Granite Oil: Still Bullish

Temporary operational setbacks have sent the stock to the cave.

Tighter well spacing wasn’t optimal after all.

In 2017, the Company tested further down‐spacing, with infill drilling on 100 and 133 meter intervals (see May 9, 2017 press release). These wells initially tested at rates comparable to wells drilled on 200  meter spacing, and while economic, have proved to be less productive over time.

Granite Oil Press Release, November 9, 2017

Well spacing will be 200 meters from now on.

Despite these setbacks, Granite is still one of my favorite oil stocks.

  • The company will spend over C$10M in growth capital in 2018. This will grow production 600 barrels per day year-over-year.
  • Cash netbacks are high.
  • The dividend is safe at current WTI prices.
  • Some of the decrease in production is due to conversion of producing wells to gas injectors.

Plus there are still 80 drilling opportunities to further grow production and oil recovery. The next area of focus is delimited in purple, with approximately 10 drilling locations

Drilling Development GXO December 03

Source: Granite Oil, December 2017 Corporate Presentation

I added to my position on November 15, 2017.

Disclosure: I am long GXO. Not for republication on Seeking Alpha.

Granite Oil: I Should Stop

The next resistance level is at C$4 per share.

Cadotte Capital Partners, November 7, 2017.


GXO November 13


GXO November 13


Yeah, I should stop. But it’s still a great time to buy the stock. For better or worse, management is keeping the dividend. Warning: The dividend will be cut should oil drops below $50 again.

Disclosure: I am long GXO. Not for republication on Seeking Alpha.

What’s Up With Granite Oil

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

GXO October 7


And the weeklies aren’t looking good either.

GXO October 7


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: Granite Oil, September 2017 Corporate Presentation

GXO August Presentation October 7

Source: Granite Oil, August 2017 Corporate Presentation

GXO May Presentation October 7

Source: Granite Oil, May 2017 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 February 3

Source: Cadotte Capital Partners

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.