HighPeak Energy, Inc. Q1 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to the HighPeak Energy 2024 First Quarter Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Steven Tholen, CFO. Please go ahead.

Good morning, everyone. And welcome to HighPeak Energy's first quarter 2024 earnings call. Representing HighPeak today are Chairman and CEO, Jack Hightower; President, Michael Hollis; and I'm Steven Tholen, the Chief Financial Officer. During today's call, we will make reference to our May investor presentation and our first quarter 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. 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 refer to certain non-GAAP financial measures on today's call. So please see the reconciliations in the earnings release and in our May investor presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.

Thank you, Steve, and good morning, ladies and gentlemen, and thank you for joining us today. My prepared remarks will begin on Slide 4 of our May investor presentation. I'm very excited to report we had a great start to the year. Results were in line or exceeded our expectations. We continue to stay committed to our 2024 core values, which, if you recall, include maintaining disciplined operations, strengthening our balance sheet, and maximizing shareholder value. We are going to continue staying within our capital budget expenditures and not getting overextended. Operationally, you heard me say last quarter that running a 2-rig development program will allow our operations team to aggressively focus on reducing capital costs, optimize daily operations, and drive down operating expenses. The operations team absolutely delivered on these goals. Financially, we generated positive free cash flow from operations for the third consecutive quarter, prioritizing debt reduction in the utilization of that free cash flow while also steadily increasing capital returns to shareholders. In addition, we continued our pursuit of increasing shareholder value through raising our dividend, implementing our share buyback program, continuing to organically add high-value, liquids-rich inventory to our portfolio, and ultimately maximizing shareholder value through our strategic alternatives process. Now turning to Slide 5 on the operations front. We had a great first quarter. We held our average production levels flat compared to the fourth quarter at roughly 50,000 barrels a day. We made huge strides in continuing to lower our operating expenses, as evidenced by the 16% decrease in LOE, or BOE, from last quarter down to $6.30. And I want to take this opportunity to congratulate and thank our operations team for all their hard work as we are starting to realize significant progress and savings in this area. The reduction in LOE costs has further improved our already peer-leading EBITDAX margins. Our operational success led to generating first-quarter EBITDAX in line with our fourth quarter, which on a run rate approaches $1 billion. We increased our free cash flow by 42% compared to the last quarter, and we've now generated positive free cash flow of over $150 million in the last three quarters. We utilized free cash generated in the first quarter to reduce long-term debt by $30 million. We increased our dividend by 60%. And we implemented our share repurchase plan, whereby we acquired over 565,000 shares during the first quarter. Now I'll turn the call back over to our President, Mike Hollis, to provide an update on our first quarter operations.

