HighPeak Energy, Inc. Q2 FY2021 Earnings Call

Thank you, Norma. Good morning, everyone, and welcome to HighPeak Energy's second quarter 2021 conference call. Representing HighPeak today are Chairman and CEO, Jack Hightower; and President Michael Hollis. During today's call, we will make reference to our August Investor Presentation and our second quarter 2021 earnings release, which can be found on HighPeak's website at www.highpeakenergy.com. Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions, and future performance. So please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call. So please see the reconciliations in the earnings release, which was issued Monday afternoon. I will now turn the call over to Chairman and CEO, Jack Hightower.

Thank you, Steve, and good morning, everyone, and welcome to today's call. As expected, our second quarter proved to be another successful quarter for HighPeak, evidenced by our continued positive well results, capital efficiency, and high operating margins. Our production increased, and our EBITDAX increased over 90% quarter-over-quarter. Our liquids-rich production stream of 90% oil and 96% liquids continues to differentiate us from our peers and will continue in the future. Our barrel of oil equivalent is much more valuable and results in these higher profit margins. We currently have multiple wells that are in the early stages of flowback. In addition, we recently added a second rig, which will further accelerate our growth profile into 2022. We are definitely a growth company, and as will be evident after our presentation and discussions about our plans for the future, I'd like you to refer to the highlights in the press release and then turn to slide three of our August investor presentation. This slide, along with our discussion, will emphasize and further discuss the highlights that we outlined in our press release. In our second quarter, we focused very much on fiscal responsibility, growth, and production growth along with high operating margins. As mentioned in the press release, we averaged over 8,800 barrels of oil equivalent per day, up 66% from our average in quarter one production. We have multiple wells that are in early stages of flowback, and as these wells ramp up and other wells come online, we expect our production to continue going forward. We picked up our second rig in early third quarter, and the addition of the second rig will accelerate our growth profile going into early 2022. Our contiguous acreage position and high percentage of operative properties allow us to control our own destiny, which is very important in today's business climate. We effectuated some acreage swaps during the second quarter, which also increased our percentage of operating properties. In addition, we made multiple acquisitions that we will be closing, adding approximately 6,200 net acres to our acreage position, which will add up to almost 1,400 barrels a day for the remainder of 2021, not included in our guidance as we discuss later on. We expect to close these acquisitions in the third quarter, which will increase our working interest in some of our operating units, and with our oil cut and our expertise, contribute to our leading oil costs and full cycle economics. Our second quarter price realized an average price of $60.40 per barrel equivalent, and our operating cash margin was $51.35 per BOE. Both of these values are peer leading, so we're extremely excited about our capital efficiency and what's going on. Continuing to deliver capital efficient growth, our production increased 66% compared to our first quarter, going from 8,800 barrels versus 5,300 barrels in the first quarter. Our EBITDA went up almost 91% to $38.4 million, as mentioned. Our production stream of 90% oil and 96% liquids drives our high margins, giving us different BOE and more valuable income than our peers with the same amount of production. We increased our lateral feet drilled quarter-over-quarter by almost 40%, attributing that to our drilling and operations team’s ability to execute effectively. Our balance sheet continues to stay strong, as evidenced by our small amount of debt. In fact, our net debt is only $1.2 million, and we have a $127 million borrowing base. Some key metrics on slide four include realized prices of $60.40, which I mentioned, being 92% of the WTI index on an unhedged basis, which is peer leading and phenomenal compared to some of our other peers. Our hedged BOE prices are still $59.10 per barrel, which is also extremely high compared to our peers, and our hedged barrels are at $62 per barrel through the second quarter of 2022. This represents less than 50% of our forecasted oil production, giving us good exposure to strong oil prices. Our cash margin in the second quarter was 75% of the oil and gas WTI index, again higher than any of our peers. We're extremely excited about that. Our cash G&A decreased by over 45% this quarter, which helps us drive high operating margins. Our CapEx in the first quarter totaled $46.8 million, down to $44 million, related to DCE&F costs. For full transparency, we always include our equipment costs, facility costs, and water handling costs for the first six months. We drilled 106,400 feet of lateral feet, not including two horizontal wells, our two horizontal south water disposal wells. Our average daily production was up over 300% during the last four quarters. We are a growth company and expect to continue that growth moving forward. We have 5,000 barrels a day hedged at approximately $62 per barrel through the first quarter of 2022. I will now turn the program over to Mike Hollis, our President, who will talk more about our capital efficiency and operations.

