HighPeak Energy, Inc. Form 10-Q Summary
Business context and reporting period
HighPeak Energy is an independent oil and gas exploration and production company focused on the Permian Basin in West Texas, primarily Howard County. The filing covers the quarter and nine months ended September 30, 2020. The HighPeak business combination closed on August 21, 2020; therefore, successor results cover August 22–September 30, 2020, while predecessor results cover earlier periods and are not fully comparable.
- September 30, 2020 assets included approximately 60,541 gross and 51,343 net acres, with an average operated working interest of approximately 85%.
- The Company operated approximately 93% of its net acreage and had one drilling rig active at September 30, 2020.
- Common shares outstanding were 91.6 million as of September 30, 2020 and 91.7 million as of November 11, 2020.
Financial performance and key metrics
| Metric | Successor: Aug. 22–Sept. 30, 2020 | Predecessor: Jan. 1–Aug. 21, 2020 | Prior comparable period |
|---|---|---|---|
| Operating revenue | $4.8 million | $8.2 million | $4.3 million for nine months ended Sept. 30, 2019 |
| Net loss | $11.5 million | $85.0 million | $5.8 million for nine months ended Sept. 30, 2019 |
| Operating cash flow | $1.2 million | $(4.1) million | $1.8 million for nine months ended Sept. 30, 2019 |
| Capital and investing cash outflows | $(42.0) million | $(67.9) million | $(18.7) million for nine months ended Sept. 30, 2019 |
| Financing cash flow | $93.8 million | $51.2 million | $19.9 million for nine months ended Sept. 30, 2019 |
- Successor revenue consisted of $4.8 million of crude oil sales and $47,000 of natural gas and NGL sales.
- Successor loss from operations was $13.8 million. The net loss included $14.5 million of stock-based compensation expense, primarily associated with options granted when the Company became public.
- Basic and diluted loss per share was $0.13 based on 91.6 million weighted-average shares.
- Successor average production was 3,200 Boe per day, including 3,104 barrels of oil per day, 44 barrels of NGLs per day and 312 Mcf of gas per day.
- Average realized prices were $38.55 per barrel of oil, $16.43 per barrel of NGLs and $2.30 per Mcf of natural gas during the successor period.
- For the combined nine-month 2020 period, average production was 1,636 Boe per day, with liquids representing approximately 96% of production on a Boe basis.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $54.9 million at September 30, 2020, compared with $22.7 million at December 31, 2019.
- Total assets were $531.5 million and total stockholders’ equity was $473.5 million.
- The Company had no outstanding borrowings and was negotiating a credit facility; the filing states that closing of the facility was not assured.
- Current liabilities were $15.1 million, deferred income tax liabilities were $40.5 million and asset retirement obligations were $2.4 million.
- Operating lease liabilities totaled $641,000 on a present-value basis.
- The Company raised approximately $102.1 million through stock offerings, or $93.8 million net of offering costs, during the successor period.
Material changes versus the prior comparable period
- Combined third-quarter 2020 production increased 574% year over year to 2,165 Boe per day, driven by horizontal drilling and the return of curtailed production after the April 2020 price downturn.
- Combined third-quarter revenue increased by approximately $6.0 million versus the prior-year quarter, despite a 23% decline in average realized commodity prices per Boe.
- Average realized oil price declined to $39.19 per barrel from $53.42, while average natural gas price increased to $1.89 per Mcf from $1.34.
- Lease operating expense per Boe declined to $5.24 from $18.14, reflecting higher production and a larger horizontal-well base.
- DD&A expense increased because of higher production, but DD&A per Boe declined to $18.18 from $27.82 due primarily to increased proved reserves.
- The Company recorded a $76.5 million charge in the first quarter of 2020 after terminating the $615.0 million Grenadier Acquisition and forfeiting related deposits and extension payments.
- The transition to a public corporation created new income tax accounting, public-company costs and equity-based compensation expenses that reduce comparability with predecessor periods.
Guidance, outlook, risks and unusual items
- The Company reduced its remaining 2020 capital budget to approximately $66 million in response to COVID-19 and commodity-price uncertainty. Capital expenditures for the first nine months totaled approximately $69.5 million.
- Management planned to operate one drilling rig and approximately one frac fleet during the fourth quarter, while reviewing activity monthly based on economics and market conditions.
- The Company had twelve uncompleted wells at the reporting date and was using two completion crews to fracture eight wells, while completing four additional wells.
- COVID-19 materially reduced oil demand, commodity prices and 2020 capital activity. Future impacts remain uncertain and could affect production, liquidity, asset values and financial reporting.
- Management intended to evaluate commodity hedges and was considering a credit facility, but no hedging arrangements or debt facility were reported as established at September 30, 2020.
- Proved oil and gas properties were tested for impairment and no impairment was recorded; however, management stated that future impairment remains reasonably possible if prices, reserves, production or costs deteriorate.
- Customer concentration was significant: Lion Oil Trading and Transportation purchased approximately 97% of production during the successor period.
- The Company’s internal control framework was still being designed after the business combination. Management was unable, without unreasonable effort or expense, to assess the effectiveness of disclosure controls and procedures as of September 30, 2020.
- Subsequent events included a $1.5 million payment to a director-owned company for design work related to a proposed produced-water recycling facility and the grant of 62,500 fully vested shares to outside directors.
Important facts for investors to verify
- Reconcile successor and predecessor periods before interpreting growth, margins, earnings or year-over-year trends.
- Assess the sustainability of production growth and the economics of completing the remaining wells under current oil and gas prices.
- Review liquidity after the remaining 2020 capital program and confirm whether the proposed credit facility was ultimately completed.
- Evaluate exposure to COVID-19, commodity-price volatility, customer concentration and potential future impairment charges.
- Consider dilution and contingent obligations from 10.5 million warrants, 10.2 million contingent value rights and 9.7 million stock options.
- Review the $76.5 million terminated-acquisition loss, $14.5 million stock-based compensation charge and $40.5 million deferred tax liability as unusual or nonrecurring items.