Thanks, Jack. Now turning to Slide 6. As Jack previously mentioned, the team has been intensely focused on reducing costs across the board. On the capital side of the equation, costs continue to trend in the right direction for HighPeak, leading to increased capital efficiency. As I mentioned last quarter, we are trending well below our guided dollar per completed lateral foot cost for the year. One additional point that I'd like to make on the capital cost front is that we'll continue to improve as we progress in our development program our facility costs. Our central tank battery configuration is large, scalable, and efficient. And as our drilling program advances, we will be able to reduce the per well facility cost on our new well high ends, thus reducing future total capital costs per foot. We anticipate seeing additional improvement throughout the year. But as always, we continue to adhere to the under-promise over-deliver philosophy. Now turning the focus to the operations side of the equation, and I'd like to take this opportunity to put a couple of numbers out there. HighPeak was able to keep our absolute dollars spent on LOE this quarter to roughly $200,000 below what we spent in Q1 of 2023, a year ago when our production was only 37,200 BOE per day. And again, we spent less in Q1 of '24 while our production was roughly 50,000 BOEs a day. Some of the key drivers to accomplishing this feat are shown on the right-hand side of this slide, where you can see the field-wide build-out of our world-class electrical and produced water infrastructure systems. This system is built for the life of the field. The operations group has been extremely busy over the past few years constructing these systems in both Flat Top and Signal Peak, and the fruits of their labor are absolutely starting to show. Other areas where our operations teams continue to make positive strides include optimizing our field-wide chemical programs, exploiting that world-class infrastructure, and maximizing the production of our base—all of which is supported by the reliability of our overhead electrical power distribution system. The capital investment the company has made in this system is and will continue to pay huge dividends as we develop our large inventory of high-value locations for decades to come and by improving EBITDAX margins and lowering well breakeven costs. As you can see on these maps, the majority of our acreage is now tied into these systems, which means only small incremental infrastructure dollars will be needed in the future as our development program continues, thus reducing future CapEx needs. Our overhead electrical system will be further enhanced by our Flat Top solar farm, which we look to commission within the next week or two, the timing of which is great as we'll be able to take advantage of the summer West Texas sunshine to provide power to the field during daylight hours. This will greatly reduce our exposure to electrical spot prices and brownouts, which are frequent during the hot summer months in West Texas. As a reminder, our 2024 capital budget is slightly first-half weighted due to entering the year with three rigs and completing the DUCs we carried into this year. Having great rock coupled with low-cost operations and efficient deployment of capital leads to increased corporate efficiency and free cash flow generation. And HighPeak will be able to continue this for decades because of our extensive runway of inventory. Now turning to Slide 7. HighPeak's margins per BOE continue to command a leading position among our peer group. Our unhedged first quarter EBITDAX margin of $52.68 per BOE was close to 70% higher than our public peer average and over 30% higher than our closest peer. Adjusting our current volumes to an equivalent economic production rate to achieve the same cash flow for HighPeak based on our peer group's average cash margins would equate to HighPeak producing 85,000 BOEs a day. We produce and generate meaningful EBITDAX, no matter how you look at it. One contributing factor to increasing our margin is our focus on reducing LOE costs. As you can see on the chart on the right-hand side of the slide, we have delivered four consecutive quarters of reducing LOE costs per BOE. HighPeak posted a 26% reduction quarter-over-quarter, which equates to roughly $6 million less absolute dollars spent this quarter for roughly the same production we had last quarter or 4Q of 2023. All of that savings is additional free cash flow now and in the future. As we always say, not all BOEs are created equal. Our high oil cut coupled with our improving cost structure will continue to drive differential margins for our shareholders. I am always surprised and appreciative of what the operations team can deliver. They have met every stretch goal we’ve placed in front of them, and for such a liquids-rich BOE to have a lifting cost that competes with the best operators in the basin without having the added low-value gas BOEs in the denominator of the equation is a feat. We had the same GOR as our peer group; think about how lower LOE would be here at HighPeak. It would have a 4 handle on the number. Again, this is first-class performance, and my hat goes off to the operations team. As natural gas and NGL prices continue to face significant headwinds and our lifting costs continue to decrease, in my opinion, our margins will continue to stand head and shoulders above the peer group over the next handful of years. Now turning to Slide 8 to highlight our inventory-rich portfolio. HighPeak entered the year with approximately 2,600 locations, with over 1,700 in what we currently consider are primary delineated zones. Our current development plan is focused on our bread and butter, Wolfcamp A and Lower Spraberry benches, where we have close to 15 years of high-value oil-rich inventory at our current development case. In addition, some of the zones that we presently classify as upside are being delineated throughout the county and directly offsetting our acreage. We remain extremely excited about these early results and are looking forward to moving some of these locations into our primary zone classification. I'd like to take a moment to focus on a very topical concept within our industry. That is the notion of breakeven cost. At HighPeak's current cost, including D, C, E and F, West Texas lanes, that's blood, guts, and feathers all in. Our portfolio has over 1,100 locations that generate a 10% or higher IRR at $50 a barrel. In addition, we anticipate being able to move more of our sticks into the sub-$50 a barrel breakeven category as we continue to drive down our costs and as our upside zones are proven out across the acreage position. We are extremely blessed at HighPeak to have decades worth of oil-rich low-cost high-margin inventory, which we will economically convert to free cash flow for our shareholders. And with the comments now complete, I will now turn the call back over to Jack to wrap up on Slide 9.