Thanks, Jack. I'd like to start by thanking our organization and letting them know how proud I am for accomplishing so much in such a short time. We've made great progress on our key objectives of operating and capital efficiency, maintaining our impeccable safety record, all while rapidly increasing our production. With our marketing agreements, power upgrades, and solar initiatives, recycling and sourcing of local sand, we're addressing all sides of the efficiency equation, receiving higher realized prices while reducing our CapEx and OpEx, and achieving all this while advancing our ESG goals. If you will turn to slide six, we see capital efficiency. We've maintained consistent capital efficiency over the past three-plus quarters, despite recent inflationary pressures. Since our IPO, we've dramatically reduced costs to $1 per foot, and we continue to achieve approximately $505 a foot for all DCE&F costs. We've increased average lateral lengths to roughly 13,000 feet. These longer wells are more capital efficient, and we also benefit from large acreage positions that allow for optimized field development. Our drilling team is continuously making improvements on our drilling metrics. Since our IPO, we have reached TD 33% faster on much longer wells. Our goal is to keep our DCE&F cost per foot relatively flat as we move into this more active upstream environment. HighPeak began recycling produced fluids in the second quarter on our most recent four-well pad. We're excited to report that we were able to use up to 85% of produced fluid on several stages, which reduces our costs and need for any makeup fluid. We also plan to source local sand mines to minimize transportation costs, which also have significant ESG benefits of reducing emissions from infield truck traffic. Our second rig will primarily focus on drilling infield multi-well pads, allowing us to optimize production while increasing pad efficiency. Our flat top well economics continue to be strong, with 12,500-foot Wolfcamp A wells paying out in less than seven months at $70 oil, and still paying out in less than a year at $50 oil. Our Lower Spraberry well economics continue to be compelling as well. Please turn with me to slide seven for operational efficiency and margins. Here’s another large differentiating factor that makes HighPeak compelling. As Jack mentioned earlier, our roughly 8,800 BOE a day is unique. Our BOE is 96% liquids, with 90% of it being oil, making our BOE inherently more valuable per unit. Our all-in cash costs continue to decrease due to the higher value of our BOE and lower costs to produce it. This equates to HighPeak having the highest cash margin for BOE among our peer group. The chart to the right shows HighPeak’s second quarter results, where our revenue per BOE for the second quarter was $60.95. This is 25% higher than our next closest peer and significantly higher than the average. HighPeak's cash margin for the second quarter was $49.32 per BOE, 32% higher than our next closest peer. HighPeak's owned infrastructure continues to positively impact our economics now and even more so as we move into the future. Please turn to slide eight for the HighPeak Infrastructure update. Phase 1 and Phase 2 of our company-owned and operated produced fluid system are now operational. This will provide for cost-efficient fluid disposal and increased recycling capabilities, which will help reduce our OpEx as well as our CapEx. HighPeak has begun utilizing produced fluids for our completion operations. Our second horizontal Ellenburger SWD is now drilled and should be operational very soon. We signed a long-term crude oil gathering and purchasing agreement in the second quarter. This agreement provides attractive all-in rates, and the gatherer is required to install and operate the system. This project will increase our realized price and decrease infield truck traffic. HighPeak also signed a replacement gas contract for our flat top production, providing improved natural gas and NGL pricing. The gatherer will expand the low-pressure gathering system, eliminating the need for infill compression and reducing flaring and greenhouse gas emissions once operational. If you turn now to slide nine, you’ll see our ESG highlights. It’s a testament to HighPeak’s experienced team and ingenuity that we are, I feel, years ahead of any company our size on ESG initiatives. This has been a long-standing effort by our team. We will continue to lean into this movement, always striving to be an ESG leader and look forward to providing future updates on our progress. We started recycling produced fluid in the second quarter, with plans to continue to increase that percentage over time. We have also entered into agreements for significant electrical upgrades to enhance field electrification, which will reduce emissions and the need for generators in the future, allowing us to run rigs off Highline power. Additionally, in the second quarter, we signed an agreement for a 13-megawatt solar farm, which will result in a reduction of approximately 100,000 metric tonnes of CO2 over the life of the contract. Essentially, HighPeak will be using solar power to operate many of our wells, and we've had zero safety incidents reported to date. HighPeak continues to be an active player in our local operating community and recently joined an environmental partnership. We are also committed to providing our employees with a flexible working environment in this post-COVID world. With my comments now complete, I'll turn the call back over to Jack to discuss our updated capital guidance.

