What’s Up With Granite Oil

It doesn’t look good from a daily point of view.

GXO StockCharts.com October 7

Source: StockCharts.com

And the weeklies aren’t looking good either.

GXO StockCharts.com October 7

Source: StockCharts.com

So what’s up? Well, we are back to the lower for longer rhetoric.

And if oil prices are lower for longer, then Granite Oil’s whole business model is in big trouble. Especially if we look at current and past guidance from management.

GXO September Presentation October 7

Source: September corporate presentation

GXO August Presentation October 7

Source: August corporate presentation

GXO May Presentation October 7

Source: May corporate presentation

What can we see:

  • We know management is planning for lower for longer;
  • $55 WTI is expected until 2021 compared to 2018 before;
  • Capital expenditures are lower, and therefore production growth is almost nonexistent;
  • And… The juicy dividend is maintained nonetheless.

This is the reason the market is reacting: Management is definitively holding the dividend steady. This is big trouble for Granite Oil’s business model, should oil prices hold $50 in the long-term.

GXO Free Cash Flow Projections October 9

Source: Corporate presentations and my own work.

As we can see in the graph, free cash flow is negative years out using $50 WTI. Debt will increase, and there won’t be any cash to make up for it.

Not to mention bullish assumptions, including a tight WTI/WCS differential and an advantageous foreign exchange rate.

In all, Granite Oil will need higher oil prices for the stock to be worth something. $50 WTI isn’t enough, and it’s the price the market expects in the medium to long-term.

Disclosure: I am long GXO.

2 thoughts on “What’s Up With Granite Oil”

  1. You are wrong. They calculate FCF post dividend, when in reality FCF is pre-dividend. They model for $55 and $60 right, so subtract $5 and $10 from the operating cashflow to get to the $50 you predict. And it’s still postive.
    They aren’t losing money.

    1. Here is my calculation:

      Operating cash flow – Capital expenditures – Dividend = Free cash flow.

      As you say, operating cash flow is positive, even at $50 WTI. However, for each year, capital expenditures and the distribution (the juicy dividend) are higher then the operating cash flow, hence negative free cash flow (at $50 WTI, of course). Don’t forget to convert oil prices in Canadian Dollars.

      Don’t get me wrong, I am still long GXO. The market expects $50 WTI in the long-term: I don’t.

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