HighPeak Energy, Inc. Q3 FY2021 Earnings Call

Good day and thank you for joining us. Welcome to the HighPeak Energy Third Quarter Earnings Call for Twenty Twenty One. All participants are currently in listen-only mode. After the presentations, we will have a question-and-answer session. I would now like to turn the conference over to our first speaker, Steven Tholen, Chief Financial Officer. Please proceed.

Good morning, everyone, and welcome to HighPeak Energy's third quarter twenty twenty one conference call. Representing HighPeak today are Chairman and CEO, Jack Hightower; President, Michael Hollis; and Vice President of Business Development, Ryan Hightower; and I'm Steven Tholen, the Chief Financial Officer. During today's call, we will make reference to our November Investor Presentation and our third quarter twenty twenty one earnings release, which can be found on HighPeak's website. 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. Please see the reconciliations in the earnings release, which was issued on Monday afternoon. Our prepared remarks will begin on slide four of our November investor presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.

Steve, thank you very much for the introduction and I want to welcome everybody to our third quarter conference call. This is a very exciting report we have for you. We know that you have your press release and you can look at the financial numbers. As we have mentioned earlier, we have lumpy production, so our financials are not as exciting. But when you look at our production, this is a significant growth story for twenty twenty two. We had our second rig early in the third quarter. We're focused on drilling margin fill pads in our Flat Top operating area. As we mentioned in our August call, we expected that this would cause our production volumes in the third quarter to be lumpy because we temporarily curtailed some of our producing wells. Now that that's behind us, our production volumes are recovering and getting our wells back online and getting new wells starting to produce. We've rebounded nicely since the beginning of October, averaging approximately fifteen thousand five hundred barrels of oil a day, almost an eighty percent increase over our production in the third quarter. This tremendous increase in production shows the benefit of having our oil production come back online successfully and how successful we're being at adding new wells. It's important to note that these production levels are a product of our initial one rig development program. Wells drilled with our second rig will begin to contribute meaningful production volumes in early twenty-two. With our excellent well economics and the current strength of the commodity market, we've added a third rig in late October and plan to add a fourth rig by year-end. We will continue to pull our present value forward for our investors while maintaining our philosophy of staying below one-time debt-to-EBITDA. We'll go through the financials and discuss that as we move forward. On slide four of your presentation, it is interesting to look at Howard County as shown by the faded white line and the activity in Howard County. When you see our acreage block and the two contiguous acreage blocks we've added signal peak since the last conference call, and what we have in Flat Top now, it's a tremendous acreage position. In the quarter, we averaged eighty two hundred barrels a day compared to eight hundred ninety barrels a day in the first quarter. We had literally between four and six thousand barrels a day shut in during this period to frac wells. But since mid-October, we've averaged fifteen thousand five hundred barrels a day. We've increased our acreage position up to sixty two thousand acres and still operate ninety two percent of our acreage position. We significantly closed ten thousand six hundred additional acres during the quarter, giving us almost one hundred more additional locations. With four rigs drilling, we have plenty of inventory and forward value, and our production increases will continue throughout twenty twenty three and beyond. We also still have the highest cash operating margins of any of our peers at fifty one and eighty eight and an average realized price of sixty three eighteen through the quarter. On slide five, the next slide is one of the most exciting slides we have at least through this quarter. It gives you an explanation of our production increases, starting at three thousand three hundred barrels a day. After COVID-19 hit, we faced production impacts, including a winter storm that shut down production. We increased production from three thousand three hundred up to fifty three hundred barrels a day in the first quarter, and then faced further issues due to offset fracking that inhibited our growth. However, as we got our wells back online, production took off in the third quarter and is expected to continue growing, especially with our addition of rigs. Turning to the next slide, on slide six, we continue to receive great prices for our production, with a realized price of sixty three eighteen, which is eighty nine percent of WTI. This is higher than any of our peers in the industry. Our CapEx in the third quarter was sixty four million dollars excluding acquisitions, and we drilled over one hundred twenty four thousand four hundred feet of lateral footage, excluding our second horizontal SWD wells. We now have two horizontal SWD wells, which we believe are the only two in the United States, handling our water disposal needs up in Flat Top. This quarter is a stepping stone for growth as we go forward. If you turn to slide six, you will see that our earnings were down from forty million to thirty three million dollars, principally due to our wells being offline. While our realized pricing is still fantastic compared to our peers, our production is starting to come back up again. I wouldn't pay too much attention to this decline as we knew it would happen due to taking wells offline, which raised our operating and G&A costs per barrel. All of these things will revert as we become more efficient. Now, I'm going to turn it over to Michael Hollis to discuss the operations and margins in some of the next few slides.

