteen banks, with commitments nearly twice the target."

"Production came in slightly higher than expected at 23,800 BOE per day."

"Controlled capital strategy accounted for 40% of D&C capital expenditures."

"Aiming for a super-majority of capital to be "controlled" within the next few years."

"Production expected to be roughly flat for the next two quarters before ramping in Q4 2024."

"Granite Ridge controls 40 gross/21.9 net operated locations in the Permian Basin."

"Expect to turn to sales a pad of 5.5 net single-mile wells in Loving County in early June 2024."