Executive Summary / Key Takeaways

• A Transformation from Passive to Active: Granite Ridge is executing a fundamental strategic shift from a traditional non-operated working interest investor to a "publicly traded private equity" model built on operated partnerships, giving it control over capital allocation and development timing while targeting full-cycle returns exceeding 25% in a dislocated market.

• Market Dislocation as Opportunity: The 90% collapse in private equity fundraising for U.S. natural resources (2018-2023) has created a vacuum that Granite Ridge is exploiting to acquire high-quality drilling inventory at attractive entry costs ($1.7-1.9 million per net location), building a multi-year inventory runway that larger competitors are too slow to capture.

• Capital Efficiency at the Cost of Scale: The company's conservative 0.9x leverage ratio and 8.6% dividend yield reflect disciplined capital stewardship, but this comes with a trade-off—production growth of 27% year-over-year in Q3 2025 lags behind Vital Energy (31% growth) but exceeds Crescent Energy (16% growth), while the 151% payout ratio raises questions about dividend sustainability.

• Execution Risk on the Pivot: The operated partnership model, while promising, remains unproven at scale. Admiral Permian's success (7,400 BOE/day net, 23% of total production) demonstrates the concept, but newer partnerships are still in "aggregation mode," and the company remains 100% dependent on third-party operators for its traditional non-op assets, creating potential bottlenecks.

• Valuation Reflects Niche Positioning: Trading at $5.05 with an enterprise value of $939 million (2.9x EV/EBITDA), Granite Ridge trades at a discount to its asset value but a premium to cash flow multiples of larger peers, reflecting its unique hybrid model and the market's uncertainty about whether this pivot can deliver sustainable competitive advantages.

Setting the Scene: The Public PE Model in a Private Capital Vacuum

Granite Ridge Resources, founded in 2014 as an oil and gas private equity firm, spent its first eight years building a quiet empire—amassing interests in over 3,100 wells across six premier U.S. unconventional basins. This foundation as an investment-driven entity, rather than a traditional operator, shaped its DNA: the company learned to underwrite deals, manage partnerships, and allocate capital with the discipline of a financial sponsor rather than the growth-at-all-costs mentality of many E&P operators. When the company transitioned to a publicly traded entity in October 2022, it brought this PE mindset to the public markets, a rarity in an industry dominated by asset-heavy, operationally-focused players.

The company's place in the industry structure is deliberately hybrid. Granite Ridge operates in one reporting segment—oil and natural gas development, exploration, and production—but manages capital through two distinct strategies that function as separate business lines. The traditional non-operated (non-op) business involves owning minority interests in core areas managed by experienced third-party operators, providing stable cash flow and diversification without operational control. The newer operated partnership model, launched around 2023, represents a controlled investment where Granite Ridge holds a majority working interest alongside proven value creators, granting full control over capital allocation, development timing, and well design.

This positioning emerged from a profound market dislocation. Between 2018 and 2023, private equity fundraising for U.S. natural resources plummeted nearly 90%, creating a void that Granite Ridge is systematically exploiting. As CEO Tyler Farquharson noted, "the private equity capital that is left in the space is focused on much larger format transactions," leaving a "pretty attractive space for us that fits our model well where we're able to just continue to aggregate smaller transactions at really attractive prices." This dynamic has compressed the historical discount between non-operated and operated inventory—from roughly 50% in 2014 to near parity by 2023—making Granite Ridge's ability to source off-market deals at $1.7 million per net location a genuine competitive advantage.

Technology, Products, and Strategic Differentiation: Control Without Complexity

The core strategic advantage of Granite Ridge's operated partnership model lies in its elegant solution to the capital allocation problem that plagues both pure non-op investors and traditional operators. By partnering with proven value creators like Admiral Permian Resources, Granite Ridge gains the control benefits of an operator—deciding when to drill, how to design wells, and where to allocate capital—without the overhead, technical staffing, and operational complexity of running its own drilling rigs and field operations. This "capital discipline of an investment firm" combined with "the control of an operator" creates a unique economic proposition.

The tangible benefits are measurable. Admiral Permian Resources, the company's longest-standing partnership, has scaled to 7,400 BOE per day net to Granite Ridge (23% of total production) in less than three years, capturing 198 wells (94 net) representing nearly $1 billion of development capital. The partnership's multi-horizon portfolio consistently delivers results in line with underwriting expectations while advancing technologies like U-turn well design that enhance efficiency and cost control. This performance validates the model's ability to generate the targeted full-cycle returns exceeding 25%.

The flexibility inherent in this structure provides a powerful risk mitigation tool. In a scenario of sustained oil prices below $55 per barrel, management can pivot to maintenance mode, targeting approximately $225 million in CapEx, and defer activity from operated partnerships. As former CEO Luke Brandenberg explained, "we have full control over the timing and the development pace of those partnerships" to "push some of that activity out if we do see a quarter or 2 worth of oil price in the low 50s." This contrasts sharply with traditional non-op positions, where Granite Ridge is subject to operators' capital allocation decisions and AFEs (Authority for Expenditure) that may not align with its economic thresholds.