Thanks, Jack. I'd like to start by congratulating our team for maintaining our peer-leading cost levels in spite of recent industry-wide inflationary pressures. This statement is a testament to their cost-focused attention to detail and the measures they've implemented to keep our cost stable in the current environment. We made great progress on our key objectives of operating and capital efficiency while rapidly increasing production. Turning to slide seven, our twenty twenty one margins, driven by our low cost and high oil cuts, continue to lead our peers both on a hedged and unhedged basis. The benchmarking graph comparing HighPeak to our Permian peer group shows this clearly. These margins will continue to grow differentially to our peer group in twenty twenty two as we drive down LOE and G&A costs. Our LOE ran a little hot in the third quarter. This is a transitory situation; we foresaw this and began the necessary corrective steps last year. The bulk of the transitory operating costs were related to three factors: our overall lower production in the third quarter due to curtailing significant production for all completion operations, costs incurred in several new wells brought online prior to their production ramp-up, and rental generator usage until our new HighPeak substation is commissioned in the second quarter of twenty twenty two. This substation project remains on schedule despite current worldwide supply chain bottlenecks. Generator rental and fuel costs make up roughly two dollars and fifty cents per BOE of this quarter's transitory change. However, we expect this change to trend down toward the second quarter of twenty twenty two as production continues to ramp up and we no longer need rentals in May when we energize our system. This field-wide electrification project will substantially reduce our operating costs in twenty twenty two and beyond while also advancing our ESG initiatives. Turning to slide eight, at Flat Top, we focused our third quarter activity on multi-well pad development on infill locations, which drove our curtailed volumes in the third quarter. We have transitioned into full manufacturing mode at Flat Top, where we will focus entirely on multi-well pad development going forward. We have successfully delineated both the Wolfcamp A and the Lower Spraberry areas across our entire acreage position as evidenced by our very robust well results in both of our key formations on all sides of our block. We anticipate HighPeak methodically developing other benches in twenty twenty two. At Signal Peak, during the fourth quarter, we will utilize our third rig to begin initial pad development across our acreage volume. We are currently drilling a Wolfcamp A and Lower Spraberry pad and will continue delineating the Wolfcamp D formation based on strong well results from our successful Wolfcamp D well as well as excellent results from offset wells in the area. We can't stress enough how exciting we are about the additional acreage we added in the third quarter and the positive well results to date, while standing up the third rig in our Signal Peak area. If you turn now to slide nine, our team continues to focus on cost-saving initiatives as shown by our third quarter results, which remained flat with our prior quarters despite recent inflationary pressures. We strive to keep our costs flat even as we accelerate development plans by increasing rig count. We're implementing additional measures to offset inflationary pressures and help lower costs further—like recycling a higher percentage of produced fluids. This initiative benefits both capital calls and operational costs. On our current pad that we're fracking today, we averaged sixty percent recycled fluid and pumped many stages using one hundred percent recycled fluid. Overall, sixty percent of our stimulation fluid during the third quarter was recycled produced fluids. Our local sand mine project will be operational by the second quarter of twenty twenty two and will reduce overall completion costs, advancing our ESG initiatives by reducing emissions associated with trucking. Our third quarter activity focused on Flat Top, where well economics continue to be fantastic. These economics result from great reservoir performance, low costs, and capital efficiency from our longer wells, high oil cuts, and our differentiated realized pricing. These result in phenomenal profitability, with a twelve thousand five hundred foot Wolfcamp A well at eighty dollars oil paying out in less than six months from first production and generating an NPV10 of twenty million dollars per well. The Lower Spraberry is also impressive, with an NPV of eighteen million dollars per well. These economics are Tier One in anyone's portfolio. Now turning to slide ten, our team is deeply engaged in maintaining ESG initiatives, metrics, safety, and the construction of necessary infrastructure in our daily operations. We don’t view ESG as an additional step; it's merely the outcome of doing the right things. HighPeak utilized significant recycled produced fluids in our third quarter; we recycled over two million barrels this quarter, which equated to about sixty percent of our entire stimulation fluid needs. Additionally, several zones were completed with one hundred percent produced fluid. Our HighPeak substation project remains on schedule with an expected online date in the second quarter of twenty twenty two. This will greatly reduce our need for generators, subsequently lowering costs and emissions while providing electricity to our rigs in the second half of twenty twenty two. We also signed an agreement for a thirteen megawatt solar farm, which will come online in the same quarter. During daylight hours, HighPeak will utilize solar power to drill and operate our wells. Importantly, we have had zero recordable safety incidents and continue to provide our employees with a flexible work environment in this post-COVID world. Our experienced team and ingenuity have played a crucial role in our success thus far, and we are advancing our ESG goals while rapidly expanding our activity and production. My comments now complete, I'll turn the call back over to Jack.