Thanks, Mike. That's a really great operational performance during this quarter. And as Mike just talked about, we have an excellent asset base full of high-margin high oil production with decades of inventory. Over the last year, we have focused on operational and capital discipline in drilling within cash flow. Extremely important, we are going to maintain capital discipline. This, along with some oil price support, has led to us generating over $150 million of free cash flow over the last nine months. We will continue to proceed with the disciplined exploitation of our asset base to generate more free cash flow moving forward. As we do, we will use that cash flow to strengthen our balance sheet, pay down debt, and increase our liquidity. Through doing all these steps, I believe it is only a matter of time before the market recognizes the value dislocation of our stock and starts to reward our shareholders with increased value. With emphasis, I would say we're going to maintain our capital discipline in our current drilling program, but a great way to think about strategic alternatives looking to the future is to consider what our asset base could do in the hands of a company with the financial resources to significantly increase drilling activity. These assets and our inventory, which is one of the largest inventories that can be acquired in the Permian Basin, would allow a purchaser the opportunity to increase production while staying within cash flow to almost double its current level and maintain that level for many years into the future. That's why we add so much value to so many companies that might be looking to acquire oil-rich assets. So now I'll open up the conference call to questions from our analysts.

First question comes from John White with ROTH MKM Capital.

Congratulations on a strong quarter, and to Mike, many congratulations on the progress on LOE. You mentioned increased efficiency in your chemical program. Could you provide us with more details on what is happening with that program?

Sure, John. And again, these are operational efficiencies and LOE are things that take quarters and quarters of planning. When you look at the infrastructure that HighPeak has invested in over the last three, three and a half years, we’ve built out power, water, oil, and SWD recycle capability. That infrastructure, the power, and the solar farm reduces our costs on both the capital and the LOE side. To your point, a lot of things have been done over the last kind of nine months or so on the chemical program. Again, that's more of an optimization, being able to spend the time and manpower to look at every single detail. They all add up. Most of them are all incrementally small, but when you add them all together, it matters. And being able to exploit this world-class infrastructure at a higher percentage, again, having company-owned disposal instead of having to pay third-party disposal. And on that chemical program, a lot of the chemicals that we're mentioning here also have to do with the water treatment side. Our current treatment cost on our recycled water is about half of what it was six months ago. So again, the team and the guys in the field have done a great job across the board, and holistically, even down to each individual well level, optimizing the chemical program, which also goes into the equation of the production that you have from the field. So uptime is extremely important. So again, having our own substation and our own power distribution system servicing our field and only us allows us a lot more uptime. So again, it reduces the workover expenses needed that would also go into production. So again, it's a very long-winded answer, I know, but there's a whole lot of pieces to this puzzle that come together. We've been working on them for a couple of years and they're finally all being utilized and maximized. So into the future, we see these kinds of calls being able to be achieved as we go through the next several years being able to be at these levels. Now we have other things that we're always working on. Of course, the solar farm is going to reduce our power cost as we go forward, and that energizes here in about a week. So as we're always trying to tweak, but I think now as you look going forward, it's going to be smaller changes as we go forward. I wouldn't expect the dollar change anymore going forward. There are not enough things we could pick up out there. But I would take this opportunity because I think this is important for people to understand what these operation guys have done. I kind of mentioned in the prepared remarks that our BOEs are different, right? We make very little gas, and we make almost all oil. I think 1% of our revenue is from the gas stream. However, it's all holistically important. But when you look at HighPeak at $6.30 LOE compared to our public peer group all across the Permian Basin, we screen pretty competitively with everyone except for a few large companies that have a little bit lower cost overall. However, when you look at our BOE basis, we don't have 50% gas and gas being very low value today when you look at an LOE metric, it is in that denominator that divides your cost. So again, to compare our absolute calls to anyone else's, especially on an EBITDA generation from those BOEs, this is world-class performance and these guys need to hear that, and we absolutely appreciate everything they've done.

Thank you for providing that additional detail. I appreciate it. Regarding the potential shift to a three-drilling rig program, do you believe that we need to see crude prices stabilize in the high $80s to low $90s? Is that a reasonable perspective?