The traditional non-op business, while less glamorous, serves a critical strategic function. It provides stable cash flow, diversification across six basins, and exposure to high-quality operators without capital intensity. In Q3 2025, the company participated in 59 gross wells (9.3 net) turned to sales, primarily in the Permian and Appalachian Basins. Management is "particularly encouraged by our results in the Appalachian Basin," where the company has added over 1,500 net acres in 2025 and consistently outperformed underwriting expectations. This diversification proves "incredibly valuable during times of volatility," as gas production (roughly 50% of the mix) provides a natural hedge when oil prices weaken.

Financial Performance: Growth at the Cost of Margins

Granite Ridge's Q3 2025 financial results provide mixed evidence for the operated partnership thesis. Production surged 27% year-over-year to 31,900 BOE per day, driven by both operated partnerships and outperformance in non-op wells. Oil and natural gas sales increased 20% to $112.7 million, with natural gas revenues up 142% due to a 93% increase in realized prices and 25% production growth. This top-line momentum supports the strategic pivot, demonstrating that controlled investments can drive meaningful volume growth.

However, the margin story reveals the cost of this transformation. Lease operating expenses (LOE) jumped 81% to $8.03 per BOE, primarily due to increased well count from acquisitions and successful drilling, leading to an 83% increase in saltwater disposal costs and overall service cost inflation. This margin compression meant that despite 27% production growth, adjusted EBITDAX rose only 4% to $78.6 million. The operating leverage that should accompany production growth is being offset by higher per-unit costs, particularly in the Permian Basin where operated partnerships are concentrated.

The capital allocation reflects the strategic priority shift. Year-to-date 2025, approximately 50% of capital spending has been deployed through operated partnerships, with the full-year target reaching 60%. Development capital is allocated roughly 51% to operated partnerships and the balance to traditional non-op. This represents a significant increase from 2024, when just under half of capital went to operated partnerships. The company is on track to invest $400-420 million in total CapEx for 2025, including $120 million for acquisitions.

The balance sheet remains a source of strength, with a leverage ratio of 0.9x net debt to adjusted EBITDA at Q3 2025—well below the long-term target of less than 1.25x. The November 2025 issuance of $350 million in 8.88% senior unsecured notes due 2029, combined with a reaffirmed $375 million borrowing base, contributed to pro forma liquidity of $422 million. This conservative capital structure provides the firepower to continue acquiring inventory while maintaining dividend payments, though the 151.7% payout ratio raises sustainability questions.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 reflects confidence in the operated partnership model while acknowledging commodity price uncertainty. The company maintains full-year production guidance of 31,000-33,000 BOE per day (28% year-over-year growth at the midpoint) with oil representing roughly 50% of the mix. Q4 production is expected to grow in the "high single digits" from Q3 levels, with capital spending of approximately $125 million, "a big chunk of that being the remaining acquisitions that we're closing for the year."

The strategic framework for 2026 outlines a clear price-dependent path. Above $60 oil, the company plans "measured growth with modest outspend." If sustained oil prices fall below $55 per barrel, management will pivot to maintenance mode targeting roughly $225 million in CapEx while maintaining flexibility for opportunistic acquisitions. This agility is supported by the just-in-time inventory model, diversified asset base, and minimal drilling commitments that allow the company to "remain nimble through varying market conditions."

The hedging program provides additional downside protection, with approximately 75% of expected production hedged through 2026. As former CEO Brandenberg noted, this level of hedging "preserves our expected cash flows and provides significant optionality as we look to capitalize on opportunities in this environment."

Execution risk centers on scaling the operated partnership platform. While Admiral Permian is a proven success, newer partnerships with PetroLegacy and two confidential partners are still in "aggregation mode," expected to take six months to build 18 months of drilling inventory before committing to full-time rigs. Management expects "at least one rig on one of the two new partners by some point in 2026," but the timeline remains uncertain. The operated partnership model requires not just capital but also proven operator teams, and the competition for top-tier partners could intensify as other E&Ps recognize the opportunity.

Risks and Asymmetries: When Control Meets Dependency

The most material risk to Granite Ridge's thesis is the inherent tension between its operated partnership ambitions and its continued dependence on third-party operators. While the company touts "full control" over capital allocation in operated partnerships, 100% of its wells remain operated by external partners. If these operators are unsuccessful, unable, or unwilling to perform—particularly in a low commodity price environment—the company's financial condition could be adversely affected. As management acknowledges, "third-party operators may also make decisions that are not in the company's best interests."

This dependency creates a potential bottleneck. In Q1 2025, outperformance was driven by "traditional non-op wells that came online earlier than we thought" and "existing wells that outperformed." This highlights that even in the non-op portfolio, Granite Ridge's fate is tied to operator execution. The company's ability to "swiftly cut or defer" $30 million in CapEx within operated partnerships provides flexibility, but only if operators cooperate. In a severe downturn, operators might prioritize their own interests, leaving Granite Ridge with limited recourse.

Commodity price volatility remains a persistent threat, despite hedging. A 10% increase in average commodity prices for the nine months ended September 30, 2025, would have decreased the fair value of derivatives by $16 million, illustrating the cost of this insurance. More concerning is the margin compression evident in Q3 2025: while production grew 27%, LOE per BOE jumped 81%, and adjusted EBITDAX grew only 4%. If this cost inflation continues—driven by saltwater disposal, contract labor, and service costs in the Permian—the operated partnership model's targeted 25%+ returns could prove elusive.

Scale disadvantage poses a strategic risk. Granite Ridge's Q3 2025 production of 31,900 BOE/day is a fraction of Crescent Energy 's 253,000 BOE/day or Civitas Resources 's 348,000 BOE/day. This size gap limits bargaining power with operators and service providers, potentially leading to higher per-unit costs. In an inflationary environment, "you're gonna pay more for pipe and that sort of thing if you don't have a yard full of it," as Brandenberg noted. Larger peers can negotiate volume discounts and secure service capacity that Granite Ridge cannot, putting the company at a competitive disadvantage during periods of tight supply.

The dividend sustainability question creates a binary outcome. With a payout ratio of 151.7%, the $0.11 quarterly dividend ($0.44 annually) is not covered by earnings. Management argues this is temporary, stating "we believe we can fund our dividend and achieve mid to high single-digit production growth out of cash flow." However, if the operated partnership model fails to generate the anticipated returns or if commodity prices decline, the company may face a choice between cutting the dividend—a central component of its total return framework—or increasing leverage beyond its comfort zone.

Valuation Context: Paying for Optionality

At $5.05 per share, Granite Ridge Resources trades at an enterprise value of $939.4 million, representing 2.9x EV/EBITDA and 2.2x price-to-operating cash flow. These multiples appear attractive relative to larger peers: Northern Oil and Gas trades at 2.1x EV/EBITDA, Crescent Energy at 3.1x, and Civitas Resources at 2.3x. However, the discount reflects Granite Ridge's smaller scale and execution risk on its strategic pivot.

The 8.6% dividend yield stands out in the E&P sector, exceeding Northern Oil and Gas (NOG)'s 7.7% and far surpassing Crescent Energy 's 5.1% and Civitas Resources (CIVI)'s 6.7%. Yet this yield comes with a warning: the 151.7% payout ratio indicates the dividend is not currently covered by earnings or free cash flow. Management's commitment to the dividend as a "central component of our total return framework" suggests they will prioritize it, but this may require incremental debt or asset sales if operated partnerships don't deliver expected cash flows.

Balance sheet strength provides a valuation floor. With debt-to-equity of 0.47 and leverage at 0.9x net debt/adjusted EBITDA, Granite Ridge has substantial capacity to fund its transformation. This contrasts favorably with Vital Energy (VTLE) (1.33 debt/equity) and Crescent Energy (CRGY) (0.72 debt/equity). The recent $350 million senior notes issuance at 8.88%—while expensive—provides long-term capital to repay revolving debt and fund acquisitions without diluting equity. Pro forma liquidity of $422 million offers significant optionality to capitalize on market dislocations.

The key valuation question is whether the operated partnership model can generate returns that justify the risk. The first six projects show an estimated 24% IRR, just shy of the 25% target, but these are early results. If Granite Ridge can consistently hit its return targets while scaling the partnership platform, the current valuation could prove conservative. If execution falters or costs continue to inflate, the discount to larger peers is warranted.

Conclusion: A Compelling but Unproven Transformation

Granite Ridge Resources represents a compelling experiment in bringing private equity discipline to public markets. The company's pivot to operated partnerships—capturing control, targeting 25%+ returns, and exploiting a market dislocation created by the 90% collapse in private equity fundraising—addresses the fundamental weakness of the non-op model: lack of capital allocation control. The early success of Admiral Permian Resources, generating 23% of total production with 7,400 BOE/day net, demonstrates the concept's viability.

However, the transformation remains unproven at scale. Newer partnerships are still aggregating inventory, the company remains 100% dependent on third-party operators, and Q3 2025's margin compression shows the cost pressures that can erode returns. The 151.7% dividend payout ratio and 8.6% yield reflect market skepticism about sustainability, while the 0.9x leverage ratio—though conservative—may need to increase to fund growth if operated partnerships don't generate self-sustaining cash flow quickly enough.

The investment thesis hinges on two variables: execution velocity in scaling the operated partnership platform and the durability of returns amid cost inflation. If management can replicate Admiral's success across its four partnership teams while maintaining capital discipline, Granite Ridge could carve out a durable niche as a high-yield, capital-efficient E&P with private equity-like returns. If execution falters or commodity prices decline sharply, the company may be forced to choose between its dividend and its transformation—testing the core of its investment proposition.