Thanks, Mike. I'd like everyone to turn to slide eleven in their presentation. This is perhaps the most exciting slide and tells a story of HighPeak in twenty twenty two. If you look at the left side and observe the curve at the end of the third quarter, the bar goes straight up. Starting in the first quarter of twenty twenty two, we anticipate production to ramp up significantly, reaching an average of almost twenty eight thousand to twenty nine thousand barrels a day next year. We plan to exit at between thirty six and forty two thousand; this is a conservative estimate. With that kind of growth, supported by four rigs running and an approved budget of approximately six hundred fifty million dollars from our Board of Directors, we anticipate an EBITDA or EBITDAX of over six hundred million dollars a year, which is tremendous growth. The last three weeks or month have been great for our shareholders, reflecting a fifty percent gain from the twenty five million dollars we raised in our offering. This story needs to be recognized by everyone. When you look at our reservoir, our performance, the capital efficiency, and our total return on investment with the differentials on the oil pricing, the whole process remains intact. Our company is positioned to grow significantly with four rigs next year. The next slide, twelve, illustrates that combined growth in production volumes is accompanied by growing reserves because as we expand our production volumes, we also enhance our reserves, increasing our proved and developed locations. Most of our growth results from drilling our wells, as we've drilled and operated almost sixty-two wells, with only thirty-three contributing directly to our increasing three hundred million dollars of PDP value. This represents seven hundred twenty-three million dollars by the end of the third quarter. We expect fourteen additional wells to come online in the fourth quarter, taking us to over eight hundred fifty million to one billion dollars in PDP reserves heading into next year's business. On average, for each well we introduce, we expect to add at least one PUD, sometimes two. The company's growth in reserves, income, and production will be phenomenal next year. Turning to slide thirteen, our liquidity position remains strong, with an increased credit facility now at one hundred ninety-five million dollars, affording us an undrawn capacity of approximately one hundred million dollars. This gives us ample liquidity to navigate throughout the year and enhances our borrowing base, barring any unforeseen changes in oil prices. We're very bullish on oil prices moving forward, having completed our twenty-five million dollar offering, making us S3 eligible for a shelf offering. We do not plan on doing this; we don't need capital right now. However, it's an option if we need capital for an acquisition or something similar. We've been very selective about past acquisitions and would ensure any transaction is accretive. Our EBITDAX target for debt to EBITDA remains below one-time, with our ratio at point six at the end of the quarter. This figure doesn’t fully reflect the impact of bringing wells back online, as we could be less than zero point three for our debt to EBITDA. Even with the forward rig program, we don't plan on exceeding one-time debt to EBITDA, and we expect to exit the year at approximately zero point three to zero point three three times debt to EBITDA—a very healthy balance sheet moving forward. On slide fourteen, you can see our hedge position. Keep in mind that we hedge to protect our borrowing base and to safeguard our capital budget; we don't speculate on hedges. Currently, we have around four thousand one hundred barrels a day hedged at an average price of sixty-five eighty. Many larger public companies are currently facing huge write-offs, but our hedge position remains solid, with less than twenty percent of our projected volumes hedged in the coming year. This provides ample exposure to commodities while still securing our financial position. To wrap up our story on slide fifteen, this quarter was a significant leap forward and a stepping stone for growth going into twenty twenty two. We've added our second and third rigs, and we'll install the fourth rig by year-end. We have maintained our peer-leading cost structures amidst inflationary pressures. This reflects Mike and our drilling and operations team’s outstanding performance despite rising costs, attributed to their technological advances and industry knowledge. We're directing attention toward operational excellence and continue rising as a rapidly growing company without compromising our leverage levels, ensuring we remain below one-time debt to EBITDA. We intend to take advantage of emerging commodity prices as we proceed. I would now like to open the floor to questions.