John, actually, it is a function of crude price, but it's also a function of the capital discipline in knowing exactly how much free cash flow we're going to have to try to reduce our total debt and go forward with that thought process in mind. For example, with a 0.5 rig increase instead of 1 rig, each drilling rig we add, adds about 6,000 barrels a day to our production number. So if we wanted to maintain 53,000 barrels a day, we would add half a rig. We wanted to maintain 56,000 barrels a day, we would add a rig, with just the three rigs. If oil prices allowed us to go up, and that's exactly what you said, if we have an increase in oil price, we might even get to four rigs and that would increase our production effectively up another 12,000 barrels a day. So in my last statement, I mentioned what another company could do; they could literally go to eight rigs, increasing production up to 100,000 barrels a day and do so for years and years into the future. But we are going to maintain discipline, and it's not a function of just does it reach that price level quickly, but does it reach it where we can look at it and know that it's going to maintain a higher price level into the future, which allows us to plan for more activity.

John, I think a real simple way to think about this is that we will absolutely be slow on the gas to increase activity. In other words, we want to see and have enough free cash generated so that if we did pick up activity, it's all done out of that free cash flow bank. But we will absolutely be fast on the break. If things pull away from us, we have the ability, again with this acreage position, we don't need a lot of rigs running to hold this acreage position together. We can do it with just one rig. So again, slow on the gas, fast on the rig.

Okay. Emphasizing the capital discipline approach, and thanks for the additional color on that.

Our next question comes from Jeff Robertson with Water Tower Research.

Mike, you spoke a lot about infrastructure and central tank battery facilities and the SWD. My question is, at the current pace of a 2-rig program, is that really aimed at maximizing the value of those assets and the capacity that you have rather than trying to stretch it with additional activity?

Yes. Jeff, great question. Kind of the way I always try to portray our infrastructure, we built the infrastructure for the life of the field, not so much for the activity that HighPeak is running today. Obviously, at two rigs and one frac crew, the infrastructure is absolutely adequate forever. Now, if in someone else's hands, if activity were to increase up to 6, 8 rigs, our infrastructure is built to be able to handle that. Our company-owned SWDs, again, are built for the life of the field at an accelerated pace of development, so everything is sized for that. So obviously, today, we've got 100% utilization and very efficient running of the system today, but also if someone were to increase that activity, this infrastructure is built to accommodate that.

You spoke with respect to inventory about testing some of the upside zones around your acreage. Can you provide any more color on what's going on with other operators nearby?

You bet. And the great thing is we love to explore with other people's dollars; that's a great way to gain confidence in your inventory. Probably the most exciting one that we have currently is the Middle Spraberry that's getting developed, I mean, literally right west of our acreage position. The wells look great, very economic. They're a little cheaper to drill than even our Lower Spraberry wells and look very similar to the kind of Wolfcamp A production, so when you look at that, if you can do it a little cheaper and it is good a result, then the breakeven costs are even lower than our Wolfcamp A's, which are down into the $40 range, breakeven. So again, we're extremely excited about that. I would think sometime in the near future, it would be reasonable to expect to see HighPeak test some of those zones on our acreage. And we're having great results on our base production. Again, going back to things we're seeing that the operations group is able to do with more focus. And of course, we’ve grown that team and the experience has grown. But down in Signal Peak, another enticing performance is, believe it or not, in our Wolfcamp C well that is over a year old. We had it on gas lift and we're having some trouble with the compressor. The well looked like it was going to be a pretty good well, somewhere in the 0.5 million barrels of oil recovery. We changed the lift mechanism and optimized the well production, and we've more than doubled the production a year later after the well has already produced almost 100,000 barrels. We came in and changed the lift mechanism and more than doubled production. So that's going to be another zone of interest to watch and look forward to. And of course, we have several hundred locations in that Wolfcamp C that are in Signal Peak. If it looks like this well that we went and optimized, if we can do that in the future, you have, again, several hundred locations that will break even well under $50 a barrel. So again, a lot of exciting things going on.

Jack, you talked about returning cash to shareholders in the context of shareholder value. You obviously have the current dividend and the new repurchase program. But does accelerating repayments under the term loan have a place in your philosophy? I know you have a $30 million per quarter amortization on the term loan. But is there a scenario where you consider accelerating that?

