Freedom upgraded Granite Ridge Resources to Buy with 17% upside potential

Freedom analyst Sergey Pigarev upgraded his rating on shares of oil and gas company Granite Ridge Resources (GRNT) to “Buy” and maintained the target price at $6. With a closing price of $5.11, the new rating implies a 17.4% upside potential. The upgrade followed a significant decline in the share price, despite continued pressure on the company’s financial performance.

Granite Ridge Resources’ revenue rose 37%

In Q2 2026, Granite Ridge Resources increased revenue by 36.7% year over year to $149.3 million. The growth was supported by high oil prices: the average realized price rose 52.9% to $93.93 per barrel. Including hedging, it was $75.65 per barrel.

Granite Ridge Resources (GRNT) is a U.S. oil and gas company that invests in oil and natural gas production. Its assets are located in six major U.S. oil and gas basins, including the Permian Basin, Eagle Ford, and Bakken. A distinctive feature of Granite Ridge’s business model is that the company primarily **invests in stakes across many oil and gas fields and wells that are developed by other operators**, and also participates in joint projects with private oil and gas companies. This approach allows it to diversify investments across different regions, fields, and partners. 

At the same time, production dynamics were much more modest. Oil production increased 2.1% to 1.49 million barrels, and natural gas production rose 0.9% to 8.57 billion cubic feet. Total production grew 1.5% to 32 thousand barrels of oil equivalent per day. Management expects to accelerate it in the second half of the year and reach about 40 thousand barrels of oil equivalent per day by year-end.

Low gas prices and rising costs weigh on Granite Ridge Resources’ results

One of the main challenges for Granite Ridge Resources remains low realized natural gas prices. In Q2, they fell 51.7% year over year to $1.12 per thousand cubic feet. The pressure is partly related to infrastructure constraints. Management views Q2 as a local bottom and expects pricing to improve in the second half of the year as pipeline infrastructure expands.

At the same time, production costs increased. Lease operating expenses rose 48.9% to $30 million, or $10.27 per barrel of oil equivalent. The main drivers were higher water disposal costs in the Permian Basin and higher initial costs at new sites. As a result, the company raised its forecast for such expenses for 2026.

Granite Ridge Resources’ net debt rose to $418 million

The company’s free cash flow remains negative. Operating cash flow excluding working-capital changes amounted to $69.5 million, while capital expenditures reached $62.2 million, and the company directed another $16.7 million to asset acquisitions. An additional negative impact came from a $35.7 million outflow related to derivative financial instruments.

Over the quarter, Granite Ridge Resources’ net debt increased by $21.8 million, or 5.5%, to $418 million. Interest expense rose 7.3% to $11.1 million. The Freedom analyst allows for further debt growth in the second half of the year amid planned investments.

Granite Ridge Resources’ dividend yield is 8.8%

The company kept its quarterly dividend at $0.11 per share, corresponding to a yield of about 8.8% annually at current prices. However, operating cash flow currently does not cover both capital expenditures and asset acquisitions, so in practice dividend payments are accompanied by higher leverage. The Freedom analyst considers this source of dividend funding unsustainable.

Freedom expects Granite Ridge Resources’ cash flow to improve in 2027

The analyst sees as the key positive factor the prospect of Granite Ridge Resources transitioning to sustainably positive free cash flow in 2027. Results could also be supported by the expansion of gas transportation infrastructure and the commissioning of new LNG export capacity in the U.S., which could underpin domestic gas prices.

At the same time, the key risks remain. High leverage reduces the company’s financial resilience, and results remain sensitive to oil and natural gas price dynamics. Despite this, following a significant share-price correction, the Freedom analyst upgraded the rating to “Buy” and reaffirmed the $6 target price.

U.S. oil and gas companies face pressure from low natural gas prices

A similar situation is developing at other U.S. oil and gas companies as well. Earlier, Freedom maintained a “Buy” rating on shares of Riley Exploration Permian (REPX), but cut the target price from $55 to $51. At a price of $36.52, the new target implied 39.65% upside potential. The revision was driven by rising costs, increased investment, and continued pressure on the gas business. 

In Q2, Riley Exploration Permian’s production rose 40.7% year over year to 3.1 million barrels of oil equivalent, and revenue increased 94.2% to $169.3 million. However, infrastructure constraints in New Mexico forced the company to temporarily shut in some wells. At the same time, capital expenditures jumped 137.8% year over year to $68.3 million, and lease operating expenses increased to $9.44 per barrel of oil equivalent from $7.51 in the prior quarter. 

Low gas prices are also weighing on SandRidge Energy (SD). Freedom cut its target price from $15 to $14 and maintained a “Hold” rating. With shares around $14.3, that target implied a decline of about 2.1%. In Q2, the company’s realized natural gas price fell 56.5% versus the previous quarter to $1.36 per thousand cubic feet. 

At the same time, SandRidge maintains a strong financial position: at the end of June, the company had $114.7 million in cash and no debt. However, it plans to allocate $65 million to acquire producing assets in the Cherokee Play region. The deal should increase production, EBITDA, and free cash flow, but will also reduce cash reserves and the capacity for large shareholder payouts or share buybacks.

Not an individual investment recommendation.