Thank you, everyone. The first question comes from John White at ROTH Capital. John?

Hello, operator?

Hey, John, we can hear you.

Please go ahead and ask your question.

Okay. Yeah, the operator cut out there for just a second. Thank you. I wanted to make sure I understand Mr. Hollis’ comments on drilling at Signal Peak. You're currently drilling a Wolfcamp A well and a Lower Spraberry well, is that correct?

That is correct. Yes.

Okay. And then you plan to drill a Wolfcamp D in the fourth quarter?

Yes, sir. In the fourth quarter, we're currently drilling the Wolfcamp A and Lower Spraberry wells. We'll move and drill a two well Wolfcamp D pad about two point five miles east of where we're currently drilling, both being fifteen thousand foot Wolfcamp D wells.

Okay. And the last two well pad for the Wolfcamp D that you mentioned, is that going to be in the first quarter of twenty twenty two?

Yes, sir. The drilling will roll into the first quarter, and the completion of all these wells will commence at the end of the fourth quarter and will continue into the first quarter. Therefore, you'll see production starting late in the first quarter from all of this activity.

Okay. Thanks very much. And your twenty twenty two guidance is very impressive.

Thank you, John. We appreciate it.

I'll pass it on.

Thank you. Next, we have Nicholas Pope with Seaport Research.

Good morning, guys.

Good morning, Nicholas.

I was hoping you could talk a little bit more about the power project and the generators you have coming online. I guess what is that? As you kind of look at the financial model and the spend you guys have been seeing on that side of things, where does that show up? Is that where the drop in LOE is coming from? And I guess how much of the power are you all going to be able to generate for the rigs versus operations? Just trying to make sure I understand what all that's going to entail.

We might answer that question, Nicholas.

You bet, Nick, that's a great question. Looking toward the third quarter and going all the way up to May of twenty twenty two, we're putting in the substation in a solar farm in our Flat Top area. This project will be fully energized together in May of twenty twenty two. Between the third quarter of this year and the end of the second quarter next year, we are generating power locally for the new wells we're bringing online. We're doing this through various means, including local generation with propane-powered generators and building mini-grids to reduce total costs. In the third quarter, with our average production of eight thousand two hundred BOE a day, this cost averaged around two dollars and fifty cents per BOE. As more wells come online, our total costs will begin to decrease, with expectations to drop roughly a dollar per barrel each quarter until May of twenty twenty two when everything is switched to our power distribution system. Not only will this eliminate the need for generators, but our rigs and pumps will connect directly to the power lines.

Yeah.

Additionally, when we bring everything online in May of twenty twenty two, we anticipate our costs to decrease from eight point nine seven dollars to approximately four point fifty to five point twenty-five for our LOE costs—significant savings.

Got it. That's great. I had one other additional thing regarding the shape of the production profile. Do you anticipate any significant offset production impacts like you saw in the third quarter as you add these other rigs? Or would that be more specific to the third quarter?

Anytime, Nick, you are effectively fracking close and doing large pads; you may experience some impact due to having to shut in offset production during fracking. However, we likely won't see the impacts experienced in the third quarter again. The way we're developing our areas, with our pads and established infrastructure, we're set to eliminate and reduce impacts moving forward. Almost twenty-five percent of our area to the south, specifically in the Wolfcamp D formations, isn't as impacted compared to other zones. While we may experience occasional effects, they will be much less severe than what occurred in the third quarter.

I got it. That's great. That's all I had. I appreciate the time, guys. Thank you.

Thank you.

Thank you. Next, we have Jeff Robertson with Water Tower Research.

Thank you, Mike. As you all further develop the Signal Peak area, do you see the opportunity or necessity to implement any of the same initiatives like you did in Flat Top, such as electric substation upgrades, enhancing accrued delivery contracts, or solar, to enhance costs in that area?