Thanks, Mike. As you can see, looking at our operational overview, it’s been a very successful quarter for us, and we've laid the groundwork for many plans moving forward. We will focus on future growth by increasing our capital investment guidance. By picking up the second rig and drilling faster and more efficient wells, we’ve updated our D,C,E&F capital guidance, increasing our midpoint to about $217 million. This will allow us to drill approximately 35 to 40 growth wells. Our infrastructure guidance has been updated to $40 million at the midpoint. Most of these increased expenditures are due to adding the second rig and accelerating projects into 2021. Our second rig will focus mainly on drilling infield locations using multi-well pads. This will help us achieve responsible development, maximizing reservoir performance and optimizing efficiencies. One thing I want to recognize is that as we start drilling closer and developing wells, we will see a bit lumpier production going forward. The best way to explain this is through multi-pad development; when we offset producing wells, we'll have to shut in those wells to prevent damage or issues with our reservoir. This enables us to manage the reservoir more effectively. So, for the next few quarters, as we grow with two rigs versus one rig, we will see lumpier production, but our overall growth path will remain consistent, continuously increasing our production as we have over the past four quarters. This establishes the groundwork for tremendous production increases and growth in 2022. Turning to slide 11 now to summarize our company highlights in the second quarter, we saw responsible growth of over 66% quarter-over-quarter. We have more production growth ahead with our second rig being added. Our balance sheet remains strong, with our net debt standing at only $1.2 million. We increased our borrowing base to $125 million and initiated a dividend project to align ourselves fully with our shareholders. Despite facing some cash flow challenges versus drilling expenses, we plan to maintain a strong balance sheet going forward, keeping our debt less than one times debt-to-EBITDA. We have great operational excellence, as our team focuses on capital and operating efficiencies. Moving forward, we expect to keep our costs in line, even with inflation pressures. We are continuously putting measures in place to keep costs low and maintain our peer-leading efficiencies. Most importantly, we have the best product mix in the industry, with 90% oil and 96% liquids. This drives superior profit margins and allows us to recover our investments quickly compared to our peers as we expand our capital budget. Our realized pricing is exceptional, and we boast high workers, low costs, and great well economics. As you've seen, we had another successful quarter at HighPeak, generating positive earnings, nearly doubling our EBITDA, maintaining a strong balance sheet, and I continue to be extremely proud of our organization. Everyone is working hard and efficiently as we focus on responsible growth and set the stage for great achievements in the future. With that, I’d like to open up the call for any questions.

Thank you. Our first question comes from Neil Dingmann with Truist Securities. Your line is now open.

Hi, guys, thanks for all the details. Jack, I just want your overall philosophy moving forward. Once your growth stabilizes in a few quarters, how do you plan to balance growth and shareholder return?

That's a great question, Neil. Looking into the future, we generally try to find a balance. We prioritize maintaining a low leverage situation, understanding the volatility in the market; we don’t want to repeat the mistakes of some of our peers. We maintain a 10-year inventory of drilling locations, and as oil prices stabilize and production increases, we should find ourselves in a position with excess cash flow. Historically, we've balanced our growth profile through both acquisitions and drilling. Unless an acquisition is very accretive, we will rely on our existing locations, as we have enough to sustain growth for the next five to 10 years. Hopefully, that answers your question.

Great, and for Mike, can you share typical time needed on the flowback to reach peak production and about continuous pressure once that level is achieved?

Yes, Neil, typically, wells in our northern area, from the day we put them on pump, usually go on ESP day one. For our wells in the south, like the Wolfcamp D, they flow naturally for a period. Typically, it takes about a month to reach peak production. Once at peak production, longer wells maintain a steady level for several months before starting to decline. We experience a less steep decline than others in the basin and have slightly higher overall permeability in our reservoir. This can vary a bit between formations, and the productivity is sharper with multiple wells rather than a single well due to the ability to turn on offset wells at the same time.

Great, thank you both.

Thank you. Our next question is from John White with ROTH Capital. Your line is open.

Congratulations on a strong quarter and thanks for taking my question.

You're welcome.

Thank you, John.

In the press release, Jack commented on multiple wells in early stages of flowback. Does that include all 10 wells completed during the second quarter?

Yes. Mike, would you like to elaborate?

Yes, sure. Of the 10 wells completed in the quarter, roughly the first five to six have begun to peak production or show significant cleanup. The last four to five wells are in their initial cleanup period, mainly because they were completed near the end of the quarter. This cadence will follow the rigs moving forward as well.

Thanks very much. How about the two wells in Signal Peak?

We’re very excited about those wells, both currently producing right at 1,000 Boe equivalents. Compared to the well to the west that catalyzed movement into this formation, we're optimistic about further improvements. Economically, they have higher gas-to-oil ratios, but operating expenses are lower compared to our other wells. The Wolf C well is still early, currently around 400 barrels a day, but we see room for improvement as we learn more about the formation.

Is most of the drilling for the balance of the year focused on Flat Top?

Yes, that's correct. We anticipate that less than 5% to 10% of our wells will be drilled in Signal Peak. Most drilling will occur at Flat Top.

Thanks very much. I'll pass it back to the operator.

Thank you.

Thank you. Our next question comes from Jeff Robertson with Water Tower Research. Your line is open.

Thank you. Mike, could you quantify, in terms of dollars per BOE, the savings anticipated with sand and recycled water, as well as electrification in 2022?

Certainly, Jeff. The local sand initiatives have shown, based on public company announcements, potential savings of around $90,000 per well in the near future, with that number possibly reaching $200,000 as we adapt to rising transportation and sand costs. As for recycled produced fluids, it's a large ESG benefit to recycle instead of purchasing fluids, leading to both capital savings and reduced environmental impact. The cost per barrel usually sits around $0.50 for purchased fluid, while using our SWD line significantly cuts transportation costs.

Thank you for that. Jack, on the acreage acquisitions, where are those in terms of life cycle? Is the commodity mix similar to current production?

Yes, very similar. We've made multiple acquisitions recently, involving four acquisitions and trades. Some of these acquisitions include properties with 90 to 96% oil and others with around 70% oil. Our profit margins will remain strong and are expected to stay competitive given our low operating expenses. Overall, we are excited about the recent acquisitions from both an acreage and development perspective.

So it's fair to think, Jack, that some of those barrels can be added without significant costs since you already own some working interest?

That's a good way to look at it. Although we absorb costs associated with that interest, economically, our acquisitions are creatively structured, allowing us to quickly recoup our investment while enhancing both our proved and development opportunities.

Thank you.

Thank you.

Thank you. Here’s a follow-up question from John White with ROTH Capital. Your line is open.

That was an excellent amount of detail on your infrastructure work and its cost functions. What can we expect, in terms of time frame, for reductions in crude oil price differentials?

Go ahead, Mike.

In partnership with Delic, we’re on track to begin construction immediately. Once complete, we’ll transition from trucking rates around $1.40 to a significantly lower all-in number, approximately $0.70 lower than that for barrels at Flat Top. Start seeing effects on realized prices soon. Our gas gathering system is also in similar stages; once operational, it’s expected to enhance pricing for NGLs and gas as well.

Just to add to what Mike said, these initiatives will surely lower our differential and enhance profit margins significantly. The investment dollars we're allocating are going to yield excellent return on investment and position us well for the future.

Thank you. It sounds very positive. Did you confirm that the second SWD well is complete?

Yes, that well has been drilled. We’ve also built the necessary battery. The completion involves running tubing and some stimulation, meaning we'll be operational within weeks.

Thank you again, I'll pass it along.

You bet. Thanks, John.

Thank you. At this time, I am showing no further questions in the queue. I'd like to hand the conference back to Mr. Jack Hightower for any closing remarks.

Yes, thank you very much for attending. We’re pleased to provide insights on our company and our ongoing efforts. As CEO, I couldn’t be more excited about the progress we've made and the strides we continue to take in our industry. We look forward to further growth and success, hoping oil and gas prices remain favorable. With around 200% internal rates of return on our wells, we know our reservoirs well, and identified that nearly all our acreage is prospective. It’s now simply a matter of developing this acreage responsibly, and we're off to a solid start. Thank you for your support and participation.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.