We have a cash sweep feature in our term loan that allows us to pay down debt more quickly than the scheduled $30 million per quarter or $120 million per year, depending on our free cash flow and oil and gas prices. After 15 months, we can pay down larger amounts or refinance without any penalties. We will be disciplined in our approach moving forward, which will depend on the timing of our strategic discussions. Although paying down debt is our priority, high oil prices mean that investing in drilling is also a strong option for us, as these wells are yielding over $20 million in net asset value after payout within a year. We have rapidly expanded from 2 rigs to 6 rigs, increasing our production by nearly 35% to 50%. We believe we have reached a level that would satisfy potential buyers or merger partners, so for now, we will focus on debt repayment and do have the capacity to reduce more debt as needed.

And it sounds like the term loan gives HighPeak or anybody else the flexibility to pay down or refinance without any type of penalties, right?

Correct. After—there are penalties up to 15 months, but after that, there are no penalties.

Last question comes from Nick Pope with Seaport Research.

On the LOE, I know we spent a lot of time on it, but it was a great number. The CapEx component that you kind of allocated toward infrastructure and other, that $50 million to $60 million, I know a lot of that kind of over the past couple of years has been a big support for driving that LOE down. Curious kind of what you all think about a normalized number, where we are kind of in that build-out and how you project forward into '25, '26, what that infra and other component that wedge of the CapEx might look like on that normalized basis.

You bet, Nick. So as you can kind of see with our guide this year, that $50 million to $60 million range, as I’ve kind of shown on the map in the presentation, the life of field build-out is almost complete in the entire north in Flat Top and Signal Peak, so the $50 million this year builds out that backbone in every one of those areas. So going forward, a good go-forward price would be somewhere $20 million or less, and that's just tying in any new batteries to the infrastructure that’s currently sized accordingly for life field. And we talk about CapEx as well, and CapEx does get helped a lot by this infrastructure. Remember, we're running our rigs off of highline power instead of utilizing diesel. Our cost to recycle our produced fluid, of which we use almost 100% of our stimulation needs now with fully recycled produced water, is less than half the cost of utilizing freshwater or Santa Rosa water in the area, again reducing our capital costs. And then obviously, we talked a lot on this call about how the infrastructure helps on the LOE side. I think it's important to point out, we're moving into the summer months. We're going to have 10 megawatts of power coming from the solar farm that will augment our already hedged portion that we're getting from the grid. So those two things working in combination, where if you look back last year, you would see a little spike in our electrical spend over the summer because you always have a little bit riding on spot prices, and spot prices in the summer can move dramatically from a $40 and $50 power average up to several hundred dollars on average per megawatt and at times exceeding by $1,000 a megawatt. Now we will not have any of our power needs on that spot, and we will actually be able to sell some power back to the grid at those higher prices. So it's going to be a revenue-generating asset for us. So again, we're really excited about what's going to come. So to your other question about how to think about LOE into the future. Obviously, when we did the guide back in November of last year, we guided to what we were achieving. We knew some of these things were coming into place, but timing is always a week here, a month there. So looking forward, most likely a second-quarter earnings announcement will show a reduction in overall LOE for the quarter; I think it would be reasonable to expect that to come. From a modeling standpoint, I would probably look at current kind of $6.50 to $7 all-in with workover per BOE as a good number for the rest of the year. And I think if you do that, you're going to be pretty close.

That's very helpful in detail. Tacking on to that a little bit, natural gas volumes for the quarter saw a nice uptick. I know that's a little bit more third-party processing and the movement of the gas. Maybe you could talk just a little bit about, going forward, do you all expect that gas offtake, gas processing is pretty much caught up with where you would need it to be in the near future right now?

You bet, Nick. To clarify that question maybe a little bit, over the last couple of quarters, our percent oil has come down maybe a percentage or so. But again, if you look at our reserve report that's in the presentation and that's for the economic life of all of the wells that we add on by the end of 2023. And the economic life of these wells is 78% oil. Today, we're running 80. So if you look into the future, obviously, we're going to try to maximize the selling of any gas that we produce. And it's very rich gas. So on a gas and liquids combination, we're somewhere in the $6 to $7 per Mcf range. So we are highly incentivized to get all of that gas into the pipeline and sold. However, if you’re looking forward to see what may change over the next kind of 10-year period, Mike, you go from 80% to 79% over 10 years.

Yes.

And then over the next 10, it will level off at about that 78%? I think that's a very reasonable expectation. So we will stay extremely liquids-rich in oil. Again, that's what drives our economics, drives our margins and helps with our breakeven costs.

I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.