That's a great question, Jeff. As you consider our CapEx budget for twenty twenty two, roughly seventy-five percent will go to Flat Top, and about twenty-five percent will be directed to Signal Peak. However, regarding existing infrastructure, only about twenty-five percent of Flat Top has been developed since most of what we need there is already in place. Conversely, around seventy-five percent of our work down in Signal Peak is concentrated on establishing necessary facilities. As mentioned, infrastructure in Signal Peak will be similar, though on a smaller scale. Generally, most of the wells in the Wolfcamp D area will be gas lifted, rather than employing electric submersible pumps (ESP). This means we have a longer timeline before potential upgrades to the electrical infrastructure are needed, but we will absolutely be implementing proper water handling facilities and ensuring essential gathering for both oil and gas.

Thank you for that. I lost my turn for a second. Considering the Wolfcamp D, previously, you mentioned some locations in a slide deck. Can you quantify or at some point provide updates on the location counts for both Flat Top and Signal Peak?

Yes, Jeff, the numbers in the presentation we put out this morning are updated. Think of the Wolfcamp D as six wells across a section down in Signal Peak; we will average closer to thirteen thousand foot laterals. A lot of these wells will be fifteen thousand-foot wells, totaling six per mile.

Okay. Lastly, on your slide, you show the number of feet drilled in the third quarter. Do you have a tidy number to tie to your twenty twenty two capital program in terms of what footage you expect to drill next year?

Yes, our average footage is closer to twelve thousand to twelve thousand five hundred. You'll be looking at two wells per rig per month. So, think of it as twenty-four per rig times four, with an overall average of five hundred and five dollars a foot for the thirteen thousand to twelve thousand five hundred foot lateral length. That gives you a close estimate to what we have in our budget.

Thank you very much.

You bet. Thanks, Jeff.

Thank you. Next we have a follow-up with John White from ROTH.

Thanks. Following up again on Signal Peak, I know it's early; how are the wells that you've drilled and completed, along with offset operator wells, performing? What kind of comments would you offer?

Yes, John, we’re extremely excited about them. For instance, our Wolfcamp D well had an IP rate of about eight hundred fifty barrels of oil a day, with a peak gas rate of close to one point five million dollars a day. Today's gas prices significantly help improve returns. Just focusing on the oil, these results are strong. We have a nice acreage position in the area, and the offset operators to our west have extensive operations, some of which date back quite a while. Our wells tend to perform well on par with theirs. Additionally, we currently have three wells being completed that we are non-operationally involved with in the left side of our acreage block.

Okay. That sounds promising. On slide eight, to the southeast of your acreage, there's some white space. Did some of those areas fill in a little with the recent acquisition?

What we're highlighting in yellow are our recent acquisitions. We are always looking to expand our portfolio when opportunities arise, but the areas you mentioned refer to the deeper regions, specifically the field that is quite dense and very shallow. While there may be some movement further south, significant changes are unlikely.

Okay. I really appreciate that detail. Thank you. I'll pass it on.

You bet. Thank you.

Thank you. Next, we have Jeff Robertson with Water Tower Research.

Just to follow-up, Jack, as you look at a lot of the larger companies keeping a lid on their capital spending in favor of distributing cash flow, does that impact competitive pressure or the opportunities for a company like HighPeak in terms of costs or potential consolidation? Has that competitive pressure changed?

Actually, Jeff, I don't see it impacting us negatively at all in terms of competitive pressure. We are a growth company, not a mature one. We must take advantage of the opportunities available. As we grow reserves and production further, we'll become increasingly attractive for larger companies. Our performance on individual wells significantly exceeds the economics of most larger portfolios. We maintain high profit margins and strong return on investment. We assess all prospective acquisition opportunities, ensuring they are highly accretive and beneficial for our portfolio. Beyond that, our focus remains on growing our acreage position. By the end of twenty twenty-two, with four rigs operating, our growth profile will seamlessly continue into twenty twenty-three and twenty-four. We aspire to grasp every ounce of potential from the wonderful asset we have, maintaining our priorities.

Thank you for that. I appreciate it.

Thank you. There are no further questions. I will now turn the call over to Jack Hightower.

I just want to thank everybody for being on the call today. As you can see, this positions us for growth in the future and an outstanding development program in twenty twenty two. We're extremely excited and look forward to continuing conversations about our accomplishments. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect.